0000912057-01-536065.txt : 20011026
0000912057-01-536065.hdr.sgml : 20011026
ACCESSION NUMBER: 0000912057-01-536065
CONFORMED SUBMISSION TYPE: S-4/A
PUBLIC DOCUMENT COUNT: 8
FILED AS OF DATE: 20011019
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: ENDOREX CORP
CENTRAL INDEX KEY: 0000812796
STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834]
IRS NUMBER: 411505029
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: S-4/A
SEC ACT: 1933 Act
SEC FILE NUMBER: 333-70750
FILM NUMBER: 1762962
BUSINESS ADDRESS:
STREET 1: 28101 BALLARD DR.
CITY: LAKE FOREST
STATE: IL
ZIP: 60045
BUSINESS PHONE: 847-573-8990
MAIL ADDRESS:
STREET 1: 28101 BALLARD DR.
CITY: LAKE FOREST
STATE: IL
ZIP: 60045
FORMER COMPANY:
FORMER CONFORMED NAME: IMMUNOTHERAPEUTICS INC
DATE OF NAME CHANGE: 19920703
S-4/A
1
a2061221zs-4a.txt
FORM S-4
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 19, 2001
REGISTRATION NO. 333-70750
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
------------------------
ENDOREX CORPORATION
(Exact Name of Registrant as Specified in its Charter)
------------------------
DELAWARE 2834 41-1505029
(State of (Primary Standard Industrial (I.R.S. Employer
Incorporation) Classification Code) Identification Number)
28101 BALLARD DRIVE, SUITE F, LAKE FOREST, ILLINOIS 60045 (847) 573-8990
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
------------------------
MICHAEL S. ROSEN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
ENDOREX CORPORATION
28101 BALLARD DRIVE, SUITE F, LAKE FOREST, ILLINOIS 60045 (847) 573-8990
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
------------------------
COPIES TO:
RICHARD R. PLUMRIDGE, ESQ. EZRA G. LEVIN, ESQ.
DARREN R. HENSLEY, ESQ. KENNETH A. ADAMS, ESQ.
JOHN P.J. KIM, ESQ. KRAMER, LEVIN, NAFTALIS & FRANKEL LLP
BROBECK, PHLEGER & HARRISON LLP 919 THIRD AVENUE
370 INTERLOCKEN BLVD., SUITE 500 NEW YORK, NEW YORK 10022
BROOMFIELD, COLORADO 80021 (212) 715-9100
(303) 410-2000
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As promptly
as practicable after this registration statement becomes effective and the
effective time of the proposed merger of Roadrunner Acquisition, Inc., a wholly
owned subsidiary of the registrant, with and into Corporate Technology
Development, Inc. as described in the Agreement and Plan of Merger and
Reorganization, dated as of July 31, 2001, attached as Appendix I to the joint
proxy statement/prospectus forming a part of this registration statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(a),
MAY DETERMINE.
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[LOGO]
October 26, 2001
Dear Endorex Corporation Stockholders:
We are writing to you today about the proposed merger of Corporate
Technology Development, Inc., or CTD, and Roadrunner Acquisition, Inc., or
Roadrunner, a wholly owned subsidiary of Endorex Corporation, or Endorex.
Endorex, CTD and Roadrunner entered into an agreement and plan of merger and
reorganization on July 31, 2001, that provides for the proposed merger. Pursuant
to the proposed merger, CTD will become a wholly owned subsidiary of Endorex,
and (a) each share of CTD common stock will be exchanged for 0.271443 of a share
of Endorex common stock, par value $0.001 per share and (b) each share of CTD
Series A preferred stock will be exchanged for 1.008466 shares of Endorex common
stock. Endorex common stock is traded on the American Stock Exchange under the
symbol "DOR." In connection with the merger, Endorex expects to issue
approximately 9.4 million shares of its common stock and options and warrants
exercisable for approximately 0.6 million shares of its common stock in
substitution for CTD options and warrants. The merger is described more fully in
the accompanying joint proxy statement/prospectus.
At the annual meeting of Endorex stockholders to be held on November 29,
2001 at 10:00 a.m., central standard time, at 28101 Ballard Drive, Suite F, Lake
Forest, Illinois, you will be asked to vote upon the issuance of shares of
Endorex common stock, options and warrants pursuant to the merger agreement. For
the merger to go forward, the holders of a majority of the shares of Endorex
common stock, voting together with the holders of Endorex Series B preferred
stock on an as converted basis, entitled to vote and that are present or
represented by proxy at the Endorex annual meeting must approve the issuance of
the shares of Endorex common stock, options and warrants. Only stockholders at
the close of business on October 23, 2001 will be entitled to vote at the annual
meeting.
At the annual meeting, you will also be asked to consider and vote upon some
additional proposals which are described in the attached Notice of Annual
Meeting of Stockholders.
AFTER CAREFUL CONSIDERATION, ENDOREX'S BOARD OF DIRECTORS HAS DETERMINED
THAT THE MERGER AND THE ISSUANCE OF ENDOREX COMMON STOCK, OPTIONS AND WARRANTS
IN CONNECTION WITH THE PROPOSED MERGER ARE FAIR TO AND IN THE BEST INTERESTS OF
ENDOREX AND ITS STOCKHOLDERS, AND RECOMMENDS THAT YOU APPROVE SUCH ISSUANCE OF
THE SHARES OF ENDOREX COMMON STOCK, OPTIONS AND WARRANTS IN CONNECTION WITH THE
MERGER.
The accompanying joint proxy statement/prospectus provides detailed
information about Endorex, CTD and the merger. Please give all of this
information your careful attention. IN PARTICULAR, YOU SHOULD CAREFULLY CONSIDER
THE DISCUSSION IN THE SECTION ENTITLED "RISK FACTORS" BEGINNING ON PAGE 15 OF
THE JOINT PROXY STATEMENT/PROSPECTUS.
We invite you to attend the meeting. Whether or not you plan to attend,
please complete, sign and date the enclosed proxy card and return it to Endorex
in the enclosed envelope. If you attend the meeting, you may vote in person if
you wish, even if you have previously returned your proxy card. It is important
that your shares be represented and voted at the meeting. To approve the
issuance of shares of Endorex common stock, options and warrants pursuant to the
merger agreement, you MUST vote "FOR" that proposal by following the
instructions stated on the enclosed proxy card. We urge you to vote "FOR" this
proposal, a necessary step in consummating the proposed merger. In addition, to
approve the other proposals submitted for your approval, you must vote "FOR"
those proposals by following the instructions stated on the enclosed proxy card,
and we encourage you to do so.
Sincerely,
Kenneth Tempero
Chairman of the Board of Directors
Michael S. Rosen
President, Chief Executive Officer and
Director
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THIS TRANSACTION OR THE SECURITIES OF
ENDOREX TO BE ISSUED IN THE MERGER OR DETERMINED IF THIS JOINT PROXY
STATEMENT/PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
THIS JOINT PROXY STATEMENT/PROSPECTUS IS DATED OCTOBER 23, 2001, AND WAS
FIRST MAILED TO ENDOREX STOCKHOLDERS ON OR ABOUT OCTOBER 26, 2001.
[LOGO]
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON NOVEMBER 29, 2001
To Our Stockholders:
Endorex Corporation, or Endorex, will hold its annual meeting of
stockholders on November 29, 2001, at 10:00 a.m., central standard time, at
28101 Ballard Drive, Suite F, Lake Forest, Illinois to consider and vote on the
following proposals:
1. to issue shares of Endorex common stock, options and warrants
pursuant to the Agreement and Plan of Merger and Reorganization, or the
merger agreement, dated as of July 31, 2001 by and among Endorex, Corporate
Technology Development, Inc., or CTD, and Roadrunner Acquisition, Inc., a
wholly owned subsidiary of Endorex, under which CTD will become a wholly
owned subsidiary of Endorex;
2. to amend Endorex's Amended and Restated Certificate of Incorporation
changing Endorex's name to DOR BioPharma, Inc.;
3. to elect six directors to serve until the next annual meeting of the
stockholders of Endorex or until their successors are duly elected and
qualified;
4. to approve an amendment of Endorex's Amended and Restated 1995
Omnibus Incentive Plan, or the 1995 plan, to (i) increase the number of
shares of Endorex common stock reserved for issuance by an additional
2,165,664 shares, (ii) implement a maximum annual limit of 500,000 shares of
common stock by which the share reserve may increase annually over the term
of the 1995 Plan under the automatic share increase provision and
(iii) modify the automatic option grant program to (a) increase the initial
option grants to newly-elected board members to 50,000 shares vesting
immediately and (b) provide for annual option grants to continuing board
members for 10,000 shares vesting over one year;
5. to approve February 21, 2001 option grants to each non-employee
member of the Endorex board of directors to purchase 50,000 shares of
Endorex common stock;
6. to ratify the appointment of Ernst & Young LLP as Endorex's
independent auditors for the fiscal year ending December 31, 2001; and
7. to transact such other business as may properly come before the
annual meeting or any adjournment or postponement thereof.
Endorex's board of directors has determined that the proposed merger and the
issuance of shares of Endorex common stock, options and warrants are fair to and
in the best interests of Endorex and Endorex's stockholders, and recommends that
you vote to approve such issuance of Endorex common stock, options and warrants
in connection with the proposed merger. Endorex's board of directors has also
determined that the other proposals are in the best interests of Endorex and
Endorex's stockholders and recommends that you vote in favor of such proposals.
For more information about the merger, the merger agreement and related
matters, please review carefully the accompanying joint proxy
statement/prospectus.
Only Endorex stockholders of record at the close of business on October 23,
2001 are entitled to notice of and to vote at the annual meeting or any
adjournment or postponement thereof.
Your vote is important. To assure that your shares are represented at the
annual meeting, you are urged to complete, date and sign the enclosed proxy card
and mail it promptly in the postage-paid envelope provided, whether or not you
plan to attend the annual meeting in person. You may revoke your proxy in the
manner described in the accompanying joint proxy statement/prospectus at any
time before it has been voted at the annual meeting. You may vote in person at
the annual meeting even if you have returned a proxy card.
By Order of the Board of Directors
Kenneth Tempero
Chairman of the Board of Directors
Michael S. Rosen
President, Chief Executive Officer and
Director
Lake Forest, Illinois
October 26, 2001
CORPORATE TECHNOLOGY DEVELOPMENT, INC.
October 26, 2001
Dear Corporate Technology Development, Inc. Stockholders:
We are writing to you today about our proposed merger of Roadrunner
Acquisition, Inc., or Roadrunner, a wholly owned subsidiary of Endorex
Corporation, or Endorex, with and into Corporate Technology Development, Inc.,
or CTD. As a result of the proposed merger, CTD will become a wholly owned
subsidiary of Endorex.
Pursuant to the proposed merger, (a) each share of CTD common stock that you
own will be exchanged for 0.271443 of a share of Endorex common stock and
(b) each share of CTD Series A preferred stock that you own will be exchanged
for 1.008466 shares of Endorex common stock. In connection with the proposed
merger, Endorex expects to issue approximately 9.4 million shares of its common
stock and options and warrants exercisable for approximately 0.6 million shares
of Endorex common stock in substitution for CTD options and warrants. Endorex
common stock is traded on the American Stock Exchange under the trading symbol
"DOR," and closed at $.90 per share on October 15, 2001. The merger is described
more fully in the accompanying joint proxy statement/ prospectus.
You will be asked to vote upon the merger at a special meeting of CTD
stockholders to be held on November 29, 2001 at 10:00 a.m., local time, at CTD's
offices at 1680 Michigan Avenue, Suite 700, Miami, Florida 33139. For the merger
to go forward, the holders of a majority of the outstanding shares of CTD common
stock and the holders of a majority of the outstanding shares of CTD Series A
preferred stock, voting together on an as converted basis, must approve the
merger and the merger agreement. Only stockholders who hold shares of CTD stock
at the close of business on November 19, 2001 will be entitled to vote at the
special meeting.
CTD'S BOARD OF DIRECTORS HAS DETERMINED THAT THE TERMS AND CONDITIONS OF THE
MERGER ARE IN THE BEST INTERESTS OF CTD AND ITS STOCKHOLDERS, AND RECOMMENDS
THAT YOU APPROVE MERGER AND THE MERGER AGREEMENT.
The accompanying joint proxy statement/prospectus provides detailed
information about Endorex, CTD and the merger. Please give all of this
information your careful attention. IN PARTICULAR, YOU SHOULD CAREFULLY CONSIDER
THE DISCUSSION IN THE SECTION ENTITLED "RISK FACTORS" ON PAGE 15 OF THE JOINT
PROXY STATEMENT/PROSPECTUS.
We invite you to attend the meeting. Whether or not you plan to attend,
please complete, sign and date the enclosed proxy card and return it to CTD in
the enclosed envelope. If you attend the meeting, you may vote in person if you
wish, even if you have previously returned your proxy card. It is important that
your shares be represented and voted at the meeting. To approve the merger and
merger agreement, you MUST vote "FOR" that proposal. We urge you to vote "FOR"
this proposal, a necessary step in consummating the proposed merger.
Sincerely,
Colin Bier
Chairman of the Board of Directors
Steve H. Kanzer
President and Chief Executive Officer
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THIS TRANSACTION OR THE SECURITIES OF
ENDOREX TO BE ISSUED IN THE MERGER OR DETERMINED IF THIS JOINT PROXY
STATEMENT/PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
THIS JOINT PROXY STATEMENT/PROSPECTUS IS DATED OCTOBER 23, 2001, AND WAS
FIRST MAILED TO CTD STOCKHOLDERS ON OR ABOUT OCTOBER 26, 2001.
1680 Michigan Avenue, Suite 700, Miami, Florida 33139 Ph: 305-777-2258 Fax:
305-777-2249
www.corpdevelop.com
CORPORATE TECHNOLOGY DEVELOPMENT, INC.
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON NOVEMBER 29, 2001
To Our Stockholders:
Corporate Technology Development, Inc., or CTD, will hold a special meeting
of stockholders at 10:00 a.m., local time, on November 29, 2001 at CTD's offices
at 1680 Michigan Avenue, Suite 700, Miami, Florida 33139 to consider the
following proposals:
1. to approve the merger and the Agreement and Plan of Merger and
Reorganization dated as of July 31, 2001 by and among Endorex Corporation,
CTD and Roadrunner Acquisition, Inc., a wholly owned subsidiary of Endorex;
and
2. to transact such other business as may properly come before the
special meeting or any adjournment or postponement thereof.
CTD's board of directors has determined that the merger is in the best
interests of CTD and its stockholders, and recommends that you vote to approve
the merger and the merger agreement.
The merger is described more fully in the accompanying joint proxy
statement/prospectus, which we urge you to read carefully.
Only CTD stockholders of record at the close of business on November 19,
2001 are entitled to notice of and to vote at the special meeting or any
adjournment or postponement thereof.
Your vote is important. To assure that your shares are represented at the
special meeting, we urge you to complete, date and sign the enclosed proxy card
and mail it promptly in the postage-paid envelope provided, whether or not you
plan to attend the special meeting in person. You may revoke your proxy in the
manner described in the accompanying joint proxy statement/prospectus at any
time before it has been voted at the special meeting. You may vote in person at
the special meeting even if you have returned a proxy card.
By Order of the Board of Directors
Colin Bier
Chairman of the Board of Directors
Steve H. Kanzer
President and Chief Executive Officer
Miami, Florida
October 26, 2001
1680 Michigan Avenue, Suite 700, Miami, Florida 33139 Ph: 305-777-2258 Fax:
305-777-2249
www.corpdevelop.com
TABLE OF CONTENTS
PAGE
--------
QUESTIONS AND ANSWERS ABOUT THE MERGER...................... 1
SUMMARY..................................................... 6
ENDOREX SUMMARY HISTORICAL FINANCIAL DATA................... 13
CTD SUMMARY HISTORICAL FINANCIAL DATA....................... 14
SUMMARY UNAUDITED PRO FORMA FINANCIAL INFORMATION........... 15
RISK FACTORS................................................ 16
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS IN THIS
JOINT PROXY STATEMENT/PROSPECTUS.......................... 39
ENDOREX ANNUAL MEETING...................................... 40
CTD SPECIAL MEETING......................................... 43
THE MERGER.................................................. 45
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION AND RELATED
AGREEMENTS................................................ 68
MARKET PRICE INFORMATION.................................... 82
DESCRIPTION OF ENDOREX...................................... 83
ENDOREX MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................... 91
ENDOREX'S MANAGEMENT AND EXECUTIVE COMPENSATION............. 94
PRINCIPAL STOCKHOLDERS OF ENDOREX........................... 104
DESCRIPTION OF ENDOREX CAPITAL STOCK........................ 106
COMPARISON OF RIGHTS OF STOCKHOLDERS OF CTD AND ENDOREX..... 110
DESCRIPTION OF CTD.......................................... 117
CTD MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................... 128
PRINCIPAL STOCKHOLDERS OF CTD............................... 132
PROPOSALS TO BE VOTED UPON BY ENDOREX STOCKHOLDERS AT THE
ENDOREX ANNUAL MEETING.................................... 135
PROPOSAL ONE: APPROVAL OF ISSUANCE OF ENDOREX COMMON STOCK,
OPTIONS AND WARRANTS PURSUANT TO THE AGREEMENT AND PLAN OF
MERGER AND REORGANIZATION................................. 136
PROPOSAL TWO: APPROVAL OF AMENDMENT TO AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION.............................. 137
PROPOSAL THREE: ELECTION OF DIRECTORS....................... 138
PROPOSAL FOUR: APPROVAL OF AMENDMENT TO ENDOREX AMENDED AND
RESTATED 1995 OMNIBUS INCENTIVE PLAN...................... 142
PROPOSAL FIVE: APPROVAL OF FEBRUARY 21, 2001 OPTION GRANTS
TO NON-EMPLOYEE MEMBERS OF THE BOARD OF DIRECTORS......... 153
PROPOSAL SIX: RATIFICATION OF INDEPENDENT PUBLIC
ACCOUNTANTS............................................... 156
STOCKHOLDER PROPOSALS....................................... 158
OTHER MATTERS............................................... 158
PROPOSAL TO BE VOTED UPON BY CTD STOCKHOLDERS AT THE CTD
SPECIAL MEETING........................................... 159
EXPERTS..................................................... 160
LEGAL MATTERS............................................... 160
WHERE YOU CAN FIND MORE INFORMATION......................... 160
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
INFORMATION............................................... P-1
INDEX OF CONSOLIDATED FINANCIAL STATEMENTS.................. F-1
INDEX TO APPENDICES......................................... IA-1
i
QUESTIONS AND ANSWERS ABOUT THE MERGER
INTRODUCTORY QUESTIONS
Q: WHY ARE ENDOREX AND CTD PROPOSING A MERGER?
A: Endorex and CTD are proposing a merger for the reasons described in this
joint proxy statement/prospectus, including their belief:
- that the merged companies may provide enhanced opportunities for new drug
product discoveries, and commercial alliances;
- that the merger would likely benefit Endorex and CTD in their negotiations
with potential collaborators, corporate partners, licensors and licensees;
- that CTD's and Endorex's operations and strategic focus complement each
other, in that they both focus on pre-approved drug compounds;
- that the merger would result in operational and administrative cost
savings; and
- that CTD's and Endorex's management may be compatible.
Q: HOW IS ENDOREX PROPOSING TO ACQUIRE CTD?
A: Endorex proposes to acquire CTD by merging Roadrunner, a recently formed,
wholly owned subsidiary of Endorex, with and into CTD. CTD will survive the
merger as a wholly owned subsidiary of Endorex. Pursuant to the merger, all
outstanding shares of capital stock of CTD (other than those shares as to
which appraisal rights have been properly exercised) will be exchanged as
follows: (a) each share of CTD common stock will be exchanged for 0.271443 of
a share of Endorex common stock and (b) each share of CTD Series A preferred
stock will be exchanged for 1.008466 shares of Endorex common stock. Pursuant
to the terms of the merger agreement, Endorex expects to issue approximately
9.4 million shares of its common stock and options and warrants exercisable
for approximately 0.6 million shares of its common stock in substitution for
CTD options and warrants.
Q: ARE THERE RISKS CTD AND ENDOREX STOCKHOLDERS SHOULD CONSIDER IN DETERMINING
WHETHER TO VOTE FOR PROPOSALS IN CONNECTION WITH THE MERGER?
A: Yes. We have set out in the section entitled "Risk Factors" beginning on
page 16 a number of risk factors that you should consider carefully in
connection with the merger and the related exchange of CTD capital stock for
Endorex common stock.
QUESTIONS FOR ENDOREX STOCKHOLDERS
Q: WHAT IS CTD?
A: CTD is a holding company that does business and carries out its operations
primarily through its subsidiaries, four of which are majority owned and one
of which is wholly owned by CTD. Discussions or statements contained in this
joint proxy statement/prospectus that refer to the business of CTD refer to
the combined business of CTD and its subsidiaries.
CTD is a development stage pharmaceutical company focused on developing new
oral or mucosal formulations of approved chemical entities, or ACEs, (drugs
that have been previously approved by the Food and Drug Administration, or
FDA) and products based upon ACEs that treat new indications. CTD currently
has one drug in the phase III clinical trials and one drug in phase I
clinical trials.
1
Q: WHY DOES THE ENDOREX BOARD OF DIRECTORS RECOMMEND THAT ENDOREX'S STOCKHOLDERS
VOTE "FOR" THE ISSUANCE OF SHARES OF ENDOREX COMMON STOCK PURSUANT TO THE
MERGER AGREEMENT?
A: Based on its consultations with Endorex's management, as well as Endorex's
legal and financial advisors, and its careful consideration of the terms of
the merger agreement and the transactions contemplated by the merger
agreement, and for the reasons described in this joint proxy
statement/prospectus, Endorex's board of directors believes that the terms of
the merger are fair to and in the best interests of Endorex and its
stockholders.
Q: WHY DOES ENDOREX NEED THE APPROVAL OF ITS STOCKHOLDERS?
A: Pursuant to the rules of the American Stock Exchange, or AMEX, Endorex is
required to obtain stockholder approval for issuances of its common stock in
connection with the acquisition of CTD because (a) certain affiliates of
Endorex (such as directors, officers or principal stockholders) are also
affiliates of CTD and (b) the Endorex common stock to be issued in connection
with the merger exceeds 20% of Endorex's outstanding common stock.
Q: WHAT ELSE WILL I BE VOTING ON AT THE ANNUAL MEETING?
A: In addition to voting on the proposed issuance of shares of Endorex common
stock, options and warrants pursuant to the merger agreement, Endorex's
stockholders will also be asked to vote on:
- the amendment of Endorex's Amended and Restated Certificate of
Incorporation to change Endorex's name to DOR BioPharma, Inc.;
- the election of six directors to serve until the next annual meeting of
the stockholders of Endorex or until their successors are duly elected and
qualified;
- the amendment of Endorex's Amended and Restated 1995 Omnibus Incentive
Plan to (i) increase the number of shares of Endorex common stock reserved
for issuance by an additional 2,165,664 shares, (ii) implement a maximum
annual limit of 500,000 shares of common stock by which the share reserve
may increase annually over the term of the 1995 Plan under the automatic
share increase provision and (iii) modify the automatic option grant
program to (a) increase the initial option grants to newly-elected board
members to 50,000 shares vesting immediately and (b) provide for annual
option grants to continuing board members to 10,000 shares vesting over
one year;
- the February 21, 2001 option grants to each non-employee member of the
Endorex board of directors to purchase 50,000 shares of Endorex common
stock;
- the ratification of the appointment of Ernst & Young LLP as Endorex's
independent auditors for the fiscal year ending December 31, 2001; and
- such other business as may properly come before the annual meeting or any
adjournment or postponement thereof.
Q: HOW MANY VOTES DO I HAVE?
A: You are entitled to one vote for each share of Endorex common stock and
approximately 13.55 votes for each share of Endorex Series B preferred stock
(representing the number of shares of common stock into which each share of
Series B preferred is convertible) that you owned at the close of business on
October 23, 2001, the Endorex record date.
2
Q: SHOULD ENDOREX STOCKHOLDERS SEND IN THEIR STOCK CERTIFICATES?
A: No. Endorex stockholders will continue to own their shares of Endorex stock
after the merger and should continue to hold their stock certificates.
QUESTIONS FOR CTD STOCKHOLDERS
Q: WHAT IS ENDOREX?
A: Endorex is a development stage drug delivery company focused on developing
oral and mucosal formulations of macromolecular and small molecule drugs that
are currently administered by injections. Endorex's core drug delivery
technology is based on lipid systems, which can be used to encapsulate
fragile drugs in a protective layer of polymerized lipids or liposomes. This
process allows fragile drugs to survive the stress of the gastrointestinal
tract and improve the bioavailability of water insoluble drugs.
Q: DO CTD'S STOCKHOLDERS HAVE TO APPROVE THE MERGER?
A: Yes. Delaware General Corporation Law requires that the holders of a majority
of the outstanding shares of CTD common stock and the holders of a majority
of the outstanding shares of CTD Series A preferred stock, voting together on
an as converted basis, must approve the merger and the merger agreement.
Q: HOW MANY VOTES DO I HAVE?
A: You are entitled to one vote for each share of CTD common stock and one vote
for each share of CTD Series A preferred stock (representing the number of
shares of common stock into which each share of CTD Series A preferred stock
is convertible) that you owned at the close of business on November 19, 2001,
the CTD record date.
Q: WHAT RIGHTS DO I HAVE TO DISSENT FROM THE MERGER?
A: Those CTD stockholders who do not wish to accept Endorex common stock issued
in connection with the merger have the right under Delaware law to have the
fair value of their CTD shares determined by the Delaware Chancery Court.
This right to appraisal is subject to a number of restrictions and technical
requirements as described under "The Merger--Appraisal Rights of CTD
Stockholders."
Q: WILL CTD STOCKHOLDERS BE ABLE TO SELL THE ENDOREX COMMON STOCK THAT THEY
RECEIVE IN THE MERGER?
A: All shares of Endorex common stock that CTD stockholders receive in
connection with the merger will be listed on AMEX and will be freely
transferable unless the holder is considered an affiliate of CTD, at the time
the merger is submitted to the vote of CTD stockholders, or an affiliate of
Endorex for purposes of the Securities Act of 1933, as amended, or the
Securities Act (such as directors, officers or principal stockholders).
Shares of Endorex common stock and warrants held by these affiliates may be
sold only in compliance with Rule 145 under the Securities Act or pursuant to
an effective registration statement or an exemption under the Securities Act.
Certain affiliates of CTD have additionally agreed not to sell or transfer
their Endorex common stock, options and warrants until the date upon which
Endorex has filed two reports on either Form 10-QSB or 10-KSB with the
Securities and Exchange Commission, or SEC, for any two reporting periods
subsequent to the effective date of the merger and thereafter only pursuant
to an effective registration statement or an exemption under the Securities
Act.
3
Q: WILL ANY PORTION OF THE ENDOREX COMMON STOCK ISSUED IN THE MERGER BE HELD IN
ESCROW?
A: Yes. The merger agreement provides that 1,350,000 shares of the Endorex
common stock to be issued in connection with the merger will be placed in
escrow to indemnify Endorex for any damages or losses resulting from breaches
of the merger agreement by CTD and for other specified matters. The escrow
and indemnification provisions of the merger agreement, and the related
escrow agreement, are described under "Agreement and Plan of Merger and
Reorganization and Related Agreements--Indemnification" and "Agreement and
Plan of Merger and Reorganization and Related Agreements--Related
Agreements--Escrow Agreement."
Q: SHOULD CTD STOCKHOLDERS SEND IN THEIR STOCK CERTIFICATES NOW?
A: No. After the merger is completed, Endorex will send instructions to CTD
stockholders explaining the procedure for exchanging their shares of common
stock and Series A preferred stock of CTD for the appropriate number of
shares of Endorex common stock.
Q: WHAT ARE THE FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER?
A: In general, CTD stockholders will recognize no gain or loss for federal
income tax purposes on the exchange of their CTD stock in the merger, except
with respect to any cash they receive in lieu of a fractional share of
Endorex stock, as described under "The Merger--Material Federal Income Tax
Consequences.
QUESTIONS FOR ENDOREX AND CTD STOCKHOLDERS
Q: WHEN DO YOU EXPECT TO COMPLETE THE MERGER?
A: Endorex and CTD are working to complete the merger in the fourth quarter of
2001. Because the merger is subject to various conditions, however, we cannot
predict the exact timing or assure you that those conditions will be fully
satisfied by the fourth quarter of 2001, if at all.
Q: HOW MANY SHARES OF ENDOREX COMMON STOCK WILL ENDOREX ISSUE IN THE MERGER?
A: In connection with the merger, Endorex expects to issue approximately
9.4 million shares of Endorex common stock and options and warrants
exercisable for approximately 0.6 million shares of Endorex common stock in
substitution for CTD options and warrants.
Q: WHAT PERCENTAGE OF ENDOREX WILL BE OWNED BY FORMER CTD STOCKHOLDERS
IMMEDIATELY FOLLOWING THE MERGER?
A: Upon consummation of the proposed merger, CTD stockholders will own
approximately 44% of the outstanding Endorex common stock, assuming the
exercise of all outstanding Endorex options and warrants to be issued in
substitution for CTD options and warrants. CTD stock options will be
exchanged for options to purchase shares of Endorex common stock based on the
CTD common stock exchange ratio and CTD warrants to acquire CTD Series A
preferred stock will be exchanged for warrants to acquire Endorex common
stock based on the CTD common stock exchange ratio.
Q: WHAT DO I NEED TO DO NOW?
A: After carefully reviewing this joint proxy statement/prospectus, Endorex and
CTD stockholders should fill out the applicable proxy card, sign and date it,
and promptly return it in the enclosed return envelope as soon as possible.
If you abstain from voting your shares, it will have the same effect as a
vote against the matters to be voted upon at the stockholder meeting other
than the election of the Endorex board of directors.
4
Q: CAN I CHANGE MY VOTE AFTER I HAVE MAILED MY SIGNED PROXY CARD?
A: Yes. You can change your vote at any time before your proxy is voted at the
annual or special meeting, as applicable. You can do this by:
- sending a written notice to the corporate secretary of Endorex or CTD, as
appropriate, stating that you would like to revoke your proxy;
- completing and submitting a new proxy card with a later date; or
- attending the annual or special meeting, as applicable, and voting in
person.
Q: IF MY BROKER HOLDS MY SHARES IN STREET NAME, WILL MY BROKER VOTE MY SHARES
FOR ME?
A: No. Your broker will not be able to vote your shares without instructions
from you. If you have instructed your broker to vote your shares, you must
follow directions received from your broker to change those instructions.
Q: WHO CAN I CALL WITH QUESTIONS?
A: If you are a Endorex stockholder with questions about the merger, please call
Steve J. Koulogeorge, Controller and Assistant Secretary of Endorex, at
(847) 573-8990.
If you are a CTD stockholder with questions about the merger, please call
Nicholas Stergiopoulos, Director of Corporate Development of CTD, at
(305) 777-2258.
5
SUMMARY
FOR YOUR CONVENIENCE, WE HAVE SUMMARIZED HERE INFORMATION THAT IS CONTAINED
ELSEWHERE IN THIS DOCUMENT. THIS SUMMARY MAY NOT CONTAIN ALL OF THE INFORMATION
THAT IS IMPORTANT TO YOU. TO UNDERSTAND THE TRANSACTIONS MORE FULLY AND FOR A
MORE COMPLETE DESCRIPTION OF THE LEGAL TERMS OF THESE TRANSACTIONS, YOU SHOULD
CAREFULLY READ THIS DOCUMENT AND THE DOCUMENTS TO WHICH WE HAVE REFERRED. SEE
"WHERE YOU CAN FIND MORE INFORMATION" ON PAGE 159. WE HAVE INCLUDED PAGE
REFERENCES PARENTHETICALLY TO DIRECT YOU TO A MORE COMPLETE DESCRIPTION OF THE
TOPICS IN THIS SUMMARY.
THE COMPANIES
ENDOREX CORPORATION
28101 Ballard Drive, Suite F
Lake Forest, Illinois 60045
(847) 573-8990
Endorex Corporation is a development stage drug delivery company focused on
developing oral and mucosal formulations of macromolecular and small molecule
drugs that are currently administered by injections. Endorex's core drug
delivery technology is based on lipid systems which can be used to encapsulate
fragile drugs in a protective layer of polymerized lipids and liposomes. Endorex
believes this process may allow fragile drugs to survive the stress of the
gastrointestinal tract and improve the bioavailability of water insoluble drugs.
Endorex also believes this will result in better patient compliance.
Applications of Endorex's technology could result in oral versions of peptide
hormones, such as insulin and human growth hormone, other sensitive peptide
drugs and proteins, and nucleic acids such as DNA and RNA. Virtually all of
these compounds are currently given to patients via injection.
CORPORATE TECHNOLOGY DEVELOPMENT, INC.
1680 Michigan Avenue, Suite 700
Miami, Florida 33139
(305) 777-2258
CTD is a development stage pharmaceutical company. Its primary strategy is
to develop, through its subsidiaries, innovative oral and mucosal formulations
and new, therapeutic indications of drugs that previously have been approved by
the FDA for marketing in the United States. Such compounds are known as approved
chemical entities, or ACEs. CTD currently has two ACE drug products in clinical
development, orBec-TM- and Oraprine-TM-; orBec-TM- is in phase III clinical
trials and Oraprine-TM- is in phase I clinical trials. CTD also has a drug
product in preclinical development, Metropt-TM-, for which an Investigational
New Drug, or IND, application has been filed with and approved by the FDA.
THE MERGER (SEE PAGE 45)
Endorex and CTD have entered into a merger agreement that provides for the
merger of a newly formed, wholly owned subsidiary of Endorex into CTD. As a
result, CTD will become a wholly owned subsidiary of Endorex. Stockholders of
CTD will become stockholders of Endorex following the merger, and (a) each share
of CTD common stock will be exchanged for 0.271443 of a share of Endorex common
stock and (b) each share of CTD Series A preferred stock will be exchanged for
1.008466 shares of Endorex common stock. In connection with the merger, Endorex
expects to issue a total of approximately 9.4 million shares of Endorex common
stock and options and warrants exercisable for approximately 0.6 million shares
of Endorex common stock in substitution for CTD options and warrants. We urge
you to carefully read in its entirety the merger agreement, a copy of which is
attached as Appendix I hereto.
6
VOTING OF PROXIES (SEE PAGE 41 & 43)
To have your shares represented and voted at the applicable stockholder
meeting, you must either attend and vote at the meeting in person or complete,
date and sign the accompanying proxy card and promptly return it in the enclosed
postage-paid envelope. All properly executed proxy cards that Endorex or CTD, as
applicable, receive prior to the vote at the applicable stockholder meeting and
that are not revoked, will be voted in accordance with the instructions
indicated on the proxies or, if no instructions are given, to approve the
proposals to be voted upon. A stockholder may revoke a proxy at any time before
it is used by delivering to Endorex or CTD, as applicable, a signed notice of
revocation or a later dated signed proxy card, or by attending the applicable
stockholder meeting and voting in person.
STOCKHOLDER APPROVALS (SEE PAGE 41 & 44)
ENDOREX STOCKHOLDERS
At the annual meeting, the affirmative vote of the holders of a majority of
the shares of Endorex common stock, voting together with the holders of Endorex
Series B preferred stock on an as converted basis, that are entitled to vote and
are present or represented by proxy at the Endorex meeting is required to
approve the proposals submitted to the Endorex stockholders for their approval,
except (a) the election of directors which requires a plurality of the votes
cast and (b) the amendment to the Amended and Restated Certificate of
Incorporation which requires the approval of the holders of a majority of the
outstanding shares of Endorex common stock, voting together with the holders of
Endorex Series B preferred stock on an as converted basis. Endorex stockholders
are entitled to one vote per share of Endorex common stock and approximately
13.55 votes per share of Endorex Series B preferred stock owned on October 23,
2001, the record date.
As of October 15, 2001, directors and executive officers of Endorex and
their affiliates beneficially owned an aggregate of 1,707,686 shares of Endorex
common stock and 100,410 shares of Endorex Series B preferred stock (exclusive
of any shares issuable upon the exercise of options) representing approximately
13.4% of the outstanding Endorex common stock and 100% of the outstanding
Endorex Series B preferred stock on such date.
CTD STOCKHOLDERS
At the special meeting, the affirmative vote of the holders of a majority of
the outstanding shares of CTD common stock voting together with the holders of
the outstanding shares of CTD Series A preferred stock, on an as converted
basis, is required to approve the merger and the merger agreement. CTD
stockholders are entitled to one vote per share of CTD common stock and one vote
per share of CTD Series A preferred stock owned at the close of business on
November 19, 2001, the record date. Pursuant to a voting agreement in the form
attached as Appendix II hereto, certain CTD stockholders, including CTD's
directors, executive officers and their affiliates, owning beneficially
approximately 63% and 61% of CTD's common stock and Series A preferred stock,
respectively, outstanding as of October 15, 2001 have agreed to vote all of
their shares of CTD capital stock for approval of the merger, the merger
agreement and the transactions contemplated thereby.
As of October 15, 2001, directors and executive officers of CTD and their
affiliates beneficially owned an aggregate of 2,872,453 shares of CTD common
stock (exclusive of any shares issuable upon the exercise of options) and
1,000,000 shares of CTD Series A preferred stock, representing approximately
39.7% of the shares of CTD common stock and approximately 13.1% of the shares of
CTD Series A preferred stock outstanding on such date.
7
TREATMENT OF CTD STOCK OPTIONS AND WARRANTS (SEE PAGE 66)
STOCK OPTIONS
At the effective time of the merger and without any action on the part of
the holders of CTD options, each option to acquire CTD common stock that is
issued and outstanding immediately prior to the merger, and all rights in
respect thereof, will be exchanged for an Endorex option to acquire Endorex
common stock. Each Endorex option will be evidenced by a new stock option
agreement issued by Endorex to each of the holders of a CTD option. Each such
Endorex option will have, and be subject to, the same terms and conditions set
forth in the applicable option holder's stock option agreements for the CTD
options, as in effect on the date of the merger agreement, except that the
number of shares and the exercise price of the CTD options will be changed to
reflect the exchange ratio of 0.271443 of a share of Endorex common stock for
each share of CTD common stock.
WARRANTS
The holders of CTD warrants exercisable for CTD Series A preferred stock
have agreed to amend such warrants prior to the effective time of the merger
such that at the effective time of the merger and without any action on the part
of the holders of CTD warrants issued and outstanding immediately prior to the
merger, such warrants and all rights in respect thereof will be exchanged for
Endorex warrants to acquire Endorex common stock. Each Endorex warrant will be
evidenced by a new warrant agreement issued by Endorex to each of the holders of
a CTD warrant. Each such Endorex warrant will have, and be subject to, the same
terms and conditions set forth in the applicable warrant holder's warrant
agreement (as such warrant agreement will be amended pursuant to the terms of
the merger agreement) for the CTD warrants, as in effect on the date of the
merger agreement, except that the number of shares and the exercise price of the
CTD warrants will be changed to reflect the exchange ratio of 0.271443 of a
share of Endorex common stock for each share of CTD preferred stock and will be
exercisable for Endorex common stock instead of CTD Series A preferred stock.
COMPARISON OF STOCKHOLDER RIGHTS (SEE PAGE 110)
As a result of the merger, CTD stockholders will become holders of shares of
Endorex common stock. The rights of CTD stockholders are currently governed by
the CTD charter, the CTD bylaws and the laws of the State of Delaware. Following
the merger, the rights of all former holders of shares of CTD common stock and
Series A preferred stock will be governed by the Endorex charter and the Endorex
bylaws and will continue to be governed by the laws of the State of Delaware. In
connection with the merger, CTD Series A preferred stock will be exchanged for
common stock of Endorex. As a result of this exchange, holders of CTD's
Series A preferred stock will lose certain important rights.
RECOMMENDATIONS OF THE BOARDS OF DIRECTORS (SEE PAGE 42 & 44)
The CTD and Endorex boards of directors have determined that the terms and
conditions of the merger are in the best interests of their respective
stockholders. The CTD board recommends that CTD stockholders vote "FOR" approval
of the merger and the merger agreement, and the Endorex board recommends that
Endorex stockholders vote "FOR" the issuance of the shares of Endorex common
stock, options and warrants in connection with the merger.
OPINION OF ENDOREX FINANCIAL ADVISOR (SEE PAGE 52)
In deciding to approve the merger, the board of directors of Endorex
considered, among various factors described below in "The Merger--Endorex's
Reasons for the Merger and Recommendation of the Endorex Board of Directors,"
the opinion of its independent financial advisor, Wells Fargo Van Kasper, or
WFVK.
8
On July 13, 2001, WFVK delivered its oral opinion to the Endorex board of
directors that, as of that date, the consideration to be received from CTD
stockholders (the exchange ratio) was fair from a financial point of view to the
stockholders of Endorex. WFVK subsequently confirmed its oral opinion by
delivering a written opinion dated July 13, 2001. The full text of the written
opinion sets forth the assumptions made, matters considered and limitations on
the review undertaken in connection with the opinion and is attached as
Appendix III hereto. You should read this opinion in its entirety. WFVK'S
OPINION IS DIRECTED TO ENDOREX'S BOARD OF DIRECTORS AND ADDRESSES ONLY THE
FAIRNESS OF THE EXCHANGE RATIO PURSUANT TO THE MERGER AGREEMENT FROM A FINANCIAL
POINT OF VIEW TO THE STOCKHOLDERS OF ENDOREX AS OF THE DATE OF THE OPINION, AND
DOES NOT CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER AS TO HOW STOCKHOLDERS
SHOULD VOTE ON ANY MATTER RELATING TO THE MERGER.
INTERESTS OF CERTAIN PERSONS IN THE MERGER AND POTENTIAL CONFLICTS OF INTEREST
(SEE PAGE 59)
When considering the recommendations of the boards of directors of Endorex
and CTD regarding the merger, you should be aware that some directors and
officers may have interests in the merger that are different from, or in
addition to, yours. As a result, these directors and officers may be more likely
to recommend approval of the merger, the merger agreement and the transactions
contemplated thereby than CTD and Endorex stockholders generally. See "The
Merger--Interests of Certain Persons in the Merger and Potential Conflicts of
Interest."
CONDITIONS TO COMPLETION OF THE MERGER (SEE PAGE 69)
Whether Endorex and CTD complete the merger depends on a number of
conditions being satisfied in addition to Endorex stockholders' approval of the
issuance of Endorex common stock, options and warrants and CTD stockholders'
approval of the merger and the merger agreement. However, either Endorex or CTD
may choose to complete the merger even though one or more of these conditions
has not been satisfied, as long as the applicable law allows them to do so.
Neither Endorex nor CTD can be certain when, or if, the conditions to the merger
will be satisfied or waived, or that the merger will be completed.
TERMINATION OF THE MERGER AGREEMENT (SEE PAGE 75)
At any time prior to the effective time of the merger, the merger agreement
may be terminated by the mutual agreement of Endorex and CTD. Also, CTD or
Endorex can decide, without the other's consent, to terminate the merger
agreement:
- if the merger has not been completed on or before December 31, 2001;
- if the other party has breached the merger agreement; or
- for certain other reasons.
TERMINATION FEE AND EXPENSES (SEE PAGE 76)
CTD and Endorex have each agreed to pay the other party, under certain
circumstances, reasonable costs and expenses incurred in connection with the
merger agreement and a termination fee of $1,000,000.
NO SOLICITATION OF TRANSACTIONS (SEE PAGE 74)
The merger agreement prohibits Endorex from directly or indirectly taking
certain actions relating to the solicitation of alternative proposals or offers
for Endorex to acquire other entities, except in limited circumstances, and CTD
is prohibited from directly or indirectly taking certain actions relating to the
solicitation of competing proposals or offers to acquire all or any part of
CTD's stock or assets.
9
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER (SEE PAGE 61)
The merger is intended to qualify as a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code of 1986, as amended, or Internal
Revenue Code. If the merger qualifies as a reorganization, CTD stockholders
generally will recognize no gain or loss for United States federal income tax
purposes on the exchange of CTD stock for shares of Endorex common stock
pursuant to the merger, except for cash received in lieu of fractional shares of
Endorex common stock. Consummation of the merger is conditioned upon each of CTD
and Endorex receiving a legal opinion from outside counsel that the merger
constitutes a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code.
Tax matters are very complicated and the tax consequences of the merger to
you will depend on the facts of your own situation. You should consult with your
own tax advisor for a full understanding of all tax consequences of the merger
to you.
ANTICIPATED ACCOUNTING TREATMENT OF THE MERGER (SEE PAGE 61)
Endorex intends to treat the merger as a purchase for accounting and
financial reporting purposes, which means that CTD will be treated as a separate
entity for periods prior to the closing, and thereafter as a wholly-owned
subsidiary of Endorex.
MARKET PRICE INFORMATION (SEE PAGE 82)
Endorex common stock is traded on AMEX under the symbol "DOR." On July 31,
2001, the last trading day before announcement of the proposed merger, the
closing price per share of Endorex common stock on AMEX was $1.13. On
October 15, 2001, the latest practicable trading day before this joint proxy
statement/prospectus was printed, the closing price per share of Endorex common
stock was $.90. CTD is unable to provide information with respect to the market
price of CTD stock because there is no established trading market for CTD stock.
RESTRICTIONS ON THE ABILITY TO SELL ENDOREX STOCK (SEE PAGE 67)
All shares of Endorex common stock that CTD stockholders receive in
connection with the merger will be freely transferable unless the holder is
considered an affiliate of CTD, at the time the merger is submitted to the vote
of CTD stockholders, or an affiliate of Endorex for purposes of the Securities
Act (such as officers, directors and principal stockholders). Shares of Endorex
common stock and warrants held by these affiliates may be sold or transferred
only pursuant to an effective registration statement or an exemption under the
Securities Act. Certain affiliates of CTD have additionally agreed not to sell
or transfer their Endorex common stock, options and warrants until the date upon
which Endorex shall have filed two reports on either Form 10-QSB or 10-KSB with
the SEC for any two reporting periods subsequent to the effective date of the
merger and thereafter only pursuant to an effective registration statement or an
exemption under the Securities Act.
APPRAISAL RIGHTS (SEE PAGE 63)
Under the Delaware General Corporation Law, any holder of shares of CTD
stock who does not wish to accept the merger consideration in respect of its
shares has the right to dissent from the merger and to seek an appraisal of, and
to be paid the fair cash value (exclusive of any element of value arising from
the accomplishment or expectation of the merger) for, its shares of stock, as
determined by a court, together with a fair rate of interest, if any, provided
that the stockholder fully complies with the provisions of Section 262 of the
Delaware General Corporation Law. A copy of Section 262 is attached as
Appendix IV hereto. If you properly request appraisal, the fair value of your
shares will be determined by the Delaware Court of Chancery and may be less than
or greater than the value of the consideration to be paid to CTD stockholders
who do not seek appraisal. This right to appraisal is
10
subject to a number of restrictions and technical requirements. If you fail to
strictly comply with all of the restrictions and requirements, you will lose
your appraisal rights. Generally, in order to exercise your appraisal rights you
must:
- send a written demand to CTD for appraisal in compliance with the Delaware
General Corporation Law BEFORE the proposal to approve the merger is voted
on;
- not vote in favor of approving the merger and merger agreement; and
- continuously hold your CTD common stock from the date you make the demand
for appraisal through the completion of the merger.
MERELY VOTING AGAINST THE APPROVAL OF THE MERGER AND THE MERGER AGREEMENT
WILL NOT PROTECT YOUR RIGHTS TO AN APPRAISAL. THE REQUIREMENTS UNDER DELAWARE
LAW FOR EXERCISING APPRAISAL RIGHTS ARE DESCRIBED IN FURTHER DETAIL IN THE
SECTION OF THIS JOINT PROXY STATEMENT/PROSPECTUS ENTITLED "APPRAISAL RIGHTS OF
CTD STOCKHOLDERS" BEGINNING ON PAGE 63. THE COMPLETE TEXT OF SECTION 262 OF THE
DELAWARE GENERAL CORPORATION LAW IS ATTACHED AS APPENDIX IV HERETO.
If you vote in favor of approving the merger and the merger agreement, you
will waive your rights to seek appraisal of your shares of CTD common stock
under Delaware law.
Endorex will not be obligated to complete the merger if CTD stockholders
entitled to receive more than 250,000 shares of Endorex common stock to be
issued in connection with the merger properly exercise their appraisal rights
under Delaware law. However, Endorex may nevertheless waive its right not to
complete the merger if the 250,000 share threshold is exceeded.
ESCROW AGREEMENT (SEE PAGE 78)
1,350,000 shares of Endorex common stock to be issued in the merger will be
deposited into an escrow fund to indemnify Endorex for any losses or damages
resulting from breaches of the merger agreement by CTD and for other specified
matters. Except in limited circumstances, the escrow shares are Endorex's
exclusive remedy for claims for indemnification and Endorex will receive
compensation only if its aggregate damages exceed $100,000. On each of
March 31, 2002, September 30, 2002 and March 31, 2003, 674,975, 337,502 and
337,523 shares of Endorex common stock, respectively, less any shares subject to
an indemnification claim or which have been distributed to Endorex pursuant to
indemnification claims, shall be distributed to the CTD stockholders from the
escrow.
The form of the escrow agreement is attached as Appendix V hereto. CTD
stockholders will be required to execute the escrow agreement in connection with
the closing of the merger. You are encouraged to read the escrow agreement in
its entirety.
TRADEMARKS
This document contains trademarks of Endorex, CTD and others.
OTHER ENDOREX PROPOSALS (SEE PAGE 40)
At the Endorex annual meeting, Endorex is also presenting to its
stockholders the following proposals:
- amendment of Endorex's Amended and Restated Certificate of Incorporation
changing Endorex's name to DOR BioPharma, Inc.;
- election of six directors to serve until the next annual meeting of the
stockholders of Endorex or until their successors are duly elected and
qualified;
11
- approval of an amendment of Endorex's Amended and Restated 1995 Omnibus
Incentive Plan to (i) increase the number of shares of Endorex common
stock reserved for issuance by an additional 2,165,664 shares,
(ii) implement a maximum annual limit of 500,000 shares of common stock by
which the share reserve may increase annually over the term of the 1995
Plan under the automatic share increase provision and (iii) modify the
automatic option grant program to (a) increase the initial option grants
to newly-elected board members to 50,000 shares vesting immediately and
(b) provide for annual option grants to continuing board members for
10,000 shares vesting over one year;
- approval of the February 21, 2001 option grants to each non-employee
member of the Endorex board of directors to purchase 50,000 shares of
Endorex common stock;
- ratification of the appointment of Ernst & Young LLP as Endorex's
independent auditors for the fiscal year ending December 31, 2001; and
- transaction of such other business as may properly come before the annual
meeting or any adjournment or postponement thereof.
12
ENDOREX SUMMARY HISTORICAL FINANCIAL DATA
The summary financial data presented below as of December 31, 2000 and for
the five years ended December 31, 2000 is derived from the audited consolidated
financial statements of Endorex. The summary financial data presented below as
of and for the six months ended June 30, 2000 and June 30, 2001 and the
cumulative period since inception of Endorex to June 30, 2001 is derived from
the unaudited consolidated financial statements of Endorex. The data set forth
below should be read in conjunction with Endorex's consolidated financial
statements and accompanying notes and "Endorex Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this joint proxy statement/prospectus.
PERIOD FROM
FEBRUARY 1, 1996 SIX MONTHS ENDED
TO DECEMBER 31, YEAR ENDED DECEMBER 31, JUNE 30,
----------------- ------------------------------------------------------ --------------------------
1996 1997 1998 1999 2000 2000 2001
----------------- ----------- ------------ ----------- ----------- ------------ -----------
(UNAUDITED) (UNAUDITED)
STATEMENT OF OPERATIONS
DATA:
SBIR contract revenue... $ -- $ -- $ -- $ -- $ -- $ -- $ --
Operating expenses:
SBIR contract research
and development..... -- -- -- -- -- -- --
Proprietary research
and development..... 1,141,926 1,826,066 1,977,994 2,028,945 956,742 468,193 1,171,494
General and
administrative...... 865,831 1,450,828 3,500,682 3,046,684 2,101,767 981,521 908,269
----------- ----------- ------------ ----------- ----------- ----------- -----------
Total operating
expenses.......... 2,007,757 3,276,894 5,478,676 5,075,629 3,058,509 1,449,714 2,079,763
----------- ----------- ------------ ----------- ----------- ----------- -----------
Loss from operations.... (2,007,757) (3,276,894) (5,478,676) (5,075,629) (3,058,509) (1,449,714) (2,079,763)
Equity in losses from
joint ventures........ (17,097,975) (2,865,908) (2,682,368) (1,578,856) (577,661)
Other income............ 3,790 250,000 -- (1,577)
Interest income......... 44,880 185,642 799,335 488,582 747,073 320,965 294,686
Interest expense........ (153,074) (15,854) (51,854) (51,889) (23,019) (27,320)
----------- ----------- ------------ ----------- ----------- ----------- -----------
Net loss................ (1,962,877) (3,244,326) (21,793,170) (7,501,019) (4,795,693) (2,730,624) (2,391,635)
Preferred stock
dividends............. -- -- (713,187) (1,285,413) (1,382,200) (687,378) (737,142)
----------- ----------- ------------ ----------- ----------- ----------- -----------
Net loss applicable to
common stockholders... $(1,962,877) $(3,244,326) $(22,506,357) $(8,786,432) $(6,177,893) $(3,418,002) $(3,128,777)
=========== =========== ============ =========== =========== =========== ===========
CUMULATIVE PERIOD
FEBRUARY 15,
1985 (INCEPTION)
TO JUNE 30, 2001
-----------------
(UNAUDITED)
STATEMENT OF OPERATIONS
DATA:
SBIR contract revenue... $ 100,000
Operating expenses:
SBIR contract research
and development..... 86,168
Proprietary research
and development..... 16,004,499
General and
administrative...... 13,980,313
------------
Total operating
expenses.......... 30,070,980
------------
Loss from operations.... (29,970,980)
Equity in losses from
joint ventures........ (23,223,912)
Other income............ 253,725
Interest income......... 3,336,274
Interest expense........ (340,630)
------------
Net loss................ (49,945,523)
Preferred stock
dividends............. (4,117,942)
------------
Net loss applicable to
common stockholders... $(54,063,465)
============
DECEMBER 31, JUNE 30, JUNE 30,
2000 2000 2001
------------- ----------- -----------------
(UNAUDITED) (UNAUDITED)
BALANCE SHEET DATA:
Cash and cash equivalents................................... $10,831,266 $10,170,382 $ 9,808,676
Working capital............................................. 10,112,440 12,267,644 6,626,974
Total assets................................................ 13,669,458 15,012,487 11,582,177
Total stockholders' equity (deficit)........................ 880,633 3,285,321 (1,846,269)
13
CTD SUMMARY HISTORICAL FINANCIAL DATA
The summary financial data presented below for the fiscal years ended
December 31, 2000, December 31, 1999 and December 31, 1998 and as of
December 31, 2000 are derived from the audited consolidated financial statements
of CTD. The summary financial data presented below for the six months ended
June 30, 2001 and June 30, 2000 and the period from January 1, 1998
(commencement of operations) through June 30, 2001 and as of June 30, 2001 is
derived from the unaudited financial statements of CTD. The data set forth below
should be read in conjunction with CTD's consolidated financial statements and
accompanying notes and "CTD Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this joint proxy
statement/ prospectus.
PERIOD FROM
JANUARY 1, 1998
(COMMENCEMENT
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED OF OPERATIONS)
--------------------------------------- ------------------------------- THROUGH JUNE 30,
1998 1999 2000 JUNE 30, 2000 JUNE 30, 2001 2001
----------- ----------- ----------- -------------- -------------- ----------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Interest income.................... $ 214,000 $ 167,000 $ 428,000 $ 230,000 $ 173,000 $ 982,000
----------- ----------- ----------- --------- ----------- -----------
General and administrative
expenses......................... 991,000 1,528,000 1,354,000 607,000 724,000 4,597,000
Research and development
expenses......................... 96,000 955,000 1,324,000 558,000 880,000 3,255,000
Write-off of licenses.............. -- 1,822,000 -- -- -- 1,822,000
----------- ----------- ----------- --------- ----------- -----------
1,087,000 4,305,000 2,678,000 1,165,000 1,604,000 9,674,000
(873,000) (4,138,000) (2,250,000) (935,000) (1,431,000) (8,692,000)
Gain on sale of license............ -- 3,052,000 -- -- -- 3,052,000
----------- ----------- ----------- --------- ----------- -----------
Loss before minority interest and
discontinued operations.......... (873,000) (1,086,000) (2,250,000) (935,000) (1,431,000) (5,640,000)
Minority interest in net income of
subsidiary....................... -- (298,000) -- -- -- (298,000)
----------- ----------- ----------- --------- ----------- -----------
Loss from continuing operations.... (873,000) (1,384,000) (2,250,000) (935,000) (1,431,000) (5,938,000)
Loss from operations of
discontinued subsidiary.......... (3,121,000) (4,852,000) -- -- -- (7,973,000)
Gain on sale of discontinued
subsidiary....................... -- 4,956,000 -- -- -- 4,956,000
----------- ----------- ----------- --------- ----------- -----------
Net loss........................... $(3,994,000) $(1,280,000) $(2,250,000) $(935,000) $(1,431,000) $(8,955,000)
=========== =========== =========== ========= =========== ===========
DECEMBER 31, 2000 JUNE 30, 2001
----------------- --------------
(UNAUDITED)
BALANCE SHEET DATA:
Cash and cash equivalents................................... $6,508,000 $5,072,000
Liabilities................................................. $ 279,000 $ 242,000
Working Capital............................................. $6,249,000 $4,831,000
Total assets................................................ $6,645,000 $5,205,000
Stockholders' Equity........................................ $6,366,000 $4,963,000
14
SUMMARY UNAUDITED PRO FORMA
FINANCIAL INFORMATION
The following table presents summary pro forma financial information related
to Endorex's proposed acquisition of CTD and should be read in conjunction with
the introduction to the unaudited pro forma financial information and related
notes included elsewhere in this joint proxy statement/ prospectus. This
information has been derived from each company's respective financial statements
and notes, which are included elsewhere in this joint proxy
statement/prospectus. The unaudited summary pro forma financial information
below presents Endorex's statement of operations data on a pro forma basis to
reflect the proposed acquisition of CTD as though the transaction had occurred
on January 1, 2000 and presents balance sheet data on a pro forma basis as
though the transaction occurred on June 30, 2001. You should not rely on the
unaudited summary pro forma financial information as an indication of the
results of operations or financial position that would have been achieved if the
acquisition had taken place earlier or as an indication of the results of
operations or financial position of Endorex after completion of the acquisition.
YEAR SIX MONTHS
ENDED ENDED
DECEMBER 31, JUNE 30,
2000 2001
------------ -----------
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS DATA:
Revenue..................................................... $ -- $ --
Operating expenses.......................................... 6,818,066 4,221,014
Loss from operations........................................ (6,818,066) (4,221,014)
Net loss.................................................... (8,127,250) (4,359,886)
Net loss applicable to common stockholders.................. (9,509,450) (5,097,028)
Basic and diluted net loss per share applicable to common
stockholders.............................................. $ (0.44) $ (0.23)
Basic and diluted weighted average common shares
outstanding............................................... 21,628,144 22,175,742
JUNE 30,
2001
-----------
UNAUDITED PRO FORMA BALANCE SHEET DATA:
Cash and cash equivalents................................... $14,880,676
Working capital............................................. 11,457,974
Total assets................................................ 21,155,082
Long-term liabilities, net of current portion............... 162,754
Total stockholders' equity.................................. 7,484,636
15
RISK FACTORS
BY VOTING IN FAVOR OF THE MERGER, CTD STOCKHOLDERS WILL BE CHOOSING TO
INVEST IN ENDOREX COMMON STOCK. AN INVESTMENT IN ENDOREX COMMON STOCK INVOLVES A
HIGH DEGREE OF RISK. YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS IN
ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS JOINT PROXY STATEMENT/
PROSPECTUS IN DECIDING WHETHER TO VOTE FOR THE MERGER (OR, IN THE CASE OF
ENDOREX STOCKHOLDERS, IN EVALUATING WHETHER TO VOTE IN FAVOR OF THE ISSUANCE OF
SHARES OF ENDOREX COMMON STOCK, OPTIONS AND WARRANTS IN CONNECTION WITH THE
MERGER). IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, THE BUSINESS AND
PROSPECTS OF CTD OR ENDOREX MAY BE SERIOUSLY HARMED AND YOU MAY LOSE ALL OR PART
OF YOUR INVESTMENT.
RISKS RELATED TO THE MERGER
CTD STOCKHOLDERS WILL RECEIVE A FIXED NUMBER OF SHARES OF ENDOREX COMMON STOCK
DESPITE CHANGES IN MARKET VALUE OF ENDOREX COMMON STOCK OR CHANGES IN THE VALUE
OF CTD. THE DOLLAR VALUE OF ENDOREX COMMON STOCK RECEIVED IN THE MERGER MAY
INCREASE OR DECREASE AFTER CTD STOCKHOLDERS SUBMIT THEIR PROXIES.
Endorex expects to issue approximately 9.4 million shares of Endorex common
stock in exchange for all outstanding shares of CTD capital stock and to make
certain payments to CTD employees in connection with the merger. In addition,
Endorex expects to issue options and warrants exercisable for approximately
0.6 million shares of Endorex common stock in substitution for CTD options and
warrants in connection with the merger. There will be no adjustment for changes
in the market price of Endorex common stock. In addition, neither CTD nor
Endorex may terminate the merger agreement or "walk away" from the merger or
resolicit the vote of its stockholders solely because of changes in the market
price of Endorex common stock.
Accordingly, the specific dollar value of Endorex common stock that CTD
stockholders will receive upon the merger's completion will depend upon the
market value of Endorex common stock when the merger is completed, which could
be lower than it was on the date you submit your proxy. The market price of
Endorex common stock is by nature subject to the general price fluctuations in
the market for publicly traded equity securities as well as substantial price
fluctuations associated with development stage drug delivery companies. The
market price of Endorex common stock has experienced significant volatility in
the past. We urge you to obtain current market quotations for Endorex common
stock. Endorex cannot predict or give any assurances regarding the market price
of Endorex common stock at any time before or after the completion of the
merger.
THE MERGER WILL RESULT IN AN IMMEDIATE AND SUBSTANTIAL INCREASE IN ENDOREX'S NET
LOSS.
The merger would, on a pro forma basis, increase Endorex's net loss (before
preferred dividends) from a loss of $4.8 million to a loss of $8.1 million for
the year ended December 31, 2000. This increase in Endorex's loss from
operations could have a negative impact on the market price of Endorex's common
stock. Analysts and investors carefully review a company's earnings per share
and often base investment decisions on a company's operating profits and losses
and per share earnings.
ENDOREX'S STOCKHOLDERS WILL BE SUBSTANTIALLY DILUTED AS A RESULT OF THE MERGER.
Endorex will issue approximately 9.4 million shares of Endorex common stock
and options and warrants exercisable for approximately 0.6 million shares of
Endorex common stock in substitution for CTD options and warrants in connection
with the merger. As of October 15, 2001, there were 12,741,858 shares of Endorex
common stock outstanding. Upon completion of the merger, CTD stockholders will
collectively own approximately 44% of Endorex's outstanding common stock
assuming exercise of all Endorex options and warrants issued in substitution for
CTD options and warrants. Therefore, after the merger, current Endorex
stockholders will face immediate and substantial dilution and the CTD
stockholders could exert significant influence over the matters of Endorex.
16
THE EXERCISE PRICE OF CERTAIN ENDOREX WARRANTS AND THE CONVERSION PRICE OF THE
SERIES B AND SERIES C PREFERRED STOCK OF ENDOREX MAY BE SUBJECT TO ADJUSTMENT AS
A RESULT OF THE MERGER, THEREBY DILUTING ENDOREX STOCKHOLDERS.
Certain warrants issued by Endorex and the Series B and Series C preferred
stock of Endorex are subject to anti-dilution provisions that adjust the
exercise price of the warrants and the conversion price of the Series B and
Series C preferred stock. Depending upon the price per share of Endorex common
stock as quoted on AMEX or any other national exchange at the effective time of
the merger, the exercise price of the warrants and the conversion price of the
Series B and C preferred stock may be adjusted, resulting in the issuance of a
greater number of shares of Endorex common stock upon the exercise of the
warrants and the conversion of the Series B and Series C preferred stock and
diluting Endorex stockholders.
ENDOREX AND CTD MAY NOT SUCCESSFULLY MEET THE CHALLENGES NECESSARY TO REALIZE
THE POTENTIAL BENEFITS OF THE MERGER.
Endorex and CTD will need to overcome significant issues in order to realize
any benefits or synergies from the merger, including, but not limited to, the
following challenges:
- developing and commercializing existing product candidates of both
companies;
- integrating the operations, business models and research and development
of both companies;
- integrating CTD product candidates and technology with Endorex drug
delivery technology;
- developing or acquiring new product candidates or technology;
- successfully commercializing future product candidates or technology;
- obtaining FDA approval for the product candidates of both companies;
- developing and commercializing products that can successfully compete with
similar products; and
- raising sufficient funds to develop and commercialize product candidates.
The successful completion of these post-merger events will involve
considerable difficulty and there can be no assurance that Endorex will be able
to overcome these obstacles, or that there will be a market for existing product
candidates or new products developed by Endorex after the merger. Endorex's
failure to do so could have a material adverse effect on the combined company's
business, financial condition and operating results or could result in the loss
of key personnel. In addition, the attention and effort devoted to the
integration of the two companies may divert management's attention from other
important issues, and could seriously harm the combined company.
THE MARKET PRICE OF ENDOREX COMMON STOCK MAY DECLINE AS A RESULT OF THE MERGER.
The market price of Endorex common stock may decline as a result of the
merger if:
- investors or analysts do not view the merger favorably;
- the integration of Endorex and CTD is unsuccessful;
- Endorex does not achieve the perceived benefits of the merger as rapidly
or to the extent anticipated by the two companies, financial or industry
analysts or investors;
- the effect of the merger on Endorex's financial results is not consistent
with the expectations of both companies, financial or industry analysts or
investors;
17
- the combined company fails to successfully develop or market the product
candidates of Endorex and CTD; or
- the demand for CTD and Endorex products fails to develop or diminishes.
ENDOREX'S AND CTD'S OFFICERS AND DIRECTORS MAY HAVE INTERESTS IN THE MERGER
DIFFERENT FROM THOSE OF THE STOCKHOLDERS OF ENDOREX AND CTD THAT MAY INFLUENCE
THEM TO SUPPORT OR APPROVE THE MERGER.
Endorex's and CTD's current directors and officers may have interests in the
merger that are in addition to, or different from, the interests of other
Endorex and CTD stockholders. These interests include:
- Pursuant to the terms of the merger agreement, CTD's current directors and
officers will, after the merger, be indemnified by CTD and, for a period
of six years thereafter, benefit from insurance coverage for liabilities
that arise from their service as directors and officers of CTD prior to
the merger.
- Pursuant to the terms of the merger agreement, after the closing of the
merger, Dr. Colin Bier, Guy Rico and Peter Kliem, currently directors of
CTD, will become directors of Endorex. Mr. Rico and Mr. Kliem, as
non-employee directors, will upon appointment and subject to the approval
of Proposal Four by the Endorex stockholders at the Endorex annual
meeting, receive an option exercisable for 50,000 shares of Endorex common
stock and will thereafter each receive options exercisable for an
additional 10,000 shares of Endorex common stock at each annual meeting of
the Endorex stockholders vesting one year from the date of grant. If
Proposal Four is not approved, then each will receive an option
exercisable for 42,000 shares of Endorex common stock upon their
appointment to the Endorex board of directors and will thereafter each
receive an option exercisable for 12,000 shares of Endorex common stock
for every two years they serve as a non-employee director of Endorex.
- Concurrently with the closing of the merger, Dr. Bier, the Chairman of the
board of directors of CTD, will enter into an agreement with Endorex to
become the Chairman of the board of directors and the Chief Executive
Officer of Endorex. Pursuant to this agreement, Dr. Bier will receive an
initial annual base salary of $275,000 and options exercisable for 700,000
shares of Endorex common stock.
- Pursuant to the terms of the merger agreement, Steve H. Kanzer, the
President and a director of CTD, will receive a payment of 250,000 shares
of Endorex common stock upon the closing of the merger.
- Concurrently with the closing of the merger, Mr. Kanzer will enter into a
noncompetition and nonsolicitation agreement with Endorex whereby he will
be paid approximately $250 per hour for any time incurred while assisting
Endorex in obtaining and enforcing patents, copyrights or trademarks for
any intellectual property acquired or discovered by Mr. Kanzer during the
course of performing services for or acting as an employee or officer of
CTD.
- Pursuant to the terms of the merger agreement, Nicholas Stergiopoulos, the
Director of Corporate Development of CTD, will receive a payment of
133,334 shares of Endorex common stock upon the closing of the merger.
- Concurrently with the closing of the merger, Mr. Stergiopoulos will enter
into a consulting agreement with Endorex whereby he will be paid
approximately $8,200 per calendar month for a period of six months. In
addition, Mr. Stergiopoulos will receive 1% of the proceeds of any
licensing or asset sale transaction between RxEyes, Inc., a majority owned
subsidiary of CTD, and a certain third party or its affiliates, if that
license agreement or asset sale was consummated due to the efforts of
Mr. Stergiopoulos.
18
- Pursuant to a voting agreement in the form attached as Appendix II hereto
among Endorex, CTD, Roadrunner and the other parties thereto, certain CTD
stockholders, including CTD's directors, executive officers and their
affiliates, owning beneficially approximately 63% and 61% of CTD's common
stock and Series A preferred stock, respectively, outstanding as of
October 15, 2001 have agreed to vote all of their shares of CTD common
stock and Series A preferred stock for approval of the merger, the merger
agreement and the transactions contemplated thereby.
- The officers and directors of CTD own in the aggregate options exercisable
for 1,322,725 shares of CTD common stock at an exercise price of $.20 per
share which will be assumed by Endorex and exchanged for Endorex options
exercisable for 359,042 shares of Endorex common stock at an exercise
price of $.74 per share.
Mr. Kanzer is a director of Endorex and the President and Chief Executive
Officer and a director of CTD. As of October 15, 2001, Mr. Kanzer beneficially
owned 1.92% of Endorex's common stock and 21.0% of CTD's common stock.
Mr. Kanzer serves on the board of directors of Endorex as a nominee of the Aries
Master Fund II and the Aries Domestic Fund, who subsequently transferred their
right to nominate a member to the board of directors of Endorex to Aries
Select, Ltd., or Aries, and Aries Select I LLC, or Aries I, each of which is a
principal stockholder of Endorex. Aries Select II LLC, or Aries II, is also a
stockholder of Endorex.
Paramount Capital Asset Management, Inc., or PCAM, is the investment manager
of Aries and the managing member of each of Aries I and Aries II. Lindsay A.
Rosenwald, M.D. is the Chairman and sole stockholder of PCAM and Paramount
Capital, Inc., or Paramount. As of October 15, 2001, Dr. Rosenwald beneficially
owned 34.0% of Endorex's common stock. Paramount has acted as a placement agent
in connection with certain private placements of Endorex's common stock, as a
finder in connection with a private placement of Endorex's common stock and
warrants, and as a financial advisor to Endorex. In addition, certain officers,
employees and associates of Paramount and its affiliates own securities of
Endorex and a subsidiary of Endorex.
Dr. Rosenwald is also the Chairman and sole stockholder of Huntington Street
Company, or Huntington Street, and June Street Company, or June Street, and is
the sole member of Paramount Capital Drug Development Holdings LLC, or Paramount
Holdings. Paramount Holdings and Dr. Rosenwald's wife are principal stockholders
of CTD. Dr. Rosenwald, Huntington Street and June Street are also stockholders
of CTD. In addition, certain officers, employees and associates of Paramount and
its affiliates own securities of CTD and subsidiaries of CTD. Paramount has also
acted as a placement agent in connection with certain private placements of
CTD's Series A preferred stock. As of October 15, 2001, Dr. Rosenwald
beneficially owned 56.5% of CTD's common stock and 6.0% of CTD's Series A
preferred stock. Additionally, as of October 15, 2001, Dr. Rosenwald's wife
beneficially owned 8.9% of CTD's common stock.
Mr. Peter Kash, an employee of Paramount who beneficially owns 5.0% of CTD's
common stock and is a security holder of Endorex, and Mr. Martin Kratchman, an
employee of Paramount who is a security holder of both Endorex and CTD, will, at
the closing of the merger, receive options to acquire an aggregate of 100,000
shares of common stock of Endorex. Mr. Kash and Mr. Kratchman are receiving the
options as compensation for their financial advisory services to Endorex in
connection with the merger.
For the above reasons, the directors and officers of Endorex and CTD who are
entitled to vote at Endorex's annual meeting of stockholders and CTD's special
meeting of stockholders could be more likely to vote to approve the merger, the
merger agreement and the transactions contemplated thereby than if they did not
have these interests. Endorex and CTD stockholders should consider whether these
interests may have influenced these directors and officers to support or
recommend the merger.
19
FAILURE TO COMPLETE THE MERGER COULD NEGATIVELY IMPACT ENDOREX'S STOCK PRICE AND
ENDOREX'S AND CTD'S FUTURE BUSINESS AND OPERATIONS.
If the merger is not completed for any reason, Endorex and CTD may be
subject to a number of material risks, including the following:
- depending on the reasons for termination of the merger agreement, Endorex
may be required to pay CTD, or CTD may be required to pay Endorex, a
termination fee of $1,000,000 plus costs and expenses incurred in
connection with the merger agreement;
- the market value of Endorex common stock may decline if the market views
the proposed merger positively and the current market price reflects a
market assumption that the merger will be completed; and
- costs incurred by Endorex and CTD related to the merger, such as legal and
accounting fees, must be paid even if the merger is not completed.
In addition, Endorex or CTD corporate partners, existing and potential
investors and suppliers, in response to the announcement of the merger, may
delay or defer decisions concerning the two companies. Any delay or deferral in
those decisions could have a material adverse effect on the business of either
company, regardless of whether the merger is ultimately completed. Similarly,
current and prospective employees may experience uncertainty about their future
roles until strategies with regard to the two companies are announced or
executed. This may adversely affect the ability of either company to attract and
retain key management, sales, marketing and technical personnel.
Further, if the merger is not completed and the board of directors of either
company determines to seek another merger or business combination, there can be
no assurance that either company will be able to find an acceptable candidate or
negotiate a transaction on acceptable terms. Pursuant to the merger agreement,
CTD is prohibited from soliciting, initiating or encouraging or entering into
certain extraordinary transactions, such as a merger, sale of assets or other
business combination, with any party other than Endorex. Furthermore, pursuant
to the merger agreement, Endorex is prohibited from soliciting, initiating or
encouraging or entering into any agreement or arrangement to acquire all or
substantially all of the outstanding securities or assets of another entity if
such acquisition would materially adversely effect Endorex's ability to
consummate the merger.
THE COMBINED COMPANY WILL CONTINUE TO HAVE THE RISKS THAT EACH OF ENDOREX AND
CTD WERE SUBJECT TO BEFORE THE MERGER.
CTD will represent a substantial portion of the operations, businesses and
results of the combined company. As a result, the combined company will be
susceptible to the risks to which both Endorex and CTD are subject. These risks
are more fully described in this "Risk Factor" section.
RISKS RELATED TO ENDOREX
IF ENDOREX CANNOT OBTAIN ADDITIONAL FUNDING, ENDOREX MAY REDUCE OR DISCONTINUE
ITS PRODUCT DEVELOPMENT AND COMMERCIALIZATION EFFORTS.
Until it is able to generate sufficient revenue from the sale and/or
licensing of its products, Endorex will require additional funding to sustain
its research and development efforts, provide for future clinical trials, and
continue its operations. Endorex cannot be certain whether it will be able to
obtain additional required funding on terms satisfactory to it, if at all. In
addition, Endorex has expended, and will continue to expend, substantial funds
developing its product candidates and for clinical trials. Endorex currently has
commitments to spend additional funds in connection with development of its oral
delivery systems, licenses, severance arrangements, employment agreements and
consulting agreements. If Endorex is unable to raise additional funds when
necessary, Endorex may
20
have to reduce or discontinue development, commercialization or clinical testing
of some or all of its product candidates or enter into financing arrangements on
terms that Endorex would not otherwise accept.
ENDOREX HAS HAD SIGNIFICANT LOSSES AND ANTICIPATES FUTURE LOSSES.
Endorex is a development stage company that has experienced significant
losses since inception and has a significant accumulated deficit. Endorex
expects to incur significant additional operating losses in the future and
expects cumulative losses to substantially increase due to expanded research and
development efforts, preclinical studies and clinical trials. All of Endorex's
products are currently in development, preclinical studies or clinical trials
and Endorex has not generated significant revenues from product sales or
licensing. There can be no guarantee that Endorex will ever generate product
revenues sufficient to become profitable or to sustain profitability.
ENDOREX IS DEPENDENT ON ITS JOINT VENTURES, CORPORATE PARTNERS AND FUTURE JOINT
VENTURES OR CORPORATE PARTNERSHIPS.
Endorex's strategy for research, development and commercialization of
certain of its technologies is to rely on arrangements with corporate partners.
As a result, Endorex's ability to commercialize future products is dependent
upon the success of third parties in performing preclinical studies and clinical
trials, obtaining regulatory approvals, and manufacturing and successfully
marketing Endorex's products. In connection with Endorex's two joint ventures
with Elan, InnoVaccines Corporation, or InnoVaccines, and Endorex Newco, Ltd.,
or Newco, Endorex is obligated to fund research and development activities in
proportion to Endorex's ownership interest in each joint venture, currently
80.1% of each joint venture. If Endorex does not have sufficient resources to
meet its funding obligations under each of the two Elan joint ventures, Endorex
may have to terminate the joint ventures prior to commercialization of its
technologies or renegotiate the terms of the joint ventures, and Endorex's
interest in the joint ventures may be diluted.
Endorex cannot assure you that its joint ventures, corporate collaborations
or corporate partnerships will be successful or that the development efforts
carried out by them will continue. Endorex is currently in discussions with Elan
regarding terminating InnoVaccines and Newco, although no definitive agreements
have been reached by Endorex and Elan with respect to such terminations. Endorex
cannot assure you that the results of these discussions will be favorable or
that the joint ventures with Elan will continue. If Elan chooses to discontinue
its collaborations with Endorex, Endorex may not be able to continue to license
certain proprietary technology from Elan and obtain Elan's expertise and
research and development services on reasonable terms, if at all.
Newco is Endorex's joint venture with Elan that has focused on developing a
product to deliver iron chelation compounds using Elan's
MEDIPAD-Registered Trademark- delivery device. Newco licensed Elan's
MEDIPAD-Registered Trademark- device on a worldwide basis to Schein
Pharmaceutical, Inc., or Schein, which has been acquired by Watson
Pharmaceuticals, Inc., or Watson, for use with Schein's iron chelation compound.
Schein agreed to develop and market the MEDIPAD-Registered Trademark- iron
chelation product in the United States, and Newco and Schein agreed to jointly
seek partners for marketing the product outside the United States. In May 2001,
Watson indicated to Endorex that it will not continue to meet the obligations
originally agreed to by Schein in connection with the license, although no
definitive agreements have been reached by Newco and Watson. Subsequently,
Watson discontinued its collaboration efforts. Endorex cannot assure you that
Watson and Newco will continue their efforts to develop, market, commercialize
or obtain the necessary regulatory approvals for the
MEDIPAD-Registered Trademark- delivery device in the United States or
internationally or that the agreement with Watson will continue. Thus, Endorex
cannot assure you that Newco's MEDIPAD-Registered Trademark- iron chelator
product will be marketed and sold in the near future or at all. If the
collaboration with Watson does not continue, Endorex cannot assure you that
Newco will be able
21
to find another corporate partner to develop and market an iron chelation
product or that Endorex will continue with its MEDIPAD-Registered Trademark-
iron chelator joint venture with Elan. In the event that Endorex and Elan
terminate their Newco joint venture, Endorex may lose its rights to use Elan's
MEDIPAD-Registered Trademark- technology and its supply of
MEDIPAD-Registered Trademark- devices.
Endorex intends to pursue additional corporate partnerships and
collaborations in the future; however, the terms available may not be acceptable
to Endorex and the corporate partnerships or collaborations may not be
successful. In addition, the amount and timing of resources that Endorex's
collaborators devote to these activities are not within Endorex's control. If
any of Endorex's current corporate partnerships, such as those discussed above,
are discontinued, Endorex cannot assure you that it will be able to find others
to develop and commercialize its current product candidates. If any of Endorex's
corporate partnerships and collaborations for its current product candidates are
discontinued, Endorex may not be able to continue the development of such
product candidates due to the loss of technology, intellectual property or
expertise or due to contractual restrictions. Furthermore, the successful
development and commercialization of Endorex's drug delivery technology depends
upon entering into corporate partnerships, collaborations or license agreements
that provide rights to drug candidates that are compatible with Endorex's drug
delivery technology and that are safe and proven effective for medical
conditions. Endorex cannot assure you that it will be able to enter into such
new corporate partnerships, collaborations or license agreements to develop and
commercialize any future product candidates using its drug delivery technology.
PROBLEMS IN PRODUCT DEVELOPMENT MAY INCREASE AND VARY THE RATE AT WHICH ENDOREX
SPENDS ITS FUNDS.
Endorex has limited experience with preclinical development, clinical trials
and regulatory affairs and if it encounters unexpected difficulties with its
operations or clinical trials, Endorex may have to spend additional funds, which
would increase its cash depletion rate. Endorex's cash depletion rate will vary
substantially from quarter to quarter as Endorex funds non-recurring items
associated with clinical trials, product development, patent expenses, legal
fees and consulting fees.
ENDOREX'S PRODUCT DEVELOPMENT AND COMMERCIALIZATION EFFORTS MAY NOT BE
SUCCESSFUL.
Endorex's product candidates, which have not received regulatory approval,
are in the early stages of development. If the initial results from any of the
evaluations for these product candidates are poor, those results could seriously
harm Endorex's business and its ability to raise additional capital which may be
necessary to continue research and development for its oral delivery technology.
In addition, product candidates resulting from Endorex's research and
development efforts, if any, are not expected to be available commercially for
several years, if at all.
Although Endorex is involved in developing oral versions of injectable drugs
and vaccines that have already been approved by the FDA, the products Endorex is
currently developing will require significant additional laboratory and clinical
testing and investment for the foreseeable future. Endorex's product candidates
may not show sufficient efficacy in animal models to justify continuing research
into clinical testing stages or may not prove to be effective in clinical trials
or may cause serious harmful side effects. In addition, Endorex's product
candidates, if approved, may prove impracticable to manufacture in commercial
quantities at a reasonable cost and/or with acceptable quality. Any of these
results could seriously harm Endorex's business.
Endorex's products, if approved, may not be immediately used by doctors
unfamiliar with Endorex's product applications. Endorex or its commercialization
partner may be required to implement an aggressive education and promotion plan
with doctors in order to gain market recognition, understanding and acceptance
of Endorex's products. Any such effort may be time consuming and costly and
might not be successful.
22
ENDOREX'S PRODUCT DEVELOPMENT AND COMMERCIALIZATION EFFORTS MAY BE REDUCED OR
DISCONTINUED DUE TO DIFFICULTIES OR DELAYS IN CLINICAL TRIALS.
Endorex may encounter unanticipated problems, including development,
manufacturing, distribution, financing and marketing difficulties, during the
product development, approval and commercialization process. Endorex's product
candidates may take longer than anticipated to reach and progress through
clinical trials. In addition, patient enrollment in the clinical trials may be
delayed or prolonged significantly, thus delaying the clinical trials and
causing increased costs. If Endorex experiences any such difficulties or delays,
Endorex may have to reduce or discontinue development, commercialization or
clinical testing of some or all of Endorex's product candidates.
ENDOREX DEPENDS ON A LIMITED NUMBER OF SUPPLIERS AND MANUFACTURERS.
Prior to commercial distribution of any of its products, if approved,
Endorex will need to enter into contracts with commercial suppliers or
manufacturers for production of commercial volumes of its products. Endorex
cannot guarantee that such suppliers or manufacturers will be able to qualify
their facilities under regulations imposed by the FDA or that they will be able
to label and supply Endorex in a timely manner, if at all, with drugs that meet
regulatory and commercial requirements. Accordingly, any failure to enter into
supply or manufacturing agreements, any failure of such suppliers and
manufacturers to perform, and any change in Endorex's existing or future
contractual relationships with, or an interruption in supply from, any
third-party service provider or supplier could seriously harm Endorex's ability
to develop and commercialize its products.
ENDOREX DOES NOT HAVE AGREEMENTS WITH THIRD PARTIES OR A SALES FORCE TO MARKET
ITS PRODUCTS.
If Endorex receives approval from the FDA for Endorex's initial product
candidates, the commercialization of these products will depend upon Endorex's
ability to enter into marketing agreements with companies that have sales and
marketing capabilities or to recruit, develop, train and deploy its own sales
force. Endorex currently intends to sell its products in the United States and
internationally in collaboration with one or more marketing partners. Endorex
cannot assure you that it will be able to enter into any such collaborations to
commercialize products in a timely manner or on commercially reasonable terms,
if at all. Additionally, Endorex does not currently have a sales force, or
possess the resources or experience necessary to market any of its product
candidates, if they are approved. Development of an effective sales force
requires significant financial resources, time and expertise. Endorex cannot
assure you that it will be able to obtain the financing necessary to establish
such a sales force in a timely or cost effective manner, if at all, or that such
a sales force will be capable of generating demand for Endorex's product
candidates, if they are approved.
ENDOREX MAINTAINS LIMITED PRODUCT LIABILITY INSURANCE AND MAY BE EXPOSED TO
CLAIMS IF ITS INSURANCE COVERAGE IS INSUFFICIENT.
