-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EZ5u2v2rRzSpMi5VxIpqGfOkcx5Qu6FSkT5rHgOPInAj62ZAOFtcaWn5rS7s0WBU 6frz8zKq3xJqIy6+f+fF5A== 0000950133-98-001186.txt : 19980401 0000950133-98-001186.hdr.sgml : 19980401 ACCESSION NUMBER: 0000950133-98-001186 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ENTREMED INC CENTRAL INDEX KEY: 0000895051 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MEDICAL LABORATORIES [8071] IRS NUMBER: 581959440 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-20713 FILM NUMBER: 98582754 BUSINESS ADDRESS: STREET 1: 9610 MEDICAL CENTER DR STE 200 CITY: ROCKVILLE STATE: MD ZIP: 20850 BUSINESS PHONE: 3012179858 MAIL ADDRESS: STREET 2: 9610 MEDICAL CENTER DR STE 200 CITY: ROCKVILLE STATE: MD ZIP: 20850 10-K405 1 FORM 10-K405 1 ================================================================================ FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C., 20549 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 Commission file number 0-20713 ENTREMED, INC. (Exact name of registrant as specified in its charter) Delaware 58-1959440 - ------------------------------------------- ---------------------------------- (State of Incorporation) (I.R.S. Employer Identification No.) Suite 200, 9610 Medical Center Drive, Rockville, MD 20850 - ---------------------------------------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (301) 217-9858 - ---------------------------------------------------- Securities registered pursuant to Section 12 (g) of the Act: Title Name of Exchange ----- ---------------- Common Stock, Par Value $.01 Per Share Nasdaq National Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this form 10-K or any amendment to this Form 10-K [X] As of March 19, 1998, 12,372,104, shares of common stock were outstanding and the aggregate market value of the shares of common stock held by non-affiliates was approximately $157,978,350. DOCUMENTS INCORPORATED BY REFERENCE See Part III hereof with respect to incorporation by reference from the registrant's definitive proxy statement to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934 and the Exhibit Index hereto. ================================================================================ 2 ENTREMED, INC. AND SUBSIDIARIES FORM 10-K - FISCAL YEAR ENDED DECEMBER 31, 1997 Contents and Cross Reference Sheet
Form 10-K Form 10-K Form 10-K Part No. Item No. Description Page No. ------------ ------------ ----------- ------------- I 1 Business The Company . . . . . . . . . . . . . . . . . . . . . . . 3 Corporate Strategy . . . . . . . . . . . . . . . . . . . . 5 Angiogenesis . . . . . . . . . . . . . . . . . . . . . . . 5 EntreMed's Antiangiogenesis Program . . . . . . . . . . . 7 EntreMed's Cell Permeation Technology . . . . . . . . . . 9 Collaborations and License Agreements . . . . . . . . . . 11 Competition . . . . . . . . . . . . . . . . . . . . . . . 14 Manufacturing and Marketing . . . . . . . . . . . . . . . 16 Patents and Proprietary Rights . . . . . . . . . . . . . . 16 Government Regulation . . . . . . . . . . . . . . . . . . 18 Employees . . . . . . . . . . . . . . . . . . . . . . . . 22 Risk Factors . . . . . . . . . . . . . . . . . . . . . . . 22 2 Properties . . . . . . . . . . . . . . . . . . . . . . . . . . 29 3 Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . 29 4 Submission of Matters to a Vote of Security Holders . . . . . 30 II 5 Market for Registrant's Common Equity and Related Stockholder Matters . . . . . . . . . . . . . . . . . 30 6 Selected Financial Data . . . . . . . . . . . . . . . . . . . 32 7 Management's Discussion and Analysis of Financial Conditions and Results of Operations Overview . . . . . . . . . . . . . . . . . . . . . . . . . 33 Results of Operations . . . . . . . . . . . . . . . . . . 33 Liquidity and Capital Resources . . . . . . . . . . . . . 34 Year 2000 . . . . . . . . . . . . . . . . . . . . . . . . 36 Impact of Recently Issued Accounting Standards . . . . . . 36 Inflation . . . . . . . . . . . . . . . . . . . . . . . . 36 8 Financial Statements . . . . . . . . . . . . . . . . . . . . . 36 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . 37 III 10 - 13 Incorporated by reference from the Company's Proxy Statement . 37 IV 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . 37 - ------------------------ Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1 Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II - 1
2 3 This document includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended ("Exchange Act"). All statements in this Form 10-K that are not descriptions of historical facts are forward-looking statements, based on management's estimates, assumptions and projections, that are subject to risks and uncertainties. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable as of the date hereof, actual results could differ materially from those currently anticipated due to a number of factors, including risks relating to the early stage of products under development; uncertainties relating to clinical trials; dependence on third parties; future capital needs; and risks relating to the commercialization, if any, of the Company's proposed products (such as marketing, safety, regulatory, patent, product liability, supply, competition and other risks). Additional important factors that could cause actual results to differ materially from the Company's current expectations are included in the Company's Securities and Exchange Commission filings. The Company assumes no obligation to update its forward-looking statements. PART I ITEM 1. BUSINESS THE COMPANY EntreMed, Inc. ("EntreMed" or the "Company") was organized in September 1991 and is engaged primarily in the research and development of biopharmaceutical products that address the role of angiogenesis in the prevention and treatment of a broad range of diseases. The Company is an innovative biopharmaceutical company with a research and product focus on the role of angiogenesis in disease. Angiogenesis is the biological process by which new blood vessels are formed and is a normal process during the first three months of embryonic development, the reproductive cycle of women, and in wound healing. At other times, angiogenesis is harmful when associated with pathology, particularly that of cancer and macular degeneration, a leading cause of blindness. The Company believes that antiangiogenic products, which inhibit the abnormal growth of blood vessels, may have fewer adverse side effects than traditional therapies for these diseases. EntreMed's portfolio of potential therapeutics include the anti-angiogenic compounds, Angiostatin(TM) protein, Endostatin(TM) protein, 2-Methoxyestradiol and thalidomide which are used to block the growth of blood vessels supplying primary and metastatic tumors. In December 1995, the Company and Bristol-Myers Squibb Company ("Bristol-Myers Squibb") entered into a collaboration (the "BMS Collaboration") to develop and commercialize certain antiangiogenic therapeutics. This collaboration provides for Bristol-Myers Squibb to fund certain Company research, provide milestone payments to the Company and pay the Company royalties on net sales of any products developed under the collaboration. In addition, in December 1995 and June 1996 Bristol-Myers Squibb made equity investments in the Company 3 4 in an aggregate amount of $11,500,000. In return, the Company granted Bristol-Myers Squibb exclusive worldwide rights to antiangiogenic applications of thalidomide, thalidomide analogs and the Angiostatin(TM) protein and a five-year right of first refusal to negotiate for commercial rights with respect to the development of any technology licensed, or to be licensed, by the Company from Children's Hospital, Boston, an affiliate of Harvard Medical School, ("Children's Hospital"), in the field of antiangiogenic therapeutics. See "Collaborations and License Agreements". The Company's product candidates have been developed primarily through sponsored research collaborations and licensing agreements. The principal antiangiogenic therapeutics currently under development by the Company were licensed from Children's Hospital where the Company sponsors research under the direction of Dr. M. Judah Folkman. The Company's sponsored research programs are augmented by its internal capabilities in the angiogenesis field. To date, the Company has: _ Licensed from Children's Hospital four antiangiogenic molecules - Angiostatin(TM) protein, thalidomide and thalidomide analogs, Endostatin(TM) protein and 2-Methoxyestradiol. - Licensed to Bristol-Myers Squibb Company commercial rights to Angiostatin(TM) protein, thalidomide and thalidomide analogs. _ Isolated, identified, sequenced, cloned, and recombinantly expressed Angiostatin(TM) protein in quantities sufficient for preclinical studies. In preclinical studies, Angiostatin(TM) protein appeared to inhibit vascularization and growth of primary and metastatic tumors. _ Isolated, identified, sequenced, cloned, and recombinantly expressed Endostatin(TM) protein in quantities sufficient for preclinical studies. In preclinical studies, Endostatin(TM) protein appeared to inhibit vascularization and growth of primary and metastatic tumors. _ Initiated randomized Phase II clinical trials to evaluate the antiangiogenic effects of thalidomide in inhibiting the progression of age-related macular degeneration, a leading cause of blindness. _ Initiated Phase II clinical trials to evaluate the antiangiogenic effects of thalidomide in inhibiting the progression of metastatic breast cancer. _ Received positive interim results in Phase II clinical trials evaluating the antiangiogenic effects of thalidomide in inhibiting the progression of brain cancer, prostate cancer, and Kaposi's sarcoma. _ Reacquired commercial rights to thalidomide from Bristol-Myers Squibb Company. _ Assayed in mice an orally administered thalidomide analog resulting in inhibition of metastatic mouse melanoma. 4 5 _ Signed letters of intent to collaborate with the National Cancer Institute ("NCI") to undertake pharmacology and toxicology studies and also to develop commercial production methods for both Endostatin(TM) protein and 2-Methoxyestradiol. _ Demonstrated that orally administered 2-Methoxyestradiol inhibits growth of human breast and neuroblastoma cell lines in mice. CORPORATE STRATEGY The Company's strategy is to discover and develop novel antiangiogenic therapeutics as well as other promising technologies, such as cell permeation, which the Company perceives to have clinical and commercial potential. The principal elements of the Company's strategy are (i) to focus its resources on current core technologies, (ii) to broaden its product and technology portfolio through sponsored research collaborations with academic institutions, government organizations and private enterprises, (iii) to augment product development with its in-house research and development capabilities and (iv) to leverage its resources through corporate partnerships in order to minimize the cost to the Company of late-stage clinical trials and to accelerate product commercialization. The Company's product candidates are in the developmental stage and require further research, evaluation, and regulatory approval. No assurance can be given that any product candidate will result in a product capable of commercial use. ANGIOGENESIS Overview Within the human body, a network of arteries, capillaries and veins, known as the vasculature, functions to transport blood throughout the tissues. The basic network of the vasculature is developed through angiogenesis, a fundamental process by which new blood vessels are formed. The primary angiogenic period in humans takes place during the first three months of embryonic development. During this period, cytokines and growth factors, which are normally suppressed, are activated to stimulate the growth of new blood vessels. Once the general network of the blood vessels is complete, these angiogenic stimulators are inhibited and blood vessels grow longer and larger in diameter until adulthood through a different process termed vasculogenesis. Angiogenesis and Cancer The term cancer includes many different types of uncontrolled cellular growth. Clusters of cancer cells, referred to as tumors, may destroy surrounding organs, impair physiological function and often lead to death. In order to survive, cancer cells require oxygen and nutrients which they receive from the body's blood supply. In order to access this blood supply, cancer cells initiate a biochemical mechanism that stimulates angiogenesis to provide the blood supply 5 6 that nourishes the tumor. As cancer cells grow and metastasize (spread from primary sites to other parts of the body) they require continuous angiogenesis. Antiangiogenic drug candidates are intended to inhibit the growth of tumor-feeding blood vessels and may prove to be effective in treating certain cancers, with fewer adverse side effects than current therapies. Cancer is the second leading cause of death in the United States and it is estimated that approximately one million two hundred thousand new cases of cancer are expected to be diagnosed in 1998. Existing cancer treatments include surgery, radiation therapy and chemotherapy. Surgery is an invasive method of removing tumors. However, some tumors are currently deemed inoperable due to their location, extent of organ infiltration or size. Radiation therapy produces ionized molecules within the body that attack cancer cells, and may also damage surrounding healthy cells. Chemotherapy involves the administration of toxic substances (cytotoxins) designed to kill cancer cells and usually produces severe side effects. In addition, resistance to chemotherapy occurs over time. The Company believes that its antiangiogenic therapeutics may prove to have significant advantages over traditional cancer therapies, including reduced toxicity, and lack of drug resistance, and may be administered in conjunction with other antiangiogenic and traditional therapies. Angiogenesis and Blindness Angiogenesis within the eye, a condition often associated with diabetes and macular degeneration, is a major cause of blindness. Macular degeneration, which is often age-related, and diabetic retinopathy, a secondary effect of diabetes, both involve the formation of new blood vessels behind, or in front of the retina, respectively. The blood vessels that grow in front of the retina block vision and the blood vessels that grow behind the retina often hemorrhage or cause retinal detachment each resulting in a decrease or loss of vision. It is estimated that approximately eight million people in the U.S. have diabetic retinopathy, and that twenty-five thousand cases result in blindness each year. It is estimated that approximately thirteen million Americans suffer from macular degeneration. Nearly two million of these people will develop vision impairment, of which one hundred thousand will develop blindness each year. (Source: Prevent Blindness America). Current treatments for diabetic retinopathy and to a more limited extent, macular degeneration involve laser-based photocoagulation therapy, which often causes additional damage to the retina and surrounding cells. Angiogenesis and Other Disease Indications A variety of other disease indications are related to angiogenesis, including rheumatoid arthritis, atherosclerosis, psoriasis and Crohn's disease. The Company believes that its antiangiogenic technologies may be applicable to such diseases. To date, the Company has not researched antiangiogenic therapy in diseases outside of cancer or macular degeneration. There can be no assurance that the Company will pursue research outside these indications, that product candidates will result from any research undertaken, or that any products for these diseases will ever be commercialized. 6 7 ENTREMED'S ANTIANGIOGENESIS PROGRAM The Company believes that certain small molecules or proteins that exhibit antiangiogenic effects may be useful as therapeutics for diseases involving angiogenesis. The Company currently focuses on angiogenesis inhibition as a treatment for oncologic and ophthalmologic indications. Product candidates under development include: (i) thalidomide and several of its chemical analogs which inhibit angiogenesis, (ii) Angiostatin(TM) protein and Endostatin(TM) protein, each a newly discovered angiogenesis inhibitor naturally produced by the body and, (iii) 2-Methoxyestradiol, an oral angiogenesis inhibitor, and its chemical analogs. The Company's evaluation of thalidomide and its chemical analogs as an antiangiogenic therapeutic may also enable the Company to generate clinical and marketing data on the general utility of angiogenesis inhibitors. The Company believes that this data might be useful in the development of Angiostatin(TM) protein, Endostatin(TM) protein, and 2-Methoxyestradiol which, although in an earlier stage of development than thalidomide, may have greater specificity as antiangiogenic therapeutics. The Company believes that, if successfully developed, these products could be used alone or in combination with each other to treat certain angiogenic-related diseases. Product Candidates Thalidomide and Thalidomide Analogs. The Company is evaluating the antiangiogenic properties of the drug thalidomide and its chemical analogs. Thalidomide, which was widely prescribed as a sedative in Europe in the late 1950s and early 1960s, caused severe birth defects when taken by pregnant women. The Company believes that thalidomide may have affected fetal development and caused birth defects by blocking new blood vessel growth, a characteristic that may make thalidomide useful in the prevention and treatment of angiogenic disorders. Thalidomide has been shown to block angiogenesis in preclinical animal studies conducted at Children's Hospital. Due to the negative history of thalidomide, as well as patent and competitive issues, the Company has commenced research on chemical analogs of thalidomide which have similar mechanisms of action and focus on the antiangiogenic therapeutic potential of this drug. The Company proposes to develop thalidomide, or a thalidomide analog, as an oral therapeutic to inhibit the progression of certain angiogenic diseases, including cancer and certain causes of blindness. The Company and the National Cancer Institute initiated Phase II clinical trials in 1996 to evaluate the antiangiogenic effects of thalidomide in inhibiting the progression of breast cancer, prostate cancer and Kaposi's sarcoma. The Company also initiated and expanded a Phase II clinical trial for brain cancer in 1996. In May 1997, the Company announced successful interim results in brain cancer and Kaposi's sarcoma patients treated with thalidomide. In June 1997, the Company and the National Cancer Institute announced an increase in the number of prostate cancer patients in NCI-sponsored Phase II clinical trials of thalidomide. In August 1997, the Company reacquired the commercial rights to thalidomide in exchange for renewing Bristol-Myers Squibb's warrant to purchase an additional $10,000,000 of the Company's common stock. Bristol-Myers Squibb continues to hold the rights to thalidomide analogs. See "-- Collaborations and License Agreements.", "---Competition", and "Patents and Proprietary Rights". Thalidomide 7 8 was additionally shown to inhibit the abnormal formation of blood vessels in the eye in animal studies performed at Children's Hospital. The Company is currently conducting Phase II clinical trials at the Scheie Eye Institute at the University of Pennsylvania School of Medicine and with the Retina Associates of Cleveland to evaluate the antiangiogenic effects of thalidomide in blindness due to age-related macular degeneration. Although not yet approved for sale in the United States, thalidomide has been used as an investigational agent to treat a limited number of patients for leprosy and other diseases and is being developed by other companies for various disease indications, but not including the diseases in which angiogenesis is a factor. Celgene Corporation has received an approvable letter from the U.S. Food and Drug Administration ("FDA") for the use of thalidomide in erythema nodosum leprosum, an inflammatory skin condition of some leprosy patients. The approvable letter from the FDA indicates that Celgene will be required to resolve issues of labeling, packaging, and distribution prior to final market approval. Angiostatin(TM) Protein and Endostatin(TM) Protein. The Company is currently developing two endogenous proteins, Angiostatin(TM) protein and Endostatin(TM) protein, as potential long term cancer therapeutics to prevent metastatic disease and as therapies for primary tumors. These two proteins are different in structure and origin but have similar biological activity. Metastatic tumor growth is attributed to the implantation and growth of tumor cells at secondary sites. These tumor cells are released by a primary tumor, or are released into circulation during surgical removal of the primary tumor. Although surgeons generally remove significant amounts of healthy tissue surrounding the tumor, in many cases "seed cells" have already escaped the primary tumor, circulated through the body, and become embedded elsewhere. It has been observed that in certain cases, these seed cells, or metastases, do not vascularize and grow while the primary tumor is in place. However, after the primary tumor is removed, metastatic tumors often grow rapidly. In Company-sponsored research at Children's Hospital, a substance associated with primary tumors was identified which appears to prevent vascularization and growth of metastatic tumors. Based upon such research, the Company believes that primary tumors secrete an enzyme that cleaves plasminogen, a known protein associated with blood clotting, into a smaller, previously undiscovered protein. The Children's Hospital team isolated and identified the protein in 1995, which the Company named Angiostatin(TM) protein. The Company has cloned and expressed the gene that codes for Angiostatin(TM) protein. In 1996, the Children's Hospital team also isolated and identified a second endogenous protein, named Endostatin(TM) protein. The gene for Endostatin(TM) protein has been cloned and expressed by the Company. Preclinical studies, including the murine Lewis Lung Carcinoma ("LLC") metastatic model, demonstrated that both Angiostatin(TM) and Endostatin(TM) proteins inhibited the growth of metastatic tumors. In addition, the Angiostatin(TM) protein was shown to reduce the size of primary murine carcinomas and sarcomas as well as human prostate, breast and colon cancers grown in immunodeficient mice. The Company is addressing additional required preclinical studies for Angiostatin(TM) protein. The Company is currently producing Angiostatin(TM) and Endostatin(TM) protein in quantities sufficient for preclinical studies. 