The clinical testing, manufacture and sale of Endorex's products involves an
inherent risk that human subjects in clinical testing or consumers of Endorex's
products may suffer serious bodily injury or death due to side effects, allergic
reactions or other unintended negative reactions to Endorex's products. Endorex
currently has clinical trial and product liability insurance with limits of
liability of $10 million. Because liability insurance is expensive and difficult
to obtain, Endorex cannot assure you that it will be able to maintain existing
insurance or obtain additional liability insurance on acceptable terms or with
adequate coverage against potential liabilities. Endorex's inability to obtain
sufficient insurance coverage on acceptable terms or to otherwise protect
against potential liability claims in excess of Endorex's insurance coverage
could seriously harm Endorex's business.
23
ENDOREX USES HAZARDOUS MATERIALS IN ITS BUSINESS. ANY CLAIMS RELATING TO
IMPROPER HANDLING, STORAGE, OR DISPOSAL OF THESE MATERIALS COULD BE COSTLY.
Endorex's research and development processes involve the controlled use of
hazardous materials, including hazardous chemicals and radioactive and
biological materials. Endorex's operations also produce hazardous waste
products. Endorex cannot fully eliminate the risk of accidental contamination or
discharge of such materials and any resulting injury. Endorex could be subject
to civil damages in the event of improper or unauthorized release of, or
exposure of individuals to, hazardous materials. In addition, Endorex could be
sued for injury or contamination that results from its use of hazardous
materials or their use by third parties or Endorex's collaborators, and
Endorex's liability may exceed its assets. Federal, state, and local laws and
regulations govern the use, manufacture, storage, handling, and disposal of
these materials. Endorex believes that its current operations comply in all
material respects with these laws and regulations. Compliance with environmental
laws and regulations may be expensive, and current or future environmental
regulations may impair Endorex's research, development, or commercialization
efforts.
ENDOREX MAY NOT BE ABLE TO COMPETE WITH ITS COMPETITORS IN THE BIOTECHNOLOGY
INDUSTRY.
The biotechnology industry is intensely competitive, subject to rapid change
and sensitive to new product introductions or enhancements. Virtually all of
Endorex's existing competitors have greater financial resources, larger
technical staffs, and larger research budgets than Endorex has, as well as
greater experience in developing products and conducting clinical trials.
Endorex's competitors in the field of oral and nasal delivery of protein and
peptide-based drugs include Emisphere Technologies, which has started phase III
trials for oral heparin and phase I trials for oral calcitonin (through its
collaborator Novartis) and oral insulin; Unigene Laboratories, which has an oral
calcitonin product in phase I/II trials; Nobex Corp. (formerly known as Protein
Delivery), which has an oral insulin in phase II trials, and Generex, which has
an oral insulin spray in phase I trials. Endorex's competitors in the vaccine
delivery field include Aviron, which is developing a nasal flu vaccine that is
in phase III clinical trials, I.D. Biomedical, which is in phase I/II trials
with an intranasal flu vaccine and another major vaccine, specialized
biotechnology firms, universities, and governmental agencies. Endorex's
competitors in the liposomal formulation field include The Liposome Company
(owned by Elan Corporation), NexStar (owned by Gilead Sciences, Inc.) and Sequus
(owned by ALZA Corporation). In addition, there may be other companies which are
currently developing competitive technologies and products or which may in the
future develop technologies and products that are comparable or superior to
Endorex's technologies and products. Accordingly, Endorex cannot assure you that
it will be able to compete successfully with its existing and future competitors
or that competition will not negatively affect Endorex's financial position or
results of operations in the future.
ENDOREX MAY NOT BE SUCCESSFUL IF IT IS UNABLE TO OBTAIN AND MAINTAIN PROPRIETARY
POSITIONS IN ITS PRODUCTS AND TECHNOLOGY.
Endorex's success depends, in large part, on its ability to obtain and
maintain a proprietary position in Endorex's products through patents, trade
secrets and orphan drug designations. Endorex has been granted several United
States patents and has submitted several United States patent applications and
numerous corresponding foreign patent applications, and has also obtained
licenses to patents and patent applications owned by other entities. However,
Endorex cannot assure you that any of these patent applications will be granted
or that Endorex's patent licensors will not terminate any of its patent
licenses. Endorex also cannot guarantee that any issued patents will provide
competitive advantages for its products or that any issued patents will not be
successfully challenged or circumvented by Endorex's competitors. Further, the
laws of certain countries may not protect Endorex's proprietary rights to the
same extent as United States law and Endorex cannot assure you it will obtain
patent protection outside the United States. To the extent that Endorex relies
on trade
24
secret protection and confidentiality agreements to protect Endorex's
technology, others may independently develop similar or superior technology, or
otherwise obtain access to Endorex's findings or research materials embodying
those findings, thus diminishing the value of such trade secrets and
confidentiality obligations.
The application of patent law to the field of biotechnology is relatively
new and has resulted in considerable litigation. In addition, since patent
applications in the United States are maintained in secrecy until patents issue,
and since publication of discoveries in the scientific or patent literature
often lags behind actual discoveries, Endorex cannot be certain that it and its
licensors are the first creators of inventions covered by any licensed patent
applications or patents or that they are the first to file. Moreover, the United
States Patent and Trademark Office, or PTO, may commence interference
proceedings involving Endorex's patents or patent applications, in which the
question of first inventorship is contested. There is a substantial risk in the
rapidly developing biotechnology industry that patents and other intellectual
property rights held by Endorex could be infringed by others or that products
developed by Endorex or its method of manufacture could be covered by patents
owned by other companies. Although Endorex believes that its products and
services do not infringe on any third party's patents or other intellectual
property rights, Endorex cannot be certain that it can avoid litigation
involving such proprietary rights. Intellectual property litigation entails
substantial legal and other costs and may take years to resolve, and Endorex may
not have the necessary financial resources to defend or prosecute Endorex's
rights in connection with any litigation. Responding to, defending or bringing
claims related to patents and other intellectual property rights may require
Endorex's management to redirect its human and monetary resources to address
these claims and may take years to resolve.
ENDOREX DEPENDS ON LICENSES FROM THIRD PARTIES.
Endorex's business depends on its license of polymerized liposome technology
from the Massachusetts Institute of Technology, or MIT, licenses from Elan in
connection with Endorex's two joint ventures with Elan, and the technology
licensed by InnoVaccines from Southern Research Institute. Endorex's license
agreement with MIT provides that Endorex will commence phase I clinical trials
with the MIT liposome technology prior to January 1, 2002. Endorex cannot assure
you that it will be able to meet this commitment. If Endorex fails to meet this
commitment and fails to obtain a waiver or extension from MIT, then MIT will
have a right to terminate Endorex's license to the MIT liposome technology and
have a claim against Endorex for breach of contract. In addition, Endorex cannot
assure you that the technology underlying these licenses will be profitable, or
that Endorex will be able to retain licenses for these technologies. If Endorex
is unable to retain these licenses and rights to third party technology, or if
Endorex is unable to obtain rights to substitute technology on reasonable terms,
Endorex's development efforts and business will be seriously harmed.
ENDOREX MAY BE FORCED TO REDUCE OR DISCONTINUE PRODUCT DEVELOPMENT AND
COMMERCIALIZATION EFFORTS DUE TO DELAYS OR FAILURE IN OBTAINING REGULATORY
APPROVALS.
Endorex will need to do substantial additional development and clinical
testing prior to seeking any regulatory approval for commercialization of
Endorex's product candidates. Testing, manufacturing, commercialization,
advertising, promotion, exporting and marketing, among other things, of
Endorex's proposed products are subject to extensive regulation by governmental
authorities in the United States and other countries. The testing and approval
process requires substantial time, effort and financial resources and Endorex
cannot guarantee that any approval will be granted on a timely basis, if at all.
At least initially, Endorex intends, to the extent possible, to rely on
licensees to obtain regulatory approval for marketing Endorex's products.
Failure by Endorex or its licensees to adequately demonstrate the safety and
efficacy of any of its product candidates under development could delay, limit
or prevent regulatory approval of the product, which may require Endorex to
reduce or discontinue development, commercialization or clinical testing of some
or all of its product candidates.
25
Companies in the pharmaceutical and biotechnology industries have suffered
significant setbacks in conducting advanced human clinical trials, even after
obtaining promising results in earlier trials. Furthermore, the FDA may suspend
clinical trials at any time on various grounds, including a finding that the
subjects or patients are being exposed to an unacceptable health risk. Also,
even if regulatory approval of a product is granted, such approval may entail
limitations on the indicated uses for which the product may be marketed.
Accordingly, Endorex may be unable to, or experience difficulties and delays in
obtaining, necessary governmental clearances and approvals to market a product.
ENDOREX'S PRODUCTS, IF APPROVED, MAY NOT BE COMMERCIALLY VIABLE DUE TO HEALTH
CARE CHANGES AND THIRD-PARTY REIMBURSEMENT LIMITATIONS.
Recent initiatives to reduce the federal deficit and to change health care
delivery are increasing cost-containment efforts. Endorex anticipates that
Congress, state legislatures and the private sector will continue to review and
assess alternative benefits, controls on health care spending through
limitations on the growth of private health insurance premiums and Medicare and
Medicaid spending, price controls on pharmaceuticals, and other fundamental
changes to the health care delivery system. Any such changes could negatively
impact the commercial viability of Endorex's products, if approved. Endorex's
ability to successfully commercialize its product candidates, if they are
approved, will depend in part on the extent to which appropriate reimbursement
codes and authorized cost reimbursement levels of such products and related
treatment are obtained from governmental authorities, private health insurers
and other organizations, such as health maintenance organizations. In the
absence of national Medicare coverage determination, local contractors that
administer the Medicare program, within certain guidelines, can make their own
coverage decisions. Accordingly, there can be no assurance that any of Endorex's
product candidates, if approved and when commercially available, will be
included within the then current Medicare coverage determination or the coverage
determination of state Medicaid programs, private insurance companies and other
health care providers. In addition, third-party payers are increasingly
challenging the necessity and prices charged for medical products, treatments
and services. Also, the trend toward managed health care and the growth of
health maintenance organizations in the United States may result in lower prices
for Endorex's products, if approved and when commercially available, than
Endorex currently expects. The cost containment measures that health care payers
and providers are instituting and the effect of any health care changes could
negatively affect Endorex's financial performance, if one or more of Endorex's
products are approved and available for commercial use.
ENDOREX'S BUSINESS COULD BE SERIOUSLY HARMED IF ENDOREX CANNOT ATTRACT AND
RETAIN KEY PERSONNEL.
Endorex's success is dependent, in part, upon Michael S. Rosen, Endorex's
President and Chief Executive Officer, Panayiotis Constantinides, Ph.D.,
Endorex's Vice President of Research and Development, John McCracken, Endorex's
Vice President of Business Development, and Steve Koulogeorge, Endorex's
Controller, Assistant Secretary and Assistant Treasurer. Endorex also believes
that its future success will depend largely upon its ability to attract and
retain highly skilled research and development and technical personnel. Although
Endorex maintains and is the beneficiary of key man life insurance for
Mr. Rosen, Endorex does not believe the proceeds would be adequate to compensate
it for his loss. Endorex faces intense competition in its recruiting activities,
including competition from larger companies with greater resources. Endorex
cannot assure you that it will be successful in attracting or retaining skilled
personnel. The loss of certain key employees or Endorex's inability to attract
and retain other qualified employees could seriously harm its business.
26
ENDOREX'S STOCK PRICE IS HIGHLY VOLATILE AND ITS STOCK IS THINLY TRADED.
The market price of Endorex's common stock, like that of many other
development stage public pharmaceutical and biotechnology companies, has been
highly volatile and may continue to be so in the future due to many factors,
including, but not limited to:
- actual or anticipated fluctuations in its results of operations;
- announcements of innovations by Endorex or its competitors;
- introduction of new products by Endorex or its competitors;
- additions or departures of key personnel;
- commencement of litigation;
- developments with respect to intellectual property rights;
- conditions and trends in the pharmaceutical and drug delivery industries;
- changes in estimates of the development, future size and growth rate of
Endorex's markets;
- general market conditions; and
- future sales of Endorex's common stock.
In addition, the stock market has experienced significant price and volume
fluctuations that affect the market price for the common stock of Endorex and
many other biotechnology companies. These market fluctuations were sometimes
unrelated or disproportionate to the operating performance of these companies.
Any significant stock market fluctuations in the future, whether due to
Endorex's actual performance or prospects or not, could result in a significant
decline in the market price of Endorex's common stock.
Since it commenced trading on the American Stock Exchange on August 6, 1998,
Endorex's common stock has been thinly traded. Endorex cannot assure you that a
more active trading market for its common stock will develop.
ENDOREX CANNOT ASSURE YOU THAT IT WILL CONTINUE TO BE LISTED ON THE AMERICAN
STOCK EXCHANGE.
Endorex cannot assure you that it will satisfy the requirements necessary to
remain listed on the American Stock Exchange or that the American Stock Exchange
will not take actions to delist Endorex's common stock. If such events were to
occur, Endorex cannot assure you that it will be able to list its common stock
on another national exchange. If Endorex's common stock is not listed on an
exchange, Endorex cannot assure you that an active trading market will exist for
its common stock.
INVESTORS MAY SUFFER SUBSTANTIAL DILUTION.
Endorex has a number of agreements or obligations that may result in
dilution to investors. These include:
- warrants to purchase 2,014,001 shares of common stock at $2.54375 per
share, subject to adjustment, issued in connection with the October 1997
private placement of Endorex's common stock;
- warrants to purchase 230,770 shares of common stock at $10.00 per share,
subject to adjustment, held by Elan;
- warrants to purchase 43,334 shares of common stock at $2.3125 per share,
subject to adjustment, held by Aries Select Ltd. and warrants to purchase
23,334 shares of common stock at $2.3125
27
per share, subject to adjustment, held by Aries Select I LLC, both issued
on May 19, 1997 pursuant to a senior line of credit that has been
subsequently retired;
- warrants to purchase 452,383 shares of common stock at $5.91, subject to
adjustment, held by certain investors pursuant to the April 2000 private
placement of Endorex's common stock;
- warrants to purchase 226,190 shares of common stock at $5.25, subject to
adjustment, issued to Paramount Capital, Inc., as the finder in connection
with the April 2000 private placement of Endorex's common stock;
- conversion rights and dividend rights of preferred stock held by Elan,
consisting of 100,410 shares of Series B preferred stock ($8.0 million
original liquidation value) bearing an 8% cumulative payment-in-kind
dividend and convertible at the liquidation value into common stock at
$7.38 per share and 97,603 shares of Series C preferred stock
($8.4 million original liquidation value) bearing a 7% cumulative
payment-in-kind dividend and exchangeable for part of Endorex's interest
in the Newco joint ventures with Elan or convertible at liquidation value
into common stock at $8.86 per share;
- options to purchase approximately 2.2 million shares of common stock
issued to participants in Endorex's stock option plan with a weighted
average exercise price of approximately $2.01; and
- anti-dilution rights under the above warrants and preferred stock, which
can permit purchase of additional shares and/or lower exercise/conversion
prices under certain circumstances.
To the extent that anti-dilution rights are triggered, or warrants, options or
conversion rights are exercised, Endorex's stockholders will experience
substantial dilution and Endorex's stock price may decrease.
FUTURE SALES OF COMMON STOCK BY ITS EXISTING STOCKHOLDERS COULD ADVERSELY AFFECT
ENDOREX'S STOCK PRICE.
The market price of Endorex's common stock could decline as a result of
sales by Endorex's existing stockholders of shares of common stock in the
market, or the perception that these sales could occur. These sales also might
make it more difficult for Endorex to sell equity securities in the future at a
time and at a price that Endorex deems appropriate.
ENDOREX HAS NOT PAID CASH DIVIDENDS.
Endorex has never paid cash dividends on its common stock and it does not
anticipate paying any dividends in the foreseeable future. Endorex currently
intends to retain earnings, if any, to develop its business.
ENDOREX HAS CERTAIN RELATIONSHIPS THAT MAY PRESENT POTENTIAL CONFLICTS OF
INTEREST.
Lindsay A. Rosenwald, M.D. is the Chairman and sole stockholder of Paramount
Capital Asset Management, Inc., or PCAM, Paramount Capital, Inc., or Paramount,
and Paramount Capital Investment LLC, or PCI, a merchant banking and venture
capital firm specializing in biotechnology companies. PCAM is the investment
manager of Aries Select, Ltd., and the managing member of Aries Select I LLC and
Aries Select II LLC, each of which is an affiliate of PCI, PCAM, Paramount and
Lindsay Rosenwald. Aries Select I LLC and Aries Select, Ltd. are principal
stockholders, and Aries Select II LLC is also a stockholder, of Endorex.
Paramount has also acted as a placement agent in connection with private
placements of Endorex's common stock, as a finder in connection with a private
placement of Endorex's common stock and warrants and as a financial advisor to
Endorex. In addition, certain officers, employees and associates of Paramount
and its affiliates own securities of a subsidiary of Endorex. In the regular
course of its business, PCI identifies, evaluates and pursues investment
opportunities in biomedical and pharmaceutical products, technologies and
companies.
28
However, PCI is under no obligation to make any additional products or
technologies available to Endorex, and Endorex does not expect, and you should
not expect, that any biomedical or pharmaceutical product or technology
identified by such affiliates or PCI in the future will be made available to it.
In addition, certain of Endorex's officers and directors and officers or
directors appointed in the future may from time to time serve as officers,
directors or consultants of other biopharmaceutical or biotechnology companies
and those companies may have interests that conflict with Endorex's interests.
CERTAIN DIRECTORS, OFFICERS AND STOCKHOLDERS HAVE SIGNIFICANT INFLUENCE.
Endorex's directors, executive officers and principal stockholders and
certain of their affiliates have the ability to influence the election of
directors and most other stockholder actions. This may discourage or prevent any
proposed takeover of Endorex, including transactions in which stockholders might
otherwise receive a premium for their shares over the then current market
prices. Such stockholders may also influence corporate actions, including
influencing elections of directors and significant corporate events.
RISKS RELATED TO CTD
CTD HAS NO OPERATING HISTORY, HAS AN ACCUMULATED DEFICIT, HAS NEVER BEEN
PROFITABLE AND MAY NOT BE ABLE TO GENERATE REVENUES SUFFICIENT TO ACHIEVE
PROFITABILITY.
CTD, to date, has had no operations and has not been profitable since
inception in 1997. As of June 30, 2001, CTD had an accumulated deficit of
approximately $9.0 million. CTD expects to continue to incur significant
operating losses for the foreseeable future, as it expects to continue to incur
costs related to research, development, testing, regulatory compliance
activities, and initiation and continuation of clinical trials. CTD has never
received any significant milestone revenue or license fees. CTD expects that it
will take a number of years before it generates revenue from commercial sales of
products based upon any drug target or drug lead that it identifies, and may
never do so. CTD cannot assure you that it will achieve significant revenues or
that it will ever achieve profitability. CTD's ability to generate revenue will
depend on its ability, alone or with others, to successfully research, develop,
obtain regulatory clearance for, manufacture, and market its products under
development. In addition, if collaborative development arrangements are
terminated or commercialization efforts under those agreements are delayed or
are unsuccessful, then successful commercialization of CTD's products under
development may be delayed or terminated, which could have a material adverse
effect on its business.
CTD IS AN EARLY DEVELOPMENT STAGE COMPANY AND MAY NOT SUCCEED IN DEVELOPING
COMMERCIALLY VIABLE PRODUCTS.
To be profitable, CTD must, alone or with corporate partners and
collaborators, successfully research, develop and commercialize its technologies
or product candidates. Current technologies and product candidates are in
various stages of clinical and pre-clinical development and will require
significant further funding, research, development, preclinical and/or clinical
testing, regulatory approval and commercialization testing, and are subject to
the risks of failure inherent in the development of products based on innovative
or novel technologies. They are also rigorously regulated by the federal
government, particularly the FDA, and by comparable agencies in state and local
jurisdictions and in foreign countries. Each of the following is possible with
respect to any one of CTD's technologies or product candidates:
- that CTD will not be able to maintain its current research and development
schedules;
- that CTD will not be able to enter into human clinical trials because of
scientific, governmental or financial reasons, or that CTD will encounter
problems in clinical trials that will cause it to delay or suspend
development of one of the technologies;
29
- that its products will be found to be ineffective or unsafe;
- that government regulations will delay or prevent its products' marketing
for a considerable period of time and impose costly procedures upon CTD's
activities;
- that the FDA or other regulatory agencies will not approve a given product
or will not do so on a timely basis;
- that the FDA or other regulatory agencies may not approve the process or
facilities by which a given product is manufactured;
- that CTD's dependence on others to manufacture its products may adversely
affect CTD's ability to develop and deliver the products on a timely and
competitive basis;
- that, if CTD is required to manufacture its own products, CTD will be
subject to similar risks regarding delays or difficulties encountered in
manufacturing the products, will require substantial additional capital,
and may be unable to manufacture the products in a manner that meets
regulatory requirements or in a cost-effective manner;
- that the FDA's policies may change and additional government regulations
and policies may be instituted, both of which could prevent or delay
regulatory approval of CTD's potential products; or
- that CTD will be unable to obtain, or will be delayed in obtaining,
approval of a product in other countries because the approval process
varies from country to country and the time needed to secure approval may
be longer or shorter than that required for FDA approval.
If any of the risks set forth above occurs, CTD may not be able to
successfully develop its technologies and product candidates and CTD's business
will be seriously harmed.
Similarly, it is possible that, for reasons including, but not limited to
those set forth below, CTD may be unable to commercialize, or receive royalties
from the sale of, any given technology, even if it is shown to be effective, if:
- it is uneconomical or if the market for CTD's products does not develop or
diminishes;
- CTD is not able to enter into arrangements or collaborations to
commercialize its products;
- in the case of one of CTD's pharmaceutical technologies, it is not
eligible for third-party reimbursement from government or private
insurers;
- others hold proprietary rights that preclude CTD from commercializing any
of its products;
- others have brought to market similar or superior products;
- others have superior resources to market similar products or technologies;
- government regulation imposes limitations on the indicated uses of a
product, or later discovery of previously unknown problems with a product
results in added restrictions on the product or results in the product
being withdrawn from the market; or
- the product has undesirable or unintended side effects that prevent or
limit its commercial use.
CTD'S CURRENT AND FUTURE PRODUCT CANDIDATES MAY NOT BE DEVELOPED SUCCESSFULLY
AND MAY NOT TREAT MEDICAL CONDITIONS OTHER THAN THOSE ALREADY BEING TREATED BY
THE ACES.
CTD is focused on the development of new therapeutic uses and new oral and
mucosal formulations of ACEs. CTD cannot assure you that its product candidates
will effectively treat medical conditions other than those for which the ACE was
designed, have new therapeutic uses or utilize new formulations.
30
EVEN IF ORBEC-TM- IS APPROVED, ITS PROFITABILITY MAY BE LIMITED.
CTD's business may not become profitable if and when orBec-TM-, CTD's lead
product candidate, is approved for commercialization by the FDA or similar
foreign regulatory agencies because the market for the use of orBec-TM- for the
treatment of intestinal GVHD is relatively small. CTD has initiated clinical
studies to examine whether or not orBec-TM- is effective and safe when used to
treat disorders other than intestinal GVHD, but CTD does not know whether these
studies will in fact demonstrate safety and efficacy, or if they do, whether CTD
will succeed in receiving regulatory clearance to market orBec-TM- for
additional indications. If the results of these studies are negative, or if
adverse experiences are reported in these clinical studies or otherwise in
connection with the use of orBec-TM- by patients, this could undermine physician
and patient comfort with the product, limit the commercial success of the
product, and even impact the acceptance of orBec-TM- in the intestinal GVHD
market. Furthermore, new technology is being developed for bone marrow
transplants that could reduce or eliminate instances of intestinal GVHD
resulting from bone marrow transplants, and therapeutic alternatives to bone
marrow transplants may become available. Any such developments could
significantly decrease the market for orBec-TM-.
IF SUFFICIENT FUNDS TO FINANCE CTD'S BUSINESS ARE NOT AVAILABLE TO CTD WHEN
NEEDED OR ON ACCEPTABLE TERMS, CTD MAY BE REQUIRED TO DELAY, SCALE BACK,
ELIMINATE OR ALTER ITS STRATEGY FOR ITS PROGRAMS.
CTD will require additional funds for its research and product development
programs, operating expenses, the pursuit of regulatory approvals, license or
acquisition opportunities and the expansion of its production, sales and
marketing capabilities. Historically, CTD has satisfied its funding needs
through equity financings. These funding sources may not be available to CTD
when needed in the future, and, if available, they may not be on terms
acceptable to CTD. Insufficient funds could delay, scale back or eliminate
research and development programs or cause CTD to discontinue its business.
CTD's cash requirements may vary materially from those now planned because of
factors including:
- increased research and development expenses;
- patent or other intellectual property developments and disputes;
- licensing or acquisition opportunities;
- relationships with collaboration partners;
- litigation;
- the FDA regulatory process;
- capital expenditures not needed in the ordinary course of business; and
- selling, marketing and manufacturing expenses in connection with
commercialization of products.
CTD MAINTAINS LIMITED PRODUCT LIABILITY INSURANCE AND MAY BE EXPOSED TO CLAIMS
IF ITS INSURANCE COVERAGE IS INSUFFICIENT.
The clinical testing, manufacture and sale of CTD's products involves an
inherent risk that human subjects in clinical trials or consumers of CTD's
products will suffer serious bodily injury or death due to side effects,
allergic reactions, drug interactions or other unintentional negative reactions
to CTD's products. Furthermore, CTD's clinical trial and product liability
insurance has a $4 million limit. Because such liability insurance is expensive
and difficult to obtain, CTD cannot assure you that it will be able to maintain
existing insurance or obtain additional liability insurance on acceptable terms
or with adequate coverage against potential liabilities. CTD's inability to
obtain sufficient insurance coverage on acceptable terms or to otherwise protect
against potential liability claims in excess of CTD's insurance coverage, if
any, could seriously harm CTD's business.
31
IF CTD FAILS TO ADEQUATELY PROTECT ITS INTELLECTUAL PROPERTY RIGHTS OR FACES A
CLAIM OF INTELLECTUAL PROPERTY INFRINGEMENT BY A THIRD PARTY, THEN CTD COULD
LOSE VALUABLE INTELLECTUAL PROPERTY RIGHTS, BE LIABLE FOR SIGNIFICANT DAMAGES OR
BE PREVENTED FROM COMMERCIALIZING ITS PRODUCTS.
CTD's success depends in part on its ability to obtain and maintain patents,
protect trade secrets and operate without infringing upon the proprietary rights
of others. In the absence of patent and trade secret protection, competitors may
adversely affect CTD's business by independently developing and marketing
substantially equivalent or superior products and technology, possibly at lower
prices. It is also possible that CTD could incur substantial costs in litigation
if CTD is required to defend itself in intellectual property infringement suits
brought by third parties, or if CTD is required to initiate litigation against
others to protect or assert its intellectual property rights.
CTD has filed various patent applications covering certain uses of its
product candidates. However, CTD may not be issued patents from the patent
applications already filed or from applications CTD may file in the future.
Moreover, the patent position of companies in the pharmaceutical industry
generally involves complex legal and factual questions, and recently has been
the subject of much litigation. Any patents CTD has obtained, or may obtain in
the future, may be challenged, invalidated or circumvented. To date, no
consistent policy has been developed in the PTO regarding the breadth of claims
allowed in biotechnology patents.
In addition, since patent applications in the United States are maintained
in secrecy until patents issue, and since publication of discoveries in the
scientific or patent literature often lags behind actual discoveries, CTD cannot
be certain that it and its licensors are the first creators of inventions
covered by any licensed patent applications or patents or that they are the
first to file. Moreover, the PTO may commence interference proceedings involving
its patents or patent applications, in which the question of first inventorship
is contested. Accordingly, there can be no assurance that patents owned by CTD
or patents licensed to CTD in the future will be valid or will afford it
protection against competitors with similar technology or that patent
applications licensed to CTD will result in the issuance of patents. Any
challenge to, or invalidation or circumvention of, CTD's patents or patent
applications could have a material adverse effect on its business.
No assurance can be given that any issued patents will provide competitive
advantages for the proposed products or will not be successfully challenged or
circumvented by competitors, or that the patents of others will not be infringed
by CTD's proposed products. In addition, others may independently develop
similar products or duplicate any of CTD's products. It is also possible that
CTD's patented technologies may infringe on patents or other rights owned by
others, licenses to which may not be available to CTD. CTD may have to alter its
products or processes, pay licensing fees or cease activities altogether because
of patent rights of third parties, thereby causing additional unexpected costs
and delays to CTD.
CTD relies upon unpatented proprietary technology. CTD may not be able to
meaningfully protect its rights with regard to such unpatented proprietary
technology and competitors may duplicate or independently develop substantially
equivalent technology. A failure by CTD to protect its rights could seriously
harm CTD's business. To the extent that consultants, key employees or other
third parties apply technological information independently developed by them or
by others to any of the proposed projects of CTD, disputes may arise as to the
proprietary rights to such information which may not be resolved in favor of
CTD. Third parties, typically drug companies, hold patents or patent
applications covering the composition-of-matter for most of the ACEs for which
CTD has use patents or patent applications. In each of these cases, unless CTD
has or obtains a license agreement, CTD generally may not commercialize the ACE
until these third-party patents expire. Because pharmaceutical patents typically
provide valuable rights that take many years to develop, the United States has
laws that allow the term of such patents to be extended. This has led to complex
and costly litigation between large pharmaceutical companies and others seeking
to sell products based on compositions of matter covered
32
by expiring patents. Licenses may not be available to CTD for these patents on
acceptable terms, if at all. In addition, CTD would incur substantial cost,
expense and delay as well as expand considerable management and operational
resources if it needed to contest the validity of a third-party patent or defend
itself against claims that it infringed a third-party patent. Moreover,
litigation involving third-party patents may not be resolved in CTD's favor.
CTD DEPENDS ON LICENSES FROM THIRD PARTIES.
CTD relies on license agreements from several third parties for the rights
to commercialize its product candidates. Such agreements require that CTD meet
certain milestones; the failure to meet those milestones allows licensors to
terminate the licenses, whereas meeting those milestones triggers payment
obligations on the part of CTD. CTD may not be able to retain the rights granted
under such agreements or negotiate additional agreements on reasonable terms, or
at all. CTD is currently involved in a dispute with the licensors of its
Metropt-TM- product candidate, and has received communications from the
licensors that they intend to terminate that license agreement. CTD may not be
able to resolve that dispute on terms that are favorable to CTD, or at all. In
the event that CTD is not able to settle that dispute and retain its rights
under the Metropt-TM- license agreement, it would not be able to commercialize
the Metropt-TM- product without the risk of a lawsuit from the licensors for
infringement of their patent rights and misappropriation of their trade secrets,
which lawsuit could be costly and distracting to management and could result in
a costly damage award against CTD, including the potential for a treble damage
award for willful infringement, and injunctions that could prevent CTD from
pursuing its Metropt-TM- business.
CTD MAY NOT BE ABLE TO QUALIFY ITS PRODUCT CANDIDATES FOR CERTAIN GOVERNMENTAL
PROGRAMS AND OBTAIN THE MARKET EXCLUSIVITY PROVIDED UNDER SUCH PROGRAMS.
CTD's business strategy relies significantly on the product and use
exclusivity provided by various government programs, including programs under
the Orphan Drug Act of 1983 and Waxman-Hatch Amendment of 1984, as well as the
three year market exclusivity period for approved new drug applications and
supplemental new drug applications. Currently, the FDA has granted orphan drug
status to orBec-TM-, for treatment of intestinal GVHD and prevention of GVHD,
and to Oraprine-TM-, for the treatment of oral auto-immune diseases. However,
CTD may not be able to maintain the orphan drug designations or qualify its
future product candidates for such governmental programs and obtain the
exclusivity provided thereunder, or obtain the market exclusivity provided for
new drug applications and supplemental new drug applications. Without such
exclusivity, CTD may not be able to successfully commercialize its product
candidates.
CTD EXPECTS TO FACE INTENSE COMPETITION AND ITS COMPETITORS HAVE GREATER
RESOURCES AND CAPABILITIES THAN CTD.
CTD encounters intense competition and the market for CTD's proposed
products is characterized by rapidly changing technology, evolving industry
standards, and the frequent introduction of new products. In order to compete
effectively, CTD will need to continually upgrade its scientific expertise and
technology, bring to market in a timely manner products that meet changing
market demands, identify and retain capable management, and pursue
scientifically feasible and commercially viable opportunities. Products or
technologies developed by others may render CTD's products or technologies
non-competitive or obsolete.
Many companies, research institutes, hospitals and universities are working
to develop products and processes in CTD's fields of research and development.
Most of these entities have substantially greater financial, technical,
manufacturing, marketing, distribution and other resources than CTD. Many of
CTD's competitors have greater experience in undertaking testing and clinical
trials. Accordingly, other companies may succeed in developing products earlier
than CTD or products that
33
are more effective than those proposed to be developed by CTD. Further, it is
expected that competition in CTD's field will intensify.
Competition is particularly intense in the gastroenterology and transplant
areas being addressed by CTD. Numerous companies are attempting to develop
technologies to treat GVHD by suppressing, through various mechanisms, the
immune system. Some companies, including Sangstat, Abgenix, and Protein Design
Labs, Inc., are developing monoclonal antibodies to treat GVHD. Biotransplant,
Novartis, Medimmune, and Ariad are developing both gene therapy products or
small molecules to treat GVHD.
Competition is also intense in the therapeutic area of inflammatory bowel
disease, or IBD, including Crohn's disease and ulcerative colitis. Several
companies, including Centocor, Immunex, and Celgene, have products that are
currently FDA approved. For example, Centocor, a subsidiary of Johnson &
Johnson, markets the drug product Remicade. Other drugs used to treat IBD
include another orally-active corticosteroid called budesonide, which is being
marketed by AstraZeneca in Europe and Canada under the tradename of Entocort. In
addition, Salix Pharmaceuticals, Inc. markets an FDA-approved therapy for
ulcerative colitis.
Several companies have also established various colonic drug-delivery
systems to deliver therapeutic drugs to the colon for treatment of Crohn's
disease. These companies include Ivax Corporation, Inkine Pharmaceutical
Corporation, and Elan Pharmaceuticals, Inc. Isis Pharmaceuticals, Inc. is in the
process of developing an antisense therapy to treat Crohn's disease.
CTD MAY NOT RECEIVE GOVERNMENTAL PRODUCT APPROVAL AND MAY NOT BE ABLE TO
COMMERCIALIZE ITS PRODUCTS.
The proposed products of CTD will be subject to very stringent United
States, federal, foreign, state and local government regulations, including,
without limitation, the Federal Food, Drug and Cosmetic Act, the Environmental
Protection Act, the Occupational Safety and Health Act, and state and local
counterparts to such acts. Similar regulatory frameworks exist in other
countries where CTD may seek to market its products. Prior to marketing any
proposed product CTD may develop, such product must undergo an extensive
regulatory approval process.
The regulatory process includes pre-clinical and clinical testing of any
product to establish its safety and efficacy. This testing can take many years
and require the expenditure of substantial capital and other resources. Delays
or denials of marketing approval are regularly encountered due to the submission
of data deemed unacceptable or incomplete by the FDA or other similar regulatory
agency, or due to regulatory policy for product approvals. These delays may be
encountered both domestically and abroad. Other problems that may arise during
clinical trials include:
- results of clinical trials may not be consistent with earlier clinical or
pre-clinical study results; and
- products may not be shown to be safe and efficacious.
There is no assurance that even after clinical testing, regulatory approval
will ever be obtained. If obtained, regulatory approval entails limitations on
the indicated uses for which any products may be marketed. Following regulatory
approval, if any, a marketed product and its manufacturer are subject to
continual regulatory review. Later discovery of problems with a product or
manufacturer may result in restrictions on such product or manufacturer. These
restrictions may include withdrawal of the marketing approval for the product.
Moreover, if CTD fails to comply with applicable regulatory requirements, CTD
may be subject to fines, suspension or withdrawal of regulatory approvals,
product recalls, seizure of products, operating restrictions and criminal
prosecution.
34
CTD'S RESEARCH AND DEVELOPMENT CONTRACTORS MAY NOT BE COMPLYING WITH UNITED
STATES GOOD LABORATORY PRACTICE.
CTD has not and some third party contractors performing research and
development for CTD may not have Good Laboratory Practice, or GLP, designation
from the United States regulatory authorities, and they may fail to qualify for
GLP designation. Failure to qualify for GLP designation may impair CTD's ability
to use the results of such party's research which, may seriously harm CTD's
product development efforts.
CTD MUST COMPLY WITH GOVERNMENTAL REGULATION REGARDING ENVIRONMENTAL MATTERS AND
ANY PAST OR FUTURE FAILURE TO COMPLY COULD ADVERSELY AFFECT CTD'S FINANCIAL
CONDITION.
CTD is subject to various foreign, federal, state and local environmental
laws and regulations, in particular those governing the use, storage, handling
and disposal of hazardous substances and hazardous wastes. CTD believes that it
is in material compliance with environmental laws. Nonetheless, there can be no
assurance that hazardous materials have not been released into the environment
as a result of CTD's prior or ongoing operations. In the event of such a release
of hazardous substances, CTD could be held liable for any damages that result
and such liability could have a material adverse effect on CTD's business,
financial conditions and results of operations. While CTD does not anticipate
material costs to comply with environmental laws, there can be no assurances
that in the future, CTD will not be required to make significant capital
expenditures to comply with these laws or that CTD's business, financial
condition, and results of operation will not be materially adversely affected by
current or future environmental laws or regulations.
CTD'S PRODUCTS, IF APPROVED, MAY NOT BE COMMERCIALLY VIABLE DUE TO HEALTH CARE
CHANGES AND THIRD-PARTY REIMBURSEMENT LIMITATIONS.
Recent initiatives to reduce the federal deficit and to change health care
delivery are increasing health care cost-containment efforts. CTD anticipates
that Congress, state legislatures and the private sector will continue to review
and assess alternative benefits, controls on health care spending through
limitations on the growth of private health insurance premiums and Medicare and
Medicaid spending, price controls on pharmaceuticals, and other fundamental
changes to the health care delivery system. Any such changes could negatively
impact the commercial viability of CTD's products, if approved. CTD's ability to
successfully commercialize its product candidates, if they are approved, will
depend in part on the extent to which appropriate reimbursement codes and
authorized cost reimbursement levels of such products and related treatment are
obtained from governmental authorities, private health insurers and other
organizations, such as health maintenance organizations. In the absence of
national Medicare coverage determination, local contractors that administer the
Medicare program, within certain guidelines, can make their own coverage
decisions. Accordingly, there can be no assurance that any of CTD's product
candidates, if approved and when commercially available, will be included within
the then current Medicare coverage determination or the coverage determination
of state Medicaid programs, private insurance companies and other health care
providers. In addition, third-party payers are increasingly challenging the
necessity and prices charged for medical products, treatments and services.
Also, the trend toward managed health care and the growth of health maintenance
organizations in the United States may all result in lower prices for CTD's
products, if approved and when commercially available, than CTD currently
expects. The cost containment measures that health care payers and providers are
instituting and the effect of any health care changes could negatively affect
CTD's financial performance, if one or more of CTD's products are approved and
available for commercial use.
35
CTD DEPENDS UPON KEY PERSONNEL, CONSULTANTS AND EMPLOYEES FOR BOTH ITSELF AND
ITS SUBSIDIARIES.
CTD is highly dependent upon its officers, as well as consultants and
collaborating scientists. The loss of certain of these individuals could have a
negative impact on CTD.
Competition for qualified employees among pharmaceutical and biotechnology
companies is intense, and the loss of any of such persons, or an inability to
attract, retain and motivate any additional highly skilled employees required
for the expansion of CTD's activities, could have a material adverse effect on
CTD. There can be no assurance that CTD will be able to retain its existing
personnel or attract additional qualified employees and such failure would
seriously harm CTD's business.
CTD LACKS MANAGEMENT AND EMPLOYEE DEPTH.
CTD has only two full time employees: a President and a Director of
Corporate Development. CTD may need to identify and attract potential candidates
for other positions. This process could take several months, or longer, and CTD
may not be successful in attracting suitable candidates on terms acceptable to
CTD, if at all.
CTD HAS CERTAIN INTERLOCKING RELATIONSHIPS THAT MAY PRESENT POTENTIAL CONFLICTS
OF INTEREST.
Lindsay A. Rosenwald, M.D., is the Chairman and sole stockholder of
Paramount, PCI, Huntington Street Company and June Street Company, and is the
sole member of Paramount Capital Drug Development Holdings LLC, or Paramount
Holdings. Paramount Holdings and Mr. Rosenwald's wife are principal stockholders
of CTD. Mr. Rosenwald, Huntington Street Company and June Street Company are
also stockholders of CTD. In addition, certain officers, employees and
associates of Paramount and its affiliates own securities of CTD and
subsidiaries of CTD. Paramount has also acted as a placement agent in connection
with private placements of CTD's Series A preferred stock. In the regular course
of its business, PCI identifies, evaluates and pursues investment opportunities
in biomedical and pharmaceutical products, technologies and companies. However,
PCI is under no obligation to make any additional products or technologies
available to CTD, and CTD does not expect, and you should not expect, that any
biomedical or pharmaceutical product or technology identified by PCI or any
other affiliates of Dr. Rosenwald in the future will be made available to CTD.
In addition, certain of CTD's current officers and directors and officers or
directors of CTD appointed in the future may from time to time serve as
officers, directors or consultants of other biopharmaceutical or biotechnology
companies and those other companies may have interests that conflict with CTD's
interests.
CTD'S CLINICAL TRIALS AND PRE-CLINICAL RESULTS ARE UNCERTAIN.
In order for CTD to be granted regulatory approvals to sell its proposed
products, CTD or its collaborators will need to successfully conduct extensive
pre-clinical and clinical testing to demonstrate safety and efficacy of those
products in humans. The results of pre-clinical and clinical testing may prove
to be inconclusive. The results of pre-clinical testing are subject to varying
interpretations and may not be indicative of results that will be obtained in
humans. In addition, the results of early clinical trials may not be indicative
of the results of later clinical trials. As results of particular pre-clinical
studies and clinical trials are received, CTD and/or its collaborators, if any,
may abandon projects that they had previously thought promising.
Regulatory agencies may not accept CTD's interpretation of results from
pre-clinical and clinical trials. Even if the development of CTD's products
advances to the clinical stage, there can be no assurance that they will prove
to be safe and effective for human use. The products that are successfully
developed, if any, will be subject to requisite regulatory approval prior to
their commercial sale, and the approval, if obtainable, may take several years.
Generally, only a very small percentage of
36
new pharmaceutical products are approved for sale. Even if a new pharmaceutical
product is approved for sale, it may not be commercially successful. CTD may
encounter unanticipated problems relating to development, manufacturing,
distribution and marketing, some of which may be beyond CTD's financial and
technical capacity to resolve. The failure to address such problems adequately
will seriously harm CTD's business.
CTD LACKS SALES AND MARKETING EXPERIENCE.
CTD does not anticipate having the resources in the foreseeable future to
allocate to the sale and marketing of its proposed pharmaceutical and related
products. The future success of CTD may depend, in part, on its ability to enter
into and maintain contracts for such sales and marketing. CTD intends to pursue
such collaborative arrangements; however, there can be no assurances that CTD
will be able to establish or maintain such collaborative arrangements. If CTD
decides not to, or is unable to, enter into such collaborative arrangements, it
will need to devote significant capital funds, management resources and time to
build an in-house sales force that may or may not be effective to market its
products.
FUTURE INABILITY TO OBTAIN RAW MATERIALS OR PRODUCTS FROM CONTRACT MANUFACTURERS
COULD SERIOUSLY AFFECT CTD'S OPERATIONS.
CTD currently obtains raw materials and other products from single domestic
or foreign suppliers. Although to date CTD has not experienced difficulty in
obtaining these products, CTD cannot assure you that the supply will not be
interrupted in the future or that it will not have to obtain substitute
materials and products. Changes in CTD's raw material suppliers could result in
delays in production, higher raw material costs, and loss of sales and customers
because regulatory authorities must generally approve raw material sources for
pharmaceutical products.
CTD LACKS MANUFACTURING EXPERIENCE AND WILL RELY ON THIRD-PARTY MANUFACTURERS.
THIS COULD ADVERSELY AFFECT CTD'S ABILITY TO MEET CUSTOMERS DEMANDS.
CTD has no manufacturing capabilities. Accordingly, CTD will need to rely on
third-party manufacturers of its products. CTD may not be able to identify any
such manufacturers, and, even if it is able to do so, CTD may not be able to
enter into manufacturing agreements on terms that are favorable to CTD, if at
all. CTD will be required to rely on contract manufacturers for the foreseeable
future to produce quantities of products and substances necessary for research
and development, pre-clinical trials, human clinical trials and product
commercialization. There can be no assurances that such products can be
manufactured at a cost or in quantities necessary to make them commercially
viable. There can be no assurance that third-party manufacturers will be able to
meet CTD's needs with respect to timing, quantity and quality for the products.
If CTD is unable to contract for a sufficient supply of required products and
substances on acceptable terms, or if it should encounter delays or difficulties
in its relationships with manufacturers, CTD's research and development,
pre-clinical and clinical testing would be delayed, thereby delaying the
submission of products for regulatory approval or the market introduction and
subsequent sales of such products. Any such delays may have a material adverse
effect on CTD's business, financial condition and results of operations.
Moreover, contract manufacturers that CTD may use must adhere to current Good
Manufacturing Practices regulations enforced by the FDA through its facilities
inspection program. If the facilities of such manufacturers cannot pass a
pre-approval plant inspection, the FDA pre-market approval of CTD's products
will not be granted.
CTD DEPENDS ON OTHERS FOR CLINICAL DEVELOPMENT AND REGULATORY APPROVALS OF ITS
PRODUCT CANDIDATES.
In order for CTD to successfully develop and commercialize its product
candidates, it may need to enter into collaboration agreements with partners to
help research and develop its product candidates
37
and to fund all or part of the costs thereof. CTD may not be able to enter into
such collaboration agreements or the terms of the collaboration agreements may
not be favorable to CTD. CTD's inability to enter into collaboration agreements
could delay or preclude the development, manufacture and/or marketing of some of
its product candidates or could significantly increase the costs of doing so.
In the future, CTD may grant to its collaborative partners, if any, rights
to license and commercialize pharmaceutical and related products developed under
these collaborative agreements and such rights would limit CTD's flexibility in
considering alternatives for the commercialization of such products. Under such
agreements, CTD may rely on its collaborative partners to conduct research
efforts and clinical trials on, obtain regulatory approvals for, and
manufacture, market and commercialize certain of its product candidates.
Although CTD believes that its collaborative partners will have an economic
motivation to commercialize the pharmaceutical and related products which they
may license, the amount and timing of resources devoted to these activities
generally will be controlled by each such individual partner.
38
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
IN THIS JOINT PROXY STATEMENT/PROSPECTUS
This joint proxy statement/prospectus contains forward-looking statements
within the meanings of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended. All
statements, other than statements of historical facts, that address activities,
events or developments that Endorex or CTD intends, expects, projects, believes
or anticipates will or may occur in the future are forward looking statements
within the "safe harbor" provisions of the Private Securities Litigation Reform
Act of 1995, as amended. Such statements are characterized by terminology
including "believe," "hope," "may," "anticipate," "should," "intend," "plan,"
"will," "expect," "estimate," "project," "positioned," "strategy" and similar
expressions. These statements are based on assumptions and assessments made by
Endorex's or CTD's management in light of their experience and their perception
of historical trends, current conditions, expected future developments and other
factors they believe to be appropriate. These forward-looking statements are
subject to risks and uncertainties that could cause actual results to differ
materially from those expectations. These risks and uncertainties are beyond
Endorex's and CTD's control and, in many cases, neither can predict the risks
and uncertainties that could cause Endorex's and CTD's actual results to differ
materially from those indicated by the forward-looking statements. Endorex and
CTD disclaim any duty to update any forward-looking statements.
39
ENDOREX ANNUAL MEETING
GENERAL
Endorex is furnishing this joint proxy statement/prospectus to holders of
Endorex common stock and Series B preferred stock in connection with the
solicitation of proxies by the Endorex board of directors for use at the annual
meeting of stockholders of Endorex to be held on November 29, 2001, and any
adjournment or postponement thereof.
This joint proxy statement/prospectus is first being furnished to Endorex
stockholders on or about October 26, 2001.
DATE, TIME AND PLACE
The annual meeting will be held on November 29, 2001 at 10:00 a.m., central
standard time, at 28101 Ballard Drive, Suite F, Lake Forest, Illinois.
MATTERS TO BE CONSIDERED AT THE ANNUAL MEETING
At the annual meeting and any adjournment or postponement of the annual
meeting, Endorex stockholders will be asked to consider and vote upon the
following proposals:
- to issue shares of Endorex common stock, options and warrants pursuant to
the merger agreement, under which CTD will become a wholly owned
subsidiary of Endorex;
- to amend Endorex's Amended and Restated Certificate of Incorporation
changing Endorex's name to DOR BioPharma, Inc.;
- to elect six directors to serve until the next annual meeting of the
stockholders of Endorex or until their successors are duly elected and
qualified;
- to approve an amendment of the 1995 Plan to (i) increase the number of
shares of common stock issuable under the 1995 Plan by an additional
2,165,664 shares, (ii) implement a maximum annual limit of 500,000 shares
of common stock by which the share reserve may increase annually over the
term of the 1995 Plan under the automatic share increase provision and
(iii) modify the automatic option grant program to (a) increase the
initial option grants to newly-elected board members to 50,000 shares
vesting immediately and (b) provide for annual option grants to continuing
board members for 10,000 shares vesting over one year;
- to approve February 21, 2001 option grants to each non-employee member of
the Endorex board of directors to purchase 50,000 shares of Endorex common
stock;
- to ratify the appointment of Ernst & Young LLP as Endorex's independent
auditors for the fiscal year ending December 31, 2001; and
- to transact such other business as may properly come before the annual
meeting or any adjournment or postponement thereof.
OTHER MATTERS
Endorex knows of no other matters that will be presented for consideration
at the annual meeting. If any other matters properly come before the annual
meeting, it is the intention of the persons named in the enclosed proxy card to
vote the shares they represent as the board of directors may recommend.
Discretionary authority with respect to such other matters is granted by the
execution of the enclosed proxy.
40
RECORD DATE
Endorex's board has fixed the close of business on October 23, 2001, as the
record date for determining the Endorex stockholders entitled to notice of and
to vote at the annual meeting.
VOTING OF PROXIES
Endorex requests that its stockholders complete, date and sign the enclosed
proxy card and promptly mail it to Endorex in the postage-paid envelope
provided. Brokers holding shares in "street name" may vote the shares only if
the stockholder provides instructions on how to vote. Brokers will provide
directions on how to instruct the broker to vote the shares. All properly
executed proxies that Endorex receives prior to the vote at the annual meeting
and that are not revoked will be voted in accordance with the instructions
indicated on the proxy cards or, if no direction is indicated, to approve
proposals described above.
Stockholders may in the following manner revoke their proxies at any time
prior to their use:
- by delivering to the secretary of Endorex a signed notice of revocation or
a later-dated signed proxy card; or
- by attending the annual meeting and voting in person.
Attendance at the annual meeting does not in itself serve to revoke a proxy.
VOTES REQUIRED
As of the close of business on October 15, 2001, there were 12,741,858
shares of Endorex common stock and 100,410 shares of Series B preferred stock
outstanding and entitled to vote. The affirmative vote of the holders of a
majority of the shares of Endorex common stock, voting together with the holders
of Endorex Series B preferred stock on an as converted basis, that are entitled
to vote and are present or represented by proxy at the Endorex meeting is
required to approve the proposals described above, except (a) the election of
directors which requires a plurality of the votes cast and (b) the amendment to
the Amended and Restated Certificate of Incorporation which requires the
approval of the holders of a majority of the outstanding shares of Endorex
common stock, voting together with the holders of Endorex Series B preferred
stock on an as converted basis. Endorex stockholders are entitled to one vote
per share of Endorex common stock and approximately 13.55 votes per share of
Endorex Series B preferred stock owned on October 23, 2001, the record date.
As of October 15, 2001, directors and executive officers of Endorex and
their affiliates beneficially owned an aggregate of 1,707,686 shares of Endorex
common stock and 100,410 shares of Endorex Series B preferred stock (exclusive
of any shares issuable upon the exercise of options) representing approximately
13.4% of the outstanding Endorex common stock and 100% of the outstanding
Endorex Series B preferred stock on such date. The directors and executive
officers of Endorex have indicated their intention to vote their shares of
Endorex common stock in favor of the issuance of shares of Endorex common stock,
options and warrants pursuant to the merger agreement.
QUORUM; ABSTENTIONS AND BROKER NON-VOTES
The required quorum for the transaction of business at the annual meeting is
holders, present or by proxy, of a majority of the shares of Endorex common
stock and Series B preferred stock, on an as converted basis, issued and
outstanding on the record date. If you hold your shares of Endorex common stock
through a broker, bank or other nominee, generally the nominee may only vote
your Endorex common stock in accordance with your instructions. However, if your
broker or nominee has not timely received your instructions, the nominee may
vote on matters for which it has discretionary voting authority. Brokers
generally will not have discretionary authority to vote on the proposal to
41
approve the issuance of Endorex common stock, options and warrants in connection
with the Merger. If a broker cannot vote certain shares for or against a given
proposal because it does not have discretionary voting authority, this is a
"broker non-vote" for that proposal. Brokers holding shares for beneficial
owners cannot vote on the actions proposed in this joint proxy
statement/prospectus without the owners' specific instructions. Abstentions and
broker non-votes will be included in determining the number of shares present at
the meeting for purposes of determining whether a quorum exists. Broker
non-votes will not be included in vote totals and will have no effect on the
outcome of the votes on the proposals. Abstentions, however, will have the same
effect as a vote against the proposals.
SOLICITATION OF PROXIES; PROXY SOLICITATION EXPENSES
Endorex has retained the services of D.F. King & Company to assist it in
soliciting of proxies from Endorex stockholders. Endorex does not expect to pay
more than $9,000, plus reasonable out-of-pocket expenses, for such services.
Endorex and CTD will each bear their own expenses in connection with soliciting
proxies for their respective meetings of stockholders, except that each will pay
one-half of all filing fees incurred in connection with the registration
statement and this joint proxy statement/prospectus.
In addition to solicitation by mail, the directors, officers and employees
of Endorex may solicit proxies from Endorex stockholders by telephone, facsimile
or in person. Endorex will ask brokerage houses, nominees, fiduciaries and other
custodians to forward soliciting materials to beneficial owners and will
reimburse them for their reasonable expenses incurred in sending proxy materials
to beneficial owners.
BOARD RECOMMENDATIONS
Endorex's board of directors has determined that the proposed merger and the
issuance of shares of Endorex common stock, options and warrants are fair to and
in the best interests of Endorex and Endorex's stockholders, and recommends that
you vote to approve such issuance of Endorex common stock, options and warrants
in connection with the proposed merger. Endorex's board of directors has also
determined that the other proposals are in the best interests of Endorex and
Endorex's stockholders and recommends that you vote in favor of such proposals.
The matters to be considered at the annual meeting are of great importance
to Endorex stockholders. Accordingly, Endorex stockholders are urged to read and
carefully consider the information presented in this joint proxy
statement/prospectus, and to complete, date, sign and promptly return the
enclosed proxy card in the enclosed postage-paid envelope.
Endorex stockholders should NOT send any stock certificates with their proxy
cards.
42
CTD SPECIAL MEETING
GENERAL
CTD is furnishing this joint proxy statement/prospectus to holders of CTD
common stock and Series A preferred stock in connection with the solicitation of
proxies by the CTD board of directors for use at the special meeting of
stockholders of CTD to be held on November 29, 2001, and any adjournment or
postponement thereof.
This joint proxy statement/prospectus is first being furnished to
stockholders of CTD on or about October 26, 2001.
DATE, TIME AND PLACE
The special meeting will be held on November 29, 2001 at 10:00 a.m., local
time, at CTD's offices at 1680 Michigan Avenue, Suite 700, Miami, Florida 33139.
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING
At the CTD special meeting and any adjournment or postponement of the
special meeting, CTD stockholders will be asked:
- to approve the merger and the merger agreement; and
- to transact such other business as may properly come before the special
meeting.
OTHER MATTERS
CTD knows of no other matters that will be presented for consideration at
the special meeting. If any other matters properly come before the special
meeting, the persons named in the enclosed form of proxy intend to vote the
shares they represent as the board of directors may recommend. By signing and
returning the enclosed proxy card, you are granting discretionary authority with
respect to such other matters.
RECORD DATE
CTD's board has fixed the close of business on November 19, 2001, as the
record date for determining CTD stockholders entitled to notice of and to vote
at the special meeting.
VOTING OF PROXIES
CTD requests that stockholders of CTD complete, date and sign the enclosed
proxy card and promptly mail it to CTD in the postage-paid envelope provided.
All properly executed proxies that CTD receives prior to the vote at the special
meeting, and that are not revoked will be voted in accordance with the
instructions indicated on the proxy cards or, if no direction is indicated, to
approve the merger and the merger agreement.
Stockholders may in the following manner revoke their proxies at any time
prior to their use:
- by delivering to the secretary of CTD a signed notice of revocation or a
later-dated signed proxy card; or
- by attending the annual meeting and voting in person.
Attendance at the special meeting does not in itself serve to revoke a
proxy.
43
VOTES REQUIRED
As of the close of business on October 15, 2001, there were 5,000,000 shares
of CTD common stock and 7,628,750 shares of Series A preferred stock outstanding
and entitled to vote. The affirmative vote of the holders of a majority of the
outstanding shares of CTD common stock, voting together with the holders of
Series A preferred stock, on an as converted basis is required to approve the
merger and the merger agreement. CTD stockholders are entitled to one vote per
share of CTD common stock and one vote per share of CTD Series A preferred stock
owned on November 19, 2001.
As of October 15, 2001, directors and executive officers of CTD and their
affiliates beneficially owned an aggregate of 2,872,453 shares of CTD common
stock (exclusive of any shares issuable upon the exercise of options) and
1,000,000 shares of CTD Series A preferred stock, representing approximately
39.7% of the shares of CTD common stock and approximately 13.1% of the shares of
CTD Series A preferred stock outstanding on such date. The directors and
executive officers of CTD have indicated their intention to vote their shares of
CTD common stock in favor of the merger and the merger agreement. Pursuant to a
voting agreement in the form attached as Appendix II hereto, certain CTD
stockholders, including CTD's directors, executive officers and their
affiliates, owning beneficially approximately 63% and 61% of CTD's common stock
and Series A preferred stock, respectively, outstanding as of October 15, 2001
have agreed to vote all of their shares of CTD capital stock for approval of the
merger and the merger agreement.
QUORUM
The required quorum for the transaction of business at the special meeting
is holders, present or by proxy, of a majority of the issued and outstanding
shares of CTD common stock and Series A preferred stock, on an as converted
basis, issued and outstanding on the record date.
SOLICITATION OF PROXIES; PROXY SOLICITATION EXPENSES
CTD will bear its own expenses in connection with the solicitation of
proxies for its special meeting of stockholders, except that Endorex and CTD
each will pay one-half of all filing fees incurred in connection with the
registration statement and this joint proxy statement/prospectus.
In addition to solicitation by mail, the directors, officers and employees
of CTD may solicit proxies from stockholders by telephone, facsimile or in
person.
BOARD RECOMMENDATIONS
The CTD board has determined that the merger and the merger agreement are in
the best interests of CTD and its stockholders. Accordingly, the board has
approved, and recommends that stockholders vote to approve the merger and the
merger agreement. In considering this recommendation, CTD stockholders should be
aware that some CTD directors and officers have interests in the merger that are
different from, or in addition to, those of CTD stockholders, and that Endorex
has agreed to provide certain indemnification arrangements to some directors and
officers of CTD. See "The Merger--Interests of Certain Persons in the Merger and
Potential Conflicts of Interest."
The matters to be considered at the special meeting are of great importance
to CTD stockholders. Accordingly, CTD stockholders are urged to read and
carefully consider the information presented in this joint proxy
statement/prospectus, and to complete, date, sign and promptly return the
enclosed proxy card in the enclosed postage-paid envelope.
CTD's stockholders should NOT send any stock certificates with their proxy
cards. A transmittal form with instructions for the surrender of CTD stock
certificates will be mailed to CTD stockholders promptly once the merger has
been completed.
44
THE MERGER
THIS SECTION OF THE JOINT PROXY STATEMENT/PROSPECTUS DESCRIBES MATERIAL
ASPECTS OF THE PROPOSED MERGER, INCLUDING THE MERGER AGREEMENT, WHICH IS
ATTACHED AS APPENDIX I HERETO AND INCORPORATED BY REFERENCE HEREIN. WHILE WE
BELIEVE THAT THIS DESCRIPTION COVERS THE MATERIAL TERMS OF THE MERGER AND THE
RELATED TRANSACTIONS, THIS SUMMARY MAY NOT CONTAIN ALL OF THE INFORMATION THAT
IS IMPORTANT TO ENDOREX STOCKHOLDERS AND CTD STOCKHOLDERS. FOR A MORE COMPLETE
UNDERSTANDING OF THE MERGER, STOCKHOLDERS SHOULD READ CAREFULLY AND IN THEIR
ENTIRETY THE MERGER AGREEMENT AND THE OTHER DOCUMENTS WE REFER TO.
GENERAL
Endorex's and CTD's respective boards of directors are using this joint
proxy statement/prospectus to solicit proxies from the holders of Endorex's and
CTD's respective capital stock for use at the Endorex annual meeting and the CTD
special meeting. At Endorex's annual meeting, holders of Endorex capital stock
will be asked to vote upon approval and adoption of the issuance of Endorex
common stock, options and warrants pursuant to the terms of the merger
agreement. At CTD's special meeting, holders of CTD capital stock will be asked
to vote upon approval of the merger and the merger agreement.
BACKGROUND OF THE MERGER
At the end of 1999, Endorex began concentrating its efforts on developing
its drug delivery business. In a presentation to the Endorex board of directors
in February 2000, Michael Rosen, President and Chief Executive Officer of
Endorex, proposed that Endorex acquire technology or companies within the field
of drug delivery. Endorex's management and board believed Endorex should seek to
increase financial resources, product portfolio (particularly products in
clinical trials), and scientific resources. The board approved management's
recommendation that the Endorex management team identify potential acquisition
candidates. Dr. Kenneth Tempero, Chairman of the Endorex board of directors, and
Mr. Rosen contacted and visited drug delivery companies to explore both
potential interest in an acquisition and synergies with Endorex. In addition,
Steve H. Kanzer, a director of Endorex and an officer and director of CTD,
provided non-confidential information regarding CTD to Endorex for review.
Additionally, during the fourth quarter of 2000, Peter Kash and Martin
Kratchman, each a security holder of both Endorex and CTD and an employee of
Paramount Capital, Inc., an investment bank that is an affiliate of significant
stockholders of both Endorex and CTD, suggested that Mr. Rosen and Mr. Kanzer
explore a potential transaction between Endorex and CTD. CTD was interested in
exploring such a transaction as a means of providing it investors with
liquidity, while Endorex was interested in obtaining CTD's financial resources
and product portfolio.
On October 18, 2000, Endorex and CTD executed a mutual confidentiality and
non-disclosure agreement and CTD provided Endorex with a package of confidential
information explaining CTD's product portfolio, capital structure and financial
situation. Mr. Kanzer and Mr. Rosen also spoke by telephone to arrange a meeting
at O'Hare Airport in Chicago, Illinois to explore further merger possibilities.
On October 23, 2000, a meeting was held at O'Hare Airport with Mr. Rosen,
Mr. Frank Reid, former Vice President, Finance and Corporate Development of
Endorex, Dr. Colin Bier, Chairman of the board of directors of CTD, Mr. Kanzer
and Mr. Nicholas Stergiopoulos, Director of Corporate Development of CTD, in
attendance. The parties discussed various issues, including the potential
synergies of a business combination. At the end of the meeting, the parties
indicated that they were interested in pursuing further discussions and
initiating further due diligence.
On October 30, 2000, Mr. Kanzer sent to Mr. Rosen a proposal that Endorex
acquire CTD. This proposal was accompanied by an initial term sheet and outline
of a proposed merger structure,
45
including a proposed valuation of CTD. Mr. Rosen responded by telephone that he
would review the proposal with the Endorex board of directors.
On November 9, 2000, at an Endorex board meeting, Mr. Rosen and Mr. Reid
presented the CTD proposal as well as details of discussions with other
potential acquisition candidates. The board established a Strategy and Mergers
and Acquisition Committee, or M&A Committee, consisting of Dr. Tempero,
Dr. Paul Rubin and Mr. Richard Dunning, to work with Mr. Rosen and Endorex
management on potential acquisition opportunities.
On November 29, 2000, Dr. Bier and Mr. Stergiopoulos visited Endorex's
headquarters in Lake Forest, Illinois and met with Mr. Rosen, Dr. Tempero,
Mr. Robert Brey, former Vice President of Research and Development of Endorex,
and Mr. Reid. Both parties discussed development of their respective products
and technologies, and the status of collaborations with corporate partners and
scientific and commercial institutions. The parties also discussed the potential
synergies of combining the companies and reviewed the terms of CTD's merger
proposal. Both parties expressed interest in continuing their merger
discussions.
During December 2000, a number of telephone conversations occurred among
Dr. Tempero, Mr. Rosen, Dr. Bier and Mr. Kanzer regarding the potential
synergies of combining Endorex and CTD, as well as how to structure any merger.
On December 6, 2000, a telephone conference was held among Dr. Tempero,
Mr. Rosen, Mr. Kanzer, representatives of Brobeck Phleger & Harrison LLP, or
Brobeck, legal counsel for Endorex, and a representative of Kramer Levin
Naftalis & Frankel LLP, or Kramer Levin, legal counsel for CTD, regarding the
potential structure of a merger transaction between Endorex and CTD.
On December 18, 2000, another telephone conference was held with
Dr. Tempero, Mr. Rosen, Mr. Kanzer, Dr. Bier, representatives of Brobeck and
representatives of Kramer Levin participating. The discussion again was
regarding the potential structure of a merger transaction between Endorex and
CTD and related AMEX and SEC requirements.
On December 26, 2000, Mr. Rosen sent to Mr. Kanzer a counterproposal to
Mr. Kanzer's October 30, 2000 acquisition proposal.
On December 29, 2000, a telephone conference was held among Dr. Bier,
Mr. Kanzer, Dr. Tempero and Mr. Rosen in which Mr. Rosen outlined the rationale
for his acquisition proposal. Although issues remained open regarding the terms
of an acquisition, both parties indicated interest in pursing discussions
regarding a business combination and a two-day meeting was scheduled for
January 8-9, 2001 in Miami, Florida, to negotiate a term sheet for the
transaction.
On January 3, 2001, a telephonic meeting of Endorex's M&A Committee was
held. Mr. Rosen summarized conversations with CTD since the board meeting held
on November 9, 2000, including the discussions that occurred during the visit to
Endorex by CTD management and the telephone conference among the parties on
December 29, 2000.
On January 8-9, 2001, Dr. Tempero, Mr. Rosen, Dr. Bier, Mr. Kanzer and
Mr. Stergiopoulos met in Miami, Florida, to negotiate a term sheet for the
transaction. At the meeting, the major terms of a potential transaction were
agreed upon. The parties also agreed that Mr. Rosen would have Brobeck draft a
letter of intent and term sheet for review by the parties.
From January 9, 2001, until execution of the letter of intent regarding the
merger on February 27, 2001, numerous telephone conversations were held among
Dr. Tempero, Mr. Rosen, Dr. Bier, Mr. Stergiopoulos and representatives of each
of Brobeck and Kramer Levin to negotiate the letter of intent and term sheet,
request due diligence materials and discuss due diligence materials and issues
with respect to both Endorex and CTD.
46
On January 16, 2001, a telephonic meeting of the M&A Committee was held
during which Mr. Rosen summarized the interim discussions with CTD, including
the meeting in Miami, Florida and the potential terms of the transaction.
On January 29, 2001, a telephonic meeting of the M&A Committee was held and
was attended by Mr. Dunning and Dr. Tempero. Also present by invitation were
Mr. Rosen and Mr. Darren Hensley of Brobeck. Mr. Rosen briefed the committee on
discussions that had occurred between Endorex and CTD since January 16, 2001.
The M&A Committee discussed a two-step process proposed by CTD to consummate the
merger as compared to a conventional merger structure. The M&A Committee
determined that while the two-step process had elements that could be considered
attractive, it also entailed several potential drawbacks for Endorex. The M&A
Committee also discussed certain due diligence issues regarding CTD.
On February 13, 2001, the M&A Committee members met with Dr. Bier in a
conference room at Logan Airport in Boston, Massachusetts. The purpose of the
meeting was to allow the members of the M&A Committee to meet and interview
Dr. Bier, as the M&A Committee contemplated that it might be appropriate to
appoint Dr. Bier Chairman and Chief Executive Officer of Endorex subsequent to a
merger. After introductions and a brief discussion of Dr. Bier's background and
experience, a discussion ensued regarding management philosophy, vision for the
combined companies, strategies for attaining goals, the priorities for the
combined companies, investor relations, public relations, capital structure,
capital needs, and the like. Dr. Bier's compensation requirements were also
discussed.
On February 21, 2001, at Endorex's quarterly board of directors meeting,
Mr. Rosen provided the board with a draft of the letter of intent and term sheet
for the merger transaction that had been negotiated with CTD. The board approved
the letter of intent and term sheet and authorized Endorex management to execute
the letter of intent with CTD. Subsequent to the meeting, Mr. Rosen telephoned
Dr. Bier to inform him of the board's approval of the letter of intent and term
sheet.
On February 26, 2001, a telephonic meeting of CTD's board of directors was
held to discuss the letter of intent and term sheet. Present by invitation were
Mr. Stergiopoulos as well as Kenneth A. Adams of Kramer Levin. The board of
directors voted to approve the letter of intent and term sheet. Mr. Kanzer
abstained from voting.
On February 27, 2001, Endorex and CTD executed a letter of intent with an
attached term sheet outlining the terms of the proposed acquisition of CTD by
Endorex pursuant to a merger transaction.
From the execution of the letter of intent on February 27, 2001, until
execution of the agreement and plan of merger and reorganization on July 31,
2001, numerous telephone conversations were held among Dr. Tempero, Mr. Rosen,
Dr. Bier, Mr. Stergiopoulos and representatives of each of Brobeck and Kramer
Levin to negotiate the terms of the merger agreement and related agreements,
request due diligence materials and discuss due diligence materials and issues
with respect to both Endorex and CTD.
On March 9, 2001, Dr. Brey received from Mr. Stergiopoulos a partial set of
FDA submissions related to clinical development programs for orBec-TM- and
Oraprine-TM-. Endorex also requested additional documents regarding
manufacturing and formulation data on the new formulations of orBec-TM-.
On March 11, 2001, after contacting several investment banks, Endorex
executed an engagement letter with Wells Fargo Van Kasper, or WFVK, pursuant to
which WFVK would provide the Endorex board of directors with a fairness opinion
with respect to the fairness of the terms of the merger transaction to the
stockholders of Endorex from a financial point of view.
On April 9, 2001, a telephonic M&A Committee meeting occurred during which
Mr. Rosen provided an update regarding the status of negotiations with CTD
regarding the transaction. A
47
discussion ensued regarding the open issues and what positions Endorex should
take. Mr. Rosen reviewed with the M&A Committee target dates for moving the
transaction to completion.
On April 17, 2001, Mr. Steve Nelson of WFVK visited Endorex's offices to
meet with Mr. Koulogeorge, Mr. Rosen and Dr. Brey for purposes of a due
diligence review of Endorex related to the WFVK fairness opinion.
On April 20, 2001, a telephone conference occurred pursuant to which
Dr. Hal Gerber of WFVK conducted a due diligence review of CTD with Dr. Peter
Hoyle and Dr. Paul Waymack, CTD regulatory and clinical consultants, and
Dr. Bier and Mr. Stergiopoulos.
On May 1, 2001, there took place a joint telephonic meeting of the Endorex
board of directors Executive Committee and M&A Committee. Mr. Hensley of Brobeck
was present by invitation for a portion of the meeting. Mr. Rosen recapped the
history of the negotiations, summarized the proposed changes from the letter of
intent, explained the rationale for each of the deviations and analyzed their
potential impact upon the transaction. He then proceeded to itemize the open
issues, explaining their background and solicited input and guidance from the
committees. Dr. Tempero summarized the feedback received from Dr. Bier regarding
one of the open issues, the terms of his employment agreement, and also
solicited input and guidance from the committees with respect thereto.
On May 10, 2001, a telephonic M&A Committee meeting occurred. Mr. Rosen
summarized the status of CTD negotiations since the last M&A Committee meeting
and informed the committee of recent comments from CTD on the transaction
documents that raised a number of new issues. The M&A Committee discussed the
items in detail and provided guidance to Mr. Rosen with respect thereto.
On May 28, 2001, CTD and Endorex executed an amendment to the letter of
intent extending the exclusivity period to June 25, 2001.
On June 14, 2001, a telephonic meeting of the M&A Committee occurred. The
purpose of the meeting was for Mr. Rosen to provide a status report of the
negotiations with CTD, to summarize the status of scientific work underway
within both companies, and to summarize remaining open items with respect to the
transaction negotiations. The M&A Committee determined that the exclusivity
period should not be extended upon its current expiration and that Endorex would
then be free to explore other acquisition candidates.
On June 15, 2001, Mr. Rosen sent a letter to Dr. Bier reminding CTD of the
impending expiration of the exclusivity period and indicating that Endorex would
not agree to extend the exclusivity period in the letter of intent and that it
would discontinue all merger negotiations with CTD at that time. Additionally,
Mr. Rosen placed a telephone call to Dr. Bier to advise him of the content of
the letter and the concern of the Endorex board that the transaction
negotiations were proceeding much too slowly.
On July 2, 2001, a telephonic meeting of CTD's board of directors was held
to discuss the merger agreement. Present by invitation were Mr. Stergiopoulos as
well as Mr. Adams of Kramer Levin. The principal topic of discussion was
concerns expressed by certain CTD stockholders regarding treatment of the
outstanding warrants to purchase shares of CTD Series A preferred stock. Also
discussed were other aspects of the merger agreement as well as composition of
Endorex's board of directors post-merger. The board did not approve the merger
agreement, but instead agreed to hold another meeting after any uncertainties
regarding treatment of the warrants had been resolved.
On July 2, 2001, a special telephonic meeting of the Endorex board of
directors was held to approve the merger, the merger agreement and the
transactions contemplated thereby. Present by invitation were Mr. Koulogeorge;
Dr. Gerber, Mr. Allan Auerbach and Mr. Nelson of WFVK; and Mr. Hensley and
Mr. John Kim of Brobeck. Mr. Rosen presented an overview of the transaction
48
documents previously distributed to the board and the merger transaction.
Mr. Kanzer posed questions about CTD's warrants and the request of one CTD
stockholder that the terms upon which Endorex issues substitute warrants for
them be changed. Mr. Kanzer indicated that the CTD board of directors had not
approved the merger at a meeting earlier that day and had agreed to reschedule
the meeting after resolution of the stockholder request. Due to this new
information, the meeting was adjourned without approving the transaction.
On July 6, 2001, a telephonic meeting of CTD's board of directors was held
to discuss the merger agreement, treatment of the warrants to purchase shares of
Series A preferred stock, and when Endorex would announce the proposed merger to
the public. Present by invitation were Mr. Stergiopoulos and Mr. Adams. The
board of directors voted to approve the merger agreement and to submit the
merger agreement to CTD's stockholders for their approval. Mr. Kanzer abstained
from voting.
On July 13, 2001, a special telephonic meeting of the Endorex board of
directors was held. Present by invitation were Mr. Koulogeorge, Mr. Nelson,
Dr. Gerber, Mr. Auerbach, Mr. Kim and Mr. Hensley. Mr. Rosen discussed the
background of the proposed merger and changes in the terms of the transaction
that had occurred due to the concern raised by a CTD stockholder. Mr. Rosen
informed the board that the CTD board had previously approved the merger
agreement with the revisions requested by the stockholder. The representatives
of WFVK presented their analysis and the background for their fairness opinion,
as well as the assumptions, terms and limitations thereof. WFVK delivered its
oral opinion, subsequently confirmed in writing, that the merger was fair to the
stockholders of Endorex from a financial point of view. The board of directors
subsequently voted to approve the merger, the merger agreement and the
transactions contemplated thereby and to submit the transaction to Endorex's
stockholders for approval. Mr. Kanzer abstained from the vote. Mr. Rosen then
discussed the actions and items that need to be completed prior to or
concurrently with the execution of the merger agreement and the time frame for
completing these actions and items, as well as the execution of the merger
agreement. Mr. Rosen also discussed other actions that will need to be taken
subsequent to the execution of the merger agreement and the board discussed when
to announce publicly the proposed merger.
On July 19, 2001, a draft of a press release announcing the merger was
distributed to CTD for review. Also on July 19, 2001, Dr. Bier visited Endorex
to meet with Mr. Rosen and Endorex's management team. Discussions covered what
documents needed to be completed before the merger agreement could be signed,
the press release announcing the execution of the merger agreement, the
timetable for filing a Form S-4 registration statement with the SEC and the
ensuing process, timing for stockholder meetings of each company, company
integration activities, and presentations at financial meetings in the fall.
Between July 19, 2001 and July 31, 2001, numerous telephone conferences
occurred between Mr. Rosen, Mr. Stergiopoulos, Dr. Bier and representatives of
each of Brobeck and Kramer Levin negotiating the language of the press release
and the Form 8-K to be filed with the SEC in connection with the issuance of the
press release.
On July 31, 2001, Endorex, Roadrunner Acquisition, Inc., or Roadrunner, a
wholly owned subsidiary of Endorex, and CTD executed the merger agreement and
Endorex, Roadrunner, CTD and certain stockholders of CTD executed the voting
agreement.
On August 1, 2001, Endorex and CTD issued a joint press release announcing
the execution of the merger agreement and Endorex filed a Form 8-K and Rule 425
filing with the SEC regarding the press release.
On August 7, 2001, Endorex made a Rule 425 filing with the SEC regarding
question and answer materials distributed to Endorex employees.
49
On September 5, 2001, pursuant to Rule 425, Endorex filed with the SEC
slides used in connection with a presentation delivered by Mr. Rosen at the WFVK
"The Class of 2001" Conference in San Francisco, California.
On September 25, 2001, CTD filed with the SEC under Rule 425 a press release
announcing that the FDA had recently granted Enteron Pharmaceuticals, Inc., a
majority owned subsidiary of CTD, an "orphan drug" designation for the use of
orBec-TM- to prevent graft-versus-host disease.
On October 9, 2001, Endorex filed with the SEC under Rule 425 a press
release announcing that Endorex filed with the SEC the registration statement of
which this joint proxy statement/prospectus is a part.
STRUCTURE OF THE MERGER
Roadrunner, a wholly owned subsidiary of Endorex, will merge into CTD, and
CTD will survive the merger and become a wholly owned subsidiary of Endorex. CTD
stockholders will become stockholders of Endorex.
ENDOREX'S REASONS FOR THE MERGER AND RECOMMENDATION OF THE ENDOREX BOARD OF
DIRECTORS
The Endorex board of directors, after careful consideration, has approved
the merger, the merger agreement and the transactions contemplated thereby,
including the proposed issuance of Endorex common stock, options and warrants in
connection with the merger. The Endorex board believes that the merger is
advisable and in the best interests of its stockholders and recommends that its
stockholders vote "FOR" the proposed issuance of Endorex common stock and
options and warrants to acquire Endorex common stock in connection with the
merger.
The Endorex board of directors also considered and reviewed with the
management of Endorex a wide variety of information, factors and reasons in
connection with its evaluation of the merger and the merger agreement. In
particular, Endorex's board of directors considered the following information,
reasons and factors:
- that CTD had, as of June 30, 2001, no debt and approximately $5 million in
cash, which CTD believes will be sufficient to fund development of
orBec-TM- and Oraprine-TM- in the near term and to take orBec-TM-, its
lead drug candidate in phase III clinical trials, through the FDA approval
process;
- that the addition of CTD's drug product candidates will increase and
broaden Endorex's product pipeline;
- that the merged companies may provide enhanced opportunities for new drug
product discoveries and commercial alliances;
- the likelihood the merger may benefit Endorex in its negotiations with
potential collaborators, corporate partners, licensors and licensees;
- information concerning CTD's and Endorex's respective businesses, plans
and operations, technology, management, competitive position, future
business prospects, and historical and projected financial performance;
- the complementary nature of CTD's and Endorex's operations and strategy,
in that they both focus on pre-approved compounds;
- the operational and administrative cost savings that would result from the
merger with CTD;
- the amount of Endorex common stock and options and warrants exercisable
for Endorex common stock to be issued to CTD's stockholders;
50
- the compatibility of CTD's and Endorex's management;
- the effect of the merger on Endorex's potential corporate partners and
collaborators; and
- the terms of the merger agreement.
In reaching its conclusions, the board also considered the following:
- the results of management's analysis of the drug delivery and development
industry generally;
- the written opinion of WFVK, independent financial advisors to the board,
dated July 13, 2001, that, as of July 13, 2001, and based on the
considerations set forth in the opinion, the exchange of shares of
Endorex's common stock and options and warrants to acquire Endorex common
stock for all of CTD's outstanding common stock, preferred stock, options
and warrants is fair from a financial point of view to Endorex's
stockholders;
- management's valuation of CTD at approximately 10 million shares of
Endorex common stock (utilizing an Endorex common stock per share price of
$1.50 as of January 9, 2001) after extensive arm's-length negotiations
with CTD;
- that Endorex would remain a public entity after the merger was complete;
and
- restrictions on Endorex's ability to acquire other entities prior to the
closing of the merger and the provisions regarding the payment of a fee
under certain circumstances upon termination of the merger agreement.
Endorex's board of directors also considered a variety of potential risks
and detriments, including, but not limited to, the following:
- CTD's limited operating history;
- CTD's limited revenue and historical and projected losses from operations;
- the difficulties associated with merging the operations of each company
including the distance between operational locations;
- the risk that the merger might not be consummated;
- the effect that announcing the merger would have on the price of Endorex's
common stock;
- the time and costs incurred or associated with the merger; and
- other applicable risks described in this joint proxy statement/prospectus
under "Risk Factors" starting on page 15.
The Endorex board of directors was made aware and discussed the interests of
Steve H. Kanzer in CTD and the merger. Steve H. Kanzer abstained in the board's
vote to approve the merger, the merger agreement and the transactions
contemplated thereby. See "The Merger--Interests of Certain Persons in the
Merger and Potential Conflicts of Interest."
Due to the many different factors and risks and the information considered
in connection with its evaluation of the merger, Endorex's board did not find it
practicable to quantify or otherwise assign relative weight or value to the
specific factors that it considered in approving the merger, the merger
agreement and the transactions contemplated thereby. Furthermore, individual
Endorex board members may have viewed or valued factors considered by them
differently from the other Endorex board members.
The foregoing discussion of the information, factors and risks considered by
the Endorex board of directors is not meant to be exhaustive, but includes the
principal factors considered by the board.
51
OPINION OF ENDOREX'S FINANCIAL ADVISOR
SELECTION OF INDEPENDENT FINANCIAL ADVISOR FOR FAIRNESS OPINION
Endorex's objectives in selecting an independent financial advisor to render
a fairness opinion in connection with the merger were to:
- engage an independent financial advisor recognized as a leader in
biotechnology transactions and with knowledge of the biotechnology
industry;
- obtain the fairness opinion at a reasonable cost in relationship to the
size and valuation of the transaction; and
- establish a relationship for future activities of Endorex.
Endorex contacted several independent financial advisors, including Gruntal,
Adams Harkness & Hill, William Blair & Co., and WFVK, to discuss their interest
in working with Endorex on the merger and in continuing to work with Endorex in
the future for other investment banking activities. After discussion with
personnel from the healthcare or lifescience divisions of each of these entities
and receiving cost estimates for rendering of the fairness opinion, Endorex
selected WFVK as its independent financial advisor in connection with the
merger. Prior to this contact, Endorex had no banking or other relationship with
WFVK or any of its affiliates during the last two years. An affiliate of WFVK,
Wells Fargo Bank Minnesota, National Association, will serve as escrow agent
under the terms of the escrow agreement to be executed at the closing of the
merger.
OPINION OF WELLS FARGO VAN KASPER
On March 11, 2001, Endorex engaged WFVK to provide financial advisory
services to Endorex regarding Endorex's proposed business combination with CTD.
On July 13, 2001, WFVK delivered its oral opinion to Endorex's board of
directors, subsequently confirming that opinion with a written opinion dated
July 13, 2001, as to the fairness to the stockholders of Endorex, from a
financial point of view, of the merger consideration to be paid by Endorex in
the merger.
WFVK's opinion is limited to the fairness of the merger consideration, from
a financial point of view, to the stockholders of Endorex and does not address
Endorex's underlying business decision to proceed with the merger. No
limitations were imposed by the Endorex board on WFVK with respect to the
investigations made or procedures followed by it in furnishing its opinion. The
merger consideration was determined through negotiations between the respective
managements of Endorex and CTD. WFVK did not assist Endorex in those
negotiations and in the negotiations leading to an agreement on principal
structural and terms of the agreement. In furnishing its opinion, WFVK was not
engaged as an agent or fiduciary of Endorex's stockholders or any other third
party.
THE FULL TEXT OF THE WRITTEN OPINION OF WFVK, WHICH SETS FORTH ASSUMPTIONS
MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN IN CONNECTION
WITH THE OPINION, IS ATTACHED AS APPENDIX III HERETO. THE SUMMARY CONTAINED
HEREIN IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE
OPINION. WE URGE THE STOCKHOLDERS OF ENDOREX TO CAREFULLY READ THE OPINION IN
ITS ENTIRETY.
The WFVK opinion does not address the following:
- the relative merits of the merger and any other transactions;
- business strategies discussed by the Endorex board as alternatives to the
merger; or
- the underlying business decision of the Endorex board to proceed with the
merger process.
52
In connection with the preparation of its opinion, WFVK did, among other
things, the following:
- reviewed the financial terms and conditions set forth in the form of the
merger agreement provided to WFVK by Endorex, which was represented to
WFVK to be the final version to be executed by both parties;
- reviewed certain financial information relating to CTD, including
historical financial and operating statements and financial and operating
projections prepared by the management of CTD;
- discussed with members of CTD's management CTD's historical and current
business operations, financial conditions and prospects and other matters
WFVK deemed relevant;
- discussed with members of Endorex's management Endorex's historical and
current business operations, financial conditions and prospects and other
matters WFVK deemed relevant;
- reviewed operating results, trading multiples, research reports and
consensus revenues and earnings estimates reported by I/B/E/S
International, Inc., a third party financial information service company
that provided to WFVK such information for selected publicly traded
companies that WFVK deemed comparable to CTD;
- compared the financial terms of the merger with the financial terms, to
the extent publicly available, of other business combinations that WFVK
deemed relevant;
- reviewed the stock price and trading history of Endorex common stock; and
- made other studies, inquiries and analyses and reviewed other data as WFVK
deemed relevant and appropriate, based on WFVK's judgement as investment
bankers, for the purpose of the opinion.
In the course of WFVK's review, the assumption was made, with Endorex's
permission, that the documents prepared to be used and signed by the parties to
formally effect the merger, including any disclosure material to be delivered to
the stockholders of Endorex to elicit the necessary consents to the merger, will
effect the merger on the terms set forth in the proposed form of the merger
agreement provided to WFVK by Endorex, without material alteration.
WFVK did not negotiate the terms of the merger or provide any legal advice
with respect to the merger. WFVK did not make or provide an independent
evaluation or appraisal of any of the assets or liabilities (contingent or
otherwise) of CTD or Endorex nor did WFVK make a physical inspection of any of
the properties or assets of CTD or Endorex.
In rendering its opinion, WFVK relied, without independent verification, on
the accuracy and completeness of all of the financial and other information that
was publicly available or furnished or otherwise communicated to WFVK by Endorex
and CTD and relied upon and assumed without independent verification that there
had been no material change in the assets, financial condition and business
prospects of CTD or Endorex since the date that the most recent financial
statements were made available to WFVK.
With respect to financial projections provided to WFVK by CTD management,
WFVK reviewed the projections and was advised by certain members of Endorex and
CTD management, and has relied upon and assumed without independent
verification, that the projections:
- were reasonably prepared;
- are based upon assumptions reflecting the best currently available
estimates and good faith judgments of CTD management as to the future
performance of CTD as an independent company; and
53
- are believed to be realizable in the amounts and time periods contemplated
thereby.
Each of the management of Endorex and CTD has also advised WFVK that they do
not currently have any information or beliefs that would make the projections
incomplete or misleading. With respect to projections of companies deemed
comparable to CTD by WFVK, WFVK used only projections, published in recent
research analysts' reports, reviewed those projections, and in all instances
used a median of the projected numbers.
The opinion is based upon analyses of the foregoing factors in light of
WFVK's assessment of general economic, financial and market conditions as they
exist and as they can be evaluated by WFVK as of the date of the opinion and on
information made available to WFVK as of the date of the opinion. Although
events occurring after the date of the opinion could materially affect the
assumptions relied upon in preparing the opinion, WFVK does not have any
obligation to update, revise or reaffirm its opinion unless requested by Endorex
upon payment of an additional fee.
The opinion is for the benefit and use of the board of directors of Endorex
in its consideration of the merger and is not a recommendation to any
stockholder as to how such stockholder should vote with respect to the merger.
Further, the opinion addresses only the financial fairness of the merger
consideration to be paid by Endorex and does not address any other aspect of the
merger.
SUMMARY OF METHODS UTILIZED
Set forth below is a summary of the material financial analyses performed by
WFVK in connection with the delivery of its written opinion stating that the
merger consideration, as of July 13, 2001, was fair to the stockholders of
Endorex, from a financial point of view. The summary of the financial analyses
is not a complete description of all of the analyses performed by WFVK. Some of
the summaries of financial analyses include information presented in tabular
format. In order to fully understand the financial analyses, the tables must be
read together with the text of each summary. The tables alone do not constitute
a complete description of the financial analyses. Considering the data in the
tables without considering the full narrative description of the financial
analyses, including the methodologies and assumptions underlying the analyses,
could create a misleading or incomplete view of the financial analyses. WFVK
performed several procedures, including each of the financial analyses described
below, and reviewed with CTD and Endorex management the assumptions on which its
analyses were based and other factors, including CTD's historical and projected
financial results. No limitations were imposed by Endorex with respect to the
investigations made or procedures followed by WFVK in rendering its opinion.
ANALYSIS OF ENDOREX STOCK TRADING HISTORY
To provide contextual data and comparative market data, WFVK reviewed the
historical market prices of Endorex common stock for the 90 days preceding the
date of the WFVK opinion. WFVK noted that over the indicated period from
April 11, 2001 to July 12, 2001, Endorex's common stock sold for a high of $1.20
per share, a low of $.75 per share, and had an average sale price at the close
of market trading of $.96 per share. The implied merger consideration, based on
a maximum of ten million shares of Endorex common stock to be issued as defined
in the merger agreement multiplied by the average closing sale price as
indicated above, was calculated by WFVK to be approximately $9.6 million.
54
DISCOUNTED CASH FLOWS ANALYSIS
WFVK estimated ranges of equity values for CTD based upon the discounted
present value of CTD's projected after-tax cash flows and the discounted present
value of CTD's terminal value at December 31, 2009, calculated using a perpetual
growth rate methodology, based on:
- CTD's forecasts, and
- CTD's forecasts, assuming the generation of revenues solely through
licensing of technology to a third party in exchange for royalty payments
of 15% of the product revenues set forth in CTD's forecasts.
The purpose of the discounted cash flow analysis is to compare the
consideration paid in the merger to the present value of after-tax cash flows
implied by CTD's forecasts. WFVK applied the discounted cash flow methodology to
CTD's forecasts because CTD is a development stage company and the majority of
its value is derived from the sale of its products in the future. After-tax cash
flow was calculated by taking projected earnings before interest and taxes and
subtracting from this amount projected taxes, changes in working capital and
changes in other assets and liabilities and adding back projected depreciation
and amortization. This analysis was based upon assumptions described by,
projections supplied by, and discussions held with CTD and Endorex management.
For each scenario, a range of equity values was generated utilizing discount
rates ranging from 25% to 35%. In calculating the terminal value, WFVK utilized
a perpetual growth rate of zero, which was arrived at through discussions with
CTD and Endorex management regarding the life cycles of CTD's products.
Utilizing this methodology, the equity value ranged from (in $ millions):
LOW HIGH
-------- --------
Based on CTD's forecasts.................................... $12.1 $15.5
Based on CTD's forecasts, as adjusted by estimated royalty
payments as set forth above............................... $15.2 $22.1
COMPARABLE COMPANIES ANALYSIS
WFVK analyzed, among other things, certain trading multiples of the
following publicly traded companies in the specialty pharmaceutical industry, or
the Comparable Companies, that WFVK deemed comparable:
- Questcor Pharmaceuticals, Inc.
- Cellegy Pharmaceuticals, Inc.
- Inkine Pharmaceuticals, Inc.
- SangStat Medical Corporation
WFVK analyzed the trading multiples of enterprise value-to-projected net
revenues of the Comparable Companies for calendar years 2001 and 2002. All
trading multiples were based on closing sale prices on July 12, 2001. WFVK
determined the median enterprise value-to-projected net revenue multiple of the
Comparable Companies, for the calendar year 2002, to be 2.64 and applied this
multiple to CTD's projected 2009 revenues, based on:
- CTD's forecasts, and
- CTD's forecasts, assuming the generation of revenues solely through
licensing of technology to a third party in exchange for royalty payments
of 15% of the product revenues set forth in CTD's forecasts.
55
For each scenario, a range of equity values were generated by discounting
the resulting values to 2002 utilizing discount rates ranging from 25% to 35%.
WFVK applied the discount rate to CTD's forecasts because CTD is a development
stage company and the majority of its value is derived from the sale of its
products in the future.
Utilizing this methodology, the equity value ranged from (in $ millions):
LOW HIGH
-------- --------
Based on CTD's forecasts.................................... $33.4 $42.3
Based on CTD's forecasts, as adjusted by estimated royalty
payments as set forth above............................... $11.2 $13.5
PRECEDENT TRANSACTIONS ANALYSIS
WFVK analyzed the aggregate transaction values and implied transaction-value
multiples paid in selected merger or acquisition transactions in the specialty
pharmaceutical industry. WFVK compared, among other things, the aggregate
transaction value in each of these transactions as a multiple of the latest
twelve month's revenues and earnings before interest, taxes, depreciation and
amortization (EBITDA), prior to the transaction.
Based on this analysis, WFVK applied the revenue multiple of 5.64, which
approximates the median revenue multiple, to CTD's projected 2009 revenues,
based on:
- CTD's forecasts, and
- CTD's forecasts, assuming the generation of revenues solely through
licensing of technology to a third party in exchange for royalty payments
of 15% of the product revenues set forth in CTD's forecasts.
For each scenario, a range of equity values were generated by discounting
the resulting values utilizing discount rates ranging from 25% to 35%. WFVK
applied the discount rate to CTD's forecasts because CTD is a development stage
company and the majority of its value is derived from the sale of its products
in the future.
Utilizing this methodology, the equity value ranged from (in $ millions):
LOW HIGH
-------- --------
Based on CTD's forecasts.................................... $46.6 $62.2
Based on CTD's forecasts, as adjusted by estimated royalty
payments as set forth above............................... $14.8 $19.0
WFVK performed this analysis to compare the consideration offered in this
merger to transactions in the public market. These transactions were selected
because they involve companies in a comparable industry, specialty
pharmaceuticals. No company used or transaction compared in the above comparable
company or precedent transaction analysis is identical to CTD or the combined
company. Accordingly, an analysis of the results of the foregoing is not purely
mathematical; rather it involves complex considerations and judgments as to the
financial and operating characteristics of the companies and other factors that
could affect the value of the companies to which CTD is being compared.
While the foregoing summary describes certain analyses and factors that WFVK
deemed material in its presentation to the Endorex board, it is not a
comprehensive description of all analyses and factors considered by WFVK.
The preparation of a fairness opinion is a complex process that involves
various determinations as to the most appropriate and relevant methods of
financial analyses and the application of these
56
methods to the particular circumstances and, therefore, such an opinion is not
readily susceptible to summary description. WFVK believes that its analyses must
be considered as a whole and that selecting portions of its analyses and of the
factors considered by it, without considering all analyses and factors, would
create an incomplete view of the evaluation process underlying the WFVK opinion.
Several analytical methodologies were employed and no one method of analyses
should be regarded as critical to the overall conclusion reached by WFVK. Each
analytical technique has inherent strengths and weaknesses, and the nature of
the available information may further affect the value of particular techniques.
The conclusions reached by WFVK are based on all analyses and factors taken as a
whole and also on application of WFVK's own experience and judgment. Such
conclusions may involve significant elements of subjective judgment and
qualitative analyses. WFVK therefore gives no opinion as to the value or merit
standing alone of any one or more parts of the analyses it performed.
In performing its analyses, WFVK considered, and made numerous assumptions
with respect to industry performance, general business and economic conditions,
market and financial conditions and other matters in addition to the assumptions
described above. The analyses performed by WFVK are not necessarily indicative
of actual values or future results, which may be significantly more or less
favorable than those suggested by such analyses. Accordingly, analyses relating
to the value of a business do not purport to be appraisals or to reflect the
prices at which the business actually may be purchased. Furthermore, no opinion
is being expressed as to the prices at which shares of Endorex or CTD common
stock may be traded at any future time.
WFVK is a nationally recognized investment banking firm. As part of its
investment banking business, WFVK is frequently engaged in the valuation of
businesses and their securities in connection with mergers and acquisitions,
negotiated underwritings, secondary distributions of securities, private
placements and other purposes.
WFVK has received a fee for the rendering of the fairness opinion. In
addition, Endorex has agreed to reimburse WFVK for its reasonable out of pocket
expenses incurred in connection with the transaction and to indemnify WFVK and
its affiliates against certain liabilities, including liabilities arising under
applicable securities laws and its legal expenses in connection with any
litigation relating to the transaction.
CTD'S REASONS FOR THE MERGER AND RECOMMENDATION OF THE CTD BOARD OF DIRECTORS
After careful consideration, CTD's board of directors has determined that
the terms of the merger and the merger agreement are in the best interests of
CTD and its stockholders. As a result, CTD's board has approved the merger and
the merger agreement and recommends that CTD stockholders vote "FOR" approval of
the merger and the merger agreement.
CTD's board of directors reviewed a wide variety of information and
considered a number of factors in connection with its evaluation of the merger
and the merger agreement, and determined that the proposed merger provides an
opportunity that serves the best interests of CTD and its stockholders. In
particular, CTD's board of directors considered, among other things:
- the likelihood that by providing CTD with greater financial security and
leverage, the merger may benefit CTD in its negotiations with potential
collaborators or other licensees, enabling CTD to achieve improved
financial terms;
- the existence of a public market for the Endorex common stock to be
received by CTD's stockholders in the merger in place of their CTD capital
stock, which is not publicly traded;
- information concerning CTD's and Endorex's respective businesses, plans
and operations, technology, management, competitive position, future
business prospects, and historical and projected financial performance;
57
- current financial market conditions and historical market prices and
trading information with regard to Endorex's common stock;
- the complementary and synergistic nature of CTD's and Endorex's operations
and strategic focus, in that they both focus on new oral and mucosal
formulations of drugs that are currently approved and commercialized;
- the potential operational and administrative cost savings that would
result from the merger with Endorex;
- the amount of Endorex stock to be received by CTD's stockholders;
- the compatibility of CTD's and Endorex's management;
- the effect of the merger on CTD's collaborators; and
- the terms of the merger agreement, including restrictions on CTD's ability
to consider alternative acquisition proposals following execution of the
merger agreement and the provisions regarding payment of a termination
fee.
In its deliberations concerning the merger, CTD's board of directors also
identified and considered a variety of potentially negative factors. CTD's board
considered, among other things:
- the risk that the merger might not be consummated;
- the risk that integration of CTD's and Endorex's operations and employees
might not occur in a timely manner and that their operations might not be
successfully integrated;
- the risk of disrupting relationships with current and prospective
corporate collaborators, academic collaborators, and key service
providers;
- the effects of the public announcement of the merger on CTD's ability to
secure additional working capital financing on terms acceptable to CTD,
its ability to attract and retain key management and technical personnel,
and the progress of certain of its development projects;
- the risk that the market price of Endorex common stock might decline in
response to public announcement of the merger;
- the risks associated with potential volatility in the market price of
Endorex common stock;
- the substantial legal, accounting, and other expenses to be incurred in
connection with the merger;
- the risk that benefits sought in the merger will not be fully realized;
and
- the other risks described above under "Risk Factors."
The board of directors of CTD was made aware of and discussed the interests
of Steve H. Kanzer in the merger and Endorex. Steve H. Kanzer did not vote on
the CTD's board approval of the merger, the merger agreement and the
transactions contemplated thereby. See "The Merger--Interests of Certain Persons
in the Merger and Potential Conflicts of Interest."
Due to the many different factors, reasons and information considered in
connection with its evaluation of the merger, CTD's board did not find it
practicable to quantify or otherwise assign relative weight or value to the
specific factors that it considered in approving the merger and the merger
agreement. Furthermore, individual CTD board members may have viewed or valued
factors considered by them differently from other CTD board members.
The foregoing discussion of the information and factors considered by the
board of directors of CTD is not meant to be exhaustive, but includes the
principal factors considered by the board.
58
INTERESTS OF CERTAIN PERSONS IN THE MERGER AND POTENTIAL CONFLICTS OF INTEREST
In considering the proposals made in this joint proxy statement/prospectus
and the recommendations of the boards of directors of Endorex and CTD regarding
such proposals, stockholders of Endorex and CTD should be aware that certain
executive officers and directors have some interests in the merger that may be
different from or in addition to the general interests of the stockholders of
Endorex and CTD. The boards of directors of Endorex and CTD were each aware of
these interests and considered them, among other matters, in making their
recommendations. These interests include the following:
- Pursuant to the terms of the merger agreement, CTD's current directors and
officers will, after the merger, be indemnified by CTD and, for a period
of six years thereafter, benefit from insurance coverage for liabilities
that arise from their service as directors and officers of CTD prior to
the merger.
- Pursuant to the terms of the merger agreement, after the closing of the
merger, Dr. Colin Bier, Guy Rico and Peter Kliem, currently directors of
CTD, will become directors of Endorex. Mr. Rico and Mr. Kliem, as
non-employee directors, will upon appointment and subject to the approval
of Proposal Four by the Endorex stockholders at the Endorex annual
meeting, receive a fully vested option exercisable for 50,000 shares of
Endorex common stock and will thereafter each receive options exercisable
for an additional 10,000 shares of Endorex common stock at each annual
meeting of the Endorex stockholders vesting one year from the date of
grant. If Proposal Four is not approved, then each will receive an option
exercisable for 42,000 shares of Endorex common stock upon their
appointment to the Endorex board of directors and will thereafter each
receive an option exercisable for 12,000 shares of Endorex common stock
for every two years they serve as a non-employee director of Endorex.
- Concurrently with the closing of the merger, Dr. Bier, the Chairman of the
board of directors of CTD, will enter into an agreement with Endorex to
become the Chairman of the board of directors and the Chief Executive
Officer of Endorex. Pursuant to this agreement, Dr. Bier will receive an
initial annual base salary of $275,000 and options exercisable for 700,000
shares of Endorex common stock.
- Pursuant to the terms of the merger agreement, Steve H. Kanzer, the
President and a director of CTD, will receive a payment of 250,000 shares
of Endorex common stock upon the closing of the merger.
- Concurrently with the closing of the merger, Mr. Kanzer will enter into a
noncompetition and nonsolicitation agreement with Endorex whereby he will
be paid approximately $250 per hour for any time incurred while assisting
Endorex in obtaining and enforcing patents, copyrights or trademarks for
any intellectual property acquired or discovered by Mr. Kanzer during the
course of performing services for or acting as an employee or officer of
CTD.
- Pursuant to the terms of the merger agreement, Nicholas Stergiopoulos, the
Director of Corporate Development of CTD, will receive a payment of
133,334 shares of Endorex common stock upon the closing of the merger.
- Concurrently with the closing of the merger, Mr. Stergiopoulos will enter
into a consulting agreement with Endorex whereby he will be paid
approximately $8,200 per calendar month for a period of six months. In
addition, Mr. Stergiopoulos will receive 1% of the proceeds of any
licensing or asset sale transaction between RxEyes, Inc., a majority owned
subsidiary of CTD, and a certain third party or its affiliates, if that
license agreement or asset sale was consummated due to the efforts of
Mr. Stergiopoulos.
59
- Pursuant to a voting agreement in the form attached as Appendix II hereto
among Endorex, CTD, Roadrunner and the other parties thereto, certain CTD
stockholders, including CTD's directors, executive officers and their
affiliates, owning beneficially approximately 63% and 61% of CTD's common
stock and Series A preferred stock, respectively, outstanding as of
October 15, 2001 have agreed to vote all of their shares of CTD common
stock and Series A preferred stock for approval of the merger, the merger
agreement and the transactions contemplated thereby.
- The officers and directors of CTD own in the aggregate options exercisable
for 1,322,725 shares of CTD common stock at an exercise price of $.20 per
share which will be exchanged for Endorex options exercisable for 359,042
shares of Endorex common stock at an exercise price of $.74 per share.
INTERLOCKING RELATIONSHIPS OF LINDSEY ROSENWALD, M.D. AND AFFILIATES
Steve H. Kanzer is a director of Endorex and the President and Chief
Executive Officer and a director of CTD. As of October 15, 2001, Mr. Kanzer
beneficially owned 1.92% of Endorex's common stock and 21.0% of CTD's common
stock. Mr. Kanzer serves on the board of directors of Endorex as a nominee of
the Aries Master Fund II and the Aries Domestic Fund, who subsequently
transferred their right to nominate a member to the board of directors of
Endorex to Aries Select, Ltd., or Aries, and Aries Select I LLC, or Aries I,
each of which is a principal stockholder of Endorex. Aries Select II LLC, or
Aries II, is also a stockholder of Endorex.
Paramount Capital Asset Management, Inc., or PCAM, is the investment manager
of Aries and the managing member of each of Aries I and Aries II. Lindsay A.
Rosenwald, M.D. is the Chairman and sole stockholder of PCAM and Paramount
Capital, Inc., or Paramount. As of October 15, 2001, Dr. Rosenwald beneficially
owned 34.0% of Endorex's common stock. Paramount has acted as a placement agent
in connection with certain private placements of Endorex's common stock, as a
finder in connection with a private placement of Endorex's common stock and
warrants, and as a financial advisor to Endorex. In addition, certain officers,
employees and associates of Paramount and its affiliates own securities of
Endorex and a subsidiary of Endorex.
Dr. Rosenwald is also the Chairman and sole stockholder of Huntington Street
Company, or Huntington Street, and June Street Company, or June Street, and is
the sole member of Paramount Capital Drug Development Holdings LLC, or Paramount
Holdings. Paramount Holdings and Dr. Rosenwald's wife are principal stockholders
of CTD. Dr. Rosenwald, Huntington Street and June Street are also stockholders
of CTD. In addition, certain officers, employees and associates of Paramount and
its affiliates own securities of CTD and subsidiaries of CTD. Paramount has also
acted as a placement agent in connection with certain private placements of
CTD's Series A preferred stock. As of October 15, 2001, Dr. Rosenwald
beneficially owned 56.5% of CTD's common stock and 6.0% of CTD's Series A
preferred stock. Additionally, as of October 15, 2001, Dr. Rosenwald's wife
beneficially owned 8.9% of CTD's common stock.
Mr. Peter Kash, an employee of Paramount who beneficially owns 5.0% of CTD's
common stock and is a security holder of Endorex, and Mr. Martin Kratchman, an
employee of Paramount who is a security holder of both Endorex and CTD, will, at
the closing of the merger, receive options to acquire an aggregate of 100,000
shares of common stock of Endorex. Mr. Kash and Mr. Kratchman are receiving the
options as compensation for their financial advisory services to Endorex in
connection with the merger.
OPERATIONS FOLLOWING THE MERGER
Following the merger, CTD will operate as a wholly owned subsidiary of
Endorex. The stockholders of CTD will become stockholders of Endorex, and their
rights as stockholders will be
60
governed by Endorex's certificate of incorporation and bylaws. Upon completion
of the merger, the members of CTD's board will be Michael S. Rosen, Richard
Dunning, Steve H. Kanzer, Steven Thornton, Dr. Paul D. Rubin, Dr. Kenneth
Tempero, Dr. Colin Bier, Guy Rico and Peter Kliem and the officers will be as
follows:
NAME OFFICE
---- ------------------------------------------------------------
Dr. Colin Bier................ Chairman of the Board and Chief Executive Officer
Michael S. Rosen.............. President, Chief Operating Officer and Secretary
Steve J. Koulogeorge.......... Chief Financial Officer
ACCOUNTING TREATMENT
The merger will be accounted for using the purchase method under United
States generally accepted accounting principles. Under this accounting method,
Endorex will record assets and liabilities of CTD at their fair value at the
effective time of the merger, with the excess of the purchase price over the net
tangible and identifiable intangible assets acquired being recorded as goodwill.
AMEX LISTING
The Endorex shares of common stock to be issued in connection with the
merger are required to be listed on the American Stock Exchange. Endorex expects
to obtain before the merger is completed AMEX's approval to list these shares of
common stock, subject to official notice of issuance.
FEDERAL SECURITIES LAWS CONSEQUENCES; STOCK TRANSFER RESTRICTION AGREEMENTS
This joint proxy statement/prospectus does not cover any resales of the
Endorex common stock or warrants to be received by the CTD stockholders and
warrant holders upon completion of the merger, and no person is authorized to
make any use of this joint proxy statement/prospectus in connection with any
such resale.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following general discussion summarizes certain anticipated material
United States federal income tax consequences of the merger. This discussion is
based upon current provisions of the Internal Revenue Code, current and proposed
Treasury regulations, and judicial and administrative decisions and rulings as
of the date of this joint proxy statement/prospectus, all of which are subject
to change (possibly with retroactive effect) and all of which are subject to
differing interpretation. This discussion addresses only those CTD stockholders
who hold CTD stock and will hold the Endorex common stock received in the merger
as capital assets and does not address all of the United States federal income
tax consequences that may be relevant to particular CTD stockholders in light of
their individual circumstances or to CTD stockholders who are subject to special
rules, such as:
- persons subject to the alternative minimum tax;
- persons who hold CTD stock through partnerships or other pass-through
entities;
- financial institutions;
- tax-exempt organizations;
- retirement plans;
- insurance companies;
- dealers in securities or foreign currencies;
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- persons who are not citizens or residents of the United States or who are
foreign corporations, foreign partnerships or foreign estates or trusts;
- persons who hold CTD stock as part of a straddle, a hedge against currency
risk, or as part of a constructive sale or conversion transaction; or
- persons who acquired CTD stock upon the exercise of employee stock options
or otherwise as compensation.
In addition, this discussion does not address the tax consequences of the
merger under state, local and foreign laws or the tax consequences, if any, of
the amendment of CTD's certificate of incorporation such that the Liquidation
Amount (as defined in the certificate of incorporation) payable to the holders
of the CTD Series A preferred stock in connection with the consummation of the
merger does not exceed the aggregate number of shares of Endorex common stock
that the holders of CTD Series A preferred stock are entitled to receive in
exchange for their shares of Series A preferred stock in connection with the
merger.
Consummation of the merger is conditioned upon receipt of opinions, dated as
of the date of the consummation of the merger, from Brobeck, Phleger & Harrison
LLP and Kramer Levin Naftalis & Frankel LLP to the effect that the merger
constitutes a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code. Such opinions will be based on certain assumptions, and
both Brobeck and Kramer Levin will receive and rely upon representations,
unverified by counsel, contained in certificates of Endorex, CTD and possibly
others. The inaccuracy of any of those assumptions or representations might
jeopardize the validity of the opinions rendered.
The opinions of counsel will neither bind the Internal Revenue Service nor
preclude the Internal Revenue Service from adopting positions contrary to those
expressed above, and no assurance can be given that contrary positions will not
be asserted successfully by the Internal Revenue Service or adopted by a court
if the issues are litigated. Neither Endorex nor CTD intends to obtain a ruling
from the Internal Revenue Service with respect to the tax consequences of the
merger.
Based on the conclusion that the merger qualifies as a reorganization under
Section 368(a) of the Internal Revenue Code, the material federal income tax
consequences of the merger will be as follows:
- no gain or loss will be recognized by Endorex, Roadrunner or CTD as a
result of the merger;
- no gain or loss will be recognized by CTD stockholders on the exchange of
shares of CTD stock for shares of Endorex common stock pursuant to the
merger, except with respect to cash, if any, received in lieu of
fractional shares of Endorex common stock;
- the aggregate tax basis to a CTD stockholder of the shares of Endorex
common stock received in exchange for shares of CTD stock pursuant to the
merger will equal such CTD stockholder's aggregate tax basis in the shares
of CTD stock surrendered in exchange therefor, reduced by the amount of
tax basis allocable to a fractional share interest in Endorex common stock
for which cash is received;
- the holding period of a CTD stockholder for shares of Endorex common stock
received in exchange for shares of CTD stock pursuant to the merger will
include the holder's holding period for the shares of CTD stock
surrendered in exchange therefor; and
- a CTD stockholder who receives cash in lieu of a fractional share of
Endorex common stock pursuant to the merger will be treated as having
received the fractional share in the merger and then as having sold the
fractional share for cash. Such shareholder will generally recognize
capital gain or loss on the deemed sale in an amount equal to the
difference between the amount of cash received and the ratable portion of
the stockholder's tax basis in the CTD stock surrendered in the merger
that is allocated to the fractional share.
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CTD stockholders receiving Endorex common stock in the merger should file a
statement with their United States federal income tax returns for the year in
which the merger occurs setting forth their tax basis in the CTD stock exchanged
in the merger and the fair market value of the Endorex common stock and the
amount of any cash, if any, received in the merger. In addition, CTD
stockholders will be required to retain permanent records of these facts
relating to the merger.
A CTD stockholder who exercises dissenter's rights with respect to its CTD
stock and receives payment for those shares in cash generally will recognize
gain or loss equal to the difference between the amount of cash received and the
stockholder's tax basis in such shares. Any gain or loss recognized will be
long-term capital gain or loss if the stockholder's holding period for its CTD
stock exceeds twelve months at the effective time of the merger. However, it is
possible under certain circumstances for a CTD stockholder to recognize ordinary
income equal to the amount of cash received; therefore, each CTD stockholder
should consult its own tax advisor as to the income tax consequences of
exercising dissenter's rights under such stockholder's particular circumstances.
The United States federal income tax consequences set forth above are for
general information only and are not intended to constitute a complete
description of all tax consequences relating to the merger or the tax
consequences associated with any receipt of merger consideration that is deemed
to be other than in exchange for CTD stock, including amounts paid in
consideration for services rendered. You are strongly urged to consult your own
tax advisor to determine the particular tax consequences to you of the merger,
including the applicability and effect of foreign, state, local and other tax
laws.
APPRAISAL RIGHTS OF CTD STOCKHOLDERS
Under the Delaware General Corporation Law, any holder of shares of CTD
stock who does not wish to accept the merger consideration in respect of its
shares has the right to dissent from the merger and to seek an appraisal of, and
to be paid the fair cash value (exclusive of any element of value arising from
the accomplishment or expectation of the merger) for, its shares of stock,
determined by a court, together with a fair rate of interest, if any, provided
that the stockholder fully complies with the provisions of Section 262 of the
Delaware General Corporation Law. A copy of Section 262 is attached as
Appendix IV hereto. Section 262 requires the following:
DISSENTING STOCKHOLDERS MUST MAKE A WRITTEN DEMAND FOR APPRAISAL
Dissenting stockholders must deliver a written demand for appraisal to CTD
before the vote at the CTD special meeting on November 29, 2001 to approve the
merger and the merger agreement.
DISSENTING STOCKHOLDERS MUST REFRAIN FROM APPROVING THE MERGER
Dissenting stockholders must not approve the merger and the merger
agreement. If a dissenting stockholder votes in favor of the merger and the
merger agreement, that will terminate the stockholder's right to appraisal, even
if the stockholder previously filed a written demand for appraisal.
DISSENTING STOCKHOLDERS MUST CONTINUOUSLY HOLD THEIR CTD SHARES
Dissenting stockholders must continuously hold their shares of CTD stock
from the date they make the demand for appraisal through the effective date of
the merger. Record holders of CTD stock who make a written demand for appraisal
but thereafter transfer their shares prior to the effective date of the merger
will lose any right to appraisal in respect of those shares.
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DEMAND FOR APPRAISAL
A written demand for appraisal of CTD shares is only effective if it
reasonably informs CTD of the identity of the stockholder and that the
stockholder demands appraisal of its shares.
Dissenting stockholders who are beneficial owners, but not the stockholder
of record, must have the stockholder of record sign a demand for appraisal.
Dissenting stockholders who own CTD stock in a fiduciary capacity, such as a
trustee, guardian or custodian, must disclose the fact that they are signing in
that capacity the demand for appraisal.
Dissenting stockholders who own CTD stock with more than one person, such as
in a joint tenancy or tenancy in common, must ensure that all the owners sign,
or have signed for them, the demand for appraisal. An authorized agent, which
could include one or more of the joint owners, may sign the demand for appraisal
for a stockholder of record, except that the agent must expressly disclose who
the stockholder of record is and that the agent is signing the demand as that
stockholder's agent.
A dissenting stockholder who is a record owner, such as a broker, of shares
of CTD stock as a nominee for others may exercise a right of appraisal with
respect to the shares held for one or more beneficial owners while not
exercising that right for other beneficial owners. In such a case, the
stockholder should specify in the written demand the number of shares as to
which the stockholder wishes to demand appraisal. If the written demand does not
expressly specify the number of shares, CTD will assume that the written demand
covers all the shares of CTD capital stock that are in the nominee's name.
Dissenting stockholders who elect to exercise appraisal rights should mail
or deliver a written demand to:
Corporate Technology Development, Inc.
1680 Michigan Avenue, Suite 700
Miami, FL 33139
Attention: President
It is important that CTD receive all written demands promptly as provided
above. This written demand should be signed by, or on behalf of, the stockholder
of record. The written demand for appraisal should specify the stockholder's
name and mailing address, the number and class of shares of stock owned, and
that the stockholder is thereby demanding appraisal of that stockholder's
shares.
Dissenting stockholders who fail to comply with any of these conditions will
only be entitled to receive the merger consideration specified in the merger
agreement.
WRITTEN NOTICE
Either before or within ten days after the effective date of the merger, CTD
must give written notice to dissenting stockholders that the merger has or will
become effective and that dissenting stockholders are entitled to the rights
described in Section 262. If given on or after the effective date of the merger,
the notice must specify the effective date of the merger. If the notice does not
specify the effective date of the merger, then a second notice must be sent
prior to the effective date of the merger or within ten days of the effective
date of the merger specifying such date.
PETITION WITH THE CHANCERY COURT
Within 120 days after the merger, either CTD or any stockholder who has
complied with the conditions of Section 262 may file a petition in the Delaware
Court of Chancery. This petition should request that the Chancery Court
determine the value of the shares of stock held by all the stockholders who are
entitled to appraisal rights. Dissenting stockholders who intend to exercise
their appraisal
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rights should file this petition in the Chancery Court. CTD has no intention at
this time to file this petition. Because CTD has no obligation to file this
petition, if no dissenting stockholder files this petition within 120 days after
the effective date of the merger, dissenting stockholders will lose their rights
of appraisal.
WITHDRAWAL OF DEMAND
A dissenting stockholder who no longer wants to exercise appraisal rights
must withdraw the stockholder's demand for appraisal rights within 60 days after
the effective date of the merger. A stockholder may also withdraw a demand for
appraisal rights after 60 days after the effective date of the merger, but only
with the written consent of CTD. If a stockholder effectively withdraws a demand
for appraisal rights, the stockholder will receive the merger consideration
provided in the merger agreement.
REQUEST FOR APPRAISAL RIGHTS STATEMENT
If a stockholder has complied with the conditions of Section 262, that
stockholder is entitled to receive a statement from CTD setting forth the
aggregate number of shares for which appraisal rights have been demanded and the
aggregate number of stockholders who own those shares. In order to receive this
statement, a stockholder must send a written request to CTD within 120 days
after the effective date of the merger. After the merger, CTD has ten days after
receiving a request to mail the statement, or, if later, ten days after the
period in which demands for appraisal rights must be made has expired.
CHANCERY COURT PROCEDURES
If dissenting stockholders properly file a petition for appraisal in the
Delaware Court of Chancery and deliver a copy to CTD, CTD will then have
20 days to provide the Chancery Court with a list of the names and addresses of
all stockholders who have demanded appraisal rights and have not reached an
agreement with CTD as to the value of their shares. The Chancery Court may then
send notice to all the stockholders who have demanded appraisal rights. The
Chancery Court will then conduct a hearing to determine whether the stockholders
have fully complied with Section 262 of the Delaware General Corporation Law and
whether they are entitled to appraisal rights under that section. The Chancery
Court may also require dissenting stockholders to submit their stock
certificates to the Register in Chancery so that it can note on the certificates
that an appraisal proceeding is pending. Dissenting stockholders who do not
follow this requirement may be dismissed from the proceeding.
APPRAISAL OF SHARES
After the Chancery Court determines which stockholders are entitled to
appraisal rights, the Chancery Court will appraise the shares of stock. To
determine the fair value of the shares, the Chancery Court will consider all
relevant factors, and will exclude any appreciation or depreciation due to the
anticipation or accomplishment of the merger. After the Chancery Court
determines the fair value of the shares, it will direct CTD to pay that value to
the stockholders who are entitled to appraisal rights, together with interest,
simple or compound, if any, as the court may direct. In order to receive payment
for their shares, dissenting stockholders must then surrender their stock
certificates to CTD.
The Chancery Court could determine that the fair value of shares of stock is
more than, the same as, or less than the merger consideration. In other words,
dissenting stockholders who demand appraisal rights could receive less
consideration than they would receive under the merger agreement.
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COSTS AND EXPENSES OF APPRAISAL PROCEEDING
The costs of the appraisal proceeding may be assessed against CTD and the
stockholders participating in the appraisal proceeding, as the Chancery Court
deems equitable under the circumstances. Dissenting stockholders may also
request that the Chancery Court allocate the expenses of the appraisal action
incurred by any stockholder pro rata against the value of all the shares
entitled to appraisal.
LOSS OF STOCKHOLDER'S RIGHTS
From and after the effective date of the merger, dissenting stockholders who
demand appraisal rights will not be entitled:
- to vote the shares of stock for which they have demanded appraisal rights
for any purpose;
- to receive payment of dividends or any other distribution with respect to
the shares of stock for which they have demanded appraisal, except for
dividends or distributions, if any, that are payable to holders of record
as of a record date prior to the effective date of the merger; or
- to receive the payment of the consideration provided for in the merger
agreement (unless the holder properly withdraws the demand for appraisal).
If no petition for an appraisal is filed within 120 days after the effective
date of the merger, a stockholder's right to an appraisal will cease. A
stockholder may withdraw a demand for appraisal and accept the merger
consideration by delivering to CTD a written withdrawal of the demand, except
that (1) any attempt to withdraw made more than 60 days after the closing of the
merger will require the written approval of CTD, and (2) an appraisal proceeding
in the Chancery Court cannot be dismissed unless the Chancery Court approves.
Dissenting stockholders who fail to comply strictly with the procedures
described above will lose their appraisal rights. Consequently, dissenting
stockholders who wish to exercise their appraisal rights are strongly urged to
consult a legal advisor before attempting to exercise their appraisal rights.
TREATMENT OF CTD SECURITIES
COMMON STOCK
As of October 15, 2001, CTD had outstanding 5,000,000 shares of common
stock, par value $.001 per share. Pursuant to the merger agreement, each
outstanding share of CTD common stock will be exchanged for .271443 of a share
of Endorex common stock, with cash payment being made for any fractional shares
as set forth in the merger agreement.
SERIES A PREFERRED STOCK
As of October 15, 2001, CTD had outstanding 7,628,750 shares of Series A
preferred stock, par value $.001 per share. Pursuant to the merger agreement,
each outstanding share of CTD Series A preferred stock will be exchanged for
1.008466 shares of Endorex common stock, with cash payment being made for any
fractional shares as set forth in the merger agreement.
STOCK OPTIONS
As of October 15, 2001, CTD had outstanding under its stock option plan
options to purchase 1,322,725 shares of CTD common stock at an exercise price of
$0.20 per share. At the effective time of the merger and without any action on
the part of the holders of CTD options, each option to acquire CTD common stock
issued and outstanding immediately prior to the merger, and all rights in
respect thereof, will be exchanged for Endorex options to acquire Endorex common
stock in substitution for
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those CTD options. Each such Endorex option will be evidenced by a new stock
option agreement issued by Endorex to each of the holders of a CTD option. Each
such Endorex option will have, and be subject to, the same terms and conditions
set forth in the applicable option holder's stock option agreements for the CTD
options, as in effect on the date of the merger agreement, except that the
number of shares and the exercise price of the CTD options will be changed to
reflect the exchange ratio of 0.271443 of a share of Endorex common stock for
each share of CTD common stock, with the number of options aggregated for each
holder and rounded down to the nearest whole share. The exercise price of each
such option for CTD common stock adjusted proportionately and rounded up to the
nearest whole cent will be $0.74 per share.
WARRANTS
As of October 15, 2001, CTD had warrants outstanding to purchase 762,875
shares of Series A preferred stock at an exercise price of $2.20 per share. The
holders of CTD warrants have agreed to amend such warrants prior to the
effective time of the merger. At the effective time of the merger and without
any action on the part of the holders of CTD warrants issued and outstanding
immediately prior to the merger, each warrant to acquire CTD Series A preferred
stock and all rights in respect thereof will be exchanged for Endorex warrants
to acquire Endorex common stock in substitution for those CTD warrants. Each
such Endorex warrant will be evidenced by a new warrant agreement issued by
Endorex to each of the holders of a CTD warrant. Each such Endorex warrant will
have, and be subject to, the same terms and conditions set forth in the
applicable warrant holder's warrant agreement for the CTD warrants, except that
the number of shares and the exercise price of the CTD warrants will be changed
to reflect the exchange ratio of 0.271443 of a share of Endorex common stock for
each share of CTD preferred stock pursuant to the warrant and will be
exercisable for Endorex common stock instead of CTD Series A preferred stock,
with the number of warrants aggregated for each holder and rounded down to the
nearest whole share. The exercise price of each warrant for CTD Series A
preferred stock adjusted proportionately and rounded up to the nearest whole
cent will be $8.11.
RESTRICTIONS ON SALE OF SHARES BY AFFILIATES OF CTD
The shares of Endorex common stock issued in the merger and issuable upon
exercise of Endorex options and warrants issued in connection with the merger
will be registered under the Securities Act, and these securities will be freely
transferable under the Securities Act, except for shares issued to any person
who is deemed to be an affiliate of CTD, at the time the merger is submitted to
the vote of CTD's stockholders, or an affiliate of Endorex under the Securities
Act. Persons who may be deemed to be affiliates of CTD include individuals or
entities that control, are controlled by, or are under common control with CTD
and may include some of the officers, directors or principal stockholders of
CTD. Affiliates may not sell their shares of Endorex common stock or warrants
acquired in connection with the merger except pursuant to:
- an effective registration statement under the Securities Act covering the
resale of those shares;
- an exemption under paragraph (d) of Rule 145 under the Securities Act; or
- another applicable exemption under the Securities Act.
Endorex's registration statement on Form S-4, of which this proxy
statement/prospectus forms a part, does not cover the resale of shares of
Endorex common stock or warrants to be received by affiliates in the merger.
Certain affiliates of CTD have additionally agreed not to sell or transfer
their Endorex common stock, options or and warrants until the date upon which
Endorex has filed two reports on either Form 10-QSB or 10-KSB with the SEC for
any two reporting periods subsequent to the effective date of the merger and
thereafter only pursuant to an effective registration statement or an exemption
under the Securities Act.
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AGREEMENT AND PLAN OF MERGER AND
REORGANIZATION AND RELATED AGREEMENTS
THE FOLLOWING DESCRIPTION OF THE AGREEMENT AND PLAN OF MERGER AND
REORGANIZATION, AND CERTAIN RELATED AGREEMENTS ENTERED IN CONNECTION THEREWITH,
DOES NOT PURPORT TO BE COMPLETE AND IS SUBJECT TO, AND QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO, THE MERGER AGREEMENT. A COPY OF THE MERGER AGREEMENT IS
ATTACHED AS APPENDIX I HERETO. WE ENCOURAGE YOU TO READ THE FULL AND COMPLETE
TEXT OF THE MERGER AGREEMENT AND RELATED AGREEMENTS BECAUSE THEY ARE THE LEGAL
DOCUMENTS THAT GOVERN THE MERGER.
CLOSING AND EFFECTIVE TIME OF THE MERGER
The merger agreement provides that the closing will take place as soon as
practicable after the satisfaction or the waiver of the conditions to the merger
contained in the merger agreement unless some other time or date is agreed to by
Endorex and CTD.
On the closing date, the parties to the merger agreement will file with the
Secretary of State of Delaware a certificate of the merger prepared and executed
in accordance with the relevant provisions of the Delaware General Corporation
Law. The merger will become effective when this certificate of merger is
accepted and recorded by the Delaware Secretary of State, unless some other time
or date is agreed to by Endorex and CTD.
WHAT CTD STOCKHOLDERS WILL RECEIVE IN THE MERGER
Each share of CTD common stock issued and outstanding immediately prior to
the effective time of the merger will automatically convert into the right to
receive .271443 of a share of Endorex common stock. Each share of CTD Series A
preferred stock that is issued and outstanding immediately prior to the
effective time of the merger will automatically be converted into 1.008466
shares of Endorex common stock. Each CTD option will be exchanged for a new
Endorex option based on the number of shares the option can be converted into
and an adjusted strike price according to the formula listed in the merger
agreement. Each CTD warrant will also be exchanged for a new Endorex warrant
based on the number of shares issuable upon exercise of that CTD warrant and an
adjusted strike price according to the formula stated in the merger agreement.
Pursuant to the merger agreement, Endorex is not required to issue common stock
or any securities exercisable for Endorex common stock that would result in the
issuance of more than 10,000,000 shares of Endorex common stock, assuming the
exercise of any such exercisable securities at the closing of the merger.
Pursuant to the merger agreement, at closing, Nicholas Stergiopoulos will
receive 133,334 shares of Endorex common stock from Endorex as payment of a
bonus related to his employment with CTD and Steve H. Kanzer will receive
250,000 shares of Endorex common stock from Endorex as payment of a bonus
related to his employment with CTD.
CTD STOCKHOLDERS, OPTION HOLDERS AND WARRANT HOLDERS WILL RECEIVE ENDOREX STOCK,
OPTIONS OR WARRANTS BASED ON THE MERGER AGREEMENT
Endorex has agreed to mail to all CTD stockholders following the effective
time of the merger instructions for converting their CTD stock into Endorex
common stock or cash for fractional shares. After the effective time, all CTD
capital stock will no longer be outstanding and will automatically be cancelled
and cease to exist. CTD stockholders must surrender their shares to be eligible
for distributions and dividends on Endorex common stock. No distribution or
dividend will be paid for unsurrendered shares. Upon surrender of the CTD stock,
however, Endorex will pay all outstanding distributions and dividends for whole
shares of Endorex common stock, without interest.
Following the effective time of the merger, all CTD options will be
exchanged for Endorex options and CTD option holders will have the right only to
exchange their CTD options for Endorex options as
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provided in the merger agreement. Endorex will mail to all CTD option holders
instructions for exchanging their CTD options for Endorex options subsequent to
the effective time of the merger.
Following the effective time of the merger, all CTD warrants will be
exchanged for Endorex warrants and warrant holders will have the right only to
exchange their CTD warrants for Endorex warrants as provided in the merger
agreement. Endorex will mail to all CTD warrant holders instructions for
exchanging their CTD warrants for Endorex warrants subsequent to the effective
time of the merger.
WHAT CTD DISSENTING STOCKHOLDERS WILL RECEIVE
CTD will provide CTD's dissenting stockholders all rights provided them in
Section 262 of the Delaware General Corporation Law. It is a condition precedent
to Endorex closing the merger agreement, however, that the CTD stockholders that
have exercised their dissenter's rights be entitled to receive in the merger no
more than 250,000 shares of Endorex common stock.
CONDITIONS TO OBLIGATIONS OF EACH PARTY TO CONSUMMATE THE MERGER
CTD and Endorex agreed that the merger will only be deemed effective and the
parties bound when the conditions stated in the merger agreement have been
fulfilled or waived. These conditions include the following:
- no temporary restraining order, preliminary or permanent injunction or
other order issued by any court is in effect preventing consummation of
the merger;
- the merger is not found to be illegal by any governmental body;
- the parties have obtained all governmental approvals necessary for
consummation of the merger;
- the escrow agreement has been executed and is in full force;
- the merger and the merger agreement have been approved by the stockholders
of CTD;
- the issuance of Endorex common stock, options and warrants in connection
with the merger have been approved by the stockholders of Endorex;
- the shares of Endorex common stock to be issued in the merger have been
registered with the SEC under the Securities Act, the registration
statement has become effective and the registration statement is not the
subject of any stop order or proceedings seeking a stop order;
- the shares of Endorex common stock to be issued in the merger have been
approved for listing by AMEX and Endorex has not received a notice from
AMEX indicating that Endorex is not in compliance with AMEX listing
requirements; and
- CTD and Endorex have received opinions, dated as of the closing date, to
the effect that the merger will constitute a reorganization within the
meaning of Section 368(a) of the Internal Revenue Code.
CONDITIONS TO OBLIGATIONS OF CTD
CTD agreed to consummate the merger agreement only if the conditions listed
in the merger agreement have been satisfied or waived, including:
- Endorex has provided all necessary documents and has been truthful and
accurate in all material respects in the representations and warranties in
the merger agreement;
- Endorex has complied in all material respects with all covenants and
obligations in the merger agreement;
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- there has been no material adverse change in the conditions, properties,
assets, liabilities, business operations or results of operations of
Endorex;
- all required consents, third-party approvals and legal opinions have been
given;
- at the effective time, the board consists of nine members including
Dr. Colin Bier, Mr. Guy Rico, and Mr. Peter Kliem; and
- Endorex has executed a consulting agreement with Nicholas Stergiopoulos,
an employment agreement with Dr. Bier and a noncompetition and
nonsolicitation agreement with Steve H. Kanzer.
CONDITIONS TO THE OBLIGATIONS OF ENDOREX
Endorex has agreed to consummate the merger agreement only if the conditions
listed in the merger agreement have been satisfied or waived, including:
- CTD has provided all necessary documents and has been truthful and
accurate in all material respects in the representations and warranties in
the merger agreement;
- CTD has complied in all material respects with all covenants and
obligations in the merger agreement;
- there has been no material adverse change in the conditions, properties,
assets, liabilities, business operations, or results of operations of CTD;
- CTD's directors and officers have resigned prior to the effective time of
the merger;
- all required consents, third-party approvals and legal opinions have been
given;
- CTD has terminated all employment agreements or arrangements;
- Mr. Stergiopoulos has executed a consulting agreement with Endorex,
Dr. Bier has executed an employment agreement with Endorex and Mr. Kanzer
has executed a noncompetition and nonsolicitation agreement with Endorex;
- no CTD securities are outstanding other than as set forth in the merger
agreement;
- those CTD stockholders that have exercised dissenters rights are entitled
to receive no more than 250,000 shares of Endorex common stock in the
merger;
- CTD has amended its warrants and certificate of incorporation in
compliance with the merger agreement; and
- Endorex's stockholders have approved an amendment to Endorex's stock
option plan.
REPRESENTATIONS AND WARRANTIES
The merger agreement contains representations and warranties of the parties
that are customary for a transaction of this nature. These representations and
warranties are related to, among other things, the parties' organizations,
capital structures, authority to enter into the transaction, filings with
regulatory authorities, compliance with governmental laws, regulations and
statutes, compliance with organizational documents, the absence of material
litigation and the accuracy of the information supplied for the merger agreement
including the accuracy of the financial statements and other matters.
CTD REPRESENTATIONS AND WARRANTIES
The merger agreement contains various representations and warranties of CTD
relating to, among other things:
- financial statements;
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- absence of undisclosed liabilities;
- absence of certain changes since December 31, 2000;
- intellectual property rights;
- capitalization and outstanding securities;
- title to property;
- interested party transactions;
- payment of taxes and the sufficiency of reserves for current tax
liability;
- employee benefit plans;
- employee matters;
- absence of an agreement with a broker, finder or investment banker that
requires payment of a fee or commission relating to the merger;
- absence of any non-compete agreement that would impair the conduct of
business;
- environmental matters;
- stockholder votes;
- absence of excessive parachute payments;
- insurance policies;
- guaranties;
- subsidiaries;
- employment agreements;
- compliance with FDA regulations;
- results of clinical tests conducted;
- patent and trademark applications;
- license agreement with Dr. George McDonald;
- sale of the assets of Intero Corp.;
- dissolution of selected subsidiaries, including Neuropath, Inc.,
Iopthalmics, Inc., Magyar Pharmaceuticals, Inc., CTD Drug Design, Inc.,
Institute for Drug Research Publications, Inc., CTD Investments, LLC and
Nodolor, Inc.; and
- liquidation rights of Series A preferred stockholders.
ENDOREX AND ROADRUNNER REPRESENTATIONS AND WARRANTIES
The merger agreement contains various representations and warranties of
Endorex and Roadrunner Acquisition, Inc., a wholly owned subsidiary of Endorex,
relating to, among other things:
- timeliness and accuracy of Endorex's SEC and AMEX filings;
- absence of undisclosed litigation;
- absence of undisclosed liabilities;
- absence of certain changes since December 31, 2000; and
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- absence of an agreement with a broker, finder or investment banker that
requires payment of a fee or commission relating to the merger.
COVENANTS
JOINT COVENANTS
Endorex and CTD have each agreed that until the effective time of the
merger, they will do the following:
- obtain consents required in connection with material contracts;
- cooperate on CTD tax matters, including the preparation of tax returns;
- provide business information and access to the other party on reasonable
advance notice;
- confer with the other party regarding material operational matters before
taking any actions prior to the effective time;
- treat and hold all confidential information as such and refrain from using
the confidential information except in connection with the merger
agreement;
- consult with each other and obtain permission before issuing any press
release or making any public disclosure regarding the merger;
- use reasonable best efforts to effectuate the merger, fulfill all of the
conditions of the merger agreement and notify the other party of the
failure of any representation or warranty to be true or to comply with any
covenant or condition under the merger agreement;
- use best efforts to cause the merger to qualify as a reorganization under
Section 368(a) of the Internal Revenue Code of 1986, as amended;
- timely provide all necessary information and make all necessary filings
under federal and state law and in compliance with SEC, AMEX and blue sky
rules and guidelines;
- timely prepare and file with the SEC the joint proxy statement/prospectus
and cause the registration statement to become effective as soon as
practicable;
- timely and accurately respond to comments and requests from the other
party; and
- promptly call a meeting of the stockholders of CTD to vote on the merger
and the merger agreement and a meeting of the Endorex stockholders to vote
on the issuance of Endorex common stock in the merger, and coordinate
their individual meetings of stockholders to fall on the same day, if
possible.
CTD COVENANTS
CTD additionally covenanted that it would do the following:
- provide complete and accurate copies of its unaudited consolidated
financial statements for the quarterly periods ended during the fiscal
year 2001 prior to the effective time;
- deliver to Endorex a comfort letter from Richard A. Eisner & Company, LLP
stating that certain information in the joint proxy statement/prospectus
is accurate;
- notify Endorex of any event or occurrence not in the ordinary course of
business or which could have a material adverse effect on Endorex or any
of its interests;
- provide litigation support in connection with actions regarding the merger
or CTD;
- amend and terminate certain employment agreements and employment
relationships;
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- deliver to Endorex within 30 days executed affiliate agreements from all
affiliates of CTD;
- amend its certificate of incorporation as contemplated in the merger
agreement;
- provide information for inclusion in the joint proxy statement/prospectus;
- amend its warrants as contemplated in the merger agreement;
- use its best efforts to amend the license agreement with Dr. George
McDonald; and
- notify all relevant persons of its recent change of address.
CTD covenanted not to do the following without the prior written consent of
Endorex:
- permit any amendments to its certificate of incorporation, bylaws or other
charter documents, other than those contemplated under the merger
agreement;
- declare or pay any dividends or make any other distributions on its
capital stock;
- enter into any material contracts or commitments or breach the terms of
any material contracts;
- issue, deliver or sell any shares of its capital stock or securities
exchangeable for its capital stock;
- transfer or sell its intellectual property rights;
- sell, lease, license or otherwise dispose of or encumber its assets;
- incur any material indebtedness or guarantee or issue or sell any debt
securities;
- enter into any non-budgeted operating lease;
- pay any material claim or liability which is not part of the budget;
- make any capital expenditures or capital improvements;
- terminate or waive any right of substantial value;
- adopt or amend any employee benefit, stock option or stock purchase plan;
- hire any new employee other than secretarial staff;
- grant any severance or termination pay or pay any bonus;
- commence a lawsuit;
- acquire another business;
- change any tax election; or
- take any action outside its ordinary course of business.
AMENDMENT TO CTD'S CERTIFICATE OF INCORPORATION
Pursuant to the terms of the merger agreement, CTD is required, prior to the
effective time of the merger, to amend its certificate of incorporation such
that the Liquidation Amount (as defined in the certificate of incorporation)
payable to the holders of CTD Series A preferred stock in connection with the
consummation of the merger does not exceed the aggregate number of shares of
Endorex common stock that the holders of CTD Series A preferred stock are
entitled to receive in exchange for their shares of Series A preferred stock in
connection with the merger. The effect of the amendment is to reduce the number
of shares of Endorex common stock the holders of shares of CTD Series A
preferred stock would be entitled to receive in the merger and to increase the
number of shares of Endorex common stock the holders of shares of CTD common
stock would be entitled to receive in the merger.
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RESTRICTIONS ON SOLICITING ALTERNATIVE PROPOSALS
In the merger agreement, CTD agreed that it will not directly or indirectly
do any of the following:
- solicit, engage in, or participate in any negotiations or discussions with
respect to an offer to acquire all or any part of CTD's stock or assets
from any party other than Endorex;
- disclose non-public information or permit access to the properties, books
or records of CTD for the purpose of formulating an offer competing with
the merger with Endorex;
- assist, cooperate with, or encourage any person or entity making, or
facilitate the making of a competing offer; or
- agree to, enter into, approve, recommend or endorse a competing offer.
CTD agreed to notify Endorex within 24 hours after learning of a competing
offer and to forward to Endorex copies of any competing proposal or request that
is made in writing and copies of all correspondence related thereto. Thereafter,
CTD will keep Endorex fully apprised of the status of the competing offer and of
any term modifications. CTD has agreed to terminate all discussions or
negotiations with any parties other than Endorex about a competing offer.
In the merger agreement, Endorex agreed it will not directly or indirectly
do any of the following:
- solicit, engage in, or participate in any negotiations or discussions with
respect to any offer to acquire substantially all of the assets or equity
interests of another entity if the proposed acquisition by Endorex would
materially adversely affect Endorex's ability to consummate the merger
agreement;
- disclose non-public information or permit access to the properties, books
or records of Endorex for the purpose of formulating another such
acquisition by Endorex;
- assist, cooperate with, or encourage any person or entity to make, or
facilitate the making of, a competing offer to be acquired by Endorex; or
- agree to, enter into, approve, recommend or endorse a competing offer to
be acquired by Endorex.
Endorex agreed to forward to CTD copies of any acquisition inquiries that
are made in writing and copies of all correspondences relating thereto.
Thereafter, Endorex has promised to keep CTD fully apprised of the status of any
such potential acquisition and of any term modifications. Endorex has agreed to
terminate all discussions or negotiations with any parties other than CTD about
any proposed acquisition.
The parties acknowledged that any breach of the promise to deal exclusively
with each other will result in irreparable harm to the non-breaching party that
is not compensable with money damages and agreed that the covenants regarding
solicitation of alternative proposals will be enforceable by specific
performance and injunctive relief.
INDEMNIFICATION
All of the representations, warranties, covenants and agreements of the
parties to the merger agreement survive and continue in effect until March 31,
2003. The parties to the merger agreement have agreed to indemnify the other
parties thereto and their respective officers, directors, employees, agents and
advisors, against all demands, claims, actions, judgments, obligations,
liabilities, losses, costs, expenses and the like resulting from any breach of
any representation or warranty or failure to perform any covenant or agreement
in the merger agreement and any other agreement entered into or document
delivered by such party in connection with the merger. Pursuant to the terms of
the merger agreement and the escrow agreement, an escrow fund containing shares
of Endorex common stock to be issued in connection with the merger will be
available to compensate Endorex and certain other
74
indemnified persons for breaches of such representations, warranties, covenants
and agreements of CTD under the merger agreement.
Except as set forth in the merger agreement, no party to the merger
agreement is entitled to make a claim for indemnification under the merger
agreement until the aggregate amount of damages incurred by such party exceeds
$100,000, at which time the party seeking indemnification may recover all
amounts up to a maximum of the closing date fair market value of the aggregate
number of shares of Endorex common stock in escrow on the date of the delivery
of the notice of indemnification. Closing date fair market value means, prior to
the closing of the merger, $1.50, and, after the closing of the merger, the
average closing price of Endorex common stock on AMEX for the 30 trading days
prior to the closing date. The parties have the option to make indemnification
payments in shares of Endorex common stock or cash.
In particular, CTD's stockholders are required to indemnify the Endorex
parties for damages and the like resulting from a dispute between CTD and the
licensors under the license agreement relating to Metropt-TM-. Indemnification
for such dispute will not be subject to the $100,000 threshold, but shall not
exceed $200,000.
AMEX NON-COMPLIANCE NOTICE
Endorex has agreed that if it receives an official written notice from AMEX
stating that Endorex is not in compliance with the requirements for the
continued listing of Endorex's common stock on AMEX, that Endorex will use its
reasonable best efforts to remedy the deficiencies for continued listing of
Endorex's common stock on AMEX.
TAXES
Endorex and CTD agreed to use their best efforts to cause the merger to
qualify as a reorganization within the meaning of Section 368(a) of the Internal
Revenue Code.
TERMINATION OF THE MERGER AGREEMENT
At any time prior to the effective time of the merger, the merger agreement
may be terminated by the mutual agreement of Endorex and CTD. The merger
agreement also may be terminated by Endorex if:
- CTD materially breaches any representation, warranty, obligation, or
agreement that is not cured by CTD within ten days of receipt of notice
thereof, unless Endorex is in breach of the merger agreement at that time;
- the merger is not completed by December 31, 2001, unless Endorex is in
breach of the merger agreement at that time;
- the merger is enjoined by a court order not entered at the request or with
the support of Endorex or certain of its affiliates;
- CTD stockholders fail to approve the merger and the merger agreement;
- Endorex stockholders fail to approve the issuance of Endorex securities in
connection with the merger;
- CTD's board of directors withdraws or modifies in an adverse manner its
recommendation of the merger agreement and the merger; or
- CTD's board of directors recommends or endorses to the CTD stockholders a
proposal that competes with the merger agreement.
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The merger agreement may be terminated by CTD if:
- Endorex or Roadrunner materially breaches any representation, warranty,
obligation, or agreement that is not cured by Endorex or Roadrunner, as
the case may be, within ten days of receipt of notice thereof, unless CTD
is in breach of the merger agreement at that time;
- the merger is not completed by December 31, 2001, unless CTD is in breach
of the merger agreement at that time;
- the merger is enjoined by a court order not entered at the request or with
the support of CTD or certain of its affiliates;
- Endorex stockholders fail to approve the issuance of Endorex securities in
connection with the merger; or
- Endorex's board of directors withdraws or modifies in an adverse manner
its recommendation of the issuance of Endorex securities in connection
with the merger.
TERMINATION FEE
Under the merger agreement, CTD is obligated to pay to Endorex a termination
fee of $1,000,000, plus all reasonable costs and expenses incurred by Endorex in
connection with the merger agreement, if Endorex terminates the merger agreement
because:
- CTD materially breached a representation, warranty, obligation, or
agreement that was not cured by CTD within ten days of receipt of notice
thereof and within 12 months after termination, CTD enters into another
specified acquisition transaction with a third party that was in contact
with the CTD prior to the termination of the merger agreement;
- CTD stockholders fail to approve the merger and the merger agreement;
- CTD's board of directors withdraws or modifies in an adverse manner its
recommendation of the merger agreement and the merger; or
- CTD's board of directors recommends or endorses to the CTD stockholders a
proposal that competes with the merger agreement.
Endorex is obligated to pay to CTD a termination fee of $1,000,000, plus all
reasonable costs and expenses incurred by CTD in connection with the merger
agreement, if CTD terminates the merger agreement because:
- Endorex materially breached a representation, warranty, obligation, or
agreement that was not cured by Endorex within ten days of receipt of
notice thereof and within 12 months after such termination, Endorex enters
into another specified acquisition transaction with a third party that was
in contact with Endorex prior to the termination of the merger agreement;
- Endorex's board of directors withdraws or modifies in an adverse manner
its recommendation of the issuance of Endorex securities in connection
with the merger; or
- Endorex stockholders fail to approve the issuance of Endorex securities in
connection with the merger and stockholders representing greater than 50%
of the outstanding stock of Endorex eligible to vote on that issuance vote
against the proposal, excluding from the calculation the shares held by
and votes of Dr. Lindsey Rosenwald and his affiliates and any stockholders
that are also stockholders of CTD or their affiliates.
EXPENSES OF THE COMBINATION
Endorex and CTD agreed that all costs and expenses incurred as a result of
the merger agreement are the responsibility of the incurring party. CTD has
agreed that its costs and expenses incurred in
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connection with the merger agreement may not exceed $425,000 in the aggregate.
If CTD's costs and expenses exceed $425,000, two-thirds of the excess will be
deemed damages for which Endorex is entitled to indemnity and one-third will
increase the $425,000 limit by that amount, except that the limit may not exceed
$475,000. In addition, Endorex and CTD agreed to share equally any payment for:
- the filing fee for the joint proxy statement/prospectus and the related
registration statement
- the fees of the escrow agent; and
- the cost of a directors' and officers' insurance tail policy for CTD (net
of any refunds from cancellation of the regular policy).
SURVIVAL OF REPRESENTATIONS AND WARRANTIES
All representations, warranties, and covenants of the parties contained in
the merger agreement shall survive until March 31, 2003.
RELATED AGREEMENTS
VOTING AGREEMENT
Concurrently with entering into the merger agreement, Endorex, Roadrunner
Acquisition, Inc., CTD and stockholders of CTD holding approximately 63% of
CTD's outstanding common stock and 61% of CTD's outstanding Series A preferred
stock, or the Voting Agreement Stockholders, entered into a voting agreement
dated as of July 31, 2001 pursuant to which the Voting Agreement Stockholders
agreed to vote their shares of CTD stock in favor of the merger, the merger
agreement and all of the transactions contemplated by the merger agreement, and
any other matters necessary for the consummation of such transactions. The
Voting Agreement Stockholders also agreed to vote their shares of CTD capital
stock against any proposals competing with the merger agreement, changes in the
directors or capitalization of CTD, or amendment of CTD's certificate of
incorporation or bylaws, that could reasonably be expected to impede, interfere
with, delay, postpone or materially adversely affect the transactions
contemplated by the merger agreement. In connection with the execution of the
voting agreement, the Voting Agreement Stockholders executed and delivered to
Endorex and its designees an irrevocable proxy with respect to the Voting
Agreement Stockholders' shares of CTD stock to vote such shares as agreed in the
voting agreement.
In the voting agreement, the Voting Agreement Stockholders agreed not to
grant any proxies or enter into any voting trust or agreement to vote the Voting
Agreement Stockholders' shares of CTD stock and not to sell, assign, transfer,
encumber, pledge, or dispose of those shares, or enter into any contract to do
so. Each Voting Agreement Stockholder agreed to promptly provide notice to
Endorex if that Voting Agreement Stockholder is approached or solicited by any
person with respect to the foregoing or becomes aware of a proposal competing
with the merger agreement. In addition, each Voting Agreement Stockholder waived
its appraisal rights for its shares of CTD stock in connection with the merger.
The voting agreement and the irrevocable proxy terminate upon the earliest
to occur of (a) the mutual written consent of the parties, (b) the effective
time of the merger, and (c) the termination of the merger agreement according to
its terms.
We encourage you to read the entire form of voting agreement, a copy of
which is attached as Appendix II hereto.
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ESCROW AGREEMENT
At the closing of the merger, Endorex, the CTD stockholders, and Mr. Peter
Kliem, as the representative of the CTD stockholders, are required pursuant to
the terms of the merger agreement to enter into an escrow agreement with Wells
Fargo Bank Minnesota, National Association, as escrow agent, to place into
escrow 1,350,000 of the shares of Endorex common stock to be received by the CTD
Stockholders in connection with the merger. Those shares are to be held in
escrow for payment of indemnification claims that Endorex may make against the
CTD stockholders pursuant to the merger agreement. Under the escrow agreement,
Endorex may make a request to the escrow agent for indemnification pursuant to
Endorex's indemnification rights under the merger agreement. The stockholder
representative has the right to dispute any such request. The escrow agent will
disburse shares from the escrow pursuant to the terms of the escrow agreement
when the dispute is resolved.
On each of March 31, 2002, September 30, 2002 and March 31, 2003, 674,975,
337,502 and 337,523 shares of Endorex common stock, respectively, less any
shares subject to an indemnification claim or which have been distributed to
Endorex pursuant to indemnification claims, will be distributed to the
stockholder representative from escrow. Regardless of the terms for distribution
of the escrow, Endorex and the stockholder representative may deliver a written
notice to the escrow agent specifying different distribution instructions.
While any shares are being held in escrow, CTD stockholders will be entitled
to exercise any voting, consent and other rights with respect to those shares
and to cause the escrow agent to tender those shares pursuant to a tender or
exchange offer, with any property received pursuant to any such tender or
exchange being put into the escrow. All dividends, cash or other property
distributed in respect of the escrow shares will become escrow property to be
disbursed with the escrow shares to which the property was apportioned.
The escrow agent will have a lien on the property in escrow to secure
payment for its services under the escrow agreement. The parties to the escrow
agreement will agree, jointly and severally, to indemnify and hold the escrow
agent harmless from any liability incurred by the escrow agent in connection
with the escrow agreement and the escrowed property.
Under the terms of the escrow agreement, each of the CTD stockholders will
represent and warrant to Endorex that:
- that CTD stockholder has the capacity and authority to enter into the
escrow agreement, voting agreement and affiliate agreement, if applicable,
or collectively the Stockholder Documents, and to perform its obligations
thereunder;
- execution, delivery and performance of the Stockholder Documents and
consummation of the transactions contemplated thereby will not conflict
with any laws, rules, regulations, judgments, orders, permits, licenses or
the like applicable to that CTD stockholder or constitute a breach or
default under, conflict with or require any consent under any instrument,
contract, agreement or the like to which that CTD stockholder is a party;
- the Stockholder Documents are valid and binding obligations of that CTD
stockholder and are enforceable against that CTD stockholder in accordance
with their terms, except as set forth in the escrow agreement;
- that CTD stockholder holds the number of shares of CTD capital stock set
forth in an exhibit to the merger agreement, free and clear of any liens,
claims, encumbrances and the like and restrictions on transfer, other than
pursuant to state and federal securities laws; and
- that CTD stockholder will not enter into any agreement, contract or
commitment requiring it to sell, transfer or otherwise dispose of any
capital stock of CTD or any trust, proxy or other agreement with respect
to the voting of such stock, other than the voting agreement.
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In addition, CTD stockholders that are not individuals will, pursuant to the
terms of the escrow agreement, represent and warrant to Endorex that:
- it is duly organized, validly existing and in good standing under the laws
of its jurisdiction of organization and has the authority under it
organizational documents to enter into the Stockholder Documents, to
perform its obligations thereunder and to consummate the transactions
contemplated thereby;
- it has taken all organizational action necessary to enter into the
Stockholder Documents, to perform its obligations thereunder and to
consummate the transaction contemplated thereby; and
- the execution, delivery and performance of the Stockholder Documents and
the consummation of the transactions contemplated thereby will not
constitute a violation, breach or default under, conflict with or require
any consent under its organizational documents.
Pursuant to the terms of the escrow agreement, each CTD stockholder will
release each of CTD, Endorex and Roadrunner and their respective officers,
directors, employees, affiliates, agents and the like from all claims, causes of
action, debts, liabilities and demands which that CTD stockholder and its
affiliates have or may thereafter have against those persons arising at or prior
to the effective time of the merger, other than pursuant to the terms of the
merger agreement, and will agree not to assert any claim or demand against such
persons which is released pursuant to the terms of the escrow agreement.
Under the escrow agreement, CTD stockholders will each appoint Mr. Kliem as
their representative for all matters arising under the escrow agreement and will
agree to indemnify and hold him harmless from any claims, demands, obligations,
causes of action, loss, liability and the like in connection with his duties
under the escrow agreement. The escrow agreement provides that Endorex and the
escrow agent may rely upon any act of the stockholder representative as an act
of the CTD Stockholders under the escrow agreement.
We encourage you to read the entire form of escrow agreement to be entered
into in connection with the merger, a copy of which is attached as Appendix V
hereto.
AFFILIATE AGREEMENT
Pursuant to the terms of the merger agreement, on or before August 30, 2001,
each affiliate of CTD entered into an affiliate agreement with Endorex. Under
each affiliate agreement, the affiliate agreed not to sell, assign or transfer
any Endorex common stock, option or warrant that affiliate receives in
connection with the merger unless that transaction is registered under the
Securities Act or an exemption from registration is available. The affiliate
acknowledged that Endorex is under no obligation to register the sale, transfer
or other disposition of those shares or to take any action to make compliance
with an exemption from registration available. The affiliate agreed not to sell,
transfer, contract to sell, pledge, grant any option to purchase, make any short
sale or otherwise dispose of or reduce its risk with respect to any Endorex
securities held by it until the date upon which Endorex has filed two reports on
either Form 10-KSB or 10-QSB with the SEC for any two reporting periods ended
subsequent to the effective time of the merger. Finally, the affiliate
acknowledged that restrictive legends will be placed on certificates
representing CTD common stock it receives in connection with the merger.
EMPLOYMENT AGREEMENT
At the closing of the merger, Endorex and Dr. Colin Bier, CTD's Chairman of
the board, will enter into an employment agreement pursuant to which Dr. Bier
will be employed by Endorex as it Chairman of the board of directors and Chief
Executive Officer. In addition, Dr. Bier will agree to serve as a director of
Endorex's subsidiaries. The employment agreement is for a term of three years
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and automatically renews for successive one year periods unless one of the
parties elects not to renew the agreement.
Pursuant to the terms of the employment agreement, Dr. Bier will receive a
base salary of at least $275,000, subject to annual review. In addition,
Dr. Bier will be entitled to receive an annual bonus of up to 50% of his base
salary based upon certain milestones being met. Upon entering into the
employment agreement, Dr. Bier will be granted options to purchase 700,000
shares of Endorex common stock at a purchase price equal to the fair market
value on the date of the grant of the options. Of those options 200,000 will
vest on the date of grant, 175,000 will vest on the first anniversary of the
date of the employment agreement, 175,000 will vest on the second anniversary of
the date of the employment agreement, and 150,000 will vest on the third
anniversary of the date of the employment agreement, each vesting being on
condition that Dr. Bier is employed by Endorex on that date. Endorex will also
provide Dr. Bier with medical insurance, long-term disability insurance and life
insurance up to $1,000,000, in addition to other employee benefit plans and
arrangements, and at least four weeks of paid vacation.
Dr. Bier will be based out of his home office in Montreal, Quebec, Canada,
but will be required to spend a significant portion of his time at Endorex's
principal offices. Endorex will reimburse all of Dr. Bier's expenses associated
with travel between Montreal and Endorex's offices during the first 120 days of
employment and thereafter in accordance with a reimbursement policy to be
established by a committee of the board of directors of Endorex.
Pursuant to the terms of the employment agreement, Dr. Bier will agree to
keep Endorex's proprietary information confidential. In addition, Dr. Bier will
agree to disclose and assign to Endorex all intellectual property conceived or
first reduced to practice by Dr. Bier while performing services under the
employment agreement. The employment agreement provides that Dr. Bier will not
compete with any business of Endorex during his employment and for a period of
two years thereafter in any geographical area in which Endorex carries on its
business, nor will he employ or solicit for employment any employee of Endorex
during that period.
Endorex may terminate the employment agreement for:
- "Cause" as defined in the employment agreement;
- violation of the confidentiality or invention assignment provisions
thereof; or
- physical or mental incapacity if Dr. Bier cannot perform his duties
thereunder for a period of 90 consecutive days.
Dr. Bier may voluntarily terminate the employment agreement. The employment
agreement will also terminate upon Dr. Bier's death. If the employment agreement
is terminated other than for cause, disability, death or by Dr. Bier voluntarily
for good reason, as defined in the employment agreement, which includes a change
of control, then:
- Dr. Bier will be entitled to receive his base salary and a prorated bonus
for a period of six months and for a subsequent six month period, subject
to reduction during the subsequent period for earnings from other
employment;
- Dr. Bier will be entitled to receive his benefits for those periods until
other coverage is obtained;
- any unvested standard options granted to Dr. Bier will vest;
- any unvested performance options granted to Dr. Bier will, at the
discretion of the board of directors, vest; and
- Dr. Bier will have one year from the date of termination to exercise his
options.
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CONSULTING AGREEMENT
At the closing of the merger, Endorex and Nicholas Stergiopoulos, CTD's
director of corporate development, will enter into a consulting agreement
pursuant to which Mr. Stergiopoulos will provide consulting services to Endorex
in connection with ongoing product and business development activities related
to orBec-Registered Trademark-, Orprine-TM-, Metropt-TM-, the Allergan
Botox-Registered Trademark- program, the drug delivery technology from the
University Pharmaceuticals of Maryland, and activities related to the business,
products or services of CTD prior to the merger. The term of the consulting
agreement will be for six months, during which time Mr. Stergiopoulos will be
available to provide the consulting services for an average of 40 hours per
week. In consideration for rendering these consulting services,
Mr. Stergiopoulos will be paid $8166.66 per month. In addition, if a licensing
or asset sale of Metropt-TM- is consummated between RxEyes, a subsidiary of CTD,
and a certain third party or its affiliates during the term of the consulting
agreement due to the efforts of Mr. Stergiopoulos, Endorex will pay
Mr. Stergiopoulos one percent of any monies directly received by Endorex as a
result of that transaction.
Under the consulting agreement, Mr. Stergiopoulos will agree not to disclose
any of Endorex's proprietary information during the term of the consulting
agreement and for a period of two years thereafter. In addition,
Mr. Stergiopoulos will agree to assign to Endorex all intellectual property
made, conceived, discovered or acquired by him pursuant to the terms of the
consulting agreement. The consulting agreement provides that during the term of
the consulting agreement and for a period of two years thereafter,
Mr. Stergiopoulos will not anywhere in the world be involved with or own any
interest in any entity that develops, researches, manufactures, processes,
markets, distributes or sells certain drugs or compounds that are currently part
of CTD's business as specified in the consulting agreement. In addition, during
the same period Mr. Stergiopoulos will agree not to employ or solicit for
employment any employee of Endorex.
NONCOMPETITION AND NONSOLICITATION AGREEMENT
In connection with the closing of the merger, Endorex and Steve H. Kanzer,
CTD's President and Chief Executive Officer, will enter into a noncompetition
and nonsolicitation agreement pursuant to which Mr. Kanzer will agree for a
period of one year not to be involved with or own any interest in any entity
that develops, researches, manufactures, processes, markets, distributes or
sells certain drugs or compounds that are currently part of CTD's business as
specified in the agreement. In addition, during the same period Mr. Kanzer will
agree not to employ or solicit for employment any employee of Endorex or to
solicit business from any client or customers of Endorex. Under the terms of the
agreement, Mr. Kanzer will also agree not to disclose any of Endorex's
proprietary information and to assign to Endorex all intellectual property made,
conceived, discovered or acquired by him pursuant to the terms of the agreement.
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MARKET PRICE INFORMATION
ENDOREX MARKET PRICE INFORMATION
As of August 6, 1998, Endorex common stock started trading on the American
Stock Exchange under the symbol "DOR." Prior to that, quotations for Endorex's
common stock appeared on the "pink sheets" published by the National Quotations
Bureau, Inc. and on the "Bulletin Board" of the National Association of
Securities Dealers, Inc. The table below sets forth the high and low sales
prices, as provided by the American Stock Exchange, for the period from
January 1, 1999 through October 15, 2001. The amounts represent inter-dealer
quotations without adjustment for retail markups, markdowns or commissions and
do not represent the prices of actual transactions.
HIGH LOW
-------- --------
1999
1st Quarter............................................... $2.69 $1.50
2nd Quarter............................................... $2.23 $1.50
3rd Quarter............................................... $2.23 $1.50
4th Quarter............................................... $2.94 $1.38
2000
1st Quarter............................................... $9.94 $2.50
2nd Quarter............................................... $5.75 $1.75
3rd Quarter............................................... $3.81 $1.81
4th Quarter............................................... $2.81 $0.81
2001
1st Quarter............................................... $1.75 $0.75
2nd Quarter............................................... $1.30 $0.76
3rd Quarter (through October 15, 2001).................... $1.40 $0.85
As of October 15, 2001, Endorex had 1,401 registered common stockholders, 1
registered Series B preferred stockholder and 1 registered Series C preferred
stockholder of record. Endorex currently intends to retain any earnings for use
in its business and does not anticipate paying any cash dividends in the
foreseeable future.
On July 31, 2001, the last trading day before the proposed merger was
announced, the closing price per share of Endorex common stock on the American
Stock Exchange was $1.13. On , 2001, the latest practicable trading day
before the printing of this joint proxy statement/prospectus, the closing price
per share of Endorex common stock was $ .
Because the market price of Endorex common stock is subject to fluctuation,
the market value of the shares of Endorex common stock that holders of CTD
common stock will receive in the merger may increase or decrease prior to and
following the merger. We urge stockholders to obtain current market quotations
for Endorex common stock. No assurance can be given as to the future prices or
markets for Endorex common stock.
CTD MARKET PRICE INFORMATION
As of October 15, 2001, CTD had 37 registered common stockholders and 43
registered Series A preferred stockholders of record. CTD is unable to provide
information with respect to the market price of the CTD shares of stock because
there is no established trading market for them.
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DESCRIPTION OF ENDOREX
THE FOLLOWING SECTION CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE
RISKS AND UNCERTAINTIES. ENDOREX'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS
FACTORS, INCLUDING THOSE SET FORTH IN "RISK FACTORS" AND ELSEWHERE IN THIS JOINT
PROXY STATEMENT/PROSPECTUS.
BUSINESS
Endorex is a development stage drug delivery company incorporated in 1987 in
the state of Delaware under its former name Immunotherapeutics, Inc.
Immunotherapeutics was a wholly owned subsidiary of Biological
Therapeutics, Inc., a North Dakota corporation formed in 1984. Biological
Therapeutics commenced operations in 1985 and in 1987 was merged with and into
Immunotherapeutics with Immunotherapeutics continuing as the surviving entity.
The technology being developed at that time was peptide-based immunomodulators
formulated in liposomes for the treatment of various types of cancer. During the
period from 1987 to 1996, Immunotherapeutics was headquartered in Fargo, North
Dakota. In 1996, Immunotherapeutics changed its name to Endorex to reflect the
change in direction of the company after majority ownership of Endorex was
acquired by the Aries Funds, managed by Paramount Capital, Inc. A new management
team, including a new president and chief executive officer, and board of
directors was put in place to change the direction of Endorex. The new
management team established executive offices in Lake Bluff, Illinois, a Chicago
suburb, and then relocated all company operations to its new headquarters in
Lake Forest, Illinois, in early 1998.
In December 1996, Endorex began to move its business into drug delivery by
licensing a new drug delivery technology from the Massachusetts Institute of
Technology. This new delivery technology is intended to enable the oral delivery
of protein and peptide-based drugs and vaccines, which normally would be
delivered via injection. This delivery system is based on novel liposomes which
are polymerized, increasing the ability of the liposome to withstand the acids
and enzymatic activity of the stomach and upper gastrointestinal tract and
thereby protecting the protein or peptide-based drug from degradation before it
can be absorbed through the stomach or intestinal lining. Endorex began
development of this delivery system, called the Orasome-TM- system, in 1997.
In 1997, Endorex licensed a new cancer drug from the Wisconsin Alumni
Research Foundation, the repository of new technology and intellectual property
of the University of Wisconsin-Madison. This drug, perillyl alcohol, was
completing phase I clinical trials in cancer patients and about to enter
multiple phase II trials for different types of cancer.
In 1998, Endorex formed two drug delivery joint ventures with Elan
Corporation, plc. The purpose of the first joint venture, InnoVaccines
Corporation, is to research, develop and commercialize novel delivery systems
for the human and veterinary vaccine markets. Innovaccines initiated evaluation
of the oral and nasal delivery of a tetanus vaccine and another vaccine. The
second joint venture, Endorex Newco, Ltd., focuses on the utilization of the
MEDIPAD-Registered Trademark- microinfusion pump, developed by Elan, to deliver
iron chelators for the treatment of a series of genetic blood disorders known as
iron overload disorders.
In 1999, InnoVaccines acquired from Vaxcel, Inc. the exclusive license
rights to an additional oral vaccine delivery technology and a portfolio of
intellectual property owned by and invented at the Southern Research Institute,
or SRI, and the University of Alabama at Birmingham, or University of Alabama.
At the end of 1999, Endorex entered into a research and option agreement with
Novo Nordisk A/S to develop an oral form of Novo's human growth hormone product
Norditropin-Registered Trademark-, based on Novo's previous research into human
growth hormone. Also in 1999, InnoVaccines licensed from Elan a tissue-targeting
technology that had the potential to enhance the uptake of oral and/or nasal
vaccines.
83
In 2000, Endorex announced that it had decided to concentrate on drug
delivery, and it began the process of divesting its oncology technology and
business. In addition, Newco entered into a license agreement with Schein
Pharmaceutical Inc., or Schein, to develop and market the
MEDIPAD-Registered Trademark- microinfusion pump to deliver an iron chelator
drug for the treatment of iron overload disorders. Schein subsequently merged
with Watson Pharmaceuticals Inc., or Watson. Also in 2000, InnoVaccines began
evaluating SRI/University of Alabama vaccine technology for an oral tetanus
vaccine together with a vaccine adjuvant.
During 2001, Newco has continued its research and development of the
MEDIPAD-Registered Trademark- iron chelation product candidate. However, in May
2001, Watson indicated that it will not continue to meet the obligations
originally agreed to by Schein, although no definitive agreements have been
reached by Newco and Watson for the termination of the Schein agreement.
Subsequently, Watson discontinued its collaboration efforts. In light of this,
Endorex and Elan are considering terminating Newco, and Newco is evaluating
other commercialization partners for its iron chelation delivery system.
InnoVaccines' development activities during 2001 included further evaluation of
development work of the Orasome-TM- delivery system for oral and mucosal
delivery of the tetanus and influenza vaccines and the development of mucosal
tissue targeting technology for this delivery system. Work in this area has been
focused on the PLGA microparticle system licensed from SRI. In addition, oral
delivery of tetanus and influenza vaccines has been further evaluated in
preclinical animal studies. Although activities to evaluate the efficacy of
selected oral vaccines are still underway in InnoVaccines through research
conducted by Endorex, Endorex and Elan are discussing the possible termination
of InnoVaccines and the terms of such termination. On August 28, 2001, Novo
Nordisk terminated the research and option agreement with Endorex.
BUSINESS STRATEGY
Endorex's objective is to be a leader in developing oral and mucosal
formulations of therapeutic macromolecular and small molecule drugs currently
available only by injection. Its business strategy includes entering into
strategic alliances with pharmaceutical and biotech partners who have products
or compounds in development that would benefit from Endorex's drug delivery
technology. Endorex believes the benefit for such partners would be the creation
of a new differentiated product form, which could potentially enhance patient
compliance via an easier to use format, and extend its partners' product life by
combining their product with Endorex's patented technology. Endorex may also
look to develop its core drug delivery expertise, lipid-based systems, to create
other delivery systems to enhance the therapeutic use of its partner's products.