8 9 The Company is collaborating with the NCI to pursue the early preclinical development of Endostatin(TM) protein and 2-Methoxyestradiol ("2-ME") and its analogs, including exploration of methods for commercial production of the molecules and possible clinical trails. The Company currently anticipates that either the Angiostatin(TM) protein or Endostatin(TM) protein, as endogenous angiogenesis inhibitors, could be administered as an adjunct therapy after cancer diagnosis and sustained thereafter. The Company believes that there may be utility in using these proteins in combination and that these proteins may also be effective in inhibiting other angiogenic diseases such as diabetic retinopathy and macular degeneration, although the Company has not conducted any research to date in these areas. The Company has obtained exclusive licenses from Children's Hospital for patent applications filed on the Angiostatin(TM) and Endostatin(TM) proteins and related technology. BMS has sublicensed commercial rights to Angiostatin(TM) protein from the Company. Other Antiangiogenesis Research The Company maintains an internal discovery and development program and also continues to sponsor and support research at Children's Hospital on angiogenesis technologies with the aim of discovering additional antiangiogenic products. The Company's research in these areas is currently early stage, although the Company and Children's Hospital have identified other proteins and compounds with angiogenic or antiangiogenic properties that may be candidates for further development. To the extent that additional antiangiogenic therapeutics are developed at Children's Hospital and licensed by the Company, Bristol-Myers Squibb has a five-year right of first refusal to negotiate for a sublicense to such technologies from the Company. ENTREMED'S CELL PERMEATION TECHNOLOGY Overview The Company is applying its expertise in the role of blood function to the development of a cell permeation technology that may facilitate the delivery into blood cells of drugs, genes or other therapeutic agents that otherwise would not readily permeate through the cell membrane. To date, the Company has focused its cell permeation research on a method of enhancing the oxygen delivery capabilities of blood. Human blood is comprised of four components: red blood cells, white blood cells, plasma and platelets. The principal functions of human blood are to transport oxygen and nutrients to tissues, carry waste products away from tissues and defend the body against infection. Hemoglobin, a protein-iron molecule contained within red blood cells, is responsible for carrying oxygen from the lungs to tissues throughout the body. Tissues and organs in the body require oxygen to function properly, and oxygen deficiency may lead to tissue damage or death. In human blood, each hemoglobin molecule carries four molecules of oxygen, but releases only one. It has been proposed that inositol hexaphosphate ("IHP"), a naturally occurring plant 9 10 chemical, may enhance the oxygen releasing capabilities of hemoglobin by allowing the release of three oxygen molecules. The theory that IHP could enhance the oxygen releasing capacity of hemoglobin has been proposed for several years. Scientists have observed that a molecule similar to IHP found in the hemoglobin of birds is more efficient at releasing oxygen than a corresponding molecule (2,3 diphosphoglycerate, or 2,3 DPG) found in human hemoglobin. However, IHP does not readily diffuse through the cell membrane of human red blood cells and previous techniques used to introduce IHP into red blood cells showed significant problems and resulted in substantial cell damage. The Company's research is focused on overcoming these problems. The Company's research has led to the development of a prototype device designed to introduce IHP into red blood cells without significant cell damage. The Company intends to develop this application as a therapeutic in such chronic and acute diseases as angina, congestive heart failure, heart attacks, and other diseases involving inadequate circulation or respiratory functions. Existing methods of treatment for these diseases, including surgical remedies, drug therapies and non-surgical devices, treat such diseases by seeking to increase blood flow, rather than increasing the blood's oxygen releasing capacity. In addition, unlike blood that is stored in blood banks, which loses its capacity to deliver oxygen for approximately 12 to 24 hours following a transfusion, blood treated with IHP may be able to release oxygen to tissues more rapidly following transfusion. As IHP-treated blood may release more oxygen to tissues than untreated human blood, it may also be possible that a smaller amount of IHP-treated blood can be transfused to obtain equivalent tissue oxygenation. With the exception of IHP-treated red blood cells, the Company has not yet explored any other applications of its cell permeation technology. Potential therapeutic candidates will be selected based on an analysis of various disease indications and related market potential, the likely time and expense required for development and adaptation of the core technology for the specific application and the interest of potential strategic partners. Potential product candidates may be reformulations of existing compounds approved by the FDA where enhancement of delivery through blood cell membranes is believed to have increased clinical value compared to existing methods. Device for Oxygen Enhanced Blood Delivery The Company has constructed a prototype device designed to introduce IHP molecules into red blood cells, which may enhance the delivery of oxygen to tissues and organs, and is sponsoring contract research and development on IHP-treated blood. An initial prototype flow electroporation device has been constructed and the accompanying reagents have been developed, although design activities are ongoing and there can be no assurance that a clinically acceptable device will be completed. The Company intends to conduct preclinical toxicology studies required to demonstrate the safety and efficacy of IHP-treated red blood cells in enhancing the delivery of oxygen to tissues in relevant disease states. 10 11 The Company's flow electroporation technology is based on Company sponsored research previously conducted at the Center for Blood Research Laboratories at Harvard Medical School ("CBRL"). In November 1992, the Company obtained an exclusive worldwide license to this technology from the CBRL in exchange for cash payments and royalties based on sales, and a United States patent was received from the U.S. Patent and Trademark office in March 1998 covering the electroporation chamber, a core component of the Company's cell permeation technology. Device and disposable component engineering and development has been and continues to be conducted by a contract manufacturer. The Company is in discussions with several major medical device companies and is seeking to enter into collaborative arrangements with such companies to develop and commercialize the Company's cell permeation technology. However, there can be no assurance that any such agreements will be entered into with any of these companies or any potential partner or that the terms of any agreement will be favorable to the Company. COLLABORATIONS AND LICENSE AGREEMENTS General. The Company intends to continue to develop in-licensed products and sponsored research programs and to enter into collaborations and licensing agreements with corporate partners for product development, manufacturing and marketing. The Company believes that it will be necessary to enter into collaborative arrangements with other companies in the future to develop, commercialize, manufacture and market its cell permeation technology, as well as other products or technologies it may acquire or develop. Bristol-Myers Squibb Company Collaboration. In December 1995, the Company entered into the BMS Collaboration for the development of certain antiangiogenic products. The BMS Collaboration provided for a five year research program, the grant to Bristol-Myers Squibb of an exclusive license to the Company's thalidomide, thalidomide analogs and Angiostatin(TM) protein technologies and an equity investment in the Company by Bristol-Myers Squibb. During the five year research term, the Company has agreed to conduct research and Bristol-Myers Squibb has agreed to support and fund such research. Bristol-Myers Squibb has agreed to provide funding of $18,350,000, payable in ten semi-annual payments of $1,835,000, of which $9,175,000 has been paid to date. In addition, Bristol-Myers Squibb has paid $730,000 to reimburse the Company for thalidomide clinical studies. Bristol-Myers Squibb also paid to the Company $1,000,000 in license fees, a portion of which was paid to Children's Hospital, and $2,500,000 in consideration of know-how and research and development previously performed by the Company. The Company granted Bristol-Myers Squibb an exclusive worldwide royalty-bearing license to make, use and sell products that are based upon the Company's Angiostatin(TM) protein, thalidomide and thalidomide analog technologies. Bristol-Myers Squibb also received a five year right of first refusal to negotiate for commercial rights with respect to the development of any technology licensed or to be licensed by the Company from Children's Hospital in the field of antiangiogenic therapeutics. Such right of first refusal applies to the Company's Endostatin(TM) protein technology and 2- 11 12 Methoxyestradiol technologies. Pursuant to such rights of first refusal BMS proposed terms for the sublicense of such technologies. The parties were unable to reach agreement on terms. Therefore, the Company has the ability to offer sublicensing rights to Endostatin(TM) protein and 2-ME technologies to other pharmaceutical companies if it so desires. In August 1997, the Company reacquired the commercial rights to thalidomide in exchange for an extension of the period during which Bristol-Myers Squibb could evaluate Endostatin(TM) and 2-ME pursuant to BMS's right of first refusal and renewing BMS's warrants to purchase an additional $10,000,000 of the Company's common stock at $22.50 per share, or 444,444 shares from the Company. This warrant was renewed and expired in November 1997. Bristol-Myers Squibb continues to hold the rights to thalidomide analogs. Bristol-Myers Squibb advised the Company that its determination not to pursue commercialization of thalidomide was based upon patent and certain competitive and market issues, including the development of thalidomide products by other companies. See "--Competition" and "--Patents and Proprietary Rights". However, based upon discussions with Bristol-Myers Squibb, the decision regarding thalidomide is not expected to affect Bristol-Myers Squibb's internal efforts with respect to thalidomide analogs nor Angiostatin(TM) protein research and development as contemplated in the BMS Collaboration. Therefore, the Company does not believe that Bristol-Myers Squibb's decision will have a material adverse effect on the Company's development of an oral antiangiogenic therapeutic. The BMS Collaboration also provides for royalties to the Company based on the net sales price of products sold by Bristol-Myers Squibb. With respect to any product that is derived from Angiostatin(TM) protein, the royalty shall be 15% of net sales, subject to a reduction to no less than 10% based on manufacturing costs and third party royalties. With respect to any product derived from thalidomide analogs, the royalty shall range from 8% to 12.5% based on sales volume. In addition, the Company may be entitled to receive additional payments for each product category based upon the achievement of defined and primarily late-stage clinical development and regulatory filing milestones. In the event all of these milestones are achieved, as to which there can be no assurance, these additional payments could total $26,000,000. Up to $6,000,000 of the milestone payments for products related to thalidomide analogs and up to $4,000,000 of the milestones for products related to Angiostatin(TM) protein will be creditable against any royalties that may become payable by Bristol-Myers Squibb to the Company, although the cumulative amount of credits in any year may not exceed 50% of the aggregate royalties otherwise payable. The Company retained certain co-promotion rights if Bristol-Myers Squibb elects to seek a co-promotion partner with respect to any products covered by the collaboration. The BMS Collaboration may be terminated by Bristol-Myers Squibb for any reason upon six months notice without any further liability for future payments. Pursuant to the BMS Collaboration, Bristol-Myers Squibb purchased 541,666 shares of the Company's Common Stock for $12.00 per share in December 1995 and purchased an additional $5,000,000 of Common Stock concurrent with the Company's June 1996 IPO in a private placement at the initial public offering price per share of $15.00 per share. The Company also issued to Bristol-Myers Squibb a warrant, exercisable for one-year from June 19, 1996, to 12 13 purchase up to $10,000,000 of Common Stock at an exercise price per share equal to $22.50 per share, or 444,444 shares from the Company. This warrant was renewed and expired in November 1997. The Company has granted to Bristol-Myers Squibb certain registration rights with respect to all of these shares. Academic Collaborations. In addition to its in-house research program, the Company collaborates with several academic institutions to support research in areas of the Company's product development interests. Usually, research supported at outside academic institutions is performed in conjunction with additional in-house research. Often, the faculty members responsible for supervision of the research performed at the academic institution will participate further as consultants to the Company's in-house effort. Typically under these arrangements, the Company agrees to fund the research it has chosen to support with a specified budget over a specified time period, usually one to three years. In return, the Company usually obtains an exclusive license, with the right to grant sublicenses, and the right to further develop and market products that arise out of the technology being supported. Under several of these licenses, the Company is required to meet specified milestones or diligence requirements in order to retain its license of such technologies. There can be no assurance that the Company will satisfy these milestones and diligence requirements and be able to retain such licenses. In addition to providing research support, the Company usually is required to pay royalties to the academic institution on sales, if any, of any licensed products resulting from such research. The Company in most instances files and prosecutes patent applications on behalf of the institutions. The Company's primary academic collaboration is with Children's Hospital. In September 1993, the Company entered into a sponsored research agreement with Children's Hospital to support research conducted under the direction of Dr. M. Judah Folkman on the role of angiogenesis in pathological conditions. Under the agreement, as amended in August 1995, the Company agreed to pay to Children's Hospital $11,000,000, of which $8,000,000 was paid through February 1998, $1,000,000 is due on April 1, 1998 and the remainder is due in equal semi-annual payments of $1,000,000 until April 1, 1999. The Company also granted to Children's Hospital options to acquire 83,334 shares of Common Stock at an exercise price of $6.00 per share and additional options to acquire 50,000 shares at an exercise price of $6.375 per share. The Company obtained an exclusive option to negotiate an exclusive, worldwide, royalty-bearing license to any technology resulting from the research at Children's Hospital in areas covered by the agreement. The Company received a right to sublicense the licensed technologies, although the Company agreed to pay to Children's Hospital a portion of all sublicensing payments, which do not include payments to support research and development by the Company or equity investments in the Company. The Company has also received certain rights of first refusal to certain additional research projects and any new project opportunities arising from Dr. Folkman's core laboratory activities. The Company exercised its option in May 1994 to obtain exclusive worldwide licenses to certain oral antiangiogenic technology (thalidomide and its analogs), cancer diagnostic and prognostic technology, and endogenous antiangiogenic technology, Angiostatin(TM) protein. In 13 14 December 1996, the Company exercised its option to obtain the exclusive worldwide licenses to Endostatin(TM) protein and 2-Methoxyestradiol, an orally available angiogenesis inhibitor. These license agreements provide for certain milestone payments by the Company to Children's Hospital as well as royalties based on sales, if any, of any products developed from the licensed technologies. The milestone payments aggregate $4,650,000, of which $290,000 has been paid through December 31, 1997, and are based upon license fees and the achievement of regulatory approvals. Other Collaborative and Strategic Relationship Arrangements. In July 1996, the Company acquired, through its subsidiary Cytokine Sciences, Inc. ("Cytokine"), substantially all of the assets of Innovative Therapeutics, Inc. ("ITI") in exchange for 15% of the common stock of Cytokine valued at approximately $44,000. Prior to the acquisition, the Company sponsored research at ITI on methods to treat disease by stimulating cellular immunity. The methods currently under development are designed to target specific diseases by the administration of synthetic peptides or recombinant proteins that mimic proteins which occur naturally during that particular disease. These therapeutic agents are designed to initiate cellular immune responses exclusively, without affecting humoral immunity. Prior to the acquisition, the Company had paid ITI approximately $832,500 pursuant to its research collaboration. Under the terms of the transaction with ITI, the Company agreed to provide funding to Cytokine in an aggregate amount of $1,600,000 during the first two years commencing July 2, 1996, with an additional $1,500,000 to be provided at the sole option of the Company during the third year. All intercompany balances and transactions have been eliminated in the consolidated financial statements. The Company intends to continue to support and fund research at other companies or academic or other institutions in selected areas in exchange for rights to technologies and products derived from such sponsored research or equity positions in such companies. The Company expects to focus on sponsored research in areas in which it has existing expertise or where a strong market opportunity is perceived. The Company may establish subsidiaries to develop and commercialize promising technologies or products generated from this research, which may create opportunities for separately financing and managing new development programs. COMPETITION Competition in the pharmaceutical, biotechnology and biopharmaceutical industries is intense and based significantly on scientific and technological factors, the availability of patent and other protection for technology and products, the ability and length of time required to obtain governmental approval for testing, manufacturing and marketing and the ability to commercialize products in a timely fashion. Moreover, the biopharmaceutical industry is characterized by rapidly evolving technology that could result in the technological obsolescence of any products developed by the Company. The Company competes with many specialized biopharmaceutical firms, as well as a growing number of large pharmaceutical companies that are applying biotechnology to their operations. Many biopharmaceutical companies have focused their 14 15 development efforts in the human therapeutics area, and many major pharmaceutical companies have developed or acquired internal biotechnology capabilities or made commercial arrangements with other biopharmaceutical companies. These companies, as well as academic institutions, governmental agencies and private research organizations, also compete with the Company in recruiting and retaining highly qualified scientific personnel and consultants. The Company's competition will be determined in part by the potential indications for which the Company's compounds may be developed and ultimately approved by regulatory authorities. The Company is relying on Bristol-Myers Squibb to commercialize the licensed antiangiogenic products, Angiostatin(TM) protein and thalidomide analogs, and accordingly, the success of these products will depend in significant part on Bristol-Myers Squibb's efforts and ability to compete in these markets. The success of the BMS Collaboration will depend in part upon Bristol-Myers Squibb's own competitive, marketing and strategic considerations, including the relative advantages of alternative products being developed and marketed by Bristol-Myers Squibb and its competitors. For example, Bristol-Myers Squibb currently markets cancer therapeutics, which would be competitive with any antiangiogenic products developed under the BMS Collaboration to treat cancer. The Company is aware of companies and research institutions investigating the role of angiogenesis generally and specifically as it may be useful in developing therapeutics to treat various diseases associated with abnormal blood vessel growth. In studies available to date, these angiogenic inhibitors have shown varying effectiveness in inhibiting angiogenesis and differing degrees of bioavailability and toxicity. Significant further preclinical and clinical development of these products is needed prior to an assessment of the more significant competitive product candidates in the antiangiogenic disease indications targeted by the Company. The Company is aware of other companies developing thalidomide and certain of its chemical analogs for various disease indications, including Celgene Corporation, for the treatment of erythema nodosum leprosum ("ENL"), AIDS-related cachexia (or wasting) and mouth ulcers, and Andrulis Pharmaceuticals, for diabetes. Celgene has received an approvable letter from the FDA for the use of thalidomide in ENL. In 1997, two patents licensed to the Company were issued to Children's Hospital by the U.S. Patent and Trademark Office covering the use of thalidomide to treat angiogenic-mediated diseases including cancer, macular degeneration and rheumatoid arthritis. Although the Company believes that its patent rights would preclude another company from marketing thalidomide for antiangiogenic indications, there can be no assurance that any patent will issue or afford meaningful protection. In August 1997, the Company reacquired the commercial rights to thalidomide from Bristol-Myers Squibb who continue to hold the rights to thalidomide analogs. Bristol-Myers Squibb has advised the Company that its determination not to pursue the commercialization of thalidomide was based upon patent and certain competitive and market issues, including the development of thalidomide products by other companies. See "-- Collaboration and License Agreement." A number of companies utilize or are developing cell permeation or drug delivery technologies and competition for the development of drug delivery products is intense, although the Company's focus is on blood cell permeation. The Company is aware of at least one other 15 16 company, Allos Therapeutics, Inc., that is engaged in early-stage research regarding a method to acutely increase the oxygen-releasing capacity of hemoglobin for treating cancer. The Company also anticipates that IHP-treated blood (which is not technically a blood replacement), will compete for use in blood transfusions with readily available products, including whole human blood or packed red blood cells, and products under development, such as blood substitutes. Many of the Company's existing or potential competitors have substantially greater financial, technical and human resources than the Company and may be better equipped to develop, manufacture and market products. In addition, many of these competitors have extensive experience in preclinical testing and human clinical trials and in obtaining regulatory approvals. The existence of competitive products, including products or treatments of which the Company is not aware, or products or treatments that may be developed in the future, may adversely affect the marketability of products which may be developed by the Company. MANUFACTURING AND MARKETING The Company's strategy is to enter into collaborative arrangements with pharmaceutical and other companies for the development, manufacturing and marketing of products requiring broad marketing capabilities and for overseas marketing. These collaborators are generally expected to be responsible for funding or reimbursing all or a portion of the development costs, including the costs of clinical testing necessary to obtain regulatory clearances and for commercial scale manufacturing, in exchange for exclusive or semi-exclusive rights to market specific products in particular geographic territories. To date, the Company has entered into one collaboration agreement, with Bristol-Myers Squibb, relating to Angiostatin(TM) and thalidomide analogs. However, the Company may, in the future, consider manufacturing or marketing certain products directly and to co-promote certain products if it believes it is appropriate under the circumstances. The Company has no experience in manufacturing or marketing products on a commercial scale and does not have the resources to manufacture or market by itself on a commercial scale any of its product candidates. In the event the Company decides to establish a manufacturing facility, the Company will require substantial additional funds, and will be required to hire and train significant additional personnel and comply with the extensive "good manufacturing practice" regulations applicable to such a facility. PATENTS AND PROPRIETARY RIGHTS The Company's success will depend in part on its ability to obtain patent protection for its products, both in the United States and abroad. The patent position of biotechnology and pharmaceutical companies, in general, is highly uncertain and involves complex legal and factual questions. The intellectual property that the Company has licensed exclusively from Children's