When necessary, Endorex will look to in-license and develop compatible drug
delivery systems from other institutions to enhance its delivery capability and
portfolio, as was done with SRI/University of Alabama. Endorex will also seek to
develop its own product candidates through early clinical development and seek
partnerships, joint ventures or corporate collaborations to continue later stage
clinical development and commercialization.
THE DRUG DELIVERY INDUSTRY
The drug delivery industry seeks to provide new, improved or alternative
methods for delivery of drugs that enhance patient compliance, quality of life
and ease-of-use in taking medicines. Additionally, major pharmaceutical
companies have extended the life of their effective market exclusivity periods
for existing pharmaceutical products by developing new differentiated forms and
obtaining new patents based upon new formulations of existing drugs that are
administered via alternative methods. As the drug delivery industry has grown
and become more specialized, different companies have focused on core
technologies to deliver drugs in unique ways: transdermal (through the skin),
nasal (through the nasal passages), implant (delayed release of injections for
weeks or months at a time), and oral (either liquid, pills, or a spray into the
mouth) delivery comprise some of the new delivery pathways. Generally, the
regulatory hurdles for approval of a drug delivery system are less stringent
than that of a new chemical entity or new pharmaceutical product because most
drug delivery companies look at
84
delivering already approved and marketed drugs where the safety and efficacy of
the drug has been established.
One of the most difficult challenges of drug delivery has been to deliver
macromolecular drugs, the chemical structure of which is much larger than
traditional "small molecule" drugs. These drugs are based on peptides or
proteins and today are primarily available in only injectable form, although
there are companies testing pulmonary, nasal, and transdermal delivery of these
drugs to humans. Injectable therapy has two major limitations. First, many
patients find injectable therapies unpleasant due to the pain associated with
the injection. When injectable therapy is necessary for chronic and subchronic
diseases, patient compliance often decreases. Poor acceptance and compliance can
lead to higher health costs due to an increase in medical complications. Second,
studies from the Center for Disease Control have demonstrated that the vaccine
itself is often a small part of the total cost of administering the treatment,
which includes paying medical personnel to administer the injection, the cost of
the syringe, the cost to dispose of the syringe, and the like.
While all of these new delivery options offer advantages for the patient
over the traditional injectable format, oral delivery is the patient-preferred
format due to simplicity of use. However, from a technical perspective oral
delivery of this class of drugs has been extremely difficult, due to low
bioavailability of oral delivery systems to date versus the injectable version
and the fragility of these drugs resulting in their inability to withstand
transit through the stomach and upper gastrointestinal tract intact without
degradation destroying a therapeutic effect of the drug.
ENDOREX'S ORAL AND NASAL DRUG AND VACCINE DELIVERY TECHNOLOGY
Endorex is developing core lipid-based technology for a new generation of
drugs and vaccines that may be taken by mouth, thereby replacing painful
injections and increasing patient compliance. Endorex's proprietary oral and
nasal drug delivery technology could potentially convert injectable-only therapy
into the patient preferred oral therapy format. This conversion process includes
encapsulating protein and/or peptide-based (large molecule or macromolecular)
drugs for oral delivery using proprietary patented technology developed
internally by Endorex and from the Massachusetts Institute of Technology. Many
vaccines and macromolecular drugs are exceptionally fragile and thus cannot
survive the digestive process of the gastrointestinal tract. By employing
proprietary lipid drug delivery systems that utilize specially engineered,
polymerized lipids and liposomes that can encapsulate proteins or peptide-based
vaccines and drugs, many of these agents might be made orally available at
therapeutic levels. Applications of this technology under development by Endorex
could enable preparation of oral formulations of peptide hormones, such as
insulin and human growth hormone, other sensitive peptide drugs and proteins,
and nucleic acids. Virtually all of these compounds are currently given to
patients solely via injection.
As estimated by the investment banking firm of S. G. Cowen and Company,
expected sales of protein and peptide based injectable drugs could reach
$18.5 billion in 2001, and includes such drug categories as monoclonal
antibodies, insulin, growth factors, vaccines, colony stimulating factors,
hormones, and the like.
Endorex's lipid based drug delivery systems represent a series of
improvements in encapsulation technology resulting in properties that may enable
efficient uptake by crucial cells in the gastrointestinal tract. Because of the
unique ability of polymerized lipids and liposomes to withstand the activity of
bile salts, digestive enzymes, and gastric acids, this proprietary technology
may be utilized practically and commercially for the oral delivery of many
therapeutics, including both water soluble and water insoluble drugs.
These polymerized lipids and liposomes encapsulate fragile drugs and hold
them within a membrane envelope that is resistant to the environmental stress of
the gastrointestinal tract. Lipids and liposomes can also be engineered to
release their contents in a controlled fashion and to contain surface ligands,
or biological "magnets," capable of targeting specific receptors in the
intestine and
85
other tissues. By comparison, conventional liposomes and lipids appear to be
chemically and physically unstable and tend to be unsuitable for oral delivery
because they degrade rapidly upon introduction into the gastrointestinal tract.
If the encapsulated drug or vaccine is released into this environment, the
active material is destroyed and the therapeutic effect negated. In vitro
studies with Endorex's lipid systems, including studies with polymerized
liposomes as the type of lipid, have demonstrated high stability under harsh
conditions similar to conditions found in the human intestinal tract, such as
exposure to acidic pH, simulated bile salts, and detergents.
Conventional lipid and liposomal formulations have been scaled up and
manufactured commercially by others. Examples of such formulations include the
cancer drugs liposomal doxorubicin and liposomal daunorubicin as well as the
anti-fungal agent liposomal amphotericin B, which have been approved by the FDA
and are currently being marketed.
Endorex believes that its lipid based drug delivery systems comprise a
platform technology that has the potential to satisfy a number of criteria
necessary for a successful drug delivery system, including:
- flexibility for incorporating numerous drug and vaccine types (both water
soluble and insoluble drugs, as well as drugs of various molecular weight
ranges and size);
- stability of the drug or vaccine through the gastrointestinal tract;
- enhanced mucosal uptake of the drug or vaccine;
- compatibility of the delivery system with current manufacturing
techniques; and
- no apparent toxicity of the lipids in animal studies to date.
Endorex has demonstrated the bioavailability and bioactivity of selected
drugs when delivered using these lipids in animal models as well as the
stimulation of an appropriate and acceptable immune response to selected orally
delivered vaccines in similar animal models. Human growth hormone and insulin
are two of the selected drugs Endorex has tested in conjunction with these lipid
drug delivery systems on animal models. Endorex believes that oral versions of
protein and peptide based drugs could provide product differentiation,
convenience and improved compliance. Daily oral delivery could offer an
attractive alternative to multiple weekly injections or slow release
formulations, particularly for chronic therapies.
During 2000, advances in Endorex's liposome technology were made in process
development, scale up and initial toxicology studies. A key criterion for
initiating clinical trials is production of batches of product and obtaining
batch to batch consistency of results for quantities sufficient for clinical
trials. This objective was achieved during 2000 as were enhancements in loading
the drug "payload" (amount of the drug to be encapsulated in the lipids).
Additionally, recent toxicology data suggests that these liposomes do not cause
genetic mutations in animals, which is a key test required by the FDA. Endorex
believes that additional toxicology testing necessary to demonstrate the safety
of this technology, and therefore required for initiating phase I clinical
trials, will be completed during 2001. Also during 2000 and early 2001, 4
patents on the drugs and drug delivery technology were issued to Endorex and its
licensors in the United States. Endorex's drug and vaccine delivery intellectual
property portfolio now includes 11 United States patents and more than 45
patents issued in other countries, which are owned or licensed to Endorex.
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PRODUCT CANDIDATES CURRENTLY IN DEVELOPMENT
PRODUCT CANDIDATE THERAPEUTIC AREA DEVELOPMENT STATUS PARTNER/LICENSOR
-------------------------- -------------------------- ----------------------------- --------------------------
Oral insulin Diabetes Preclinical Self developed
Oral human growth hormone Growth disorders Preclinical Self developed
Oral tetanus vaccine Infectious diseases Preclinical Elan Corporation/SRI
Intranasal tetanus vaccine Infectious diseases Preclinical Elan Corporation
Oral influenza vaccine Infectious diseases Preclinical Elan Corporation/SRI
MEDIPAD-Registered Trademark- Iron overload disorders Preclinical Watson Pharmaceutical/Elan
iron chelator (drug (Beta-thalassemia & sickle Corporation
undisclosed) cell anemia)
DIABETES
ORAL INSULIN
According to the International Diabetes Federation, in 1998 approximately
143 million people suffered form diabetes throughout the world, of which
approximately 10%, or 14.3 million, are Type 1 diabetics. Type 1 diabetics are
insulin-dependent and require regular insulin therapy. The International
Diabetes Federation expects the number of diabetics to reach 300 million by the
year 2025. IMS estimated that sales of insulin in the United States during 2000
were approximately $1.1 billion. Currently, Novo Nordisk, Eli Lilly, Aventis and
a number of smaller companies market insulin. Insulin currently is available
only in an injectable format requiring insulin-dependent diabetics to receive
one or more injections daily. Insulin is a peptide with a molecular weight of
approximately 6 kilodaltons, considerably smaller than human growth hormone
which is approximately 22 kilodaltons in size, and as a result insulin is easier
to deliver orally than peptides that have greater molecular weight. During 2001,
Endorex began evaluating an oral formulation of insulin in rodent models using
Endorex's lipid-based delivery systems, including the Orasome-TM- delivery
system. The purpose of such evaluations is to determine the efficacy of this
oral formulation in reducing blood glucose levels as well as the
bioavailablility of insulin delivered via Endorex's lipid-based delivery
systems.
GROWTH DISORDERS
ORAL HUMAN GROWTH HORMONE
Worldwide sales of human growth hormone were estimated by S.G. Cowen to be
about $.9 billion for 2001. This injectable product is marketed by 5 major
pharmaceutical companies. Recently, Genentech introduced to the market an
implantable human growth hormone product which still requires periodic
injections, but reduces the number of injections needed. At the end of 1999,
Endorex signed a research and option agreement with Novo Nordisk to evaluate the
oral delivery of Novo's brand of human growth hormone
Norditropin-Registered Trademark-. During 2000 and early 2001, Endorex tested
oral versions of different formulations of human growth hormone in two animal
models (mice and rats) and improved its process for scale-up manufacturing and
loading human growth hormone into lipids. Subsequently, on August 28, 2001, Novo
Nordisk terminated the research and option agreement.
INFECTIOUS DISEASES
ORAL VACCINES
According to a Frost & Sullivan market research report on human vaccines,
the worldwide vaccine market was projected at $7 billion in 2001. In order to
participate in this market with new delivery alternatives, in 1998 Endorex
established InnoVaccines Corporation, a joint venture, with Elan Corporation for
the research, development and commercialization of oral and mucosal vaccines.
87
During the last three years, InnoVaccines has been evaluating two vaccine
delivery systems for oral and intranasal delivery. Additionally, in 1999
InnoVaccines acquired the rights to an additional oral vaccine delivery
technology. Elan also has added targeting technology to the joint venture for
targeting vaccines to key mucosal sites. InnoVaccines has worked on the
screening and identification of key ligands (biological "magnets" or "hooks") to
attach to the surface of the Orasomes and has performed further in vivo work on
the Orasomes and a tetanus vaccine candidate with the addition of various
vaccine adjuvants for oral and nasal delivery. InnoVaccines and SRI also worked
together to separately encapsulate a tetanus vaccine and an influenza vaccine in
another delivery system, also incorporating an adjuvant. InnoVaccines
development activities during 2001 have included further evaluation of
development work of the Orasome-TM- delivery system for oral and mucosal
delivery of the tetanus and influenza vaccines and the development of mucosal
tissue targeting technology for this delivery system. Endorex and Elan are
currently discussing the termination of InnoVaccines and the terms of such
termination.
IRON OVERLOAD DISORDERS
It is estimated by Cooley's Anemia Society that 4.5% of all humans have a
hemoglobin or thalassemia mutation. It is also estimated by Cooley's Anemia
Society that one million Americans are afflicted with hereditary
hemochromatosis. These genetic blood diseases are all related to the body
absorbing too much iron. Iron overload occurs because the defective gene
interferes with the normal function of the intestinal lining and allows too much
iron to pass through to the bloodstream, where it is carried to certain organs
that are sensitive to it, especially the liver. An overload of iron causes
inflammation, which damages the organs. Hemochromatosis is the more mild form of
this disease while Beta-Thalassemia is the severe form impacting those in early
childhood and requiring frequent blood transfusions. The only approved therapy
today is iron chelation requiring continuous infusions with standard infusion
pumps. Continuous infusion is required for 8-12 hours per day, 5-7 days per week
in Beta-Thalassemia patients. Cooley's Anemia Society estimates that there are
more than 175,000 Beta-Thalassemia patients around the world and approximately
10,000 in the United States. Because of the difficulties in complying with the
rigors of the current therapy and conventional infusion pumps, many patients are
not adequately treated. The average life span of Beta-Thalessemia patients is
only 30 years. In October 1998, Endorex established a second joint venture with
Elan, Endorex Newco, Ltd., to research, develop and commercialize the
MEDIPAD-Registered Trademark- drug delivery system for delivering iron chelators
to treat iron overload disorders.
MEDIPAD-Registered Trademark- is Elan's unique microinfusion pump designed
for the subcutaneous delivery of selected drugs that require continuous infusion
via pump. Each MEDIPAD-Registered Trademark- is a low cost, disposable drug
delivery device with an adhesive backing. Its light weight enables it to be worn
in a manner similar to a transdermal patch. MEDIPAD-Registered Trademark- is
expected to replace conventional infusion pumps, which are expensive and
cumbersome. While conventional pumps impede patient compliance, Endorex believes
MEDIPAD-Registered Trademark- will improve patient compliance.
THE WATSON PHARMACEUTICALS (SCHEIN PHARMACEUTICAL) AGREEMENT
In February 2000, Newco entered into a ten-year exclusive worldwide license,
development, and supply agreement with Schein to develop and commercialize
MEDIPAD-Registered Trademark- in combination with a Schein iron chelator.
Pursuant to that agreement, Schein committed to market this product in the
United States. Subsequent to the date of the agreement, Watson acquired Schein.
Under the agreement, Newco is responsible for development of the
MEDIPAD-Registered Trademark- delivery system for use with Watson's iron
chelator product in accordance with product specifications as defined jointly by
Newco and Watson. Watson is responsible for the development, sourcing and supply
of the iron chelator compound and for the packaging, selling and distribution of
the MEDIPAD-Registered Trademark-/iron chelator in the United States. Subject to
approval of Newco, Watson may sublicense commercialization of the
MEDIPAD-Registered Trademark-/iron chelator product in countries outside of the
United States. In May 2001, Watson
88
indicated that it will not continue to meet the obligations originally agreed to
by Schein, although no definitive agreements have been reached by Newco and
Watson for the termination of the Schein agreement. Subsequently, Watson
discontinued its collaboration efforts. As a result, Newco is evaluating other
commercialization partners for its iron chelation delivery system. Endorex and
Elan are also discussing the termination of Newco and the terms of such
termination. If Endorex and Elan terminate Newco, Newco may lose its rights to
the MEDIPAD-Registered Trademark- technology.
ONCOLOGY PROGRAM
On March 1, 2000 Endorex announced its decision to divest its oncology
business in favor of focusing on the development of its drug delivery business,
in spite of several active phase I and II trials with its two oncology drugs,
perillyl alcohol and ImmTher-Registered Trademark-. Further development of the
oncology business would require a substantial increase in investment in product
development and human resources at a time when Endorex is facing a similar
requirement in its drug delivery business that has already attracted initial
partners. While oncology had been Endorex's focus for many years prior to 2000,
to be a serious participant in this highly competitive arena would require a
significant restructuring of its business and significantly higher financial
resources. Endorex has continued to maintain clinical trial activity with both
drugs due to the interest and the significant financial sponsorship by many of
the participating institutions and hospitals. Endorex has continued to provide
these institutions with a clinical drug supply and keep current stability work
on the drugs. Endorex's efforts to divest this business in 2000 resulted in the
sale of an exclusive option to purchase the assets of one of the drugs for
$250,000. An asset purchase agreement was also negotiated. However, the option
was not exercised by the end of the option period. Endorex continues to look at
various strategies to divest its oncology business. This is not currently an
active business segment for Endorex and Endorex does not plan to expend
significant funds in this area. Endorex may completely eliminate this business
in 2001.
COMPETITION
Endorex's success as a drug delivery company depends upon maintaining a
competitive position in the oral and mucosal delivery of protein and
peptide-based drugs and obtaining additional patents. Although several
alternative delivery systems have emerged for protein and peptide- based drugs,
including implants, transdermal, pulmonary, nasal, and oral, Endorex believes
there are sufficient products in this class of drugs to represent substantial
commercial opportunities. S.G. Cowens & Co. estimates that the worldwide sales
for protein and peptide-based drugs in 2001 will be approximately
$18.5 billion. Likewise, the number of pharmaceutical and biotech potential
partners for this class of drugs is large and expected to grow. Endorex expects
that the "Genomics Revolution" will produce even more protein-based drugs with
delivery challenges.
The biotechnology industry is intensely competitive, subject to rapid change
and sensitive to new product introductions or enhancements. Competitors may
develop competing technologies and obtain government approval for products
before Endorex does. Virtually all of Endorex's existing competitors have
greater financial resources, larger technical staffs, and larger research
budgets than Endorex has, as well as greater experience in developing products
and conducting clinical trials. Furthermore, Endorex's current and future
corporate partners and collaborators may compete against Endorex. Endorex's
competitors in the field of oral and nasal delivery of protein and peptide-based
drugs include Emisphere Technologies, which has started phase III trials for
oral heparin and phase I trials with oral calcitonin and oral insulin (through
its collaborator Novartis); Unigene Laboratories, which has an oral calcitonin
product in phase I/II trials; Nobex Corp. (formerly known as Protein Delivery)
which has an oral insulin in phase II trials; and Generex which has an oral
insulin spray in phase I trials. Endorex's competitors in the vaccine delivery
field include Aviron, which is developing a nasal flu vaccine that is in phase
III clinical trials, I.D. Biomedical, which is in phase I and II trials with an
intranasal flu vaccine and another vaccine, specialized biotechnology firms,
universities, and governmental agencies.
89
Endorex's competitors in the liposomal formulation field include The Liposome
Company (owned by Elan Corporation), NexStar (owned by Gilead Sciences, Inc.)
and Sequus (owned by ALZA Corporation). In addition, there may be other
companies which are currently developing competitive technologies and products
or which may in the future develop technologies and products that are comparable
or superior to Endorex's technologies and products.
GOVERNMENT REGULATION
Prior to marketing, each of Endorex's products must undergo an extensive
regulatory approval process conducted by the FDA and applicable agencies in
other countries. Testing, manufacturing, commercialization, advertising,
promotion, export and marketing, among other things, of the proposed products
are subject to extensive regulation by government authorities in the United
States and other countries. All products must go through a series of tests,
including advanced human clinical trials, which the FDA is allowed to suspend as
it deems necessary.
PATENTS AND OTHER PROPRIETARY RIGHTS
Endorex relies on patent rights, trade secrets and nondisclosure agreements
to establish and protect its proprietary rights to its technologies. Despite
these precautions, it may be possible for unauthorized third parties to utilize
Endorex's technology, to obtain and use information that Endorex regards as
proprietary, to design around Endorex's proprietary rights, or to create
superior competing technologies. The laws of some foreign countries do not
protect Endorex's proprietary rights in processes and products to the same
extent as the laws of the United States.
Endorex currently has four issued drug delivery patents in the United States
relating to the Orasome-TM- drug delivery system, of which three were original
inventions of the Massachusetts Institute of Technology and the fourth was
issued to Endorex in February 2001. Endorex's patents issued in the United
States expire between 2015 and 2021. InnoVaccines has licensed the rights to a
series of vaccine delivery patents from SRI, seven of which were issued in the
United States and over 45 of which were issued outside the United States.
Additionally, Endorex has four United States patents relating to
muramyldipeptide products, as well as several foreign counterparts.
RESEARCH AND DEVELOPMENT EXPENSE
Research and development expenditures were approximately $1.0 million for
the year ended December 31, 2000 and $2.0 million for the year ended
December 31, 1999, and $1.2 million for the sixth months ended June 30, 2001 and
$0.5 million for the six months ended June 30, 2000. As a development stage
company, the research and development expenditures have not been borne by
customers of Endorex.
EMPLOYEES
As of October 15, 2001 Endorex had 22 employees, 18 of which are full-time
employees, including six Ph.D.s, one M.D. and six masters-level employees.
Endorex plans to increase this level to approximately 25 employees by the end of
2001 to expand its drug delivery research and development team.
SCIENTIFIC ADVISORY BOARD
Endorex utilizes a Scientific Advisory Board consisting of members who are
prominent researchers and academics in their fields. Scientific Advisory Board
Co-Chairman Dr. Robert Langer, Sc.D., is recognized as a leading expert on drug
delivery technology, is a member of three National Academies (Sciences, Medicine
and Engineering), holds 265 patents and has authored over 500 articles.
Dr. Langer is a Professor of Biomedical and Chemical Engineering and is
co-inventor of the Orasome technology. Scientific Advisory Board Co-Chairman
Dr. Henry Brem, M.D., is a Professor of
90
Neurology, Ophthalmology and Oncology at Johns Hopkins University. Drs. Langer
and Brem have significant involvement with Endorex as advisors, consultants and
stockholders.
FACILITIES
Endorex's executive offices and research and development center are located
in a leased facility of approximately 7,500 square feet in Lake Forest,
Illinois. The lease expires on December 31, 2003. Endorex believes that their
current leased facilities are sufficient to meet their current needs, but may
not be sufficient for the foreseeable future and that suitable additional
laboratory space may not be available if and as needed.
LEGAL PROCEEDINGS
Endorex is not a party to any legal proceedings.
91
ENDOREX MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS PROVIDES INFORMATION THAT ENDOREX
BELIEVES IS RELEVANT TO AN ASSESSMENT AND UNDERSTANDING OF ITS RESULTS OF
OPERATION AND FINANCIAL CONDITION. YOU SHOULD READ THIS ANALYSIS IN CONJUNCTION
WITH OUR AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO CONTAINED
ELSEWHERE IN THIS JOINT PROXY STATEMENT/PROSPECTUS. THIS REPORT CONTAINS
STATEMENTS OF A FORWARD-LOOKING NATURE RELATING TO FUTURE EVENTS OR ENDOREX'S
FUTURE FINANCIAL PERFORMANCE. THESE STATEMENTS ARE ONLY PREDICTIONS AND ACTUAL
EVENTS OR RESULTS MAY DIFFER MATERIALLY. IN EVALUATING SUCH STATEMENTS, YOU
SHOULD CAREFULLY CONSIDER THE VARIOUS FACTORS IDENTIFIED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE INDICATED IN ANY FORWARD-LOOKING STATEMENTS, INCLUDING THOSE SET FORTH IN
"RISK FACTORS" IN THIS JOINT PROXY STATEMENT/PROSPECTUS.
PLAN OF OPERATION
Endorex has been focusing its efforts on oral delivery of macromolecular
drugs which are currently available commercially only in an injectable format.
Most of Endorex's efforts have focused on the higher molecular weight drugs,
generally 20 kilodaltons, or kd, or above. Examples of these types of drugs
include vaccines, which generally range from 50 to 100 kd, and human growth
hormone, which is 22 kd. This contrasts with traditional orally delivered drugs,
most of which are small molecule drugs with molecular weights under .5 kd and
for which oral delivery is generally much easier. Endorex's competition is
mainly in the area of oral delivery of macromolecular drugs, focusing on drugs
ranging from .5 to 10 kd, such as peptides, while most of Endorex's work has
focused on protein-based drugs ranging above 10 kd.
Endorex is currently in the process of shifting its business strategy,
research and development and technology focus to include the oral delivery of
small molecule drugs. Over the next 12 months Endorex plans to continue to shift
its focus to evaluate its delivery systems for oral delivery of drugs in the
lower macromolecular weight range as well as oral delivery of other classes of
drugs not currently available in oral formulations. A large number of small
molecule drugs also present delivery challenges, particularly water insoluble
drugs, such as drugs used for chemotherapy and immunosuppressant drugs. Endorex
expects to evaluate a number of such drugs to identify those that are compatible
with its oral drug delivery systems and which it may decide to take into human
clinical trials in the future.
Endorex's proposed acquisition of CTD fits strategically with Endorex's
business plans, as CTD has acquired and is developing new formulations of small
molecule ACEs for new proprietary therapeutic uses. Its two lead drug candidates
are in human clinical trials, including orBec-TM-, for which CTD has initiated a
multicenter phase III trial in the United States. Endorex envisions that CTD's
product candidates will become its key products, with Endorex's proprietary oral
delivery systems potentially allowing the oral delivery of such products.
Endorex may assemble a small sales and marketing group to directly market
these product candidates in the United States since the initial product
indications are for niche markets with limited number of specialists (requiring
a small but targeted sales force), such as organ transplant specialists and
hematologists. With its own sales force, Endorex could potentially capture more
of the product revenue stream than it would by using a sales and marketing
partner.
Endorex believes the cash of the combined companies is sufficient to fund
operations and the research and development of certain key product candidates
and programs of the combined companies for the next 24 months. Endorex expects
that it will need to seek additional funding for the development of the drugs
for additional therapeutic indications for larger market segments and diseases
with greater prevalence, particularly in the area of gastrointestinal disorders.
Endorex will seek to prioritize the research and development programs of the
combined companies after the merger to best
91
utilize the combined assets of the companies. Endorex will also seek to reduce
and eliminate duplicative administrative expenses between the companies after
the merger.
Endorex may need to expand its current facilities and is currently exploring
the possibility leasing additional space adjacent to its existing facility.
Endorex is also investigating the possibility of conducting animal testing
in-house which may result in cost savings over using third party contractors.
This may also provide Endorex with greater control over the testing. Endorex
plans to continue to contract out its manufacturing needs to FDA-certified
contract manufacturers.
The acquisition of CTD may require Endorex to enhance its regulatory,
clinical development and manufacturing skills by either hiring additional
employees or hiring specialized consultants to assist the combined company over
the next 12 months. Endorex may also hire additional scientists over the next
12 months.
Endorex is currently discussing the termination of its two joint ventures
with Elan and expects to determine the status of these joint ventures by the end
of 2001. Endorex is also exploring other commercial collaborations with Elan,
including the possibility of licensing the MEDIPAD-Registered Trademark-
technology from Elan. Watson has indicated its desire to terminate the existing
license agreement with Newco for the iron chelation delivery project and is in
discussions with Endorex regarding the terms of such termination. Additionally,
on August 28, 2001, Novo Nordisk terminated the research and option agreement
with Endorex.
RESULTS OF OPERATIONS
SIX-MONTH PERIODS ENDED JUNE 30, 2001 AND 2000
RESEARCH AND DEVELOPMENT EXPENSES. Research and development, or R&D,
expenses, for the six month period ended June 30, 2001 were $1,171,494, a
150 percent increase when compared with R&D expenses of $468,193 for the
corresponding period ended June 30, 2000. This increase in R&D expenses was due
to the hiring of additional R&D personnel and expansion of proprietary
pre-clinical R&D drug delivery activities during 2001.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
for the six month period ended June 30, 2001 were $908,269 compared to $981,521
for the same period ended June 30, 2000, an 8 percent decrease. General and
administrative expenses during the period ended June 30, 2001 were lower because
additional legal and accounting expenses as well as the payment of SEC filing
fees related to the Company's private placement were incurred during the same
period in 2000.
OPERATING EXPENSES. Operating expenses of $2,079,763 for the six month
period ended June 30, 2001 increased 44 percent compared to $1,449,714 for the
same period last year, due primarily to the increased spending in R&D
pre-clinical drug delivery activities during 2001.
EQUITY LOSSES IN JOINT VENTURES. Equity losses in joint ventures for the
six months ended June 30, 2001 were $577,661 compared with losses of $1,578,856
during the same period in 2000, a 63 percent decrease. These losses pertain to
the two joint ventures with Elan. Endorex's share of the research, development
and business expenditures of these joint ventures is recorded as equity losses
in joint ventures. The decrease in expenses represents a reduction of activities
in each joint venture due to the possible termination of each.
INTEREST INCOME. Interest income for the six months ended June 30, 2001 of
$294,686 decreased 8 percent compared to $320,965 for the same period last year,
reflecting a reduction in interest rates as well as a reduction in the cash
available for investment in 2001.
INTEREST EXPENSE. Interest expense increased to $27,320, or 16 percent,
during the six months ended June 30, 2001 from $23,019 for the same period
during 2001. The increase in interest expense was due to increased interest
payments under a line of credit with Finova Technology Finance, Inc.
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NET LOSS. Net loss for the six months ended June 30, 2001 of $3,128,777
decreased 9 percent from a net loss of $3,418,002 for the same period in 2000.
The decrease in net loss year to date versus the prior year period reflects an
overall decrease in joint venture research and development activities as Endorex
redirected its activities towards more proprietary drug delivery research and
development. Additionally, net loss decreased during the first six months of
2001 due to a reduction in expenses because Endorex incurred additional expenses
in connection with its private placement during the first six months of 2000.
YEARS ENDED DECEMBER 31, 2000 AND 1999
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses for
the twelve months ended December 31, 2000 were $956,742 as compared to
$2,028,945 for the twelve months ended December 31, 1999, a decrease of
53 percent. Approximately $700,000 of this decrease was due to reduced research
and development expenses in 2000 related to Endorex's decision to divest its
oncology business. The remaining decrease was due to reductions in personnel
expenditures (salaries, benefits, travel) related to managing the oncology
business.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
for the twelve months ended December 31, 2000 were $2,101,767 as compared to
$3,046,684 for the twelve months ended December 31, 1999, a decrease of
31 percent. This decrease was primarily due to completion of amortization of the
fair value of warrants issued in connection with financial advisory agreements
of approximately $1,300,000. The warrants, which were amortized over a two-year
period, were fully amortized by the end of the third quarter of 1999. The
decrease was partially offset by increased legal fees of approximately $100,000
and accounting fees of approximately $200,000 during 2000.
OPERATING EXPENSES. Operating expenses of $3,058,509 for fiscal year 2000
decreased 40 percent compared to $5,075,629 for fiscal year 1999, due primarily
to reduced costs related to the decision to divest the oncology business and the
full amortization of the warrants during 1999.
EQUITY LOSSES IN JOINT VENTURES. Equity losses in joint ventures for the
year ended December 31, 2000 were $2,682,368 compared with losses of $2,865,908
for the year ended December 31, 1999, a decrease of 6 percent. The decrease in
equity losses in joint ventures from 1999 to 2000 was due to a decrease in
research and development activities in Newco and costs related thereto.
OTHER INCOME. Other income increased to $250,000 in 2000 from $3,790 in
1999 due to the sale of the option to purchase a portion of Endorex's oncology
business assets.
INTEREST INCOME. Interest income for the twelve months December 31, 2000
was $747,073 as compared to $488,582 for the twelve months ended December 31,
1999, an increase of 53 percent. This increase was primarily due to interest
from the investment of the net proceeds from Endorex's April 2000 private
placement.
INTEREST EXPENSE. Interest expense remained constant at $51,889 for fiscal
year 2000 compared to $51,854 for fiscal year 1999.
NET LOSS. For the twelve months ended December 31, 2000, Endorex had a net
loss applicable to common stockholders of $6,177,893 as compared to $8,786,432
for the twelve months ended December 31, 1999, a decrease of 30 percent. Net
loss applicable to common stockholders included the impact of preferred stock
dividends, which totaled $1,382,200 in 2000, as compared to $1,285,413 in 1999.
Reductions in operating expenses from $5,075,629 in 1999 to $3,058,509 in 2000
contributed significantly to the reduction in net loss. Additionally in 2000,
equity losses from Endorex's two joint ventures with Elan were $2,682,368 as
compared to $2,865,908 for 1999. Other factors contributing to the reduction in
net loss for 2000 were an increase in interest income from $488,582 in 1999 to
$747,073 in 2000, and the sale of an option to purchase some of Endorex's
oncology assets, which has subsequently expired.
93
ENDOREX'S MANAGEMENT AND EXECUTIVE COMPENSATION
DIRECTORS AND EXECUTIVE OFFICERS
NAME AGE POSITION(S) HELD
---- -------- ------------------------------------------------
Kenneth Tempero.............................. 62 Chairman of the Board
Michael S. Rosen............................. 49 President, Chief Executive Officer and Director
Steven J. Koulogeorge........................ 42 Controller, Assistant Secretary and Assistant
Treasurer
John McCracken............................... 49 Vice President, Business Development
Panayiotis P. Constantinides................. 49 Vice President, Research and Development
Richard Dunning.............................. 55 Director
Steve H. Kanzer.............................. 37 Director
Paul D. Rubin................................ 47 Director
H. Laurence Shaw............................. 55 Director
Steven Thornton.............................. 44 Director
KENNETH TEMPERO, M.D., Ph.D., M.B.A., 62, was elected Chairman of the
Endorex board of directors in May 1999 and has served as a member of the board
of directors since September 1996. Since April 1996, Dr. Tempero has been a
principal at KTC, Inc., a consulting company. Prior thereto, he served as
Chairman and Chief Executive Officer of MGI PHARMA, Inc., a company that focuses
on the development and sale of cancer therapeutics and related products. From
November 1983 to August 1987, Dr. Tempero held various positions with G.D.
Searle & Co., a pharmaceutical company, most recently as Senior Vice President
of Research and Development. Dr. Tempero holds M.S. and Ph.D. degrees in
Pharmacology from Northwestern University, an M.D. in Medicine and Surgery from
Northwestern University and an M.B.A. in Pharmaceutical Marketing from Fairleigh
Dickinson University.
MICHAEL S. ROSEN, M.B.A., 49, has served as President, Chief Executive
Officer and a member of the board of directors since August 1996. From
January 1995 until August 1996, he was President and Chief Executive Officer of
PharmaMar, S.A., a European biotechnology company. From June 1991 until
January 1995, Mr. Rosen was General Manager of the northern Latin American
businesses for Monsanto Company, a multinational chemical/pharmaceutical
company. Mr. Rosen received a B.A. in Sociology/International Relations from
Beloit College and an M.B.A. in International Business from the University of
Miami. He has undertaken post-graduate courses at Northwestern University and
Sophia University in Tokyo, Japan.
STEVEN J. KOULOGEORGE, M.B.A., C.P.A., 42, has served as Controller,
Assistant Secretary and Assistant Treasurer since September 2000. From 1983 to
1997, Mr. Koulogeorge held several accounting and finance positions with Kraft
General Foods, the last of which was Director of Finance at Alliant Foodservice.
From 1997 to 2000, Mr. Koulogeorge held several positions with Illinois Tool
Works, including Controller of the Industrial Finishing unit. Mr. Koulogeorge
received his B.S. in Finance from Drake University and received his M.B.A in
Finance from DePaul University. Mr. Koulogeorge is also a Certified Public
Accountant in the State of Illinois.
JOHN MCCRACKEN, M.B.A., 49, has served as Vice President, Business
Development since February 2001. From 1999 to 2000, Mr. McCracken was Global
Operations Director of Life Cycle Management at Pharmacia Corporation, where he
directed product life cycle initiatives with global commercial focus, including
commercial assessment of drug delivery systems. From 1981 to 1999,
Mr. McCracken directed business initiatives for G.D. Searle where he held
several executive positions ranging from Director of International Operations,
Senior Director and Assistant to the President and
94
CEO to his last position as Managing Director for Global Operations.
Mr. McCracken received his B.A. in Economics from Carleton College and earned
his M.B.A. in Finance and Accounting from Northwestern University.
PANAYIOTIS P. CONSTANTINIDES, Ph.D., 49, has served as Vice President,
Research and Development since January 2001. From 1997 until joining Endorex,
Dr. Constantinides was Director of Research at SONUS Pharmaceuticals, where he
was responsible for building the company's drug delivery program. From 1995 to
1997, Dr. Constantinides was the Section Head of Formulation Development for
Abbott Laboratories' Pharmaceutical Products Division. Dr. Constantinides
received a University Diploma in Chemistry from the National and Kapodistrian
University and a Ph.D. in Biochemistry from Brown University. He then completed
a postdoctoral fellowship in Pharmacology at Yale University and continued as an
Associate Research Scientist in the Comprehensive Cancer Center of Yale
University School of Medicine. Dr. Constantinides has written 36 publications
and filed numerous patents that deal with physicochemical and biopharmaceutical
aspects of surfactant micelles, liposomes, emulsions and self-emulsifying drug
delivery systems.
RICHARD DUNNING, 55, has served as a member of the board of directors of
Endorex since August 1997. He has been Chairman and Chief Executive Officer of
Nexell Therapeutics Inc. since May 1999. Prior to that, he was President and
Chief Executive Officer of Nexell since April 1996. Nexell, formerly known as
VIMRX Pharmaceuticals Inc., is the leading developer and marketer of innovative
diagnostics and ex vivo cell therapies for cancer, autoimmune, metabolic and
genetic diseases. Prior to joining Nexell, Mr. Dunning played an instrumental
role in the formation of The DuPont Merck Pharmaceutical Company and acted as
that organization's Executive Vice President and Chief Financial Officer from
1991 to 1995. Mr. Dunning received a B.S. in Economics and an M.B.A. in Finance
from the University of Delaware.
STEVE H. KANZER, C.P.A., Esq., 37, has served as a member of the board of
directors since June 1996. Since December 1997, Mr. Kanzer has been President
and Chief Executive Officer of Corporate Technology Development, Inc. Since
December 2000, Mr. Kanzer has also been Chairman, Chief Executive Officer and
President of Accredited Equities, Inc., a venture capital and investment banking
firm based in Miami, and President of several private biopharmaceutical
companies also based in Miami. From 1992 until December 1998, Mr. Kanzer was a
founder and Senior Managing Director of Paramount Capital, Inc., an investment
bank specializing in the biotechnology and biopharmaceutical industries, and
Senior Managing Director--Head of Venture Capital of Paramount Capital
Investments, LLC, a biotechnology and biopharmaceutical venture capital and
merchant banking firm that is affiliated with Paramount Capital, Inc. From 1993
until June 1998, Mr. Kanzer was a founder and a member of the board of directors
of Boston Life Sciences, Inc., a publicly traded pharmaceutical research and
development company. From 1994 until June 2000, Mr. Kanzer was a founder and
Chairman of Discovery Laboratories, Inc., a publicly traded pharmaceutical
research and development company. Mr. Kanzer is a member of the board of
directors of Atlantic Technology Ventures, Inc., a publicly traded
pharmaceutical research and development company. Prior to joining Paramount
Capital, Inc., Mr. Kanzer was an attorney with Skadden, Arps, Slate, Meagher &
Flom LLP in New York, New York from September 1988 to October 1991. He received
his J.D. from New York University School of Law in 1988 and a B.B.A. in
Accounting from Baruch College in 1985. Mr. Kanzer is a nominee of the Aries
Domestic Fund, LP and the Aries Master Fund II to Endorex's board of directors.
Aries Domestic Fund, L.P. and Aries Master Fund II subsequently transferred
their right to nominate a member of the board of directors of Endorex to Aries
Select, Ltd. and Aries Select I LLC. Both Aries Select, Ltd. and Aries Select I
LLC are affiliates of PCAM, PCI, Paramount and Lindsay Rosenwald, M.D.
PAUL D. RUBIN, M.D., 47, has served as a member of the board of directors of
Endorex since November 1997. Since 1999, he has been Executive Vice President
for Drug Development at Sepracor, Inc., having previously been Senior Vice
President since 1996. He is responsible for managing
95
research and development programs for Sepracor's improved chemical entities
portfolio, which includes the management of Discovery Research, Regulatory,
Clinical, Preclinical, and Project Management teams. Dr. Rubin also plays a key
role in the evaluation of external technology and licensing opportunities. From
1993 to 1996, Dr. Rubin was the Vice President and Worldwide Director of Early
Clinical Development and Clinical Pharmacology at Glaxo Wellcome. Prior to
Glaxo, Dr. Rubin held various executive research positions at Abbott
Laboratories. Dr. Rubin received his M.D. from Rush Medical College in Chicago
and completed his residency in Internal Medicine at the University of Wisconsin
Hospitals and clinics in Madison, Wisconsin.
H. LAURENCE SHAW, M.D., 55, has served as a member of the board of directors
of Endorex since August 1997. In 1999, he was appointed as Chief Executive
Officer of Applied Spectral Imaging, a company focused on the application of
technology that combines conventional imaging with spectroscopy to display
previously undetected information with applications in diverse areas such as
cytogenetics, pathology and ophthalmology, as well as fields unrelated to
healthcare. He was Chairman, President and Chief Executive Officer of Pacific
Pharmaceuticals, Inc. from December 1996 until March 1999. From 1995 to 1996,
Dr. Shaw was Corporate Vice President Research and Development for C.R.
Bard, Inc. in New Jersey. From September 1993 to 1995, he was Founder, President
and Chief Executive Officer of Atlantic Pharmaceuticals, Inc. Dr. Shaw graduated
from University College Hospital Medical School, London, England.
STEVEN THORNTON, 44, has served as a member of the board of directors since
February 1998. He has served as Executive Vice President of Commercial
Development for Elan Pharmaceutical Technologies since December 1997. Prior to
joining Elan Pharmaceutical Technologies, Mr. Thornton served from July 1994 as
President of Schein Bayer Pharmaceutical Services Inc., a joint venture of Bayer
and Schein Pharmaceutical Inc. From 1991 to 1994, he served with Bayer as Region
Director with responsibility for pharmaceutical operations in Australia, New
Zealand and South Africa. Mr. Thornton graduated with honors from Lancaster
University in 1978, receiving a B.A. in applied social psychology. Mr. Thornton
is the nominee of the holders of Endorex's Series B preferred stock.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Endorex's directors, executive officers, and persons who beneficially own
more than 10% of a registered class of its equity securities must file initial
reports of ownership and reports of changes in ownership of any equity
securities of Endorex with the Securities and Exchange Commission. Copies of the
reports must be furnished to Endorex. To Endorex's knowledge, based solely on
review of the copies of such reports furnished to it, all persons subject to
these reporting requirements filed the required reports on a timely basis with
respect to Endorex's most recent fiscal year other than Mr. Thornton and
Mr. Tempero. Inadvertently, the Form 5 of Mr. Thornton and Form 5 of
Mr. Tempero for fiscal year 2000 were filed late.
96
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation paid
during Endorex's fiscal years ended December 31, 2000, 1999 and 1998 to its
Chief Executive Officer and its two other executive officers as of December 31,
2000 whose base salary during the year was in excess of $100,000 and one other
person for whom disclosure would have been required if they were serving as an
executive officer of Endorex at December 31, 2000, collectively referred to
herein as the Named Executive Officers.
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
---------------------------------------------------- ------------
SECURITIES
OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) COMPENSATION ($) OPTIONS (#)
--------------------------- -------- ---------- --------- ---------------- ------------
Michael S. Rosen.................... 12/31/00 249,600 25,000(1) 3,340(4) --
President and Chief Executive 12/31/99 249,600 12,500(2) 6,997(4) --
Officer 12/31/98 248,808 72,000(3) 1,219(4) 25,000
Robert N. Brey...................... 12/31/00 136,000 -- -- 30,000
Vice President of Research and 12/31/99 131,904 7,000(2) 19,000(6) 10,000
Development(5) 12/31/98 126,829 13,270(3) -- --
Frank C. Reid....................... 12/31/00 111,833 -- -- 60,000
Vice President, Finance and
Corporate Development(7)
Steve J. Koulogeorge................ 12/31/00 29,886 3,675(1) -- 15,000
Controller and Assistant
Treasurer(8)
------------------------
(1) Bonuses accrued in 2000 and paid entirely in 2001.
(2) Bonuses accrued in 1999 and paid entirely in 2000.
(3) Bonuses accrued in 1998 and paid entirely in 1999.
(4) Life insurance premiums incurred and paid during the period.
(5) Mr. Brey served as an executive officer of Endorex until November 30, 2000.
(6) Reimbursed relocation expenditures.
(7) Mr. Reid resigned from Endorex on December 31, 2000.
(8) Mr. Koulogeorge joined Endorex on September 25, 2000.
97
The following table contains information concerning options granted to the
Named Executive Officers during the fiscal year ended December 31, 2000. No SARs
were granted during the period.
OPTION GRANTS IN LAST FISCAL YEAR
PERCENTAGE OF
TOTAL OPTIONS
NUMBER OF SECURITIES GRANTED TO EXERCISE
UNDERLYING OPTION EMPLOYEES IN PRICE EXPIRATION
GRANTED (#) FISCAL YEAR(1) ($/SHARE)(2) DATE
-------------------- -------------- ------------ ----------
Michael S. Rosen.......................... -- -- -- --
Robert N. Brey............................ 30,000 17% $3.94 2/8/10
Frank C. Reid............................. 60,000 34% $3.94 9/28/10
Steve J. Koulogeorge...................... 15,000 8% $2.31 2/8/10
------------------------
(1) Based on an aggregate of 176,500 options granted to employees and
non-employee board members in the fiscal year ended December 31, 2000,
including options granted to the Named Executive Officers.
(2) The exercise price of each grant is equal to the fair market value of
Endorex's common stock on the date of the grant.
The following table sets forth certain information concerning exercisable
and unexercisable stock options held as of December 31, 2000 by each of the
Named Executive Officers:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
ACQUIRED ON VALUE OPTIONS AT 12/31/00 (#) AT 12/31/00 ($)
NAME EXERCISE (#) REALIZED ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE(1)
---- ------------ ------------ ------------------------- ----------------------------
Michael S. Rosen........... -- -- 534,375/134,375 140,625/191,504
Robert N. Brey............. -- -- 40,000/50,000 98,800/128,125
Frank C. Reid.............. -- -- 0/60,000 0/0
Steve J. Koulogeorge....... -- -- 0/15,000 0/0
------------------------
(1) Based on the difference between the closing price on December 31, 2000
($1.00) and the exercise price of outstanding options.
COMPENSATION OF DIRECTORS
CASH COMPENSATION. Endorex directors receive a $2,000 fee for attending
quarterly meetings of the board of directors in person and $500 for telephonic
attendance at such meetings and for attendance at committee meetings, and are
reimbursed for travel expenses incurred in connection with performing their
respective duties as directors of Endorex.
DIRECTOR FEE OPTION GRANT PROGRAM. Each non-employee director has the right
to apply all or a portion of his annual cash retainer fee to the acquisition of
a special option grant under the Director Fee Option Grant Program pursuant to
Endorex's Amended and Restated 1995 Omnibus Incentive Plan. The grant will
automatically be made on the first trading day in January following the filing
of the stock-in-lieu-of-cash election and will have an exercise price per share
equal to one-third of the fair market value of the option shares on the grant
date. The number of shares subject to the option will be determined by dividing
the amount of the retainer fee applied to the program by two-thirds of the fair
market value per share of common stock on the grant date. As a result, the total
spread on the option
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(the fair market value of the option shares on the grant date less the aggregate
exercise price payable for those shares) will be equal to the portion of the
retainer fee invested in that option. The option will become exercisable for 50%
of the option shares upon the director's completion of six months of board
service in the calendar year in which the option is granted. The balance of the
option shares will become exercisable in six successive equal monthly
installments upon the director's completion of each additional month of board
service during that calendar year. The option will remain exercisable until the
earlier of (i) the expiration of the ten-year option term or (ii) the end of the
three-year period measured from the date of the director's cessation of board
service. The option will become immediately exercisable in its entirety should
the director die or become permanently disabled while a board member. In
addition, upon the successful completion of a hostile take over, each option may
be surrendered to Endorex for a cash distribution per surrendered option share
in an amount equal to the excess of (a) the take-over price per share over
(b) the exercise price payable for such share. This program has not been
implemented by Endorex.
AUTOMATIC OPTION GRANT PROGRAM. Subject to approval of Proposal Four by the
Endorex stockholders at the Endorex annual meeting, each non-employee director
will automatically receive a fully vested option to purchase 50,000 shares of
common stock at the commencement of board service. In addition, on the date of
each annual meeting of the Endorex stockholders, each non-employee director who
continues to serve on the board will automatically be granted an option to
purchase an additional 10,000 shares of common stock. Each 10,000 share option
granted under the Automatic Option Grant Program will be immediately exercisable
for any or all of the option shares. However, any shares purchased under the
option are subject to repurchase by Endorex, at the exercise price paid per
share, upon the director's cessation of board service prior to completion of one
year of board service measured from the option grant. The exercise price per
share of each option granted under the Automatic Option Grant Program will be
equal to the fair market value per share of common stock on the date of grant.
If Proposal Four is not approved, then each newly elected or appointed
non-employee director will receive an option to purchase 42,000 shares upon
commencement of board service; in addition, each continuing non-employee
director will be granted an option to purchase 12,000 shares on the second
anniversary of the date of grant of the initial 42,000 share option and every
two years thereafter. Each initial grant of 42,000 options will vest, and
Endorex's repurchase right will lapse, (1) with respect to 30,000 shares in a
series of two successive equal annual installments upon the Optionee's
completion of each year of board service over the two-year period measured from
the option grant date and (2) with respect to 12,000 shares in a series of eight
successive equal quarterly installments on the last day of each calendar quarter
over the two-year period measured from the option grant date, provided the
director has attended the regular board meeting held during such quarter.
Accordingly, subject to the approval of Proposal Four and subject to
consummation of the merger, Guy Rico and Peter Kleim will each receive a 50,000
share option on the date of his appointment and, subject to the approval of
Proposal Four, each continuing director will receive a 10,000 share option on
the date of the annual meeting.
DISCRETIONARY OPTION GRANT PROGRAM. On February 21, 2001, Endorex's board
granted a fully vested option to purchase 50,000 shares of Endorex common stock
to each of Endorex's non-employee board members, subject to approval of Proposal
Five by the Endorex stockholders at the Endorex annual meeting. The options have
an exercise price of $1.25 per share, which was the closing price per share on
AMEX on February 21, 2001. The options have a term of ten years.
CONSULTING AGREEMENT WITH CHAIRMAN. On May 17, 2000, Endorex entered into a
consulting agreement with Dr. Kenneth Tempero, as an independent consultant, to
provide, on a non-exclusive basis, assistance and advice to Endorex regarding
its business, licensing opportunities, corporate partnering activities and
research and development activities. The term of the consulting agreement ends
upon the first meeting of the board after the 2001 annual meeting of Endorex
stockholders; provided, however, that the term of the consulting agreement may
be extended upon mutual consent. Dr. Tempero is the Chairman of the Endorex
board of directors. Pursuant to his consulting agreement,
99
Dr. Tempero is entitled to receive compensation of $5,600 per month in exchange
for rendering 32 hours per month of consulting services to Endorex. For all time
in excess of 32 hours per month, Dr. Tempero is compensated at a rate of $215
per hour. Pursuant to his consulting agreement, Dr. Tempero also received an
option to purchase up to 12,000 shares of common stock at an exercise price of
$3.25 per share, of which options to purchase 3,000 shares of common stock shall
vest every quarter after the date of the consulting agreement. Endorex also
agreed to pay up to $10,606 annually of Dr. Tempero's healthcare costs. Pursuant
to his consulting agreement, Dr. Tempero received payments from Endorex totaling
$159,270 during the fiscal year ended December 31, 2000.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
ARRANGEMENTS
On May 17, 2000, Endorex entered into an employment agreement with Michael
S. Rosen pursuant to which Mr. Rosen will serve as the President, Chief
Executive Officer, and a director of Endorex. The term of Mr. Rosen's employment
agreement with Endorex commenced on February 8, 2000 and ends upon termination
of the employment agreement pursuant to its terms. Pursuant to his employment
agreement, Mr. Rosen is entitled currently to receive (i) an annual base salary
of $254,600 and (ii) an annual bonus of up to 50% of his annual base salary upon
achieving certain milestones. Endorex must also maintain medical, long-term
disability and life insurance with coverage of up to $1,000,000 for Mr. Rosen.
In the event Mr. Rosen's employment is terminated other than for cause, which
includes a change of control, or if Mr. Rosen terminates for good reason,
including a material reduction in his duties or responsibilities, then
(i) Mr. Rosen will be entitled to receive his base salary and a prorated bonus
for a period of six months and for a subsequent six month period, subject to
reduction during the subsequent period for earnings from other employment,
(ii) Mr. Rosen will be entitled to receive his benefits for those periods until
other coverage is obtained, (iii) any unvested standard options granted to
Mr. Rosen will vest, and (iv) Mr. Rosen will have one year from the date of
termination to exercise his options. Mr. Rosen will also receive cash payments
equal to the cost of providing life and disability insurance for six months
following initial 6 month period. Upon consummation of the merger, Mr. Rosen
would have the right to terminate his employment with Endorex within thirty days
and receive his severance benefits. Mr. Rosen and Endorex are currently
negotiating a new employment agreement to take effect subsequent to the merger.
On September 19, 2000, Endorex entered into an employment agreement with
Steven J. Koulogeorge to serve as the Assistant Treasurer and Controller.
Mr. Koulogeorge's employment commenced on September 25, 2000 and the agreement
terminates on September 24, 2004. Pursuant to his employment agreement,
Mr. Koulogeorge is entitled to receive (i) an annual base salary of $102,480 and
(ii) an annual bonus of up to 15% of his annual base salary at the discretion of
Endorex's board of directors. Pursuant to his employment agreement,
Mr. Koulogeorge also received an option to purchase up to 15,000 shares of
common stock at an exercise price of $2.3125 per share that vest equally over
4 years starting on September 28, 2001. In the event Mr. Koulogeorge is
terminated other than for cause or if he terminates his employment for good
reason within 4 months of a change of control of Endorex, Mr. Koulogeorge is
entitled to receive for a period 4 months his base monthly salary and any unpaid
bonus, subject to set off for amounts earned from alternative employment.
On December 1, 1996, Endorex entered into an employment agreement with
Robert Brey to serve as Vice President of Research and Development. Mr. Brey's
employment commenced December 1, 1996 and his employment agreement terminated on
November 30, 2000. Under his employment agreement, Mr. Brey was entitled to
receive (i) a minimum annual base salary of $115,000 and (ii) an annual bonus of
up to 25% of his annual base salary at the discretion of Endorex's board of
directors. Mr. Brey was also granted an option to purchase up to 100,000 shares
of common stock. Subsequently, in October 1997, this option was cancelled and
Dr. Brey was granted a new option to purchase 50,000 shares of common stock at
an exercise price of $2.47 per share, vesting at a rate of 3,125 shares at the
end of each three-month period thereafter commencing October 1997. Subsequent to
the
100
termination of his employment as Vice President of Research and Technology,
Mr. Brey was engaged by Endorex as a consultant.
On March 10, 1997, Endorex entered into an employment agreement with David
G. Franckowiak to serve as Controller and Treasurer. Mr. Franckowiak's
employment agreement commenced on April 1, 1997. Pursuant to the terms of his
employment agreement, Mr. Franckowiak was entitled to receive (i) a minimum
annual base salary of $127,000, (ii) an annual bonus of up to 15% of his annual
base salary at the discretion of Endorex's board of directors and (iii) options
to purchase up to 50,000 shares of common stock at an exercise price of $2.00
per share, which vest at a rate of 3,125 shares every quarter starting June 30,
1997. Pursuant to a letter agreement dated March 13, 2000, Mr. Franckowiak
resigned from Endorex on March 31, 2000 but agreed to assist Endorex for up to
four months to transition certain of his duties. Pursuant to the letter
agreement, Mr. Franckowiak was entitled to receive (i) the pro rata portion of
his annual base salary for up to four months, (ii) a $6000 bonus upon
satisfactory completion of certain duties and (iii) the continued vesting of his
options for up to four months.
On February 8, 2000, Endorex entered into an employment agreement with Frank
C. Reid to serve as Vice President of Finance and Corporate Development.
Mr. Reid's employment commenced February 21, 2000. Mr. Reid was entitled to
receive (i) an annual base salary of $130,000, (ii) a bonus of up to 30% of his
annual base salary at the discretion of Endorex's President and Chief Executive
Officer and board of directors and (iii) options to purchase up to 60,000 shares
of common stock at an exercise price of $3.94 per share. Mr. Reid resigned from
Endorex as of December 31, 2000.
On January 4, 2001, Endorex entered into an employment agreement with
Panayiotis P. Constantinides to serve as the Vice President of Research and
Development. Mr. Constantinides' employment commenced January 12, 2001 and the
agreement terminates on January 11, 2004. Pursuant to his employment agreement,
Mr. Constantinides is entitled to receive (i) an annual base salary of $170,000
and (ii) an annual bonus of up to 30% of his annual base salary at the
discretion of Endorex's Chief Executive Officer and board of directors. Pursuant
to his employment agreement, Mr. Constantinides also received an option to
purchase up to 60,000 shares of common stock at an exercise price of $1.50 per
share that vest equally over 4 years upon the anniversary date of his employment
agreement. In the event Mr. Constantinides is terminated other than for cause or
if he terminates his employment for good reason within 12 months of a change of
control of Endorex, Mr. Constantinides is entitled to receive for a period of
six months his base monthly salary and any unpaid bonus, subject to set off for
amounts earned from alternative employment.
On February 12, 2001, Endorex entered into an employment agreement with John
McCracken to serve as Vice President of Business Development. Mr. McCracken's
employment commenced February 26, 2001 and the agreement terminates on
February 25, 2005. Pursuant to his employment agreement, Mr. McCracken is
entitled to receive (i) an annual base salary of $175,000 and (ii) an annual
bonus of up to 35% of his annual base salary at the discretion of Endorex's
board of directors. Pursuant to his employment agreement, Mr. McCracken also
received an option to purchase up to 100,000 shares of common stock at an
exercise price of $1.25 per share. Options to purchase 75,000 shares of common
stock vest equally over 4 years upon each anniversary date of Mr. McCracken's
employment agreement and the remaining options to purchase 25,000 shares of
common stock vest upon meeting certain milestones. Upon receipt by Endorex of at
least $2,000,000 in revenue or income from business development activities,
Mr. McCracken's base annual salary increases by $20,000. In the event
Mr. McCracken is terminated other than for cause, Mr. McCracken is entitled to
receive for a period of seven months his base monthly salary and any unpaid
bonus, subject to set off for amounts earned from alternative employment. In the
event Mr. McCracken terminates his employment for good reason within six months
of a change of control of Endorex, Mr. McCracken is entitled to receive for a
period six months his base monthly salary and any unpaid bonus, subject to set
off for amounts earned from alternative employment.
101
The Compensation Committee has the authority to provide for the accelerated
vesting of the options granted to the Chief Executive Officer and Endorex's
other executive officers under the Endorex Amended and Restated 1995 Omnibus
Incentive Plan in the event of (i) a change in control of Endorex effected
through a successful tender offer for more than 50% of Endorex's outstanding
common stock or a change in the majority of the board as a result of one or more
contested elections for board membership, or (ii) the individual's termination
of employment (whether involuntarily or through a forced resignation) within a
designated period following such a change in control or an acquisition of
Endorex by merger or asset sale.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Endorex and its management and security holders and their respective
affiliates engage in a variety of transactions between or among each other in
the ordinary course of their respective businesses. All of these related party
transactions that are material to Endorex are described below. As a general
rule, Endorex has not retained an independent third party to evaluate these
transactions, and there has been no independent committee of its board of
directors to evaluate these transactions. Notwithstanding this fact, Endorex
believes that the terms and conditions of these transactions, including the fees
or other amounts paid by it, took into account transactions of a similar nature
entered into by Endorex with unaffiliated third parties and/or market
transactions of a similar nature entered into by unaffiliated third parties.
There can be no assurance that Endorex could not have obtained more favorable
terms from an unaffiliated third party.
On June 13, 1996, Dominion Resources, Inc. entered into an agreement with
The Aries Fund and the Aries Domestic Fund, L.P., collectively referred to
herein as the Aries Funds, with Endorex as a party to the agreement, whereby the
Aries Funds purchased an aggregate of 266,667 shares of Endorex common stock
from Dominion Resources at $1.50 per share. As part of the transaction, Dominion
Resources transferred to the Aries Funds certain of its rights under an existing
agreement with Endorex, including the right to designate one of the directors of
Endorex and the right to have the shares registered under the Securities Act.
Upon completion of the transaction, Steven H. Kanzer was elected to the board of
directors as a designee of the Aries Funds. On June 26, 1996, the Aries Funds
purchased from Endorex an additional 333,334 shares of common stock at a price
of $3.00 per share. The purchase agreements relating to such shares contains
various representations and warranties concerning Endorex and its activities and
also various affirmations and negative covenants. The agreements grant to the
Aries Funds the right to have the shares registered under the Securities Act and
restrict Endorex from entering into mergers, acquisitions, or sales of Endorex's
assets without the prior approval of the Aries Funds and the Aries Fund nominee
on the board. In 2001, the Aries Funds transferred the shares of Endorex common
stock and the rights under the purchase agreements to Aries Select, Ltd. and
Aries Select I LLC. Aries Select, Ltd. and Aries Select I LLC each beneficially
own in excess of 5% of Endorex's common stock, based upon the shares of common
stock and shares of common stock issuable upon exercise of warrants beneficially
owned by each of them.
In connection with a credit agreement entered into by Endorex and the Aries
Funds on May 19, 1997, Endorex issued to the Aries Funds warrants to purchase an
aggregate of 66,668 shares of common stock. Such warrants are exercisable until
May 19, 2002, at an exercise price of $2.31250 per share, subject to adjustment
under certain circumstances. Paramount Capital Asset Management, Inc., or PCAM,
is the investment manager of the Aries Funds and the general partner of the
Aries Domestic Fund, L.P. In 2001, the Aries Funds transferred their Endorex
warrants to Aries Select, Ltd. and Aries Select I LLC, both of which are
affiliates of PCAM, Paramount Capital, Inc., or Paramount, and Lindsay
Rosenwald, M.D. Dr. Rosenwald is the President and sole stockholder of PCAM and
Paramount. PCAM and Dr. Rosenwald each beneficially own in excess of 5% of
Endorex's outstanding common stock, based upon the shares of common stock and
shares of common stock issuable upon exercise of warrants beneficially owned by
each of them.
102
Endorex issued and sold an aggregate of 8,648,718 shares of common stock to
certain accredited investors in a private placement on July 16, October 10, and
October 16, 1997, for an aggregate purchase price of $20,000,000. The net
proceeds to Endorex after deducting commissions and expenses of Paramount, which
acted as the placement agent for the private placement, were $17,400,000.
Paramount is an affiliate of PCAM and Dr. Rosenwald.
In connection with the private placement, Endorex issued and sold to
Paramount and/or its designees warrants to purchase up to an aggregate of
864,865 shares of common stock. Also in connection with the execution of a
financial advisory agreement, dated October 16, 1997, between Endorex and
Paramount, Endorex issued and sold to Paramount warrants to purchase up to an
aggregate of 1,297,297 shares of common stock. Such warrants are exercisable
until April 16, 2003, at an exercise price of $2.54375 per share, subject to
adjustment under certain circumstances.
On January 21, 1998, Endorex established a joint venture, InnoVaccines
Corporation, with Elan Corporation, PLC for the exclusive research, development
and commercialization of oral and mucosal prophylactic and therapeutic vaccines.
As part of the transaction, Elan International Services, Ltd., or, Elan
International, a wholly owned subsidiary of Elan, made a $2.0 million investment
in Endorex by purchasing 307,692 shares of common stock and warrants to acquire
230,770 shares of common stock. The warrants are exercisable until January 21,
2004 at an exercise price of $10.00 per share, subject to adjustment under
certain circumstances. In addition, in connection with the joint venture and the
execution of a license agreement, Endorex issued $8.0 million of Series B
preferred stock to Elan International. Upon completion of the transaction,
Steven Thornton was elected to the board of directors as a designee of Elan
International. As of December 31, 2000, Elan has paid approximately $1,643,412
of Endorex's funding obligations for InnoVaccines. Based upon the shares of
common stock and shares of common stock issuable upon conversion of the
Series B preferred stock and Series C preferred stock beneficially owned, Elan
International beneficially owns in excess of 5% of the common stock of Endorex.
On October 21, 1998, Endorex established a second joint venture, Endorex
Newco, Ltd., with Elan for the exclusive research, development and
commercialization of the MEDIPAD-Registered Trademark- disposable drug delivery
system for an iron chelation therapy. In connection with the joint venture and
the execution of a license agreement, Endorex issued $8.4 million of Series C
preferred stock to Elan International. Endorex has a committed credit
availability of approximately $4,800,000 from Elan for the purposes of funding
Endorex Newco, Ltd.
Pursuant to a Financial Advisory Agreement dated as of October 25, 1999
between Paramount and Endorex, Paramount provided to Endorex financial advisory
services for a period of twelve months from the date of the agreement. Paramount
received as compensation for its services $5,000 per month for the term of the
Financial Advisory Agreement and received options for 46,000 shares of common
stock at an exercise price of $2.54 per share. Of these options, options for
10,000 shares of common stock were immediately exercisable upon the issuance of
such options and expired on October 25, 2000; options for 9,000 shares of common
stock became exercisable after October 25, 2000 and expire on October 25, 2009;
options for 9,000 shares of common stock became exercisable after April 25, 2001
and expire on October 25, 2009; and options for 18,000 shares of common stock
become exercisable after October 25, 2002 and expire on October 25, 2009.
Pursuant to a Finder Agreement dated as of February 29, 2000, as amended on
April 6, 2000, between Paramount and Endorex, Paramount agreed to act as a
finder in connection with Endorex's April 2000 private placement of common stock
and warrants. In return for its services under the Finder Agreement, Paramount
received a cash payment of $598,500 and warrants exercisable for 226,190 shares
of common stock at an exercise price of $5.25 per share, subject to adjustment
under certain circumstances. The warrants became exercisable on October 12, 2000
and expire on October 11, 2007.
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PRINCIPAL STOCKHOLDERS OF ENDOREX
The table below sets forth information regarding the beneficial ownership of
Endorex's common stock and Series B preferred stock as of October 15, 2001, by
the following individuals or groups:
- each person or entity who is known by Endorex to own beneficially more
than 5.0% of Endorex's outstanding common stock or Series B preferred
stock;
- each of Endorex's Named Executive Officers;
- each of Endorex's directors and nominees for director; and
- all of Endorex's directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the SEC
and generally includes voting or investment power with respect to securities.
Shares of Endorex's common stock that are subject to warrants, options or other
convertible securities that are presently exercisable or exercisable within
60 days of October 15, 2001 are deemed to be outstanding and beneficially owned
by the person holding the warrants or stock options for the purpose of computing
the percentage of ownership of that person, but are not treated as outstanding
for the purpose of computing the percentage of any other person. As of
October 15, 2001, Endorex had 12,741,858 shares of common stock outstanding.
SERIES B
COMMON CONVERTIBLE
STOCK PREFERRED STOCK
BENEFICIALLY PERCENT BENEFICIALLY PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED OF CLASS OWNED OF CLASS
------------------------------------ ------------ -------- --------------- --------
Aries Select I LLC(1)............................... 2,369,986 18.38% -- --
c/o Paramount Capital Asset Management, Inc.
787 Seventh Avenue
New York, NY 10019
Aries Select, Ltd.(2)............................... 1,076,081 8.39% -- --
c/o Paramount Capital Asset Management, Inc.
787 Seventh Avenue
New York, NY 10019
Elan International Services, Ltd.(3)................ 2,990,945 19.01% 100,410 100%
102 St. James Court
Flatts Smith, SL 04
Bermuda
Lindsay A. Rosenwald, M.D.(4)....................... 4,900,384 34.00% -- --
787 Seventh Avenue,
New York, NY 10019
Paramount Capital Asset Management, Inc.(5)......... 4,900,384 34.00% -- --
787 Seventh Avenue,
New York, NY 10019
Robert Brey(6)(7)................................... 64,375 * -- --
Richard Dunning(6)(7)............................... 104,000 * -- --
Steve H. Kanzer(6)(7)............................... 249,000 1.92% -- --
Steve Koulogeorge(6)(7)............................. -- -- -- --
Frank Reid(6)(7).................................... -- -- -- --
Michael S. Rosen(6)(7).............................. 634,985 4.75% -- --
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SERIES B
COMMON CONVERTIBLE
STOCK PREFERRED STOCK
BENEFICIALLY PERCENT BENEFICIALLY PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED OF CLASS OWNED OF CLASS
------------------------------------ ------------ -------- --------------- --------
Paul Rubin(6)(7).................................... 104,000 * -- --
H. Lawrence Shaw(6)(7).............................. 104,000 * -- --
Kenneth Tempero(6)(7)............................... 157,000 1.22% -- --
Steven Thornton(6)(7)............................... 92,000 * -- --
All directors and officers as a group............... 1,509,360 10.59% -- --
------------------------
* Represents less than 1% of outstanding common stock or voting power.
(1) Number of shares beneficially owned includes 23,334 shares of common stock
issuable upon exercise of warrants exercisable until May 19, 2002 at a price
of $2.3125 per share, and 56,533 shares of common stock issuable upon
exercise of warrants exercisable until April 16, 2003 at a price of $2.54375
per share. Does not include warrants to purchase 1,434,032 shares of common
stock held by Lindsay A. Rosenwald, M.D., the Chairman of PCAM, which is the
managing member of Aries Select I LLC, in his individual capacity.
Dr. Rosenwald and PCAM share the power to vote and/or dispose of the shares
of common stock held by the Aries Select I LLC, but disclaim beneficial
ownership thereof except to the extent of their pecuniary interest therein,
if any.
(2) Number of shares beneficially owned includes 43,334 shares of common stock
issuable upon exercise of warrants exercisable until May 19, 2002 at a price
of $2.3125 per share, and 112,159 shares of common stock issuable upon
exercise of warrants exercisable until April 16, 2003 at a price of $2.54375
per share. Does not include warrants to purchase 1,434,032 shares of common
stock held by Lindsay A. Rosenwald, M.D., the Chairman of PCAM, which is the
investment manager of Aries Select, Ltd., in his individual capacity.
Dr. Rosenwald and PCAM share the power to vote and/or dispose of the shares
of common stock held by Aries Select, Ltd., but disclaim beneficial
ownership thereof except to the extent of their pecuniary interest therein,
if any.
(3) Number of shares beneficially owned includes 1,350,569 shares of common
stock issuable upon conversion of Series B preferred stock, 1,101,614 shares
of common stock issuable upon conversion of Series C preferred stock and
230,770 shares of common stock issuable upon exercise of warrants
exercisable until January 21, 2004 at a price of $10.00 per share.
(4) Lindsay A. Rosenwald, M.D., is the Chairman and sole stockholder of PCAM and
Paramount Capital, Inc. The securities beneficially owned by Dr. Rosenwald
include 1,434,032 shares of common stock issuable upon exercise of warrants
exercisable until April 16, 2003 at a price of $2.54375 per share, 2,369,986
shares beneficially owned by Aries Select I LLC, 1,076,081 shares
beneficially owned by Aries Select, Ltd. and 20,284 shares beneficially
owned by Aries Select II LLC. Dr. Rosenwald disclaims beneficial ownership
of the shares owned by Aries Select I LLC, Aries Select, Ltd. and Aries
Select II LLC, except to the extent of any pecuniary interest therein.
(5) PCAM, the investment manager of Aries Select, Ltd. is also the managing
member of Aries Select I LLC and Aries Select II, LLC, each of which also
owns securities of Endorex. PCAM disclaims beneficial ownership of the
securities held by the funds, except to the extent of its pecuniary interest
therein, if any. PCAM disclaims beneficial ownership of warrants to purchase
1,434,032 shares of common stock owned by Lindsay A. Rosenwald, M.D.
(6) The address of this individual is c/o Endorex Corporation, 28101 Ballard,
Lake Forest, IL 60045.
(7) Consists entirely of shares issuable upon exercise of options that are
exercisable within the 60-day period following October 15, 2001.
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DESCRIPTION OF ENDOREX CAPITAL STOCK
The following summarizes all of the material terms and provisions of
Endorex's capital stock. It does not purport to be complete, however, and is
qualified in its entirety by the actual terms and provisions contained in
Endorex's certificate of incorporation.
AUTHORIZED CAPITAL STOCK
Endorex has 55,000,000 total authorized shares of capital stock, of which
50,000,000 are shares of common stock, par value $.001 per share; 4,600,000 are
shares of preferred stock, par value $.001 per share; 200,000 are shares of
Series B preferred stock, par value $.05 per share; and 200,000 are shares of
Series C preferred stock, par value $.05 per share.
STOCK RESERVED FOR ISSUANCE
As of October 15, 2001, Endorex has reserved 2,231,625 shares of common
stock for issuance upon exercise of outstanding stock options, 3,136,794 shares
for issuance upon exercise of outstanding warrants, 1,350,569 shares for
issuance upon conversion of Series B preferred stock and 1,101,614 shares for
issuance upon conversion of Series C preferred stock. Endorex has not reserved
any shares of preferred stock for issuance.
COMMON STOCK
VOTING RIGHTS
Each outstanding share of Endorex common stock is entitled to one vote per
share. Endorex stockholders do not have cumulative voting rights.
DIVIDENDS
Subject to preferences that may be applicable to any outstanding preferred
stock, the holders of Endorex common stock are entitled to receive ratably such
dividends, if any, as may be declared from time to time by the board of
directors of Endorex out of funds legally available for that purpose. Since
inception, Endorex has not declared any dividends on its common stock and does
not intend to do so in the foreseeable future.
LIQUIDATION RIGHTS
In the event of Endorex's liquidation, dissolution or winding up, the
holders of Endorex common stock are entitled to share ratably in all assets
remaining after payment of liabilities, subject to prior distribution rights of
preferred stock, if any, then outstanding. The holders of common stock have no
preemptive or conversion rights or other subscription rights.
There are no redemption or sinking fund provisions applicable to the common
stock. All outstanding shares of common stock are fully paid and nonassessable.
The shares of common stock to be issued in the merger will be fully paid and
nonassessable.
PREFERRED STOCK
Endorex's board of directors has the authority, without action by the
stockholders, to designate and issue preferred stock in one or more series and
to designate the rights, preferences and privileges of each series, which may be
greater than the rights of the common stock. It is not possible to state the
actual effect of the issuance of any shares of preferred stock upon the rights
of holders of the common
106
stock until the board of directors determines the specific rights of the holders
of such preferred stock. However, the effects might include, among other things:
- restricting dividends on the common stock;
- diluting the voting power of the common stock;
- impairing the liquidation rights of the common stock; or
- delaying or preventing a change in control of Endorex without further
action by the stockholders.
There are currently two series of preferred stock issued and outstanding,
Series B preferred stock and Series C preferred stock. The current series, and
any future series, of preferred stock may discourage or make more difficult a
merger, tender offer, business combination, proxy contest, or assumption of
control by a holder of a large block of Endorex securities or the removal of
incumbent management even if these events were favorable to the interests of
stockholders. The board of directors, without stockholder approval, may issue
preferred stock with voting and conversion rights and dividend and liquidation
preferences which may adversely affect the holders of common stock. Below is a
brief description of Endorex's current outstanding preferred stock.
SERIES B CONVERTIBLE PREFERRED STOCK VOTING, DIVIDEND, AND LIQUIDATION RIGHTS
VOTING RIGHTS
Series B preferred stockholders have full voting rights and powers equal to
the voting rights and powers of the common stock, including one vote for each
whole share of common stock into which their Series B preferred stock could be
converted according to their conversion rights as described in the certificate
of incorporation. Fractional votes shall not, however, be permitted and any
fractional voting rights available on an as converted basis (after aggregating
all shares into which shares of Series B preferred stock held by each holder
could be converted) shall be rounded to the nearest whole number (with one-half
being rounded upward). As of October 15, 2001, each share of Series B preferred
stock was convertible into approximately 13.55 shares of common stock.
Furthermore, without the approval of holders of Series B preferred stock
representing at least a majority of the then outstanding shares of Series B
preferred stock, Endorex may not authorize the issuance of any equity security
having voting, dividend, liquidation or redemptive preferences superior to the
Series B preferred stock.
DIVIDENDS
Series B preferred stock is paid a dividend at the rate of eight percent
(8%) per annum payable in shares of Series B preferred stock. Such dividends are
cumulative and accrue annually. In addition, if the board of directors pays a
dividend or a distribution to the then outstanding stockholders of common stock
of Endorex (other than a dividend payable solely in shares of common stock), the
holders of the Series B preferred stock are entitled to the amount of dividends
per share they would have received if they converted their shares into whole
shares of common stock.
LIQUIDATION RIGHTS
In the event of a liquidation, before any payment to the common stockholders
or any preferred stockholder subordinate in liquidation preference, Series B
preferred stockholders are entitled to receive, out of the assets of Endorex
legally available for distribution to its stockholders, the original purchase
price per share and any amount due from declared but unpaid dividends. If the
legal funds are insufficient to fully pay the amount due to the Series B
preferred stockholders, the Series B
107
preferred stockholders will share ratably in any distribution of assets in
proportion to the respective amounts which would be payable to them.
ADDITIONAL RIGHTS
Endorex may redeem the Series B preferred stock by meeting the requirements
set forth in Endorex's certificate of incorporation. Series B preferred
stockholders may convert their shares into common stock by following the
requirements set forth in the certificate of incorporation. If not converted
earlier, and in the event that Endorex's common stock meets certain trading and
listing requirements set forth in its certificate of incorporation, on or after
January 21, 2003, the Series B preferred stock shall automatically convert into
common stock. As of October 15, 2001, the total number of shares of Series B
preferred stock outstanding was 100,410, convertible into 1,350,569 shares of
Endorex common stock.
SERIES C CONVERTIBLE PREFERRED STOCK VOTING, DIVIDEND, AND LIQUIDATION RIGHTS
VOTING RIGHTS
The Series C preferred stock is generally non-voting stock. Without the
approval of holders of Series C preferred stock representing at least a majority
of the then outstanding shares of Series C preferred stock, however, Endorex may
not authorize the issuance of any equity security having voting, dividend,
liquidation or redemptive preferences superior to the Series C preferred stock.
DIVIDENDS
The Series C preferred stock is paid a dividend at the rate of seven percent
(7%) per annum payable in shares of Series C preferred stock. Such dividends are
cumulative and accrue annually. In addition, if the board of directors pays a
dividend or a distribution to the then outstanding stockholders of common stock
of Endorex (other than a dividend payable solely in shares of common stock), the
holders of the Series C preferred stock are entitled to the amount of dividends
per share they would have received if they converted their shares into whole
shares of common stock.
LIQUIDATION RIGHTS
In the event of a liquidation, before any payment to the common stockholders
or any preferred stockholder subordinate in liquidation preference, Series C
preferred stockholders are entitled to receive, out of the assets legally
available for distribution to its stockholders, the original purchase price per
share and any amount due from declared but unpaid dividends. If the legal funds
are insufficient to fully pay the amount due to the Series C preferred
stockholders, the Series C preferred stockholders will share ratably in any
distribution of assets in proportion to the respective amounts which would be
payable to them.
ADDITIONAL RIGHTS
The Series C preferred stock may be exchanged for the common stock of
Endorex Newco, Ltd. or converted into Endorex common stock by following the
requirements set forth in the certificate of incorporation. The Series C
preferred stock is not redeemable. If not converted earlier, the Series C
preferred stock will automatically convert into common stock of Endorex on
October 21, 2002. As of October 15, 2001, the total number of shares of
Series C preferred stock outstanding was 97,603, convertible into 1,101,614
shares of Endorex common stock.
DIVIDENDS
Endorex has never paid a cash dividend and has no plans to pay cash
dividends in the future.
108
ANTITAKEOVER EFFECTS OF DELAWARE LAW
Endorex is subject to the provisions of Section 203 of the Delaware General
Corporation Law, or DGCL. Subject to certain exceptions, Section 203 prohibits a
publicly held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a certain period of time. That period is
three years after the date of the transaction in which the person became an
interested stockholder, unless the interested stockholder attained that status
with the approval of the board of directors or unless the business combination
is approved in a prescribed manner. A "business combination" includes certain
mergers, asset sales and other transactions resulting in a financial benefit to
the interested stockholder. Subject to certain exceptions, an "interested
stockholder" is a person who, together with his or her affiliates and
associates, owns, or owned within three years prior, 15% or more of the
corporation's voting stock. The existence of this provision may have an
anti-takeover effect with respect to transactions not approved in advance by the
board of directors, including discouraging attempts that might result in a
premium over the market price for shares of common stock held by stockholders.
PROVISIONS OF ENDOREX CERTIFICATE OF INCORPORATION AND BYLAWS THAT MAY PREVENT
TAKEOVERS
Endorex's certificate of incorporation contains provisions that may delay,
defer or prevent a change in control and make removal of its management more
difficult. As described before, the board of directors of Endorex may issue and
designate shares of preferred stock without stockholder approval. Such preferred
stock could have a dilutive effect on the shares outstanding, thereby
discouraging a takeover.
INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF LIABILITY
Endorex's certificate of incorporation limits the liability of directors and
officers to the fullest extent permitted by the Delaware General Corporation
Law. In addition, Endorex's certificate of incorporation and bylaws provide that
Endorex will indemnify its directors and officers to the fullest extent
permitted by the Delaware General Corporation Law.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for Endorex's common stock is American
Stock Transfer & Trust Co.
109
COMPARISON OF RIGHTS OF STOCKHOLDERS OF CTD AND ENDOREX
SET FORTH BELOW IS A DESCRIPTION OF CERTAIN DIFFERENCES BETWEEN THE RIGHTS
OF CTD AND ENDOREX STOCKHOLDERS. WHILE WE BELIEVE THAT THE DESCRIPTION COVERS
THE MATERIAL DIFFERENCES BETWEEN THE TWO, THIS SUMMARY MAY NOT CONTAIN ALL THE
INFORMATION THAT IS IMPORTANT TO YOU. YOU SHOULD READ CAREFULLY THIS JOINT PROXY
STATEMENT/PROSPECTUS AND THE OTHER DOCUMENTS TO WHICH WE REFER FOR A MORE
COMPLETE UNDERSTANDING OF THE DIFFERENCES IN THE RIGHTS OF HOLDERS OF CTD AND
ENDOREX SECURITIES.
ENDOREX CTD
(DELAWARE) (DELAWARE)
-------------------------------------------- --------------------------------------------
SECURITIES MARKETS
- Endorex common stock is traded on the - There is no established trading market
American Stock Exchange under the symbol for CTD common stock.
"DOR."
CAPITALIZATION: COMMON STOCK
- 50,000,000 shares of common stock, $0.001 - 25,000,000 shares of common stock, $0.001
par value per share. par value per share.
- 12,741,858 shares of Endorex's common - 5,000,000 shares of CTD's common stock
stock were outstanding as of October 15, were outstanding as of October 15, 2001.
2001.
CAPITALIZATION: PREFERRED STOCK
- 4,600,000 shares of preferred stock, - 10,000,000 shares of preferred stock,
$0.001 par value per share, of which $0.001 par value per share, of which
200,000 shares are designated Series B 9,515,000 shares are designated as Series
convertible preferred stock, $0.05 par A convertible preferred stock.
value per share, and 200,000 shares are
designated as Series C convertible
preferred stock, par value $0.05 per
share.
- Endorex's board of directors may - CTD's board of directors may establish
establish from time to time the number of from time to time the number of shares to
shares to be included in a series and fix be included in a series and fix the
the designation, powers, preferences and designation, powers, preferences and
rights of the shares to be included in rights of the shares to be included in
each series and the qualifications, each series and the qualifications,
limitations and restrictions thereof limitations and restrictions thereof
(subject to certain limitations relating (subject to certain limitations relating
to the issuance of preferred stock senior to the issuance of preferred stock senior
to existing classes). The holders of to existing classes). The holders of
shares of Series B and Series C preferred shares of Series A preferred stock are
stock are not entitled to any preemptive not entitled to any preemptive or
or subscription rights in respect of any subscription rights in respect of any
securities of Endorex. securities of CTD.
- 100,410 shares of Series B preferred - 7,628,750 shares of Series A preferred
stock were outstanding as of October 15, stock were outstanding as of October 15,
2001. 2001.
- 97,603 shares of Series C preferred stock
were outstanding as of October 15, 2001.
110
ENDOREX CTD
(DELAWARE) (DELAWARE)
-------------------------------------------- --------------------------------------------
VOTING RIGHTS
- COMMON STOCK. Entitled to one vote per - COMMON STOCK. Entitled to one vote per
share on all matters to be voted upon by share on all matters to be voted upon by
the common stockholders. the common stockholders.
- SERIES B PREFERRED. Entitled to one vote - SERIES A PREFERRED. Entitled to the
for each full share of common stock into number of votes equal to the largest
which each share of Series B preferred number of full shares of common stock
stock could then be converted at the into which the shares of Series A
record date for the vote at issue. In any preferred stock of the applicable holder
vote by the holders of shares of Series B could be converted at the record date for
preferred stock acting as a class, each the determination of the stockholders
holder of shares of Series B preferred entitled to vote on such matters or, if
stock is entitled to one vote for each no such record date is established, at
share of Series B preferred stock held. the date such vote is taken.
- SERIES C PREFERRED. In any vote by the
holders of shares of Series C preferred
stock acting as a class, each holder of
shares of Series C preferred stock is
entitled to one vote for each share of
Series C preferred stock held.
CUMULATIVE VOTING
Under the DGCL, cumulative voting in the election of directors is not available unless
specifically provided for in the certificate of incorporation.
- The Endorex certificate of incorporation - The CTD certificate of incorporation does
does not specifically provide for not specifically provide for cumulative
cumulative voting, so cumulative voting voting, so cumulative voting is not
is not available to Endorex stockholders. available to CTD stockholders.
DIVIDENDS
- COMMON STOCK. Dividends may be declared - COMMON STOCK. Subject to preferences that
and paid from funds lawfully available may be applicable to any outstanding CTD
therefor as and when determined by the preferred stock, the holders of CTD
board of directors and subject to any common stock are entitled to receive such
preferential dividend rights of any then dividends, if any, as may be declared
outstanding preferred stock. As of the from time to time by the CTD board out of
date of this joint proxy legally available funds. As of the date
statement/prospectus, no such dividends of this joint proxy statement/prospectus,
have ever been declared or paid. no such dividends have ever been declared
or paid.
111
ENDOREX CTD
(DELAWARE) (DELAWARE)
-------------------------------------------- --------------------------------------------
- SERIES B PREFERRED STOCK. The holders of - SERIES A PREFERRED STOCK. The holders of
the shares of Series B preferred stock Series A preferred stock are entitled to
are entitled to receive dividends at the receive dividends, out of any assets
rate of 8% per year, payable in shares of legally available, in cash, stock or
Series B preferred stock. otherwise. Such dividends are payable
only when, as and if declared by the CTD
board; however, such dividends shall
accrue and accumulate and are payable
upon a liquidation event. As of the date
of this prospectus, no such dividends
have ever been declared paid.
- SERIES C PREFERRED STOCK. The holders of
shares of Series C Preferred are entitled
to receive dividends at the rate of 7%
per year, payable in shares of Series C
preferred stock.
PREFERENCES RELATING TO LIQUIDATION, DISSOLUTION, WINDING UP
- COMMON STOCK. In the event of a - COMMON STOCK. In the event of a
liquidation, dissolution or winding up of liquidation, dissolution or winding up of
Endorex, the holders of Endorex common CTD, the holders of CTD common stock are
stock are entitled to receive an equal entitled to share ratably in all assets
portion of the net assets of Endorex remaining after payment of liabilities,
available for distribution to the common subject to prior rights of CTD preferred
stockholders, subject to any preferential stock, if any, then outstanding.
rights of Endorex preferred stockholders,
if any, then outstanding.
- PREFERRED STOCK. In the event of a - SERIES A PREFERRED STOCK. In the event of
liquidation, dissolution or winding up of a liquidation, dissolution or winding up
Endorex, each holder of shares of Series of CTD, each holder of shares of Series A
B or Series C preferred stock is entitled preferred stock entitled to receive,
to receive, prior to any payment or prior and in preference to holders of all
distribution to the holders of common other series of CTD preferred stock and
stock, an amount equal to the sum of (1) common stock, an amount equal to $2.00
the original purchase price per share, per share (subject to adjustments for
which is $100 per share, and (2) an stock splits, stock combinations and the
amount equal to any declared but unpaid like) plus declared but unpaid dividends,
dividends thereon. if any, and all accrued but unpaid
preferred dividends (as described in
CTD's certificate of incorporation) on
those shares (collectively, the
"Liquidation Amount").
PROVISIONS RELATING TO MERGER, CONSOLIDATION, OR SALE OF ASSETS
- COMMON STOCK. None. - COMMON STOCK. None.
112
ENDOREX CTD
(DELAWARE) (DELAWARE)
-------------------------------------------- --------------------------------------------
- PREFERRED STOCK. Endorex's certificate of - SERIES A PREFERRED STOCK. CTD's
incorporation provides that a certificate of incorporation provides
liquidation, dissolution, or winding up that in the event of consolidation or
of Endorex is deemed to have occurred merger of CTD or sale of all or
upon the (A) acquisition of Endorex by substantially all of CTD's assets,
another entity unless Endorex's holders of Series A preferred stock are
stockholders of record immediately prior entitled to receive for each share, in
to that acquisition will, immediately cash or securities received from the
after that acquisition (by virtue of acquiring corporation, an amount equal to
securities issued as consideration for the Liquidation Amount. (Prior to
Endorex's acquisition) hold at least 50% effectiveness of the merger, CTD is
of the voting power of the surviving or required to amend this provision so as to
acquiring entity; or (B) sale of all or limit the maximum aggregate amount
substantially all of the assets of payable to the holders of the Series A
Endorex. Consequently, any such preferred stock to the merger
acquisition or sale would trigger the consideration payable to them as set
preferred stock liquidation preference forth in the merger agreement.)
described above.
REDEMPTION; EXCHANGE
- COMMON STOCK. Not redeemable. - COMMON STOCK. Not redeemable.
- SERIES B PREFERRED STOCK. Endorex may, at - SERIES A PREFERRED STOCK. CTD may, at its
its option, if the requirements set forth option at any time after May 9, 2003,
in Section C.4 of the Endorex certificate redeem the Series A preferred stock in
of incorporation are met, redeem those whole, but not in part for an amount per
shares by paying an amount in cash equal share equal to $2.00 (subject to
to the then-applicable liquidation appropriate adjustment to reflect any
preference and accrued and unpaid stock split, combination,
dividends for those shares in accordance reclassification or reorganization of the
with Section C.4 of the Endorex Series A preferred stock) plus all
certificate of incorporation. declared and unpaid dividends thereon, to
and including the redemption date and all
accrued but unpaid preferred dividends
(in accordance with Section 7 of the CTD
certificate of incorporation) to and
including the redemption date.
- SERIES C PREFERRED. Not redeemable at any
time after the issuance of shares of
Series C preferred stock. Each holder of
those shares may, at its option, on one
occasion, elect to exchange those shares
for shares of common stock, par value
$1.00 per share, of Endorex Newco, Ltd.,
a Bermuda corporation, provided that all
of the holders of Series C preferred
stock elect to exercise this exchange
right at the same time and have not
previously exercised any portion of their
conversion rights (as described below).
113
ENDOREX CTD
(DELAWARE) (DELAWARE)
-------------------------------------------- --------------------------------------------
CONVERSION RIGHTS
- COMMON STOCK. None. - COMMON STOCK. None.
- SERIES B PREFERRED STOCK. Each share of - SERIES A PREFERRED STOCK. Each holder of
Series B preferred stock is convertible, shares of Series A preferred stock is
at the option of the holder thereof, at entitled at any time to convert those
any time after the date of issuance of shares into CTD common stock at a ratio
that share, into the number of common equal to one share of CTD common stock
shares as is determined in accordance for each share of Series A preferred
with Section C.5.(a) of the Endorex stock, subject to adjustment pursuant to
certificate of incorporation. CTD's certificate of incorporation. All
Additionally, each share of Series B outstanding shares of Series A preferred
preferred stock will automatically be stock will be automatically converted
converted into shares of common stock in into shares of common stock upon
accordance with Section C.5.(b) of the occurrence of certain events stated in
Endorex certificate of incorporation. CTD's certificate of incorporation.
- SERIES C PREFERRED STOCK. Each share of
Series C preferred stock is convertible,
at the option of the holder thereof, at
any time two years after the date of
issuance of that share into the number of
common shares as is determined in
accordance with Section D.5.(a) of the
Endorex certificate of incorporation.
Additionally, each share of Series C
preferred stock will automatically be
converted into shares of common stock in
accordance with Section D.5.(b) of the
Endorex certificate of incorporation.
PROTECTIVE PROVISIONS
- COMMON STOCK. None. - COMMON STOCK. None.
- PREFERRED STOCK. Approval of holders of - SERIES A PREFERRED. Approval of holders
at least a majority of the of at least a majority of the
then-outstanding shares of Series B or then-outstanding shares of Series A
Series C preferred stock, voting preferred stock, voting separately as a
separately as a class, is required before class, is required before CTD may take
Endorex may (1) increase or decrease the any of certain actions described in CTD's
authorized or outstanding number of certificate of incorporation, except as
shares of such series so as to adversely provided therein.
affect that series' stockholders, or (2)
authorize or issue any other equity
securities, or securities convertible
into or exercisable for any equities
security, with a preference over, or on a
parity with, such Series B or Series C
preferred stock with respect to voting,
dividends, liquidation or redemption.
114
ENDOREX CTD
(DELAWARE) (DELAWARE)
-------------------------------------------- --------------------------------------------
SPECIAL MEETINGS
- The Endorex bylaws provide that special - Under the CTD bylaws, special meetings of
meetings of the stockholders may be the stockholders may be called by the
called by the Chairman of the board of Chairman of the board of directors.
directors or the President, and may be
called by the President or Secretary at
the request in writing of a majority of
the Endorex board or of stockholders
owning a majority of the shares of
Endorex capital stock issued and
outstanding and entitled to vote.
- Under the Endorex bylaws, special - The CTD bylaws provide that special
meetings of the board of directors may be meetings of the board of directors may be
called by the Chairman of the board of called by the Chairman of the board of
directors, the President, or by two or directors or the President.
more directors on at least two days'
notice by telegram, or on at least three
days' notice if sent by mail.
BOARD OF DIRECTORS
- The Endorex board currently consists of - The CTD board currently consists of four
seven directors. (Under the merger directors. Under the CTD bylaws, the
agreement, Endorex is required to cause board may not have more than nine or less
the board to consist of nine directors than three members. Election of CTD
upon effectiveness of the merger.) The directors need not be by written ballot.
Endorex certificate of incorporation and
bylaws provide that the number of
directors may be fixed in the bylaws or
by amendment thereof duly adopted by the
Endorex board or the Endorex
stockholders. However, if no such
determination is made by either the
Endorex board or its stockholders, the
number of Endorex directors will be
three. Election of Endorex directors need
not be by written ballot.
WRITTEN CONSENTS
Under the DGCL, stockholders may take action by written consent in lieu of voting at a
stockholders' meeting unless a corporation eliminates stockholder ability to act by written
consent in its certificate of incorporation.
- The Endorex certificate of incorporation - The CTD certificate of incorporation and
and bylaws specifically provide for bylaws do not address the ability of its
action by written consent of its stockholders to act by written consent,
stockholders. and accordingly CTD stockholders may act
by written consent.
115
ENDOREX CTD
(DELAWARE) (DELAWARE)
-------------------------------------------- --------------------------------------------
VACANCIES ON BOARD; REMOVAL OF DIRECTORS
- Vacancies on the Endorex board may be - Vacancies on the CTD board may be filled
filled by a majority vote of the by a majority vote of the remaining
remaining board. board.
- Directors may be removed with or without - Directors may be removed with or without
cause at any time by majority vote of cause at any time by majority vote of
stockholders. stockholders.
AMENDMENTS TO BYLAWS
- The Endorex certificate of incorporation - The CTD certificate of incorporation and
and bylaws provide that the Endorex board bylaws provide that the CTD board may
may alter or repeal the Endorex bylaws by make, alter or repeal the CTD bylaws
an affirmative vote of a majority of the subject to the power of the stockholders
entire board. to alter or repeal the bylaws.
LIMITATION ON DIRECTOR LIABILITY
- Directors' liability is limited to the - Directors' liability is limited to the
fullest extent permitted by Delaware Law. fullest extent permitted by Delaware Law.
INDEMNIFICATION
- Indemnification of officers and directors - Indemnification of officers and directors
provided to the fullest extent of provided to the fullest extent of
Delaware Law. Delaware Law.
APPRAISAL RIGHTS
Under the DGCL, a stockholder of a corporation participating in certain major corporate
transactions may be entitled, under varying circumstances, to appraisal rights pursuant to
which that stockholder may receive cash in the amount of the fair market value of its shares
in lieu of the consideration it would otherwise receive in the transaction. These rights are
not available with respect to a merger or consolidation by a corporation with shares either
listed on a national securities exchange or held of record by more than 2,000 holders. See
"The Merger--Appraisal Rights."
- Endorex common stock is listed on the - CTD is not publicly traded and has fewer
American Stock Exchange. Therefore, than 2,000 stockholders. Therefore,
appraisal rights may not be available to appraisal rights are available to CTD
Endorex stockholders in the event Endorex stockholders in connection with the
is acquired by another corporation. merger.
116
DESCRIPTION OF CTD
THE FOLLOWING SECTION CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE
RISKS AND UNCERTAINTIES. CTD'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS,
INCLUDING THOSE SET FORTH IN "RISK FACTORS" AND ELSEWHERE IN THIS JOINT PROXY
STATEMENT/PROSPECTUS.
OVERVIEW OF CTD'S BUSINESS
CTD is a development stage pharmaceutical company. Its primary strategy is
to develop, through its subsidiaries, innovative oral and mucosal formulations
and new therapeutic indications of drugs that previously have been approved by
the FDA for marketing in the United States. Such compounds are known as approved
chemical entities, or ACEs; medicinal compounds that have not been approved by
the FDA are known as new chemical entities, or NCEs. CTD currently has in
clinical development two ACE drug products, orBec-TM- and Oraprine-TM-;
orBec-TM- is in phase III clinical trials and Oraprine-TM- is in phase I
clinical trials. CTD also has a drug product, Metropt-TM-, in preclinical
development for which an Investigational New Drug, or IND, application has been
filed with and approved by the FDA. CTD believes that its strategy of developing
new oral or mucosal formulations of ACEs and products based upon ACEs to treat
new indications will allow it to develop marketable products faster, with fewer
risks, and less expensively than is usually the case with traditional drug
development. During fiscal years 2000 and 1999, CTD's expenditures on research
and development were $1,324,000 and $955,000, respectively.
THE DRUG APPROVAL PROCESS
The drug approval process is extremely expensive and is rigorously regulated
by governmental agencies, including, in the United States, the FDA. Each drug
must undergo a series of preclinical and clinical trials before the FDA will
consider approving it for commercial sale. The FDA or any company conducting
drug trials can discontinue those trials at any time if it feels that patients
are being exposed to an unacceptable health risk or if there is not enough
evidence that the drug is effective. The FDA may also require a company to
provide additional information or conduct additional tests before it will permit
a drug to proceed from one phase of trials to the next.
ADVANTAGES OF DEVELOPING ACE DRUG PRODUCTS
CTD's primary strategy is to focus on developing new oral or mucosal
formulations of ACEs and products based upon ACEs to treat new indications.
There are significant advantages to developing products from drugs that have
already been approved by the FDA.
SPEED AND COST
The ACEs on which CTD's products are based have established safety and
therapeutic profiles for uses that differ from the uses CTD plans. CTD believes
that as a consequence, the approval process will be quicker and cheaper than
would be the case with NCEs, as the FDA allows applicants developing ACE
products to rely on previous study results to support safety and efficacy
claims. To date, the FDA has not requested that CTD duplicate costly and
time-consuming preclinical animal studies and safety studies with respect to
CTD's ACE product candidates, and instead has allowed CTD to use existing data
and peer review journal articles in support of the approval process of its ACE
product candidates; this has allowed CTD to begin human clinical trials sooner
than otherwise would have been possible.
117
INCREASED LIKELIHOOD OF MULTIPLE USES
ACE products that are approved for treatment of one disease are sometimes
found effective in treating other medical conditions. Doctors and scientists
that use or prescribe a given ACE have an understanding of the chemical and
medicinal properties associated with that ACE and are often able to identify new
uses and new disease targets for that ACE.
PROPRIETARY RIGHTS
Proprietary drug products can be distinguished from generic drug products,
which are those that any company can manufacture without restriction and without
the need to acquire rights from any other party, generally because the patent or
other source of exclusivity has expired or been revoked. Generic drug companies
rely on low-margin, high-volume sales to achieve profits.
By developing new formulations of, or new therapeutic indications for, the
ACEs to which CTD has obtained patent rights, CTD may be able to gain an
advantage over competitors by preventing them, for a limited period, from
marketing that ACE in a manner that infringes those proprietary rights. CTD's
products represent new uses for existing drugs, and although it is not possible
to obtain composition-of-matter patents for these compounds, it is possible to
secure method-of-use patent protection for those new uses. However, a
method-of-use patent covering use of a given drug to treat a certain disease
only prevents competitors from using that drug to treat that disease, and is
therefore in practice more difficult to enforce than composition-of-matter
patents. CTD has an exclusive license to an existing United States patent that
claims the use of orally delivered beclomethasone for PREVENTION of tissue
damage associated with intestinal graft-versus-host disease, or GVHD, whereas
CTD's only phase III clinical trials are for TREATMENT of GVHD. A United States
patent provides exclusivity for 20 years from the date the patent application is
filed.
Another source of exclusivity is the FDA's "orphan drug products" program,
which aims to promote development of new treatments for rare diseases. Without
special incentives, drug companies do not focus on a rare disease, as it
represents a small market. Under the Orphan Drug Act of 1983, the FDA is
permitted to grant "orphan drug" status to any drug products that are intended
to treat a "rare disease or condition," defined as a disease or condition that
affects fewer than 200,000 persons in the United States. A company developing an
orphan drug is accorded four to seven years of market protection from
competitors, as well as certain tax credits for the amounts spent on human
clinical trials. Although not approved for sale in the United States, the FDA
has designated orBec-TM- and Oraprine-TM- as orphan drugs for select diseases.
Finally, the Hatch-Waxman Amendments of 1984 include exclusivity provisions
that CTD believes may apply to its ACE drug products. One is the three-year
exclusivity period for a new drug application, or NDA, that the FDA approves for
ACE drug products supported by new clinical investigations. The other is the
three-year exclusivity period for a supplemental new drug application, or sNDA,
that the FDA approves for ACE drug products that are supported by new clinical
investigations to supplement an existing NDA. These exclusivity periods would
run concurrently with any period of market protection accorded to any CTD
product under the FDA's orphan drug products program. If CTD develops orBec-TM-
or Oraprine-TM- for additional uses and files sNDAs, those products may be
eligible to apply for this extra exclusivity.
CTD has a license to the United States Patent No. 6,096,731, which expires
on Sept. 10, 2018. With regard to those pending patent applications owned by
CTD, assuming that patents issue from CTD's existing patent applications, those
patents will generally expire between 2018 and 2021. Generally, a United States
patent provides exclusivity for 20 years from the date the patent application
was filed but this period is subject to any terminal disclaimers that apply. In
addition, it is possible that these patents, including United States Patent
No. 6,096,731, may expire at an even earlier date, if found to be invalid for
any reason.
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CTD'S PRODUCTS
Each of CTD's principal products is listed in the following table, along
with the target disease and clinical trial status of that product and the CTD
subsidiary responsible for developing it:
PRODUCT INDICATION DEVELOPMENTAL STATUS CTD SUBSIDIARY
----------------------- ---------------------------- ----------------------- -----------------------
orBec-TM- Treatment of intestinal GVHD Phase III ongoing Enteron
Pharmaceuticals, Inc.
Treatment of Crohn's disease Phase II (planned) Enteron
Pharmaceuticals, Inc.
Prevention of ulcerative Phase II (planned) Enteron
colitis Pharmaceuticals, Inc.
Prevention of GVHD Phase II (planned) Enteron
Pharmaceuticals, Inc.
Oraprine-TM- Bioequivalent to tablet form Bioequivalency trial Oral Solutions, Inc.
of AZA (planned); compound
requires reformulation
Oral Suspension Drug Preclinical research Formulation
Delivery Technology Technologies, Inc.
Metropt-TM- Blepharitis, dry eye IND filed RxEyes, Inc.
ORBEC-TM-
CTD's lead product, orBec-TM-, is an oral formulation of beclomethasone
dipropionate, or BDP, a site-active corticosteroid drug that was originally
synthesized in the 1960s. It has been approved by the FDA and sold by Glaxo
Wellcome, as Beconase, in an inhaled formulation for the treatment of asthma,
allergic rhinitis, and nasal polyposis.
CTD's development of orBec-TM- is the result of CTD's majority-owned
subsidiary, Enteron Pharmaceuticals, Inc., having obtained an exclusive license
from Dr. George McDonald to develop oral formulations of BDP to treat GVHD.
Dr. George McDonald is Head of Gastroenterology and Hepatology at the Fred
Hutchinson Cancer Research Center and a Professor of Internal Medicine and
Gastroenterology at the University of Washington Medical Center. Under this
license, Enteron obtained rights to know-how and an issued patent covering the
use of orBec-TM- to prevent tissue damage associated with GVHD. In addition,
Dr. McDonald and Nicholas Stergiopoulos, CTD's Director of Corporate
Development, assigned to Enteron three patent applications covering aspects of
treating intestinal GVHD, Crohn's disease, ulcerative colitis, and inflammatory
bowel disease.
The composition-of-matter patent covering BDP has expired. To CTD's
knowledge, there are no issued method patents regarding the use of BDP to treat
GVHD or gastrointestinal diseases. Third parties own patents regarding use of
proprietary delivery systems, such as sustained release or suppositories, which
claim use of BDP to treat various gastrointestinal diseases. CTD believes that
its methods are substantially different from those described in the other
patents.
The BDP used in orBec-TM- is manufactured under an FDA-approved drug master
file. orBec-TM- is formulated and tableted under good manufacturing procedures,
or GMP, at Pharmaceutics International, Inc., a contract manufacturing firm.
orBec-TM- is then packaged into blister packets by PCI Clinical Services, Inc.,
a division of Cardinal Health Corporation. CTD relies on contract manufacturing
firms and does not own or control a manufacturing facility.
CTD is currently testing orBec-TM- in a multi-center phase III clinical
trial for the treatment of intestinal GVHD, a life-threatening disorder that can
arise following a bone marrow transplant. GVHD affects the gastrointestinal
tract, skin, and liver of patients who have received bone marrow transplants;
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it is thought to start in the gastrointestinal tract and spread to the skin and
liver. The symptoms of intestinal GVHD typically include severe diarrhea,
anorexia, vomiting, and death of the cells that line the intestinal tract.
According to the National Marrow Donor Program, 12,748 allogenic bone-marrow
transplants (transplants of blood or bone marrow cells from another person) were
performed worldwide from January 1, 2001, through July 31, 2001. According to
published studies and despite improved preventive measures, acute GVHD still
occurs in 50% to 70% of transplants where the donor was HLA-mismatched and in
30% to 40% of transplants where the donor was HLA-matched. Special blood tests,
called human leukocyte antigen, or HLA, typing, determine whether a patient has
a suitable donor for bone-marrow-cell transplant. These same studies indicate
that intestinal GVHD accounts for 15% to 30% of all cases of GVHD.
Intestinal GVHD is typically treated by high doses of Prednisone, a potent
corticosteroid, along with Cyclosporin and other immunosuppressive agents. The
systemic immunosuppression caused by immunosuppressing and the systemic side
effects of corticosteroids can result in infection and ultimately death.
orBec-TM- allows for larger doses of BDP to be delivered to the afflicted
gastrointestinal area without the significant side effects associated with other
steroids, due to the rapid conversion and deactivation of BDP and incomplete
absorption of BDP and its metabolites. Availability of a safe and effective
treatment for GVHD should increase the number of patients who could benefit from
bone marrow transplantation by improving the risk-to-benefit ratio of the
treatment.
orBec-TM- has completed a phase I/II clinical trial and a randomized phase
II/III clinical trial, achieving statistical significance and its primary
endpoint, increasing the caloric intake of patients suffering from intestinal
GVHD who were treated with orBec-TM- compared to those treated with a placebo.
On October 25, 2000 the FDA granted "fast track" status of CTD's application for
use of orBec-TM- for the treatment of intestinal GVHD. Under special
circumstances, the FDA grants a company's product fast track review, in which
case the FDA must review the related NDA within 6 months. Fast-track designation
is typically granted when a product treats unmet medical needs. orBec-TM- has
also been designated as an "orphan drug" by the FDA for treatment of intestinal
GVHD and prevention of GVHD. CTD started a phase III clinical trial in
May 2001. The multicenter phase III clinical trial will consist of a total of
130 patients. The results of this phase III trial will form the basis for an NDA
that CTD plans to file with the FDA.
Concurrently with the phase III clinical trial, CTD plans to initiate one or
more phase II clinical trials of orBec-TM- for treatment of Crohn's disease and
ulcerative colitis and prevention of GVHD. Crohn's disease is a serious
inflammatory disease of the gastrointestinal tract. It predominates in the small
intestine and the large intestine, but may occur in any section of the
gastrointestinal tract. The disease can be localized in patches of bowel.
Crohn's disease usually causes diarrhea and painful abdominal cramps, often
results in fever, and at times causes rectal bleeding. Loss of appetite and
subsequent weight loss may also occur. Crohn's disease is chronic and its cause
is not known. Medication that is currently available decreases inflammation and
usually controls the symptoms, but does not provide a cure for the disease.
Ulcerative colitis is an inflammatory disease of the large intestine and is
characterized by inflammation and ulceration of the innermost lining of the
colon. Symptoms characteristically include diarrhea with or without rectal
bleeding and, often, abdominal pain. Ulcerative colitis differs from Crohn's
disease in significant ways. It affects only the colon, where the inflammation
is maximal in the rectum and extends up the colon in a continuous manner without
any "skip" areas of normal intestine. Further, only the innermost lining of the
colon is affected. In contrast, Crohn's disease can affect the entire thickness
of the bowel wall.
Because Crohn's disease behaves similarly to ulcerative colitis, from which
it may be difficult to differentiate, the two disorders are grouped together as
inflammatory bowel disease, or IBD. According to the Crohn's and Colitis
Foundation, there are currently in the United States approximately 800,000
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persons suffering from inflammatory bowel disease (roughly half of those
patients have Crohn's disease, while the other half have ulcerative colitis),
and each year there are in the United States approximately 20,000 new cases of
IBD.
Upon approval by the FDA, CTD plans to conduct further clinical trials of
the effectiveness of orBec-TM- in treating ulcerative colitis and Crohn's
disease and in preventing GVHD. Assuming positive results from the clinical
trials, this will entail filing sNDAs for the above-mentioned indications.
ORAPRINE-TM-
Through its majority-owned subsidiary, Oral Solutions, Inc., CTD is
developing Oraprine-TM-, an oral suspension of Azathioprine, or AZA. The
composition-of-matter patent covering AZA has expired. In 1999, Oral Solutions
licensed the know-how and clinical data relating to Oraprine-TM- from Dr. Joel
B. Epstein. Dr. Epstein also assigned to Oral Solutions a United States patent
application covering the use of Oraprine-TM- to treat oral autoimmune diseases.
AZA is a widely used immunosuppressive medication in clinical medicine. AZA
is commonly prescribed in tablet form to organ transplant patients to suppress
the body's defenses against foreign bodies, specifically the transplanted organ.
This increases the chances of preventing the transplanted organ from being
rejected by the patient.
This suppression of the body's defenses makes AZA useful in treating
rheumatoid arthritis. AZA is prescribed as a "second-line" treatment for severe,
active rheumatoid arthritis in patients who do not respond to initial arthritis
medications. According to IMS Health, in 2000 approximately one million units of
AZA were sold in the United States for total revenues of $65 million.
A phase I bioequivalency clinical trial has been completed in the United
States for Oraprine-TM-. This phase I trial demonstrated that Oraprine-TM- is
equivalent to the currently marketed Imuran-Registered Trademark- tablet. CTD
plans to discuss these results with the FDA, and currently anticipates
conducting a larger bioequivalency trial, the results of which would be used to
file for FDA approval of the oral suspension formula of AZA. Before conducting
this trial, CTD will need to manufacture additional quantities of Oraprine-TM-.
It will at the same time reformulate the Oraprine-TM- suspension, which will add
at least several months to the approval process.
CTD plans to file an Abbreviated New Drug Application, or ANDA, for
Oraprine-TM-. CTD proposes to position Oraprine-TM- as a specialty generic
product, to be used by patients with autoimmune disorders who cannot swallow
medicines in tablet form. In particular, children, the elderly, and cancer
patients are prone to this difficulty. Post-approval, CTD plans to conduct
studies in patients who are afflicted with chronic oral ulcerations, such as
oral GVHD and other autoimmune diseases of the mouth and upper esophagus. CTD
has completed a pilot phase I/II clinical efficacy trial using Oraprine-TM- to
treat oral GVHD and has also successfully completed a phase I bioequivalency
trial demonstrating that Oraprine-TM- is bioequivalent to the tablet
Imuran-Registered Trademark-. CTD has filed patent applications for the use of
Oraprine-TM- to treat oral autoimmune disorders. In addition, the FDA has
granted orphan drug status for CTD's application for use of Oraprine-TM- for the
treatment of oral GVHD.
ORAL-SUSPENSION DRUG DELIVERY TECHNOLOGY
Formulation Technologies, Inc., a wholly owned subsidiary of CTD, has an
option, expiring January 20, 2002, to license an oral tablet drug delivery
technology from University Pharmaceutics of Maryland, Inc., a contract
manufacturing organization that is majority-owned by the University of Maryland.
This technology allows a pharmaceutical tablet to rapidly break apart in water
into a suspension that can be swallowed by patients.
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METROPT-TM-
CTD's majority-owned subsidiary, RxEyes, Inc., has licensed rights to two
United States patents and certain foreign patent rights, as well as know-how,
relating to certain aspects of using Metropt-TM-, an ophthalmic formulation of
metronidazole, to treat blepharitis, dry eye, and blepharitis associated dry-eye
syndrome. Metronidazole is a broad-spectrum antibiotic that is especially
effective against anaerobic infections (infections that grow in the absence of
oxygen). In body areas where there is poor central circulation and therefore an
inadequate blood supply, only bacteria that can live without oxygen can survive.
In such conditions, the metronidazole compound changes so as to inhibit the DNA
repair enzymes that normally would repair cells. This kills anaerobic bacteria
but has no effect on aerobic tissues. Metronidazole has been approved by the FDA
for use in oral, vaginal, dermatological, and intravenous forms for a variety of
inflammation-related indications.
CTD has an FDA-approved investigational new drug application, or IND, for
Metropt-TM-. CTD is currently seeking a partner in the ophthalmics industry to
aid in developing Metropt-TM-. CTD is in a dispute with the licensors of
Metropt-TM- regarding whether CTD is required to pay the licensors certain
payments provided for in the license agreement dated April 14, 1998, between CTD
and the licensors. In relation to this dispute, the licensor's have alleged that
CTD is in breach, and communicated their intent to terminate the license
agreement. CTD maintains that it is not required to make those payments, as the
formulation of Metropt-TM- developed by the licensors was not commercially
viable due to sterility problems and because another development stage company
that licensed Metropt-TM- was unable to develop a safe and effective product
based on this formulation. This dispute is not currently the subject of
litigation. To date, CTD has also been unable to prepare a formulation of
Metropt that can be used in the eye without causing excessive discomfort.
ALLERGAN MILESTONE PAYMENTS
CTD's majority-owned subsidiary, Intero Corp., obtained an exclusive license
from Johns Hopkins University to two issued patents and phase II/III clinical
data relating to use of endoscopic injections of BOTOX-Registered Trademark-
(botulinum toxin type A) to treat gastrointestinal disorders, including
achalasia, morbid obesity, sphincter of oddi dysfunction, constipation, and
benign prostatic hyperplasia. CTD was near completion of an FDA-sponsored
multi-center phase II/III clinical trial for the treatment of achalasia, a rare,
life-threatening muscle spasm of the esophageal sphincter, when in
December 1999 CTD sold to Allergan, Inc. the assets of Intero, including the two
issued patents, the clinical data, and the related IND filed by Intero with the
FDA.
As the purchase price for its assets, Intero received a payment of
$3.5 million, of which CTD received approximately $2.9 million. Intero is
entitled to receive a milestone payment of $3 million from Allergan for each of
the first two FDA approvals Allergan is granted for use of the
BOTOX-Registered Trademark- technology acquired from Intero.
MARKETING STRATEGIES
CTD has various licensing and marketing strategies depending on the nature
of its ACE products. One such strategy is the direct marketing of niche ACE
products for rare diseases and conditions. CTD intends to market orBec-TM-, its
lead ACE product for the treatment of intestinal GVHD, directly to physicians
and centers that perform bone marrow transplants. A successful bone marrow
transplant and post-operative treatment of intestinal GVHD requires a
specialized medical team of doctors, nurses, and other support staff at these
major medical centers. Since this represents a small niche market, CTD believes
it can directly market its drug product to the GVHD and bone marrow transplant
specialists at these centers in part by means of special conferences,
symposiums, and lectures catering to the target professionals, as well as
through published papers focusing on this rare medical condition. CTD intends to
promote Oraprine-TM- to patients and medical professionals in a similar manner.
This
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strategy will allow CTD to avoid having to develop an extensive sales and
marketing infrastructure to promote its niche drug products. However, at this
time CTD has no marketing or sales personnel.
Any ACE product that is targeted to a larger market such as Crohn's disease
and ulcerative colitis will require a larger sales force and marketing
infrastructure. CTD may enter into co-marketing arrangements or license
marketing rights to corporate partners that have established marketing forces
with supporting distribution capabilities. CTD's strategy is to negotiate
agreements with potential corporate partners for up-front payments, milestone
payments, a percentage of net product sales, or a combination of these payment
schemes. The revenues that CTD derives from those of its ACE products that
target larger markets will depend on the degree of success achieved by CTD's
corporate partners in licensing, manufacturing, distributing, and marketing
those products.
COMPETITION
The pharmaceutical industry is highly competitive. CTD's competitors are
major pharmaceutical and biotechnology companies, most of whom have considerably
greater financial, technical, and marketing resources than CTD. Another source
of competing technologies is universities and other research institutions, and
CTD faces competition from other companies to acquire rights to those
technologies.
Competition is particularly intense in the gastroenterology and transplant
areas being addressed by CTD. Numerous companies are attempting to develop
technologies to treat GVHD by suppressing, through various mechanisms, the
immune system. Some companies, including Sangstat, Abgenix, and Protein Design
Labs, Inc., are developing monoclonal antibodies to treat GVHD. Biotransplant,
Novartis, Medimmune, and Ariad are developing both gene therapy products and
small molecules to treat GVHD. All of these products are in various stages of
clinical development.
Competition is also intense in the therapeutic area of IBD, including
Crohn's disease and ulcerative colitis. Several companies, including Centocor,
Immunex, and Celgene, have products that are currently FDA approved. These
products are all in the class of tumor necrosis factor modulating drugs. For
example, Centocor, a subsidiary of Johnson & Johnson, markets the drug product
Remicade-Registered Trademark-. Other drugs used to treat IBD include another
orally-active corticosteroid called budesonide, which is being marketed by
AstraZeneca in Europe and Canada under the tradename of Entocort. Entocort is
structurally similar to BDP, and AstraZeneca has recently filed for FDA approval
in the United States. In addition, Salix Pharmaceuticals, Inc. markets an
FDA-approved therapy for ulcerative colitis.
Several companies have also established various colonic drug delivery
systems to deliver therapeutic drugs to the colon for treatment of Crohn's
disease. These companies include Ivax Corporation, Inkine Pharmaceutical
Corporation, and Elan Pharmaceuticals, Inc. Other approaches to treat
gastrointestinal disorders include antisense and gene therapy. Isis
Pharmaceuticals, Inc. is in the process of developing antisense therapy to treat
Crohn's disease.
The pharmaceutical industry has undergone, and is expected to continue to
undergo, rapid and significant technological change, and competition is expected
to intensify as technical advances are made in each field and become more widely
known. In order to compete effectively, CTD will need to continually upgrade its
scientific expertise and technology, identify and retain capable management, and
pursue scientifically feasible and commercially viable opportunities. CTD's
competition will be determined in part by the indications for which its products
are developed and ultimately approved by the regulatory authorities. An
important factor in competition will be the timing of market introduction and
the cost of CTD's products and those of its competitors. Accordingly, the
relative speed with which CTD can develop products and complete clinical trials
and approval processes and supply commercial quantities of products to the
market will likely be an important competitive factor.
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EMPLOYEES
As of October 15, 2001, CTD had two full-time employees and one part-time
employee, all of whom are engaged in management and research-and-development
activities. CTD, through its subsidiaries, relies heavily on consultants to
perform tasks, including regulatory analysis, medical monitoring,
pharmacokinetic analysis (relating to the distribution of drug products in the
body), and statistical analysis.
PROPERTIES
CTD leases a 1,000-square-foot office facility in Miami Beach, Florida,
under a lease with an unaffiliated party. The lease term ends May 1, 2002.
Pursuant to an oral agreement with CTD, Steve H. Kanzer has since August 1,
2001, paid and will continue to pay through the term of this lease, half of
CTD's rent and utilities costs.
CORPORATE STRUCTURE
CTD is a holding company that does business and carries out its operations
primarily through its subsidiaries, four of which are majority-owned and one of
which is wholly owned by CTD. CTD itself does not conduct any research, nor own
or have rights to any licenses, technology or assets other than its equity
interest in its subsidiaries. Each CTD subsidiary and CTD's percentage of
ownership of that subsidiary are listed below, together with the product or
technology being developed by that subsidiary.
CTD SUBSIDIARY CTD % OWNERSHIP PRODUCT OR TECHNOLOGY
-------------- --------------- ---------------------
Enteron Pharmaceuticals, Inc........................... 80.43% orBec-TM-
Oral Solutions, Inc.................................... 80% Oraprine-TM-
RxEyes, Inc............................................ 82.02% Metropt-TM-
Intero Corp............................................ 85% None
Formulation Technologies, Inc.......................... 100% Oral-suspension drug
delivery technology
CTD was incorporated in Delaware in December 1997 as Institute for Drug
Research, Inc. for purposes of acquiring an 87.5% ownership interest in
Institute for Drug Research, Ltd., a Hungarian limited liability company engaged
in contract research-and-development. In November 1999, after it sold its
ownership interest in the Hungarian company, it changed its name to Corporate
Technology Development, Inc. and developed its current business strategy. Each
of its subsidiaries is a Delaware corporation. CTD's principal executive offices
are located at 1680 Michigan Avenue, Suite 700 Miami Beach, Florida 33139, and
its telephone number is (305) 777-2258.
LEGAL PROCEEDINGS
CTD is in a dispute with the licensors of Metropt-TM- regarding whether CTD
is required to pay the licensors certain payments provided for in the license
agreement dated April 14, 1998, between CTD and the licensors. CTD maintains
that it is not required to make those payments, as the formulation of
Metropt-TM- developed by the licensors is not commercially viable. This dispute
is not currently the subject of litigation.
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
COLIN BIER, PH.D., 55, has served as Chairman of the board of directors of
CTD since 2000 and as a director since 1998. Since 1989, Dr. Bier has been
Managing Director of ABA BioResearch, an independent bioregulatory consulting
firm. Prior to founding ABA BioResearch, Dr. Bier was a
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founder, President and Chief Executive Officer of ITR Laboratories, Inc., a
contract research organization. Prior thereto, he was Vice President and
Director of Experimental Toxicology and Clinical Pathology at Bio-Research
Laboratories, Ltd. in Montreal, Quebec, a contract research organization. He is
a leading authority on toxicology, pharmaceutical, and biotechnology regulatory
and strategic development. Dr. Bier serves as a director of Neurochem, Inc. and
Boston Life Sciences, Inc., both public biopharmaceutical companies. Dr. Bier is
also the chief executive of the Centre for Translational Research in Cancer R&D
of the Sir Mortimer B. Davis--Jewish General Hospital in Montreal, Canada.
Dr. Bier is also a Senior Clinical Advisor to TVM TechnoVenture Management,
CTD's largest investor. Dr. Bier received his Ph.D. in Experimental Pathology
from Colorado State University, and pursued a post-doctoral studies as a Medical
Research Council Fellow and Dr. Douglas James Fellow in pathology at McGill
University. Upon completion of the merger, Dr. Bier will become the Chairman and
Chief Executive Officer of Endorex and will serve on the Endorex board of
directors.
PETER KLIEM, 62, has served on CTD's board of directors since 1998.
Mr. Kliem is a co-founder, Chief Operating Officer and Executive Vice President
of Enanta Pharmaceuticals, Inc., a Cambridge, Massachusetts-based drug discovery
company. Prior to establishing Enanta, he worked with Polaroid Corporation for
36 years, most recently in the positions of Senior Vice President of Business
Development, Senior Vice President of Electronic Imaging, and Senior Vice
President of Research and Development. He serves as a trustee and Vice President
of the Boston Biomedical Research Institute and served as the Chairman of PB
Diagnostics, Inc. Mr. Kliem earned his M.S. in Chemistry from Northeastern
University. Mr. Kliem is a director of Atlantic Technology Ventures, Inc., a
public biotechnology company, and he serves as Industry Advisor to TVM Techno
Venture Management. Upon consummation of the merger, Mr. Kliem will serve on the
board of directors of Endorex.
GUY R. RICO, 55, has served on CTD's board of directors since 1999. Since
1996, Mr. Rico has been the Managing Director of Financiere Tuileries, a
management company approved by the Commission des Operations de Bourse with the
purpose of managing the assets repurchased from Union des Assurances de Paris, a
leading European insurance company. Financiere Tuileries is the European
affiliate of Paul Capital Partners, a private equity group with venture capital,
leveraged buyout, and mezzanine partnership interests in operating companies and
royalty interests in healthcare and pharmaceutical products. Prior to founding
Financiere Tuileries, Mr. Rico was the director of Compagnie Financiere de
Rombas, a Paris, France-based publicly-traded holding company and subsidiary of
Union des Assurances de Paris. From 1975 to 1985, Mr. Rico was the Head of
Equity Research at Union des Assurances de Paris, where he led a team of 11
analysts in the energy and automotive business. From 1990 to 1995, Mr. Rico sat
on the Scientific Advisory Board of the Societe des Bourses Francaises, the
managing body of the French Stock Exchange. Mr. Rico has served on the board of
several companies such as Sidec, Laboratories Pharmygiene Medipole, Superba,
Cartier, and Sheaffer. Mr. Rico holds a degree in Engineering from Ecole
Centrale and a Masters Degree of Economics and Econometrics from the University
of Economics, in Lyon, France. Mr. Rico is also is a Chartered Financial
Analyst. Upon consummation of the merger, Mr. Rico will serve on the Endorex
board of directors.
STEVE H. KANZER, C.P.A., Esq., 37, has been President and Chief Executive
Officer of Corporate Technology Development, Inc. since December 1997. Since
December 2000, Mr. Kanzer has also been Chairman, Chief Executive Officer and
President of Accredited Equities, Inc., a venture capital and investment banking
firm based in Miami, and President of several private biopharmaceutical
companies also based in Miami. From 1992 until December 1998, Mr. Kanzer was a
founder and Senior Managing Director of Paramount Capital, Inc., an investment
bank specializing in the biotechnology and biopharmaceutical industries, and
Senior Managing Director--Head of Venture Capital of Paramount Capital
Investments, LLC, a biotechnology and biopharmaceutical venture capital and
merchant banking firm that is affiliated with Paramount Capital, Inc. From 1993
until June 1998, Mr. Kanzer was a founder and a member of the board of directors
of Boston Life Sciences, Inc., a publicly traded
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pharmaceutical research and development company. From 1994 until June 2000,
Mr. Kanzer was a founder and Chairman of Discovery Laboratories, Inc., a
publicly traded pharmaceutical research and development company. Mr. Kanzer is a
member of the board of directors of Endorex. Prior to joining Paramount
Capital, Inc., Mr. Kanzer was an attorney with Skadden, Arps, Slate, Meagher &
Flom LLP in New York, New York from September 1988 to October 1991. He received
his J.D. from New York University School of Law in 1988 and a B.B.A. in
Accounting from Baruch College in 1985.
NICHOLAS STERGIOPOULOS, 27, has served as Secretary, Treasurer, and Director
of Corporate Development of CTD since 1998. Prior to joining CTD, from 1997 to
1998 Mr. Stergiopoulos was an associate with Paramount Capital Investments, LLC,
a biotechnology, biomedical, and biopharmaceutical merchant banking firm, where
he participated in the startup, acquisition, and financing of several
biotechnology companies. Prior to joining Paramount, from 1997 to 1998,
Mr. Stergiopoulos worked briefly in the sales and trading department of CIBC
Oppenheimer & Company. Mr. Stergiopoulos received his M.S. in biology from New
York University in 1997 and a B.S. in biology from the University at Albany,
State University of New York. Mr. Stergiopoulos is also a member of the New York
Chapter of the Licensing Executive Society.
EXECUTIVE COMPENSATION
The following table sets forth information relating to compensation paid
during CTD's fiscal years ended December 31, 2000, 1999 and 1998 to its Chief
Executive Officer. No other executive officers of CTD at December 31, 2000 had a
base salary during the year in excess of $100,000.
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
---------------------- ---------------------
SECURITIES UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) OPTIONS (#)
--------------------------- -------- ---------- --------- ---------------------
Steve H. Kanzer,............................ 12/31/00 185,750 74,375 --
President & Chief Executive Officer 12/31/99 31,447 181,250 --
12/31/98 64,591 -- 772,725
No options or SARs that would be reportable were granted by CTD to its Chief
Executive Officer during the fiscal year ended December 31, 2000.
The following table sets forth information with respect to CTD's Chief
Executive Officer concerning exercisable and unexercisable options that he held
as of December 31, 2000. CTD's Chief Executive Officer did not exercise any
options during fiscal year 2000 and CTD has never granted stock appreciation
rights. The value of unexercised in-the-money options at fiscal year-end equals
(1) the assumed fair market value of CTD common stock at December 31, 2000,
which CTD has determined to be $0.20 per share, which is the per share exercise
price of stock options granted during fiscal year 2000, minus (2) the per share
exercise price of stock options granted during fiscal year 2000, which is $0.20.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
SHARES UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
ACQUIRED ON VALUE AT 12/31/00 (#) AT 12/31/00 ($)
NAME EXERCISE (#) REALIZED ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ------------ ------------ ------------------------- -------------------------
Steve H. Kanzer.............. -- -- 618,180/0 0/0
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EMPLOYMENT AGREEMENTS
CTD has an employment agreement with Nicholas Stergiopoulos, its Director of
Corporate Development, for a term expiring June 2002. This agreement provides
for Mr. Stergiopoulos to receive a base salary of $98,000 per year, with
cost-of-living adjustments beginning May 1, 2000. It also provides that
Mr. Stergiopoulos is entitled to a bonus of up to $20,000 per year, at the
discretion of the board of directors, and is entitled, on October 1, 1998, and
each year thereafter, to receive an option to purchase 100,000 shares of CTD
common stock (up to a total of 400,000 shares) at a purchase price of $0.20 per
share, with each option having a term of five years. Mr. Stergiopoulos is
entitled to a bonus of 1% of the gross proceeds of any acquisition of CTD, and
is entitled to a $50,000 bonus upon CTD becoming public through a reverse merger
or other alternative means. Pursuant to the merger agreement, this agreement
will be terminated prior to consummation of the merger.
CERTAIN TRANSACTIONS OF CTD
On April 24, 2000, CTD entered into an agreement with Dr. Nicholas Bodor, a
stockholder and former director of CTD. Other parties to this agreement were
Precision Pharmaceuticals, Inc., or Precision, which has since been dissolved,
as well as Magyar Pharmaceuticals, Inc., or Magyar, which has since been
dissolved but which was then owned 90% by CTD and 10% by Dr. Bodor, and CTD Drug
Design, Inc., a wholly owned subsidiary of CTD that has since been dissolved.
The purpose of the agreement was to restructure contractual relations between
the parties.
Dr. Bodor and Precision were party to two license agreements dated
October 31, 1997, and amended December 31, 1998, pursuant to which Dr. Bodor
granted to Precision an exclusive license to patents and know-how to make, use,
and sell orally or rectally administered loteprednol etabonate and topically
administered loteprednol etabonate (collectively, Loteprednol), along with the
right to grant sublicenses (collectively, the Loteprednol License Agreements).
Pursuant to a sublicense agreement dated December 31, 1998, between Precision
and Magyar, or the Sublicense Agreement, Precision granted Magyar an exclusive
sublicense under the Loteprednol License Agreements. In the agreement, Precision
and Dr. Bodor terminated the Loteprednol License Agreements and Precision and
Magyar terminated the Sublicense Agreement. In addition, Dr. Bodor agreed to pay
CTD 25% of any revenue he receives from certain named entities in connection
with commercialization of Loteprednol. Dr. Bodor, RM Drugs, Inc., a corporation
wholly owned by Dr. Bodor and his wife, and CTD Drug Design were party to an
agreement and plan of reorganization dated as of December 31, 1998, which
provided for acquisition by CTD Drug Design of the assets of RM Drugs. In the
agreement between Dr. Bodor and CTD, Dr. Bodor agreed that the agreement and
plan of reorganization was terminated, and he also agreed to release CTD Drug
Design from any claims related thereto. CTD did not retain an independent party
to evaluate this transaction and it was not evaluated by an independent
committee of CTD's board of directors. Nevertheless, CTD believes that the terms
of this transaction were fair to CTD and were negotiated without regard to
Dr. Bodor's being a stockholder or former director of CTD.
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CTD MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Since its inception, CTD has focused its efforts and resources on developing
and commercializing pharmaceutical products and technologies. CTD has not been
profitable since it was founded and has incurred a cumulative deficit of
approximately $7.5 million through December 31, 2000. CTD expects its operating
losses to increase significantly over the next several years, primarily due to
expansion of its research and development programs, including clinical trials
for some or all of its existing products and technologies and other products and
technologies that it may acquire or develop.
CTD's ability to achieve profitability depends upon, among other things, its
ability to discover and develop products, obtain regulatory approval for its
proposed products, and enter into agreements to in-license, research and
develop, manufacture, and commercialize products. Moreover, there can be no
assurance that CTD will ever achieve significant revenues or profitable
operations from the sale of any of its products or technologies.
CTD was originally organized in 1997 as the Institute for Drug
Research, Inc. to acquire Institute for Drug Research, Ltd., or IDR Hungary, a
drug research facility located in Budapest, Hungary. In early 1998, CTD acquired
an 87.5% ownership interest in IDR Hungary and concurrently obtained
$15.2 million of financing through a private placement of shares of its
Series A preferred stock. CTD's initial business plan was to conduct contract
research on behalf of biotechnology and pharmaceutical companies.
During December 1998, in an effort to build its product pipeline, CTD
acquired a number of companies that owned or held licenses to various compounds
and technologies in various stages of clinical development. CTD acquired these
companies from Paramount Capital Investments, LLC for $162,000 and CTD's
assumption of $107,000 of liabilities.
On October 12, 1999, CTD sold its majority ownership in IDR Hungary to IVAX
Corporation, a specialty pharmaceutical company, for $5,750,000. After this
sale, CTD changed its name to Corporate Technology Development, Inc.
During early December 1999, Intero Corp., an 85%-owned subsidiary of CTD,
sold substantially all of its assets to Allergan Botox Limited for $3,500,000 in
cash paid by Allergan, Inc. Intero's principal asset was a license agreement
dated February 5, 1999, between Intero and Johns Hopkins University for a patent
portfolio relating to the internal uses of neurotoxins, specifically botulinum
toxin.
Since CTD's inception, CTD has not generated any revenue. However, CTD may
receive two milestone payments of $2,000,000 and $1,000,000 from Allergan Botox
Limited upon satisfaction of certain conditions, including the successful
commercialization of the patents and intellectual property acquired from Intero.
In addition, CTD is also entitled to 25% of any amounts recovered by IDR Hungary
in a lawsuit it brought in Hungary against a large Hungarian pharmaceuticals and
specialty chemicals company for nonpayment of royalties. CTD cannot be assured
of receiving these milestone payments or any payments from IDR Hungary's
lawsuit.
CTD is currently engaged in developing and commercializing drugs in the area
of transplantation medicine and gastroenterology. CTD anticipates that during
the next 18 to 24 months it will conduct substantial research and development of
the products it is developing.
At the end of 2000, CTD relocated its executive offices from New York, New
York, to Miami, Florida, and as a result has reduced the number of its employees
from four to two.
CTD anticipates that the primary focus of its research-and-development
activities will be to complete the proposed phase III clinical trial, started in
May 2001, for the use of orBec-TM- to treat
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intestinal graft-versus-host disease, or GVHD. CTD intends to enroll
approximately 130 patients in this trial, which is to be conducted at up to 15
clinical sites in the United States and Europe. CTD expects that this trial will
last approximately 14 to 18 months. In addition, CTD intends to initiate in the
fourth quarter of 2001 two phase II clinical trials for the use of orBec-TM- to
treat Crohn's disease and ulcerative colitis, and intends in the first quarter
of 2002 to initiate a phase II clinical trial for the use orBec-TM- to prevent
GVHD. In addition, during the fourth quarter of 2000, CTD initiated a phase I
bioequivalency trial for Oraprine-TM- that demonstrated that Oraprine-TM- is
equivalent to the tablet Imuran-Registered Trademark-.
RESULTS OF OPERATIONS
COMPARISON OF SIX-MONTH PERIODS ENDED JUNE 30, 2001 AND 2000
CTD's research and development expense in the first half of 2001 was
approximately $880,000, as compared to approximately $558,000 during the same
period of 2000. This increase was primarily due to preparation for the phase III
clinical trial for the use of orBec-TM- to treat intestinal GVHD.
General and administrative expense in the first half of 2001 was
approximately $724,000, as compared to $607,000 during the same period of 2000.
This increase was primarily due to increased legal and accounting costs
associated with negotiating the merger of CTD with Endorex.
Interest income for the first six months of 2001 was $173,000, as compared
to $230,000 during the first six months of 2000. This decrease was primarily due
to a decrease in cash available for investment because of the increases in
research and development spending.
CTD's net loss for the first six months of 2001 was $1,431,000, as compared
to $935,000 during the first six months of 2000. This increase was primarily due
to preparation for the phase III clinical trial for orBec-TM-.
COMPARISON OF YEARS ENDED DECEMBER 31, 2000 AND 1999
CTD's research-and-development expense during 2000 was approximately
$1.3 million, as compared to $955,000 during 1999. This increase was primarily
due to preparation for the phase III clinical trial for the use of orBec-TM- to
treat intestinal GVHD.
General and administrative expense during 2000 was approximately
$1.3 million, as compared to $1.5 million during 1999. This decrease was due to
CTD having reduced its number of employees from eight to two.
Interest income during 2000 was approximately $428,000, as compared to
$167,000 during 1999. This increase was primarily due to an increase in the
amount of cash held by CTD resulting from CTD's sale of its 87.5% ownership
interest in IDR Hungary and sale of the assets of its subsidiary, Intero Corp.
to Allergan Botox Limited.
During 1999, CTD recorded a write-off of licenses in the amount of
$1,822,000 due to its having terminated license agreements with the University
of Florida Research Foundation, Inc. and Dr. Nicholas Bodor. Also in 1999, CTD
recognized a gain of $3,052,000 upon the sale of assets of its subsidiary Intero
Corp. to Allergan Botox Limited. There were no such write-offs or sales in 2000.
CTD incurred a loss of $4,852,000 from the operations of its majority owned
subsidiary, IDR Hungary, from January 1, 1999 through October 12, 1999, the date
CTD sold to IVAX Corporation its ownership interest in IDR Hungary. CTD
recognized a gain of $4,956,000 upon the sale.
CTD's net loss for 2000 was $2.25 million as compared to $1.3 million for
1999. This increase is primarily due to the absence in 2000 of transactions
comparable to the 1999 transactions described above.
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LIQUIDITY
As of June 30, 2001, and December 31, 2000, CTD had working capital of
approximately $4.8 million and $6.3 million, respectively. CTD's primary sources
of cash have been the net proceeds of $13,150,000 from the 1998 Series A
preferred stock financing, proceeds of approximately $5.75 million from the sale
in October 1999 of its majority ownership in IDR Hungary to IVAX Corporation,
and approximately $2.9 million from CTD's share of the proceeds of the sale in
December 1999 of substantially all of Intero's assets to Allergan Botox Limited.
CTD's gross proceeds from sale of its ownership interest in IDR Hungary were
approximately $3 million less than CTD's investment in, and advances to, IDR
Hungary.
CTD believes its current working capital is sufficient to meet its planned
research and development activities through the first quarter of 2003. CTD will,
however, need additional financing from investors or collaborators to complete
research and development, commercialization and launch of its current product
candidates.
Historically, CTD's working capital has been secured through private
financings. In May and July 1998, pursuant to a private placement offering, CTD
sold 152.575 units, each unit consisting of 50,000 shares of Series A preferred
stock, with a price per unit of $100,000 ($2.00 per share of Series A preferred
stock). Net proceeds from the private placement were approximately $13,150,000.
As of June 30, 2001, aggregate unpaid accrued dividends equaled $30,515,000.
The placement agent for the private placement, Paramount Capital, Inc.,
received approximately $1,998,000 in cash plus warrants to acquire through
January 15, 2008, 762,875 shares of CTD's Series A preferred stock at a price of
$2.20 per share. Paramount subsequently transferred these warrants to its
employees and brokers. The warrants contain certain anti-dilution provisions and
may be exercised on a "cashless exercise" basis.
CTD's capital requirements will depend on many factors. These factors
include:
- expenses associated with completing the merger;
- problems, delays, expenses and complications frequently encountered by
development stage companies;
- the progress of CTD's research, development and clinical trial programs;
- the extent and terms of any future collaborative research, manufacturing,
marketing or other funding arrangements;
- the cost and timing of, and any delays in, seeking and obtaining
regulatory approvals of CTD's products;
- the ability to enter into corporate partnerships and collaborations to
in-license, acquire, research and develop and commercialize CTD products;
- the success of CTD's sales and marketing programs;
- the costs of filing, prosecuting and defending and enforcing any patent
claims and other intellectual property rights; and
- changes in economic, regulatory, or competitive conditions of CTD's
planned business.
Estimates of the adequacy of funding for CTD's activities are based on
certain assumptions, including the assumption that testing and regulatory
procedures relating to CTD's products can be conducted at projected costs. There
can be no assurance that changes in CTD's development plans, acquisitions or
other events will not result in accelerated or unexpected expenditures.
130
CTD's working capital requirements will depend upon numerous factors,
including without limitation the progress of CTD's research and development
programs, preclinical and clinical testing, the timing and cost of obtaining
regulatory approvals, the resources that CTD devotes to developing manufacturing
and marketing capabilities, technological advances, the status of competitors,
and CTD's ability to establish collaborative arrangements with other
organizations.
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PRINCIPAL STOCKHOLDERS OF CTD
The following table contains information regarding the beneficial ownership
of CTD common stock and Series A preferred stock as of October 15, 2001, by the
following individuals or groups:
- each person or entity who is known by CTD to own beneficially more than 5%
of its common stock or Series A preferred stock;
- each of the chief executive officer and the four other executive officers
who earned more than $100,000 during 2000;
- each of CTD's directors; and
- all directors and executive officers of CTD as a group.
Beneficial ownership is determined in accordance with the rules of the SEC
and generally includes voting or investment power with respect to securities.
Except as indicated by footnote, and subject to community property laws where
applicable, the stockholders named in the table below have sole voting and
investment power with respect to all shares of CTD common stock and preferred
stock shown as beneficially owned by them. Percentage ownership is based on
5,000,000 shares of CTD common stock and 7,628,750 shares of Series A preferred
stock outstanding on October 15, 2001. Options or warrants for CTD's common
stock and Series A preferred stock that are currently exercisable or exercisable
within 60 days of October 15, 2001 are deemed to be outstanding and beneficially
owned by the person holding the warrants or stock options for purposes of
computing the percentage ownership of that person, but are not treated as
outstanding for the purpose of computing the percentage ownership of any other
person.
COMMON STOCK SERIES A PREFERRED STOCK
---------------------- --------------------------
NUMBER PERCENTAGE NUMBER PERCENTAGE
NAME AND ADDRESS OF BENEFICIAL OWNER OF SHARES OF CLASS OF SHARES OF CLASS
------------------------------------ --------- ---------- ------------ -----------
Lindsay A. Rosenwald, M.D.(1) ..................... 3,094,169 56.5% 478,819 6.0%
787 Seventh Avenue, 48th Floor
New York, NY 10019
TVM Techno % %
Medical Ventures GmbH & Co. KG(2) ............... 1,350,000 21.3 1,350,000 17.7
101 Arch Street, Suite 500
Boston, MA 02110
Nomura Bank(3) .................................... 1,200,000 19.4% 1,200,000 15.7%
(Switzerland) Ltd.
Kasamaristrasse I
Zurich, Switzerland CH8021
Rivki Rosenwald(4) ................................ 445,000 8.9% -- --
787 Seventh Avenue, 48th Floor
New York, NY 10019
Imprimus Investors, LLC(5) ........................ 500,000 9.1% 500,000 6.6%
411 West Putman Avenue
Greenwich, CT 06830
Bristol Rittenhouse % %
Investments, LP(5) .............................. 500,000 9.1 500,000 6.6
1 Rockefeller Plaza
Suite 1010
New York, NY 10020
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COMMON STOCK SERIES A PREFERRED STOCK
---------------------- --------------------------
NUMBER PERCENTAGE NUMBER PERCENTAGE
NAME AND ADDRESS OF BENEFICIAL OWNER OF SHARES OF CLASS OF SHARES OF CLASS
------------------------------------ --------- ---------- ------------ -----------
Peter Kash(6) ..................................... 260,813 5.0% 170,813 2.1%
c/o Paramount Capital, Inc.
787 Seventh Avenue
48th Floor
New York, NY 10019
Nicholas Bodor .................................... 250,000 5.0% -- --
3929 SW 69th Avenue
Gainesville, FL 32608
Kenneth Johnson ................................... 250,000 5.0% -- --
2201 Williams Pt. Drive
Stoughton, WI 53589
MANAGEMENT:
Steve H. Kanzer(7) ................................ 1,182,180 21.0% -- --
300 South Point Drive,
Suite 3501
Miami Beach, FL 33139
Nicholas Stergiopoulos(8) ......................... 552,773 10.1% -- --
1541 Brickell Avenue, Apt. 2706
Miami, FL 33129
Colin Bier, Ph.D.(9) .............................. 50,000 * -- --
677 Dr. Frederik Philips
Saint-Laurent, Quebec
Canada H4M-2W4
Guy Rico(10) ...................................... 1,037,500 17.2% 1,000,000 13.1%
28, Avenue de Messine
75008 Paris, France
Peter Kliem(11) ................................... 50,000 * -- --
750 Main Street
Cambridge, MA 02139
All directors and officers as a group
(5 persons) ..................................... 2,872,453 39.7% 1,000,000 13.1%
------------------------
* Less than 1%
(1) Includes 2,515,350 shares of CTD common stock held by Paramount Capital
Drug Development Holdings LLC, of which Dr. Rosenwald is the sole member.
Includes 50,000 shares of CTD common stock held by Huntington Street
Company and 50,000 shares of CTD common stock held by June Street Company.
Dr. Rosenwald is the sole stockholder of both Huntington Street Company and
June Street Company. Also includes (i) 303,819 shares of CTD Series A
preferred stock issuable upon exercise of a warrant exercisable within
60 days of October 15, 2001, and the 303,819 shares of CTD common stock
issuable upon conversion of those shares of CTD Series A preferred stock
and (ii) 175,000 shares of CTD common stock issuable upon conversion of
175,000 shares of preferred stock. Dr. Rosenwald disclaims any beneficial
ownership of shares beneficially owned by his wife, Rivki Rosenwald and any
shares held by Mrs. Rosenwald as
133
custodian for the benefit of Dr. and Mrs. Rosenwald's children, Doni
Rosenwald, Joshy Rosenwald, Demi Rosenwald, and Davy Rosenwald.
(2) Includes 1,350,000 shares of CTD common stock issuable upon conversion of
1,350,000 shares of preferred stock.
(3) Includes 1,200,000 shares of CTD common stock issuable upon conversion of
1,200,000 shares of CTD Series A preferred stock.
(4) Includes 200,000 shares of CTD common stock held by Rivki Rosenwald as
custodian for the benefit of Mrs. Rosenwald's children, Doni Rosenwald,
Joshy Rosenwald, Demi Rosenwald and Davy Rosenwald (50,000 shares each).
(5) Includes 500,000 shares of CTD common stock issuable upon conversion of
500,000 shares of CTD Series A preferred stock.
(6) Includes 50,000 shares of CTD common stock held by Peter and Donna Kash and
40,000 shares of CTD common stock held by the Kash Family Foundation. Also
includes 170,813 shares of CTD common stock issuable upon conversion of
170,813 shares of CTD Series A preferred stock issuable upon exercise of a
warrant exercisable within 60 days of October 15, 2001.
(7) Includes options exercisable within 60 days of October 15, 2001 to purchase
618,180 shares of CTD common stock.
(8) Includes options exercisable within 60 days of October 15, 2001 to purchase
477,273 shares of CTD common stock.
(9) Represents an option exercisable within 60 days of October 15, 2001 to
purchase 50,000 shares of CTD common stock.
(10) Includes 892,400 shares of CTD Series A preferred stock held by Paul
Capital V, L.P., 75,100 shares of CTD Series A preferred stock held by
Paul Capital Partners V (Domestic Annex Fund) L.P., and 32,500 shares of
CTD Series A preferred stock held by Paul Capital Partners V
International, L.P., and the 1,000,000 shares of common stock issuable
upon conversion of those shares of preferred stock. Mr. Rico may be
considered a beneficial owner of shares owned by Paul Capital V, L.P.,
Paul Capital Partners V (Domestic Annex Fund) L.P., and Paul Capital
Partners V International, L.P. by virtue of his authority to vote and
dispose of those shares in his capacity as partner of Paul Capital
Partners. Also includes an option exercisable within 60 days of
October 15, 2001 to purchase 37,500 shares of common stock.
(11) Represents an option exercisable within 60 days of October 15, 2001 to
purchase 50,000 shares of common stock.
134
PROPOSALS TO BE VOTED UPON BY ENDOREX STOCKHOLDERS
AT THE ENDOREX ANNUAL MEETING
At the Endorex annual meeting of stockholders, Endorex's stockholders will
be asked to consider and vote on the following proposals.
1. to approve the issuance of shares of Endorex common stock, options and
warrants pursuant to the merger agreement, dated as of July 31, 2001 by
and among Endorex, CTD, and Roadrunner Acquisition, Inc., a wholly owned
subsidiary of Endorex, under which CTD will become a wholly owned
subsidiary of Endorex;
2. to amend Endorex's Amended and Restated Certificate of Incorporation
changing Endorex's name to DOR BioPharma, Inc.;
3. to elect six directors to serve until the next annual meeting of the
stockholders of Endorex or until their successors are duly elected and
qualified;
4. to amend Endorex's Amended and Restated 1995 Omnibus Incentive Plan, or
the 1995 plan, to (i) increase the number of shares of Endorex common
stock reserved for issuance by an additional 2,165,664 shares,
(ii) implement a maximum annual limit of 500,000 shares of common stock
by which the share reserve may increase annually over the term of the
1995 Plan under the automatic share increase provision and (iii) modify
the automatic option grant program to (a) increase the initial option
grants to newly-elected Board members to 50,000 shares vesting
immediately and (b) provide for annual option grants to continuing board
members for 10,000 shares vesting over one year;
5. to approve February 21, 2001 option grants to each non-employee member
of the Endorex board of directors to purchase 50,000 shares of Endorex
common stock; and
6. to ratify the appointment of Ernst & Young LLP as Endorex's independent
auditors for the fiscal year ending December 31, 2001.
None of the proposals is contingent upon the passage of any other proposal.
135
PROPOSAL ONE: APPROVAL OF THE ISSUANCE OF ENDOREX COMMON STOCK,
OPTIONS AND WARRANTS PURSUANT TO THE
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
Endorex's board of directors adopted on July 13, 2001, resolutions approving
the merger, the merger agreement and the transactions contemplated thereby. The
issuance of the shares of Endorex common stock, options and warrants pursuant to
the merger agreement must be approved by the affirmative vote of the holders of
a majority of the shares of Endorex common stock, voting together with the
holders of Endorex Series B preferred stock on an as converted basis, entitled
to vote and that are present or represented by proxy at the Endorex annual
meeting of stockholders. Unless this happens, the merger contemplated by the
merger agreement cannot be completed. See "The Merger" and "Agreement and Plan
of Merger and Reorganization and Related Agreements." Unless otherwise
instructed in writing, the proxy holders will vote the proxies received by them
"FOR" the approval of the issuance of Endorex common stock, option and warrants
pursuant to the merger agreement.
RECOMMENDATION OF THE BOARD OF DIRECTORS
Endorex's board of directors recommends that Endorex stockholders vote "FOR"
approval of the issuance of the shares of Endorex common stock, options and
warrants pursuant to the merger agreement.
136
PROPOSAL TWO: APPROVAL OF AMENDMENT TO AMENDED
AND RESTATED CERTIFICATE OF INCORPORATION
On September 26, 2001, Endorex's board of directors adopted resolutions
proposing to amend Endorex's Amended and Restated Certificate of Incorporation
to change Endorex's name to DOR BioPharma, Inc. Endorex's board of directors
believes the name change will more appropriately reflect the new focus of
Endorex. This amendment to Endorex's Amended and Restated Certificate of
Incorporation must be approved by the affirmative vote, in person or by proxy,
of the holders of a majority of the outstanding shares of Endorex common stock,
voting together with the holders of Endorex Series B preferred stock on an as
converted basis. Unless otherwise instructed in writing, the proxy holders will
vote the proxies received by them "FOR" the approval of the amendment of
Endorex's Amended and Restated Certificate of Incorporation changing Endorex's
name to DOR BioPharma, Inc.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The board of directors recommends that the stockholders of Endorex vote
"FOR" the approval of the amendment of Endorex's Amended and Restated
Certificate of Incorporation changing Endorex's name to DOR BioPharma, Inc.
137
PROPOSAL THREE: ELECTION OF DIRECTORS
At the annual meeting, six directors are to be elected, each of whom will
serve until the next annual meeting of stockholders or until his successor is
elected and qualified, or until his death, resignation, or removal. It is
intended that any proxies granted will be voted for the six nominees named below
unless authority to vote for any such nominee is withheld. Each of the nominees
is currently a director of Endorex. Each nominee has agreed to serve if elected,
and the board of directors has no reason to believe that any nominee will be
unavailable or will decline to serve. If, however, at the time of the annual
meeting any nominee is unable or declines to serve as a director, all proxies
will be voted for any nominee who is designated by the current board of
directors to fill the vacancy. The six candidates receiving the highest number
of affirmative votes of shares present or represented by proxy at the annual
meeting and entitled to vote on this proposal will be elected directors of
Endorex. All nominees were elected by stockholders to the board of directors at
the 2000 annual stockholders meeting. If Proposal One is approved by Endorex
stockholders and the merger closes, (a) the size of the board of directors will
increase to nine members, (b) Dr. Colin Bier, Guy Rico and Peter Kliem,
currently directors of CTD, will become directors of Endorex, and
(c) Dr. Kenneth Tempero will resign as Chairman of the Endorex board of
directors and Dr. Colin Bier will be appointed the new Chairman of the Endorex
board of directors.
The affirmative vote of a plurality of those shares of Endorex's outstanding
common stock and Series B preferred stock, voting together on an as converted
basis, that are represented and voting at the annual meeting, in person or by
proxy, is required to elect the directors.
NOMINEES FOR ELECTION AS DIRECTORS
Each nominee furnished to Endorex the following information with respect to
the principal occupation or employment, other affiliations, and business
experience of each nominee during the last five years.
MICHAEL S. ROSEN, M.B.A., 49, has served as President, Chief Executive
Officer and a member of the board of directors since August 1996. From
January 1995 until August 1996, he was President and Chief Executive Officer of
PharmaMar, S.A., a European biotechnology company. From June 1991 until
January 1995, Mr. Rosen was General Manager of the northern Latin American
businesses for Monsanto Company, a multinational chemical/pharmaceutical
company. Mr. Rosen received a B.A. in Sociology/International Relations from
Beloit College and an M.B.A. in International Business from the University of
Miami. He has undertaken post-graduate courses at Northwestern University and
Sophia University in Tokyo, Japan.
RICHARD DUNNING, 55, has served as a member of the board of directors of
Endorex since August 1997. He has been Chairman and Chief Executive Officer of
Nexell Therapeutics Inc. since May 1999. Prior to that, he was President and
Chief Executive Officer of Nexell since April 1996. Nexell, formerly known as
VIMRX Pharmaceuticals Inc., is the leading developer and marketer of innovative
diagnostics and ex vivo cell therapies for cancer, autoimmune, metabolic and
genetic diseases. Prior to joining Nexell, Mr. Dunning played an instrumental
role in the formation of The DuPont Merck Pharmaceutical Company and acted as
that organization's Executive Vice President and Chief Financial Officer from
1991 to 1995. Mr. Dunning received a B.S. in Economics and an M.B.A. in Finance
from the University of Delaware.
STEVE H. KANZER, C.P.A., Esq., 37, has served as a member of the board of
directors since June 1996. Since December 1997, Mr. Kanzer has been President
and Chief Executive Officer of Corporate Technology Development, Inc. Since
December 2000, Mr. Kanzer has also been Chairman, Chief Executive Officer and
President of Accredited Equities, Inc., a venture capital and investment banking
firm based in Miami, and President of several private biopharmaceutical
companies also based in Miami. From 1992 until December 1998, Mr. Kanzer was a
founder and Senior Managing Director
138
of Paramount Capital, Inc., an investment bank specializing in the biotechnology
and biopharmaceutical industries, and Senior Managing Director--Head of Venture
Capital of Paramount Capital Investments, LLC, a biotechnology and
biopharmaceutical venture capital and merchant banking firm that is affiliated
with Paramount Capital, Inc. From 1993 until June 1998, Mr. Kanzer was a founder
and a member of the board of directors of Boston Life Sciences, Inc., a publicly
traded pharmaceutical research and development company. From 1994 until
June 2000, Mr. Kanzer was a founder and Chairman of Discovery
Laboratories, Inc., a publicly traded pharmaceutical research and development
company. Mr. Kanzer is a member of the board of directors of Atlantic Technology
Ventures, Inc., a publicly traded pharmaceutical research and development
company. Prior to joining Paramount Capital, Inc., Mr. Kanzer was an attorney
with Skadden, Arps, Slate, Meagher & Flom LLP in New York, New York from
September 1988 to October 1991. He received his J.D. from New York University
School of Law in 1988 and a B.B.A. in Accounting from Baruch College in 1985.
Mr. Kanzer is a nominee of the Aries Domestic Fund, LP and the Aries Master Fund
II to Endorex's board of directors. Aries Domestic Fund, L.P. and Aries Master
Fund II subsequently transferred their right to nominate a member of the board
of directors of Endorex to Aries Select, Ltd. and Aries Select I LLC. Both Aries
Select, Ltd. and Aries Select I LLC are affiliates of PCAM, PCI, Paramount and
Lindsay Rosenwald, M.D.
PAUL D. RUBIN, M.D., 47, has served as a member of the board of directors of
Endorex since November 1997. Since 1999, he has been Executive Vice President
for Drug Development at Sepracor, Inc., having previously been Senior Vice
President since 1996. He is responsible for managing research and development
programs for Sepracor's improved chemical entities portfolio, which includes the
management of Discovery Research, Regulatory, Clinical, Preclinical, and Project
Management teams. Dr. Rubin also plays a key role in the evaluation of external
technology and licensing opportunities. From 1993 to 1996, Dr. Rubin was the
Vice President and Worldwide Director of Early Clinical Development and Clinical
Pharmacology at Glaxo Wellcome. Prior to Glaxo, Dr. Rubin held various executive
research positions at Abbott Laboratories. Dr. Rubin received his M.D. from Rush
Medical College in Chicago and completed his residency in Internal Medicine at
the University of Wisconsin Hospitals and clinics in Madison, Wisconsin.
KENNETH TEMPERO, M.D., PH.D., M.B.A., 62, was elected Chairman of the
Endorex board of directors in May 1999 and has served as a member of the board
of directors since September 1996. Since April 1996, Dr. Tempero has been a
principal at KTC, Inc., a consulting company. Prior thereto, he served as
Chairman and Chief Executive officer of MGI PHARMA, Inc., a company that focuses
on the development and sale of cancer therapeutics and related products. From
November 1983 to August 1987, Dr. Tempero held various positions with G.D.
Searle & Co., a pharmaceutical company, most recently as Senior Vice President
of Research and Development. Dr. Tempero holds M.S. and Ph.D. degrees in
Pharmacology from Northwestern University, an M.D. in Medicine and Surgery from
Northwestern University and an M.B.A. in Pharmaceutical Marketing from Fairleigh
Dickinson University.
STEVEN THORNTON, 44, has served as a member of the board of directors since
February 1998. He has served as Executive Vice President of Commercial
Development for Elan Pharmaceutical Technologies since December 1997. Prior to
joining Elan Pharmaceutical Technologies, Mr. Thornton served from July 1994 as
President of Schein Bayer Pharmaceutical Services Inc., a joint venture of Bayer
and Schein Pharmaceutical Inc. From 1991 to 1994, he served with Bayer as Region
Director with responsibility for pharmaceutical operations in Australia, New
Zealand and South Africa. Mr. Thornton graduated with honors from Lancaster
University in 1978, receiving a B.A. in applied social psychology. Mr. Thornton
is the nominee of the holders of Endorex's Series B preferred stock.
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BOARD AND COMMITTEE MEETINGS
During the year ended December 31, 2000, the board of directors held 6
formal meetings, of which all members of the board of directors of Endorex,
other than Paul Rubin and Steve Thornton, attended at least 75 percent of the
meetings. In addition to formal meetings, the board of directors and the members
of the Executive, Mergers and Acquisitions, Audit and Compensation Committees
confer frequently on an informal basis.
The Compensation Committee of the board of directors determines the salaries
and incentive compensation of the officers of Endorex and provides
recommendations for the salaries and incentive compensation of the other
employees and consultants of Endorex. The Compensation Committee also
administers various incentive compensation, stock and benefit plans. Mr. Shaw
and Dr. Tempero served on the Compensation Committee until May 16, 2000, and as
of May 17, 2000, Dr. Rubin and Mr. Kanzer have served on the Compensation
Committee; Dr. Rubin is the Chairman. The Compensation Committee had 2 meetings
during fiscal year 2000, of which all the members of the Compensation Committee
attended at least 75 percent of the meetings that occurred during the period in
which they served as a member of the Compensation Committee.
The Executive Committee of the board of directors acts on the matters
referred to it by the full board of directors. Dr. Tempero, the Chairman of the
Executive Committee, Mr. Thornton and Mr. Rosen are currently the Executive
Committee members. Mr. Dunning served on the Executive Committee until May 16,
2000, and was subsequently replaced by Mr. Thornton on May 17, 2000. The
Executive Committee had 2 meetings during fiscal year 2000, of which all the
members of the Executive Committee, other than Mr. Thornton, attended at least
75 percent of the meetings that occurred during the period in which they served
as a member of the Executive Committee.
The M&A Committee of the board of directors of Endorex acts on any matters
referred to it by the full board of directors related to current or potential
mergers or acquisitions. Dr. Tempero, the Chairman of the M&A Committee, Richard
Dunning and Dr. Rubin are the current members of the M&A Committee. The M&A
Committee of Endorex held no meetings during the fiscal year 2000.
The Audit Committee of the board of directors reviews, acts on and reports
to the board of directors with respect to various auditing and accounting
matters, including the selection of Endorex's independent public accountants,
the scope of the annual audits, fees to be paid to the auditors, the performance
of Endorex's auditors and the accounting practices of Endorex. Mr. Dunning,
Chairman of the Audit Committee, and Dr. Shaw are currently the Audit Committee
members. Mr. Kanzer and Dr. Rubin served on the Audit Committee until May 16,
2000, and were subsequently replaced by Dr. Shaw and Mr. Dunning on May 17,
2000. The Audit Committee had 6 meetings during fiscal year 2000; of the members
of the Audit Committee, only Mr. Dunning attended at least 75 percent of the
meetings that occurred during the period in which they served as a member of the
Audit Committee. Mr. Dunning and Dr. Shaw are independent as defined by
Section 121(A) of the American Stock Exchange's listing standards.
REPORT OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
SEPTEMBER 28, 2001
Endorex's Audit Committee is comprised of two independent members, each of
whom is able to read and understand fundamental financial statements and at
least one of whom has past employment experience in finance or accounting or
other comparable experience. The Audit Committee reviews the accounting
principles and procedures of Endorex and its annual financial reports and
statements, discusses the audited financial statements with management,
recommends to the board of directors the engagement of Endorex's independent
accountants, reviews with the independent accountants the plans and results of
the auditing engagement and considers the independence of Endorex's auditors.
140
The main function of the Audit Committee is to ensure that effective
accounting policies are implemented and that internal controls are put in place
in order to deter fraud, anticipate financial risks and promote accurate, high
quality and timely disclosure of financial and other material information to the
public markets, the board and the stockholders. The Audit Committee also reviews
and recommends to the board the approval of the annual financial statements and
provides a forum, independent of management, where Endorex's auditors can
communicate any issues of concern.
The independent members of the Audit Committee believe that the present
composition of the Audit Committee accomplishes all of the necessary goals and
functions of an audit committee as recommended by the Blue Ribbon Committee on
Improving the Effectiveness of Corporate Audit Committees and adopted by the
United States stock exchanges and the Securities and Exchange Commission. In
accordance with the promulgated new rules regarding audit committees, the Audit
Committee has adopted a formal, written charter, or, the Audit Committee
Charter, approved by the full board of directors. The Audit Committee Charter
specifies the scope of the Audit Committee's responsibilities and how it should
carry out those responsibilities. The Audit Committee has reviewed and discussed
the audited financial statements of Endorex for the fiscal year ended
December 31, 2000, with Endorex's management. The Audit Committee has discussed
with Ernst & Young LLP, Endorex's independent public accountants, the matters
required to be discussed by Statement on Auditing Standards No. 61
(Communication with Audit Committees). The Audit Committee has also received the
written disclosures and the letter from Ernst & Young LLP required by
Independence Standards Board Standard No. 1 (Independence Discussion with Audit
Committees) and the Audit Committee has discussed the independence of Ernst &
Young LLP with that firm.
Based on the review and discussions with Endorex's auditors for the fiscal
year ended December 31, 2000, the Audit Committee recommended to the board of
directors that the financial statements be included in Endorex's Annual Report
on Form 10-KSB.
THE AUDIT COMMITTEE
Richard Dunning
H. Laurence Shaw
NOTWITHSTANDING ANYTHING TO THE CONTRARY SET FORTH IN ANY OF ENDOREX'S
PREVIOUS OR FUTURE FILINGS UNDER THE SECURITIES ACT OR THE SECURITIES EXCHANGE
ACT OF 1934, AS AMENDED, THAT MIGHT INCORPORATE THIS JOINT PROXY
STATEMENT/PROSPECTUS OR FUTURE FILINGS MADE BY ENDOREX UNDER THOSE STATUTES, THE
AUDIT COMMITTEE REPORT, AUDIT COMMITTEE CHARTER, AND REFERENCE TO THE
INDEPENDENCE OF THE AUDIT COMMITTEE MEMBERS ARE NOT DEEMED FILED WITH THE SEC
AND ARE NOT DEEMED INCORPORATED BY REFERENCE INTO ANY OF THOSE PRIOR FILINGS OR
INTO ANY FUTURE FILINGS MADE BY ENDOREX UNDER THOSE STATUTES.
DIRECTOR COMPENSATION
See "Endorex Management and Executive Compensation."
RECOMMENDATION OF THE BOARD OF DIRECTORS
The board of directors recommends that Endorex stockholders vote "FOR" the
election of all of the nominees listed above.
141
PROPOSAL FOUR: APPROVAL OF AMENDMENT TO
ENDOREX AMENDED AND RESTATED 1995 OMNIBUS INCENTIVE PLAN
Endorex stockholders are being asked to approve an amendment to the Endorex
Amended and Restated 1995 Omnibus Incentive Plan, or 1995 Plan, which will have
the following effects:
(i) increase the number of shares of common stock issuable under the
1995 Plan by an additional 2,165,664 shares;
(ii) implement a maximum annual limit of 500,000 shares of common stock
by which the share reserve may increase annually over the term of the 1995
Plan under the automatic share increase provision; and
(iii) modify the automatic option grant program to (a) increase the
initial option grants to newly-elected board members to 50,000 shares of
Endorex common stock vesting immediately and (b) provide for annual option
grants to continuing board members for 10,000 shares vesting over one year.
The board believes the amendment to increase the share reserve is necessary
to assure that a sufficient reserve of common stock remains available for
issuance under the 1995 Plan in order to allow Endorex to continue to utilize
equity incentives to attract and retain the services of key individuals
essential to Endorex's long-term growth and financial success. The
implementation of a limit by which the share reserve may increase annually is
necessary to ensure that Endorex can grant incentive stock options on the basis
of such increases. The board of directors of Endorex believes that the
amendments to increase the awards and simplify the vesting schedule of the
automatic option grants to board members are necessary in order to attract
certain qualified members of the board. Endorex relies significantly on equity
incentives in the form of stock option grants in order to attract and retain key
employees and believes that such equity incentives are necessary for it to
remain competitive in the marketplace for executive talent and other key
employees. Option grants made to newly-hired or continuing employees will be
based on both competitive market conditions and individual performance.
The 1995 Plan was initially adopted in April 1995. The 1995 Plan was
subsequently amended in July 1996, October 1997 and February 1998 to effect
increases to the share reserve and certain other amendments; all such amendments
were approved by the stockholders. The board of directors adopted the amendments
to the 1995 Plan that are the subject of this proposal on February 21, 2001
((iii) above), May 16, 2001 ((i) above) and September 26, 2001 ((i), (ii) and
(iii) above), subject to stockholder approval at the annual meeting of the
Endorex stockholders.
The following is a summary of the principal features of the 1995 Plan, as
most recently amended. Any stockholder who wishes to obtain a copy of the actual
plan document may do so upon written request to Endorex at 28101 Ballard Drive,
Suite F, Lake Forest, Illinois 60045.
EQUITY INCENTIVE PROGRAMS
The 1995 Plan consists of four separate equity incentive programs: (1) the
Discretionary Option Grant Program, (2) the Salary Investment Option Grant
Program, (3) the Automatic Option Grant Program for non-employee board members
and (4) the Director Fee Option Grant Program for non-employee board members.
The principal features of each program are described below. The Compensation
Committee of the board will administer the Discretionary Option Grant Program,
determine the calendar year or years in which the Salary Investment Option Grant
Program will be in effect and select the individuals who are to participate in
such program. The board may at any time appoint a secondary committee of one or
more board members to have separate but concurrent authority with the
Compensation Committee to make option grants under the Discretionary Option
Grant Program to individuals other than Endorex's executive officers and
non-employee board members. All grants under the Salary Investment Option Grant,
the Automatic Option Grant and the
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Director Fee Option Grant Programs will be made in strict compliance with the
express provisions of each such program. Neither the Compensation Committee nor
any secondary committee will exercise any administrative discretion under those
programs.