Hospital of the Harvard Medical School includes eight pending U.S. patent applications and one issued patent covering Angiostatin(TM) protein, DNA coding for the Angiostatin(TM) protein, the use of Angiostatin(TM) protein as a therapeutic agent and the use of Angiostatin(TM) protein as a diagnostic agent. Four of these patent applications have been allowed by the U.S. Patent and 16 17 Trademark Office. Included in the Children's Hospital license are five pending U.S patent applications and three issued patents covering the use of the thalidomide molecule and thalidomide analogs as an anti-angiogenic agent for the treatment of a wide variety of diseases that are caused by uncontrolled angiogenesis. These patent applications also include composition of matter coverage for certain thalidomide analogs. In addition, the Company has licensed two pending patent applications and two issued patents covering estrogenic compounds as anti-mitotic agents and anti-angiogenic compounds. The Company has also licensed two pending U.S. patent applications covering the Endostatin(TM) protein, DNA coding for the Endostatin(TM) protein, the use of Endostatin(TM) protein as a therapeutic agent and the use of Endostatin(TM) protein as a diagnostic agent. The patent applications also cover the combination of Endostatin(TM) protein and Angiostatin(TM) protein as a therapeutic composition. The Company has two U.S. patent applications pending and two issued patents covering the device and method for introducing substances into cells by flow electroporation. These patent applications and patents cover the electroporation chamber in the device, the overall electroporation device and the treatment of a wide variety of diseases using cells that have been treated in the electroporation device. One of the issued patents has been licensed from the Centers for Blood Research at Harvard University. Patent applications corresponding to the above described U.S. patent applications have been filed in Europe, Japan, Canada and other selected countries. The Company has registered the mark ENTREMED in the U.S. Patent and Trademark Office and has filed intent-to-use trademark applications in the U.S. Patent and Trademark Office for the marks "ANGIOSTATIN", "ENDOSTATIN" "VASCULOSTATIN", "WE'RE NOT MAKING BETTER BLOOD, WE'RE MAKING BLOOD BETTER", and "DOING WELL BY DOING GOOD". There can be no assurance that any future patents will be granted or that patents issued to the Company will not be challenged, invalidated or circumvented, or that the rights granted thereunder will provide proprietary protection to the Company. Furthermore, there can be no assurance that others will not independently develop similar products or, if patents are issued to the Company or its collaborators, will not design around such patents Furthermore, the enactment of the legislation implementing the General Agreement on Trade and Tariff ("GATT") has resulted in certain changes to United States patent laws that became effective on June 8, 1995. Most notably, the term of patent protection for patent applications filed on or after June 8, 1995 is no longer a period of seventeen years from the date of grant. The new term of a United States patent will commence on the date of issuance and terminate twenty years from the earliest effective filing date of the application. Because the time from filing to issuance of biotechnology patent application is often more than three years; a twenty-year term from the effective date of filing may result in a substantially shortened term of patent protection, which may adversely impact the Company's patent position if this change results in a shorter period of patent coverage. The Company's business could be adversely affected to the extent that the duration and level of the royalties it is entitled to receive from a collaborative partner is based on the existence of a valid patent. 17 18 The Company's potential products may conflict with patents which have been or may be granted to competitors, universities or others. As the biotechnology industry expands and more and more patents are issued, the risk increases that the Company's potential products may give rise to claims that they infringe the patents of others. Such other persons could bring legal actions against the Company claiming damages and seeking to enjoin clinical testing, manufacturing and marketing of the affected products. If any such actions are successful, in addition to any potential liability for damages, the Company could be required to obtain a license to continue to manufacture or market the affected products. There can be no assurance that the Company would prevail in any such action or that any license required under any such patent would be made available on acceptable terms, if at all. If the Company becomes involved in litigation, it could consume a substantial portion of the Company's time and resources. Composition of matter patent protection is not available for thalidomide. The Company is aware of at least two other issued patents covering certain non-antiangiogenic uses of thalidomide. Although the Company believes that the claims in such patents will not interfere with the Company's proposed use of thalidomide, there can be no assurance that the holders of such patents will not be able to exclude the Company from using thalidomide for other non-antiangiogenic uses of thalidomide. The Company also relies on trade secret protection for its confidential and proprietary information. However, trade secrets are difficult to protect and there can be no assurance that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to the Company's trade secrets or disclose such technology, or that the Company can meaningfully protect its rights to unpatented trade secrets. The Company requires its employees, consultants and advisors to execute a confidentiality agreement upon the commencement of an employment or consulting relationship with the Company. The agreements generally provide that trade secrets and all inventions conceived by the individual and all confidential information developed or made known to the individual during the term of the relationship shall be the exclusive property of the Company and shall be kept confidential and not disclosed to third parties except in specified circumstances. There can be no assurance, however, that these agreements will provide meaningful protection for the Company's proprietary information in the event of unauthorized use or disclosure of such information. GOVERNMENT REGULATION The Company's development, manufacture and potential sale of therapeutics is subject to extensive regulation by United States and foreign governmental authorities. Regulation of Pharmaceutical Products. Products being developed by the Company may be regulated by the FDA as drugs or biologics or, in some cases, as medical devices. New drugs are subject to regulation under the Federal Food, Drug, and Cosmetic Act, and biological products, in addition to being subject to certain provisions of that Act, are regulated under the 18 19 Public Health Service Act. The Company believes that drug products developed by it or its collaborators will be regulated either as biological products or as new drugs. Both statutes and the regulations promulgated thereunder govern, among other things, the testing, manufacturing, safety, efficacy, labeling, storage, record keeping, advertising and other promotional practices involving biologics or new drugs, as the case may be. FDA approval or other clearances must be obtained before clinical testing, and before manufacturing and marketing, of biologics and drugs. Obtaining FDA approval has historically been a costly and time consuming process. Generally, in order to gain FDA premarket approval, a developer first must conduct preclinical studies in the laboratory and in animal model systems to gain preliminary information on an agent's efficacy and to identify any safety problems. The results of these studies are submitted as a part of an investigational new drug ("IND") application, which the FDA must review before human clinical trials of an investigational drug can start. The IND application includes a detailed description of the clinical investigations to be undertaken. In order to commercialize any products, the Company or its collaborator must sponsor and file an IND and be responsible for initiating and overseeing the clinical studies to demonstrate the safety, efficacy and potency that are necessary to obtain FDA approval of any such products. For Company or collaborator-sponsored INDs, the Company or its collaborator will be required to select qualified investigators (usually physicians within medical institutions) to supervise the administration of the products, and ensure that the investigations are conducted and monitored in accordance with FDA regulations, including the general investigational plan and protocols contained in the IND. Clinical trials are normally done in three phases, although the phases may overlap. Phase I trials are concerned primarily with the safety and preliminary effectiveness of the drug, involve fewer than 100 subjects, and may take from six months to over one year. Phase II trials normally involve a few hundred patients and are designed primarily to demonstrate effectiveness in treating or diagnosing the disease or condition for which the drug is intended, although short-term side effects and risks in people whose health is impaired may also be examined. Phase III trials are expanded clinical trials with larger numbers of patients which are intended to evaluate the overall benefit-risk relationship of the drug and to gather additional information for proper dosage and labeling of the drug. Clinical trials generally take two to five years to complete, but may take longer. The FDA receives reports on the progress of each phase of clinical testing, and it may require the modification, suspension, or termination of clinical trials if it concludes that an unwarranted risk is presented to patients. If clinical trials of a new product are completed successfully, the sponsor of the product may seek FDA marketing approval. If the product is regulated as a biologic, the FDA will require the submission and approval of a Biologics License Application ("BLA") before commercial marketing of the biologic. If the product is classified as a new drug, the Company must file a New Drug Application ("NDA") with the FDA and receive approval before commercial marketing of the drug. The NDA or BLA must include detailed information about the drug and its manufacture and the results of product development, preclinical studies and clinical trials. The testing and approval processes require substantial time and effort and there can be no assurance that any approval will be granted on a timely basis, if at all. NDAs and BLAs submitted to the FDA can take up to two to five years to receive approval. If questions arise during the FDA 19 20 review process, approval can take more than five years. Notwithstanding the submission of relevant data, the FDA may ultimately decide that the NDA or BLA does not satisfy its regulatory criteria for approval and deny approval or require additional clinical studies. In addition, the FDA may condition marketing approval on the conduct of specific post-marketing studies to further evaluate safety and effectiveness. Even if FDA regulatory clearances are obtained, a marketed product is subject to continual review, and later discovery of previously unknown problems or failure to comply with the applicable regulatory requirements may result in restrictions on the marketing of a product or withdrawal of the product from the market as well as possible civil or criminal sanctions. Thalidomide is regulated by the FDA's Center for Drug Evaluation and Research. Although not approved for sale in the U.S., thalidomide has been used as an investigational agent to treat thousands of patients for leprosy and other diseases. EntreMed has filed an IND application and started Phase II trials in macular degeneration, a leading cause of blindness, and expects that the analysis of these results, together with availability of necessary funding, could determine whether Phase III trials may be attempted. The National Cancer Institute in collaboration with EntreMed has begun Phase II trials in breast cancer, prostate cancer, brain cancer and Kaposi's sarcoma. It is expected that future cancer trials may be dependent on the results of these studies. Thalidomide must meet the standard regulatory requirements of any new drug, and successful Phase III clinical trials will be necessary to form the basis of an NDA. Analogs of thalidomide may be regulated as new chemical entities by the FDA's Center for Drug Evaluation and Research. Although these compounds are in the discovery phase of research, it is expected that as new chemical entities are discovered complete preclinical toxicology studies will be required prior to studies in humans. The remainder of the developmental and regulatory requirements will be similar to that of any new drug. Angiostatin(TM) and Endostatin(TM) proteins, each a naturally occurring substance, are considered biologics and will be regulated by the FDA's Center for Biologics Evaluation and Research. As genetically engineered and endogenous proteins, Angiostatin(TM) protein and Endostatin(TM) protein will face unique and specific regulation hurdles, such as those related to the manufacture of the products and the behavior of the products in the body. The regulatory requirements for recombinant proteins have been developed for other endogenous molecules (e.g., Epogen(TM), Neupogen(TM) and interferons) and Angiostatin(TM) protein and Endostatin(TM) protein are expected to follow these established guidelines. Successful preclinical studies and Phase I, II and III trials will be necessary to form the basis for a BLA. Bristol-Myers Squibb is responsible for conducting these clinical studies with Angiostatin(TM) protein. The cell permeation technology, and specifically IHP-treated red blood cells, will be regulated by the FDA's Center for Biologics Evaluation and Research. In 1997, the FDA responded to a letter from EntreMed requesting a product jurisdiction determination, designating the Center for Biologics Evaluation and Research as the agency component with primary jurisdiction for the premarket review and regulation of the product. The product will be reviewed as a medical device under the premarket application ("PMA") provisions of the Federal Food, Drug and Cosmetic Act (described below). Historically, the FDA's Office of Blood 20 21 Research and Review has had the most expertise and experience in regulating blood, apheresis equipment and disposables associated with the processing of human blood. Further development for IHP-treated blood is expected to follow a similar path to that of any therapeutic biologic, with successful completion of Phase I, Phase II and Phase III trials required to precede the filing of a PMA. As the cell permeation technology requires the use of red blood cells produced from humans, the Company will be required to comply with, or to contract with suppliers that comply with, stringent regulation of blood component collection. That regulation is designed to protect both donors and recipients of blood products and involves significant record-keeping and other burdens. Regulation of Devices. Any device products which may be developed by the Company are likely to be regulated by the FDA as medical devices rather than drugs. In addition, as noted, the device used to insert IHP in blood cells also may be regulated as a medical device. The nature of the FDA requirements applicable to such products depends on their classification by the FDA. A device developed by the Company would be automatically classified as a Class III device, requiring pre-market approval, unless the device was substantially equivalent to an existing device that has been classified in Class I or Class II or to a pre-1976 device that has not yet been classified or the Company could convince the FDA to reclassify the device as Class I or Class II. If the Company were unable to demonstrate such substantial equivalence and unable to obtain reclassification, it would be required to undertake the costly and time-consuming process, comparable to that for new drugs, of conducting preclinical studies, obtaining an investigational device exemption to conduct clinical tests, filing a premarket approval application, and obtaining FDA approval. If the device were a Class I product, the "general controls" of the Federal Food, Drug, and Cosmetic Act chiefly adulteration, misbranding, and good manufacturing practice requirements would nevertheless apply. If substantial equivalence to a Class II device could be shown, the general controls plus "special controls" such as performance standards, guidelines for safety and effectiveness, and post-market surveillance would apply. While demonstrating substantial equivalence to a Class I or Class II product is not as costly or time-consuming as the pre-market approval process for Class III devices, it can in some cases also involve conducting clinical tests to demonstrate that any differences between the new device and devices already on the market do not affect safety or effectiveness. If substantial equivalence to a pre-1976 device that has not yet been classified has been shown, it is possible that the FDA would subsequently classify the device as a Class III device and call for the filing of premarket approval applications at that time. If the FDA took that step, then filing an application acceptable to the FDA would be a prerequisite to remaining on the market. It is likely that the review process will nevertheless occur in the Center for Biologics Evaluation and Research. It is possible, however, that such Center would consult with relevant officials in the FDA's Center for Devices and Radiological Health. Such a consultation might further delay approval of the device and thus of this technology. Other. In addition to the foregoing, the Company's business is and will be subject to regulation under various state and federal environmental laws, including the Occupational Safety 21 22 and Health Act, the Resource Conservation and Recovery Act and the Toxic Substance Control Act. These and other laws govern the Company's use, handling and disposal of various biological, chemical and radioactive substances used in and wastes generated by its operations. The Company believes that it is in material compliance with applicable environmental laws and that its continued compliance therewith will not have a material adverse effect on its business. The Company cannot predict, however, whether new regulatory restrictions on the marketing of biotechnology products will be imposed by state or federal regulators and agencies. EMPLOYEES As of March 31, 1998, the Company had 50 full-time employees, of which 40 were in research and development and 10 were in management and administration. The Company intends to hire additional personnel. The Company also utilizes part-time or temporary consultants on an as-needed basis. None of the Company's employees is represented by a labor union and the Company believes its relations with its employees are satisfactory. RISK FACTORS History of Losses; Accumulated Deficit and Anticipated Future Losses. To date, the Company has been engaged primarily in research and development activities and, with the exception of license fees and research and development funding under the BMS Collaboration and research grants, has not derived any revenues from operations. At December 31, 1997, the Company had an accumulated deficit of approximately $31,794,000 and significant losses have continued and are expected to continue for the foreseeable future. The Company will be required to conduct substantial research and development and clinical testing activities for all of its proposed products, which activities are expected to result in operating losses for the foreseeable future, particularly due to the extended time period before the Company expects to commercialize any products, if ever. In addition, to the extent the Company relies upon others for development and commercialization activities, the Company's ability to achieve profitability will be dependent upon the success of such third parties. There can be no assurance that the Company will be able to generate revenues from operations or achieve profitability on a sustained basis, if at all. Early Stage and Uncertainty of Product Development. The Company's proposed products and research programs are in the early developmental stage and require significant time-consuming and costly research and development, testing and regulatory clearances. Accordingly, the Company does not expect any of its product candidates to be commercially available for several years, if ever. The successful development of any product is subject to the risks of failure inherent in the development of products or therapeutic procedures based on innovative technologies. These risks include the possibilities that any or all of these proposed products or procedures are found to be ineffective or toxic, or otherwise fail to receive necessary regulatory clearances; that the proposed products or procedures are uneconomical to manufacture or market or do not achieve broad market acceptance; that third parties hold proprietary rights that preclude the Company from marketing them; or that third parties market a superior or equivalent product. The failure of the Company's research and development activities to result in 22 23 any commercially viable products would materially adversely affect the Company's future prospects. Uncertainties Related to Clinical Trials. The Company has limited experience in conducting clinical trials and intends to rely primarily on Bristol-Myers Squibb or other pharmaceutical companies with which it may collaborate in the future for clinical development and regulatory approval of its product candidates. Before obtaining regulatory approvals for the commercial sale of its products, the Company or its collaborative partners will be required to demonstrate through preclinical studies and clinical trials that the proposed products are safe and effective for use in each target indication. The results from preclinical studies and early clinical trials may not be predictive of results that will be obtained in large-scale testing, and there can be no assurance that the clinical trials conducted by the Company or its partners will demonstrate sufficient safety and efficacy to obtain the required regulatory approvals or will result in marketable products. One of the Company's potential products, thalidomide, is believed to have caused severe birth defects in children during the late 1950s and early 1960s. Although the Company believes that the characteristics of thalidomide that may have affected fetal development and caused birth defects by blocking new blood vessel growth may make thalidomide useful in the prevention and treatment of angiogenic disorders, there can be no assurance that clinical trials with the drug will demonstrate its safety and efficacy or that the drug will not be associated with other characteristics that prevent or limit its commercial use. In addition, clinical trials are often conducted with patients having the most advanced stages of disease. During the course of treatment, these patients can die or suffer other adverse medical effects for reasons that may not be related to the pharmaceutical agent being tested, but which can nevertheless affect clinical trial results. Various companies in the pharmaceutical industry have suffered significant setbacks in advanced clinical trials, even after attaining promising results in earlier trials. Clinical trials for the product candidates being developed by the Company and its collaborators may be delayed by many factors. Any delays in, or termination of, the clinical trials of any of the Company's product candidates, or the failure of any clinical trials to meet applicable regulatory standards, could have a material adverse effect on the Company's business, financial condition and results of operations. Dependence on Bristol-Myers Squibb and Other Collaborative Partners and Licensees. The Company does not intend to conduct late-stage clinical trials, or manufacture or market any of its product candidates in the foreseeable future. The Company has granted Bristol-Myers Squibb the right to conduct development, manufacturing, commercialization and marketing activities relating to certain of the Company's antiangiogenesis technologies. Accordingly, the Company is substantially dependent on Bristol-Myers Squibb for the development, funding and commercial success of any of these