The term plan administrator, as used in this summary, will mean the
Compensation Committee and any secondary committee, to the extent each such
entity is acting within the scope of its administrative jurisdiction under the
1995 Plan.
SHARE RESERVE
An aggregate of 4,500,000 shares of common stock has been reserved for
issuance over the term of the 1995 Plan, including the additional increase of
2,165,664 shares of common stock that forms part of this proposal. In addition,
on the first trading day of each calendar year during the term of the 1995 Plan,
the number of shares of common stock available for issuance under the 1995 Plan
will automatically increase by an amount equal to one percent (1%) of the total
number of shares of Endorex's common stock outstanding on the last trading day
of the immediately preceding fiscal year. In no event will any such annual
increase exceed 500,000 shares of common stock.
As of October 15, 2001, 2,334,336 shares of common stock were subject to
outstanding options under the 1995 Plan, 97,056 shares of common stock had been
issued pursuant to the exercise of options granted under the 1995 Plan, and
2,806,862 shares of common stock remained available for future issuance,
assuming stockholder approval of this proposal.
No participant in the 1995 Plan may receive option grants or separately
exercisable stock appreciation rights for more than 750,000 shares of common
stock in the aggregate per calendar year. Stockholder approval of this proposal
will also constitute a reapproval of the 750,000 share limitation for purposes
of Internal Revenue Code Section 162(m).
The shares of common stock issuable under the 1995 Plan may be drawn from
shares of Endorex's authorized but unissued shares of common stock or from
shares of common stock reacquired by Endorex, including shares repurchased on
the open market.
In the event any change is made to the outstanding shares of common stock by
reason of any recapitalization, stock dividend, stock split, combination of
shares, exchange of shares or other change in corporate structure effected
without the receipt of consideration by Endorex, appropriate adjustments will be
made to: (1) the maximum number and/or class of securities issuable under the
1995 Plan, (2) the maximum number and/or class of securities by which the share
reserve may increase annually under the automatic share increase reserve
provisions, (3) the number and/or class of securities for which any one person
may be granted options or separately exercisable stock appreciation rights per
calendar year, (4) the number and/or class of securities for which automatic
option grants are to be subsequently granted to eligible directors, and (5) the
number and/or class of securities and the exercise price per share in effect
under each outstanding option (including any options incorporated from the
predecessor 1994 Non-Employee Stock Option Plan and Incentive Stock Option Plan
which were incorporated into the 1995 Plan).
ELIGIBILITY
Employees, non-employee board members and independent consultants in the
service of Endorex or its parent and subsidiaries (whether now existing or
subsequently established) are eligible to participate in the Discretionary
Option Grant Program. Executive officers and other highly paid employees are
also eligible to participate in the Salary Investment Option Grant Program.
Participation in the Automatic Option Grant and Director Fee Option Grant
Programs is limited to non-employee members of the board.
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As of October 15, 2001, five executive officers, six non-employee board
members and approximately 21 other employees and consultants were eligible to
participate in the Discretionary Option Grant Program. The five executive
officers were also eligible to participate in the Salary Investment Option Grant
Program, and the six non-employee board members were also eligible to
participate in the Automatic Option Grant and Director Fee Option Grant
Programs.
VALUATION
The fair market value per share of common stock on any relevant date under
the 1995 Plan is deemed to be equal to the closing selling price per share on
that date on a stock exchange where shares of Endorex's common stock are traded.
On October 15, 2001, the fair market value per share determined on such basis
was $0.90.
DISCRETIONARY OPTION GRANT PROGRAM
The plan administrator has complete discretion under the Discretionary
Option Grant Program to determine which eligible individuals are to receive
option grants, the time or times when those grants are to be made, the number of
shares subject to each such grant, the status of any granted option as either an
incentive stock option or a non-statutory option under the federal tax laws, the
vesting schedule (if any) to be in effect for the option grant and the maximum
term for which any granted option is to remain outstanding.
Each granted option will have an exercise price per share no less than 85%
of the fair market value of the shares on the grant date unless otherwise
determined by the plan administrator. No granted option will have a term in
excess of 10 years, and the option will generally become exercisable in one or
more installments over a specified period of service measured from the grant
date. However, one or more options may be structured so that they will be
immediately exercisable for any or all of the option shares. The shares acquired
under immediately exercisable options will be subject to repurchase by Endorex,
at the exercise price paid per share, if the optionee ceases service with
Endorex prior to vesting in those shares.
Upon cessation of service, the optionee will have a limited period of time
in which to exercise any outstanding option to the extent exercisable for vested
shares. The plan administrator will have complete discretion to extend the
period following the optionee's cessation of service during which his or her
outstanding options may be exercised and/or to accelerate the exercisability or
vesting of such options in whole or in part. Such discretion may be exercised at
any time while the options remain outstanding, whether before or after the
optionee's actual cessation of service.
The plan administrator is authorized to issue two types of stock
appreciation rights in connection with option grants made under the
Discretionary Option Grant Program:
TANDEM STOCK APPRECIATION RIGHTS, which provide the holders with the
right to surrender their options for an appreciation distribution from
Endorex equal in amount to the excess of (a) the fair market value of the
vested shares of common stock subject to the surrendered option over
(b) the aggregate exercise price payable for such shares. Such appreciation
distribution may, at the discretion of the plan administrator, be made in
cash or in shares of common stock.
LIMITED STOCK APPRECIATION RIGHTS, which may be granted to the officers
of Endorex as part of their option grants. Any option with such a limited
stock appreciation right in effect may be surrendered to Endorex upon the
successful completion of a hostile take-over of Endorex. In return for the
surrendered option, the officer will be entitled to a cash distribution from
Endorex in an amount per surrendered option share equal to the excess of
(a) the take-over price per share over (b) the exercise price payable for
such share.
144
The plan administrator also has the authority to effect the cancellation of
outstanding options under the Discretionary Option Grant Program (and
outstanding options incorporated from the predecessor 1994 Non-Employee Stock
Option Plan and Incentive Stock Option Plan which were incorporated into the
1995 Plan) that have exercise prices in excess of the then-current market price
of Endorex's common stock and to issue replacement options with an exercise
priced on the market price of Endorex's common stock at the time of the new
grant.
SALARY INVESTMENT OPTION GRANT PROGRAM
The Compensation Committee has complete discretion to implement the Salary
Investment Option Grant Program for one or more calendar years and in selecting
the executive officers and other eligible individuals who are to participate in
the program. As a condition to such participation, each selected individual
must, prior to the start of the calendar year of participation, file with the
Compensation Committee an irrevocable authorization directing Endorex to reduce
his or her base salary for the upcoming calendar year by a specified dollar
amount not less than $10,000 nor more than $75,000 and to apply that amount to
the acquisition of a special option grant under the program. Each selected
individual who files such a timely election will automatically be granted a
non-statutory option on or before the last trading day in January of the
calendar year for which that salary reduction is to be in effect.
Stockholder approval of this proposal will constitute the pre-approval of
each option subsequently granted under the Salary Investment Option Grant
Program on the basis of the share increase effected pursuant to this proposal
and the subsequent exercise of that option in accordance with its terms.
The number of shares subject to each option will be determined by dividing
the salary reduction amount by two-thirds of the fair market value per share of
Endorex's common stock on the grant date. The exercise price will be equal to
one-third of the fair market value of Endorex's common stock per share on the
grant date. As a result, the total spread on the option shares at the time of
grant (the fair market value of the option shares on the grant date less the
aggregate exercise price payable for those shares) will be equal to the amount
by which the optionee's salary is to be reduced for the calendar year. In
effect, the salary reduction serves as an immediate prepayment, as of the time
of the option grant, of two thirds of the then-current market price of the
shares of common stock subject to the option.
The option will become exercisable in a series of 12 equal monthly
installments upon the optionee's completion of each month of service in the
calendar year for which such salary reduction is in effect and will become
immediately exercisable for all the option shares on an accelerated basis should
Endorex experience certain changes in ownership or control. Each option will
remain exercisable for any vested shares until the earlier of (1) the expiration
of the ten-year option term or (2) the end of the three-year period measured
from the date of the optionee's cessation of service.
Endorex has not yet implemented the Salary Investment Option Grant Program.
AUTOMATIC OPTION GRANT PROGRAM
Under the Automatic Option Grant Program, eligible non-employee board
members receive a series of option grants over their period of board service.
Each non-employee board member will, at the time of his or her initial election
or appointment to the board on or after this annual stockholders meeting,
receive a non-statutory stock option grant for 50,000 shares of common stock. In
addition, on the date of each annual stockholders meeting beginning with this
annual stockholder meeting, each individual who is re-elected to serve as a
non-employee board member will be automatically granted an option to purchase
10,000 shares of common stock (provided such individual has served as a
non-employee board member for at least six months). There will be no limit on
the number of such
145
10,000-share option grants any one eligible non-employee board member may
receive over his or her period of continued board service.
Stockholder approval of this proposal will also constitute pre-approval of
each option granted under the Automatic Option Grant Program on or after the
date of the annual stockholders meeting and the subsequent exercise of that
option in accordance with the terms of the program summarized below.
Each automatic grant will have an exercise price per share equal to the fair
market value per share of common stock on the grant date and will have a maximum
term of 10 years, subject to earlier termination following the optionee's
cessation of board service.
The shares subject to each initial 50,000-share automatic grant will
immediately vest. Each 10,000-share option will be immediately exercisable for
the option shares and the shares acquired under the option will be subject to
repurchase by Endorex at the option exercise price paid per share, upon the
optionee's cessation of board service prior to vesting in those shares. The
shares subject to each annual 10,000-share grant will vest upon the completion
of one year of Board service measured from the option grant date.
Each outstanding automatic option grant will automatically accelerate and
become immediately exercisable for any or all of the option shares as
fully-vested shares upon certain changes in control or ownership of Endorex or
upon the optionee's death or disability while a board member. Following the
optionee's cessation of board service for any reason, each option will remain
exercisable for a 12-month period and may be exercised during that time for any
or all shares in which the optionee is vested at the time of such cessation of
board service.
DIRECTOR FEE OPTION GRANT PROGRAM
The Compensation Committee has complete discretion to implement the Director
Fee Option Grant Program for one or more calendar years in which non-employee
board members may participate. As a condition to such participation, each
non-employee board member must, prior to the start of the calendar year of
participation, file with Endorex's Chief Financial Officer an irrevocable
authorization directing Endorex to apply all or a portion of his or her cash
retainer fee for the upcoming calendar year to the acquisition of a special
option grant under the program.
Each non-employee board member who files such a timely election will
automatically be granted a non-statutory option on the first trading day in
January of the calendar year for which that retainer fee election is to be in
effect.
The number of shares subject to each such option will be determined by
dividing the amount of the retainer fee for the calendar year to be applied to
the program by two-thirds of the fair market value per share of Endorex's common
stock on the grant date. The exercise price will be equal to one-third of the
fair market value of Endorex's common stock per share on the grant date. As a
result, the total spread on the option shares at the time of grant (the fair
market value of the option shares on the grant date less the aggregate exercise
price payable for those shares) will be equal to the portion of the retainer fee
that optionee has elected to be applied to the program. In effect, the portion
of the annual retainer fee otherwise payable in cash serves as an immediate
prepayment, as of the time of the option grant, of two thirds of the
then-current market price of the shares of common stock subject to the option.
The option will become exercisable for 50% of the option shares upon the
optionee's completion of six months of service in the calendar year for which
such retainer fee election is in effect and the balance in a series of six equal
monthly installments upon the optionee's completion of each additional month of
service during that calendar year. The option will become immediately
exercisable for all the option shares on an accelerated basis should Endorex
experience certain changes in ownership or
146
control. Each option will remain exercisable for any vested shares until the
earlier of (1) the expiration of the ten-year option term or (2) the end of the
three-year period measured from the date of the optionee's cessation of service.
Endorex has not yet implemented the Director Fee Option Grant Program.
GENERAL PROVISIONS
ACCELERATION
In the event that Endorex is acquired by merger or asset sale, each
outstanding option under the Discretionary Option Grant Program that is not to
be assumed or replaced by the successor corporation will automatically
accelerate in full, and all unvested shares outstanding under the Discretionary
Option Grant Program will immediately vest, except to the extent Endorex's
repurchase rights with respect to those shares are to be assigned to the
successor corporation.
The plan administrator will have the authority under the Discretionary
Option Grant Program to provide that options granted under such program will
automatically vest in full (1) upon an acquisition of Endorex, whether or not
those options are assumed or replaced, (2) upon a hostile change in control of
Endorex effected through a tender offer for more than 50% of Endorex's
outstanding voting stock or by proxy contest for the election of board members,
or (3) in the event the individual's service is terminated, whether
involuntarily or through a resignation for good reason, within a designated
period (not to exceed 18 months) following an acquisition in which those options
are assumed or replaced or a hostile change in control. The options granted
under the Salary Investment Option Grant Program, the Automatic Option Grant
Program and the Director Fee Option Grant Program will automatically accelerate
and become exercisable in full upon an acquisition or change in control
transaction.
The acceleration of vesting in the event of a change in the ownership or
control of Endorex may be seen as an anti-takeover provision and may have the
effect of discouraging a merger proposal, a takeover attempt or other efforts to
gain control of Endorex.
LIMITED STOCK APPRECIATION RIGHTS
Each option granted under the Automatic Option Grant and Director Fee Option
Grant Programs includes a limited stock appreciation right so that upon the
successful completion of a hostile tender offer for more than 50% of Endorex's
outstanding voting securities, the option may be surrendered to Endorex in
return for a cash distribution from Endorex. The amount of the distribution per
surrendered option share will be equal to the excess of (1) the fair market
value per share at the time the option is surrendered or, if greater, the tender
offer price paid per share in the hostile take-over over (2) the exercise price
payable per share under such option. In addition, the plan administrator may
grant such rights to officers of Endorex as part of their option grants under
the Discretionary Option Grant Program.
Stockholder approval of this proposal will also constitute pre-approval of
each limited stock appreciation right granted under the Automatic Option Grant
Director Fee Option Grant Programs and the subsequent exercise of those rights
in accordance with the foregoing terms.
FINANCIAL ASSISTANCE
The plan administrator may institute a loan program to assist one or more
participants in financing the exercise of outstanding options under the
Discretionary Option Grant Program through full-recourse interest-bearing
promissory notes. However, the maximum amount of financing provided any
participant may not exceed the cash consideration payable for the issued shares
plus all applicable withholding taxes incurred in connection with the
acquisition of those shares.
147
SPECIAL TAX ELECTION
The plan administrator may provide one or more holders of non-statutory
options under the 1995 Plan with the right to have Endorex withhold a portion of
the shares otherwise issuable to such individuals in satisfaction of the
withholding taxes to which such individuals become subject in connection with
the exercise of those options or the vesting of those shares. Alternatively, the
plan administrator may allow such individuals to deliver previously acquired
shares of common stock in payment of such withholding tax liability.
AMENDMENT AND TERMINATION
The board may amend or modify the 1995 Plan at any time, subject to any
required stockholder approval pursuant to applicable laws and regulations.
Unless sooner terminated by the board, the 1995 Plan will terminate on the
earliest of (1) April 23, 2005, (2) the date on which all shares available for
issuance under the 1995 Plan have been issued as fully-vested shares or (3) the
termination of all outstanding options in connection with certain changes in
control or ownership of Endorex.
STOCK AWARDS
The table below shows, as to Endorex's Chief Executive Officer, the three
other most highly compensated executive officers of Endorex (with base salary
and bonus for the past fiscal year in excess of $100,000) and the other
individuals and groups indicated, the number of shares of common stock subject
to option grants made under the 1995 Plan from January 1, 2000 through June 30,
2001, together with the weighted average exercise price payable per share.
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OPTION TRANSACTIONS
NUMBER OF SHARES WEIGHTED AVERAGE
UNDERLYING EXERCISE PRICE
NAME AND POSITION OPTIONS GRANTED PER SHARE ($)
----------------- ---------------- ----------------
Michael S. Rosen ........................................... 160,000 $ 1.250
President, Chief Executive Officer and Director
Robert N. Brey ............................................. 30,000 $ 3.938
Senior Advisor for Technology Assessment and Intellectual
Property(1)
Frank C. Reid .............................................. 60,000 $ 3.938
Vice President, Finance and Corporate Development(2)
Panayiotis P. Constantinides ............................... 60,000 $ 1.500
Vice President of Research and Development
John McCracken ............................................. 100,000 $ 1.250
Vice President, Business Development
Steve J. Koulogeorge ....................................... 30,000 $ 1.781
Controller, Assistant Secretary and Assistant Treasurer
All current executive officers as a group................... 380,000 $ 1.544
Richard Dunning ............................................ 50,000(3) $ 1.250
Director
Steve H. Kanzer ............................................ 50,000(3) $ 1.250
Director
Paul D. Rubin .............................................. 50,000(3) $ 1.250
Director
H. Laurence Shaw ........................................... 50,000(3) $ 1.250
Director
Kenneth Tempero ............................................ 62,000(3) $ 1.637
Director
Steven Thornton ............................................ 62,000(3) $ 1.952
Director
All current non-employee directors as a group
(6 persons)............................................... 324,000 $ 1.458
All employees, including current officers, as a group
(approximately 18 persons)................................ 488,500 $ 1.617
------------------------
(1) Mr. Brey served as an executive officer of Endorex in the capacity of Vice
President of Research and Development until November 30, 2000.
(2) Mr. Reid resigned from Endorex on December 31, 2000.
(3) Includes an option to purchase 50,000 shares of Endorex common stock granted
on February 21, 2001, subject to stockholder approval.
149
FEDERAL INCOME TAX CONSEQUENCES
OPTION GRANTS
Options granted under the 1995 Plan may be either incentive stock options
which satisfy the requirements of Section 422 of the Internal Revenue Code or
non-statutory options which are not intended to meet such requirements. The
Federal income tax treatment for the two types of options differs as follows:
INCENTIVE OPTIONS. No taxable income is recognized by the optionee at the
time of the option grant, and no taxable income is generally recognized at the
time the option is exercised. The optionee will, however, recognize taxable
income in the year in which the purchased shares are sold or otherwise disposed.
For Federal tax purposes, dispositions are divided into two categories:
(1) qualifying and (2) disqualifying. A qualifying disposition occurs if the
sale or other disposition is made after the optionee has held the shares for
more than two years after the option grant date and more than one year after the
exercise date. If either of these two holding periods is not satisfied, then a
disqualifying disposition will result.
If the optionee makes a disqualifying disposition of the purchased shares,
Endorex will be entitled to an income tax deduction, for the taxable year in
which such disposition occurs, equal to the excess of (1) the fair market value
of such shares on the option exercise date over (2) the exercise price paid for
the shares. If the optionee makes a qualifying disposition, Endorex will not be
entitled to any income tax deduction.
NON-STATUTORY OPTIONS. No taxable income is recognized by an optionee upon
the grant of a non-statutory option. The optionee will in general recognize
ordinary income in the year in which the option is exercised equal to the excess
of the fair market value of the purchased shares on the exercise date over the
exercise price paid for the shares, and the optionee will be required to satisfy
the tax withholding requirements applicable to such income.
If the shares acquired upon exercise of the non-statutory option are
unvested and subject to repurchase by Endorex in the event of the optionee's
termination of service prior to vesting in those shares, then the optionee will
not recognize any taxable income at the time of exercise but will have to report
as ordinary income, as and when Endorex's repurchase right lapses, an amount
equal to the excess of (1) the fair market value of the shares on the date the
repurchase right lapses over (2) the exercise price paid for the shares. The
optionee may, however, elect under Section 83(b) of the Internal Revenue Code to
include as ordinary income in the year of exercise of the option an amount equal
to the excess of (1) the fair market value of the purchased shares on the
exercise date over (2) the exercise price paid for such shares. If the
Section 83(b) election is made, the optionee will not recognize any additional
income as and when the repurchase right lapses.
Endorex will be entitled to an income tax deduction equal to the amount of
ordinary income recognized by the optionee with respect to the exercised
non-statutory option. The deduction will in general be allowed for the taxable
year of Endorex in which such ordinary income is recognized by the optionee.
STOCK APPRECIATION RIGHTS
No taxable income is recognized upon receipt of a stock appreciation right.
The holder will recognize ordinary income, in the year in which the stock
appreciation right is exercised, in an amount equal to the appreciation
distribution. Endorex will be entitled to an income tax deduction equal to the
appreciation distribution in the taxable year in which such ordinary income is
recognized by the optionee.
150
DEDUCTIBILITY OF EXECUTIVE COMPENSATION
Endorex anticipates that any compensation deemed paid by it in connection
with the disqualifying dispositions of incentive stock option shares or the
exercise of non-statutory options with exercise prices equal to the fair market
value of the option shares on the grant date will qualify as performance-based
compensation for purposes of Code Section 162(m) and will not have to be taken
into account for purposes of the $1 million limitation per covered individual on
the deductibility of the compensation paid to certain executive officers of
Endorex. Accordingly, all compensation deemed paid with respect to those options
will remain deductible by Endorex without limitation under Code Section 162(m).
ACCOUNTING TREATMENT
Option grants under the Discretionary Option Grant and Automatic Option
Grant Programs with exercise prices equal to the fair market value of the option
shares on the grant date will not result in any direct charge to Endorex's
reported earnings. However, the fair value of those options is required to be
disclosed in the notes to Endorex's financial statements, and Endorex must also
disclose, in footnotes to the financial statements, the pro forma impact those
options would have upon Endorex's reported earnings were the fair value of those
options at the time of grant treated as a compensation expense. In addition, the
number of outstanding options may be a factor in determining Endorex's earnings
per share on a fully diluted basis.
Option grants made under the 1995 Plan with exercise or issue prices less
than the fair market value of the shares on the grant or issue date will result
in a direct compensation expense in an amount equal to the excess of such fair
market value over the exercise or issue price. The expense must be amortized
against Endorex's earnings over the period that the option shares or issued
shares are to vest.
On March 31, 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, which is an interpretation of APB Opinion No. 25
governing the accounting principles applicable to equity incentive plans. Under
the Interpretation, option grants made to consultants (but not non-employee
board members) after December 15, 1998 will result in a direct charge to
Endorex's reported earnings based upon the fair value of the option measured
initially as of the grant date and then subsequently on the vesting date of each
installment of the underlying option shares. Such charge will accordingly
include the appreciation in the value of the option shares over the period
between the grant date of the option (or, if later, the July 1, 2000 effective
date of the Interpretation) and the vesting date of each installment of the
option shares. In addition, any options which are repriced after December 15,
1998 will also trigger a direct charge to Endorex's earnings measured by the
appreciation in the value of the underlying shares over the period between the
grant date of the option (or, if later, the July 1, 2000 effective date of the
Interpretation) and the date the option is exercised for those shares.
Should one or more individuals be granted tandem stock appreciation rights
under the 1995 Plan, then such rights would result in a compensation expense to
be charged against Endorex's reported earnings. Accordingly, at the end of each
fiscal quarter, the amount (if any) by which the fair market value of the shares
of common stock subject to such outstanding stock appreciation rights has
increased from the prior quarter-end would be accrued as compensation expense,
to the extent such fair market value is in excess of the aggregate exercise
price in effect for those rights.
NEW PLAN BENEFITS
As of October 15, 2001, no stock options had been granted, and no shares of
common stock had been issued, on the basis of the share increases which are the
subject of this proposal. However, subject to approval of this proposal, on the
date of the annual meeting, each of Messrs. Dunning, Kanzer, Rubin, Shaw,
Tempero and Thornton will receive an option to purchase 10,000 shares of Endorex
common stock. In addition, subject to consummation of the merger, each of
Messrs. Rico and Kliem
151
will receive on the date of their initial appointment to the Endorex board of
directors an option to purchase 50,000 shares of Endorex common stock.
STOCKHOLDER APPROVAL
The affirmative vote of the holders of a majority of the shares of Endorex
common stock, voting together with the holders of Endorex Series B preferred
stock on an as converted basis, entitled to vote and that are present or
represented by proxy at the Endorex annual meeting of stockholders is required
for approval of the amendment to the 1995 Plan. Should such stockholder approval
not be obtained, then: (a) the 2,165,664-share increase to the share reserve
under the 1995 Plan will not be implemented and any stock options granted under
the 1995 Plan on the basis of the increase will immediately terminate without
ever becoming exercisable for the shares of common stock subject to those
options, (b) there will be no maximum annual limit of shares of common stock by
which the share reserve may increase annually under the automatic share increase
provision of the 1995 Plan, and (c) the changes to the number of shares and
vesting schedule applicable to the initial and continuing option grants under
the automatic option grant program to non-employee board members will not be
implemented. The 1995 Plan will, however, continue in effect as previously
approved by the stockholders, and option grants may continue to be made under
the 1995 Plan (including option grants under the automatic option grant program
as previously approved by the stockholders) until all the shares available for
issuance under the 1995 Plan has been issued pursuant to such option grants.
Endorex does not have to consummate the merger unless its stockholders approve
the increase of the number of shares of common stock issuable under the 1995
Plan, although this condition may be waived by Endorex.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The board of directors recommends that the stockholders vote "FOR" the
approval of the amendments to the 1995 Plan.
152
PROPOSAL FIVE: APPROVAL OF FEBRUARY 21, 2001
OPTION GRANTS TO NON-EMPLOYEE
MEMBERS OF THE BOARD OF DIRECTORS
Endorex's stockholders are being asked to approve certain stock option
grants to the non-employee members of Endorex's board of directors under the
Discretionary Option Grant Program of the Endorex's Amended and Restated 1995
Omnibus Incentive Plan. The Endorex board believes that it is in Endorex's best
interests to provide additional incentives to Endorex's non-employee board
members to remain in service.
MATERIAL TERMS OF THE OPTIONS
On February 21, 2001, Endorex's board of directors granted a fully vested
option to purchase 50,000 shares of Endorex common stock to each of Endorex's
non-employee board members--Richard Dunning, Steve H. Kanzer, Dr. Paul D. Rubin,
Dr. H. Laurence Shaw, Dr. Kenneth Tempero, and Steven Thornton--subject to
subsequent approval by the stockholders at the annual meeting of stockholders.
The material terms and conditions of each option grant may be summarized as
follows:
(i) Each option has an exercise price equal to $1.25 per share, the
closing price per share of the common stock on the February 21, 2001 grant
date, as reported on the AMEX. On October 15, 2001, the closing price per
share on the AMEX was $0.90.
(ii) Each option is immediately exercisable for all of the option shares
as fully vested shares.
(iii) Each option has a maximum term of ten (10) years measured from the
February 21, 2001 grant date, subject to earlier termination upon the
cessation of service of the non-employee board member. If the non-employee
board members terminate service for any reason other than death or
disability, then such individuals will have a twelve (12)-month period
following their termination date in which to exercise their option. Should
the non-employee board members die or become disabled while the option
remains outstanding, then such individuals or their legal representatives
will have a twelve (12)-month period in which to exercise the option.
(iv) The exercise price may be paid in cash or in shares of Endorex's
common stock held for the requisite period necessary to avoid a charge to
Endorex's earnings. Each option may also be exercised through a same-day
sale program, pursuant to which a designated brokerage firm effects the
immediate sale of the shares purchased under the option and pays over to
Endorex, out of the sale proceeds available on the settlement date,
sufficient funds to cover the exercise price for the purchased shares plus
all applicable withholding taxes.
(v) In the event that Endorex is acquired by merger or asset sale, each
option will terminate and cease to be exercisable, except to the extent
assumed by the successor corporation. If the options are so assumed, the
exercise price and number of shares subject to the option will be
appropriately adjusted so that the aggregate exercise price remains the
same.
(vi) Each option contains a limited stock appreciation right which will
trigger the automatic cancellation of the option upon the successful
completion of a hostile tender offer for more than 50% of Endorex's
outstanding voting securities. In return for the cancelled option, the
non-employee board member will be entitled to a cash distribution from
Endorex in an amount per cancelled option share equal to the excess of
(a) the highest price per share of common stock paid in connection with the
tender offer over (b) the exercise price payable for such share.
(vii) In the event any change is made to the common stock issuable under
the option by reason of any stock split, stock dividend, recapitalization,
combination of shares, exchange of shares, or other change in corporate
structure effected without Endorex's receipt of consideration,
153
appropriate adjustments will be made to the number and/or class of
securities subject to the option and the exercise price payable per share.
(viii) The remaining terms and conditions of each option grant is
substantially the same as those summarized above in the "Discretionary
Option Grant Program" section of Proposal Four above.
FEDERAL INCOME TAX CONSEQUENCES
The option grants which are part of this proposal are non-statutory stock
options which are not intended to satisfy the requirements of Section 422 of the
Internal Revenue Code.
No taxable income is recognized by the non-employee board member upon the
grant of the option. The non-employee board member will recognize ordinary
income, in the year in which the option is exercised, equal to the excess of the
fair market value of the purchased shares on the exercise date over the exercise
price paid for the shares.
Endorex will be entitled to an income tax deduction equal to the amount of
ordinary income recognized by the non-employee board members with respect to the
exercised non-statutory option. The deduction will in general be allowed for the
taxable year of Endorex in which such ordinary income is recognized by the
non-employee board members.
DEDUCTIBILITY OF COMPENSATION
Endorex anticipates that any compensation deemed paid by it in connection
with the exercise of the option grants to the non-employee board members will be
fully deductible by Endorex.
ACCOUNTING TREATMENT
The option grants to the non-employee board members will not result in any
direct charge to Endorex's reported earnings. However, the fair value of those
options is required to be disclosed in the notes to Endorex's financial
statements, and Endorex must also disclose, in footnotes to the financial
statements, the pro forma impact those options would have upon Endorex's
reported earnings were the fair value of those options at the time of grant
treated as a compensation expense. In addition, the number of outstanding
options may be a factor in determining Endorex's earnings per share on a fully
diluted basis.
On March 31, 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, which is an interpretation of APB Opinion No. 25
governing the accounting principles applicable to equity incentive plans. Under
the Interpretation, any options which are repriced after December 15, 1998 will
also trigger a direct charge to Endorex's earnings measured by the appreciation
in the value of the underlying shares over the period between the grant date of
the option and the date the option is exercised for those shares.
STOCK AWARDS
The table below shows the number of shares of common stock subject to option
grants made to non-employee board members under the 1995 Plan from January 1,
2000 through June 30, 2001, together with the weighted average exercise price
payable per share.
154
OPTION TRANSACTIONS
NUMBER OF SHARES WEIGHTED AVERAGE
UNDERLYING EXERCISE PRICE
NAME AND POSITION OPTIONS GRANTED PER SHARE ($)
----------------- ---------------- ----------------
Richard Dunning ............................................ 50,000(1) $ 1.250
Director
Steve H. Kanzer ............................................ 50,000(1) $ 1.250
Director
Paul D. Rubin .............................................. 50,000(1) $ 1.250
Director
H. Laurence Shaw ........................................... 50,000(1) $ 1.250
Director
Kenneth Tempero ............................................ 62,000(1) $ 1.637
Director
Steven Thornton ............................................ 62,000(1) $ 1.952
Director
All current non-employee directors as a group (6 persons)... 324,000 $ 1.458
------------------------
(1) Includes an option to purchase 50,000 shares of Endorex common stock granted
on February 21, 2001, subject to stockholder approval under this proposal.
NEW PLAN BENEFITS
As of October 15, 2001, options to purchase 300,000 shares of Endorex common
stock had been granted on the basis of this Proposal.
STOCKHOLDER APPROVAL
The affirmative vote of the holders of a majority of the shares of Endorex
common stock, voting together with the holders of Endorex Series B preferred
stock on an as converted basis, entitled to vote and that are present or
represented by proxy at the Endorex annual meeting of stockholders is required
for approval of the option grants to the non-employee board members. Should such
stockholder approval not be obtained, then the option grants to the non-employee
board members will immediately terminate without ever becoming exercisable for
the shares of common stock subject to those options.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The board of directors recommends that the stockholders vote "FOR" the
approval of the 50,000-share option grants to the non-employee board members on
February 21, 2001.
155
PROPOSAL SIX: RATIFICATION OF INDEPENDENT PUBLIC ACCOUNTANTS
Upon the recommendation of the Audit Committee, the board of directors
appointed Ernst & Young LLP, or E&Y, independent public accountants and
auditors, as auditors of Endorex to serve for the year ending December 31, 2001,
subject to the ratification of such appointment by stockholders at the annual
meeting. The affirmative vote of the holders of a majority of the shares of
Endorex common stock, voting together with the holders of Endorex Series B
preferred stock on an as converted basis, entitled to vote and that are present
or represented by proxy at the Endorex annual meeting stockholders. is required
to ratify the appointment of the auditors. Unless otherwise instructed, the
proxy holders will vote the proxies received by them "FOR" the ratification of
E&Y, to serve as Endorex's auditors for the year ending December 31, 2001.
A representative of E&Y is expected to be available at the annual meeting,
will have the opportunity to make a statement if he or she desires to do so, and
will be available to respond to appropriate questions.
On November 2, 2000, Endorex engaged E&Y as its independent public
accountant and dismissed PricewaterhouseCoopers LLP, or PwC. The decision to
change independent public accountants was recommended and approved by Endorex's
Audit Committee.
PwC's reports on the financial statements of Endorex for the fiscal years
ended December 31, 1998 and 1999 did not contain an adverse opinion or
disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope or accounting principle.
In connection with its audits for the fiscal years ended December 31, 1998
and 1999 and through November 2, 2000, there were no disagreements with PwC on
any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which, if not resolved to PwC's
satisfaction, would have caused them to make reference to the subject matter of
the disagreements in their report on the financial statements for such years.
During the fiscal years ended December 31, 1998 and 1999 and through
November 2, 2000 there were no reportable events except that in connection with
its review of the June 30, 2000 financial statements, PwC reported a material
weakness in Endorex's internal control structure relative to the employees of
Endorex not having expertise in the area of generally accepted accounting
principles and financial reporting procedures. Endorex did not have a certified
public accountant on its full-time staff at that time. Endorex has since hired a
certified public accountant to serve as Endorex's corporate controller.
Endorex's management and Audit Committee believe that the concerns expressed by
PwC have been adequately addressed with the hiring of the certified public
accountant as controller. Furthermore, Endorex's management and Audit Committee
do not believe that the reported material weakness in Endorex's internal control
structure relative to the employees of Endorex not having expertise in the area
of generally accepted accounting principles and financial reporting procedures
had an effect on Endorex's financial statements.
Prior to engaging E&Y, Endorex did not consult E&Y with respect to the
application of accounting principles to a specific completed transaction or
contemplated transaction, or the type of audit opinion that might be rendered on
Endorex's financial statements. Endorex provided a copy of PwC's letter
reporting the material weakness to E&Y and authorized PwC to respond fully to
the inquiries of E&Y regarding the letter.
AUDIT FEES
The aggregate fees for professional services rendered by E&Y and PwC in
connection with their audit and review of Endorex's consolidated financial
statements included in Endorex's Quarterly Reports on Form 10-QSB and Annual
Report on Form 10-KSB for the fiscal year ended December 31, 2000 were
approximately $123,150 and $26,285, respectively.
156
FINANCIAL INFORMATION SYSTEMS DESIGN AND IMPLEMENTATION FEES
There were no professional services rendered by E&Y or PwC in the fiscal
year ended December 31, 2000 relating to financial information systems design
and implementation.
ALL OTHER FEES
The aggregate fees for all other services rendered by E&Y during fiscal year
ended December 31, 2000 was $2,500 for audit related services and $16,800 for
nonaudit related services. The aggregate fees for all other services rendered by
PwC during fiscal year ended December 31, 2000 was $24,770. Audit related
services consisted of accounting consultations and registration statements filed
with the SEC. Nonaudit services related to Endorex's income tax filings.
The Audit Committee, in conducting its review of auditor independence,
considered whether the performance of services by E&Y, in addition to their
audit services, was compatible with maintaining the independence of Ernst &
Young LLP as auditors.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The board of directors recommends that Endorex stockholders vote "FOR"
ratification of E&Y as Endorex's independent public accountants for the year
ending December 31, 2001.
157
STOCKHOLDER PROPOSALS
The rules of the SEC permit stockholders of a company to present proposals
for stockholder action in the company's proxy statement if those proposals are
consistent with applicable law, pertain to matters appropriate for stockholder
action and are not properly omitted by company action in accordance with the
proxy rules. Endorex expects to hold on or about May 16, 2002, its annual
meeting of stockholders following the end of fiscal year 2001. In order for
Endorex to include stockholder proposals in the proxy statement for that
meeting, they must comply with the proxy rules and Endorex must receive them
before March 15, 2001. If Endorex is not notified of a stockholder proposal by
March 15, 2001, then the proxy solicited by the board of directors for the 2002
annual meeting will confer discretionary authority to vote against that
stockholder proposal. Endorex's bylaws also contain procedures to be followed to
submit stockholder proposals to a vote of stockholders including the nomination
of directors.
OTHER MATTERS
Endorex management knows of no matters that are to be presented for action
at the meeting other than those set forth above. If any other matters properly
come before the meeting, the persons named in the enclosed form of proxy will
vote the shares represented by proxies in accordance with their best judgment on
those matters.
158
PROPOSAL TO BE VOTED UPON BY CTD STOCKHOLDERS
AT THE CTD SPECIAL MEETING
At the CTD special meeting of stockholders, CTD's stockholders will be asked
to consider and vote on the following proposal:
To approve and adopt the merger and the Agreement and Plan of Merger and
Reorganization dated as of July 31, 2001, by and among CTD, Endorex and
Roadrunner Acquisition, Inc.
CTD's board of directors adopted on July 6, 2001, resolutions approving the
merger, the merger agreement and the transactions contemplated thereby. The
merger and the merger agreement must be approved by the affirmative vote, in
person or by proxy, of the holders of a majority of the outstanding shares of
CTD common stock voting together with the holders of Series A preferred stock,
on an as converted basis. The merger contemplated by the merger agreement cannot
be completed unless CTD stockholders holding the requisite number of shares of
CTD capital stock approve the merger and the merger agreement. See "The Merger"
and "Agreement and Plan of Merger and Reorganization and Related Agreements."
Unless otherwise instructed in writing, the proxy holders will vote the proxies
received by them to approve the merger and the merger agreement.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The board of directors recommends that CTD stockholders vote "FOR" the
approval of the merger and the merger agreement.
OTHER MATTERS
The management of CTD knows of no matters that are to be presented for
action at the meeting other than those set forth above. If any other matters
properly come before the meeting, the persons named in the enclosed form of
proxy will vote the shares represented by proxies in accordance with their best
judgment on such matters.
159
EXPERTS
The consolidated financial statements of Endorex at December 31, 2000, and
for the year then ended, included in this joint proxy statement/prospectus have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
reports appearing elsewhere herein, and are included in reliance upon such
reports given on the authority of such firms as experts in accounting and
auditing.
The financial statements as of December 31, 1999 and for the year then
ended, and for the period cumulative from inception (February 15, 1985) to
December 31, 1999 included in this joint proxy statement/prospectus have been so
included in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
The consolidated financial statements of CTD at December 31, 2000 and
December 31, 1999 and for the years then ended, and for the cumulative period
from commencement of operations (January 1, 1998) to December 31, 2000, included
in this joint proxy statement/prospectus have been audited by Richard A.
Eisner & Company, LLP, independent auditors, as set forth in their report
thereon appearing elsewhere herein, which, as to the period from January 1, 1998
through December 31, 2000 is based in part on the report of other auditors. The
financial statements referred to above are included in reliance upon such
reports given on the authority of said firm as experts in accounting and
auditing.
Representatives of Ernst & Young LLP are expected to be present at the
Endorex annual meeting, will have the opportunity to make a statement at the
Endorex annual meeting if they desire to do so and are expected to be available
to respond to appropriate questions.
Representatives of Richard A. Eisner & Company, LLP are expected to be
present at the CTD special meeting, will have the opportunity to make a
statement at the CTD special meeting if they desire to do so and are expected to
be available to respond to appropriate questions.
LEGAL MATTERS
Certain legal matters in connection with the combination will be passed upon
by Brobeck, Phleger & Harrison LLP on behalf of Endorex, and by Kramer Levin
Naftalis & Frankel LLP on behalf of CTD.
WHERE YOU CAN FIND MORE INFORMATION
Endorex files annual, quarterly and special reports, proxy statements and
other information with the SEC. You may read and copy any reports, statements or
other information Endorex files at the SEC's Public Reference Rooms at 450 Fifth
Street, N.W., Washington, D.C. 20549, as well as at the SEC's regional offices
at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World
Trade Center, Suite 1300, New York, New York 10048. You may obtain information
on the operation of the Public Reference Rooms by calling the SEC at
1-800-SEC-0330. Endorex filings are also available to the public from commercial
document retrieval services and at the web site maintained by the SEC
(http://www.sec.gov).
Endorex has supplied all information contained in this document relating to
Endorex. CTD has supplied all information in this document relating to CTD.
160
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following Unaudited Pro Forma Condensed Consolidated Financial
Statements relate to Endorex's proposed acquisition of CTD. The transaction will
be accounted for under the purchase method of accounting. Under the purchase
method of accounting, the purchase price is allocated to the assets acquired and
liabilities assumed based on estimated fair values. Based on the closing price
of Endorex's common stock on June 30, 2001, the acquisition is valued at
approximately $10 million. The amount of the consideration issued to the former
shareholders and option or warrant holders of CTD was determined by arms-length
negotiations between the parties.
The following Unaudited Pro Forma Condensed Consolidated Balance sheet at
June 30, 2001 reflects the combined historical financial position with pro forma
adjustments as though the acquisition of CTD had occurred on June 30, 2001.
The Unaudited Pro Forma Condensed Consolidated Statements of Operations for
the year ended December 30, 2000 and the six months ended June 30, 2001 reflect
the combined historical results of operations with pro forma adjustments as
though the acquisition of CTD had occurred on January 1, 2000. The Unaudited Pro
Forma Condensed Consolidated Statements of Operations are based on the
following: 1) historical results of operations of Endorex for the year ended
December 31, 2000 derived from audited financial statements included in
Form 10-KSB; 2) historical results of CTD derived from audited financial
statements for the year ended December 31, 2000; and 3) unaudited financial
statements of Endorex and CTD for the six months ended June 30, 2001.
The Unaudited Pro Forma Financial Statements and the accompanying notes, or
Pro Forma Financial Information, should be read in conjunction with, and are
qualified by, the historical financial statements and notes thereto of Endorex
and CTD.
The Unaudited Pro Forma Financial Statements are intended for informational
purposes only and are not necessarily indicative of the combined results that
would have occurred had the acquisition taken place on January 1, 2000, nor is
it necessarily indicative of results that may occur in the future.
P-1
ENDOREX CORPORATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
BALANCE SHEET
JUNE 30, 2001
PRO FORMA
ENDOREX CTD ADJUSTMENTS PRO FORMA
------------ ----------- ----------- ------------
ASSETS
Current Assets:
Cash and cash equivalents.............. $ 9,808,676 $ 5,072,000 $ -- $ 14,880,676
Receivable from related party.......... 26,745 -- -- 26,745
Prepaid expenses....................... 52,930 1,000 -- 53,930
------------ ----------- ----------- ------------
Total current assets................. 9,888,351 5,073,000 -- 14,961,351
Leasehold improvements and equipment,
net.................................... 407,373 13,000 -- 420,373
Patent issuance costs, net............... 281,845 116,000 -- 397,845
Identifiable intangibles................. -- -- 5,372,513 c 5,372,513
Other assets............................. 1,004,608 3,000 (1,004,608)d 3,000
------------ ----------- ----------- ------------
TOTAL ASSETS............................. $ 11,582,177 $ 5,205,000 $ 4,367,905 $ 21,155,082
============ =========== =========== ============
LIABILITIES
Current liabilities:
Accounts payable and accrued
expenses............................. $ 674,319 $ 242,000 $ -- $ 916,319
Accrued compensation................... 174,616 -- -- 174,616
Dur to joint ventures.................. 2,285,831 -- -- 2,285,831
Current portion of capital lease
obligations.......................... 126,611 -- -- 126,611
------------ ----------- ----------- ------------
Total current liabilities............ 3,261,377 242,000 -- 3,503,377
Long-term portion of capital lease
obligations............................ 162,754 -- -- 162,754
------------ ----------- ----------- ------------
Total liabilities.................... 3,424,131 242,000 -- 3,666,131
Series C Preferred stock................. 10,004,315 -- -- 10,004,315
Stockholders' equity (deficit):
Preferred stock........................ -- 8,000 (8,000)b --
Series B convertible preferred stock... 10,439,339 -- -- 10,439,339
Common Stock........................... 12,861 5,000 9,050 a 21,911
(5,000)b
Additional paid-in capital............. 39,633,107 13,971,000 9,328,909 a 48,962,016
(13,971,000)b
Deferred compensation.................. (6,350) (66,000) (7,054)c (13,404)
66,000 b
Deficit accumulated during the
development stage.................... (51,481,746) (8,955,000) 8,955,000 b (51,481,746)
Unrealized gain on marketable
securities........................... 270 -- -- 270
Treasury stock......................... (443,750) -- -- (443,750)
------------ ----------- ----------- ------------
Total stockholders' equity
(deficit).......................... (1,846,269) 4,963,000 4,367,905 7,484,636
------------ ----------- ----------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY................................. $ 11,582,177 $ 5,205,000 $ 4,367,905 $ 21,155,082
============ =========== =========== ============
P-2
ENDOREX CORPORATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2001
PRO FORMA
ENDOREX CTD ADJUSTMENTS PRO FORMA
----------- ----------- ----------- -----------
SBIR contract revenue....................... $ -- $ -- $ -- $ --
Expenses:
SBIR contract research and development.... -- -- -- --
Proprietary research and development...... 1,171,494 880,000 -- 2,051,494
General and administrative................ 908,269 724,000 -- 1,632,269
Intangible amortization................... -- -- 537,251c 537,251
----------- ----------- --------- -----------
Total Expenses.............................. 2,079,763 1,604,000 537,251 4,221,014
----------- ----------- --------- -----------
Loss from operations........................ (2,079,763) (1,604,000) (537,251) (4,221,014)
Equity in losses from joint ventures........ (577,661) -- -- (577,661)
Other income................................ (1,577) -- -- (1,577)
Interest income............................. 294,686 173,000 -- 467,686
Interest expense............................ (27,320) -- -- (27,320)
----------- ----------- --------- -----------
Net loss.................................... (2,391,635) (1,431,000) (537,251) (4,359,886)
Preferred stock dividends................... (737,142) -- -- (737,142)
----------- ----------- --------- -----------
Net loss applicable to common
stockholders.............................. $(3,128,777) $(1,431,000) $(537,251) $(5,097,028)
=========== =========== ========= ===========
Basic and diluted net loss per share
applicable to common stockholders......... $ (0.25) $ (0.23)
Basic and diluted weighted average common
shares outstanding........................ 12,741,858 22,175,742
P-3
ENDOREX CORPORATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2000
PRO FORMA
ENDOREX CTD ADJUSTMENTS PRO FORMA
----------- ----------- ----------- -----------
SBIR contract revenue...................... $ -- $ -- $ -- $ --
Expenses:
SBIR contract research and development... -- -- --
Proprietary research and development..... 956,742 1,324,000 2,280,742
General and administrative............... 2,101,767 1,354,000 3,455,767
Intangible amortization.................. -- -- 1,074,503 1,074,503
Stock option compensation................ -- -- 7,054 c 7,054
----------- ----------- ----------- -----------
Total Expenses............................. 3,058,509 2,678,000 1,081,557 6,818,066
----------- ----------- ----------- -----------
Loss from operations....................... (3,058,509) (2,678,000) (1,081,557) (6,818,066)
Equity in losses from joint ventures....... (2,682,368) -- (2,682,368)
Other income............................... 250,000 -- 250,000
Interest income............................ 747,073 428,000 1,175,073
Interest expense........................... (51,889) -- (51,889)
----------- ----------- ----------- -----------
Net loss................................... (4,795,693) (2,250,000) (1,081,557) (8,127,250)
Preferred stock dividends.................. (1,382,200) -- (1,382,200)
----------- ----------- ----------- -----------
Net loss applicable to common
stockholders............................. $(6,177,893) $(2,250,000) $(1,081,557) $(9,509,450)
=========== =========== =========== ===========
Basic and diluted net loss per share
applicable to common stockholders........ $ (0.51) $ (0.44)
Basic and diluted weighted average common
shares outstanding....................... 12,194,260 21,628,144
P-4
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(1) To record the June 30, 2001 acquisition of CTD.
A summary of the purchase price for the acquisition is as follows:
Stock.................................................. $ 9,056,529
Stock options and warrants............................. 274,376
Direct acquisition costs............................... 1,004,608
-----------
Total Purchase price................................... $10,335,513
===========
The purchase price was allocated as follows:
Cash acquired.......................................... $ 5,072,000
Other current assets................................... 4,000
Equipment.............................................. 13,000
Licenses............................................... 116,000
Accounts payable and accrued expenses.................. (242,000)
Indentifiable Intangibles.............................. 5,372,513
-----------
$10,335,513
===========
Purchase accounting adjustments include:
a) The issuance of Endorex common stock as part of the purchase price.
b) The elimination of CTD's equity prior to the transaction.
c) The recognition of identifiable intangibles and unearned
compensation. Identifiable intangible amortization has been based
upon a five year life. Unearned compensation amortization has been
based upon the remaining average vesting period of the unvested
options (5 months).
d) The recognition of estimated closing costs of $1,004,608.
(2) Pro Forma basic and diluted net loss per share are computed by dividing the
pro forma net loss attributable to common shareholders by the pro forma
weighted average number of common shares outstanding. Potentially dilutive
securities were not taken into account because their effects would be
anti-dilutive. A reconciliation of shares used to compute historical basic
and diluted net loss per share to shares used to compute pro forma basic and
diluted net loss per share is as follows:
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 2001 DECEMBER 31, 2000
---------------- -----------------
Shares used to compute historical basic and diluted
net loss per share................................. 12,741,858 12,194,260
Shares issued in acquisition......................... 9,433,884 9,433,884
---------- ----------
Shares used to compute pro forma basic and diluted
net loss per share................................. 22,175,742 21,628,144
========== ==========
P-5
INDEX OF CONSOLIDATED FINANCIAL STATEMENTS
ENDOREX CORPORATION AND ITS SUBSIDIARIES
Report of Independent Auditors.............................. F-3
Report of Independent Accountants........................... F-4
Balance Sheets as of December 31, 2000 and 1999............. F-5
Statements of Operations for the years ended December 31,
2000 and 1999 and the cumulative period February 15, 1985
(Inception) to December 31, 2000.......................... F-6
Statements of Stockholders' Equity from February 15, 1985
(Inception) to December 31, 2000.......................... F-7
Statements of Cash Flows for the years ended December 31,
2000 and 1999 and the cumulative period February 15, 1985
(Inception) to December 31, 2000.......................... F-10
Notes to Financial Statements............................... F-11
Balance Sheets as of June 30, 2000 and 1999 (unaudited)..... F-21
Statements of Operations for the six months ended June 30,
2001 and 2000 and the cumulative period February 15, 1985
(Inception) to June 30, 2001 (unaudited).................. F-22
Statements of Cash Flows for the six months ended June 30,
2001 and 2000 and the cumulative period February 15, 1985
(Inception) to December 31, 2000 (unaudited).............. F-24
Notes to Financial Statements (unaudited)................... F-25
CORPORATE TECHNOLOGY DEVELOPMENT, INC.
Report of Independent Auditors.............................. F-27
Balance Sheets as of December 31, 2000 and 1999 and as of
June 30, 2000 (unaudited)................................. F-28
Statements of Operations for the years ended December 31,
2000 and 1999 and the cumulative period January 1, 1998
(Inception) to December 31, 2000 and the six months ended
June 30, 2001 and June 30, 2000 (unaudited) and the
cumulative period January 1, 1998 (Inception) to June 30,
2001 (unaudited).......................................... F-29
Statements of Changes in Stockholders' Equity from
January 1, 1998 (Inception) to December 31, 2000 and as of
June 30, 2001 (unaudited)................................. F-30
Statements of Cash Flows for the years ended December 31,
2000 and 1999 and the cumulative period January 1, 1998
(Inception) to December 31, 2000, the six months ended
June 30, 2001 and June 30, 2000 (unaudited) and the
cumulative period January 1, 1998 (Inception) to June 30,
2001 (unaudited).......................................... F-31
Notes to Financial Statements............................... F-32
F-1
ENDOREX CORPORATION, INC.
AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED FINANCIAL STATEMENTS
F-2
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of Endorex Corporation
(A Development Stage Enterprise)
We have audited the accompanying balance sheet of Endorex Corporation (the
Company, a development stage enterprise) as of December 31, 2000, and the
related statements of operations, stockholders' equity, and cash flows for the
year then ended, and for the period February 15, 1985 (inception) through
December 31, 2000. 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. The financial statements as of
December 31, 1999 and for the year then ended and for the period February 15,
1985 (inception) through December 31, 1999, were audited by other auditors whose
report dated February 4, 2000 expressed an unqualified opinion on those
statements. The financial statements for the period February 15, 1985
(inception) through December 31, 1999 include total revenues and net loss of
$100,000 and $(42,758,195), respectively. Our opinion on the statements of
operations, stockholders' equity, and cash flows for the period February 15,
1985 (inception) through December 31, 2000, insofar as it relates to amounts for
prior periods through December 31, 1999, is based solely on the report of other
auditors.
We conducted our audit 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 audit and the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audit and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of the Company at December 31, 2000 and the results of
its operations and its cash flows for the year then ended and the period from
February 15, 1985 (inception) through December 31, 2000, in conformity with
accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Milwaukee, Wisconsin
February 15, 2001
F-3
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Endorex Corporation
(A Development Stage Enterprise):
In our opinion, the accompanying consolidated balance sheet as of
December 31, 1999 and the related consolidated statements of operations, of
stockholders' equity and of cash flows for the year ended December 31, 1999, and
for the period cumulative from inception (February 15, 1985) to December 31,
1999, present fairly, in all material respects, the financial position, results
of operations and cash flows of Endorex Corporation and its subsidiaries (a
development stage enterprise) at December 31, 1999 and for the year ended
December 31, 1999, and for the period cumulative from inception (February 15,
1985) to December 31, 1999, in conformity with accounting principles generally
accepted in the United States of America. 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 of these statements in accordance with auditing standards generally
accepted in the United States of America, which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion. We have not
audited the consolidated financial statements of Endorex Corporation for any
period subsequent to December 31, 1999.
/s/ PricewaterhouseCoopers LLP
Chicago, Illinois
February 4, 2000
F-4
ENDOREX CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 10,831,266 $ 4,995,906
Marketable securities--available for sale................. 2,014,984 3,547,847
Receivable from related party............................. 126,538 34,339
Prepaid expenses.......................................... 58,803 68,207
------------ ------------
Total current assets.................................... 13,031,591 8,646,299
Leasehold improvements and equipment net of, accumulated
amortization of $800,066 and $649,092..................... 384,162 448,951
Patent issuance costs, net of accumulated amortization of
$10,970 and $5,088........................................ 253,705 176,875
------------ ------------
TOTAL ASSETS................................................ $ 13,669,458 $ 9,272,125
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses..................... $ 642,440 $ 496,889
Accrued compensation...................................... 147,205 184,508
Due to joint ventures..................................... 2,010,713 942,333
Current portion of capital lease obligations.............. 118,793 110,342
------------ ------------
Total current liabilities............................... 2,919,151 1,734,072
Long-term portion of capital lease obligations.............. 204,162 281,899
------------ ------------
Total Liabilities....................................... 3,123,313 2,015,971
Series C exchangeable convertible preferred stock, $.05 par
value. Authorized 200,000 shares; 97,603 and 91,218 issued
and outstanding, at liquidation value..................... 9,665,512 9,027,012
Stockholders' equity (deficit):
Preferred stock, $.001 par value. Authorized 4,600,000
shares; none issued and outstanding..................... -- --
Series B convertible preferred stock, $.05 par value.
Authorized 200,000 shares; 100,410 and 92,973 issued &
outstanding, at liquidation value....................... 10,041,000 9,297,300
Common stock, $.001 par value. Authorized 50,000,000
shares; 12,860,500 and 10,874,295 issued, 12,741,858 and
10,755,653 outstanding.................................. 12,861 10,878
Additional paid-in capital................................ 40,365,410 33,659,131
Deferred compensation..................................... (4,853) --
Deficit accumulated during the development stage.......... (49,090,110) (44,294,417)
Unrealized gain on marketable securities.................. 75 --
------------ ------------
1,324,383 (1,327,108)
Less: Treasury stock, at cost, 118,642 shares............. (443,750) (443,750)
------------ ------------
Total Stockholders' Equity (Deficit).................... 880,633 (1,770,858)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)........ $ 13,669,458 $ 9,272,125
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
ENDOREX CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS
CUMULATIVE PERIOD
FEBRUARY 15,
YEAR ENDED YEAR ENDED 1985 (INCEPTION)
DECEMBER 31, DECEMBER 31, TO DECEMBER 31,
2000 1999 2000
------------ ------------ -----------------
SBIR contract revenue............................... $ -- $ -- $ 100,000
Expenses:
SBIR contract research and development............ -- -- 86,168
Proprietary research and development.............. 956,742 2,028,945 14,833,005
General and administrative........................ 2,101,767 3,046,684 13,072,044
----------- ----------- ------------
Total expenses...................................... 3,058,509 5,075,629 27,991,217
----------- ----------- ------------
Loss from operations................................ (3,058,509) (5,075,629) (27,891,217)
Equity in losses from joint ventures................ (2,682,368) (2,865,908) (22,646,251)
Other income........................................ 250,000 3,790 255,302
Interest income..................................... 747,073 488,582 3,041,588
Interest expense.................................... (51,889) (51,854) (313,310)
----------- ----------- ------------
Loss before income taxes............................ (4,795,693) (7,501,019) (47,553,888)
Income taxes........................................ -- -- --
----------- ----------- ------------
Net loss............................................ (4,795,693) (7,501,019) (47,553,888)
Preferred stock dividends........................... (1,382,200) (1,285,413) (3,380,800)
----------- ----------- ------------
Net loss applicable to common stockholders.......... $(6,177,893) $(8,786,432) $(50,934,688)
=========== =========== ============
Basic and diluted net loss per share applicable to
common stockholders............................... $ (0.51) $ (0.82) $ (16.30)
Basic and diluted weighted average common shares
outstanding....................................... 12,194,260 10,755,328 3,125,041
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
ENDOREX CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(DEFICIT)
ACCUMULATED
COMMON STOCK PREFERRED STOCK ADDITIONAL DURING THE
---------------------- ---------------------- PAID-IN DEVELOPMENT
SHARES PAR VALUE SHARES VALUE CAPITAL STAGE
---------- --------- -------- ----------- ----------- ------------
Common stock issued for cash in February 1985 at
$1.50 per share................................ 667 $ 1 $ 999 $ --
Net earnings for the period from February 15,
1985 to January 31, 1986....................... -- -- -- 6,512
---------- ------- ------- ----------- ----------- ------------
BALANCE--JANUARY 31, 1986........................ 667 1 999 6,512
Common stock issued for cash in October 1986 at
$750.00 per share.............................. 666 1 499,999 --
Excess of fair market value over option Price of
non-qualified stock option granted............. -- -- 13,230 --
Net loss for the year............................ -- -- -- (34,851)
---------- ------- ------- ----------- ----------- ------------
BALANCE--JANUARY 31, 1987........................ 1,333 2 514,228 (28,339)
Common stock issued in May 1987 at $750.00 per
share for legal services performed for the
company........................................ 7 -- 5,000 --
Net proceeds from initial public stock offering
in June 1987 at $6,000.00 per share, less
issuance costs................................. 333 -- 1,627,833 --
Non-qualified stock options exercised............ 48 -- 33,808 --
Amortization of deferred compensation............ -- -- -- --
Excess of fair market value over option price of
non-qualified stock options granted............ -- -- 75,063 --
Net loss for the year............................ -- -- -- (627,652)
---------- ------- ------- ----------- ----------- ------------
BALANCE--JANUARY 31, 1988........................ 1,721 2 2,255,932 (655,991)
Non-qualified stock options exercised............ 18 -- 256 --
Stock warrants exercised......................... 1 -- 12,000 --
Common stock redeemed and retired................ (10) -- (150) --
Excess of fair market value over option price of
non-qualified stock options granted............ -- -- 36,524 --
Amortization of deferred compensation............ -- -- -- --
Net loss for the Year............................ -- -- -- (1,092,266)
---------- ------- ------- ----------- ----------- ------------
BALANCE--JANUARY 31, 1989........................ 1,730 2 2,304,562 (1,748,257)
Non-qualified stock options exercised............ 71 -- 1,060 --
Common stock redeemed and retired................ (12) -- (175) --
Excess of fair market value over option price of
non-qualified stock options granted............ -- -- 113,037 --
Net proceeds from secondary public stock offering
in April 1989 at $525.00 per share, less
issuance cost.................................. 2,174 2 980,178 --
Amortization of deferred compensation............ -- -- -- --
Net loss for the year............................ -- -- -- (1,129,477)
---------- ------- ------- ----------- ----------- ------------
BALANCE--JANUARY 31, 1990........................ 3,963 4 3,398,662 (2,877,734)
Common stock issued for cash in October 1990
through January 1991 at $9.00 per share........ 5,694 6 51,244 --
Excess of fair market value over option price of
non-qualified stock options granted............ -- -- 30,635 --
Net loss for the year............................ -- -- -- (854,202)
---------- ------- ------- ----------- ----------- ------------
OTHER TREASURY STOCK TOTAL
COMPREHENSIVE -------------------- DEFERRED NOTE STOCKHOLDERS'
INCOME SHARES COST COMPENSATION RECEIVABLE EQUITY
------------- -------- --------- ------------ ----------- -------------
Common stock issued for cash in February 1985 at
$1.50 per share................................ $ -- -- $ -- $ -- $ -- $ 1,000
Net earnings for the period from February 15,
1985 to January 31, 1986....................... -- -- -- -- 6,512
-------- ------- --------- --------- ----------- ------------
BALANCE--JANUARY 31, 1986........................ -- -- -- -- 7,512
Common stock issued for cash in October 1986 at
$750.00 per share.............................. -- -- -- -- 500,000
Excess of fair market value over option Price of
non-qualified stock option granted............. -- -- -- -- 13,230
Net loss for the year............................ -- -- -- -- (34,851)
-------- ------- --------- --------- ----------- ------------
BALANCE--JANUARY 31, 1987........................ -- -- -- -- 485,891
Common stock issued in May 1987 at $750.00 per
share for legal services performed for the
company........................................ -- -- -- -- 5,000
Net proceeds from initial public stock offering
in June 1987 at $6,000.00 per share, less
issuance costs................................. -- -- -- -- 1,627,833
Non-qualified stock options exercised............ -- -- (28,188) -- 5,620
Amortization of deferred compensation............ -- -- 7,425 -- 7,425
Excess of fair market value over option price of
non-qualified stock options granted............ -- -- -- -- 75,063
Net loss for the year............................ -- -- -- -- (627,652)
-------- ------- --------- --------- ----------- ------------
BALANCE--JANUARY 31, 1988........................ -- -- (20,763) -- 1,579,180
Non-qualified stock options exercised............ -- -- -- -- 256
Stock warrants exercised......................... -- -- -- -- 12,000
Common stock redeemed and retired................ -- -- -- -- (150)
Excess of fair market value over option price of
non-qualified stock options granted............ -- -- -- -- 36,524
Amortization of deferred compensation............ -- -- 19,113 -- 19,113
Net loss for the Year............................ -- -- -- -- (1,092,266)
-------- ------- --------- --------- ----------- ------------
BALANCE--JANUARY 31, 1989........................ -- -- (1,650) -- 554,657
Non-qualified stock options exercised............ -- -- -- -- 1,060
Common stock redeemed and retired................ -- -- -- -- (175)
Excess of fair market value over option price of
non-qualified stock options granted............ -- -- -- -- 113,037
Net proceeds from secondary public stock offering
in April 1989 at $525.00 per share, less
issuance cost.................................. -- -- -- -- 980,180
Amortization of deferred compensation............ -- -- 1,650 -- 1,650
Net loss for the year............................ -- -- -- -- (1,129,477)
-------- ------- --------- --------- ----------- ------------
BALANCE--JANUARY 31, 1990........................ -- -- -- -- 520,932
Common stock issued for cash in October 1990
through January 1991 at $9.00 per share........ -- -- -- -- 51,250
Excess of fair market value over option price of
non-qualified stock options granted............ -- -- -- -- 30,635
Net loss for the year............................ -- -- -- -- (854,202)
-------- ------- --------- --------- ----------- ------------
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
ENDOREX CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (CONTINUED)
(DEFICIT)
ACCUMULATED
COMMON STOCK PREFERRED STOCK ADDITIONAL DURING THE
---------------------- ---------------------- PAID-IN DEVELOPMENT
SHARES PAR VALUE SHARES VALUE CAPITAL STAGE
---------- --------- -------- ----------- ----------- ------------
BALANCE--JANUARY 31, 1991--FORWARD............... 9,657 $ 10 $ 3,480,541 $ (3,731,936)
Common stock issued for cash in February 1991
through April 1991 at $9.00 per share.......... 2,772 3 24,947 --
Common stock issued for cash and services in
November 1991 at $1.50 per share............... 15,333 15 22,985 --
Common stock issued for cash and note in December
1991 at $0.75 per share........................ 296,949 297 200,018 --
Excess of fair market value over option price of
non-qualified stock options granted............ -- -- 16,570 --
Non-qualified stock options exercised............ 1 -- 1 --
Net loss for the year............................ -- -- -- (410,149)
---------- ------- ------- ----------- ----------- ------------
BALANCE--JANUARY 31, 1992........................ 324,712 325 3,745,062 (4,142,085)
Payment on note receivable....................... -- -- -- --
Net proceeds from secondary public stock offering
in August 1992 at $112.50 per share, less
issuance costs................................. 66,666 66 6,230,985 --
Non-qualified stock options exercised............ 2,000 2 28 --
Net loss for the year............................ -- -- -- (564,173)
---------- ------- ------- ----------- ----------- ------------
BALANCE--JANUARY 31, 1993........................ 393,378 393 9,976,075 (4,706,258)
Excess of fair market value over option price of
non-qualified stock options granted............ -- -- 126,000 --
Amortization of deferred compensation............ -- -- -- --
Non-qualified stock options exercised............ 67 -- 57 --
Collection of note receivable.................... -- -- -- --
Net loss for the year............................ -- -- -- (1,012,882)
---------- ------- ------- ----------- ----------- ------------
BALANCE--JANUARY 31, 1994........................ 393,445 393 10,102,132 (5,719,140)
Acquisition of treasury stock.................... -- -- -- --
Forfeiture of non-qualified stock options
granted........................................ -- -- (22,402) --
Amortization of deferred compensation............ -- -- -- --
Net loss for the year............................ -- -- -- (1,349,678)
---------- ------- ------- ----------- ----------- ------------
BALANCE--JANUARY 31, 1995........................ 393,445 393 10,079,730 (7,068,818)
Acquisition of treasury stock.................... -- -- -- --
Forfeiture of non-qualified stock options
granted........................................ -- -- (1,379) --
Amortization of deferred compensation............ -- -- -- --
Net loss for the year............................ -- -- -- (1,187,985)
---------- ------- ------- ----------- ----------- ------------
BALANCE--JANUARY 31, 1996........................ 393,445 393 10,078,351 (8,256,803)
Common stock issued at $0.975 per share.......... 333,333 333 324,667 --
Common stock issued at $3.00 per share........... 333,333 333 999,667 --
Non-qualified stock options exercised............ 145,283 146 379,003 --
Net loss for the period.......................... -- -- -- (1,962,877)
---------- ------- ------- ----------- ----------- ------------
OTHER TREASURY STOCK TOTAL
COMPREHENSIVE -------------------- DEFERRED NOTE STOCKHOLDERS'
INCOME SHARES COST COMPENSATION RECEIVABLE EQUITY
------------- -------- --------- ------------ ----------- -------------
BALANCE--JANUARY 31, 1991--FORWARD............... -- $ -- $ -- $ -- $ (251,385)
Common stock issued for cash in February 1991
through April 1991 at $9.00 per share.......... -- -- -- -- 24,950
Common stock issued for cash and services in
November 1991 at $1.50 per share............... -- -- -- -- 23,000
Common stock issued for cash and note in December
1991 at $0.75 per share........................ -- -- -- (50,315) 150,000
Excess of fair market value over option price of
non-qualified stock options granted............ -- -- -- -- 16,570
Non-qualified stock options exercised............ -- -- -- -- 1
Net loss for the year............................ -- -- -- -- (410,149)
-------- ------- --------- --------- ----------- ------------
BALANCE--JANUARY 31, 1992........................ -- -- -- (50,315) (447,013)
Payment on note receivable....................... -- -- -- 11,300 11,300
Net proceeds from secondary public stock offering
in August 1992 at $112.50 per share, less
issuance costs................................. -- -- -- -- 6,231,051
Non-qualified stock options exercised............ -- -- -- -- 30
Net loss for the year............................ -- -- -- -- (564,173)
-------- ------- --------- --------- ----------- ------------
BALANCE--JANUARY 31, 1993........................ -- -- -- (39,015) 5,231,195
Excess of fair market value over option price of
non-qualified stock options granted............ -- -- (126,000) -- --
Amortization of deferred compensation............ -- -- 40,750 -- 40,750
Non-qualified stock options exercised............ -- -- -- -- 57
Collection of note receivable.................... -- -- -- 39,015 39,015
Net loss for the year............................ -- -- -- -- (1,012,882)
-------- ------- --------- --------- ----------- ------------
BALANCE--JANUARY 31, 1994........................ -- -- (85,250) -- 4,298,135
Acquisition of treasury stock.................... 41,975 (300,000) -- -- (300,000)
Forfeiture of non-qualified stock options
granted........................................ -- -- 22,402 -- --
Amortization of deferred compensation............ -- -- 49,348 -- 49,348
Net loss for the year............................ -- -- -- -- (1,349,678)
-------- ------- --------- --------- ----------- ------------
BALANCE--JANUARY 31, 1995........................ 41,975 (300,000) (13,500) -- 2,697,805
Acquisition of treasury stock.................... 76,667 (143,750) -- -- (143,750)
Forfeiture of non-qualified stock options
granted........................................ -- -- 1,379 -- --
Amortization of deferred compensation............ -- -- 12,121 -- 12,121
Net loss for the year............................ -- -- -- -- (1,187,985)
-------- ------- --------- --------- ----------- ------------
BALANCE--JANUARY 31, 1996........................ 118,642 (443,750) -- -- 1,378,191
Common stock issued at $0.975 per share.......... -- -- -- -- 325,000
Common stock issued at $3.00 per share........... -- -- -- -- 1,000,000
Non-qualified stock options exercised............ -- -- -- -- 379,149
Net loss for the period.......................... -- -- -- -- (1,962,877)
-------- ------- --------- --------- ----------- ------------
The accompanying notes are an integral part of the consolidated financial
statements.
F-8
ENDOREX CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (CONTINUED)
(DEFICIT)
ACCUMULATED
COMMON STOCK PREFERRED STOCK ADDITIONAL DURING THE
---------------------- ---------------------- PAID-IN DEVELOPMENT
SHARES PAR VALUE SHARES VALUE CAPITAL STAGE
---------- --------- -------- ----------- ----------- ------------
BALANCE--DECEMBER 31, 1996--FORWARD.............. 1,205,394 $ 1,205 $ $11,781,688 $(10,219,680)
Warrants exercised at $1.20 per share............ 1,173 1 1,407 --
Proceeds on exercise of stock options............ -- -- 5,000 --
Warrants Issued.................................. 5,407,546
Net proceeds from private placement at $2.3125
per share, less issuance cost.................. 8,648,718 8,650 15,122,943 --
Net loss for the year............................ -- -- -- (3,244,326)
---------- ------- ------- ----------- ----------- ------------
BALANCE--DECEMBER 31, 1997....................... 9,855,285 9,856 32,318,584 (13,464,006)
Net proceeds from issuance of common stock and
warrants....................................... 307,692 308 1,871,537 --
Proceeds from exercise of stock options.......... 25,000 25 61,725 --
Purchase and retirement of common stock.......... (133,335) (134) (129,866)
Net proceeds from issuance of Series B Preferred
Stock at $100 per share........................ 80,100 8,010,000
Accrued preferred stock dividends................ 5,986 598,666 (713,187)
Net loss for the year............................ -- -- -- (21,793,170)
---------- ------- ------- ----------- ----------- ------------
BALANCE--DECEMBER 31, 1998....................... 10,054,642 10,055 86,086 8,608,666 33,408,793 (35,257,176)
Proceeds from exercise of stock options.......... 334 4 347 --
Common stock dividends issued.................... 819,319 819 1,535,403 (1,536,222)
Accrued preferred stock dividends................ 6,887 688,634 (1,285,412)
Net loss for the year............................ -- -- -- (7,501,019)
---------- ------- ------- ----------- ----------- ------------
BALANCE--DECEMBER 31, 1999....................... 10,874,295 10,878 92,973 9,297,300 33,659,131 (44,294,417)
Net proceeds from private placement at $4.725 per
share, less issuance cost...................... 1,809,520 1,810 7,772,738
Issuance of options issued in exchange for
financial advisory services.................... 87,373
Issuance of options issued in exchange for
consulting services............................ 12,787
Amortization of deferred compensation............
Proceeds from exercise of stock options.......... 71,722 69 215,685
Non-cash exercise of warrants.................... 104,963 104 (104)
Accrued preferred stock dividends................ 7,437 743,700 (1,382,200)
Unrealized gain on marketable securities.........
Net loss for the year............................ (4,795,693)
Comprehensive loss...............................
---------- ------- ------- ----------- ----------- ------------
BALANCE--DECEMBER 31, 2000....................... 12,860,500 $12,861 100,410 $10,041,000 $40,365,410 $(49,090,110)
========== ======= ======= =========== =========== ============
OTHER TREASURY STOCK TOTAL
COMPREHENSIVE -------------------- DEFERRED NOTE STOCKHOLDERS'
INCOME SHARES COST COMPENSATION RECEIVABLE EQUITY
------------- -------- --------- ------------ ----------- -------------
BALANCE--DECEMBER 31, 1996--FORWARD.............. 118,642 $(443,750) $ -- $ -- $ 1,119,463
Warrants exercised at $1.20 per share............ -- -- -- -- 1,408
Proceeds on exercise of stock options............ -- -- -- -- 5,000
Warrants Issued.................................. 5,407,546
Net proceeds from private placement at $2.3125
per share, less issuance cost.................. -- -- -- -- 15,131,593
Net loss for the year............................ -- -- -- -- (3,244,326)
-------- ------- --------- --------- ----------- ------------
BALANCE--DECEMBER 31, 1997....................... 118,642 (443,750) -- -- 18,420,684
Net proceeds from issuance of common stock and
warrants....................................... -- -- -- -- 1,871,845
Proceeds from exercise of stock options.......... -- -- -- -- 61,750
Purchase and retirement of common stock.......... (130,000)
Net proceeds from issuance of Series B Preferred
Stock at $100 per share........................ 8,010,000
Accrued preferred stock dividends................ (114,521)
Net loss for the year............................ -- -- -- -- (21,793,170)
-------- ------- --------- --------- ----------- ------------
BALANCE--DECEMBER 31, 1998....................... 118,642 (443,750) -- -- 6,326,588
Proceeds from exercise of stock options.......... -- -- -- -- 351
Common stock dividends issued.................... --
Accrued preferred stock dividends................ (596,778)
Net loss for the year............................ -- -- -- -- (7,501,019)
-------- ------- --------- --------- ----------- ------------
BALANCE--DECEMBER 31, 1999....................... 118,642 (443,750) -- -- (1,770,858)
Net proceeds from private placement at $4.725 per
share, less issuance cost...................... 7,774,548
Issuance of options issued in exchange for
financial advisory services.................... (87,373) --
Issuance of options issued in exchange for
consulting services............................ (12,787) --
Amortization of deferred compensation............ 95,307 95,307
Proceeds from exercise of stock options.......... 215,754
Non-cash exercise of warrants.................... --
Accrued preferred stock dividends................ (638,500)
Unrealized gain on marketable securities......... 75 75
Net loss for the year............................ (4,795,693)
Comprehensive loss............................... (4,795,618)
-------- ------- --------- --------- ----------- ------------
BALANCE--DECEMBER 31, 2000....................... $ 75 118,642 $(443,750) $ (4,853) $ -- $ 880,633
======== ======= ========= ========= =========== ============
The accompanying notes are an integral part of the consolidated financial
statements.
F-9
ENDOREX CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOW
CUMULATIVE PERIOD
FEBRUARY 15, 1985
YEAR ENDED YEAR ENDED (INCEPTION) TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 1999 2000
------------- ------------- ------------------
OPERATING ACTIVITIES:
Net Loss.................................................. $ (4,795,693) $(7,501,019) $(47,553,888)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization........................... 156,856 153,894 1,374,580
Gain on sale of marketable Securities--available for
sale.................................................. -- (110,244) (110,244)
Noncash stock compensation.............................. 95,307 755,773
Equity in losses from joint ventures.................... 2,682,368 2,865,908 22,646,251
Amortization of fair value of warrants................ -- 1,253,856 3,307,546
Gain on sale of assets.................................. -- (3,790) (4,530)
Write off patent issuance cost.......................... -- 327,078 439,725
Changes in assets and liabilities:
Restricted cash......................................... -- 500,000 --
Receivable from related party........................... (92,199) (34,339) (126,538)
Prepaid expenses........................................ 9,404 (2,446) (58,803)
Accounts payable and accrued expenses................... 145,551 188,503 732,410
Accrued compensation.................................... (37,303) (56,509) 147,205
Due to joint ventures................................... (1,613,988) 442,333 (671,655)
------------ ----------- ------------
Total adjustments................................... 1,345,996 5,524,244 28,431,720
------------ ----------- ------------
NET CASH USED IN OPERATING ACTIVITIES....................... (3,449,697) (1,976,775) (19,122,168)
INVESTING ACTIVITIES:
Patent issuance cost...................................... (82,712) (152,530) (759,225)
Investment in joint ventures.............................. -- (2,465,408) (19,963,883)
Organizational costs incurred............................. -- -- (135)
Purchases of leasehold improvements....................... -- (20,054) (695,613)
Purchases of office and lab equipment..................... (86,185) (107,873) (997,461)
Proceeds from assets sold................................. -- 3,790 4,790
Purchases of marketable securities--available for sale.... (5,390,981) (4,663,099) (11,004,080)
Proceeds from sale of marketable securities--available for
sale.................................................... 6,923,919 2,175,496 9,099,415
------------ ----------- ------------
NET CASH USED IN INVESTING ACTIVITIES....................... 1,364,041 (5,229,678) (24,316,192)
FINANCING ACTIVITIES:
Net proceeds from issuance of common stock................ 7,774,548 -- 37,799,270
Net proceeds from issuance of preferred stock............. -- -- 16,325,712
Proceeds from exercise of options......................... 215,754 351 417,092
Proceeds from borrowings under line of credit............. 45,621 95,774 1,196,534
Repayment of borrowings under line of credit.............. (114,907) (96,181) (873,579)
Proceeds from notes payable............................... -- -- 342,300
Payments on notes payable................................. -- -- (342,300)
Repayment of long-term note receivable.................... -- -- 50,315
Repayment of note payable issued in exchange for legal
service................................................. -- -- (71,968)
Purchase and retirement of common stock................... -- -- (130,000)
Purchase of treasury stock................................ -- -- (443,750)
------------ ----------- ------------
NET CASH PROVIDED BY(USED IN) FINANCING ACTIVITIES.......... 7,921,016 (56) 54,269,626
------------ ----------- ------------
NET INCREASE(DECREASE) IN CASH AND CASH EQUIVALENTS......... 5,835,360 (7,206,509) 10,831,266
CASH AND CASH EQUIVALENTS--BEGINNING OF PERIOD.............. 4,995,906 12,202,415 --
------------ ----------- ------------
CASH AND CASH EQUIVALENTS--END OF PERIOD.................... $ 10,831,266 $ 4,995,906 $ 10,831,266
============ =========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW:
Cash paid for interest.................................... $ 51,889 $ 51,950 $ 160,341
NON-CASH TRANSACTIONS
Issuance of common stock dividends in kind................ $ -- $ 1,536,223 $ 1,536,223
Issuance of preferred stock dividends in kind............. 1,382,200 1,285,413 3,380,800
The accompanying notes are an integral part of the consolidated financial
statements
F-10
ENDOREX CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF OPERATIONS
BASIS OF PRESENTATION--Endorex Corporation (Endorex, or the Company) and
Subsidiaries was incorporated in January 1987 as ImmunoTherapeutics, Inc, a
wholly owned subsidiary of BiologicalTherapeutics, Inc. ("BTI"). BTI was
incorporated on December 19, 1984 and commenced operations on February 15, 1985
{inception date}. On March 30, 1987 BTI was merged into Endorex. The Company's
financial statements include the accounts of the predecessor, BTI, for all
periods presented. In October 1996 Endorex formed its first subsidiary, Orasomal
Technologies, Inc. ("Orasomal"), and in July 1997, formed a second subsidiary,
Wisconsin Genetics, Inc. ("WGI").
NATURE OF BUSINESS--Endorex is a development stage, drug delivery company.
The Company's core drug delivery technology focuses on oral/mucosal delivery of
drugs and vaccines previously delivered only by injection. The Company's
Orasome-TM- system utilizes technology licensed from MIT to develop the
oral/mucosal delivery of vaccines, proteins and peptides.
In 1998 the Company formed two joint ventures with Elan Corporation, plc
("Elan"), one of the world's leading drug delivery companies. The purpose of the
first joint venture, InnoVaccines Corporation ("InnoVaccines"), is to research,
develop, and commercialize novel delivery systems for the human and veterinary
vaccine markets. The second joint venture, Endorex Newco, LTD. ("Newco"),
focuses on the utilization of the MEDIPAD-Registered Trademark- microinfusion
pump, developed by Elan, to deliver iron chelators for the treatment of a series
of genetic blood disorders known as iron overload disorders.
2. DEVELOPMENT STAGE ENTERPRISE
The Company's activities to date principally have been conducting research
and development in conjunction with developing new products. Consequently, as
shown in the accompanying financial statements, the Company has not realized
substantial revenue and has a deficit accumulated during the development stage
for the period from inception, February 15, 1985 through December 31, 2000 of
$49.1 million. The company will continue to be a development stage company, as
defined in Statement of Financial Accounting Standards No. 7, "Accounting and
Reporting by Development Stage Enterprises", until it begins normal operations
with revenue.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION--The consolidated financial statements include
Endorex and its subsidiaries, Orasomal and WGI. All significant intercompany
accounts and transactions have been eliminated in consolidation.
SEGMENT AND GEOGRAPHIC INFORMATION--The Company operates in the
biotechnology drug delivery industry and do not have reportable operating
segments as defined by Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information."
EQUITY METHOD ACCOUNTING FOR INVESTMENTS IN COMMON STOCK--The Company
accounts for investments in common stock of non-controlled entities (i.e.,
InnoVaccines and Newco joint ventures) using the equity method, in accordance
with Accounting Principles Board Opinion (APB) No. 18. The Company discontinues
application of the equity method when the investment is reduced to zero and does
not provide for additional losses, provided that the Company has not guaranteed
the obligations
F-11
ENDOREX CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
of the investee and is not otherwise committed to provide further financial
support for the investee. See Note 4 for a description of the Company's
investment in joint ventures.
CASH AND CASH EQUIVALENTS--The Company considers all highly liquid
investments with a maturity of 90 days or less when purchased to be cash
equivalents.
MARKETABLE SECURITIES--Marketable securities are comprised of high-grade
commercial paper and short-term government agency notes that have maturities
ranging from three to twelve months from the purchase date. The fair value of
marketable securities classified as available for sale approximates the carrying
value of these assets at December 31, 2000 and 1999 due to the short maturity of
the instruments.
RESEARCH AND DEVELOPMENT COSTS--Expenditures for research and development
activities are charged to operations as incurred.
PATENT COSTS--Patent costs, principally legal fees, are capitalized and,
upon issuance of the patent, are amortized on a straight-line basis over the
estimated useful life of the patent or the estimated remaining economic life.
IMPAIRMENT OF LONG-LIVED ASSETS--Equipment, leasehold improvements and
intangible assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. If the
sum of the expected undiscounted cash flows is less than the carrying value of
the related asset or group of assets, a loss is recognized for the difference
between the fair value and the carrying value of the related asset or group of
assets. Such analyses necessarily involve significant judgement.
NET LOSS PER SHARE--In accordance with generally accepted accounting
principles, basic and diluted net loss per share has been computed using the
weighted-average number of shares of common stock outstanding during the
respective periods. The effect of stock options, warrants and convertible
preferred stock is antidilutive for all periods presented.
INCOME TAXES--Deferred income taxes are recognized for the tax consequences
in future years of differences between the tax bases of assets and liabilities
and their financial reporting amounts at each year-end, based on enacted tax
laws and statutory tax rates applicable to the periods in which the differences
are expected to affect taxable income. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.
Income tax expense is the current tax payable for the period plus or minus the
change during the period in deferred tax assets and liabilities. No current or
deferred income taxes have been provided through December 31, 2000 because of
the net operating losses incurred by the Company since its inception.
STOCK BASED COMPENSATION--The Company accounts for stock-based compensation
for awards to employees using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and has adopted the disclosure only alternative of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (FAS 123). Stock compensation expense for options granted to
nonemployees has been determined in accordance with FAS 123 and EITF 96-18,
"Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services," and represents
the fair value of the consideration received, or the fair value of the equity
instruments
F-12
ENDOREX CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
issued, whichever may be more reliably measured. For options that vest over
future periods, the fair value of options granted to non-employees is
periodically remeasured as the underlying value of the securities changes.
FAIR VALUE OF FINANCIAL INSTRUMENTS--Generally accepted accounting
principles require that fair values be disclosed for most of the company's
financial instruments. The carrying amounts of the Company's financial
instruments, which include cash and cash equivalents, marketable securities,
receivables from related party, current liabilities and capital lease
obligations are considered to be representative of their respective fair values.
USE OF ESTIMATES--The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts in
the financial statements and accompanying notes. Actual results could differ
from those estimates.
RISK AND UNCERTAINTIES--The Company is subject to risks common to companies
in the biotechnology industry, including, but not limited to, litigation,
product liability, development of new technological innovations, dependence on
key personnel, protections of proprietary technology, and compliance with FDA
regulations.
RECLASSIFICATIONS--Certain reclassifications have been made to the 1999
financial statements to conform to the 2000 presentation.
NEW ACCOUNTING PRONOUNCEMENTS--In June 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standard No. 133 (SFAS
No. 133), "Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments and
hedging activities. SFAS No. 133, as amended, will be effective for the Company
on January 1, 2001 and requires that an entity recognize all derivatives as
either assets or liabilities in the balance sheet and measure those instruments
at fair value. The Company does not expect the effect of adopting the provisions
of SFAS no. 133 to have a significant impact on its financial position or
results of operations.
4. INVESTMENT IN JOINT VENTURES
In 1998 Endorex formed two joint ventures with Elan as follows:
INNOVACCINES CORPORATION
InnoVaccines was established in January 1998 pursuant to agreements between
Endorex and Elan. At closing, the Company issued to Elan International
Services, Ltd. ("EIS") 307,692 shares of Endorex common stock and a six-year
warrant for the purchase an additional 230,770 shares of Endorex common stock at
an exercise price of $10.00 per share for an aggregate purchase price of
$2.0 million. In addition, EIS purchased $8.0 million of Endorex Series B
convertible preferred stock, which is convertible into Endorex common stock at a
price of $7.38 per share, subject to adjustment. The Series B convertible
preferred stock pays an 8% annual in-kind dividend, which was $743,700 and
$688,634 in 2000 and 1999, respectively.
F-13
ENDOREX CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENT IN JOINT VENTURES (CONTINUED)
InnoVaccines is owned 80.1% by Endorex and 19.9% by Elan. Although Endorex
is the majority shareholder, the joint development agreement of InnoVaccines
gives management participation to both Endorex and Elan equally. Therefore,
because the minority shareholder, Elan, has substantive participating veto
rights, Endorex accounts for its investment in the joint venture using the
equity method of accounting, in accordance with EITF-96-16 "Investor's
Accounting for an Investee, When the Investor Has a Majority of the Voting
Interest but the Minority Shareholder of Shareholders Have Certain Approval or
Veto Rights". InnoVaccines licensed certain technology from Elan and certain
other technology from Orasomal. Endorex and Elan originally invested $8.0 and
$2.0 million in the joint venture, respectively.
At closing, InnoVaccines paid Elan an initial $10.0 million license payment.
Elan may receive future milestone payments and royalties based on the joint
venture's performance. As the technology did not yet represent a commercial
product, the joint venture recorded an expense in 1998 for the initial license
fee. The Company recorded its $8.0 million share of the license fee expense in
accordance with the equity method.
Orasomal sub-licensed to InnoVaccines oral vaccine rights to its proprietary
Orasome polymerized liposome technology exclusively licensed from MIT. In
consideration of the license, Orasomal may receive milestone payments and
royalties.
The InnoVaccines joint venture entity contracts with both Endorex and Elan,
which perform research and development on behalf of the joint venture. Elan and
Endorex each funded research and development related to InnoVaccines technology
equally from the inception of the joint venture through March 31, 1999, in
accordance with the joint development and operating agreement. Such payments
were not funded through the joint venture and Endorex expensed the payments.
Subsequent to April 1, 1999, Endorex and Elan are responsible for funding joint
venture expenditures in proportion to their respective ownership levels through
the joint venture entity (as a loan). During the years ended December 31, 2000
and 1999, Endorex incurred research and development and general and
administrative expenditures aggregating $1.7 and $1.5 million, respectively,
which were billed to InnoVaccines.
Endorex has a payable due to the joint venture of approximately
$1.7 million as of December 31, 2000, which consists of Endorex's share of the
joint venture's net losses to date in excess of Endorex's initial investment
less amounts billed by the Company to the joint venture. The InnoVaccines joint
venture has a payable due to Elan of $1.7 million, representing the amount Elan
has contributed to InnoVaccines in excess of its funding obligation.
Endorex and Elan also incurred $677,000 and $870,000 of expenditures during
the years ended December 31, 2000 and 1999, respectively, related to certain
licenses that Endorex and Elan acquired for further development on behalf of
InnoVaccines. Elan and Endorex each agreed to pay 50% of the license costs
outside of the joint venture entity. The receivable from related party of
$126,538 and $34,339 at December 31, 2000 and 1999, respectively, on the
accompanying consolidated balance sheets represent reimbursements not yet
received from Elan. The Company's portion of the license costs have been
included in equity in losses from joint ventures in the accompanying statements
of operations. These amounts were not capitalized, because the technology does
not yet represent a commercial product.
F-14
ENDOREX CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENT IN JOINT VENTURES (CONTINUED)
ENDOREX NEWCO, LTD.
Newco was established in October 1998 pursuant to agreements between Endorex
and Elan. At closing, Endorex and EIS purchased $8.4 million and $2.1 million of
Newco's common stock, respectively. In addition, Elan purchased $8,410,500 of
Endorex Series C Convertible Preferred Stock. The Series C Preferred Stock is
exchangeable at Elan's option for an additional 30.1% ownership interest of
Newco's common stock, or it may be converted into Endorex's common stock at a
price of $8.86 per share. The Series C Preferred Stock pays a 7% annual in-kind
dividend, which was $638,500 and $596,778 in 2000 and 1999, respectively.
Newco is owned 80.1% by Endorex and 19.9% by EIS. Although Endorex is the
majority shareholder, the joint development agreement of Newco gives management
participation to both Endorex and Elan equally. Therefore, because the minority
shareholder, Elan, has substantive participating veto rights, Endorex accounts
for its investment in the joint venture using the equity method of accounting in
accordance with EITF-96-16. At closing, Newco paid Elan an initial
$10.0 million license payment. Because the technology did not represent a
commercial product, Newco recorded an expense in 1998 for the initial license
fee expense. The Company recorded its $8.0 million share of the license fee in
accordance with the equity method. Elan may also receive future milestone
payments and royalties based on Newco's performance.
In consideration of the license fee, Newco has obtained an exclusive
worldwide license to the MEDIPAD drug delivery system developed by Elan with two
drugs. Newco is focusing on development of the first of those drugs,
Norditropin, an iron chelator for the treatment of a series of genetic blood
disorders known as iron overload disorders. MEDIPAD is a lightweight,
microinfusion pump, which combines the simplicity of a patch with the extensive
delivery capabilities of an infusion pump.
The Newco joint venture entity contracts with both Endorex and Elan, which
perform research and development on behalf of the joint venture. During 2000 and
1999, Elan and Endorex were required to fund Newco expenditures according to
their respective ownership interests. Endorex may choose to borrow from a
multi-draw convertible note with Elan to fund its portion of Newco's research
and development expenses. Through December 31, 2000, no amounts have been
borrowed under this note.
During the years ended December 31, 2000 and 1999, Endorex incurred research
and development and general and administrative expenditures aggregating $42,000
and $148,000, respectively, related to the joint venture and billed to Newco.
Endorex has a payable due to Newco of $334,000 at December 31, 2000, which
consists of Endorex's initial investment less amounts billed by the Company to
the joint venture.
F-15
ENDOREX CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENT IN JOINT VENTURES (CONTINUED)
UNAUDITED CONDENSED FINANCIAL STATEMENTS FOR UNCONSOLIDATED JOINT VENTURES
Condensed, unaudited financial statement information of the joint ventures
is stated below. The joint ventures had no revenues in any period.
DECEMBER 31,
-------------------------
2000 1999
----------- -----------
InnoVaccines net loss.............................. $(3,466,101) $(2,679,643)
Newco net loss..................................... (168,945) (682,902)
----------- -----------
Total net loss..................................... $(3,635,046) $(3,362,545)
=========== ===========
Reconciliation of joint venture net losses to
equity in losses from joint ventures:
Total joint venture net losses..................... $(3,635,046) $(3,362,545)
Endorex mark up(a)............................... 617,925 509,683
Elan Minority Interest........................... 723,374 669,146
InnoVaccine license costs incurred by Endorex,
outside of joint venture....................... (388,621) (682,192)
----------- -----------
Equity in losses from joint ventures............. $(2,682,368) $(2,865,908)
=========== ===========
------------------------
(a) The Company invoices the joint venture at cost, plus a mark-up that is
agreed to by Elan, which is intended to approximate overhead costs.
5. LEASEHOLD IMPROVEMENTS AND EQUIPMENT
Office and lab equipment is stated at cost. Depreciation is computed on a
straight-line basis over five years. Leasehold improvements are amortized
utilizing the straight-line method over the term of the lease. Depreciation
expense was $151,024 and $138,582 and for the periods ended December 31, 2000
and 1999, respectively. Leasehold improvements and equipment consisted of the
following at December 31:
2000 1999
---------- ----------
Leasehold improvements............................... $ 255,888 $ 255,888
Laboratory equipment................................. 786,902 730,803
Office equipment..................................... 141,438 111,302
---------- ----------
1,184,228 1.097,993
Accumulated depreciation............................. (800,066) (649,042)
---------- ----------
$ 384,162 $ 448,951
========== ==========
6. LINES OF CREDIT
On December 31, 1998, Endorex obtained a $750,000 equipment financing line
with Finova Technology Financing, Inc. ("Finova"). At December 31, 2000,
approximately $503,000 has been used to finance equipment and leasehold
improvements under capital leases (see Note 10). Interest rates for each draw
are based upon a base interest rate of 7.4%, plus an index rate equivalent to
the highest yield published for three-year United States Treasury Notes two days
prior to the loan draw. The
F-16
ENDOREX CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LINES OF CREDIT (CONTINUED)
aggregate interest rates incurred to date range from 12.15% to 13.82%. Draws are
payable in monthly installments over a period of 48 months, with a final payment
in June 2004.
On May 19, 1997, Endorex entered into a senior line of credit agreement with
The Aries Funds, two of the Company's major stockholders, to borrow up to
$500,000 (the "Bridge Loan"). During 1997, the Company paid the outstanding
principal and interest on the Bridge Loan. In partial consideration of the
Bridge Loan, the Company granted warrants to purchase an aggregate of 66,668
shares of common stock at an initial exercise price equal to $2.3125 per share.
The warrant exercise price and the number of shares that can be purchased are
subject to adjustment in certain circumstances. The warrants are exercisable
until May 19, 2002.
7. STOCKHOLDERS' EQUITY
Private Placements--In April 2000, the Company issued and sold an aggregate
of 1,809,520 shares of common stock. Gross proceeds of these issuances were
$8.6 million with net proceeds, after deducting commissions and expenses, of
$7.8 million.
In connection with the April 2000 private placement, the Company issued
warrants to the investors for the purchase of 452,383 shares of its common
stock. The warrants issued to these investors are immediately exercisable at
$5.91 per share and expire in April 2005. Also, as part of the compensation
received by Paramount Capital, Inc. ("Paramount") for its assistance in the
private placement, Paramount received warrants to purchase 226,190 shares of
Endorex common stock. These warrants are immediately exercisable at $5.25 per
share, expire in October 2007 and may be called if the closing bid price of the
common stock equals or exceeds $13.125 per share for at least 20 consecutive
trading days.
During 1997, the Company issued and sold an aggregate of 8,648,718 shares of
common stock to certain accredited investors. The gross proceeds of these
issuances were $20 million with net proceeds, after deducting commissions and
expenses, of $15.1 million.
In connection with the 1997 private placement, the Company issued warrants
for the purchase of 864,865 shares of Endorex common stock at an exercise price
of $2.54375 per share to Paramount, the placement agent, and certain of its
affiliates and employees. The Company also issued warrants to purchase 1,297,297
shares of Endorex common stock at an exercise price of $2.54375 per share to
certain employees of Paramount. The estimated fair value at the warrants' grant
date was $3.16 million, which was recorded as a deferred cost and amortized to
expense over two years, the term of the agreement. The warrants are exercisable
and expire on April 16, 2003. Through December 31, 2000, 148,161 warrants have
been exercised.
Common Stock Dividend--The terms of the 1997 private placement also included
5%, semi-annual dividends payable in additional shares of common stock based on
the number of shares held as of the record date, including previous dividend
distributions. The first and second semi-annual common stock dividends were
payable to holders of stock with dividend rights as of the record date of
April 16, 1999 and October 16, 1999, respectively. The Company distributed the
first and second dividends on June 1, 1999 and November 16, 1999, respectively.
No dividends were paid during 2000; dividend rights were terminated effective
March 20, 2000.
F-17
ENDOREX CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCK OPTION PLANS
The Amended and Restated 1995 Omnibus Plan ("the Plan") is intended to
promote Endorex's interests by providing eligible persons with the opportunity
to acquire a proprietary interest, or otherwise increase their proprietary
interest, in the Company as an incentive for them to remain in the service of
the Company. The Plan is divided into three separate equity programs: 1) the
Discretionary Option Grant Program, under which eligible persons may, at the
discretion of the Plan Administrator, be granted options to purchase shares of
common stock, 2) the Salary Investment Option Grant Program, under which
eligible employees may elect to have a portion of their base salary invested
each year in options to purchase shares of common stock, 3) the Automatic Option
Grant Program, under which eligible non-employee Board members will
automatically receive options at periodic intervals to purchase shares of common
stock, and 4) the Director Fee Option Grant Program, under which non-employee
Board members may elect to have all, or any portion, of their annual retainer
fee otherwise payable in cash applied to a special option grant.
The Board of Directors' Compensation Committee determines the terms of the
options, including vesting periods. No one person participating in the Plan may
receive options and separately exercisable stock appreciation rights for more
than 750,000 shares of common stock per calendar year.
As permitted by Statement of Financial Accounting Standards No. 123,
"Accounting For Stock-Based Compensation" (SFAS No. 123), the Company follows
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees", in accounting for its stock option plans. Had the Company accounted
for its stock option plans based on the fair value at the grant date for options
granted under the plan, based on provisions of SFAS 123, the Company's pro forma
net loss and pro forma net loss per share would have increased by approximately
$0.1 million, or $.01 per share, and $0.4 million, or $0.03 per share, for 2000
and 1999, respectively. Net loss and net loss per share would have increased as
follows:
2000 1999
----------- -----------
Net loss applicable to common stockholders:
As reported............................................... $(6,177,893) $(8,786,431)
Pro forma................................................. (6,325,952) (9,118,581)
Basic and diluted net loss per share applicable to common
stockholders
As reported............................................... $ (0.51) $ (0.82)
Pro forma................................................. (0.52) (0.85)
The weighted average fair value of options granted with an exercise price
equal to the fair market value of the stock was $0.75 and $1.45 for 2000 and
1999, respectively.
The fair value of options in accordance with SFAS 123 was estimated using
the Black-Scholes option-pricing model and the following weighted-average
assumptions: dividend yield 0%, expected life of four years, volatility of 102%
and 139% in 2000 and 1999, respectively and average risk-free interest rates in
2000 and 1999 of 5.5% and 5.63%, respectively.
F-18
ENDOREX CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCK OPTION PLANS (CONTINUED)
Option activity for the periods ended December 31, 2000 and 1999 was as
follows:
WEIGHTED AVERAGE
OPTIONS
OPTIONS EXERCISE PRICE
--------- ----------------
Balance at December 31, 1998....................... 1,460,776 $3.18
Granted............................................ 229,000 1.93
Exercised.......................................... (334) 1.05
Forfeited.......................................... (117,940) 5.11
--------- -----
Balance at December 31, 1999....................... 1,571,502 2.82
Granted............................................ 176,500 3.78
Exercised.......................................... (71,722) 3.01
Forfeited.......................................... (157,155) 4.76
--------- -----
Balance at December 31, 2000....................... 1,519,125 $2.73
========= =====
The weighted average exercise price, by price range, for all outstanding
options as of December 31, 2000 is:
WEIGHTED AVERAGE
REMAINING
CONTRACTUAL OUTSTANDING OPTIONS
LIFE OPTIONS EXCERCISEABLE
---------------- ----------- -------------
Price Range $1.38 - $2.54............. 8.2 years 1,272,625 1,059,248
Price Range $3.25 - $4.88............. 9.2 years 161,500 22,800
Price Range $5.50 - $6.75............. 7.0 years 85,000 85,000
--------- ---------
1,519,125 1,167,048
========= =========
9. INCOME TAXES
The types of temporary differences between tax bases of assets and
liabilities and their financial reporting amounts that give rise to the deferred
tax asset (liability) and their approximate tax effects are as follows:
DECEMBER 31
2000 1999
------------ ------------
Deferred tax assets:
Net operating loss carryforwards............... $ 5,858,000 $ 5,414,000
Research and development credit carryforward... 618,000 618,000
Licensing fees--amortization................... 4,778,000 5,045,000
Other.......................................... 98,000 108,000
------------ ------------
11,352,000 11,185,000
Valuation allowance.............................. (11,352,000) (11,185,000)
------------ ------------
Net deferred tax assets.......................... $ -- $ --
============ ============
At December 31, 2000, the Company had net operating loss carryforwards of
approximately $17 million for U.S. Federal and state tax purposes, which expire
beginning in 2007. In the event of a change in ownership greater than 50% in a
three-year period, utilization of the net operating losses
F-19
ENDOREX CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES (CONTINUED)
may be subject to a substantial annual limitation due to the ownership change
limitations provided by the Internal Revenue Code of 1986 and similar state
provisions
10. LEASE COMMITMENTS
The Company leases executive offices and research facilities under operating
leases, which provide for annual minimum rent and additional rent based on
increases in operating costs and real estate taxes. Rental expense was $59,318
during 2000 and $83,153 during 1999.
Future minimum lease payments under capital leases and non-cancelable
operating leases with initial terms of one year or more consisted of the
following at December 31, 2000:
CAPITAL OPERATING
LEASES LEASES
-------- ---------
2001.................................................... $151,965 $ 55,632
2002.................................................... 179,886 57,300
2003.................................................... 35,835 59,018
2004.................................................... 10,619 --
Thereafter.............................................. -- --
-------- --------
Total Minimum Lease Payments............................ $378,305 $171,950
======== ========
Amount representing interest............................ (55,350)
Present value of net minimum lease payments, including
current portion....................................... $322,955
========
At December 31, 2000, the gross amount of equipment and leasehold
improvements recorded under capital leases and related accumulated amortization
was approximately, $503,088 and $206,842, respectively.
F-20
ENDOREX CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JUNE 30, DECEMBER 31,
2001 2000
------------ -------------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 9,808,676 $ 10,831,266
Marketable securities--available for sale................. 0 2,014,984
Related party receivable.................................. 26,745 126,538
Prepaid expenses.......................................... 52,930 58,803
------------ ------------
Total current assets.................................... 9,888,351 13,031,591
Leasehold improvements and equipment, net of accumulated
amortization of $883,409.................................. 407,373 384,162
Patent issuance costs, net of accumulated amortization of
$13,030................................................... 281,845 253,705
Other Assets:
Prepaid Acquisition Cost.................................. 1,004,608 0
------------ ------------
TOTAL ASSETS................................................ $ 11,582,177 $ 13,669,458
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses..................... $ 674,319 $ 642,440
Accrued compensation...................................... 174,616 147,205
Due to joint ventures..................................... 2,285,831 2,010,713
Current portion of line of credit......................... 126,611 118,793
------------ ------------
Total current liabilities............................... 3,261,377 2,919,151
Long-term liabilities:
Long-term portion of line of credit....................... 162,754 204,162
------------ ------------
Total long-term liabilities............................. 162,754 204,162
------------ ------------
Total Liabilities....................................... 3,424,131 3,123,313
Series C exchangeable convertible preferred stock, $.05 par
value. Authorized 200,000 shares; 97,603 issued and
outstanding at liquidation value.......................... 10,004,315 9,665,512
Stockholders' equity:
Preferred stock, $.001 par value. Authorized 4,600,000
shares; none issued and outstanding..................... -- --
Series B convertible preferred stock, $.05 par value.
Authorized 200,000 shares; 100,410 issued & outstanding
at liquidation value.................................... 10,439,339 10,041,000
Common stock, $.001 par value. Authorized 50,000,000
shares; 12,860,500 issued, and 12,741,858 outstanding... 12,861 12,861
Additional paid-in capital................................ 39,633,107 40,365,410
Unearned compensation..................................... (6,350) (4,853)
Deficit accumulated during the development stage.......... (51,481,746) (49,090,110)
Unrealized gain/(loss) on marketable securities........... 270 75
------------ ------------
(1,402,519) 1,324,383
Less: Treasury stock, at cost, 118,642 shares............. (443,750) (443,750)
------------ ------------
Total Stockholders' Equity.............................. (1,846,269) 880,633
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $ 11,582,177 $ 13,669,458
============ ============
See accompanying condensed notes to financial statements.
F-21
ENDOREX CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
CUMULATIVE FROM
SIX MONTHS ENDED JUNE 30, FEBRUARY 15, 1985
------------------------- (DATE OF INCEPTION)
2001 2000 TO JUNE 30, 2001
----------- ----------- -------------------
Revenue:
SBIR contract revenue............................. $ -- $ -- $ 100,000
Expenses:
SBIR contract research and development............ -- -- 86,168
Proprietary research and development.............. 1,171,494 468,193 16,004,499
General and administrative........................ 908,269 981,521 13,980,313
----------- ----------- ------------
Total operating expenses............................ 2,079,763 1,449,714 30,070,980
----------- ----------- ------------
Loss from operations................................ (2,079,763) (1,449,714) (29,970,980)
Equity losses in joint ventures..................... (577,661) (1,578,856) (23,223,912)
Other income........................................ (1,575) -- 253,725
Interest income..................................... 294,685 320,965 3,336,274
Interest expense.................................... (27,321) (23,019) (340,630)
----------- ----------- ------------
Net loss............................................ (2,391,635) (2,730,624) (49,945,523)
Preferred stock dividends........................... (737,142) (687,378) (4,117,942)
----------- ----------- ------------
Net loss available to common stockholders........... $(3,128,777) $(3,418,002) $(54,063,465)
=========== =========== ============
Basic and diluted net loss per share available to
common stockholders............................... $ (0.25) $ (0.29) $ (15.83)
Basic and diluted weighted average common shares
outstanding....................................... 12,741,858 11,646,663 3,416,117
See accompanying condensed notes to financial statements.
F-22
ENDOREX CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED JUNE 30,
-----------------------------
2001 2000
------------- -------------
Revenue:
SBIR contract revenue..................................... $ -- $ --
Expenses:
SBIR contract research and development.................... -- --
Proprietary research and development...................... 585,642 217,112
General and administrative................................ 439,515 615,559
----------- -----------
Total operating expenses.................................... 1,025,157 832,671
----------- -----------
Loss from operations........................................ (1,025,157) (832,671)
Equity losses in joint ventures............................. (260,603) (648,779)
Other income................................................ -- --
Interest income............................................. 120,317 198,165
Interest expense............................................ (16,728) (11,221)
----------- -----------
Net loss.................................................... (1,182,171) (1,294,506)
Preferred stock dividends................................... (370,608) (342,747)
----------- -----------
Net loss available to common stockholders................... $(1,552,779) $(1,637,253)
=========== ===========
Basic and diluted net loss per share available to common
stockholders.............................................. $ (0.12) $ (0.13)
Basic and diluted weighted average common shares
outstanding............................................... 12,741,858 12,488,842
See accompanying condensed notes to financial statements.
F-23
ENDOREX CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS CUMULATIVE PERIOD
ENDED JUNE 30, FEBRUARY 15, 1985
------------------------- (INCEPTION) TO
2001 2000 JUNE 30, 2001
----------- ----------- -----------------
NET CASH USED IN OPERATING ACTIVITIES...................... $(1,279,328) $(1,319,747) $(20,401,496)
INVESTING ACTIVITIES:
Patent issuance cost..................................... (30,201) (33,454) (789,426)
Investment in joint ventures............................. (577,661) (964,064) (20,541,544)
Organizational costs incurred............................ -- -- (135)
Purchases of leasehold improvements...................... (7,098) -- (702,711)
Purchases of office and lab equipment.................... (87,893) (52,236) (1,085,354)
Proceeds from assets sold................................ -- -- 4,790
Purchases of marketable securities--available for sale... (3,973,724) (3,456,799) (14,977,804)
Proceeds from sale of marketable securities--available
for sale............................................... 5,988,708 3,000,000 15,088,123
Prepaid acquisition cost................................. (1,004,608) -- (1,004,608)
----------- ----------- ------------
NET CASH USED IN INVESTING ACTIVITIES...................... 307,523 (1,506,553) (24,008,669)
FINANCING ACTIVITIES:
Net proceeds from issuance of common stock............... -- 7,797,238 37,799,270
Net proceeds from issuance of preferred stock............ -- -- 16,325,712
Proceeds from exercise of options........................ -- 215,888 417,092
Proceeds from borrowings under line of credit............ -- 45,621 1,196,534
Repayment of borrowings under line of credit............. (50,785) (57,971) (924,364)
Repayment of long-term note receivable................... -- -- 50,315
Repayment of note payable issued in exchange for legal
service................................................ -- (71,968)
Purchase and retirement of common stock.................. -- -- (130,000)
Purchase of treasury stock............................... -- -- (443,750)
----------- ----------- ------------
NET CASH PROVIDED BY(USED IN) FINANCING ACTIVITIES......... (50,785) 8,000,776 54,218,841
----------- ----------- ------------
NET INCREASE(DECREASE) IN CASH AND CASH EQUIVALENTS........ (1,022,590) 5,174,476 9,808,676
CASH AND CASH EQUIVALENTS--BEGINNING OF PERIOD............. 10,831,266 4,995,906 --
----------- ----------- ------------
CASH AND CASH EQUIVALENTS--END OF PERIOD................... $ 9,808,676 $10,170,382 $ 9,808,676
=========== =========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW:
Cash paid for interest................................... $ 27,321 $ 23,020 $ 187,662
NON-CASH TRANSACTIONS
Issuance of common stock dividends in kind............... $ -- -- $ 1,536,223
Issuance of preferred stock dividends in kind............ 737,142 687,378 (4,117,942)
The accompanying notes are an integral part of the consolidated financial
statements
F-24
ENDOREX CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO FINANCIAL STATEMENTS
We prepared these unaudited interim consolidated financial statements under
the rules and regulations for reporting on Form 10-QSB. Accordingly, we omitted
some information and footnote disclosures normally accompanying the annual
financial statements. You should read these interim financial statements and
notes in conjunction with the consolidated financial statements and their notes
included in our latest annual report on Form 10-KSB, as amended. It is our
opinion that the consolidated financial statements include all adjustments
necessary for a fair statement of the results of operations, financial position
and cash flows for the interim periods. All adjustments were of a normal
recurring nature. The results of operations for interim periods are not
necessarily indicative of the results for the full fiscal year.
NET LOSS PER SHARE
Net loss per share is presented on the Consolidated Statements of Operations
in accordance with SFAS No. 128 for the current and prior periods. Endorex had a
net loss for all periods being presented, which resulted in diluted and basic
earnings per share being the same for all periods presented. The potential
impact of warrants and stock options outstanding was not included in the
calculation because their inclusion would have been anti-dilutive.
JOINT VENTURE ESTIMATES
The preparation of the quarterly consolidated financial statements requires
management to make estimates and assumptions that affect the reported amounts
related to the activities of InnoVaccines Corporation, or InnoVaccines and
Endorex Newco, Ltd., or Newco, our joint ventures with Elan Corporation, plc, or
"Elan", including the reported net liabilities related to the joint ventures and
the reported amounts of equity in losses from joint ventures. Actual results
could differ from those estimates.
UNAUDITED CONDENSED FINANCIAL STATEMENTS FOR UNCONSOLIDATED JOINT VENTURES
Condensed, unaudited financial statement information of the joint ventures
is stated below. The joint ventures had no revenues. Net expenses equaled the
net loss for all periods.
For the six months ended
JUNE 30,
-----------------------
2001 2000
--------- -----------
InnoVaccines, net of Endorex mark up on billings to
InnoVaccines.............................................. $(482,202) $(2,077,843)
Newco, net of Endorex mark up on billings to Newco.......... (230,825) (131,496)
--------- -----------
Total net loss.............................................. $(713,027) $(2,209,339)
========= ===========
Reconciliation to equity in losses from joint ventures:
Total joint venture net losses.............................. $(713,027) $(2,209,339)
Less: Elan minority interest................................ 135,366 630,454
--------- -----------
Equity in losses from joint ventures........................ $(577,661) $(1,578,885)
========= ===========
F-25
CORPORATE TECHNOLOGY DEVELOPMENT, INC.
AND SUBSIDIARIES
(FORMERLY INSTITUTE FOR DRUG RESEARCH, INC.)
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999
F-26
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Corporate Technology Development, Inc.
New York, New York
We have audited the accompanying consolidated balance sheets of Corporate
Technology Development, Inc. and subsidiaries (a development stage company) as
of December 31, 2000 and 1999, and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for each of
the years then ended and for the period from January 1, 1998 (commencement of
operations) through December 31, 2000. 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 did not audit the
1998 financial statements of Institute for Drug Research, Limited ("IDRL"), a
foreign subsidiary which is accounted for as a discontinued operation. Those
financial statements were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to the amounts included
for IDRL, is based solely on the report of the other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the report of
the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and with respect to the period from
January 1, 1998 through December 31, 2000, the report of the other auditors, the
financial statements enumerated above present fairly, in all material respects,
the consolidated financial position of Corporate Technology Development, Inc.
and subsidiaries as of December 31, 2000 and 1999, and the consolidated results
of their operations and their consolidated cash flows for each of the years then
ended and for the period from January 1, 1998 (commencement of operations)
through December 31, 2000, in conformity with accounting principles generally
accepted in the United States of America.
/s/ Richard A. Eisner & Company, LLP
New York, New York
March 9, 2001
With respect to Note I[2]
July 31, 2001
F-27
CORPORATE TECHNOLOGY DEVELOPMENT, INC. AND SUBSIDIARIES
(FORMERLY INSTITUTE FOR DRUG RESEARCH, INC.)
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
JUNE 30, -------------------------
2001 2000 1999
----------- ----------- -----------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents........................... $ 5,072,000 $ 6,508,000 $ 8,904,000
Prepaid expenses and other current assets........... 1,000 20,000
----------- ----------- -----------
Total current assets.............................. 5,073,000 6,528,000 8,904,000
Office equipment, net................................. 13,000 9,000 10,000
Licenses.............................................. 116,000 108,000 103,000
Other assets.......................................... 3,000
----------- ----------- -----------
$ 5,205,000 $ 6,645,000 $ 9,017,000
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses............... $ 242,000 $ 279,000 $ 577,000
----------- ----------- -----------
Commitments
Stockholders' equity:
Preferred stock--$.001 par value; authorized
10,000,000 shares; issued and outstanding
7,628,750 shares (liquidation preference including
dividends in arrears $45,773,000 at June 30, 2001
and $38,144,000 at December 31, 2000)............. 8,000 8,000 8,000
Common stock--$.001 par value; authorized 25,000,000
shares; issued and outstanding 5,000,000 shares... 5,000 5,000 5,000
Additional paid-in capital.......................... 13,971,000 13,971,000 14,015,000
Deficit accumulated during the development stage.... (8,955,000) (7,524,000) (5,274,000)
Subscription receivable............................. (3,000)
Unearned compensation............................... (66,000) (94,000) (311,000)
----------- ----------- -----------
4,963,000 6,366,000 8,440,000
----------- ----------- -----------
$ 5,205,000 $ 6,645,000 $ 9,017,000
=========== =========== ===========
See notes to financial statements
F-28
CORPORATE TECHNOLOGY DEVELOPMENT, INC. AND SUBSIDIARIES
(FORMERLY INSTITUTE FOR DRUG RESEARCH, INC.)
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
PERIOD FROM PERIOD FROM
JANUARY 1, 1998 JANUARY 1, 1998
(COMMENCEMENT (COMMENCEMENT
SIX MONTHS ENDED OF OPERATIONS) YEAR ENDED OF OPERATIONS)
JUNE 31, THROUGH DECEMBER 31, THROUGH
------------------------- JUNE 30, ------------------------- DECEMBER 31,
2001 2000 2001 2000 1999 2000
----------- ----------- ---------------- ----------- ----------- ----------------
(UNAUDITED) (UNAUDITED)
Interest income....... $ 173,000 $ 230,000 $ 982,000 $ 428,000 $ 167,000 $ 809,000
----------- ----------- ----------- ----------- ----------- -----------
Expenses:
Research and
development....... 880,000 558,000 3,255,000 1,324,000 955,000 2,375,000
General and
administrative.... 724,000 607,000 4,597,000 1,354,000 1,528,000 3,873,000
License fee written
off............... 1,822,000 1,822,000 1,822,000
----------- ----------- ----------- ----------- ----------- -----------
1,604,000 1,165,000 9,674,000 2,678,000 4,305,000 8,070,000
----------- ----------- ----------- ----------- ----------- -----------
(1,431,000) (935,000) (8,692,000) (2,250,000) (4,138,000) (7,261,000)
Gain on sale of
license............. 3,052,000 3,052,000 3,052,000
----------- ----------- ----------- ----------- ----------- -----------
Loss before minority
interest and
discontinued
operations.......... (1,431,000) (935,000) (5,640,000) (2,250,000) (1,086,000) (4,209,000)
Minority interest in
net income of
subsidiary.......... (298,000) (298,000) (298,000)
----------- ----------- ----------- ----------- ----------- -----------
Loss from continuing
operations.......... (1,431,000) (935,000) (5,938,000) (2,250,000) (1,384,000) (4,507,000)
Loss from operations
of discontinued
subsidiary.......... (7,973,000) (4,852,000) (7,973,000)
Gain on sale of
discontinued
subsidiary.......... 4,956,000 4,956,000 4,956,000
----------- ----------- ----------- ----------- ----------- -----------
Net loss.............. $(1,431,000) $ (935,000) $(8,955,000) $(2,250,000) $(1,280,000) $(7,524,000)
=========== =========== =========== =========== =========== ===========
See notes to financial statements
F-29
CORPORATE TECHNOLOGY DEVELOPMENT, INC. AND SUBSIDIARIES
(FORMERLY INSTITUTE FOR DRUG RESEARCH, INC.)
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
PREFERRED STOCK COMMON STOCK ADDITIONAL
-------------------- -------------------- PAID-IN ACCUMULATED SUBSCRIPTION
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT RECEIVABLE
--------- -------- --------- -------- ----------- ----------- ------------
Sale of common shares to founders
at $.001 per share............. 5,150,000 $5,000 $(5,000)
Issuance of private placement
units at $2.00 per share, net
offering expenses of
$2,108,000..................... 7,628,750 $8,000 $13,142,000
Compensatory stock options
granted........................ 645,000
Compensation expense
recognized.....................
Net loss......................... $(3,994,000)
Translation adjustment...........
--------- ------ --------- ------ ----------- ----------- -------
BALANCE AT DECEMBER 31, 1998..... 7,628,750 8,000 5,150,000 5,000 13,787,000 (3,994,000) (5,000)
Subscriptions collected.......... 2,000
Compensatory stock options
granted........................ 228,000
Compensation expense
recognized.....................
Net loss......................... (1,280,000)
Translation adjustment realized
upon sale of subsidiary........
--------- ------ --------- ------ ----------- ----------- -------
BALANCE AT DECEMBER 31, 1999..... 7,628,750 8,000 5,150,000 5,000 14,015,000 (5,274,000) (3,000)
Subscribed common shares
cancelled...................... (150,000)
Subscriptions collected.......... 3,000
Compensatory stock options
cancelled...................... (82,000)
Compensatory stock options
granted........................ 38,000
Compensation expense
recognized.....................
Net loss......................... (2,250,000)
--------- ------ --------- ------ ----------- ----------- -------
BALANCE AT DECEMBER 31, 2000..... 7,628,750 8,000 5,000,000 5,000 13,971,000 (7,524,000) 0
Net loss (unaudited)............. (1,431,000)
Compensation expense recognized
(unaudited)....................
--------- ------ --------- ------ ----------- ----------- -------
BALANCE AT JUNE 30, 2001
(UNAUDITED).................... 7,628,750 $8,000 5,000,000 $5,000 $13,971,000 $(8,955,000) $ 0
========= ====== ========= ====== =========== =========== =======
OTHER
UNEARNED COMPREHENSIVE COMPREHENSIVE
COMPENSATION (LOSS) LOSS TOTAL
------------ ------------- ------------- -----------
Sale of common shares to founders
at $.001 per share............. $ 0
Issuance of private placement
units at $2.00 per share, net
offering expenses of
$2,108,000..................... 13,150,000
Compensatory stock options
granted........................ $(645,000) 0
Compensation expense
recognized..................... 295,000 295,000
Net loss......................... $(3,994,000) (3,994,000)
Translation adjustment........... (153,000) $(153,000) (153,000)
--------- ----------- --------- -----------
$(4,147,000)
===========
BALANCE AT DECEMBER 31, 1998..... (350,000) (153,000) 9,298,000
Subscriptions collected.......... 2,000
Compensatory stock options
granted........................ (228,000) 0
Compensation expense
recognized..................... 267,000 267,000
Net loss......................... (1,280,000) (1,280,000)
Translation adjustment realized
upon sale of subsidiary........ 153,000 153,000 153,000
--------- ----------- --------- -----------
$(1,127,000)
===========
BALANCE AT DECEMBER 31, 1999..... (311,000) 0 8,440,000
Subscribed common shares
cancelled......................
Subscriptions collected.......... 3,000
Compensatory stock options
cancelled...................... 82,000 0
Compensatory stock options
granted........................ (38,000) 0
Compensation expense
recognized..................... 173,000 173,000
Net loss......................... (2,250,000)
--------- --------- -----------
BALANCE AT DECEMBER 31, 2000..... (94,000) 0 6,366,000
Net loss (unaudited)............. (1,431,000)
Compensation expense recognized
(unaudited).................... 28,000 28,000
--------- --------- -----------
BALANCE AT JUNE 30, 2001
(UNAUDITED).................... $ (66,000) $ 0 $ 4,963,000
========= ========= ===========
See notes to financial statements
F-30
CORPORATE TECHNOLOGY DEVELOPMENT, INC. AND SUBSIDIARIES
(FORMERLY INSTITUTE FOR DRUG RESEARCH, INC.)
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
PERIOD FROM
PERIOD FROM JANUARY 1, 1998
JANUARY 1, 1998 (COMMENCEMENT
SIX MONTHS ENDED (COMMENCEMENT YEAR ENDED OF OPERATIONS)
JUNE 30, OF OPERATIONS) DECEMBER 31, THROUGH
------------------------- THROUGH ------------------------- DECEMBER 31,
2001 2000 JUNE 30, 2001 2000 1999 2000
----------- ----------- ---------------- ----------- ----------- ----------------
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss.......................... $(1,431,000) $ (935,000) $(8,955,000) $(2,250,000) $(1,280,000) $(7,524,000)
Add loss from operations of
discontinued subsidiary......... 7,973,000 4,852,000 7,973,000
Less gain on sale of discontinued
subsidiary...................... (4,956,000) (4,956,000) (4,956,000)
----------- ----------- ----------- ----------- ----------- -----------
Loss from continuing operations... (1,431,000) (935,000) (5,938,000) (2,250,000) (1,384,000) (4,507,000)
Adjustments to reconcile loss from
continuing operations to net
cash used in operating
activities:
Gain on sale of license......... (3,052,000) (3,052,000) (3,052,000)
Minority interest in net income
of subsidiary................. 298,000 298,000 298,000
License fee written-off......... 1,822,000 1,822,000 1,822,000
Depreciation and amortization... 7,000 6,000 171,000 11,000 152,000 164,000
Compensation expense recognized
from stock options............ 28,000 11,000 763,000 173,000 267,000 735,000
Changes in:
Prepaid expenses and other
current assets.............. 19,000 (1,000) (20,000) 689,000 (20,000)
Other assets.................. (3,000) (3,000) 50,000
Accounts payable and accrued
expenses.................... (37,000) (232,000) 242,000 (298,000) 366,000 279,000
----------- ----------- ----------- ----------- ----------- -----------
Net cash used in operating
activities................ (1,417,000) (1,150,000) (5,698,000) (2,384,000) (792,000) (4,281,000)
----------- ----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Acquisition of office equipment... (5,000) (19,000) (5,000) (14,000)
Acquisition of license............ (14,000) (2,228,000) (15,000) (2,078,000) (2,214,000)
Advances to unconsolidated
subsidiary...................... (3,240,000) (2,186,000) (3,240,000)
Collection of advances to
subsidiary...................... 3,240,000 3,240,000 3,240,000
Proceeds from sale of interest in
subsidiary...................... 2,510,000 2,510,000 2,510,000
Investment in subsidiary.......... (5,527,000) (122,000) (5,527,000)
Proceeds from sale of license..... 3,177,000 3,177,000 3,177,000
Distribution to minority
stockholders.................... (298,000) (298,000) (298,000)
----------- ----------- ----------- ----------- -----------
Net cash (used in) provided
by investing activities... (19,000) (2,385,000) (15,000) 4,238,000 (2,366,000)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from subscriptions of
common stock.................... 3,000 5,000 3,000 2,000 5,000
Proceeds from private placement
offering........................ 15,258,000 15,258,000
Private placement offering
costs........................... (2,108,000) (2,108,000)
----------- ----------- ----------- ----------- ----------- -----------
Net cash provided by
financing activities...... 3,000 13,155,000 3,000 2,000 13,155,000
----------- ----------- ----------- ----------- ----------- -----------
NET (DECREASE) INCREASE IN CASH..... (1,436,000) (1,147,000) 5,072,000 (2,396,000) 3,448,000 6,508,000
Cash--beginning of year............. 6,508,000 8,904,000 8,904,000 5,456,000
----------- ----------- ----------- ----------- ----------- -----------
CASH--END OF YEAR................... $ 5,072,000 $ 7,757,000 $ 5,072,000 $ 6,508,000 $ 8,904,000 $ 6,508,000
=========== =========== =========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid for income taxes........ $ -- $ 28,000 $ 87,000 $ 28,000 $ 59,000 $ 87,000
Noncash investing activity:
Amount payable for acquisition
of license.................... $ 1,843,000
See notes to financial statements
F-31
CORPORATE TECHNOLOGY DEVELOPMENT, INC. AND SUBSIDIARIES
(FORMERLY INSTITUTE FOR DRUG RESEARCH, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999
(UNAUDITED WITH RESPECT TO JUNE 30, 2001)
NOTE A--THE COMPANY AND BASIS OF PRESENTATION
Institute for Drug Research, Inc. (the "Company") was incorporated in
Delaware on December 12, 1997 and commenced operations on January 1, 1998. The
Company was formed to license and develop pharmaceutical products to treat a
variety of human diseases. In November 1999, the Company changed its name to
Corporate Technology Development, Inc.
On December 31, 1998, the Company entered into an option agreement with
Paramount Capital Investments, LLC ("Paramount"), an affiliate of one of the
Company's stockholders, whereby Paramount granted to the Company an option to
purchase all of Paramount's rights and interests in all of the capital stock of
the following companies which were owned by Paramount:
% OF STOCK PREVIOUSLY
OWNED BY PARAMOUNT
---------------------
Neuropath, Inc. .......................................... 93.00%
RxEyes, Inc. ............................................. 82.02%
Intero Corp. (formerly Synergy Therapeutics, Inc.)........ 86.75%
Enteron Pharmaceuticals, Inc. ............................ 80.43%
Oral Solutions, Inc. ..................................... 80.00%
The option was exercised in January 1999 by the Company by payment of
$162,000 and the assumption by the Company of liabilities in an aggregate amount
of $107,000.
The Company's subsidiaries and percentages of ownership are as follows:
Enteron Pharmaceuticals, Inc. .............................. 80.43%
Magyar Pharmaceuticals, Inc. ("MPI")*....................... 90.00%
RxEyes Inc. ................................................ 82.02%
Oral Solutions, Inc. ....................................... 80.00%
Neuropath, Inc.*............................................ 93.00%
Iophthalmics, Inc.*......................................... 100.00%
CTD Drug Design Incorporated*............................... 100.00%
Institute for Drug Research, Limited ("IDRL") (sold in
October 1999 (see Note C[1]))............................. 87.50%
Intero Corp. (sold in December 1999 (see Note C[2]))........ 85.00%
Formulation Technologies, Inc. (formed in February 2001).... 100.00%
------------------------
* These companies were dissolved on September 20, 2000.
IDRL is a limited liability company registered under the laws of the
Republic of Hungary; its activities centered on original drug research, contract
research activity and generic drug development (see Note C[1] with respect to
its disposition).
F-32
CORPORATE TECHNOLOGY DEVELOPMENT, INC. AND SUBSIDIARIES
(FORMERLY INSTITUTE FOR DRUG RESEARCH, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000 AND 1999
(UNAUDITED WITH RESPECT TO JUNE 30, 2001)
NOTE A--THE COMPANY AND BASIS OF PRESENTATION (CONTINUED)
The accompanying financial statements include the accounts of the Company
and its subsidiaries. Intercompany balances and transactions have been
eliminated. Results of operations of entities sold or dissolved are included to
the dates of their disposition.
As reflected in the accompanying financial statements, since inception, the
Company has incurred substantial losses from operations. As a result of the
start-up nature of its business, the Company can expect to continue incurring
substantial operating losses for at least the next several years and significant
additional financing will be required. Continuation of the Company is dependent
on its ability to obtain additional financing and, ultimately, on its ability to
achieve profitable operations. There is no assurance however, that such
financing will be available or that the Company's efforts will ultimately be
successful.
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
[1] CASH AND CASH EQUIVALENTS:
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.
[2] OFFICE EQUIPMENT:
Office equipment is recorded at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets (five
years).
[3] LICENSES:
Licenses are being amortized on a straight-line basis over their
remaining terms.
[4] RESEARCH AND DEVELOPMENT:
Research and development costs are charged to operations as incurred.
[5] 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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.
[6] LONG-LIVED ASSETS:
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of," the Company intends to record impairment losses
on long-lived assets used in operations, including intangible assets, when
events and circumstances indicate that the assets might be impaired. No such
losses have been recorded.
F-33
CORPORATE TECHNOLOGY DEVELOPMENT, INC. AND SUBSIDIARIES
(FORMERLY INSTITUTE FOR DRUG RESEARCH, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000 AND 1999
(UNAUDITED WITH RESPECT TO JUNE 30, 2001)
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[7] STOCK-BASED COMPENSATION:
The Company adopted Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). The
provisions of SFAS No. 123 allow companies to either expense the estimated
fair value of employee stock options or to continue to follow the intrinsic
value method set forth in Accounting Principles Board Opinion 25,
"Accounting for Stock Issued to Employees" ("APB 25") but disclose the pro
forma effects on net income (loss) had the fair value of the options been
expensed. The Company has elected to continue to apply APB 25 in accounting
for its employee stock option incentive plans. See Note F to the financial
statements for further information.
[8] INTERIM FINANCIAL STATEMENTS:
The accompanying financial statements as of June 30, 2001 and for the
six months ended June 30, 2001 and 2000 and the period from January 1, 1998
(commencement of operations) to June 30, 2001 are unaudited. In the opinion
of management, such statements include all adjustments (consisting only of
normal recurring items), which are considered necessary for a fair
presentation of the consolidated financial position of the Company at
June 30, 2001, and the consolidated results of its operations, and cash
flows for such periods. The results of operations for the six-month period
ended June 30, 2001 are not necessarily indicative of the operating results
for the full year.
NOTE C--ACQUISITIONS AND DISPOSITIONS
[1] INSTITUTE FOR DRUG RESEARCH, LIMITED:
On February 23, 1998, the Company purchased an 83 1/3% interest from
existing quotaholders of IDRL for $3,500,000 cash. Immediately following the
purchase of the quotas, the Company contributed $1,400,000 to IDRL, thereby
increasing its interest in IDRL to 87.5%. In addition, the Company incurred
acquisition costs of $505,000. The excess ($3,567,000) of cost over the
value of identifiable net assets acquired was being accounted for as
goodwill which was being amortized over 15 years. As of December 31, 1998,
the Company had loaned IDRL $1,054,000.
On October 12, 1999, the Company sold its 87.5% interest in IDRL to
third parties for $2,510,000 cash. The buyers also repaid the
interest-bearing debt of IDRL to the Company which, as of October 12, 1999,
aggregated $3,240,000. IDRL was accounted for as a discontinued operation in
the accompanying 1999 statement of operations as the Company plans to
discontinue the types of activities carried on by IDRL. Results of
operations of IDRL through the date of sale is reflected in the Company's
1999 statement of operations as loss from operations of discontinued
subsidiary.
F-34
CORPORATE TECHNOLOGY DEVELOPMENT, INC. AND SUBSIDIARIES
(FORMERLY INSTITUTE FOR DRUG RESEARCH, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000 AND 1999
(UNAUDITED WITH RESPECT TO JUNE 30, 2001)
NOTE C--ACQUISITIONS AND DISPOSITIONS (CONTINUED)
The condensed statement of income (loss) of IDRL is presented below.
YEAR ENDED
DECEMBER 31, 1999
------------------
Net sales................................................... $ 1,002,000
Costs and expenses.......................................... (2,743,000)
Minority interest share in losses........................... 218,000
Write-off of goodwill....................................... (3,329,000)
-----------
Loss from operations of discontinued subsidiary............. $(4,852,000)
===========
[2] SALE OF ASSETS OF INTERO CORP.:
In December 1999, the Company sold substantially all of the assets of
its 86.75% owned subsidiary, Intero Corp., which was formed in
February 1999. The Company received $3,500,000 for the assets which
consisted principally of Intero's rights to various consulting agreements,
scientific advisory board agreement and a license agreement with the Johns
Hopkins University for which the Company paid approximately $125,000 in
February 1999. The Company recorded a gain of $3,052,000 on the sale. The
Company may also receive a maximum of $3,000,000 upon the approval by the
Food and Drug Administration of the various treatments discussed in the
licensed agreement.
NOTE D--SUBLICENSE AGREEMENT
[1] MPI:
On December 31, 1998, MPI entered into a sublicense agreement with
Precision Pharmaceuticals, Inc. ("Precision"). Precision is an exclusive
licensee, with a right to grant sublicenses, of the University of Florida
Research Foundation, Inc. ("UFRF") and of Nicholas Bodor ("Bodor"), a former
director of the Company, under license agreements dated October 31, 1997 as
amended. Pursuant to the sublicense agreement, Precision granted MPI an
exclusive worldwide sublicense of all of its rights and interest in the
licensed patents and know-how as defined in the license agreements to make,
use and sell licensed products and to use licensed processes in exchange for
license fees paid by MPI of $750,000 and milestone payments aggregating
$1,100,000. The agreement also provides for the payment by MPI of royalties
of (a) 6.25% of gross selling price for licensed products or licensed
processes that are covered by one or more licensed patents, and (b) 4.25% of
the selling price of licensed products or licensed processes which are not
covered by one or more licensed patents but which include or are derived
from the know-how. In connection therewith, the Company incurred costs of
approximately $114,000 which it included in cost of the license. In
April 1999 and April 2000, the sublicense agreements with UFRF and Bodor,
respectively, were terminated and Bodor's shares of the Company's common
stock were cancelled. As a result, the Company wrote off the unamortized
balance of the license fee amounting to $1,822,000 as of December 31, 1999.
F-35
CORPORATE TECHNOLOGY DEVELOPMENT, INC. AND SUBSIDIARIES
(FORMERLY INSTITUTE FOR DRUG RESEARCH, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000 AND 1999
(UNAUDITED WITH RESPECT TO JUNE 30, 2001)
NOTE D--SUBLICENSE AGREEMENT (CONTINUED)
[2] RXEYES, INC.:
On April 14, 1998, RxEyes, Inc. ("RxEyes") entered into a license
agreement with Neil F. Martin, M.D., Howard N. Robinson, M.D., Marvin S.
Towsend, Esquire and Leonard Bloom, Esquire (collectively the "Licensor").
Pursuant to the license agreement, Licensor granted RxEyes an exclusive
license in the licensed patents and know-how as defined in the license
agreement to make, use and sell licensed products and to use licensed
processes in exchange for license fees of $50,000 and milestone payments
aggregating $750,000. The agreement also provides for the payment of
royalties of 6% of selling price for licensed products or licensed processes
that are covered by one or more licensed patents. In connection therewith,
the Company incurred costs of approximately $33,000 which are included in
the cost of the license.
On February 26, 2001, RxEyes received a notice of termination of the
license agreement from the Licensor alleging nonpayment by RxEyes of a
$200,000 penalty payment. RxEyes maintains that it is not required to make
such payment.
[3] ENTERON PHARMACEUTICALS, INC.:
On November 24, 1998, Enteron Pharmaceuticals, Inc. ("Enteron") entered
into a license agreement with George B. McDonald, M.D. ("Licensor").
Pursuant to the license agreement, Licensor granted Enteron an exclusive
license in the licensed patents and know-how as defined in the license
agreement to make, use and sell licensed products and to use licensed
processes in exchange for license fees of $20,000 and milestone payment of
$300,000. The agreement also provides for the payment of royalties of 6% to
8% of net selling price, as defined, for licensed products or licensed
processes that are covered by one or more licensed patents and 25% to 33% of
sublicense fees, as defined, received from third parties for the right to
practice the licensed processes. In connection therewith, the Company
incurred costs of approximately $7,000 which are included in cost of the
license. On March 5, 2001, Enteron and the Licensor amended the license
agreement whereby the milestone payment of $300,000 was increased to
$400,000.
[4] ORAL SOLUTIONS, INC.:
On June 8, 1999, Oral Solutions, Inc. ("OSI") entered into a license
agreements with Joel B. Epstein, D.M.D. ("Licensor"). Pursuant to the
license agreement, Licensor granted OSI an exclusive license with the right
to grant sublicenses under the licensed patents and know-how as defined in
the license agreement to make, use and sell licensed products and to use
licensed processes. The agreement also provides for the payment of 2% of
royalties received by OSI from the sales by any sublicensee of the licensed
products.
F-36
CORPORATE TECHNOLOGY DEVELOPMENT, INC. AND SUBSIDIARIES
(FORMERLY INSTITUTE FOR DRUG RESEARCH, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000 AND 1999
(UNAUDITED WITH RESPECT TO JUNE 30, 2001)
NOTE E--STOCKHOLDERS' EQUITY
[1] PRIVATE PLACEMENT:
In May and July 1998, pursuant to a private placement offering, the
Company sold 152.575 units, each unit consisting of 50,000 shares of
Series A Convertible Preferred Stock of the Company at a price per unit of
$100,000 ($2.00 per preferred share). Pursuant to the terms of the offering,
the holders of each share of Preferred Stock are entitled to (a) convert the
preferred share to common stock on a share-for-share basis subject to
adjustments for changes in capital stock, (b) vote on an as converted basis,
(c) receive cumulative dividends when as and if declared by the Board of
Directors as follows: (1) two dollars ($2.00) per share effective the first
day following the final closing date and (2) effective on the date that is
eighteen (18) months from the final closing date, and every twelve
(12) months thereafter, a one dollar ($1.00) dividend per share, and (d) a
liquidation preference of $2.00 per share plus any dividends accrued and
unpaid. The Series A Convertible Preferred Stock is redeemable at the option
of the Company in whole, but not in part, upon not less than 30 days nor
more than 60 days written notice, at a price equal to the liquidation
amount. Net proceeds from the private placement approximated $13,150,000.
Dividends in arrears as of December 31, 2000 aggregated $22,886,000. In
January 2001, additional dividends aggregating $7,629,000 accrued.
The placement agent for the offering received approximately $1,998,000
in cash plus warrants which, pursuant to the Placement Agency Agreement give
the holders thereof the right to acquire 762,875 shares of Series A
Convertible Preferred Stock of the Company at a price of $2.20 per share
through January 15, 2009. The warrants contain certain anti-dilution
provisions and may be exercised on a "cashless exercise" basis pursuant to a
provision that does not require the payment of any cash to the Company.
[2] COMMON SHARES RESERVED FOR ISSUANCE:
The Company has reserved shares of common stock for issuance upon
conversion of preferred stock and exercise of options as follows:
(i) Series A Convertible Preferred Stock 7,628,750
(ii) Placement agent warrants conversion of preferred stock 762,875
(iii) Stock options 1,322,725
NOTE F--STOCK OPTIONS
The Company applies APB No. 25 in accounting for stock options granted,
which requires recognition of employee compensation expense for the difference
between the fair value of the underlying common stock and the exercise price of
the option at the grant date. The effect of applying SFAS No. 123 on pro forma
net income (loss) is not necessarily representative of the effects on reported
net income (loss) for future years due to, among other things, (1) the vesting
period of stock options and the (2) fair value of additional stock options in
future years. Had the compensation expense been determined based upon the fair
value at the grant date, as prescribed under SFAS
F-37
CORPORATE TECHNOLOGY DEVELOPMENT, INC. AND SUBSIDIARIES
(FORMERLY INSTITUTE FOR DRUG RESEARCH, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000 AND 1999
(UNAUDITED WITH RESPECT TO JUNE 30, 2001)
NOTE F--STOCK OPTIONS (CONTINUED)
No. 123, the Company's pro forma net loss for the years ended December 31, 2000
and 1999 would have been approximately $2,525,000 and $1,600,000, respectively.
The weighted average fair value of the options granted during 2000 and 1999
is estimated to be $0.45 and $0.66, respectively. The fair value of the options
on the grant date was computed using the Black-Scholes option-pricing model. The
following assumptions were used for this valuation: dividend yield of 0%,
volatility of 80%, risk free interest rate of 5.65% and expected life of options
of 5 years.
DECEMBER 31,
JUNE 30, -----------------------------------------------------------
2001 2000 1999
--------- ---------------------------- ----------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES SHARES EXERCISE PRICE SHARES EXERCISE PRICE
--------- --------- ---------------- --------- ----------------
Outstanding, beginning of
year......................... 1,322,725 1,372,725 $0.20 1,172,725 $0.20
Granted during the year........ 154,545 0.20 450,000 0.20
Cancelled during the year...... (204,545) 0.20 (250,000)
--------- --------- ---------
Outstanding, end of year....... 1,322,725 1,322,725 0.20 1,372,725 0.20
========= ========= =========
Exercisable, end of year....... 1,146,464 1,146,464 0.20 776,389 0.20
========= ========= =========
The following table summarizes stock option information as of December 31,
2000:
OPTIONS OUTSTANDING
WEIGHTED AVERAGE
EXERCISE NUMBER REMAINING OPTIONS
PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISABLE
--------------------- ----------- ------------------- -----------
$0.20 100,000 2.67 83,334
0.20 772,725 2.92 729,796
0.20 50,000 3.00 33,334
0.20 400,000 3.50 300,000
--------- ---------
1,322,725 3.00 1,146,464
========= ---------
NOTE G--COMMITMENTS
[1] The Company has an employment agreement with its Chief Executive Officer
which expires June 2001. The agreement provides for, (1) annual compensation
of $198,000 (reduced to $100,000 effective October 25, 2000) plus bonuses to
be determined at the sole discretion of the Board of Directors, and (2) the
grant of options to purchase 772,725 shares of common stock of the Company
at a purchase price of $0.20 per share (including "cashless exercise"
feature, as defined which may result in a charge to operations which may be
material), for a period of five years, which vested 193,181 shares on
December 1, 1998 and the remainder, quarterly in advance over nine quarterly
periods beginning February 1, 1999, provided that the CEO is still employed
by the
F-38
CORPORATE TECHNOLOGY DEVELOPMENT, INC. AND SUBSIDIARIES
(FORMERLY INSTITUTE FOR DRUG RESEARCH, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000 AND 1999
(UNAUDITED WITH RESPECT TO JUNE 30, 2001)
NOTE G--COMMITMENTS (CONTINUED)
Company. The options, which were valued at $406,000, were recorded as
unearned compensation. For the years ended December 31, 2000 and 1999, the
Company recorded compensation expense of approximately $56,000 and $135,000,
respectively, in connection with the options issued.
On November 25, 2000, the Company and the Chief Executive Officer agreed
to cancel fully exercisable stock options to purchase 154,545 shares of
common stock of the Company granted to the Chief Executive Officer in
December 1998. The cancelled stock options, at the request of the Chief
Executive Officer, were reissued to three employees of the Company.
[2] The Company has an employment agreement with its Director of Corporate
Development for a term expiring June 2002. The agreement provides for,
(1) annual compensation of $60,000 plus bonuses to be determined at the sole
discretion of the Board of Directors, and (2) the grant of options to
purchase 400,000 shares of common stock of the Company at a purchase price
of $0.20 per share (including "cashless exercise" feature, as defined which
may result in a charge to operations which may be material), for a period of
five years, which vested 100,000 shares on October 1, 1998 and the remainder
vesting annually in advance in equal installments, provided that the officer
is still employed by the Company. The options, which were valued at
$228,000, were recorded as unearned compensation. For the year ended
December 31, 2000 and 1999, the Company recorded compensation expense of
approximately $57,000 and $71,000, respectively, in connection with the
options issued.
NOTE H--INCOME TAXES
At December 31, 2000, the Company has available for Federal income tax
purposes a net consolidated operating loss carryforward of approximately
$2,400,000, which will expire in 2018 through 2020. In addition, the Company has
incurred an operating loss of $1,431,000 for the period January 1, 2001 through
June 30, 2001. The Company also has a $3,017,000 capital loss carryforward which
expires in 2004, an orphan drug credit of $611,000 expiring through 2020 and
research and development credits of $47,000 expiring through 2020. The Company's
ability to utilize these carryforwards may be subject to annual limitations
pursuant to Section 382 of the Internal Revenue Code if future changes in
ownership occur.
F-39
CORPORATE TECHNOLOGY DEVELOPMENT, INC. AND SUBSIDIARIES
(FORMERLY INSTITUTE FOR DRUG RESEARCH, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000 AND 1999
(UNAUDITED WITH RESPECT TO JUNE 30, 2001)
NOTE H--INCOME TAXES (CONTINUED)
The Company's deferred tax assets are attributable to the following:
DECEMBER 31,
JUNE 30, -------------------------
2001 2000 1999
----------- ----------- -----------
Net operating loss carryforward........................ $ 1,450,000 $ 950,000 $ 639,000
Capital loss carryforward.............................. 1,388,000 1,388,000 1,388,000
Orphan drug and research and development credits....... 658,000 658,000
----------- ----------- -----------
3,496,000 2,996,000 2,027,000
Valuation allowance.................................... (3,496,000) (2,996,000) (2,027,000)
----------- ----------- -----------
Net.................................................... $ 0 $ 0 $ 0
=========== =========== ===========
The Company has provided a valuation allowance against the full amount of
the deferred tax asset as realization is uncertain.
NOTE I--SUBSEQUENT EVENTS
[1] LICENSE OPTION:
On February 20, 2001, Formulation Technologies, Inc. ("Formulation"), a
newly formed and wholly-owned subsidiary of the Company, entered into a
twelve-month preliminary exclusive license option agreement with University
Pharmaceuticals of Maryland, Inc,. ("UPM"). UPM is an exclusive licensee,
with a right to grant sublicenses, of certain patented technology from the
University of Maryland. Pursuant to the option agreement, UPM granted
Formulation an exclusive option to license the patent and technology, as
defined, in exchange for an option fee of $10,000. Formulation has a twelve
month option to enter into a sub-license agreement with UPM whereby UPM will
grant Formulation an exclusive sublicense of all of its rights and interest
in the licensed patent and know-how as defined to make, use and sell
licensed products and to use licensed processes in exchange for license fees
to be paid by Formulation amounting to $35,000 and milestone payments
aggregating $1,000,000. The proposed agreement will provide for the payment
by Formulation of royalties of 3% of gross selling price for licensed
products or licensed processes that are covered by the licensed patent.
[2] MERGER:
The Company has entered into a merger agreement with Endorex Corporation
("Endorex") whereby Endorex has agreed to acquire the Company in exchange
for the issuance of Endorex common stock, options and warrants to the
existing stockholders, warrant holders and option holders of the Company as
described in the agreement and plan of merger and reorganization dated
July 31, 2001. There are no assurances that the merger will take place.
F-40
INDEX TO APPENDICES
Appendix I -- Agreement and Plan of Merger and Reorganization............. I-1
Appendix II -- Voting Agreement............................................ II-1
Appendix III -- Opinion of Wells Fargo Van Kasper, financial advisor to
Endorex Corporation....................................... III-1
Appendix IV -- Section 262 of the Delaware General Corporation Law......... IV-1
Appendix V -- Escrow Agreement............................................ V-1
Appendix VI -- Form of Amended and Restated 1995 Omnibus Incentive Plan, as
proposed to be amended.................................... VI-1
Appendix VII -- Endorex Audit Committee Charter............................. VII-1
IA-1
APPENDIX I
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
BY AND AMONG
ENDOREX CORPORATION,
ROADRUNNER ACQUISITION, INC.,
AND
CORPORATE TECHNOLOGY DEVELOPMENT, INC.
DATED AS OF JULY 31, 2001
TABLE OF CONTENTS
PAGE
--------
ARTICLE I THE MERGER............................................................... I-1
1.1 The Merger.................................................. I-1
1.2 Closing; Effective Time..................................... I-2
1.3 Effect of the Merger........................................ I-2
1.4 Certificate of Incorporation; Bylaws........................ I-2
1.5 Directors and Officers...................................... I-2
1.6 Merger Consideration........................................ I-2
1.7 Dissenting Shares........................................... I-4
1.8 Surrender of Certificates................................... I-5
1.9 Lost, Stolen or Destroyed Certificates...................... I-7
1.10 Closing of Company's Transfer Books......................... I-7
1.11 Tax Consequences............................................ I-7
1.12 No Liability................................................ I-7
1.13 Affiliates.................................................. I-8
1.14 Taking of Necessary Action; Further Action.................. I-8
ARTICLE II REPRESENTATIONS AND WARRANTIES OF COMPANY AND STOCKHOLDERS OF COMPANY...
I-8
2.1 Organization, Standing and Power............................ I-8
2.2 Capital Structure........................................... I-8
2.3 Authority................................................... I-9
2.4 No Conflicts; Required Filings and Consents................. I-9
2.5 Permits; Compliance with Laws............................... I-10
2.6 Financial Statements........................................ I-11
2.7 Absence of Certain Changes.................................. I-11
2.8 Absence of Undisclosed Liabilities.......................... I-12
2.9 Litigation.................................................. I-12
2.10 Restrictions on Business Activities......................... I-12
2.11 Title to Property........................................... I-12
2.12 Intellectual Property....................................... I-13
2.13 Taxes....................................................... I-15
2.14 Employee Benefit Plans...................................... I-17
2.15 Employees; Employee Matters................................. I-18
2.16 Interested Party Transactions............................... I-18
2.17 Complete Copies of Materials; Bank Accounts................. I-18
2.18 Material Contracts.......................................... I-19
2.19 No Breach of Material Contracts............................. I-19
2.20 Brokers..................................................... I-20
2.21 No Business Activity Restriction............................ I-20
2.22 Environmental Matters....................................... I-20
2.23 Company Stockholders' Approval.............................. I-21
2.24 No Excess Parachute Payments................................ I-21
2.25 Completeness of the Company Information..................... I-22
2.26 Insurance................................................... I-22
2.27 Guaranties.................................................. I-22
2.28 Subsidiaries................................................ I-22
2.29 Anti-Takeover Matters....................................... I-22
2.30 FDA Matters................................................. I-22
I-i
PAGE
--------
2.31 Studies..................................................... I-23
2.32 Employment Agreements....................................... I-23
2.33 Patent and Trademark Applications........................... I-23
2.34 McDonald License Agreement.................................. I-24
2.35 Allergan Transaction........................................ I-24
2.36 Liquidation Amount.......................................... I-24
2.37 Parent Securities........................................... I-24
2.38 Dissolution................................................. I-24
2.39 Common Stock................................................ I-24
2.40 Representations Complete.................................... I-24
ARTICLE III REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB................
I-25
3.1 Organization and Standing................................... I-25
3.2 Capital Structure of Parent................................. I-25
3.3 Authority................................................... I-25
3.4 No Conflict; Required Filings and Consents.................. I-25
3.5 SEC Filings; Financial Statements of Parent................. I-26
3.6 Litigation.................................................. I-26
3.7 No Undisclosed Liabilities.................................. I-26
3.8 Absence of Certain Changes.................................. I-27
3.9 Brokers..................................................... I-27
3.10 Reorganization.............................................. I-27
3.11 Representations Complete.................................... I-28
ARTICLE IV CONDUCT PRIOR TO THE EFFECTIVE TIME..................................... I-28
4.1 Conduct of Business of Company.............................. I-28
4.2 Exclusivity................................................. I-30
4.3 Notices of Certain Events................................... I-31
ARTICLE V ADDITIONAL AGREEMENTS.................................................... I-31
5.1 Access to Information....................................... I-31
5.2 Confidentiality............................................. I-32
5.3 Public Disclosure........................................... I-32
5.4 Reasonable Efforts and Further Assurances................... I-33
5.5 Notification of Certain Matters............................. I-33
5.6 Employment and Consulting Agreements; Employees............. I-33
5.7 No Liability of Parent if Transaction is Not Tax-Free....... I-34
5.8 Company Disclosure Schedule................................. I-34
5.9 Litigation Support.......................................... I-34
5.10 Transition.................................................. I-34
5.11 Tax Treatment............................................... I-34
5.12 Joint Proxy Statement/Prospectus; Registration Statement.... I-35
5.13 Stockholders Meetings....................................... I-35
5.14 Affiliate Agreements........................................ I-35
5.15 Registration Statement; Joint Proxy Statement/Prospectus.... I-36
5.16 Directors' and Officers' Indemnification and Insurance...... I-36
5.17 Amendment to Company's Certificate of Incorporation......... I-36
5.18 McDonald License Agreement.................................. I-36
5.19 Address Change Notices...................................... I-37
5.20 Amendment of the Warrants................................... I-37
I-ii
PAGE
--------
5.21 AMEX Noncompliance Notice................................... I-37
ARTICLE VI CONDITIONS TO THE MERGER................................................ I-37
6.1 Conditions to Obligations of Each Party to Consummate the
Merger...................................................... I-37
6.2 Additional Conditions to Obligations of Company............. I-38
6.3 Additional Conditions to Obligations of Parent and Merger
Sub......................................................... I-39
ARTICLE VII TERMINATION AND AMENDMENT.............................................. I-40
7.1 Termination................................................. I-40
7.2 Effect of Termination....................................... I-42
7.3 Certain Payments............................................ I-42
ARTICLE VIII REMEDIES, ESCROW AND INDEMNIFICATION.................................. I-43
8.1 Survival of Representations and Warranties.................. I-43
8.2 Escrow Fund................................................. I-43
8.3 Limitations on Indemnification.............................. I-43
8.4 Indemnification by the Stockholders......................... I-44
8.5 Indemnification by Parent and Surviving Corporation......... I-45
8.6 Third Party Claims.......................................... I-45
ARTICLE IX GENERAL PROVISIONS...................................................... I-45
9.1 Expenses.................................................... I-45
9.2 Notices..................................................... I-46
9.3 Certain Definitions; Interpretation......................... I-47
9.4 Counterparts................................................ I-47
9.5 Entire Agreement; Parties in Interest; Nonassignability..... I-47
9.6 Severability................................................ I-47
9.7 Governing Law............................................... I-48
9.8 Rules of Construction....................................... I-48
9.9 Extension; Waiver........................................... I-48
9.10 No Third-Party Beneficiary.................................. I-48
9.11 Attorneys' Fees............................................. I-48
9.12 Amendment................................................... I-48
I-iii
EXHIBITS
Exhibit A -- Form of Delaware Certificate of Merger
Exhibit B -- Directors and Officers of Surviving Corporation
Exhibit C -- Form of Escrow Agreement
Exhibit D -- Form of Bier Employment Agreement
Exhibit E -- Company Affiliates
Exhibit F -- Form of Affiliate Agreement
Exhibit G -- Form of Legal Opinions of Counsel to Company
Exhibit H -- Form of Legal Opinion of Counsel to Parent and Merger Sub
Exhibit I -- Executing Stockholders and Form of Voting Agreement
Exhibit J -- Form of Stergiopoulos Consulting Agreement
Exhibit K -- Form of Kanzer Noncompetition/Nonsolicitation Agreement
Exhibit L -- Certificate of Incorporation and Bylaws of Surviving
Corporation
Exhibit M -- Escrow Shares
Exhibit N -- 2001 Company Budget
Exhibit O -- Form of Amended Warrant
SCHEDULES
Company Disclosure Schedule
Parent Disclosure Schedule
I-iv
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
THIS AGREEMENT AND PLAN OF MERGER AND REORGANIZATION (the "AGREEMENT") is
made and entered into as of July 31, 2001, by and among Endorex Corporation, a
Delaware corporation ("PARENT"); Roadrunner Acquisition, Inc., a Delaware
corporation and wholly-owned subsidiary of Parent ("MERGER SUB"); and Corporate
Technology Development, Inc., a Delaware corporation ("COMPANY").
RECITALS
A. The Boards of Directors of Company, Merger Sub and Parent believe it is
in the best interests of their respective corporations and the stockholders of
their respective corporations to enter into a business combination by means of a
statutory merger of Merger Sub with and into Company (the "MERGER") and, in
furtherance thereof, have approved the Merger.
B. Pursuant to the Merger, among other things, the outstanding shares of
common stock, $.001 par value per share, of Company (the "COMPANY COMMON STOCK")
and the outstanding shares of Series A Convertible Preferred Stock, par value
$.001 per share, of Company ("SERIES A PREFERRED" and, together with the Company
Common Stock, the "COMPANY STOCK") shall be converted into the right to receive
shares of common stock of Parent, $.001 par value per share (the "PARENT COMMON
STOCK"), on the terms and subject to the conditions set forth herein. Parent
will issue options to acquire Parent Common Stock (the "PARENT OPTIONS")
pursuant to Parent's Amended and Restated 1995 Omnibus Incentive Plan, as
amended (the "PARENT PLAN"), to holders of options (the "COMPANY OPTIONS")
issued pursuant to Company's 1998 Stock Incentive Plan (the "COMPANY PLAN") in
substitution for the Company Options. All outstanding warrants of Company to
acquire shares of Series A Preferred (the "WARRANTS") shall be amended to be
substantially in the form set forth in EXHIBIT O attached hereto (the "AMENDED
WARRANTS") prior to the Effective Time (defined in Section 1.2), and Parent
shall issue warrants exercisable for shares of Parent Common Stock in
substitution for the Amended Warrants (the "PARENT WARRANTS").
C. The parties intend, by executing this Agreement, to adopt a plan of
reorganization within the meaning of Section 368(a) of the Internal Revenue Code
of 1986, as amended (the "CODE"), and the Treasury Regulations promulgated
thereunder, and intend that the Merger qualify as a reorganization within the
meaning of Section 368(a) of the Code.
D. Concurrently with the execution of this Agreement, each of the security
holders of the Company set forth on EXHIBIT I attached hereto is executing and
delivering to Parent a Voting Agreement substantially in the form set forth in
EXHIBIT I attached hereto (the "VOTING AGREEMENT").
NOW, THEREFORE, in consideration of the representations, warranties,
covenants and agreements set forth herein, and for other good and valuable
consideration, the receipt of which is hereby acknowledged, the parties agree as
follows:
ARTICLE I
THE MERGER
1.1 THE MERGER. At the Effective Time (as defined in Section 1.2) and
subject to and upon the terms and conditions set forth in this Agreement and the
applicable provisions of the Delaware General Corporation Law ("DELAWARE LAW"),
Merger Sub shall be merged with and into Company, the separate corporate
existence of Merger Sub shall cease and Company shall continue as the surviving
corporation and as a wholly-owned subsidiary of Parent. Company, as the
surviving corporation after the Merger, is hereinafter sometimes referred to as
the "SURVIVING CORPORATION."
I-1
1.2 CLOSING; EFFECTIVE TIME. The closing of the Merger (the "CLOSING")
shall take place as soon as practicable after the satisfaction or waiver of each
of the conditions set forth in Article VI or at such other time as the parties
hereto agree (the "CLOSING DATE"). The Closing shall take place at the offices
of Brobeck, Phleger & Harrison LLP, 370 Interlocken Boulevard, Suite 500,
Broomfield, Colorado 80021, or at such other location as the parties hereto
agree. At the Closing and simultaneously therewith, the parties hereto shall
cause the Merger to be consummated by filing a Certificate of Merger
substantially in the form attached hereto as EXHIBIT A (the "DELAWARE
CERTIFICATE OF MERGER") with the Secretary of State of the State of Delaware in
accordance with the relevant provisions of Delaware Law (the time of filing of
the Delaware Certificate of Merger being the "EFFECTIVE TIME").
1.3 EFFECT OF THE MERGER. At the Effective Time, the effect of the Merger
shall be as provided in this Agreement, the Delaware Certificate of Merger and
the applicable provisions of Delaware Law. Without limiting the generality of
the foregoing, and subject thereto, at the Effective Time, all the property,
rights, privileges, powers and franchises of Company and Merger Sub shall vest
in the Surviving Corporation, and all debts, liabilities and duties of Company
and Merger Sub shall become the debts, liabilities and duties of the Surviving
Corporation, and the Surviving Corporation shall be a wholly-owned subsidiary of
Parent.
1.4 CERTIFICATE OF INCORPORATION; BYLAWS.
(a) CERTIFICATE OF INCORPORATION. Unless otherwise determined by
Parent prior to the Effective Time, at the Effective Time the Certificate of
Incorporation of Merger Sub, as in effect immediately prior to the Effective
Time, shall be the Certificate of Incorporation of the Surviving Corporation
(except the name of the Surviving Corporation shall be amended to become
"Corporate Technology Development, Inc.") until thereafter amended, as
provided by Delaware Law and such Certificate of Incorporation.
(b) BYLAWS. Unless otherwise determined by Parent prior to the
Effective Time, at the Effective Time the Bylaws of Merger Sub, as in effect
immediately prior to the Effective Time, shall be the Bylaws of the
Surviving Corporation, until thereafter amended, as provided by Delaware
Law, the Surviving Corporation's Certificate of Incorporation and such
Bylaws.
1.5 DIRECTORS AND OFFICERS.
(a) SURVIVING CORPORATION. From and after the Effective Time, the
directors and officers of the Surviving Corporation shall be as set forth on
EXHIBIT B annexed hereto, in each case until their respective successors are
duly elected or appointed and qualified.
(b) PARENT. Parent shall take, or cause to be taken, such action so
that, at the Effective Time, the Board of Directors of Parent (the "PARENT
BOARD") shall consist of nine (9) members, three of whom shall be Dr. Colin
Bier, Mr. Guy Rico and Mr. Peter Kliem, who shall serve until their
successors are duly elected and qualified. Without limiting the foregoing,
if necessary to comply with this Section 1.5(b), Parent shall cause the
number of directors that shall constitute the Parent Board to be increased
by resolution of the Parent Board. Dr. Bier will become the Chief Executive
Officer of Parent and be appointed by the Parent Board as the Chairman of
the Parent Board and Dr. Bier shall serve as the Chairman until such time as
a successor is appointed by the Parent Board.
1.6 MERGER CONSIDERATION.
(a) CONVERSION OF COMPANY STOCK. At the Effective Time by virtue of
the Merger and without any action on the part of the holders of Company
Common Stock, each share of Company Common Stock issued and outstanding
immediately prior to the Effective Time (excluding those held in the
treasury of Company), and all rights in respect thereof, shall forthwith
cease to exist and be converted into .271443 of a share (the "COMMON STOCK
EXCHANGE RATIO") of Parent
I-2
Common Stock. At the Effective Time by virtue of the Merger and without any
action on the part of the holders of shares of Series A Preferred, each
share of Series A Preferred issued and outstanding immediately prior to the
Effective Time (excluding those held in the treasury of Company), and all
rights in respect thereof, shall forthwith cease to exist and be converted
into 1.008466 shares of Parent Common Stock (the "PREFERRED STOCK EXCHANGE
RATIO," and, together with the Common Stock Exchange Ratio, the "EXCHANGE
RATIOS"). At the Effective Time by virtue of the Merger and without any
action on the part of the holders of the Company Options, each Company
Option issued and outstanding immediately prior to the Effective Time, and
all rights in respect thereof, shall forthwith cease to exist and Parent
Options shall be substituted therefor. Each such Parent Option shall be
evidenced by a new stock option agreement issued by Parent to each of the
holders of a Company Option (each a "PARENT GRANT AGREEMENT"). Each such
Parent Grant Agreement shall have, and be subject to, the same terms and
conditions set forth in the applicable stock option agreements for the
Company Options, as in effect on the date hereof (each a "COMPANY OPTION
AGREEMENT"), except that each Parent Option will be exercisable for the
number of shares of Parent Common Stock equal to the product of the number
of shares of Company Common Stock that were subject to such corresponding
Company Option immediately prior to the Effective Time multiplied by the
Common Stock Exchange Ratio, rounded down to the nearest whole share, and
the per share exercise price for the shares of Parent Common Stock issuable
upon exercise of such Parent Option will be equal to the quotient determined
by dividing the exercise price per share of Company Common Stock at which
such Company Option was exercisable immediately prior to the Effective Time
by the Common Stock Exchange Ratio, rounded up to the nearest whole cent. At
the Effective Time by virtue of the Merger and without any action on the
part of the holders of the Amended Warrants, each Amended Warrant issued and
outstanding immediately prior to the Effective Time, and all rights in
respect thereof, shall forthwith cease to exist and Parent Warrants shall be
substituted therefor. Each such Parent Warrant shall have, and be subject
to, the same terms and conditions set forth in the applicable Amended
Warrant, except that each Parent Warrant will be exercisable for the number
of shares of Parent Common Stock equal to the product of the number of
shares of Series A Preferred that were subject to such corresponding Amended
Warrant immediately prior to the Effective Time multiplied by the Common
Stock Exchange Ratio, rounded down to the nearest whole share, and the per
share exercise price for the shares of Parent Common Stock issuable upon
exercise of such Parent Warrent will be equal to the quotient determined by
dividing the exercise price per share of Series A Preferred at which such
Amended Warrant was exercisable immediately prior to the Effective Time by
the Common Stock Exchange Ratio, rounded up to the nearest whole cent.
Except pursuant to the terms of Sections 1.6(d) or 8.5, in no event shall
Parent be required to issue any Parent Common Stock or options, warrants or
other securities exercisable for or convertible into in excess of 10,000,000
shares of Parent Common Stock pursuant to the terms of this Agreement,
including, but not limited to, the Parent Common Stock issuable upon
exercise of the Parent Options, the Parent Common Stock issuable upon
exercise of the Parent Warrants, the Parent Common Stock to be issued to
Nicholas Stergiopoulos pursuant to Section 1.6(g) and the Parent Common
Stock to be issued to Steve Kanzer pursuant to Section 1.6(h). An aggregate
of 1,350,000 shares of the Merger Consideration (as defined below) payable
to the stockholders of Company (the "STOCKHOLDERS") as set forth on EXHIBIT
M attached hereto shall be subject to escrow pursuant to Sections
1.8(b) and 8.2. The aggregate number of shares of Parent Common Stock
issuable (i) pursuant to this Section 1.6(a), (ii) upon exercise of the
Parent Options and the Parent Warrants, and (iii) pursuant to
Section 1.6(d) are collectively referred to herein as the "MERGER
CONSIDERATION". The aggregate number of shares of Parent Common Stock that
the holders of the Series A Preferred receive pursuant to this
Section 1.6(a) is referred to herein as the "SERIES A PREFERRED MERGER
CONSIDERATION."
I-3
(b) CANCELLATION OF CAPITAL STOCK OWNED BY COMPANY. At the Effective
Time, all shares of capital stock of Company that are held in the treasury
of Company or owned by Company or any subsidiary of Company immediately
prior to the Effective Time shall be canceled and extinguished without any
conversion thereof and without payment of any consideration therefor.
(c) NO FRACTIONAL SHARES. No certificate or scrip representing
fractional shares of Parent Common Stock shall be issued upon the surrender
for exchange of certificates that immediately prior to the Effective Time
represented outstanding shares of Company Stock (the "COMPANY
CERTIFICATES"), no dividend or distribution of Parent shall relate to such
fractional share interests, and such fractional share interests will not
entitle the owner thereof to vote or to any other rights of a stockholder of
Parent. Notwithstanding any other provision of this Agreement, each holder
of shares of Company Stock exchanged pursuant to the Merger who would
otherwise have been entitled to receive a fraction of a share of Parent
Common Stock (after taking into account all Company Certificates delivered
by such holder) shall receive, in lieu thereof, cash (without interest) in
an amount equal to such fractional part of a share of Parent Common Stock
multiplied by the Closing Date Fair Market Value (as defined in
Section 8.3(d)).
(d) ADJUSTMENTS TO EXCHANGE RATIOS. The Exchange Ratios shall be
adjusted to reflect fully the effect of any stock split, reverse split,
stock dividend (including any dividend or distribution of securities
convertible into Parent Common Stock or securities of Company),
reorganization, recapitalization or other like change with respect to Parent
Common Stock or securities of Company occurring after the date hereof and
prior to the Effective Time; PROVIDED, HOWEVER, that the Exchange Ratios
shall not be adjusted for any dividend of Parent's securities on Parent's
Series B Convertible Preferred Stock or Series C Convertible Preferred Stock
pursuant to the terms of Parent's Amended and Restated Certificate of
Incorporation.
(e) CONVERSION OF MERGER SUB COMMON STOCK. At the Effective Time, each
share of common stock of Merger Sub issued and outstanding immediately prior
to the Effective Time shall remain outstanding and shall represent one
validly issued, fully paid and nonassessable share of common stock of the
Surviving Corporation.
(f) OUTSTANDING CAPITAL STOCK OF COMPANY. After the Effective Time, no
share of capital stock of Company shall be deemed to be outstanding or to
have any rights other than those set forth in this Section 1.6.
(g) STERGIOPOULOS PAYMENT. At the Closing, Nicholas Stergiopoulos
shall receive 133,334 shares of Parent Common Stock from Parent as payment
of a bonus pursuant to Section 3(a)(iv) of the Stergiopoulos Employment
Agreement (as defined in Section 5.6(c)).
(h) KANZER PAYMENT. At the Closing, Steve Kanzer shall receive 250,000
shares of Parent Common Stock from Parent as payment of a bonus related to
his employment with CTD.