product candidates. In addition, payments from Bristol-Myers Squibb may constitute a substantial portion of the Company's revenues for the next several years. The BMS Collaboration may be terminated for any reason by Bristol-Myers Squibb on six months' notice, in which event Bristol-Myers Squibb would have no further funding obligation to the Company. In the event Bristol-Myers Squibb were to terminate its agreement with the Company or otherwise fail to conduct its collaborative activities successfully and in a timely manner, the preclinical and clinical development or commercialization of the 23 24 licensed antiangiogenesis product candidates would be delayed or terminated. Any such delay or termination could have a material adverse effect on the Company's business, financial condition and results of operations. The success of the BMS Collaboration will depend in part upon Bristol-Myers Squibb's own competitive, marketing and strategic considerations, including the relative advantages of alternative products being developed and marketed by Bristol-Myers Squibb and its competitors. In addition, if Bristol-Myers Squibb is unsuccessful in commercializing any product candidates, the Company's business, financial condition and results of operations would be materially adversely affected. The Company intends to enter into additional corporate alliances to develop and commercialize products based upon its cell permeation technology and any other technologies that may be acquired or developed by the Company. The Company expects to grant to its collaborative partners rights to commercialize any products developed under these collaborative agreements, and the Company may rely on its collaborative partners to conduct research and development efforts and clinical trials on, obtain regulatory approvals for, and manufacture and market any products licensed to these partners. The amount and timing of resources devoted to these activities generally will be controlled by each such individual partner. As the Company generally expects to retain only a royalty interest in sales or a percentage of profits of products licensed to third parties, its revenues may be less than if it retained all commercialization rights and marketed products directly. In addition, there can be no assurance that the corporate partners will not pursue alternative technologies or develop competitive products as a means for developing treatments for the diseases targeted by the Company's programs. There can be no assurance that the Company will be successful in establishing any additional collaborative arrangements, that products will be successfully commercialized under any collaborative arrangement or that the Company will derive any revenues from such arrangements. In addition, the Company's strategy involves entering into multiple, concurrent strategic alliances to pursue commercialization of its core technologies. There can be no assurance that the Company will be able to manage simultaneous programs successfully. With respect to existing and potential future strategic alliances and collaborative arrangements, the Company will be dependent upon the expertise and dedication of sufficient resources by these outside parties to develop, manufacture or market products. Should a strategic alliance or collaborative partner fail to develop or commercialize a product to which it has rights, the Company's business, financial condition and results of operations could be materially and adversely affected. Future Capital Needs and Commitments; Uncertainty of Additional Funding. The Company has incurred negative cash flows since inception and has expended, and expects to continue to expend, substantial funds to continue its research and development programs. The Company anticipates that its existing resources and committed funding from Bristol-Myers Squibb will be sufficient to meet the Company's planned expenditures during 1998, although there can be no assurance that the Company will not require additional funds. There can be no assurance that the results of research and development activities, progress of preclinical studies or clinical trials, changes in or terminations of relationships with strategic partners, changes in the focus, direction or costs of the Company's research and development programs, competitive 24 25 and technological advances, the regulatory approval process or other factors will not result in the expenditure of the Company's resources before such time. The Company will require substantial funds in addition to existing working capital to develop its product candidates and otherwise to meet its business objective. The Company is a party to sponsored research agreements requiring it to fund $4,100,000 through 1999 (including $3,000,000 to Children's Hospital). Pursuant to the terms of certain license agreements, the Company is also obligated to exercise diligence in bringing potential products to market and to make certain milestone payments that, in some instances, are substantial. The Company's failure to make any required sponsored research or milestone payment could result in the termination of the relevant sponsored research or license agreement, which could have a material adverse effect on the Company. The Company may seek additional funding through collaborative arrangements and public or private financing, including equity financing. There can be no assurance that such collaborative arrangements or additional financing will be available on acceptable terms or at all. If additional funds are raised by issuing equity securities, dilution to stockholders may result. If adequate funds are not available, the Company may be required to delay, reduce the scope of, or eliminate one or more of its research and development programs or forfeit its rights to future technologies; to obtain funds through arrangements with collaborative partners or others that may require the Company to relinquish rights to certain of its technologies, product candidates or products that the Company would otherwise seek to develop or commercialize itself; or to license the rights to such products on terms that are not favorable to the Company. Uncertainty of Government Regulatory Requirements; Lengthy Approval Process. The Company's research, development, preclinical and clinical trials, manufacturing and marketing of most of its product candidates are subject to an extensive regulatory approval process by the United States Food and Drug Administration (the "FDA") and other regulatory agencies in the United States and abroad. The process of obtaining FDA and other required regulatory approvals for drug and biologic products, including required preclinical and clinical testing, is lengthy, expensive and uncertain. There can be no assurance that, even after such time and expenditures, the Company will be able to obtain necessary regulatory approvals for clinical testing or for the manufacturing or marketing of any products. The Company or its collaborators may encounter significant delays or excessive costs in their efforts to secure necessary approvals or licenses. Even if regulatory clearance is obtained, a marketed product is subject to continual review, and later discovery of previously unknown defects or failure to comply with the applicable regulatory requirements may result in restrictions on a product's marketing or withdrawal of the product from the market as well as possible civil or criminal sanctions. Competition; Risk of Technological Obsolescence. The pharmaceutical biotechnology industries are intensely competitive and competition from other companies and other research and academic institutions is expected to increase. Many of these companies have substantially greater financial and research and development capabilities than the Company and have substantially greater experience in undertaking preclinical and clinical testing of products, obtaining regulatory approvals and manufacturing and marketing pharmaceutical products. The 25 26 Company is aware of other companies engaged in the development of thalidomide for various disease indications, including Celgene Corporation and Andrulis Pharmaceuticals, and a number of other companies and academic institutions are pursuing angiogenesis research and are testing other angiogenesis inhibitors. The Company's blood oxygen enhancement product candidate will also compete for certain applications with numerous other available therapeutics and with blood and blood substitute products in development by others. In addition to competing with universities and other research institutions in the development of products, technologies and processes, the Company may compete with other companies in acquiring rights to products or technologies from universities. Moreover, the pharmaceutical and biotechnology industries are rapidly evolving fields in which developments are expected to continue at a rapid pace. There can be no assurance that the Company will develop products that are more effective or achieve greater market acceptance than competitive products, or that the Company's competitors will not succeed in developing products and technologies that are more effective than those being developed by the Company or that would render the Company's products and technologies less competitive or obsolete. Dependence on Patents and Other Proprietary Rights; Uncertainty of Patent Position and Proprietary Rights. The Company's success will depend in part on its ability to obtain patent protection for its products, both in the United States and abroad. The patent position of biotechnology and pharmaceutical companies in general is highly uncertain and involves complex legal and factual questions. There can be no assurance that any additional patents will be granted or that patents issued to the Company will not be challenged, invalidated or circumvented, or that the rights granted thereunder will provide proprietary protection to the Company. Furthermore, there can be no assurance that others will not independently develop similar products or, on patents issued to the Company or its collaborators, will not design around such patents. Furthermore, the enactment of the legislation implementing the General Agreement on Trade and Tariffs has resulted in certain changes to United States patent laws that became effective on June 8, 1995. Most notably, the term of patent protection for patent applications filed on or after June 8, 1995 is no longer a period of seventeen years from the date of grant. The new term of a United States patent will commence on the date of issuance and terminate twenty years from the earliest effective filing date of the application. As the time from filing to issuance of biotechnology patents is often more than three years, a twenty-year term from the effective date of filing may result in a substantially shortened term of patent protection, which may adversely impact the Company's patent position. If this change results in a shorter period of patent coverage, the Company's business could be adversely affected to the extent that the duration and level of the royalties it is entitled to receive from a collaborative partner is based on the existence of a valid patent. The Company's potential products may conflict with patents which have been or may be granted to competitors, universities or others. As the biotechnology industry expands and more patents are issued, the risk increases that the Company's potential products may give rise to claims that they infringe the patents of others. Such other persons could bring legal actions 26 27 against the Company claiming damages and seeking to enjoin clinical testing, manufacturing and marketing of the affected products. Any such litigation could result in substantial cost to the Company and diversion of effort by the Company's management and technical personnel. If any such actions are successful, in addition to any potential liability for damages, the Company could be required to obtain a license in order to continue to manufacture or market the affected products. There can be no assurance that the Company would prevail in any such action or that any license required under any such patent would be made available on acceptable terms, if at all. Failure to obtain needed patents, licenses or proprietary information held by others may have a material adverse effect on the Company's business. In addition, if the Company becomes involved in such litigation, it could consume a substantial portion of the Company's time and resources. Composition of matter patent protection is not available for thalidomide. The Company is aware of at least two other issued patents covering certain non-antiangiogenic uses of thalidomide. Although the Company believes that the claims in such patents will not interfere with the Company's proposed use of thalidomide, there can be no assurance that the holders of such patents will not be able to exclude the Company from using thalidomide for other non-antiangiogenic uses of thalidomide. The Company also relies on trade secret protection for its confidential and proprietary information. However, trade secrets are difficult to protect and there can be no assurance that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to the Company's trade secrets or disclose such technology, or that the Company can meaningfully protect its rights to unpatented trade secrets. The Company requires its employees, consultants and advisors to execute a confidentiality agreement upon the commencement of an employment or consulting relationship with the Company. The agreements generally provide that all trade secrets and inventions conceived by the individual and all confidential information developed or made known to the individual during the term of the relationship shall be the exclusive property of the Company and shall be kept confidential and not disclosed to third parties except in specified circumstances. There can be no assurance, however, that these agreements will provide meaningful protection for the Company's proprietary information in the event of unauthorized use or disclosure of such information. To the extent that consultants, key employees or other third parties apply technological information independently developed by them or by others to the Company's proposed projects, disputes may arise as to the proprietary rights to such information which may not be resolved in favor of the Company. Certain of the Company's consultants are employed by or have consulting agreements with third parties and any inventions discovered by such individuals generally will not become property of the Company. Dependence Upon Key Personnel and Consultants. The Company is dependent on certain of its executive officers and scientific personnel, including John W. Holaday, Ph.D., the Company's Chairman, President and Chief Executive Officer. The Company has entered into a three-year employment agreement with Dr. Holaday effective January 1, 1996. Competition for qualified employees among pharmaceutical and biotechnology companies is intense, and the loss 27 28 of certain of such persons, or an inability to attract, retain and motivate additional highly skilled scientific, technical and management personnel, could materially adversely affect the Company's business and prospects. There can be no assurance that the Company will be able to retain its existing personnel or attract and retain additional qualified employees. The Company may also be dependent, in part, upon the continued contributions of the lead investigators of the Company's sponsored research programs. The Company's scientific consultants and collaborators may have commitments to or consulting or advisory agreements with other entities that may affect their ability to contribute to the Company or may be competitive with the Company. Inventions or processes discovered by such persons will not necessarily become the property of the Company, but may remain the property of such persons or of such persons' full-time employers. Risk of Product Liability; Availability of Insurance. The use of the Company's potential products in clinical trials and the marketing of any pharmaceutical products may expose the Company to product liability claims. The Company has obtained a level of liability insurance coverage that it deems appropriate for its current stage of development. However, there can be no assurance that the Company's present insurance coverage is adequate. Such existing coverage will not be adequate as the Company further develops products, and no assurance can be given that in the future adequate insurance coverage or indemnification by collaborative partners will be available in sufficient amounts or at a reasonable cost. A successful product liability claim could have a material adverse effect on the business and financial condition of the Company. Uncertainty Related to Health Care Reimbursement and Reform Measures. The Company's success may depend, in part, on the extent to which reimbursement for the costs of therapeutic products and related treatments will be available from third-party payors such as government health administration authorities, private health insurers, managed care programs and other organizations. Over the past decade, the cost of health care has risen significantly, and there have been numerous proposals by legislators, regulators and third-party health care payors to curb these costs. Some of these proposals have involved limitations on the amount of reimbursement for certain products. There can be no assurance that similar federal or state health care legislation will not be adopted in the future or that any products sought to be commercialized by the Company or its collaborators will be considered cost-effective or that adequate third-party insurance coverage will be available for the Company to establish and maintain price levels sufficient for realization of an appropriate return on its investment in product development. Moreover, the existence or threat of cost control measures could have an adverse effect on the willingness or ability of Bristol-Myers Squibb or other potential collaborators to pursue research and development programs related to the Company's product candidates. Hazardous Materials. The Company's research and development involves the controlled use of hazardous biological, chemical and radioactive materials. The Company is subject to federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of such materials and certain waste products. Although the Company believes that its safety procedures for handling and disposing of such materials comply with the standards 28 29 prescribed by such laws and regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of such an accident, the Company could be held liable for any damages that result and any such liability could have a material adverse effect on of the Company. No Manufacturing or Marketing Capacity. The Company does not generally expect to engage directly in manufacturing or marketing of products in the near term, but may elect to do so in certain cases. The Company does not currently have the capacity to manufacture or market products or any experience in such activities. If the Company elects to perform these functions, the Company will be required to either develop these capacities, or contract with others to perform some or all of these tasks. The Company may be dependent to a significant extent on corporate partners, licensees or other entities for manufacturing and marketing of products. If the Company engages directly in manufacturing or marketing, the Company will require substantial additional funds and personnel and will be required to comply with extensive regulations applicable to such a facility. There can be no assurance that the Company will be able to develop or contract for these capacities when required in connection with the Company's business. ITEM 2. PROPERTIES The Company currently occupies an aggregate of approximately 13,500 square feet of office space (approximately 8,250 square feet of which is laboratory space) in Rockville, Maryland pursuant to two leases. One lease, representing 1,900 square feet, is on a month to month basis and the other lease expires in April 2003. The leases provide for total annual rent of approximately $227,000 during 1998, subject to specified annual increases. The Company is presently intending to lease a new facility. ITEM 3. LEGAL PROCEEDINGS The Company is a defendant in a lawsuit initiated in August 1995 in the United States District Court for the Eastern District of Tennessee by Bolling, McCool & Twist ("BMT"), a consulting firm. In the suit, BMT asserts that the Company breached an agreement between BMT and the Company by failing to pay BMT certain fees it asserts are owed under the agreement. More specifically, BMT has asserted a claim for the payment of services rendered in the approximate amount of $50,000 and seeks a success fee in an unspecified amount in connection with the BMS Collaboration. The judge in the case bifurcated the proceeding into two phases: an adjudication of whether the Company breached its agreement with BMT and then a damage phase. After a trial on the merits the jury found in favor of BMT on the breach of contract claim. However the damage phase of the trial has not been completed. Despite the jury verdict on the breach of contract claim, the Company is unable to predict with certainty the eventual outcome of the lawsuit. The Company intends to continue to contest the action vigorously and believes that this proceeding will not have a material adverse effect on the Company or on its financial condition, although there can be no assurance that this will be the case. 29 30 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS EntreMed's Common Stock trades on the Nasdaq National Market under the symbol "ENMD". The table below sets forth the high and low sales prices of the Company's Common Stock as reported by the Nasdaq National Market for the periods indicated. These prices are based on quotations between dealers, do not reflect retail mark-up, mark-down or commissions, and do not necessarily represent actual transactions.
1996 High Low ---- ---- --- Second Quarter (June 19, 1996 - June 30, 1996) 16 1/4 14 7/8 Third Quarter (July 1, 1996 - September 30, 1996) 18 5/8 8 7/8 Fourth Quarter (October 1, 1996 - December 31, 1996) 17 1/4 12 1997 ---- First Quarter (January 1, 1997 - March 31, 1997) 18 1/2 12 1/4 Second Quarter (April 1, 1997 - June 30, 1997) 14 3/4 8 1/2 Third Quarter (July 1, 1997 - September 30, 1997) 12 3/4 8 7/8 Fourth Quarter (October 1, 1997 - December 31, 1997) 15 1/2 6 1/2 1998 ---- First Quarter (January 1, 1997 - March 19, 1998) 15 3/4 9 3/4
At March 19, 1998, there were approximately 350 shareholders of record, and as of that date, the Company estimates there were approximately 1,000 beneficial owners holding stock in nominee or "street" name. The Company has not paid any cash dividends and does not anticipate paying any cash dividends in the foreseeable future. In June 1996, the Registrant issued to Bristol-Myers Squibb Company 333,333 shares of Common Stock at a purchase price of $15.00 per share. 30 31 In January through March 1996, the Registrant issued an aggregate of 83,991 shares of Common Stock to Samuel R. Dunlap, Jr., a director of the Registrant, upon the exercise of stock options exercisable at $1.50 per share. In December 1996, the Registrant issued to a former employee an aggregate of 15,686 shares of Common Stock upon the exercise of stock options for an aggregate consideration of $99,998 or $6.375 per share. During the year ended December 31, 1997, the Registrant issued an aggregate of 244,170 shares of Common Stock upon the exercise of stock options and warrants for an aggregate consideration of $504,632 at exercise prices ranging from $1.50 to $9.00 per share. Except as otherwise noted above, (i) the above transactions were private transactions not involving a public offering and were exempt from the registration provisions of the Securities Act of 1933, as amended, pursuant to Section 4(2) thereof, (ii) the sale of securities was without the use of an underwriter and (iii) the certificates evidencing the shares bear a restrictive legend permitting the transfer thereof only upon registration of the shares or an exemption under the Securities Act of 1933, as amended. 31 32 ITEM 6. SELECTED FINANCIAL DATA The following selected financial data as of December 31, 1997, and for each of the five years in the period ended December 31, 1997, are from the financial statements of EntreMed, Inc., which have been audited by Ernst & Young LLP, independent auditors. The data should be read in conjunction with the financial statements, related notes and other financial information included herein.
Year Ended December 31, ----------------------- STATEMENTS OF OPERATIONS DATA: 1997 1996 1995 1994 1993 --------------------------------------------------------------------------- Revenues Collaborative research and development $ 4,342,369 $ 4,425,000 $ 347,501 $ - $ - License fees 200,000 200,000 16,667 - - Grant Revenues 215,119 - 347,001 90,185 - Total revenues 4,757,488 4,625,000 711,169 90,185 - Expenses: Research and development 8,998,705 7,553,793 5,939,512 3,673,929 4,772,652 General and administrative 4,915,724 3,435,501 2,458,976 1,549,705 1,552,143 Interest expense 1,418 27,267 65,754 - - Interest income (2,621,630) (1,621,729) (44,854) (18,993) (85,939) Net Loss (6,536,729) $(4,769,832) $(7,708,219) $(5,114,456) $(6,238,856) Net Loss per share $ (0.54) $ (0.50) $ (1.41) $ (1.09) $ (1.57) Weighted average number of shares outstanding 12,158,372 9,532,671 5,485,763 4,712,776 3,980,899 Pro forma net loss per share(1) $ (0.46) $(1.03) Pro forma weighted average number of shares outstanding (1) 10,422,781 7,485,763 BALANCE SHEET DATA: Cash and cash equivalents and short-term investments 45,245,071 52,720,829 6,885,099 218,619 2,188,665 Working capital 41,454,371 49,049,124 5,689,810 (332,427) 2,112,738 Total assets 47,838,663 54,146,339 10,146,383 843,742 3,258,995 Deferred revenue, less current portion 1,341,666 2,236,666 2,741,666 - - Accumulated deficit (31,793,532) (25,256,803) (20,486,971) (12,778,752) (7,280,210) Total stockholders' equity 41,953,094 47,694,191 3,601,260 292,696 2,798,982
- ---------- (1) Pro forma net loss per share and weighted average shares outstanding for the years ended December 31, 1995 and 1996 give effect to the automatic conversion of 3,000,000 outstanding shares of Preferred Stock into 2,000,000 shares of Common Stock on June 19, 1996, the effective date of the Company's initial public offering. See Notes 1 and 8 of Notes to Financial Statements. 32 33 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Consolidated Financial Statements and Notes thereto appearing elsewhere in this report. See"---Risk Factors". OVERVIEW Since its inception in September 1991, the Company has devoted substantially all of its efforts and resources to sponsoring and conducting research and development on its own behalf and through collaborations with corporate partners and academic research and clinical institutions, and establishing its facilities and hiring personnel. With the exception of license fees and research and development funding from Bristol-Myers Squibb and certain research grants, the Company has not generated any revenue from operations. For the period from inception to December 31, 1997, the Company incurred a cumulative net loss of approximately $31,800,000. The Company has incurred additional losses since such date and expects to incur additional operating losses for the foreseeable future. In December 1995, the Company entered into the BMS Collaboration and, through December 31, 1997, had received approximately $13,405,000 in license and research and development fees and expense reimbursements and an $11,500,000 equity investment pursuant to this alliance. The Company expects that its revenue sources for at least the next several years will be limited to research grants and future collaboration payments from Bristol-Myers Squibb and from other collaborators under arrangements that may be entered into in the future. The timing and amounts of such revenues, if any, will likely fluctuate sharply and depend upon the achievement of specified milestones, and results of operations for any period may be unrelated to the results of operations for any other period. See "Business - Collaborations and License Agreements". RESULTS OF OPERATIONS Years Ended December 31, 1997, 1996, and 1995. Revenues under collaborative research and development agreements were approximately $4,342,000, $4,425,000, and $348,000 and license fees were approximately $200,000, $200,000, and $17,000 in the years ended December 31, 1997, 1996, and 1995, respectively. The collaborative research and development fees relate to the amortization over five years of a one-time payment of $2,500,000 ($500,000, $500,000 and $42,000 recognized in 1997, 1996 and 1995, respectively); the amortization of the semi-annual payment of $1,835,000 as called for under the BMS Collaboration ($3,670,000, $3,670,000 and $306,000 recognized in 1997, 1996 and 1995, respectively); and $172,000 and $255,000 recognized in 1997 and 1996, respectively, as reimbursement for clinical studies. The license fees represent the amortization over five years of a one-time $1,000,000 license fee under the BMS Collaboration, a portion of which was paid to Children's Hospital. Approximately one month's amortization of these amounts is included in 1995 as the BMS Collaboration was entered into in December 1995 compared to twelve full months for 1997 and 1996. In addition, revenues during 1995 included grant revenues from the 33 34 World Health Organization and SBIR grants of $347,000. In 1997, there were grant revenues of approximately $215,000 from a Small Business Innovative Research program from the National Institutes of Health. Research and development expenses increased by 27.2% from approximately $5,940,000 in 1995 to $7,554,000 in 1996 and increased by 19.1% to approximately $8,999,000 in 1997, due primarily to increased efforts in the Company's internal and sponsored research and product development programs related to its antiangiogenesis and blood cell permeation technologies. Research and development expenditures included sponsored research payments of approximately $2,570,000, $3,461,000, and $3,700,000 and internal research and development expenses of approximately $3,370,000, $4,093,000, and $5,300,000 in 1995, 1996 and 1997, respectively. General and administrative expenses increased by 43.1% in 1997 to approximately $4,916,000 from $3,436,000 in 1996 and increased by 39.7% in 1996 from $2,459,000 in 1995. The 1997 and 1996 increases resulted primarily from increases in administrative costs associated with being a public company, investigating potential strategic relationships, obtaining professional services and adding administrative staff to support the research scientists and collaborative efforts the Company is conducting. Interest income increased from $45,000 to $1,622,000 in 1995 and 1996, respectively, and to $2,622,000 in 1997. The 1996 and 1997 increases are due to the Company investing in interest-bearing securities the net proceeds from the IPO and the BMS Collaboration. The Company had interest expense of approximately $66,000, $27,000, and $1,400 in 1995, 1996, and 1997, respectively, as a result of capital lease obligations. LIQUIDITY AND CAPITAL RESOURCES From inception through December 31, 1997, the Company financed its operations from (i) the net proceeds of private placements of equity securities which raised approximately $17,000,000, (ii) payments from Bristol-Myers Squibb, including $9,700,000 received in December 1995 (of which $6,500,000 was an equity investment), $11,535,000 received in 1996 (of which $5,000,000 was an equity investment), and $3,670,000 in 1997, (iii) various grants from the World Health Organization and Small Business Innovation Research ("SBIR") grants totaling approximately $652,000, (iv) its June 1996 Initial Public Offering ("IPO") which raised net proceeds of approximately $43,541,000 and (v) proceeds of approximately $654,000 under capital leases. Bristol-Myers Squibb is obligated to make additional semi-annual payments to the Company of $1,835,000 in each of June and December through June 2000 as well as additional payments in the event certain mostly late-stage regulatory milestones are achieved. Bristol-Myers Squibb may terminate the collaboration agreement and return the licensed technology to the Company at any time upon six months' notice, in which event it would have no further funding obligation to the Company. At December 31, 1997, the Company had working capital of approximately $41,500,000. The Company's cash resources have been used to finance research and development, including 34 35 sponsored research, capital expenditures, including leasehold improvements to the Company's laboratory facility, and general and administrative expenses. Over the next several years, the Company expects to incur substantial additional research and development costs, including costs related to early-stage research in areas not reimbursed by Bristol-Myers Squibb, preclinical and clinical trials, increased administrative expenses to support its research and development operations and increased capital expenditures for expanded research capacity, various equipment needs and facility improvements. At December 31, 1997, the Company was a party to sponsored research agreements requiring it to fund an aggregate of approximately $4,100,000 through 1999 (including $3,000,000 to Children's Hospital) and license agreements requiring milestone payments of up to $4,360,000 and additional payments upon attainment of regulatory milestones. In addition, the Company agreed to provide funding to Cytokine Sciences, Inc., its 85% owned subsidiary, in an aggregate amount of $1,600,000 during the first two years commencing July 2, 1996, with an additional $1,500,000 to be provided at the sole option of the Company during the third year. The Company is also a party to an office lease expiring in 2003 with total future minimum lease payments of approximately $1,227,000. See Note 11 of Notes to Financial Statements. At December 31, 1997, the Company had available net operating loss carryforwards of $30,224,000 to offset any future taxable income for federal tax purposes. The utilization of the loss carryforwards to reduce future income taxes will depend on the Company's ability to generate sufficient taxable income prior to the expiration of the net operating loss carryforwards. The carryforwards begin to expire in the year 2006. However, the Tax Reform Act of 1986 limits the maximum annual use of net operating loss and tax credit carryforwards in certain situations where changes occur in the stock ownership of a corporation. For financial reporting purposes, a valuation allowance has been recognized to reduce the net deferred tax assets to zero due to uncertainties with respect to the Company's ability to generate taxable income in the future sufficient to realize the benefit of deferred income tax assets. See Note 7 of Notes to Financial Statements. The Company believes that its existing resources and committed funding from Bristol-Myers Squibb will be sufficient to meet the Company's planned expenditures during 1998, although there can be no assurance the Company will not require additional funds. The Company's working capital requirements will depend upon numerous factors, including the progress of the Company's research and development programs (which may vary as product candidates are added or abandoned), preclinical testing and clinical trials, achievement of regulatory milestones, the Company's corporate partners fulfilling their obligations to the Company, the timing and cost of seeking regulatory approvals, the level of resources that the Company devotes to the development of manufacturing, marketing and sales capabilities, if any, technological advances, the status of competitors, the ability of the Company to maintain existing and establish new collaborative arrangements with other companies to provide funding to the Company to support these activities and other factors. In any event, the Company will require substantial funds in addition to the present existing working capital to develop its product candidates and otherwise to meet its business objectives. 35 36 YEAR 2000 The Year 2000 Issue is the result of computer programs being written using two digits rather than four to define the applicable year. As a result, those computer programs having time-sensitive software would recognize a date using "00" as the year 1900 rather than the year 2000. Based on a recent assessment, the Company determined that its accounting software will need to be updated or modified. This should be accomplished through updates from the software manufacturer. The Company does not expect any material costs associated with this modification or any disruptions to its primary operations. The Company anticipates no other year 2000 problems which are reasonably likely to have a material adverse effect on the Company's operations. There can be no assurance, however, that such problems will not arise. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement No. 130, Reporting Comprehensive Income ("Statement 130"). Statement 130 establishes new standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements. These new standards require that all items recognized as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. Statement 130 is effective for fiscal years beginning after December 15, 1997. The adoption of Statement 130 will not impact the Company's consolidated financial statements. In June 1997, the FASB issued Statement 131, Disclosures About Segments of an Enterprise and Related Information ("Statement 131"). Statement 131 changes the way public companies report segment information in annual financial statements and also requires those companies to report selected segment information in interim financial reports. Statement 131 is effective for years beginning after December 15, 1997. The adoption of Statement 131 will not have a significant impact on the Company's consolidated financial statements. INFLATION Management does not believe that inflation has a material impact on the Company's results of operations. ITEM 7(a) QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK N/A. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The response to this item is submitted in a separate section of this report. See Index to Consolidated Financial Statements on Page F-1. 36 37 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III The information called for by Item 10: Directors and Executive Officers of the Registrant; Item 11: Executive Compensation; Item 12: Security Ownership of Certain Beneficial Owners and Management; and Item 13: Certain Relationships and Related Transactions will be included in and is incorporated by reference from the registrant's definitive proxy statement to be filed pursuant to Regulation 14A of the Securities Exchange Act of 1934 within 120 days after the close of its fiscal year. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. FINANCIAL STATEMENTS - An index to Consolidated Financial Statements appears on page F-1. 2. Schedules All financial statement schedules are omitted because they are not applicable, not required under the instructions or all the information required is set forth in the financial statements or notes thereto. 3. Exhibits 3.1* Amended and Restated Certificate of Incorporation of the Registrant 3.1(a) Amendment to the Certificate of Incorporation 3.2* Form of Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the Registrant 3.3* By-laws of the Registrant 10.1* Research Collaboration and License Agreement, dated December 7, 1995, between the Registrant and Bristol-Myers Squibb Company ("BMS") 37 38 10.2* Restricted Stock Purchase Agreement, dated December 7, 1995, between the Registrant and BMS 10.3* Warrant to Purchase Common Stock, dated December 7, 1995, issued by the Registrant to BMS 10.4* Registration Rights Agreement, dated December 7, 1995, between the Registrant and BMS 10.5* Research Agreement, dated September 29, 1993, between the Registrant and Children's Hospital 10.6* Amendment to Research Agreement, dated August 23, 1995, between the Registrant and Children's Hospital 10.7* License Agreement, dated May 26, 1994, between Children's Medical Center Corporation ("CMCC") and the Registrant 10.8* Amendment to License Agreement, dated August 23, 1995, between CMCC and the Registrant 10.9* License Agreement, dated May 26, 1994, between CMCC and the Registrant 10.10* Amendment to License Agreement, dated August 23, 1995, between CMCC and the Registrant 10.11* Sponsored Research Agreement, dated November 5, 1992, between the Registrant and CBR Laboratories, Inc. ("CBRL") 10.12* Licensing Agreement, dated November 5, 1992, between the Registrant and CBRL 10.13* Employment Agreement, dated as of January 1, 1996, between the Registrant and John W. Holaday, Ph.D. 10.14* 1992 Stock Incentive Plan 10.15* Amended and Restated 1996 Stock Option Plan 10.16* Form of Stock Option Agreement 10.17* Consulting Agreement between the Registrant and Samuel R. Dunlap, Jr. 10.18* Consulting Agreement between the Registrant and Steve Gorlin (superseded by Exhibit 10.18a) 38 39 10.18(a)* Termination Agreement dated May 15, 1996 effective August 1, 1996, between the Registrant and Steve Gorlin 10.19* Master Equipment Lease Agreement, dated April 10, 1995, between the Registrant and MMC/GATX Partnership No. 1 10.20* Lease between the Registrant and Red Gate III Limited Partnership 10.21* Form of Indemnification Agreement 10.22* Research and License Agreement, dated August 1993, between the Registrant and Innovative Therapeutics, Inc. 10.23** Agreement between Cytokine Sciences, Inc. and Innovative Therapeutics, Inc. 10.24*** License Agreement between Children's Hospital Medical Center Corporation and EntreMed, Inc. signed December 5, 1996 regarding Endostatin(TM) protein, An Inhibitor of Angiogenesis 10.25*** License Agreement between Children's Hospital Medical Center Corporation and EntreMed, Inc. signed December 20, 1996 regarding Estrogenic Compounds as Anti-Mitotic Agents 10.26 Agreement between Bristol-Myers Squibb and EntreMed, Inc. signed August 5, 1997 regarding Termination of Collaborative Research and License Agreement with Respect to Thalidomide Products 10.27**** Amendment to the 1996 Stock Option Plan 21 Subsidiaries of the Registrant 23.1 Consent of Independent Auditors 27.1 Financial Data Schedule 27.2 Financial Data Schedule - ---------------------------- * Incorporated by reference to the Company's Registration Statement on Form S-1 (File No. 333-3536) declared effective by the Securities and Exchange Commission on June 11, 1996. 39 40 ** Incorporated by reference to the Company's Form 10-Q for the quarter ended June 30, 1996 previously filed with the Securities and Exchange Commission. *** Incorporated by reference to the Company's Form 10-K for the year ended December 31, 1997 previously filed with the Securities and Exchange commission. **** Compensatory Plan or Arrangement. - ---------------------------- (b) Reports on Form 8-K The Company did not file any reports on Form 8-K during the three month period ended December 31, 1997. 40 41 ANNUAL REPORT ON FORM 10-K ITEM 8, ITEM 14(a)(1) and (2), (c) and (d) LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CERTAIN EXHIBITS YEAR ENDED DECEMBER 31, 1997 ENTREMED, INC. ROCKVILLE, MARYLAND 42 FORM 10-K - ITEM 14(a)(1) AND (2) ENTREMED, INC. AND SUBSIDIARIES List of Financial Statements and Financial Statement Schedules The following consolidated financial statements of EntreMed, Inc. and subsidiaries are included in Item 8: Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1 Consolidated Balance Sheets as of December 31, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2 Consolidated Statements of Operations for the years ended December 31, 1997, 1996 and 1995. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997, 1996 and 1995. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6
The following consolidated financial statement schedules of EntreMed, Inc. and subsidiaries are included in Item 14(d): None All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted. 43 Consolidated Financial Statements EntreMed, Inc. Years ended December 31, 1997, 1996 and 1995 with Report of Independent Auditors 44 EntreMed, Inc. Consolidated Financial Statements Years ended December 31, 1997, 1996 and 1995 CONTENTS Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Consolidated Financial Statements Consolidated Balance Sheets as of December 31, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Consolidated Statements of Operations for the years ended December 31, 1997, 1996 and 1995. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997, 1996 and 1995. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
45 Report of Independent Auditors Board of Directors EntreMed, Inc. We have audited the accompanying consolidated balance sheets of EntreMed, Inc. as of December 31, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of EntreMed, Inc. at December 31, 1997 and 1996 and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Atlanta, Georgia February 5, 1998 F-1 46 EntreMed, Inc. Consolidated Balance Sheets
DECEMBER 31, 1997 1996 -------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 18,232,491 $ 33,051,206 Short-term investments 27,012,580 19,669,623 Account receivable 84,151 - Interest receivable 520,457 401,673 Prepaid expenses and other 86,095 97,962 -------------------------------------- Total current assets 45,935,774 53,220,464 Furniture and equipment, net 1,498,781 824,559 Other assets 404,108 101,316 -------------------------------------- Total assets $ 47,838,663 $ 54,146,339 ====================================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 683,201 $ 600,303 Accrued liabilities 1,265,905 957,718 Capital leases payable - 104,152 Deferred revenue (Note 5) 2,532,297 2,509,167 -------------------------------------- Total current liabilities 4,481,403 4,171,340 Deferred revenue, less current portion (Note 5) 1,341,666 2,236,666 Minority interest 62,500 44,142 Stockholders' equity: Convertible preferred stock, $1.00 par and $1.50 liquidation value: 5,000,000 shares authorized, none issued and outstanding at December 31, 1997 and 1996, respectively - - Common stock, $.01 par value: 20,000,000 shares authorized, 12,253,768 and 12,009,598 shares issued and outstanding at December 31, 1997 and 1996, respectively 122,538 120,096 Additional paid-in capital 73,624,088 72,830,898 Accumulated deficit (31,793,532) (25,256,803) -------------------------------------- Total stockholders' equity 41,953,094 47,694,191 -------------------------------------- Total liabilities and stockholders' equity $ 47,838,663 $ 54,146,339 ======================================
See accompanying notes. F-2 47 EntreMed, Inc. Consolidated Statements of Operations
YEAR ENDED DECEMBER 31, 1997 1996 1995 ------------------------------------------------------ Revenues: Collaborative research and development (Note 5) $ 4,342,369 $ 4,425,000 $ 347,501 Licensing (Note 5) 200,000 200,000 16,667 Grant revenues 215,119 - 347,001 ------------------------------------------------------ 4,757,488 4,625,000 711,169 Costs and expenses: Research and development 8,998,705 7,553,793 5,939,512 General and administrative 4,915,724 3,435,501 2,458,976 ------------------------------------------------------ 13,914,429 10,989,294 8,398,488 Interest expense (1,418) (27,267) (65,754) Investment income 2,621,630 1,621,729 44,854 ------------------------------------------------------ Net loss $(6,536,729) $(4,769,832) $(7,708,219) ====================================================== Net loss per share (basic and diluted) $ (0.54) $ (0.50) $ (1.41) ====================================================== Weighted average number of shares outstanding (basic and diluted) 12,158,372 9,532,671 5,485,763 ====================================================== Pro forma net loss per share $ (0.46) $ (1.03) =================================== Pro forma weighted average number of shares outstanding 10,422,781 7,485,763 ===================================