1.7 DISSENTING SHARES.
(a) DISSENTER'S RIGHTS. Notwithstanding any provision of this
Agreement to the contrary, any capital stock of Company held by a holder who
has exercised such holder's dissenter's rights in accordance with
Section 262 of Delaware Law, and who, as of the Effective Time, has not
effectively withdrawn or lost such dissenter's rights ("DISSENTING SHARES"),
shall not be converted into or represent a right to receive Parent Common
Stock pursuant to Section 1.6, but the holder of the Dissenting Shares shall
only be entitled to such rights as are granted by Section 262 of Delaware
Law.
(b) LOSS OF DISSENTER'S RIGHTS. Notwithstanding the provisions of
Section 1.7(a), if any holder of capital stock of Company who demands
dissenter's rights with respect to such capital stock shall effectively
withdraw or lose (through failure to perfect or otherwise) his rights to
receive payment
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for the fair market value of such capital stock under Delaware Law, then, as
of the later of the Effective Time or the occurrence of such event, such
holder's capital stock of Company shall automatically be converted into and
represent only the right to receive Parent Common Stock and payment for
fractional shares as provided in Section 1.6(c), without interest, upon
surrender of the Company Certificates representing such shares to Parent
pursuant to Section 1.8.
(c) NOTICE. Company shall give Parent (i) prompt notice of any written
demands for payment with respect to capital stock of Company pursuant to
Section 262 of Delaware Law, withdrawals of such demands, and any other
instruments served pursuant to Delaware Law and received by Company, and
(ii) the opportunity to participate in all negotiations and proceedings with
respect to demands for dissenter's rights under Delaware Law. Company shall
not, except with the prior written consent of Parent, voluntarily make any
payment with respect to any demands for dissenter's rights with respect to
capital stock of Company or offer to settle or settle any such demands.
1.8 SURRENDER OF CERTIFICATES.
(a) EXCHANGE PROCEDURES.
(i) From and after the Effective Time, all shares of capital stock of
Company shall no longer be outstanding and shall automatically be
cancelled and retired and shall cease to exist, and each holder of a
Company Certificate shall cease to have any rights with respect thereto,
except the holders of Company Stock shall have the right, upon surrender
to Parent of Company Certificates for cancellation, to receive in
exchange therefor a certificate (a "PARENT CERTIFICATE") representing the
number of whole shares of Parent Common Stock, less the number of shares
of Parent Common Stock to be deposited into escrow on such holder's
behalf pursuant to Article VIII and the Escrow Agreement (as defined in
Section 6.1(c)), plus cash in lieu of fractional shares, if any, and the
Company Certificate so surrendered shall forthwith be canceled. Until so
surrendered, each outstanding Company Certificate that, prior to the
Effective Time, represented shares of Company Stock will be deemed from
and after the Effective Time, for all corporate purposes, other than the
payment of dividends, to evidence only the right to receive that number
of whole shares of Parent Common Stock issuable in exchange for such
shares of Company Stock, plus cash in lieu of fractional shares, if any.
(ii) As soon as reasonably practicable after the Effective Time,
Parent shall mail to each holder of record of Company Certificates whose
shares were converted pursuant to Section 1.6 into the right to receive
shares of Parent Common Stock, (A) a letter of transmittal (which shall
specify that delivery shall be effected, and risk of loss and title to
the Company Certificates shall pass, only upon delivery of the Company
Certificates to Parent and shall be in such form and have such other
provisions as Parent and Company may reasonably specify) and (B)
instructions for effecting the surrender of the Company Certificates in
exchange certificates representing shares of Parent Common Stock, plus
cash in lieu of fractional shares, if any. Upon surrender of a Company
Certificate for cancellation to Parent or to such other agent or agents
as may be appointed by Parent, together with such letter of transmittal,
duly executed, the holder of such Company Certificate shall be entitled
to receive in exchange therefor a certificate representing that number of
whole shares of Parent Common Stock which such holder has the right to
receive pursuant to the provisions of this Article I, plus cash in lieu
of fractional shares, if any.
(b) ESCROW. Subject to and in accordance with the provisions of
Article VIII and the Escrow Agreement and subject to the surrender to Parent
of all Company Certificates held by the Stockholders, Parent shall cause to
be distributed to the Escrow Agent (as defined in Section 8.2) a certificate
or certificates representing 1,350,000 shares of the Merger Consideration
issuable to
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the Stockholders pursuant to Section 1.6 (the "ESCROW SHARES"). The Escrow
Shares shall be held in escrow and shall be available to compensate Parent
for certain damages as provided in Article VIII. To the extent not used to
compensate Parent for such damages, such shares shall be released to the
Stockholders, all as provided in Article VIII and the Escrow Agreement.
(c) DISTRIBUTIONS WITH RESPECT TO UNEXCHANGED SHARES. No dividends or
other distributions with respect to Parent Common Stock with a record date
after the Effective Time will be paid to the holder of any unsurrendered
Company Certificate with respect to the shares of Parent Common Stock
represented thereby until the holder of record of such Company Certificate
shall surrender such Company Certificate to Parent as provided in
Section 1.8(a)(ii). Subject to applicable law, following surrender of any
such Company Certificate, there shall be paid to the record holder of the
certificates representing whole shares of Parent Common Stock issued in
exchange therefor, without interest, at the time of such surrender, the
amount of any such dividends or other distributions with a record date after
the Effective Time theretofore payable (but for the first sentence of this
Section 1.8(c)) with respect to such shares of Parent Common Stock.
(d) TRANSFERS OF OWNERSHIP. If any certificate for shares of Parent
Common Stock is to be issued, or any cash is to be paid, in a name other
than that in which the Company Certificate surrendered in exchange therefor
is registered, it will be a condition of the issuance thereof that the
Company Certificate so surrendered will be properly endorsed and otherwise
in proper form for transfer and that the person requesting such exchange
will have paid to Parent or any agent designated by it any transfer or other
Taxes (as defined in Section 2.13(m)(i)) required by reason of the issuance
of a certificate for shares of Parent Common Stock (or the payment of cash)
in any name other than that of the registered holder of the Company
Certificate surrendered, or established to the satisfaction of Parent or any
agent designated by it that such Tax has been paid or is not payable.
(e) OPTIONS.
(i) From and after the Effective Time, all Company Options shall no
longer be outstanding and shall automatically be cancelled and retired
and shall cease to exist, and each holder of a Company Option shall cease
to have any rights with respect thereto, except the holders of Company
Options shall have the right, upon surrender to Parent of a Company Grant
Agreement for cancellation, to receive in exchange therefor a Parent
Grant Agreement, and the Company Grant Agreement so surrendered shall
forthwith be canceled. Until so surrendered, each outstanding Company
Option that, prior to the Effective Time, represented the right to
acquire shares of Company Stock will be deemed from and after the
Effective Time, for all purposes, to evidence only the right to receive
Parent Options as described in Section 1.6(a).
(ii) As soon as reasonably practicable after the Effective Time,
Parent shall mail to each holder of record of Company Options which were
converted pursuant to Section 1.6 into the right to receive Parent
Options, (A) a letter of transmittal (which shall specify that delivery
shall be effected, and risk of loss and title to the Company Options
shall pass, only upon delivery of the Company Grant Agreement to Parent
and shall be in such form and have such other provisions as Parent and
Company may reasonably specify) and (B) instructions for effecting the
surrender of the Company Grant Agreement in exchange for a Parent Grant
Agreement. Upon surrender of a Company Grant Agreement for cancellation
to Parent or to such other agent or agents as may be appointed by Parent,
together with such letter of transmittal, duly executed, the holder of
such Company Grant Agreement shall be entitled to receive in exchange
therefor a Parent Grant Agreement representing that number of Parent
Options which such holder has the right to receive pursuant to the
provisions of this Article I.
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(f) AMENDED WARRANTS.
(i) From and after the Effective Time, all Amended Warrants shall no
longer be outstanding and shall automatically be cancelled and retired
and shall cease to exist, and each holder of an Amended Warrant shall
cease to have any rights with respect thereto, except the holders of
Amended Warrants shall have the right, upon surrender to Parent of an
Amended Warrant for cancellation, to receive in exchange therefor a
Parent Warrant, and the Amended Warrant so surrendered shall forthwith be
canceled. Until so surrendered, each outstanding Amended Warrant that,
prior to the Effective Time, represented the right to acquire shares of
Series A Preferred will be deemed from and after the Effective Time, for
all purposes, to evidence only the right to receive Parent Warrants as
described in Section 1.6(a).
(ii) As soon as reasonably practicable after the Effective Time,
Parent shall mail to each holder of record of an Amended Warrant which
was converted pursuant to Section 1.6 into the right to receive a Parent
Warrant, (A) a letter of transmittal (which shall specify that delivery
shall be effected, and risk of loss and title to the Amended Warrent
shall pass, only upon delivery of the Amended Warrant to Parent and shall
be in such form and have such other provisions as Parent and Company may
reasonably specify) and (B) instructions for effecting the surrender of
the Amended Warrant in exchange for a Parent Warrant. Upon surrender of
an Amended Warrant for cancellation to Parent or to such other agent or
agents as may be appointed by Parent, together with such letter of
transmittal, duly executed, the holder of such Amended Warrant shall be
entitled to receive in exchange therefor a Parent Warrant exercisable for
the number of shares of Parent Common Stock determined pursuant to the
formula set forth in Section 1.6(a).
1.9 LOST, STOLEN OR DESTROYED CERTIFICATES. In the event any Company
Certificates shall have been lost, stolen or destroyed, Parent shall issue in
exchange for such lost, stolen or destroyed Company Certificates, upon the
making of an affidavit of that fact by the holder thereof, such shares of Parent
Common Stock as may be required pursuant to Section 1.6; PROVIDED, HOWEVER, that
Parent may, in its discretion and as a condition precedent to the issuance and
payment thereof, require the owner of such lost, stolen or destroyed Company
Certificates to deliver to Parent an affidavit of loss, theft or destruction in
form reasonably satisfactory to Parent and to indemnify and hold harmless Parent
from and against any claim that may be made against Parent, the Surviving
Corporation, Company or any of their directors, officers, employees, affiliates
or agents with respect to the Company Certificates alleged to have been lost,
stolen or destroyed.
1.10 CLOSING OF COMPANY'S TRANSFER BOOKS. At and after the Effective Time,
holders of Company Stock shall cease to have any rights as stockholders of
Company, except for the right to receive shares of Parent Common Stock, plus
cash in lieu of fractional shares, if any, pursuant to Section 1.6. At the
Effective Time, the stock transfer books of Company shall be closed and no
transfer of shares of Company Stock and any other securities of Company,
including, but not limited to, any options and warrants, which were outstanding
immediately prior to the Effective Time shall thereafter be made.
1.11 TAX CONSEQUENCES. It is intended by the parties hereto that the
Merger shall constitute a reorganization within the meaning of Section 368(a) of
the Code.
1.12 NO LIABILITY. Notwithstanding anything to the contrary in this
Article I, none of Parent, Merger Sub, the Surviving Corporation or any party
hereto shall be liable to any person in respect of any shares of Parent Common
Stock delivered to a public official pursuant to any applicable abandoned
property, escheat or similar law.
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1.13 AFFILIATES. Notwithstanding anything herein to the contrary, Company
Certificates surrendered for exchange by any Affiliate (as defined in
Section 5.14) of Company shall not be exchanged until Parent has received an
executed Affiliate Agreement (as defined in Section 5.14) from such Affiliate.
1.14 TAKING OF NECESSARY ACTION; FURTHER ACTION. If, at any time after the
Effective Time, any further action is necessary or desirable to carry out the
purposes of this Agreement and to vest Parent with control over, and to vest the
Surviving Corporation with full right, title and possession to, all assets,
property, rights, privileges, powers and franchises of Company, the officers and
directors of Company, Parent and Merger Sub shall, in the name of their
respective corporations or otherwise, take all such lawful and necessary action
as may be requested by Parent.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF COMPANY AND STOCKHOLDERS OF COMPANY
Except for specific references to, and as set forth in the Company
Disclosure Schedule attached hereto and referring by numbered section (and,
where applicable, by lettered subsection) of the representations and warranties
in this Article II (the "COMPANY DISCLOSURE SCHEDULE"), Company represents and
warrants to Parent and Merger Sub as follows:
2.1 ORGANIZATION, STANDING AND POWER. Company and each of its direct or
indirect corporate or non-corporate subsidiaries and any other entity in which
Company or such subsidiaries have a direct or indirect equity participation
("SUBSIDIARIES") is a corporation duly organized, validly existing and in good
standing under the laws of its jurisdiction of organization. Company and each of
its Subsidiaries has the corporate power to own its properties and to carry on
its business as now being conducted and as proposed to be conducted and is duly
qualified to do business and is in good standing in each jurisdiction where it
is required by law to be so qualified, except where such failure to qualify
would not have a Material Adverse Effect (as defined in Section 9.3) on Company
or any of its Subsidiaries. Section 2.1 of the Company Disclosure Schedule sets
forth (i) the name of Company and each of its Subsidiaries, (ii) the
jurisdiction of organization of the Company and each of its Subsidiaries,
(iii) each jurisdiction in which Company and each of its Subsidiaries is duly
qualified to do business and in good standing, and (iv) all former names and all
fictitious or assumed names under which Company and each of its Subsidiaries
does or has done business. True, correct and complete copies of the Certificate
of Incorporation and Bylaws or other charter documents, as applicable, of each
of Company and its Subsidiaries, as amended to the date of this Agreement, have
been delivered to Parent and are included in Section 2.1 of the Company
Disclosure Schedule. Neither Company nor any of its Subsidiaries is in violation
of any of the provisions of its Certificate of Incorporation or Bylaws or other
charter documents, as applicable. Neither Company nor any of its Subsidiaries
owns or ever has owned directly or indirectly any equity or similar interest in,
or any interest convertible or exchangeable or exercisable for any equity or
similar interest in, any corporation, partnership, joint venture, limited
liability company or other business association or entity, other than Company's
current ownership interest in its Subsidiaries. Section 2.1 of the Company
Disclosure Schedule sets forth a list of each of the officers and directors of
Company and each of its Subsidiaries.
2.2 CAPITAL STRUCTURE. The authorized capital stock of Company consists of
25,000,000 shares of Common Stock, par value $.001 per share, of which 5,000,000
shares were issued and outstanding as of the date hereof, and 10,000,000 shares
of Preferred Stock, par value $.001 per share, of which 9,515,000 shares are
designated Series A Convertible Preferred Stock, of which 7,628,750 shares were
issued and outstanding as of the date hereof. As of the date hereof, Company has
Company Options outstanding to acquire 1,322,725 shares of Company Common Stock
at the exercise prices and for the time periods set forth in Section 2.2 of the
Company Disclosure Schedule, all of which, except as set forth in Section 2.2 of
the Company Disclosure Schedule, are fully vested. As of the date hereof,
Company has Warrants outstanding to acquire 762,875 shares of Series A Preferred
at the exercise prices and for the
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time periods set forth in Section 2.2 of the Company Disclosure Schedule, all of
which, except as set forth in Section 2.2 of the Company Disclosure Schedule,
are fully vested. At the Effective Time, no Warrants will be outstanding. All of
the security holders of Company and each of its Subsidiaries and their
respective holdings, including any holders of options, warrants or any other
right to acquire securities of Company or any of its Subsidiaries, as of the
date hereof, are as set forth on Section 2.2 of the Company Disclosure Schedule.
Other than such securities, there are no other outstanding shares of capital
stock or other securities of Company or any of its Subsidiaries and no
outstanding commitments to issue any shares of capital stock or securities of
Company or any of its Subsidiaries after the date hereof. All outstanding shares
of capital stock of Company and its Subsidiaries are duly authorized, validly
issued, fully paid and non-assessable and are free and clear of any restrictions
on transfer (other than restrictions under the Securities Act of 1933, as
amended (the "ACT") and state securities laws), Taxes, security interests,
charges, liens, encumbrances, options, warrants, purchase rights, contracts,
commitments, equities, claims, and demands), and are not subject to preemptive
rights or rights of first refusal created by statute, the Certificate of
Incorporation or Bylaws or other charter documents, as applicable, of the
respective entity or any agreement to which the respective entity is a party or
by which it is bound. Except for the rights created pursuant to this Agreement,
there are no other options, warrants, calls, rights, commitments, contracts or
agreements of any character to which any of Company, its Subsidiaries or
security holders of Company is a party or by which they are bound obligating the
respective person or entity to issue, deliver, sell, repurchase or redeem, or
cause to be issued, delivered, sold, repurchased or redeemed, any shares of
capital stock or other securities of Company or any of its Subsidiaries or any
securities convertible or exchangeable therefor or obligating Company or any of
its Subsidiaries to grant, extend, accelerate the vesting of, change the price
of, or otherwise amend or enter into any such option, warrant, call, right,
commitment or agreement. Except for this Agreement, as contemplated hereby or as
set forth in Section 2.18(h) of the Company Disclosure Schedule, there are no
contracts, commitments, trusts, proxies or agreements relating to voting,
purchase or sale of Company's or any of its Subsidiaries' securities
(i) between or among the respective entity and any of its security holders, and
(ii) between or among any of the respective entity's security holders. There are
no outstanding or authorized stock appreciation rights, phantom stock, profit
participation, dividend equivalent rights, or similar rights with respect to
Company or any of its Subsidiaries. All outstanding securities of Company and
each of its Subsidiaries were issued in compliance with all applicable federal
and state securities laws.
2.3 AUTHORITY. Company and each security holder of Company that is not a
natural person has all requisite corporate power and authority to execute and
deliver this Agreement (if applicable), the Escrow Agreement (if applicable),
the Voting Agreement (if applicable), the Affiliate Agreement (if applicable)
and any other agreement contemplated hereunder (the "TRANSACTION AGREEMENTS"),
to perform its obligations hereunder and thereunder and to consummate the
transactions contemplated hereby and thereby. Each security holder of Company
that is a natural person has full legal right, power and authority to execute
and deliver the Transaction Agreements, to perform their obligations thereunder
and to consummate the transactions contemplated hereby and thereby. The
execution, delivery and performance of the Transaction Agreements and the
consummation of the transactions contemplated hereby and thereby have been duly
authorized by all necessary corporate action on the part of Company and each
security holder of Company that is not a natural person, subject only to the
approval of the Merger by the stockholders of Company as contemplated by
Section 6.1(d). This Agreement has been duly executed and delivered by Company
and constitutes the valid and binding obligation of Company, enforceable against
Company in accordance with its terms, except that such enforceability may be
limited by bankruptcy, insolvency, moratorium or other similar laws affecting or
relating to creditors' rights generally, and is subject to general principles of
equity.
2.4 NO CONFLICTS; REQUIRED FILINGS AND CONSENTS.
(a) NO CONFLICT. Except as set forth in Section 2.4(a) of the Company
Disclosure Schedule, the execution and delivery of the Transaction
Agreements by Company and each security holder of
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Company do not, and the performance by Company and each security holder of
Company of their obligations hereunder and thereunder, and the consummation
of the Merger will not, (i) conflict with or violate any provision of the
Certificate of Incorporation, Bylaws or other charter document, as
applicable, of Company or any of its Subsidiaries or any security holder of
Company, (ii) conflict with or violate any statute, law, ordinance, rule,
regulation, judgment, decree, order, injunction, writ, permit or license
applicable to Company or any of its Subsidiaries or any security holder of
Company or by which any property or asset of Company or any of its
Subsidiaries or any security holder of Company is bound or affected, or
(iii) conflict with, result in any breach of, violate or constitute a
default (or an event which with the giving of notice or lapse of time or
both could reasonably be expected to become a default) under, or give to
others any right of termination, amendment, acceleration or cancellation of,
or result in the creation of a lien, security interest, charge or other
encumbrance on any property or asset of Company or any of its Subsidiaries
or any security holder of Company pursuant to, any note, bond, mortgage,
indenture, contract, agreement, lease, license, permit, franchise or other
instrument or obligation, except where such breach or default would not have
a Material Adverse Effect on Company or any of its Subsidiaries or any
security holder of Company or impair Company's or any security holder of
Company's ability to consummate the transactions contemplated hereby.
(b) GOVERNMENTAL FILINGS. No filing or registration with, or
notification to, and no permit, authorization, consent or approval of, any
United States Federal, state or local or any foreign governmental,
regulatory or administrative authority, agency or commission or any court,
tribunal or arbitral body ("GOVERNMENT ENTITY") is necessary for the
execution and delivery of the Transaction Agreements by Company and any
security holder of Company or the consummation by Company and any security
holder of Company of the transactions contemplated by the Transaction
Agreements, except (i) the filing of the Delaware Certificate of Merger,
(ii) the filing of the Joint Proxy Statement (as defined in Section 5.15)
with the U.S. Securities and Exchange Commission (the "SEC") in accordance
with the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"),
(iii) such filings, registrations, notifications, permits, authorizations,
registrations, declarations and filings as may be required under applicable
state securities laws, and (iv) such filings, registrations, notifications,
permits, authorizations, consents or approvals that result from the specific
legal or regulatory status of Parent or as a result of any other facts that
specifically relate to the business or activities in which Parent is engaged
other than the business of Company.
(c) THIRD PARTY CONSENTS AND NOTICES. Except as set forth in
Section 2.4(c) of the Company Disclosure Schedule, neither Company nor any
of its Subsidiaries is required to obtain the consent of, or give notice to,
any third party by reason of the transactions contemplated by the
Transaction Agreements.
2.5 PERMITS; COMPLIANCE WITH LAWS.
Except for such Company Permits (as defined below) the non-compliance with
which would not have a Material Adverse Effect on Company or any of its
Subsidiaries, Company and each of its Subsidiaries is in possession of all
franchises, grants, authorizations, licenses, establishment registrations,
product listings, permits, easements, variances, exceptions, consents,
certificates, identification and registration numbers, approvals and orders of
any Government Entity necessary for Company and each of its Subsidiaries to own,
lease and operate their properties or to offer or perform their services or to
develop, produce, store, distribute and market their products or otherwise to
carry on their business as it is now being conducted (collectively, the "COMPANY
PERMITS"), and none of the Company Permits has been suspended or cancelled nor
is any such suspension or cancellation pending or, to the knowledge of Company,
threatened. All of the Company Permits are set forth in Section 2.5 of the
Company Disclosure Schedule. Company and each of its Subsidiaries is not in
conflict with, or in default or violation of, (i) any law, statute, order, rule,
regulation, ordinance or judgment applicable to Company and each of its
Subsidiaries or by which any property or asset of Company or any of its
Subsidiaries is
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bound or affected or (ii) any Company Permits, except where such conflict would
not have a Material Adverse Effect on Company or any of its Subsidiaries. There
are no actions, proceedings, investigations or surveys pending or, to the
knowledge of Company, threatened against Company and each of its Subsidiaries
that could reasonably be expected to result in the suspension or cancellation of
any Company Permit. Since its inception, neither Company nor any of its
Subsidiaries has received from any Government Entity any written notification
with respect to possible conflicts, defaults or violations of any law, statute,
order, rule, regulation, ordinance or judgment. The Merger will not result in
the suspension or cancellation of any Company Permit.
2.6 FINANCIAL STATEMENTS. Section 2.6 of the Company Disclosure Schedule
includes true, complete and correct copies of Company's audited consolidated
financial statements (balance sheet, statement of operations and statement of
cash flows) as at, and for the fiscal years ended December 31, 1998, December
31, 1999, and December 31, 2000 (collectively, the "FINANCIAL STATEMENTS"). As
soon as reasonably practical after the respective period ends, Company shall
provide Parent true, complete and correct copies of Company's unaudited
consolidated financial statements (balance sheet, statement of operations and
statement of cash flows) as at, and for the quarterly periods ended during
fiscal year 2001 prior to the Effective Time (collectively, the "NEW FINANCIAL
STATEMENTS"). The Financial Statements have been, and the New Financial
Statements will be, prepared in accordance with U.S. generally accepted
accounting principles ("GAAP") applied on a consistent basis throughout the
periods indicated and with each other. The Financial Statements were, and the
New Financial Statements will be, prepared from and in accordance with the books
and records maintained by Company and fairly present, in all material respects,
the financial condition, operating results and cash flow of Company as of the
dates, and for the periods, indicated therein, subject to the absence of
footnotes and normal year-end audit adjustments which will not be material in
nature or in amount for the New Financial Statements. Company maintains and will
continue to maintain books and records established and administered in
accordance with GAAP.
2.7 ABSENCE OF CERTAIN CHANGES. Except as set forth in Section 2.7 of the
Company Disclosure Schedule, since December 31, 2000, Company and each of its
Subsidiaries have conducted their business only in the ordinary course
consistent with past practice and there has not occurred (i) any Material
Adverse Effect on Company or any of its Subsidiaries, (ii) any event that could
reasonably be expected to prevent or materially delay the performance of
Company's obligations pursuant to the Transaction Agreements or the consummation
of the Merger by Company, (iii) any change by Company or any of its Subsidiaries
in its accounting methods, principles or practices, (iv) any declaration,
setting aside or payment of any dividend or distribution in respect of the
shares of capital stock of Company or any of its Subsidiaries or any redemption,
purchase or other acquisition of any of Company's or any of its Subsidiaries'
securities, (v) any increase in the compensation or benefits or establishment or
payment of any bonus, insurance, severance, deferred compensation, pension,
retirement, profit sharing, stock option (including, without limitation, the
granting of stock options, stock appreciation rights, performance awards or
restricted stock awards), stock purchase or other employee benefit plan, or any
other increase in the compensation payable or to become payable to any
employees, officers, consultants or directors of Company or any of its
Subsidiaries, (vi) any issuance, grants or sale of any stock, options, warrants,
notes, bonds or other securities, or entering into any agreement with respect
thereto by Company or any of its Subsidiaries, (vii) any amendment to the
Certificate of Incorporation or bylaws or other charter documents, as
applicable, of Company or any of its Subsidiaries, (viii) other than in the
ordinary course of business consistent with past practice, any (w) capital
expenditures, (x) purchase, sale, assignment or transfer of any material amount
of assets, (y) mortgage, pledge or existence of any lien, encumbrance or charge
on any assets or properties, tangible or intangible, except for liens for taxes
not yet due and such other liens, encumbrances or charges which do not,
individually or in the aggregate, have a Material Adverse Effect on Company or
any of its Subsidiaries, or (z) cancellation, compromise, release or waiver of
any rights of material value or any material debts or claims by Company or any
of its Subsidiaries, (ix) any incurrence of any material liability (absolute or
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contingent) by Company or any of its Subsidiaries, except for current
liabilities and obligations incurred in the ordinary course of business
consistent with past practice, (x) any incurrence of any damage, destruction or
similar loss, whether or not covered by insurance, materially affecting the
business or properties of Company or any of its Subsidiaries, (xi) any entering
into any agreement, contract, lease or license by Company or any of its
Subsidiaries other than in the ordinary course of business consistent with past
practice, (xii) any acceleration, termination, modification or cancellation of
any agreement, contract, lease or license to which Company or any of its
Subsidiaries is a party or by which any of them is bound, (xiii) any entering
into any loan or other transaction by Company or any of its Subsidiaries with
any officers, directors or employees of Company or any of its Subsidiaries,
(xiv) any charitable or other capital contribution or pledge therefore by
Company or any of its Subsidiaries, (xv) any entering into any transaction of a
material nature by Company or any of its Subsidiaries other than in the ordinary
course of business consistent with past practice, or (xvi) any negotiation or
agreement by Company or any of its Subsidiaries to do any of the things
described in the preceding clauses (i) through (xv).
2.8 ABSENCE OF UNDISCLOSED LIABILITIES. Except to the extent set forth on
the balance sheet of Company as of December 31, 2000 included in the Financial
Statements (the "COMPANY BALANCE SHEET") and except for current liabilities
incurred in the ordinary course of business consistent with past practice since
December 31, 2000, Company does not have any liabilities or obligations of any
nature (whether accrued, absolute, contingent or otherwise) that would be
required to be reflected on a balance sheet or in notes thereto prepared in
accordance with GAAP.
2.9 LITIGATION. Except as set forth in Section 2.9 of the Company
Disclosure Schedule, there is no private or governmental action, suit,
proceeding, claim, arbitration, complaint, allegation, dispute or, to the
knowledge of Company, investigation pending before any governmental department,
commission, authority, arbitrator, agency, court or tribunal, foreign or
domestic, or, to the knowledge of Company, threatened against Company or any of
its Subsidiaries or any of their assets, Intellectual Property Rights (as
defined in Section 2.12(h)) or properties or any of their officers or directors
(in their capacities as such). There is no judgment, decree, injunction,
rule or order against Company or any of its Subsidiaries, or any of their
directors or officers (in their capacities as such), limiting the conduct of
business by Company or any of its Subsidiaries or that could prevent, enjoin, or
alter or delay any of the transactions contemplated by this Agreement or have an
adverse effect on Company or any of its Subsidiaries. There is no litigation
(including arbitrations) by Company or any of its Subsidiaries which is pending
against any other person or entity.
2.10 RESTRICTIONS ON BUSINESS ACTIVITIES. There is no agreement, judgment,
injunction, order or decree binding upon or governmental or regulatory action
taken against or involving Company or any of its Subsidiaries or any of their
assets or properties which has had or could reasonably be expected to have the
effect of prohibiting or impairing any current or future business practice of
Company or any of its Subsidiaries, any acquisition of property by Company or
any of its Subsidiaries or the conduct of business by Company or any of its
Subsidiaries as currently conducted or as currently proposed to be conducted.
2.11 TITLE TO PROPERTY. Neither Company nor any of its Subsidiaries owns
any real property. Section 2.11 of the Company Disclosure Schedule sets forth a
list of material assets and property owned, leased or licensed by Company or any
of its Subsidiaries. Company and each of its Subsidiaries has good and
marketable title to all of its respective assets and properties reflected in the
Company Balance Sheet and in Section 2.11 of the Company Disclosure Schedule, or
with respect to leased properties and assets, valid leasehold interests therein,
free and clear of all mortgages, liens, pledges, charges or encumbrances of any
kind or character, except for (a) mechanic's, materialman's, and similar liens,
(b) liens for Taxes not yet due and payable or for Taxes that the taxpayer is
contesting in good faith through appropriate proceedings and for which adequate
reserves have been established on the books of Company and its Subsidiaries, and
(c) purchase money liens and liens securing rental
I-12
payments under capital lease arrangements. All properties used in the operations
of Company or any of its Subsidiaries are reflected on the Company Balance Sheet
to the extent GAAP requires the same to be reflected and on Section 2.11 of the
Company Disclosure Schedule.
2.12 INTELLECTUAL PROPERTY.
(a) LIST OF COMPANY INTELLECTUAL PROPERTY. Section 2.12(a) of the
Company Disclosure Schedule contains a true and complete list of Company's
and each of its Subsidiaries' license or other agreements relating to
Intellectual Property Rights (including the parties thereto and the date and
subject matter thereof) (each a "LICENSE AGREEMENT" and collectively
"LICENSE AGREEMENTS"), patents, patent applications, registered and
unregistered trademarks and services marks, trade names, trademark and
service mark applications, Internet domain names, Internet domain name
applications, copyright registrations and applications and other filings and
formal actions made or taken pursuant to Federal, state, local and foreign
laws by Company and each of its Subsidiaries to protect their interests in
their Intellectual Property Rights, and includes details of all due dates
for further filings, registrations, maintenance, payments or other actions
falling due in respect of their Intellectual Property Rights within
twelve (12) months of the Effective Time. Company has delivered, or has made
available, to Parent a copy of each of the items listed in Section 2.12(a)
of the Company Disclosure Schedule. All of Company's and each of its
Subsidiaries' patents, patent applications, registered trademarks, trademark
applications and registered copyrights remain in good standing with all fees
paid and filings made. Company has delivered to Parent all letters,
analyses, reports and other documentation concerning the ownership,
validity, infringement of, or freedom to use, the Intellectual Property
Rights of Company or any of its Subsidiaries, any third party Intellectual
Property Rights or any License Agreement.
(b) COMPANY INTELLECTUAL PROPERTY RIGHTS. The Intellectual Property
Rights of Company and each of its Subsidiaries contain only those items and
rights which are: (i) owned by Company or any of its Subsidiaries, or
(ii) rightfully used by Company or any of its Subsidiaries pursuant to a
valid and enforceable License Agreement. Except as set forth in
Section 2.12(b) of the Company Disclosure Schedule, Company and each of its
Subsidiaries have all rights, including, without limitation, rights to make,
have made, use, reproduce, modify, adopt, create derivative works based on,
translate, distribute (directly and indirectly), transmit, display, license
and, other than with respect to the License Agreements, assign and sell, in
their Intellectual Property Rights necessary to permit Company and each of
its Subsidiaries to carry out Company's and its Subsidiaries' current
activities and their future activities to the extent such future activities
are already planned.
(c) INFRINGEMENT. To the knowledge of Company, neither (i) the
reproduction, manufacturing, distribution, licensing, sublicensing, testing,
invention, use, sale or offer to sell or any other exercise of Intellectual
Property Rights by Company or any of its Subsidiaries, nor (ii) the conduct
of business by Company or any of its Subsidiaries as currently conducted or
as currently proposed to be conducted, infringes on any third party's
Intellectual Property Rights anywhere in the world. Neither Company nor any
of its Subsidiaries has received notice of any pending or threatened claims
(i) challenging the validity, effectiveness or ownership by Company or any
of its Subsidiaries of any Intellectual Property Rights, or (ii) to the
effect that the use, testing, manufacturing, distribution, licensing,
sublicensing, sale or offer to sell or any other exercise of rights in any
product, invention, know-how, technology or process as now used or offered
or proposed for use, licensing, sublicensing or sale by Company or its
Subsidiaries or their agents or use by their customers infringes or will
infringe on or misappropriate any third party's Intellectual Property
Rights. To Company's knowledge there exist no valid grounds for any bona
fide claim of any such kind. All of the rights within the Intellectual
Property Rights of Company and each of its Subsidiaries are enforceable and
subsisting. To the knowledge of Company, there is
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no unauthorized use, infringement or misappropriation of any Intellectual
Property Rights of Company and each of its Subsidiaries by any third party,
employee or former employee.
(d) NONDISCLOSURE AGREEMENTS AND ASSIGNMENTS. All personnel, including
employees, agents, consultants and contractors, who have contributed to or
participated in the conception and development of Intellectual Property
Rights on behalf of Company or any of its Subsidiaries, have executed
nondisclosure agreements and either (i) have been a party to an enforceable
agreement with Company or any of its Subsidiaries in accordance with
applicable national and state law that accords Company or any of its
Subsidiaries full, effective, exclusive and original ownership of all
tangible and intangible property, works of authorship, inventions (whether
patentable or not) and developments arising from the efforts of such
personnel, or (ii) have executed appropriate instruments of assignment in
favor of Company or any of its Subsidiaries that have conveyed to Company or
any of its Subsidiaries full, effective and exclusive ownership of all
tangible and intangible property arising from the efforts of such personnel.
(e) NO VIOLATION. The execution or delivery of the Transaction
Agreements, or performance of Company's obligations hereunder or thereunder,
will not cause the diminution, termination or forfeiture of any of the
Intellectual Property Rights of Company or any of its Subsidiaries.
(f) ENCUMBRANCES. Except for restrictions provided for in the License
Agreements, the Intellectual Property Rights of Company and each of its
Subsidiaries are free and clear of any and all mortgages, pledges, liens,
security interests, conditional sale agreements, encumbrances or charges of
any kind.
(g) ROYALTIES. Except as set forth in Section 2.12(g) of the Company
Disclosure Schedule, to the knowledge of Company, neither Company nor any of
its Subsidiaries owes any royalties, payments, penalties, milestone payments
or other payments to third parties in respect of Intellectual Property
Rights of Company and each of its Subsidiaries or the License Agreements.
(h) DEFINITION. "INTELLECTUAL PROPERTY RIGHTS" means, collectively,
with respect to any person or entity, all of the following worldwide
intangible legal rights of such person or entity, including those existing
or acquired by ownership, license or other legal operation, whether or not
filed, perfected, registered or recorded and whether now or hereafter
existing, filed, issued or acquired: (i) patents, patent applications, and
patent rights, including any and all continuations, continuations-in-part,
divisions, reissues, reexaminations or extensions thereof; (ii) inventions
(whether patentable or not in any country), invention disclosures,
industrial designs, improvements, trade secrets, proprietary information,
know-how, INDs, technology and technical or clinical data; (iii) rights
associated with works of authorship (including audiovisual works),
including, without limitation, copyrights, copyright applications and
copyright registrations, moral rights, database rights, mask work rights,
mask work applications and mask work registrations; (iv) rights in trade
secrets, including, without limitation, rights in industrial property,
customer, vendor and prospect lists and all associated information or
databases and other confidential or proprietary information, and all rights
relating to the protection of the same, including, without limitation,
rights under nondisclosure agreements; (v) any other proprietary rights in
technology, including software, all source and object code, algorithms,
architecture, structure, display screens, layouts, inventions, development
tools and all documentation and media constituting, describing or relating
to the above, including, without limitation, manuals, memoranda, records,
business information, or trade marks, trade dress or names, anywhere in the
world; (vi) any rights analogous thereto in the preceding clauses and any
other proprietary rights relating to intangible property, including, without
limitation, brand names, trademarks, service marks, domain names, trademark
and service mark registrations and applications therefor, trade names,
rights in trade dress and packaging and all goodwill associated with the
same; (vii) all rights to sue or make any claims for any past, present or
future infringement, misappropriation or unauthorized use of any of the
foregoing rights and the right to all income, royalties, damages and other
payments that are now or may hereafter
I-14
become due or payable with respect to any of the foregoing rights,
including, without limitation, damages for past, present or future
infringement, misappropriation or unauthorized use thereof; and
(viii) rights under license agreements for the foregoing.
2.13 TAXES.
(a) RETURNS. Company and each of its Subsidiaries have duly and timely
filed or caused to be filed all Federal, state, local and foreign income Tax
Returns (as defined in Section 2.13(m)(ii)) and all other material Tax
Returns required to be filed by it to date and will duly and timely file or
cause to be filed all Tax Returns required to be filed by it prior to the
Effective Time. As of the date hereof, Company and each of its Subsidiaries
have not filed any income Tax Returns for the year ended December 31, 2000.
All such Tax Returns (including all amendments thereto) as of the time of
filing were or will be complete and accurate in all material respects. No
claim has ever been made by a Taxing authority in any jurisdiction in which
the Company or any of its Subsidiaries does not file Tax Returns that such
person is or may be subject to Taxes in such jurisdiction.
(b) PAYMENTS. All Taxes payable by Company and each of its
Subsidiaries (whether or not shown on any Tax Return) have been paid or will
be paid, when due, other than Taxes that are being contested in good faith.
(c) RESERVES; ACCRUALS. The liabilities and reserves for Taxes
reflected in the Company Balance Sheet are adequate to cover all liabilities
for unpaid Taxes of Company and each of its Subsidiaries (including those
that are being contested in good faith) for all periods or portions of
periods through the date thereof. Neither Company nor any of its
Subsidiaries has incurred or accrued any Taxes for periods or portions of
periods after December 31, 2000, and will not incur or accrue any Taxes
prior to the Effective Time, other than Taxes arising in the ordinary course
of business.
(d) PROCEEDINGS. No action, suit, proceeding or audit concerning any
Tax liability of Company or any of its Subsidiaries is pending or, to the
knowledge of Company, has been threatened against Company or any of it
Subsidiaries. There are no claims or assessments against Company or any of
its Subsidiaries for an alleged Tax deficiency and, to the knowledge of
Company, no such claims or assessments have been proposed.
(e) LIENS. To the knowledge of Company, there are no charges, liens,
encumbrances or adverse claims for Taxes upon any properties or assets of
Company or any of its Subsidiaries, except for liens described in
Section 2.11(b).
(f) WITHHOLDINGS. Company and each of its Subsidiaries have properly
withheld and paid over all withholding, employment or other similar Taxes
and all unemployment compensation and similar obligations required to be
withheld or paid over and have complied with all material information
reporting and backup withholding requirements, including maintenance of
required records with respect thereto.
(g) TAX SHARING AGREEMENTS; CONSOLIDATED GROUP. Other than with
respect to Company and its Subsidiaries, neither Company nor any of its
Subsidiaries is a party to any agreement (i) providing for the allocation or
sharing of Taxes with any entity that is not, directly or indirectly, a
wholly-owned corporate subsidiary of Company, or (ii) contractually
obligating Company or any of its Subsidiaries to indemnify any other person
with respect to Taxes (except for agreements to indemnify lenders or
security holders in respect of Taxes as set forth in Section 2.13(g) of the
Company Disclosure Schedule). Neither Company nor any of its Subsidiaries
has ever been a member of a consolidated, unitary or combined group other
than a group of which Company is and has been the common parent.
I-15
(h) REAL PROPERTY HOLDING CORPORATION. Neither Company nor any of its
Subsidiaries has been a United States real property holding corporation
within the meaning of Section 897(c)(2) during the period specified in
Section 897(c)(1)(A)(ii) of the Code.
(i) STATUTE OF LIMITATIONS. Neither Company nor any of its
Subsidiaries has consented to extend the time in which any Tax may be
assessed and collected by any Taxing authority.
(j) DOCUMENTS PROVIDED. Company and each of its Subsidiaries has
provided to Parent true, correct and complete copies of all federal, state
and local income and franchise Tax Returns, examination reports, and
statements of deficiencies assessed against or agreed to by Company or any
of its Subsidiaries for the taxable periods ending December 31, 1997,
December 31, 1998 and December 31, 1999.
(k) OTHER. Neither Company nor any of its Subsidiaries has, with
regard to any assets or property held, acquired or to be acquired by any of
them, filed a consent to the application of Section 341(f) of the Code.
Neither Company nor any of its Subsidiaries will be required to include any
item of income in, or exclude any item of deduction from, taxable income for
any period (or portion thereof) ending after the Closing Date as a result of
any (i) change in method of accounting for a taxable period ending on or
prior to the Closing Date under Code Section 481(c) (or any corresponding or
similar provision of state, local or foreign income Tax law), (ii) "closing
agreement" as described in Code Section 7121 (or any corresponding or
similar provision of state, local or foreign income tax law) executed on or
prior to the Closing Date; (iii) installment sale made prior to the Closing
Date; or (iv) deferred intercompany gain described in Treasury Regulation
Section 1.1502-13 or any excess loss account described in Treasury
Regulation Section 1.1502-19 and 1.1502-32 (or any corresponding or similar
provision of federal state, local or foreign law) arising on or before the
Closing Date. Neither Company nor any of its Subsidiaries is a party to any
agreement, contract, arrangement or plan that has resulted or would result
separately or in the aggregate, in the payment of any "excess parachute
payment" within the meaning of Code Section 280G (or similar provision of
state, local or foreign law).
(l) REORGANIZATION. To the knowledge of Company, neither Company nor
any of its affiliates has taken or agreed to take any action (other than
actions contemplated by this Agreement) that could be expected to prevent
the Merger from constituting a "reorganization" under Section 368(a) of the
Code. Company is not aware of any agreement or plan to which Company or any
of its affiliates is a party or other circumstances relating to Company or
any of its affiliates that could reasonably be expected to prevent the
Merger from so qualifying as a reorganization under Section 368(a) of the
Code.
(m) CERTAIN DEFINED TERMS. As used in this Agreement:
(i) "TAX" OR "TAXES" means all taxes, charges, fees, duties, levies
or other assessments, however denominated, imposed by any federal, state,
local or foreign government or any agency or political subdivision of
such government, which taxes shall include income or profits, gross
receipts, net proceeds, ad valorem, franchise, sales, use, transfer,
value added, registration, business license, user, excise, utility,
environmental, communications, excess profits, real or personal property
(tangible and intangible), capital stock, payroll, wage or other
withholding, employment, social security, severance, stamp, occupation,
alternative, add-on minimum, estimated, and other obligations of the same
or a similar nature to any of the foregoing, including interest,
penalties, and additions to tax related thereto.
(ii) "TAX RETURNS" means returns, declarations, reports, claims for
refund, information returns or other documents (including any related or
supporting schedules, statements, or information) filed or required to be
filed with any federal, state, local or foreign government entity or
other authority in connection with the determination, assessment or
collection of
I-16
Taxes of any party or the administration of any laws, regulations, or
administrative requirements relating to any Taxes.
2.14 EMPLOYEE BENEFIT PLANS.
(a) COMPANY EMPLOYEE PLANS. Section 2.14(a) of the Company Disclosure
Schedule lists, with respect to Company and each of its Subsidiaries,
(i) all employee benefit plans (as defined in Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA")), (ii) each
loan to a non-officer employee of Company or any of its Subsidiaries, loans
to officers and directors and any stock option, stock purchase, phantom
stock, stock appreciation right, dividend equivalent right, supplemental
retirement, severance, sabbatical, medical, dental, vision care, disability,
employee relocation, cafeteria benefit (Code Section 125) or dependent care
(Code Section 129), life insurance or accident insurance plans, programs or
arrangements, (iii) all bonus, pension, profit sharing, savings, deferred
compensation or incentive plans, programs or arrangements, (iv) other fringe
or employee benefit plans, programs or arrangements, and (v) any current or
former employment or executive compensation or severance agreements, written
or otherwise, for the benefit of, or relating to, any present or former
employee, consultant or director of Company or any of its Subsidiaries
(together, the "COMPANY EMPLOYEE PLANS").
(b) COMPANY EMPLOYEE PLAN ACTIONS. (i) There have been no prohibited
transactions within the meaning of Section 406 or 407 of ERISA or Code
Section 4975 with respect to any of the Company Employee Plans that could
result in penalties, taxes or liabilities which, singly or in the aggregate,
would have a Material Adverse Effect on Company or any of its Subsidiaries,
(ii) none of the Company Employee Plans promises or provides retiree medical
or other retiree welfare benefits to any person, except as required by
applicable law, (iii) all contributions required to be made by Company or
any of its Subsidiaries to any Company Employee Plan have been timely made,
(iv) each Company Employee Plan can be amended, terminated or otherwise
discontinued after the Effective Time in accordance with its terms, without
liability to Parent or Company or any of their subsidiaries (other than
ordinary administrative expenses typically incurred in a termination event),
(v) to the extent applicable, Company and each of its Subsidiaries has
materially complied with the applicable health care continuation and notice
provisions of the Consolidated Omnibus Budget Reconciliation Act of 1985 and
the regulations thereunder, (vi) neither Company nor any of its Subsidiaries
currently maintain, sponsor, participate in or contribute to, or has ever
maintained, established, sponsored, participated in, or contributed to, any
pension plan (within the meaning of Section 3(2) of ERISA) which is subject
to Part 3 of Subtitle B of Title I of ERISA, Title IV of ERISA or
Section 412 of the Code, (vii) neither Company nor any of its Subsidiaries
is a party to, or has made any contribution to or otherwise incurred any
obligation to contribute to, any "multiemployer plan" as defined in
Section 3(37) of ERISA, (viii) each of the Company Employee Plans has been
operated and administered in all material respects in accordance with
applicable laws during the period of time covered by the applicable statute
of limitations, and (ix) to the knowledge of Company, there are no pending,
threatened or anticipated claims involving any of the Company Employee Plans
other than claims for benefits in the ordinary course.
(c) PLAN DOCUMENTS. Company has furnished to Parent a copy of each of
the Company Employee Plans and related plan documents (including trust
documents, insurance policies or contracts, employee booklets, summary plan
descriptions and other authorizing documents, Forms 5500, Internal Revenue
Service determination letters and any material employee communications
relating thereto).
I-17
2.15 EMPLOYEES; EMPLOYEE MATTERS.
(a) SALARIES. Section 2.15(a) of the Company Disclosure Schedule
contains a true and complete list of the names and salaries of all current
employees, consultants and independent contractors of Company and each of
its Subsidiaries.
(b) COMPLIANCE WITH LAWS. Company and each of its Subsidiaries are in
compliance with all currently applicable laws and regulations respecting
employment, discrimination in employment, terms and conditions of
employment, wages, hours and occupational safety and health and employment
practices, except for instances of noncompliance that would not have a
Material Adverse Effect on Company or any of its Subsidiaries, and are not
engaged in any unfair labor practice. Company and each of its Subsidiaries
have withheld all amounts required by law or by agreement to be withheld
from the wages, salaries, and other payments to employees; and are not
liable for any arrears of wages or any Taxes or any penalty for failure to
comply with any of the foregoing, except for any such liabilities that would
not, individually or in the aggregate, have a Material Adverse Effect on
Company or any of its Subsidiaries.
(c) NO VIOLATIONS. To Company's knowledge, no employees, consultants
or independent contractors of Company or any of its Subsidiaries are in
violation of any term of any employment contract, patent disclosure
agreement, noncompetition agreement, consulting agreement or any restrictive
covenant to a third party relating to the right of any such employee,
consultant or independent contractor to be employed or engaged by Company or
any of its Subsidiaries because of the nature of the business conducted or
presently proposed to be conducted by Company or any of its Subsidiaries or
to the use of trade secrets or proprietary information of others.
(d) CONTROVERSIES. There are no material controversies pending or, to
the knowledge of Company, threatened between Company or any of its
Subsidiaries on the one hand and any representatives of any of their
employees on the other hand.
(e) ORGANIZATIONAL EFFORTS. To the knowledge of Company, there are no
organizational efforts presently being made involving any of the presently
unorganized employees of Company or any of its Subsidiaries.
(f) WARN ACT. Neither Company nor any of its Subsidiaries is in
violation of the Worker Adjustment and Retraining Notification Act of 1988,
or any similar state or local law, in each case that would have a Material
Adverse Effect on Company or any of its Subsidiaries.
(g) SEVERANCE. The consummation of the transactions contemplated by
this Agreement will not (i) entitle any current or former employee or other
service provider of Company or any of its Subsidiaries to severance benefits
or any other payment, except as expressly provided in this Agreement, or
(ii) accelerate the time of payment or vesting, or increase the amount of
compensation due any such employee or service provider.
2.16 INTERESTED PARTY TRANSACTIONS. Neither Company nor any of its
Subsidiaries is indebted to any director, officer, employee, consultant, agent
or affiliate ("INTERESTED PARTY") of Company or any of its Subsidiaries (except
for amounts due as normal salaries and bonuses and in reimbursement of ordinary
business expenses), and no Interested Party is indebted to Company or any of its
Subsidiaries (except for cash advances for ordinary business expenses). Except
as set forth in Section 2.16 of the Company Disclosure Schedule, there have been
no agreements, transactions or understandings between Company or any of its
Subsidiaries on the one hand and any Interested Party on the other hand which
were not arm's length transactions entered into in the ordinary course of
business and consistent with past practice.
2.17 COMPLETE COPIES OF MATERIALS; BANK ACCOUNTS. Company has delivered or
made available true, correct and complete copies of each document which has been
requested by Parent or its legal counsel
I-18
or accountants in connection with their legal and accounting review of Company
and each of its Subsidiaries. Company has furnished to Parent a true and
complete list setting forth the names and addresses of all banks, other
institutions and state governmental departments at which Company and each of its
Subsidiaries have accounts, deposits or the like, and the names of all persons
authorized to draw on or give instructions with respect thereto or holding a
power-of-attorney on behalf of Company or any of its Subsidiaries.
2.18 MATERIAL CONTRACTS. Section 2.18 of the Company Disclosure Schedule
sets forth the material contracts, agreements and arrangements (written or oral)
to which Company or any of its Subsidiaries is a party (collectively, the
"MATERIAL CONTRACTS"), including, without limitation:
(a) any sales, advertising, distribution, co-branding, sponsorship,
agency, investor relations or public relations contract;
(b) any continuing contract for the purchase of materials, supplies,
equipment or services involving in the case of any such contact more than
five thousand dollars ($5,000) per year;
(c) any trust indenture, mortgage, promissory note, loan agreement or
other contract for the borrowing of money, any currency exchange,
commodities or other hedging arrangement or any leasing transaction of the
type required to be capitalized in accordance with GAAP;
(d) any contract for capital expenditures;
(e) any contract pursuant to which Company or any of its Subsidiaries is
a lessor of any machinery, equipment, motor vehicles, office furniture,
fixtures or other personal property, pursuant to which payments in excess of
five thousand dollars ($5,000) remain outstanding;
(f) any employment contract, arrangement or policy (including without
limitation any collective bargaining contract or union agreement);
(g) any stockholders agreement, voting agreement, registration rights
agreement or other agreement to which Company, any of its Subsidiaries or
any stockholder of Company or any of its Subsidiaries is a party;
(h) any contract with any person or entity with whom Company or any of
its Subsidiaries does not deal at arm's length within the meaning of the
Code;
(i) any agreement of guarantee, support, indemnification, assumption or
endorsement of, or any similar commitment with respect to, the obligations,
liabilities (whether accrued, absolute, contingent or otherwise) or
indebtedness of any other person;
(j) any consulting, independent contractor, license, joint venture,
collaboration, development or similar agreements; or
(k) any lease agreement for real property.
2.19 NO BREACH OF MATERIAL CONTRACTS. Except as set forth in Section 2.19
of the Company Disclosure Schedule, Company and each of its Subsidiaries are
entitled to all material benefits under each, and are not in or alleged to be in
material default, breach or violation of, any Material Contract. Each of the
Material Contracts is valid, binding and in full force and effect with respect
to Company and each of its Subsidiaries and, to the knowledge of Company, with
respect to the other parties thereto, and has not been amended, and, except as
set forth in Section 2.19 of the Company Disclosure Schedule, there exists no
default, breach or violation or event of default or event, occurrence, condition
or act, with respect to Company or any of its Subsidiaries or, to Company's
knowledge, with respect to the other contracting party, which, with the giving
of notice, the lapse of time or the happening of any other event or conditions,
would become a default or event of default under any Material Contract. True,
correct and complete copies of all Material Contracts have been delivered to
Parent. Except for
I-19
the Material Contracts, there are no other material contracts or other
arrangements under which goods, equipment or services are provided, leased or
rendered by, or are to be provided, leased or rendered to, Company or any of its
Subsidiaries.
2.20 BROKERS. No broker, finder or investment banker is entitled to any
brokerage, finder's or other fee or commission in connection with the Merger
based upon arrangements made by or on behalf of Company or any of its
Subsidiaries.
2.21 NO BUSINESS ACTIVITY RESTRICTION. There is no non-competition or
other similar agreement, commitment, judgment, injunction, order or decree to
which Company or any of its Subsidiaries is a party or subject to that has or
could reasonably be expected to have the effect of prohibiting or impairing the
conduct of business by Company or any of its Subsidiaries. Neither Company nor
any of its Subsidiaries has entered into any agreement under which Company or
any of its Subsidiaries is restricted from selling, licensing or otherwise
distributing any of its technology or products to, or providing services to,
customers or potential customers or any class of customers, in any geographic
area, during any period of time or in any segment of the market or line of
business.
2.22 ENVIRONMENTAL MATTERS.
(a) NO VIOLATION. To the knowledge of Company, (i) Company and each of
its Subsidiaries have conducted their respective businesses in compliance
with all applicable Environmental Laws (as defined in Section 2.22(b)),
including, without limitation, having all permits, licenses and other
approvals and authorizations necessary for the operation of their respective
businesses as presently conducted, (ii) none of the properties owned or
leased by Company or any of its Subsidiaries contain any Hazardous Substance
(as defined in Section 2.22(c)) as a result of any activity of Company or
any of its Subsidiaries in amounts exceeding the levels permitted by
applicable Environmental Laws, (iii) neither Company nor any of its
Subsidiaries has received any notices, demand letters or requests for
information from any Federal, state, local or foreign governmental entity or
third party indicating that Company or any of its Subsidiaries may be in
violation of, or liable under, any Environmental Law in connection with the
ownership or operation of their businesses, (iv) there are no civil,
criminal or administrative actions, suits, demands, claims, hearings,
investigations or proceedings pending or threatened against Company or any
of its Subsidiaries relating to any violation, or alleged violation, of any
Environmental Law, (v) no reports have been filed, or are required to be
filed, by Company or any of its Subsidiaries concerning the release of any
Hazardous Substance or the threatened or actual violation of any
Environmental Law, (vi) no Hazardous Substance has been disposed of,
released or transported in violation of any applicable Environmental Law
from any properties owned or leased by Company or any of its Subsidiaries
during the time such properties were owned, leased or operated by Company or
any of its Subsidiaries, (vii) there have been no environmental
investigations, studies, audits, tests, reviews or other analyses regarding
compliance or noncompliance with any applicable Environmental Law conducted
by or which are in the possession of Company or any of its Subsidiaries,
(viii) there are no underground storage tanks on, in or under any properties
owned or leased by Company or any of its Subsidiaries and no underground
storage tanks have been closed or removed from any of such properties during
the time such properties were owned, leased or operated by Company or any of
its Subsidiaries, (ix) there is no asbestos or asbestos containing material
present in any of the properties owned or leased by Company and its
Subsidiaries, and no asbestos has been removed from any of such properties
during the time such properties were owned, leased or operated by Company or
any of its Subsidiaries, and (x) none of Company, its Subsidiaries nor any
of their respective properties are subject to any material liabilities or
expenditures (fixed or contingent) relating to any suit, settlement, court
order, administrative order, regulatory requirement, judgment or claim
asserted or arising under any Environmental Law, except for violations of
the foregoing clauses (i) through (x) that, individually or in the
aggregate, would not have a Material Adverse Effect on Company or any of its
Subsidiaries.
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(b) ENVIRONMENTAL LAW. For purposes of this Agreement, "ENVIRONMENTAL
LAW" means any Federal, state, local or foreign law, statute, ordinance,
rule, regulation, code, license, permit, authorization, approval, consent,
legal doctrine, order, judgment, decree, injunction, requirement or
agreement with any governmental entity relating to (x) the protection,
preservation or restoration of the environment (including, without
limitation, air, water vapor, surface water, groundwater, drinking water
supply, surface land, subsurface land, plant and animal life or any other
natural resource) or to human health or safety or (y) the exposure to, or
the use, storage, recycling, treatment, generation, transportation,
processing, handling, labeling, production, release or disposal of Hazardous
Substances, in each case as amended. The term Environmental Law includes,
without limitation, (i) the Federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980, the Superfund Amendments and
Reauthorization Act, the Federal Water Pollution Control Act of 1972, the
Federal Clean Air Act, the Federal Clean Water Act, the Safe Drinking Water
Act, the Hazardous Materials Transportation Act, the Federal Resource
Conservation and Recovery Act of 1976 (including the Hazardous and Solid
Waste Amendments thereto), the Federal Solid Waste Disposal and the Federal
Toxic Substances Control Act, the Federal Insecticide, Fungicide and
Rodenticide Act, the Federal Occupational Safety and Health Act of 1970,
each as amended, or any state counterpart thereof, and (ii) any common law
or equitable doctrine (including, without limitation, injunctive relief and
tort doctrines such as negligence, nuisance, trespass and strict liability)
that may impose liability or obligations for injuries, damages or penalties
due to, or threatened as a result of, the presence of, effects of or
exposure to any Hazardous Substance.
(c) HAZARDOUS SUBSTANCE. For purposes of this Agreement, "HAZARDOUS
SUBSTANCE" means any substance presently or hereafter listed, defined,
designated or classified as hazardous, toxic, radioactive, or dangerous, or
otherwise regulated, under any Environmental Law. Hazardous Substance
includes any substance to which exposure is regulated by any government
authority or any Environmental Law including, without limitation, any toxic
waste, pollutant, contaminant, hazardous substance, toxic substance,
hazardous waste, special waste, industrial substance or petroleum or any
derivative or by-product thereof, radon, radioactive material, asbestos or
asbestos containing material, urea formaldehyde foam insulation, lead or
polychlorinated biphenyls.
2.23 COMPANY STOCKHOLDERS' APPROVAL. The affirmative vote of stockholders
of Company required for approval and adoption of this Agreement and the Merger
is a majority of the votes represented by the outstanding shares of Company
Common Stock and Series A Preferred, on a combined basis. The affirmative vote
of stockholders of Company required to amend the Certificate of Incorporation as
contemplated by Section 5.17 is a majority of the votes represented by the
outstanding shares of Company Common Stock and Series A Preferred, on a combined
basis, and the consent of the holders of Series A Preferred representing at
least two thirds of the outstanding shares of Series A Preferred. Except for
shares of Company Stock, the Amended Warrants and the Company Options set forth
in Section 2.23 of the Company Disclosure Schedule, immediately prior to the
Effective Time, no options, warrants, capital stock, securities or other rights
to exchange for or convert into Company securities will be outstanding. Except
as required to comply with Section 5.17, no other vote of the stockholders of
Company is required by law, the Certificate of Incorporation, as amended, or
Bylaws of Company or otherwise in order for Company to consummate the Merger and
the transactions contemplated hereby. The Voting Agreements executed and
delivered to Parent secure the number of votes of securities of Company
necessary to approve and adopt this Agreement and the Merger at the meeting of
stockholders of Company called to approve same and such Voting Agreements and
the irrevocable proxies granted in connection therewith are in full force and
effect.
2.24 NO EXCESS PARACHUTE PAYMENTS. Neither Company nor any of its
Subsidiaries has any contracts, arrangements or understandings pursuant to which
any person may receive any amount or entitlement from Company or any of its
Subsidiaries (including cash or property or the vesting of
I-21
property) that may be characterized as an "EXCESS PARACHUTE PAYMENT" (as such
term is defined in Code Section 280G(b)(1)) as a result of any of the
transactions contemplated by this Agreement. No person is entitled to receive
any additional payment from Company, its Subsidiaries or any other person in the
event that the 20 percent (20%) parachute excise tax of Code
Section 4999(a) is imposed on such person.
2.25 COMPLETENESS OF THE COMPANY INFORMATION. Company has delivered to
Parent, Brobeck, Phleger & Harrison LLP or Ernst & Young LLP all material
documents, items and other information responsive to all requests of Parent,
Brobeck, Phleger & Harrison LLP or Ernst & Young LLP (the "Company
Information"), as the case may be.
2.26 INSURANCE. Except to the extent there would be no Material Adverse
Effect on Company or any of its Subsidiaries, all of Company's and each of its
Subsidiaries' liability, theft, health, fire, worker's compensation and other
forms of insurance, surety bonds and umbrella policies, insuring Company and any
of its Subsidiaries and their directors, officers, employees, independent
contractors, properties, assets and business (the "POLICIES"), are valid and in
full force and effect without any premium past due or pending notice of
cancellation, and are, in the reasonable judgment of Company, adequate for the
business of Company and each of its Subsidiaries as now conducted. There are no
claims, singly or in the aggregate, under the Policies in excess of $5,000,
which, in any event, are not in excess of the limitations of coverage set forth
in the Policies. All of the Policies are "OCCURRENCE" policies and no Policy is
a "CLAIMS MADE" policy. Company has no knowledge of any fact indicating that
such policies will not continue to be available to Company and each of its
Subsidiaries upon substantially similar terms subsequent to the Effective Time.
The provision and/or reserves in the most recent Financial Statements are
adequate for any and all self insurance programs maintained by Company or any of
its Subsidiaries. Section 2.26 of the Company Disclosure Schedule sets forth a
list of the Policies and self insurance programs maintained by Company or any of
its Subsidiaries and a description of the general terms and coverages thereof.
2.27 GUARANTIES. Neither Company nor any of its Subsidiaries is a
guarantor or otherwise is liable for any liability or obligation (including
indebtedness) of any other person.
2.28 SUBSIDIARIES. None of Company and any of its Subsidiaries controls
directly or indirectly or has any direct or indirect equity participation in any
corporation, partnership, trust, or other business association which is not a
Subsidiary set forth in Section 2.1 of the Company Disclosure Schedule. No
outstanding securities of any Subsidiary is convertible into or exchangeable for
any securities of Company or any other Subsidiaries of Company, whether by their
terms or pursuant to any other agreement or arrangement, and no holder of
securities of any of any Subsidiary has any right by agreement, arrangement or
otherwise to receive any Parent Common Stock issued as Merger Consideration.
2.29 ANTI-TAKEOVER MATTERS. No "fair price," "moratorium," "control share
acquisition" or other similar anti-takeover statute or regulation is applicable
to Company or (by reason of Company's participation therein) the Merger or the
other transactions contemplated by this Agreement.
2.30 FDA MATTERS. Company and each of its Subsidiaries are in compliance
with all statutes, rules and regulations of the U.S. Food and Drug
Administration or similar United States or foreign governmental authority
("FDA") with respect to the evaluation, testing, labeling and manufacturing of
all of their products, in whatever stage of development, to the extent that the
same are applicable to Company's and each of its Subsidiaries' business as it is
currently conducted. To the knowledge of Company, Company and each of its
Subsidiaries, as well as their contractors, adhere to "Good Laboratory
Practices," "Good Clinical Practices" and "Good Manufacturing Practices," as
required by the FDA. Company and each of its Subsidiaries has all requisite FDA
permits, designations, approvals or the like to conduct Company's and each of
its Subsidiaries' business as it is currently conducted. Company has previously
delivered to Parent an index of all information concerning all Investigational
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New Drug Applications obtained by Company and each of its Subsidiaries from the
FDA or required in connection with the conduct of Company's and each of its
Subsidiaries' business as it is currently conducted and has made all such
information available to Parent. Section 2.30 of the Company Disclosure Schedule
contains a list of (a) all communications between Company and each of its
Subsidiaries on the one hand and the FDA on the other hand from inception
through the date hereof, and (b) all designations or approvals by the FDA or any
similar governmental or quasi-governmental agencies throughout the world of
orphan drug designations or any applications with the FDA for Investigational
New Drug Applications, New Drug Applications or Biologics License Applications,
or any similar applications with any similar governmental or quasi-governmental
agencies throughout the world.
2.31 STUDIES. To the knowledge of Company, the clinical, preclinical and
other studies and tests conducted by or on behalf of or sponsored by Company or
any of its Subsidiaries or in which Company or any of its Subsidiaries or
Company's or any of its Subsidiaries' products or product candidates under
development have participated, were and, if still pending, are being conducted
in accordance with standard medical and scientific research procedures. Neither
Company nor any of its Subsidiaries has received any notices or other
correspondence from the FDA or any other governmental agency requiring the
termination, suspension or modification of any clinical or pre-clinical studies
or tests.
2.32 EMPLOYMENT AGREEMENTS.
(a) KANZER EMPLOYMENT AGREEMENT PAYMENTS. Other than the payment
referred to in Section 1.6(h), all amounts owed to Steve H. Kanzer (cash,
equity or otherwise) pursuant to the terms of the Kanzer Employment
Agreement (as defined in Section 5.6(b)) or otherwise, including but not
limited to any and all amounts (cash, equity or otherwise) owed under
Section 3 of the Kanzer Employment Agreement, have been paid in full or
waived by Mr. Kanzer, and Company owes no amounts (cash, equity or
otherwise) to Mr. Kanzer other than the periodic payment of his base salary
pursuant to the Kanzer Employment Agreement.
(b) STERGIOPOULOS EMPLOYMENT AGREEMENT. Other than the payment
referred to in Section 1.6(g), all amounts owed to Nicholas Stergiopoulos
(cash equity or otherwise) pursuant to the Stergiopoulos Employment
Agreement (as defined in Section 5.6(c)) or otherwise have been paid in full
or waived by Mr. Stergiopoulos, and Company owes no amounts (cash equity or
otherwise) to Mr. Stergiopoulos other than the periodic payment of his base
salary pursuant to the Stergiopoulos Employment Agreement.
2.33 PATENT AND TRADEMARK APPLICATIONS.
(a) DR. MCDONALD. Pursuant to the terms of the Consulting Agreement
dated October 1, 1998 by and between Dr. George McDonald and Enteron
Pharmaceuticals, Inc. ("ENTERON"), Dr. McDonald has assigned all right,
title and interest in the following patent applications to Enteron: (i) Use
of Oral Beclomethasone Dipropionate to Treat Liver Inflammation, filed
January 3, 2001, (ii) Method of Long-Term Treatment of Graft-Versus-Host
Disease Using Topical Active Corticosteroids, filed January 3, 2001, and
(iii) Method of Treating inflammatory disorders of the Gastrointestinal
Tract using Topically Active Corticosteroids, filed March 15, 2001.
(b) DR. EPSTEIN. Pursuant to the terms of the Consulting Agreement
dated June 8, 1999 by and between Dr. Joel Epstein and Oral Solutions, Inc.
("ORAL SOLUTIONS"), Dr. Epstein has assigned all right, title and interest
in the following U.S. and PCT patent applications to Oral Solutions:
(i) Topical Azathioprine for the Treatment of Oral Autoimmune Disorders,
No. 09/433,418, filed November 4, 1999, and (ii) Topical Azathioprine for
the Treatment of Oral Immune Disorders, No. PCT/US/00/21959, filed
August 11, 2000.
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(c) MR. STERGIOPOULOS. Mr. Nicholas Stergiopoulos has assigned all
right, title and interest in the following patent applications to Enteron:
(i) U.S. Patent Application entitled Method of Long-Term Treatment of
Graft-Versus-Host Disease Using Topical Active Corticosteriods, filed
January 3, 2001, and (ii) Method of Treating inflammatory disorders of the
Gastrointestinal Tract using Topically Active Corticosteroids, filed
March 15, 2001. Mr. Stergiopoulos has assigned all right, title and interest
to all Intellectual Property Rights that relate to carrying out Company's
and each of its Subsidiary's current activities and their future activities
to the extent such future activities are already planned.
(d) MR. KANZER. Mr. Steve H. Kanzer has no interest in any
Intellectual Property Rights that relate to carrying out Company's and each
of its Subsidiary's current activities and their future activities to the
extent such future activities are already planned.
(e) INVENTIONS, TRADE SECRETS AND WORKS OF AUTHORSHIP. All inventions
conceived of (whether patentable or not), trade secrets, know-how and works
of authorship developed or created by Mr. Steve H. Kanzer and Mr. Nicholas
Stergiopoulos have been assigned to Company.
(f) TRADEMARK FEE. Company has paid the registration fee for the mark
"Metropt" in Japan.
2.34 MCDONALD LICENSE AGREEMENT. Enteron has paid, or Dr. George McDonald
has waived, all penalty payments owed to him by Enteron pursuant to the terms of
the Exclusive License Agreement dated November 24, 1998 by and between Enteron
and Dr. McDonald (the "MCDONALD LICENSE AGREEMENT") and no amounts are owed to
Dr. McDonald pursuant to the terms thereof.
2.35 ALLERGAN TRANSACTION.
(a) LICENSE AGREEMENT. The obligations of Intero Corp. ("INTERO") to
John Hopkins University ("JHC") pursuant to Section 4.2 of the Exclusive
License Agreement effective February 5, 1999, by and between Intero and JHC
have been paid in full and no amounts are owed to JHC pursuant to the terms
thereof.
(b) SALE OF ASSETS. Company has paid each stockholder of Intero
his/her/its pro rata portion of the consideration paid or to be paid by
Allergan Botox Limited ("ALLERGAN") to Company in connection with the
transactions consummated pursuant to the Asset Purchase Agreement dated
December 1, 1999, by and between Intero and Allergan, including any
milestone payments thereunder.
2.36 LIQUIDATION AMOUNT. At the Effective Time, the total Liquidation
Amount (as defined in Company's Certificate of Incorporation, as amended) due to
all holders of the Series A Preferred in connection with the consummation of the
Merger will not exceed the Series A Preferred Merger Consideration.
2.37 PARENT SECURITIES. Neither Company nor any of its Subsidiaries owns
any outstanding securities of Parent.
2.38 DISSOLUTION. Company's Subsidiaries Neuropath, Inc.; Iopthalmics,
Inc.; Magyar Pharmaceuticals, Inc.; CTD Drug Design, Inc. (formerly known as IDR
Drug Design, Inc.); Institute for Drug Research Publications, Inc.; CTD
Investments, LLC; and Nodolor, Inc. have been dissolved in accordance with the
laws of the respective jurisdictions of their incorporation.
2.39 COMMON STOCK. All the certificates representing shares of Company
Common Stock were issued subsequent to January 5, 1998.
2.40 REPRESENTATIONS COMPLETE. None of the representations or warranties
made by Company herein or in any schedule hereto, including the Company
Disclosure Schedule, or certificate or other document furnished by Company or
the security holders of Company pursuant to this Agreement, contains or will
contain at the Effective Time any untrue statement of a material fact, or omits
or will
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omit at the Effective Time to state any material fact necessary in order to make
the statements contained herein or therein, in the light of the circumstances
under which made, not misleading.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
Except as otherwise set forth in any Parent Reports (as defined in Section
3.5(a)) or for specific references to, and as set forth in the Parent Disclosure
Schedule attached hereto and referring by numbered section (and, where
applicable, by lettered subsection) of the representations and warranties in
this Article III (the "PARENT DISCLOSURE SCHEDULE"), Parent and Merger Sub,
jointly and severally, represent and warrant to Company as follows:
3.1 ORGANIZATION AND STANDING. Each of Parent and Merger Sub is a
corporation duly organized, validly existing and in good standing under the laws
of its jurisdiction of organization. Each of Parent and Merger Sub has the
corporate power, is duly qualified to do business and is in good standing in
each jurisdiction where the character of the properties owned, leased or
operated by it or the nature of its business makes such qualification or
licensing necessary, except for such failures to be so qualified or licensed and
in good standing that would not have, individually or in the aggregate, a
Material Adverse Effect on Parent.
3.2 CAPITAL STRUCTURE OF PARENT. As of May 1, 2001, the authorized capital
stock of Parent consists of 50,000,000 shares of Parent Common Stock, 4,600,000
shares of Preferred Stock, $.001 par value per share, 200,000 shares of
Series B Convertible Preferred Stock, par value $.05 per share, and 200,000
shares of Series C Convertible Preferred Stock, par value $.05 per share, of
which 12,741,858 shares of Parent Common Stock, no shares of Preferred Stock,
102,390 shares of Series B Convertible Preferred Stock and 99,287 shares of
Series C Convertible Preferred Stock were issued and outstanding. All
outstanding shares of Parent Common Stock have been duly authorized, validly
issued, fully paid and are nonassessable and free of any liens or encumbrances
other than any liens or encumbrances created by or imposed upon the holders
thereof. The shares of Parent Common Stock to be issued pursuant to the Merger
will be duly authorized and validly issued, and, upon receipt by Parent of
Company Certificates in exchange therefor, will be fully paid and
non-assessable. The authorized capital stock of Merger Sub consists of 1,000
shares of common stock, $.001 par value per share, all of which were issued and
outstanding and held of record by Parent as of the date hereof.
3.3 AUTHORITY. Subject to approval of the Parent Voting Proposal by the
stockholders of Parent, Parent and Merger Sub have all requisite corporate power
and authority to execute and deliver the Transaction Agreements, to perform
their obligations hereunder and thereunder and to consummate the transactions
contemplated hereby and thereby. Subject to approval of the Parent Voting
Proposal by the stockholders of Parent, the execution, delivery and performance
of the Transaction Agreements and the consummation of the transactions
contemplated hereby and thereby have been duly authorized by all necessary
corporate action on the part of Parent and Merger Sub. This Agreement has been
duly executed and delivered by Parent and Merger Sub and constitutes the valid
and binding obligation of Parent and Merger Sub enforceable against Parent and
Merger Sub in accordance with its terms, except as enforceability may be limited
by bankruptcy, insolvency, moratorium or other similar laws affecting or
relating to creditors' rights generally and by general principles of equity.
3.4 NO CONFLICT; REQUIRED FILINGS AND CONSENTS.
(a) NO CONFLICT. Except for the filing of the Delaware Certificate of
Merger, any applicable federal or state securities filings (including,
without limitation, the filing with the SEC of the Joint Proxy Statement and
the Registration Statement), and as set forth on Section 3.4(a) of the
Parent Disclosure Schedule and except for such conflicts, violations,
breaches or defaults which would not have a Material Adverse Effect on
Parent, the execution and delivery of this Agreement by Parent
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and Merger Sub, do not, and the performance by Parent and Merger Sub of
their obligations hereunder and/or thereunder, as the case may be, and the
consummation of the Merger will not, (i) conflict with or violate any
provision of the Certificate of Incorporation or Bylaws of Parent or Merger
Sub, (ii) conflict with or violate any law applicable to Parent or Merger
Sub, or (iii) result in any breach of or constitute a default (or an event
which with the giving of notice or lapse of time or both could reasonably be
expected to become a default) under, or give to others any right of
termination, amendment, acceleration or cancellation of, or result in the
creation of a lien or other encumbrance on any material property or asset of
Parent or Merger Sub pursuant to, any material note, bond, mortgage,
indenture, contract, agreement, lease, license, permit, franchise or other
instrument or obligation.
(b) GOVERNMENTAL FILINGS. Assuming the accuracy of the representations
and warranties of Company set forth in Article II, except for the filing of
the Delaware Certificate of Merger and any applicable federal or state
securities filings (including, without limitation, the filing with the SEC
of the Joint Proxy Statement and the Registration Statement) and except for
such consents, approvals or authorizations, permits or filings which, if not
obtained or made, would not have a Material Adverse Effect on Parent, the
execution and delivery of this Agreement by Parent and Merger Sub do not and
the performance by Parent and Merger Sub of their obligations hereunder and
the consummation of the Merger will not, require any consent, approval,
authorization or permit of, or filing by Parent with or notification by
Parent to, any Governmental Entity.
3.5 SEC FILINGS; FINANCIAL STATEMENTS OF PARENT.
(a) PARENT REPORTS. Parent has timely filed all forms, reports,
statements and documents required to be filed by it with the SEC and the
American Stock Exchange (the "AMEX") since December 31, 2000 (collectively
together with any such forms, reports, statements and documents Parent may
file subsequent to the date hereof until the Closing, the "PARENT REPORTS").
Each Parent Report was prepared in accordance with the requirements of the
Act, the Exchange Act, or the AMEX, as the case may be, and did not at the
time it was filed contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary in order to
make the statements made therein, in the light of the circumstances under
which they were made, not misleading.
(b) FINANCIAL STATEMENTS. Each of the consolidated financial
statements (including, in each case, any notes thereto) contained in Parent
Reports are true and complete as at, and for the periods reported therein,
and was prepared in accordance with GAAP applied on a consistent basis
throughout the periods indicated (except as may be indicated in the notes
thereto) and each presented fairly, in all material respects, the
consolidated financial position of Parent and the consolidated Subsidiaries
of Parent as at the respective dates thereof and for the respective periods
indicated therein, except as otherwise noted therein (subject, in the case
of unaudited statements, to the absence of notes and normal recurring
year-end audit adjustments that will not be material in nature or in
amount).
3.6 LITIGATION. Except as set forth in Section 3.6 of the Parent
Disclosure Schedule, there is (i) no private or governmental action, suit,
proceeding, claim, arbitration or, to the knowledge of Parent, investigation
pending before any agency, court or tribunal, foreign or domestic, or, to the
knowledge of Parent, threatened against Parent or any of its assets or
properties or any of its officers or directors (in their capacities as such),
and (ii) no judgment, decree or order against Parent, or, to the knowledge of
Parent, any of its directors or officers (in their capacities as such), in each
case limiting the conduct of business by Parent or that could prevent, enjoin,
or alter or delay any of the transactions contemplated by this Agreement or have
a Material Adverse Effect on Parent.
3.7 NO UNDISCLOSED LIABILITIES. Except to the extent set forth in the
balance sheet of Parent as of December 31, 2000 included in the Parent Reports
and except for liabilities incurred in the ordinary
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course of business consistent with past practice since December 31, 2000, Parent
does not have any obligations or liabilities, whether or not accrued, contingent
or otherwise, that individually or in the aggregate would have a Material
Adverse Effect on Parent.
3.8 ABSENCE OF CERTAIN CHANGES. Except as set forth in Section 3.8 of the
Parent Disclosure Schedule and as contemplated by this Agreement, since
December 31, 2000, Parent and each of its subsidiaries have conducted their
business only in the ordinary course consistent with past practice and there has
not occurred (i) any Material Adverse Effect on Parent or any of its
subsidiaries, (ii) any event that could reasonably be expected to prevent or
materially delay the performance of Parent's obligations pursuant to the
Transaction Agreements or the consummation of the Merger by Parent, (iii) any
change by Parent or any of its subsidiaries in its accounting methods,
principles or practices, (iv) any declaration, setting aside or payment of any
dividend or distribution in respect of the shares of capital stock of Parent or
any of its subsidiaries or any redemption, purchase or other acquisition of any
of Parent's or any of its subsidiaries' securities, (v) any increase in the
compensation or benefits or establishment of any bonus, insurance, severance,
deferred compensation, pension, retirement, profit sharing, stock option
(including, without limitation, the granting of stock options, stock
appreciation rights, performance awards or restricted stock awards), stock
purchase or other employee benefit plan, or any other increase in the
compensation payable or to become payable to any employees, officers,
consultants or directors of Parent or any of its subsidiaries, (vi) other than
issuances of options pursuant to the Parent Plan, any issuance, grants or sale
of any stock, options, warrants, notes, bonds or other securities, or entering
into any agreement with respect thereto of Parent and any of its subsidiaries,
(vii) any amendment to the Certificate of Incorporation or Bylaws of Parent or
any of its subsidiaries, (viii) other than in the ordinary course of business
consistent with past practice, any (w) capital expenditures, (x) purchase, sale,
assignment or transfer of any material assets, (y) mortgage, pledge or existence
of any lien, encumbrance or charge on any material assets or properties,
tangible or intangible, except for liens for taxes not yet due and such other
liens, encumbrances or charges which do not, individually or in the aggregate,
have a Material Adverse Effect on Parent, or (z) cancellation, compromise,
release or waiver of any rights of material value or any material debts or
claims, (ix) any incurrence of any material liability (absolute or contingent),
except for current liabilities and obligations incurred in the ordinary course
of business consistent with past practice, (x) any incurrence of any damage,
destruction or similar loss, whether or not covered by insurance, materially
affecting the business or properties of Parent, (xi) any entering into any
agreement, contract, lease or license other than in the ordinary course of
business consistent with past practice, (xii) any acceleration, termination,
modification or cancellation of any agreement, contract, lease or license to
which Parent or any of its subsidiaries is a party or by which any of them is
bound, (xiii) any entering into any loan or other transaction with any officers,
directors or employees of Parent or any of its subsidiaries, (xiv) any
charitable or other capital contribution or pledge therefore, (xv) any entering
into any transaction of a material nature other than in the ordinary course of
business consistent with past practice, or (xvi) any negotiation or agreement by
the Parent or any of its subsidiaries to do any of the things described in the
preceding clauses (i) through (xv).
3.9 BROKERS. Other than fees, commissions, reimbursements of costs and
expenses and other payments due under the engagement letter between Parent and
Wells Fargo Van Kasper dated as of March 11, 2001 and as set forth on Section
3.9 of the Parent Disclosure Schedule, no broker, finder or investment banker is
entitled to any brokerage, finder's or other fee or commission in connection
with the Merger based upon arrangements made by or on behalf of Parent.
3.10 REORGANIZATION. To the knowledge of Parent, neither Parent nor any of
its affiliates has taken or agreed to take any action (other than actions
contemplated by this Agreement) that could be expected to prevent the Merger
from constituting a "reorganization" under Section 368(a) of the Code. Parent is
not aware of any agreement or plan to which Parent or any of its affiliates is a
party or other
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circumstances relating to Parent or any of its affiliates that could reasonably
be expected to prevent the Merger from so qualifying as a reorganization under
Section 368(a) of the Code.
3.11 REPRESENTATIONS COMPLETE. None of the representations or warranties
made by Parent or Merger Sub herein or in a certificate or other document
furnished by Parent or Merger Sub pursuant to this Agreement, contains or will
contain at the Effective Time any untrue statement of a material fact, or omits
or will omit at the Effective Time to state any material fact necessary in order
to make the statements contained herein or therein, in the light of the
circumstances under which made, not misleading.
ARTICLE IV
CONDUCT PRIOR TO THE EFFECTIVE TIME
4.1 CONDUCT OF BUSINESS OF COMPANY. During the period from and including
the date of this Agreement and continuing until the earlier of the termination
of this Agreement in accordance with its terms or the Effective Time, Company
agrees (except as consented to in writing by Parent) to carry on its and each of
its Subsidiaries' businesses in the usual, regular and ordinary course in
substantially the same manner as heretofore conducted. Company further agrees to
pay its and each of its Subsidiaries' debts and Taxes when due, to pay or
perform its and each of its Subsidiaries' other obligations when due, and to use
all reasonable efforts consistent with past practice and policies to preserve
intact its and each of its Subsidiaries' present business organizations, keep
available the services of its and each of its Subsidiaries' present officers and
key employees and preserve its and each of its Subsidiaries' relationships with
customers, suppliers, distributors, licensors, licensees, consultants, joint
venture partners, collaborators, and others having business dealings with it and
each of its Subsidiaries to the end that its and each of its Subsidiaries'
goodwill and ongoing businesses shall be unimpaired at the Effective Time.
Company agrees to promptly notify Parent of any event or occurrence not in the
ordinary course of business or which could have a Material Adverse Effect on
Company or any of its Subsidiaries. By way of amplification and not limitation,
Company and each of its Subsidiaries shall not, between the date of this
Agreement and the Effective Time, directly or indirectly, do, or agree to do,
any of the following without the prior written consent of Parent, which consent
shall not be unreasonably withheld:
(a) cause or permit any amendments to their Certificates of
Incorporation, Bylaws or other charter documents, as applicable, except as
contemplated by Section 5.17;
(b) declare or pay any dividends on or make any other distributions
(whether in cash, stock or property) in respect of any of their capital
stock, or split, combine or reclassify any of their capital stock or issue
or authorize the issuance of any other securities in respect of, in lieu of
or in substitution for shares of their capital stock, or repurchase or
otherwise acquire, directly or indirectly, any shares of their capital stock
except from former employees, directors and consultants in accordance with
agreements providing for the repurchase of shares in connection with any
termination of service;
(c) enter into any material contract or commitment, or violate, amend or
otherwise modify or waive any of the terms of any of the Material Contracts;
(d) issue, deliver or sell or authorize or propose the issuance,
delivery or sale of, any shares of their capital stock or securities
exchangeable for or convertible into, or subscriptions, rights, warrants or
options to acquire, or other agreements or commitments of any character
obligating them to issue any such shares or other convertible or
exchangeable securities, other than the issuance of shares of Company Common
Stock pursuant to the exercise of stock options, warrants or other rights or
the conversion of Series A Preferred outstanding as of the date of this
Agreement and the issuance of the Amended Warrants as contemplated by
Section 5.20;
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