See accompanying notes. F-3 48 EntreMed, Inc. Consolidated Statements of Stockholders' Equity
COMMON STOCK PREFERRED STOCK --------------------------- ------------------------------ SHARES AMOUNT SHARES AMOUNT ------------------------------------------------------------ Balance at January 1, 1995 5,064,101 $ 50,641 3,000,000 $ 3,000,000 Issuance of common stock for options exercised at $1.50 per share 42,663 427 - - Issuance of common stock for compensation to directors at $6.38 per share 12,150 121 - - Sale of common stock at $6.38 per share, net of offering costs of approximately $180,000 710,862 7,109 - - Sale of common stock in connection with research agreement at $12.00 per share 541,666 5,417 - Sale of common stock at $12.00 per share 5,146 51 - - Net loss - - - - ------------------------------------------------------------ Balance at December 31, 1995 6,376,588 63,766 3,000,000 3,000,000 Issuance of common stock for options exercised at $1.50 to $6.38 per share 99,677 997 - - Initial public offering of 3,200,000 shares of common stock and private placement of 333,333 shares at $15.00 per share, net of offering costs of approximately $4,459,000 3,533,333 35,333 - - Automatic conversion of preferred stock to common stock upon initial public offering 2,000,000 20,000 (3,000,000) (3,000,000) Warrants issued for consulting services - - - - Net loss - - - - ------------------------------------------------------------ Balance at December 31, 1996 12,009,598 120,096 - - Issuance of common stock for options exercised 244,170 2,442 - - Warrants issued for consulting services - - - - Net loss - - - - ------------------------------------------------------------ Balance at December 31, 1997 12,253,768 $122,538 - $ - ============================================================ ADDITIONAL PAID-IN ACCUMULATED CAPITAL DEFICIT TOTAL ---------------------------------------------- Balance at January 1, 1995 $10,020,807 $(12,778,752) $ 292,696 Issuance of common stock for options exercised at $1.50 per share 63,573 - 64,000 Issuance of common stock for compensation to directors at $6.38 per share 77,379 - 77,500 Sale of common stock at $6.38 per share, net of offering costs of approximately $180,000 4,306,382 - 4,313,491 Sale of common stock in connection with research agreement at $12.00 per share 6,494,583 - 6,500,000 Sale of common stock at $12.00 per share 61,741 - 61,792 Net loss - (7,708,219) (7,708,219) ---------------------------------------------- Balance at December 31, 1995 21,024,465 (20,486,971) 3,601,260 Issuance of common stock for options exercised at $1.50 to $6.38 per share 225,002 - 225,999 Initial public offering of 3,200,000 shares of common stock and private placement of 333,333 shares at $15.00 per share, net of offering costs of approximately $4,459,000 48,505,431 - 48,540,764 Automatic conversion of preferred stock to common stock upon initial public offering 2,980,000 - - Warrants issued for consulting services 96,000 - 96,000 Net loss - (4,769,832) (4,769,832) ---------------------------------------------- Balance at December 31, 1996 72,830,898 (25,256,803) 47,694,191 Issuance of common stock for options exercised 502,190 - 504,632 Warrants issued for consulting services 291,000 - 291,000 Net loss - (6,536,729) (6,536,729) ---------------------------------------------- Balance at December 31, 1997 $73,624,088 $(31,793,532) $41,953,094 ==============================================
See accompanying notes. F-4 49 EntreMed, Inc. Consolidated Statements of Cash Flows
YEAR ENDED DECEMBER 31 1997 1996 1995 ---------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $(6,536,729) $(4,769,832) $(7,708,219) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization 336,668 190,960 201,593 Stock and warrants issued for compensation and consulting expense 291,000 96,000 77,500 Minority interest 18,358 - - Changes in assets and liabilities: Account receivable (84,151) 2,500,000 (2,500,000) Interest receivable (118,784) (397,657) (4,016) Prepaid expenses and other 9,075 (98,360) - Accounts payable 82,898 233,053 (183,796) Accrued liabilities 308,187 615,942 341,776 Deferred revenue (Note 5) (871,870) (589,999) 5,335,832 ---------------------------------------------- Net cash used by operating activities (6,565,348) (2,219,893) (4,439,330) CASH FLOWS FROM INVESTING ACTIVITIES Purchases of short-term investments (32,014,130) (34,563,369) - Maturities of short-term investments 24,671,173 14,893,746 - Other investments (300,000) (100,000) - Purchases of furniture and equipment (1,010,890) (215,027) (210,829) ---------------------------------------------- Net cash used by investing activities (8,653,847) (19,984,650) (210,829) CASH FLOWS FROM FINANCING ACTIVITIES Sales of common stock 504,632 48,766,763 10,939,283 Proceeds from sale lease-back - - 654,020 Payment of lease obligation (104,152) (396,113) (276,664) Repayment of note payable - - (510,000) Proceeds from note payable - - 510,000 ---------------------------------------------- Net cash provided by financing activities 400,480 48,370,650 11,316,639 Net increase (decrease) in cash and cash equivalents (14,818,715) 26,166,107 6,666,480 Cash and cash equivalents at beginning of year 33,051,206 6,885,099 218,619 ---------------------------------------------- Cash and cash equivalents at end of year $18,232,491 $33,051,206 $ 6,885,099 ============================================== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION AND NONCASH INVESTMENT AND FINANCING ACTIVITIES Interest paid $ 1,418 $ 27,267 $ 65,754 ============================================== Purchase of furniture and equipment in exchange for minority interest $ - $ 44,118 $ - ============================================== Equipment purchased under capital lease $ - $ - $ 122,909 ==============================================
See accompanying notes. F-5 50 EntreMed, Inc. Notes to Consolidated Financial Statements Years ended December 31, 1997, 1996 and 1995 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION EntreMed, Inc. (the "Company") is engaged primarily in the research and development of biopharmaceutical products that address the role of blood and blood vessels in the prevention and treatment of a broad range of diseases. The Company's core technologies include (i) an antiangiogenesis program focused on the development of proprietary products intended to inhibit the abnormal growth of new blood vessels associated with cancer and certain causes of blindness and (ii) a blood cell permeation device designed to enhance the ability of red blood cells to deliver oxygen to organs and tissues and which may also be used to deliver drugs, genes or other therapeutic agents that otherwise would not readily diffuse through blood cell membranes. The Company's strategy is to accelerate development of its antiangiogenesis and cell permeation technologies as well as other promising technologies which the Company perceives to have clinical and commercial potential. The principal elements of the Company's strategy are (i) to focus its resources on current core technologies, (ii) to broaden its product and technology portfolio through sponsored research collaborations with academic institutions, government organizations and private enterprises, (iii) to augment product development with its in-house research and development capabilities and (iv) to leverage its resources through corporate partnerships in order to minimize the cost to the Company of late-stage clinical trials and to accelerate effective product commercialization. All of the Company's product candidates are in the development stage and require further research, development, testing and regulatory clearances. The Company was organized in September 1991 as a Delaware Corporation and from inception through December 1995 was in the development stage. In December 1995, the Company and Bristol-Myers Squibb Company ("Bristol-Myers Squibb") entered into a collaboration to develop and commercialize certain antiangiogenesis therapeutics (see Note 5). The Company received 95%, 100% and 50% of its revenues from Bristol-Myers Squibb in 1997, 1996 and 1995, respectively, and expects this concentration to continue in future years. The accompanying consolidated financial statements include the accounts of the Company's 85% owned subsidiary, Cytokine Sciences, Inc. Cytokine was formed in June 1996 for the purpose of acquiring the assets of Innovative Therapeutics, Inc. in F-6 51 EntreMed, Inc. Notes to Consolidated Financial Statements (continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION (CONTINUED) July 1996 in exchange for 15% of the common stock of Cytokine valued at approximately $44,000. All intercompany balances and transactions have been eliminated in consolidation. Minority interest expense of $18,358 and $24 is included in general and administrative expenses for the years ended December 31, 1997 and 1996, respectively. RESEARCH AND DEVELOPMENT Research and development expenses consist of independent proprietary research and development costs, the costs associated with work performed under collaborative research agreements and the Company's sponsored funding of research programs performed by others. Research and development costs are expensed as incurred. PATENT COSTS Costs incurred in filing, prosecuting and maintaining patents are expensed as incurred. Such costs aggregated approximately $409,000, $565,000 and $454,000 in 1997, 1996 and 1995, respectively. INVESTMENTS The Company invests in various debt securities. These investments are accounted for in accordance with Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities, which requires certain debt securities to be reported at amortized cost, certain debt and equity securities to be reported at market with current recognition of unrealized gains and losses, and certain debt and equity securities to be reported at market with unrealized gains and losses as a separate component of stockholders' equity. Management determines the appropriate classification of investments as held-to-maturity or available-for-sale at the time of purchase and re-evaluates such designation as of each balance sheet date. The Company has classified all investments as available-for-sale. Available-for-sale securities are carried at fair value, with the unrealized gains and F-7 52 EntreMed, Inc. Notes to Consolidated Financial Statements (continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INVESTMENTS (CONTINUED) losses, net of tax, reported in stockholders' equity. The amortized cost of debt securities in this category is adjusted for the amortization of premiums and accretion of discounts to maturity. Such amortization is included as investment income. Realized gains and losses and declines in value judged to be other-than-temporary on the available-for-sale securities are included in investment income. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in investment income. FURNITURE AND EQUIPMENT Furniture and equipment are stated at cost and are depreciated over their expected useful lives. Depreciation is provided on a straight-line basis. Amortization associated with capitalized leases is included in depreciation expense. Furniture and equipment are summarized as follows:
DECEMBER 31 1997 1996 ------------------------------ Furniture and equipment $2,211,263 $1,200,373 Less: accumulated depreciation (712,482) (375,814) ------------------------------ $1,498,781 $ 824,559 ==============================
CASH EQUIVALENTS Cash equivalents include cash and short-term investments with original maturities of less than 90 days. INCOME TAXES Income taxes have been provided using the liability method in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. F-8 53 EntreMed, Inc. Notes to Consolidated Financial Statements (continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) REVENUE RECOGNITION Revenue from the collaborative research and development agreement is recorded when earned as defined under the terms of the agreement. Nonrefundable fees received upon contract signing are recorded as deferred revenue and recognized over the term of the agreement mentioned in Note 5. Revenues related to grants received for specific project proposals are recognized in revenue as earned in accordance with specified provisions, including performance requirements, in the contracts. Other periodic research funding payments received which are related to future performance are deferred and recognized as income when earned. NET LOSS PER SHARE In 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings per Share ("SFAS 128"). SFAS 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effect of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where appropriate, restated to conform to the SFAS 128 requirements. Pro forma net loss per common share is calculated using the weighted average number of common and common equivalent shares outstanding during 1996 and 1995 assuming the conversion of the convertible preferred stock at the beginning of each respective period. Net loss per share is based on the weighted average number of common shares outstanding. STOCK BASED COMPENSATION Statement of Financial Accounting Standards No. 123, Accounting for Stock Based Compensation ("SFAS 123") sets forth accounting and reporting standards for stock based employee compensation plans (see Note 9). As permitted by SFAS 123, the Company continues to account for stock option grants in accordance with APB Opinion F-9 54 EntreMed, Inc. Notes to Consolidated Financial Statements (continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) STOCK BASED COMPENSATION (CONTINUED) No. 25, Accounting for Stock Issued to Employees, and related interpretations. Under APB No. 25, no compensation expense is recognized for stock or stock options issued to employees at fair market value. Accordingly, adoption of SFAS 123 has not affected the Company's results of operations or financial position. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results inevitably will differ from those estimates, and such differences may be material to the financial statements. IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement No. 130, Reporting Comprehensive Income ("Statement 130"). Statement 130 establishes new standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements. These new standards require that all items recognized as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. Statement 130 is effective for fiscal years beginning after December 15, 1997. The adoption of Statement 130 will not impact the Company's consolidated financial statements. In June 1997, the FASB issued Statement 131, Disclosures About Segments of an Enterprise and Related Information ("Statement 131"). Statement 131 changes the way public companies report segment information in annual financial statements and also requires those companies to report selected segment information in interim financial reports. Statement 131 is effective for periods beginning after December 15, 1997. The adoption of Statement 131 will not have a significant impact on the Company's consolidated financial statements. F-10 55 EntreMed, Inc. Notes to Consolidated Financial Statements (continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) RELATED PARTY TRANSACTIONS During 1995, the Company borrowed approximately $510,000 from related parties, of which $162,916 was borrowed from a director of the Company, and issued to such lenders notes payable at 9% interest. Upon receipt of proceeds from a collaborative research and development agreement mentioned in Note 5, the Company paid the notes and accrued interest. The Company receives legal services from a law firm in which a Company director is a partner. The cost of these services was negotiated on an arms length basis and amounted to $160,000 and $406,000 for the years ended December 31, 1997 and 1996, respectively. As of December 31, 1997 and 1996, the Company maintained approximately 87% and 88%, respectively, of its cash, cash equivalents and short-term investments under the management of a registered investment advisory firm for which a Company director serves as chairman of the board. Such assets under management are maintained by a high quality, third party financial institution custodian. The Company has an agreement with one of its directors under which the director provides consulting services. During 1997, the Company paid $180,000 under this agreement. 3. INVESTMENTS All of the Company's investments are classified as available-for-sale and are summarized as follows:
AVAILABLE-FOR-SALE SECURITIES -------------------------------------------------------------- GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE -------------------------------------------------------------- DECEMBER 31, 1997 U.S. Treasury securities $23,012,580 $ - $ - $23,012,580 U.S. corporate securities 4,000,000 4,000,000 -------------------------------------------------------------- Total securities $27,012,580 $ - $ - $27,012,580 ==============================================================
F-11 56 EntreMed, Inc. Notes to Consolidated Financial Statements (continued) 3. INVESTMENTS (CONTINUED)
AVAILABLE-FOR-SALE SECURITIES ---------------------------------------------------------------- GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ---------------------------------------------------------------- DECEMBER 31, 1996 U.S. Treasury securities $14,751,966 $ - $ - $14,751,966 U.S. corporate securities 4,917,657 - - 4,917,657 ---------------------------------------------------------------- Total securities $19,669,623 $ - $ - $19,669,623 ================================================================
The Company had no realized gains or losses from the sale of short-term investments for the years ended December 31, 1997 and 1996. All U.S. Treasury and U.S. corporate securities have maturity dates of less than one year as of December 31, 1997 and 1996. 4. SPONSORED RESEARCH PROGRAM AGREEMENTS The Company has entered into several agreements to sponsor external research programs. The Company's primary external research program agreement was entered into in September 1993 with the Children's Hospital in Boston, Massachusetts, an entity affiliated with Harvard Medical School ("Children's Hospital"). Under this sponsored research agreement, the Company agreed to pay Children's Hospital $11,000,000 to support research on the role of angiogenesis in pathological conditions. In accordance with the terms of this sponsored research agreement, $8,000,000 has been paid as of December 31, 1997, $1,000,000 is due on April 1, 1998 and the remainder is due in equal semi-annual payments until April 1, 1999. This sponsored research agreement gives the Company an exclusive option to negotiate an exclusive, worldwide, royalty-bearing license for any technology resulting from the research at Children's Hospital in areas covered by the agreement. Amounts due under the sponsored research agreement with Children's Hospital, which is cancelable by the Company upon six months' notice, are paid in advance every six months and are expensed as incurred as research and development costs. As of December 31, 1997, the Company's total commitments for external research programs are as follows: 1998 $2,830,000 1999 1,271,000 ----------- Total commitments $4,101,000 ===========
F-12 57 EntreMed, Inc. Notes to Consolidated Financial Statements (continued) 5. COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENT In December 1995, the Company and Bristol-Myers Squibb entered into a collaboration to develop and commercialize certain antiangiogenesis therapeutics ("BMS Collaboration"). The BMS Collaboration provides for Bristol-Myers Squibb to fund the Company's research, provide milestone payments to the Company, and pay the Company royalties on net sales of any products developed under the BMS Collaboration. In return, the Company granted Bristol-Myers Squibb exclusive worldwide rights, held by the Company, to antiangiogenic applications of thalidomide, thalidomide analogs and the Angiostatin(TM) protein. In August 1997, the Company reacquired the commercial rights to thalidomide in exchange for renewing Bristol-Myers Squibb's warrant to purchase an additional $10,000,000 of the Company's common stock as described below. Bristol-Myers Squibb continues to hold the rights to thalidomide analogs. Bristol-Myers Squibb is obligated under the BMS Collaboration to fund $18.35 million over five years for costs to be incurred by the Company related to specified research and development. The Company may receive an additional $32 million if the Company attains certain late-stage clinical development and regulatory filing milestones under the BMS Collaboration, a portion of which will be credited against royalties. In addition to this funding, Bristol-Myers Squibb has reimbursed the Company $730,000 for clinical studies and ophthalmological trials. Bristol-Myers Squibb may terminate the BMS Collaboration for any reason with six months notice, in which event Bristol-Myers Squibb would have no further funding obligation to the Company. In the event Bristol-Myers Squibb were to terminate the BMS Collaboration or otherwise fail to conduct its collaborative activities successfully and in a timely manner, the preclinical and clinical development or commercialization of the Company's licensed antiangiogenesis product candidates might be delayed or terminated. The Company received a non-refundable, non-creditable licensing fee of $1 million in 1995 under the BMS Collaboration and an additional $2.5 million on March 31, 1996 in recognition of certain research and development efforts of the Company. These amounts were recorded as deferred revenue and are being recognized over five years, the initial term of the BMS Collaboration agreement. F-13 58 EntreMed, Inc. Notes to Consolidated Financial Statements (continued) 5. COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENT (CONTINUED) Concurrent with the signing of the BMS Collaboration, the Company issued Bristol-Myers Squibb 541,666 shares of common stock for aggregate cash proceeds of $6,500,000. Bristol-Myers Squibb also purchased 333,333 shares of additional common stock of the Company at the initial public offering price of $15 per share, or a total of $5,000,000, at the time the Company completed its initial public offering in June 1996 and was granted the right to purchase an additional $10,000,000 of the Company's common stock at $22.50 per share, or 444,444 shares from the Company at any time up to June 19, 1997. This warrant was renewed and expired in November 1997. During 1997, 1996 and 1995, the Company recognized approximately $4,542,000, $4,625,000 and $347,000 in revenue, respectively, and incurred costs of approximately $5,200,000, $4,000,000 and $500,000 related to the BMS Collaboration. 6. SALE-LEASEBACK AGREEMENT During 1995, the Company entered into a sale-leaseback agreement which is accounted for as a capital lease. The lessor agreed to purchase the Company's equipment and also assumed and exercised the Company's purchase option on other leased equipment. The Company agreed to lease-back the equipment over an initial term of two years with annual renewal options in years three and four. The Company had the option to purchase the equipment at fair market value at the end of years two and three. In connection with this agreement, the Company granted the lessor warrants for 33,334 shares of common stock at an exercise price of $6.38 per share. During 1997, the Company exercised its purchase option and paid approximately $263,000 for such equipment. F-14 59 EntreMed, Inc. Notes to Consolidated Financial Statements (continued) 7. INCOME TAXES The Company has net operating loss carryforwards of approximately $30,224,000 and $22,150,000 at December 31, 1997 and 1996, respectively, for income tax purposes that expire in years 2006 through 2012. The Company also has research and development tax credit carryforwards of approximately $1,719,000 and $1,330,000 as of December 31, 1997 and 1996, respectively, that expire in years 2007 through 2012. The utilization of the net operating loss and research and development carryforwards may be limited in future years due to changes in ownership of the Company pursuant to Internal Revenue Code Section 382. For financial reporting purposes, a valuation allowance has been recognized to reduce the net deferred tax assets to zero due to uncertainties with respect to the Company's ability to generate taxable income in the future sufficient to realize the benefit of deferred income tax assets. Deferred income taxes reflect the net effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred income tax assets and liabilities as of December 31, 1997 and 1996 are as follows:
1997 1996 ------------------------------------- Deferred income tax assets (liabilities): Research and development credit carryforward $ 1,719,000 $ 1,330,000 Net operating loss carryforwards 11,485,000 8,146,000 Deferred revenues 918,000 1,073,000 Other 529,000 371,000 Depreciation (4,000) (17,000) Valuation allowance for deferred income tax assets (14,647,000) (10,903,000) ------------------------------------- Net deferred income tax assets $ - $ - =====================================
F-15 60 EntreMed, Inc. Notes to Consolidated Financial Statements (continued) 7. INCOME TAXES (CONTINUED) A reconciliation of the provision for income taxes to the federal statutory rate is as follows:
1997 1996 1995 ----------------------------------------------------- Tax benefit at statutory rate $(2,484,000) $(1,813,000) $(2,621,000) Tax credits (389,000) (90,000) (120,000) Non-qualified stock options (883,000) - - Other 12,000 12,000 11,000 Valuation allowance 3,744,000 1,891,000 2,730,000 ----------------------------------------------------- $ - $ - $ - =====================================================
8. CONVERTIBLE PREFERRED STOCK The preferred stock had certain preferential rights in the event of liquidation or dissolution of the Company but did not have any preferences in regard to voting rights or dividend distributions. The preferred stock was automatically converted into the Company's common stock upon the effective date of the Company's initial public offering of the Company's common stock. 9. STOCK OPTIONS AND WARRANTS In 1992 and 1996, the Company adopted incentive and nonqualified stock option plans whereby 1,750,000 shares of the Company's common stock were reserved for grants to various executive, scientific and administrative personnel of the Company as well as outside directors and consultants, of which 155,859 shares remain available for grant as of December 31, 1997. These options vest over periods varying from vesting immediately through vesting over four years and generally expire 10 years from the date of grant. F-16 61 EntreMed, Inc. Notes to Consolidated Financial Statements (continued) 9. STOCK OPTIONS AND WARRANTS (CONTINUED) Pro forma information regarding net income and loss per share is required by SFAS 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method subsequent to December 31, 1994. Because FASB Statement No. 123 is applicable only to options granted subsequent to December 31, 1994, its pro forma effect will not be fully reflected until 1999. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1997, 1996 and 1995, respectively: risk-free interest rates of 5.97%, 6.36% and 5.96%; no dividend yields; volatility factors of the expected market price of the Company's common stock of 0.80, 0.65 and 0.65; and a weighted-average expected life of an option of 7 years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options and warrants granted to employees are amortized to expense over the vesting period. The weighted average fair value per option granted in 1997, 1996 and 1995 was $7.90, $9.73 and $4.62, respectively. The weighted average fair value per warrant granted to employees during 1997 and 1995 was $13.00 and $4.38, respectively. The Company's pro forma information follows:
1997 1996 1995 ------------------------------------------------------------------ Pro forma net loss $(9,493,464) $(6,965,172) $(8,758,895) Pro forma loss per share $ (0.78) $ (0.71) $ (1.20)
F-17 62 EntreMed, Inc. Notes to Consolidated Financial Statements (continued) 9. STOCK OPTIONS AND WARRANTS (CONTINUED) A summary of the Company's stock options and warrants granted to employees, and related information for the years ended December 31 follows:
NUMBER OF EXERCISE PRICE OPTIONS PER SHARE --------------------------------- Outstanding at January 1, 1995 1,170,689 $1.50 - $6.38 Exercised (42,663) $1.50 Granted 436,343 $6.00 - $12.00 ------------- Outstanding at December 31, 1995 1,564,369 $1.50 - $12.00 Exercised (99,677) $1.50 - $6.38 Granted 1,188,364 $9.00 - $16.25 Cancelled (73,112) $6.38 ------------- Outstanding at December 31, 1996 2,579,944 $1.50 - $16.25 Exercised (235,836) $1.50 - $9.00 Granted 761,575 $ 9.38 - $15.00 Cancelled (5,734) $14.00 ------------- Outstanding at December 31, 1997 3,099,949 $1.50 - $16.25 ============= Exercisable at December 31, 1997 2,182,061 $1.50 - $16.25 =============
The following summarizes information about stock options and warrants granted to employees outstanding at December 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------------ ------------------------------- WEIGHTED AVERAGE WEIGHTED WEIGHTED NUMBER REMAINING AVERAGE NUMBER AVERAGE RANGE OF OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE EXERCISE PRICES AT 12/31/97 LIFE IN YEARS PRICE AT 12/31/97 PRICE - ------------------- -------------- ------------------ ---------------- ----------------- -------------- $1.50 637,184 4.7 $ 1.50 630,505 $ 1.50 $6 - $6.375 1,062,537 7.5 $ 6.31 899,419 $ 6.30 $9 - $16.25 1,400,228 9.3 $12.05 652,137 $12.89 -------------- ----------------- 3,099,949 7.8 $ 7.92 2,182,061 $ 6.88 ============== =================
F-18 63 EntreMed, Inc. Notes to Consolidated Financial Statements (continued) 9. STOCK OPTIONS AND WARRANTS (CONTINUED) The Company also granted 50,000 and 83,334 options to purchase common stock at $6.38 and $6.00 per share during 1995 and 1993, respectively, to Children's Hospital in connection with a sponsored research agreement (see Note 4). These options are not covered by the incentive and nonqualified stock option plan and are included in the table below. The Company also has granted warrants to consultants and certain third parties. Warrants granted generally expire after 10 years from the date of grant. Stock warrant activity to non-employees is as follows:
NUMBER OF EXERCISE PRICE PER WARRANTS SHARE -------------------------------------- Outstanding at January 1, 1995 127,982 $6.00 - $7.65 Granted 139,354 $6.38 -------------- Outstanding at December 31, 1995 267,336 $6.00 - $7.65 Granted 10,000 $14.00 -------------- Outstanding at December 31, 1996 277,336 $6.00 - $14.00 Granted 100,000 $13.00 Exercised (8,334) $6.00 -------------- Outstanding at December 31, 1997 369,002 $1.50 - $14.00 ============== Exercisable at December 31, 1997 332,335 $1.50 - $13.00 ==============
The Company also granted warrants to Bristol-Myers Squibb in connection with the BMS Collaboration described in Note 5 and which expired in November 1997. 10. FINANCIAL INSTRUMENTS Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents, short-term investments and account receivable. As of December 31, 1997 and 1996, the Company maintained approximately 87% and 88%, respectively, of its cash, cash equivalents and short-term investments (short-duration, high quality debt securities) under the management of a registered investment advisory firm for which a Company director serves as chairman of the board. Such assets under management are maintained by a high credit quality, third party financial institution custodian. F-19 64 EntreMed, Inc. Notes to Consolidated Financial Statements (continued) 10. FINANCIAL INSTRUMENTS (CONTINUED) The carrying amounts reported in the balance sheet for cash and cash equivalents, short-term investments, account receivable and accounts payable approximate their fair values. 11. COMMITMENTS AND CONTINGENCIES The Company is a defendant in a lawsuit initiated in August 1995 in the United States District Court for the Eastern District of Tennessee by Bolling, McCool & Twist ("BMT"), a consulting firm. In the suit, BMT asserts that the Company breached an agreement between BMT and the Company by failing to pay BMT certain fees it asserts are owed under the agreement. More specifically, BMT has asserted a claim for the payment of services rendered in the approximate amount of $50,000 and seeks a success fee in an unspecified amount in connection with the BMS Collaboration. The judge in the case bifurcated the proceeding into two phases: an adjudication of whether the Company breached its agreement with BMT and then a damage phase. After a trial on the merits the jury found in favor of BMT on the breach of contract claim. However the damage phase of the trial has not been completed. Despite the jury verdict on the breach of contract claim, the Company is unable to predict with certainty the eventual outcome of the lawsuit. The Company intends to continue to contest the action vigorously and believes that this proceeding will not have a material adverse effect on the Company or its financial statements, although there can be no assurance this will be the case. In May 1994, the Company entered into two license agreements, whereby the Company acquired the exclusive, worldwide, royalty-bearing licenses to make, use, and sell AngiostatinTM, thalidomide (see Note 5) and thalidomide analogs, all inhibitors of angiogenesis developed by Children's Hospital. In consideration for receiving the rights, the Company must pay a royalty on any sublicensing fees, as defined in the agreements, to Children's Hospital. The Company is also required to pay certain amounts upon the attainment of certain milestones. The milestone payments aggregate $2,650,000, of which $290,000 has been paid to date, and are based upon license fees and achievement of regulatory approvals. F-20 65 EntreMed, Inc. Notes to Consolidated Financial Statements (continued) 11. COMMITMENTS AND CONTINGENCIES (CONTINUED) In addition, in 1996, the Company entered into two license agreements with Children's Hospital for the exclusive, worldwide, royalty-bearing licenses to make, use and sell Endostatin(TM) and 2-Methoxyestradiol, both inhibitors of angiogenesis. In consideration for receiving the rights, the Company must pay a royalty on any sublicensing fees, as defined in the agreements, to Children's Hospital. Each agreement obligates the Company to pay up to $1,000,000 "upon the attainment of certain milestones." As of December 31, 1997, no payments were due under these agreements. These license agreements require the Company to pay Children's Hospital a specified percentage of the royalty income received on the first $100 million in net sales of the licensed products, and an increased percentage thereafter, with a minimum payment based on a percentage of net sales of the licensed products by any sublicensees. The Company leases its primary facilities through March 31, 2003. The lease agreement provides for escalation of the lease payments over the term of the lease, however, rent expense is recognized under the straight-line method. Additionally, the Company leases office equipment under an operating lease. The future minimum payments under its facilities and equipment leases as of December 31, 1997 are as follows: 1998 $ 237,800 1999 243,900 2000 250,200 2001 256,700 Thereafter 238,200 -------------- Total minimum payments $ 1,226,800 ==============
Rental expense for the years ended December 31, 1997, 1996 and 1995 was $241,000, $226,000 and $210,000, respectively. 12. EMPLOYEE RETIREMENT PLAN The Company sponsors the EntreMed, Inc. 401(k) Plan and Trust. The plan covers substantially all employees and enables participants to contribute a portion of salary and wages on a tax-deferred basis. F-21 66 EntreMed, Inc. Notes to Consolidated Financial Statements (continued) 13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Summarized quarterly financial information for the years ended December 31, 1997 and 1996 is as follows:
QUARTER ENDED MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 ----------------------------------------------------------------------------- 1997 Revenues $ 1,092,500 $ 1,092,500 $ 1,241,040 $ 1,331,448 Research and development costs 2,418,835 1,743,560 2,825,840 2,010,470 General and administrative expenses 749,660 1,219,501 882,078 2,064,485 Net loss (1,423,507) (1,180,443) (1,820,963) (2,111,816) Net loss per share $ (0.12) $ (0.10) $ (0.15) $ (0.17) 1996 Revenues $ 1,092,500 $ 1,092,500 $ 1,092,500 $ 1,347,500 Research and development costs 2,063,270 1,246,045 2,429,696 1,814,782 General and administrative expenses 771,411 472,224 721,022 1,470,844 Net loss (1,675,407) (464,938) (1,379,087) (1,250,400) Net loss per share $ (0.23) $ (0.06) $ (0.11) $ (0.10)
F-22 67 SIGNATURES Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ENTREMED, INC. By: /s/ John W. Holday, Ph.D. ----------------------------------------------- John W. Holaday, Ph.D., Chairman of the Board, President and Chief Executive Officer POWER OF ATTORNEY The Registrant and each person whose signature appears below hereby appoint John W. Holaday, Ph.D. as attorney-in-fact with full power of substitution, severally, to execute in the name and on behalf of the Registrant and each such person, individually and in each capacity stated below, one or more amendments to the annual report which amendments may make such changes in the report at the attorney-in-fact acting in the premises deems appropriate and to file any such amendment to the report with the Securities and Exchange Commission. SIGNATURE Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ John W. Holaday, Ph. D. Chairman of the Board and 3/31/98 - --------------------------- Chief Executive Officer John W. Holaday, Ph. D. (principal executive officer) /s/ R. Nelson Campbell Chief Financial Officer 3/31/98 - ---------------------- (principal financial and R. Nelson Campbell accounting officer) /s/ John C. Thomas, Jr. Secretary/Treasurer 3/31/98 - ----------------------- John C. Thomas, Jr. /s/ Donald S. Brooks Director 3/31/98 - -------------------------- Donald S. Brooks
II-1 68 /s/Samuel R. Dunlap, Jr. Director 3/31/98 - ------------------------ Samuel R. Dunlap, Jr. /s/Mark C. M. Randall Director 3/31/98 - --------------------- Mark C. M. Randall /s/Lee F. Meier Director 3/31/98 - --------------- Lee F. Meier /s/Wendell M. Starke Director 3/31/98 - -------------------- Wendell M. Starke
II-2 EX-3.1.A 2 AMENDMENT TO THE CERTIFICATE OF INCORPORATION 1 EntreMed, Inc. Exhibit 3.1(a) CERTIFICATE OF AMENDMENT OF AMENDED AND RESTATED CERTIFICATE OF INCORPORATION ENTREMED, INC., a corporation organized and existing under the General Corporation Law of the State of Delaware (the "Corporation"), DOES HEREBY CERTIFY AS FOLLOWS: FIRST: The Board of Directors of the Corporation duly adopted resolutions in accordance with Section 242 of the General Corporation Law of the State of Delaware proposing, declaring advisable and recommending amendments to the Amended and Restated Certificate of Incorporation of the Corporation. The amendments are as follows: The following shall be added as the first paragraph under Article VI of the Amended and Restated Certificate of Incorporation: "Terms of Directors. The number of Directors of the Corporation shall be fixed by resolution duly adopted from time to time by the Board of Directors. The Directors shall be classified, with respect to the term for which they hold office, into three classes, as nearly equal in number as possible. The initial Class I Director shall serve for a term expiring at the annual meeting of stockholders to be held in 1998, the initial Class II Directors shall serve for a term expiring at the annual meeting of stockholders to be held in 1999, and the initial Class III Directors shall serve for a term expiring at the annual meeting of stockholders to be held in 2000. At each annual meeting of stockholders, the successor or successors of the class of Directors whose term expires at that meeting and shall be elected by a plurality of the votes cast at such meeting shall hold office for a term expiring at the annual meeting of stockholders held in the third year following the year of their election. The Directors elected to each class shall hold office until their successors are duly elected and qualified or until their earlier resignation or removal." The following shall be added as the second paragraph under Article VI of the Amended and Restated Certificate of Incorporation: "Vacancies. Any and all vacancies in the Board of Directors, however occurring, including, without limitation, by reason of an increase in size of the Board of Directors, or the death, resignation, disqualification or removal of a Director, shall be filled solely by the affirmative vote of a majority of the remaining Directors then in 2 office, even if less than a quorum of the Board of Directors. Any Director appointed in accordance with the preceding sentence shall hold office until the annual meeting of stockholders at which the class of directors for which he or she has been chosen is elected and until such Director's successor shall have been duly elected and qualified or until his or her earlier resignation or removal. When the number of Directors is increased or decreased, the Board of Directors shall determine the class or classes to which the increased or decreased number of Directors shall be apportioned so as to maintain each class as nearly equal in number as possible; provided, however, that no decrease in the number of Directors shall shorten the term of any incumbent Director." SECOND: That the annual meeting of the stockholders of the Corporation was duly called and held upon notice in accordance with Section 222 of the General Corporation Law of the State of Delaware at which meeting the necessary number of shares was voted in favor of said amendments. THIRD: The aforesaid amendments were duly adopted in accordance with the applicable provisions of Section 242 of the General Corporation Law of the State of Delaware. FOURTH: This certificate of amendment to the Amended and Restated Certificate of Incorporation is to become effective upon filing. IN WITNESS WHEREOF, the undersigned, ENTREMED, INC., has caused this Certificate of Amendment to its Amended and Restated Certificate of Incorporation to be executed on its behalf by President and attested to by its Secretary as of this 31st day of July, 1997. ENTREMED, INC. By: /s/ John W. Holaday, PhD. ------------------------- Name: John W. Holaday, PhD. Title: President Attest: /s/ John C. Thomas, Jr. ----------------------- John C. Thomas, Jr. Secretary EX-10.26 3 TERMINATION AGREEMENT 1 EntreMed, Inc. Exhibit 10.26 August 5, 1997 EntreMed, Inc. 9610 Medical Center Drive, Suite 200 Rockville, Maryland 20850 Re: Termination of Collaborative Research and License Agreement With Respect to Thalidomide Products Dear Dr. Holaday: The purpose of this letter is to set forth the terms and conditions upon which Bristol-Myers Squibb Company ("BMS") and EntreMed, Inc. ("ENTREMED") will terminate, solely with respect to Thalidomide Products (as defined herein), that certain Research Collaboration and License Agreement (the "Agreement") between BMS and ENTREMED, dated as of December 7, 1995, as amended, and modify other provisions of the Agreement, by amendment to the Agreement pursuant to Section 16.2 thereof. 1. Termination of Rights and Obligations With Respect to Thalidomide Products. 1.1 Generally. Effective as of the date hereof, except as provided in paragraph 1.2 of this letter, all of BMS's rights and obligations under the Agreement, and all of ENTREMED's obligations under the Agreement, if any, solely with respect to Thalidomide or any article, composition, apparatus, material, method, process or service which is or includes Thalidomide or any product developed or derived therefrom (each (including Thalidomide), a "Thalidomide Product"), but not with respect to any analogs of Thalidomide or any product developed or derived from any such analog, shall terminate; provided, however, that all of the parties' rights and obligations under the Agreement with respect to any other compound or PRODUCT shall continue. By way of amplification of the preceding sentence, on and after the date hereof: (i) the definition in Section 1.18 of the Agreement of "NCE PRODUCTS" shall exclude all Thalidomide Products; (ii) BMS's right and license under Section 2.1 of the Agreement shall not include the right to make, have made, use or sell any thalidomide Product; (iii) BMS shall cease to have any research, development, registration, marketing or sales obligations under Section 4.1 of the Agreement with respect to any Thalidomide Product; 2 EntreMed, Inc. August 5, 1997 Page 2 (iv) pursuant to Section 4.2 of the Agreement, (i) all PATENT RIGHTS and licenses and rights with respect to Thalidomide Products shall revert to ENTREMED, and (ii) BMS hereby grants ENTREMED and its AFFILIATES and exclusive, royalty-free sublicensable license under the BMS patents and BMS TECHNOLOGY solely to make, have made, use and sell Thalidomide Products; (v) BMS shall have no obligation to pay royalties pursuant to Section 9.1 of the Agreement, or to pay milestone payments under Section 9.3 thereof, with respect to any Thalidomide Products; and (vi) the definition in Section 7.9(c) of the Agreement of "CMCC Products" shall exclude all Thalidomide Products. 1.2 Survival of Confidentiality, Publication Obligations. Notwithstanding any provision of this letter, BMS's obligations with respect to Thalidomide Products regarding confidentiality and publication as set forth in Section 5, 7.8, 7.9(d) and 7.9(e) of the Agreement shall not be affected by this letter, and shall remain in full force and effect. 1.3 R&D Plans. Within 60 days after the date hereof, BMS and ENTREMED, acting through the Committee, shall amend the R&D Plans in order to make them consistent with the effect of this letter. 1.4 Relinquishment of BMS's Rights. As of the date hereof, BMS hereby relinquishes to ENTREMED all of BMS's right, title and interest (including, without limitation, under Section 7.9 of the Agreement) in the BMS Results and the Joint Results, to the extent that such Results pertain to Thalidomide Products. Further, BMS acknowledges and agrees that it is not entitled to any license under Section 15.1 of the Agreement with respect to any Thalidomide Product. 1.5 Discontinuation of Patent Activity and Support. Notwithstanding any provision of the Agreement to the contrary, as of the date hereof, BMS shall discontinue all financial support of all patents or patent applications pertaining to RESEARCH PATENT RIGHTS that claim solely any Thalidomide Product and all filing, prosecution and maintenance of all patent applications and patents outside the United States relating to INVENTIONS that related solely to any Thalidomide Product. 1.6 Funding Obligations. BMS acknowledges and agrees that its obligations to fund the RESEARCH COLLABORATION under Section 7.3(a) and (b) of the Agreement shall not be affected by this letter. 3 EntreMed, Inc. August 5, 1997 Page 3 1.7 Transfer of Scientific Information. Promptly after the date hereof, BMS shall deliver to ENTREMED all scientific data and information relating to Thalidomide Products that BMS has possession of or access to, to the extent it has the right to disclose same. 2. Extension of Evaluation Period. 2.1 Extension. In partial consideration of BMS's relinquishment of its right with respect to Thalidomide Products, the period during which BMS may evaluate ENDOSTATIN(TM) and 2 MOE pursuant to Section 2.3 (a)(i) of the Agreement is hereby extended through and including November 30, 1997; provided, however, that if BMS wishes to pursue negotiations with respect to ENDOSTATIN(TM) and/or 2 MOE, it must present its Minimum Terms therefor to ENTREMED not later than November 1, 1997. Following ENTREMED's acceptance of any such Minimum Terms, BMS and ENTREMED shall negotiate in good faith a definitive agreement(s) incorporating such Minimum Terms by November 30, 1997. 2.2. Continued Disclosure; Materials Transfer. So that BMS may exercise its rights under paragraph 2.1 of this letter in an informed manner, commencing on the date hereof and through November 30, 1997: (a) ENTREMED shall promptly provide BMS with all invention disclosure reports and clinical or pre-clinical data, inform BMS with respect to any discoveries or findings of Scientific significance, and provide all other relevant scientific data or information reasonably requested by BMS, that pertain to ENDOSTATIN(TM) or 2 MOE and that have not been provided to BMS by ENTREMED prior to the date hereof, to the extent that ENTREMED has possession of, or access to, such data or information and the right to disclose same; and (b) ENTREMED shall provide to BMS, promptly after BMS's request therefor, biological materials or chemical compounds relating to ENDOSTATIN(TM) and/or 2 MOE (collectively, "Substances") to the extent that ENTREMED has possession of, or access to, such Substances and the right to transfer same. The Substances shall constitute confidential Information under the Agreement, provided that (i) notwithstanding Section 5.1 of the Agreement, BMS shall be permitted to use the Substances in determining whether to exercise its rights under paragraph 2.1 of this letter, and (ii) Section 5.3 of the Agreement shall not prohibit BMS from using the Substances in a manner consistent with this paragraph 2.2. 3. Re-issuance of Warrant. BMS and ENTREMED acknowledge that the warrant (the "Previous Warrant") to purchase Common Stock of ENTREMED that ENTREMED issued to BMS in conjunction with the 4 EntreMed, Inc. August 5, 1997 Page 4 signing of the Agreement has expired. In partial consideration of BMS's relinquishment of its rights with respect to Thalidomide Products, ENTREMED shall grant BMS a new warrant (the "New Warrant") upon the same terms and conditions as the Previous Warrant, except that the New Warrant shall be issued as of the date hereof and expire on November 30, 1997. ENTREMED agrees to issue to BMS a replacement warrant certificate evidencing the New Warrant, in the form attached as Exhibit A, upon execution of this letter by both parties. 4. Defined Terms. All block capital and uppercase terms used and not otherwise defined in this letter shall have the respective meanings assigned thereto in the Agreement. 5. Extent of Amendment. Except as expressly provided herein, the terms and conditions of the Agreement shall not be affected hereby and shall continue in full force and effect. If the terms set forth in this letter are acceptable, please sign the two copies of this letter which are enclosed and return one of them in the envelope provided. Sincerely yours, BRISTOL-MYERS SQUIBB COMPANY By: /s/ CHARLES LINZNER ------------------------- Name: Charles Linzner ----------------------- Title: Vice President and ---------------------- Sr. Counsel ACCEPTED AND AGREED TO: ENTREMED, INC. By: /s/ John W. Holaday, Ph.D. ------------------------------- Name: John W. Holaday, Ph.D. ----------------------------- Title: Chairman of the Board, President, ----------------------------- and Chief Executive Officer EX-10.27 4 AMENDMENT TO THE 1996 STOCK OPTION PLAN 1 EntreMed, Inc. Exhibit 10.27 ENTREMED, INC. AMENDED AND RESTATED 1996 STOCK OPTION PLAN 1. Purpose. The purpose of this plan (the "Plan") is to secure for ENTREMED, INC. (the "Company") and its shareholders the benefits arising from capital stock ownership by employees, officers and directors of, and consultants or advisors to, the Company who are expected to contribute to the Company's future growth and success. Except where the context otherwise requires, the term "Company" shall include all present and future subsidiaries of the Company as defined in Sections 424(e) and 424(f) of the Internal Revenue Code of 1986, as amended or replaced from time to time (the "Code"). Those provisions of the Plan which make express reference to Section 422 of the Code shall apply only to Incentive Stock Options (as that term is defined in the Plan). 2. Type of Options and Administration. (a) Types of Options. Options granted pursuant to the Plan shall be authorized by action of the Board of Directors of the Company (or a committee designated by the Board of Directors) and may be either incentive stock options ("Incentive Stock Options") meeting the requirements of Section 422 of the Code or non-statutory options which are not intended to meet the requirements of Section 422 of the Code. (b) Administration. The Plan will be administered by a committee (the "Committee") appointed by the Board of Directors of the Company, whose construction and interpretation of the terms and provisions of the Plan shall be final and conclusive. The delegation of powers to the Committee shall be consistent with applicable laws or regulations (including, without limitation, applicable state law and Rule 16b-3 ("Rule 16b-3") promulgated under the Securities Exchange Act of 1934 (the "Exchange Act"), or any successor rule). The Committee may in its sole discretion grant options to purchase shares of the Company's Common Stock, $.01 par value per share ("Common Stock") and issue shares upon exercise of such options as provided in the Plan. The Committee shall have authority, subject to the express provisions of the Plan, to construe the respective option agreements and the Plan, to prescribe, amend and rescind rules and regulations relating to the Plan, to determine the terms and provisions of the respective option agreements, which need not be identical, and to make all other determinations in the judgment of the Committee necessary or desirable for the administration of the Plan. The Committee may correct any defect or supply any omission or reconcile any inconsistency in the Plan or in any option agreement in the manner and to the extent it shall deem expedient to carry the Plan into effect and it shall be the sole and final judge of such expediency. No director or person acting pursuant to authority delegated by the - 1 - 2 Board of Directors shall be liable for any action or determination under the Plan made in good faith. Subject to adjustment as provided in Section 15 below, the aggregate number of shares of Common Stock that may be subject to options granted to any person in a calendar year shall not exceed 25% of the maximum number of shares which may be issued and sold under the Plan, as set forth in Section 4 hereof, as such section may be amended from time to time. (c) Applicability of Rule 16b-3. Those provisions of the Plan which make express reference to Rule 16b-3 shall apply to the Company only at such time as the Company's Common Stock is registered under the Exchange Act, subject to the last sentence of Section 3(b), and then only to such persons as are required to file reports under Section 16(a) of the Exchange Act (a "Reporting Person"). 3. Eligibility. (a) General. Options may be granted to persons who are, at the time of grant, employees, officers or directors of, or consultants or advisors to, the Company or any subsidiaries of the Company as defined in Sections 424(e) and 424(f) of the Code ("Participants") provided, that Incentive Stock Options may only be granted to individuals who are employees of the Company (within the meaning of Section 3401(c) of the Code). A person who has been granted an option may, if he or she is otherwise eligible, be granted additional options if the Committee shall so determine. (b) Grant of Options to Reporting Persons. The selection of a director or an officer who is a Reporting Person (as the terms "director" and "officer" are defined for purposes of Rule 16b-3) as a recipient of an option, the timing of the option grant, the exercise price of the option and the number of shares subject to the option shall be determined in advance of the grant either (i) by the Board of Directors or (ii) by a committee consisting of two or more directors having full authority to act in the matter, each of whom shall be a "non-employee director" (as hereinafter defined). For the purposes of the Plan, a director shall be deemed to be a "non-employee director" only if such person qualifies as a "non-employee director" within the meaning of Rule 16b-3, as such term is interpreted from time to time. (c) Directors' Options. Commencing on the date this plan is adopted by the Board of Directors, directors of the Company ("Eligible Directors") will be granted an option (a "Director Option") to purchase 15,000 shares of Common Stock on the date that such person is first elected or appointed a director ("Initial Director Option"). Commencing on the day immediately following the date of the annual meeting of stockholders for the Company's fiscal year ending December 31, 1996, (i) each Eligible Director will receive an automatic grant of a Director Option to purchase 5,000 shares of Common Stock, (ii) each member of any committee of the Board of Directors, other than the Executive Committee, will receive an automatic grant of a Director Option to purchase 1,000 shares of Common Stock and (iii) each member of the Executive Committee of the Board of Directors will receive an automatic grant of a Director Option to purchase 5,000 shares of Common Stock (each, an "Automatic Grant") on the day - 2 - 3 immediately following the date of each annual meeting of stockholders, as long as such director is a member of the Board of Directors. The exercise price for each share subject to a Director Option shall be equal to the fair market value of the Common Stock on the date of grant. Director Options shall be exercisable commencing on the date the option is granted and will expire the earlier of 10 years after the date of grant, unless such Director Option is an Incentive Stock Option in which case such Director Option shall be subject to the additional terms and conditions set forth in Section 11. 4. Stock Subject to Plan. The stock subject to options granted under the Plan shall be shares of authorized but unissued or reacquired Common Stock. Subject to adjustment as provided in Section 15 below, the maximum number of shares of Common Stock of the Company which may be issued and sold under the Plan is 1,266,667 shares. If an option granted under the Plan shall expire, terminate or is cancelled for any reason without having been exercised in full, the unpurchased shares subject to such option shall again be available for subsequent option grants under the Plan. 5. Forms of Option Agreements. As a condition to the grant of an option under the Plan, each recipient of an option shall execute an option agreement in such form not inconsistent with the Plan as may be approved by the Board of Directors. Such option agreements may differ among recipients. 6. Purchase Price. (a) General. The purchase price per share of stock deliverable upon the exercise of an option shall be determined by the Board of Directors at the time of grant of such option; provided, however, that in the case of an Incentive Stock Option, the exercise price shall not be less than 100% of the Fair Market Value (as hereinafter defined) of such stock, at the time of grant of such option, or less than 110% of such Fair Market Value in the case of options described in Section 11(b). "Fair Market Value" of a share of Common Stock of the Company as of a specified date for the purposes of the Plan shall mean the closing price of a share of the Common Stock on the principal securities exchange (including the Nasdaq National Market) on which such shares are traded on the day immediately preceding the date as of which Fair Market Value is being determined, or on the next preceding date on which such shares are traded if no shares were traded on such immediately preceding day, or if the shares are not traded on a securities exchange, Fair Market Value shall be deemed to be the average of the high bid and low asked prices of the shares in the over-the-counter market on the day immediately preceding the date as of which Fair Market Value is being determined or on the next preceding date on which such high bid and low asked prices were recorded. If the shares are not publicly traded, Fair Market Value of a share of Common Stock (including, in the case of any repurchase of shares, any distributions with respect thereto which would be repurchased with the shares) shall be determined in good faith by the Board of Directors. - 3 - 4 In no case shall Fair Market Value be determined with regard to restrictions other than restrictions which, by their terms, will never lapse. (b) Payment of Purchase Price. Options granted under the Plan may provide for the payment of the exercise price by delivery of cash or a check to the order of the Company in an amount equal to the exercise price of such options, or by any other means which the Board of Directors determines are consistent with the purpose of the Plan and with applicable laws and regulations (including, without limitation, the provisions of Rule 16b-3 and Regulation T promulgated by the Federal Reserve Board). 7. Option Period. Subject to earlier termination as provided in the Plan, each option and all rights thereunder shall expire on such date as determined by the Board of Directors and set forth in the applicable option agreement, provided, that such date shall not be later than (10) ten years after the date on which the option is granted. 8. Exercise of Options. Each option granted under the Plan shall be exercisable either in full or in installments at such time or times and during such period as shall be set forth in the option agreement evidencing such option, subject to the provisions of the Plan. Subject to the requirements in the immediately preceding sentence, if an option is not at the time of grant immediately exercisable, the Board of Directors may (i) in the agreement evidencing such option, provide for the acceleration of the exercise date or dates of the subject option upon the occurrence of specified events, and/or (ii) at any time prior to the complete termination of an option, accelerate the exercise date or dates of such option. 9. Transferability of Options. No incentive stock option granted under this Plan shall be assignable or otherwise transferable by the optionee except by will or by the laws of descent and distribution or pursuant to a qualified domestic relations order as defined in the Code or Title I of the Employee Retirement Income Security Act, or the rules thereunder. The Board of Directors or any committee thereof may, in its discretion, authorize all or a portion of any non-statutory options to be granted to an optionee to be on terms which permit transfer by such optionee to (i) the spouse, children or grandchildren of the optionee ("Immediate Family Members"), (ii) a trust or trusts for the exclusive benefit of such Immediate Family Members, (iii) a partnership in which such Immediate Family Members are the only partners or (iv) any non-profit charitable organization; provided that (w) the options must be held by the optionee for a period of at least one month prior to transfer, (x) there may be no consideration for any such transfer, (y) the stock option agreement pursuant to which such options are granted must be approved by the Committee, and must expressly provide for transferability in a manner consistent with this Section, and (z) subsequent transfers of transferred options shall be prohibited except by will or the laws of descent and distribution or pursuant to a qualified domestic relations order as defined in the Code - 4 - 5 or Title I of the Employee Retirement Income Security Act, or the rules thereunder. Following transfer, any such options shall continue to be subject to the same terms and conditions as were applicable immediately prior to transfer, provided that for purposes of the Plan the term "optionee" shall be deemed to refer to the transferee. The events of termination of employment of Section 10 hereof shall continue to be applied with respect to the original optionee. In the event an optionee dies during his employment by the Company or any of its subsidiaries, or during the three-month period following the date of termination of such employment, his option shall thereafter be exercisable, during the period specified in the option agreement, by his executors or administrators to the full extent to which such option was exercisable by the optionee at the time of his death during the periods set forth in Section 10 or 11(d). 10. Effect of Termination of Employment or Other Relationship. Except as provided in Section 11(d) with respect to Incentive Stock Options and except as otherwise determined by the Committee at the date of grant of an option, and subject to the provisions of the Plan, an optionee may exercise an option at any time within three (3) months following the termination of the optionee's employment or other relationship with the Company or within one (1) year if such termination was due to the death or disability of the optionee but, except in the case of the optionee's death, in no event later than the expiration date of the option. If the termination of the optionee's employment is for cause or is otherwise attributable to a breach by the optionee of an employment or confidentiality or non-disclosure agreement, the option shall expire immediately upon such termination. The Board of Directors shall have the power to determine what constitutes a termination for cause or a breach of an employment or confidentiality or non-disclosure agreement, whether an optionee has been terminated for cause or has breached such an agreement, and the date upon which such termination for cause or breach occurs. Any such determinations shall be final and conclusive and binding upon the optionee. 11. Incentive Stock Options. Options granted under the Plan which are intended to be Incentive Stock Options shall be subject to the following additional terms and conditions: (a) Express Designation. All Incentive Stock Options granted under the Plan shall, at the time of grant, be specifically designated as such in the option agreement covering such Incentive Stock Options. (b) 10% Shareholder. If any employee to whom an Incentive Stock Option is to be granted under the Plan is, at the time of the grant of such option, the owner of stock possessing more than 10% of the total combined voting power of all classes of stock of the Company (after taking into account the attribution of stock ownership rules of Section 424(d) of the Code), then the following special provisions shall be applicable to the Incentive Stock Option granted to such individual: - 5 - 6 (i) The purchase price per share of the Common Stock subject to such Incentive Stock Option shall not be less than 110% of the Fair Market Value of one share of Common Stock at the time of grant; and (ii) The option exercise period shall not exceed five years from the date of grant. (c) Dollar Limitation. For so long as the Code shall so provide, options granted to any employee under the Plan (and any other incentive stock option plans of the Company) which are intended to constitute Incentive Stock Options shall not constitute Incentive Stock Options to the extent that such options, in the aggregate, become exercisable for the first time in any one calendar year for shares of Common Stock with an aggregate Fair Market Value, as of the respective date or dates of grant, of more than $100,000. (d) Termination of Employment, Death or Disability. No Incentive Stock Option may be exercised unless, at the time of such exercise, the optionee is, and has been continuously since the date of grant of his or her option, employed by the Company, except that: (i) an Incentive Stock Option may be exercised within the period of three months after the date the optionee ceases to be an employee of the Company (or within such lesser period as may be specified in the applicable option agreement), provided, that the agreement with respect to such option may designate a longer exercise period and that the exercise after such three-month period shall be treated as the exercise of a non-statutory option under the Plan; (ii) if the optionee dies while in the employ of the Company, or within three months after the optionee ceases to be such an employee, the Incentive Stock Option may be exercised by the person to whom it is transferred by will or the laws of descent and distribution within the period of one year after the date of death (or within such lesser period as may be specified in the applicable option agreement); and (iii) if the optionee becomes disabled (within the meaning of Section 22(e)(3) of the Code or any successor provisions thereto) while in the employ of the Company, the Incentive Stock Option may be exercised within the period of one year after the date the optionee ceases to be such an employee because of such disability (or within such lesser period as may be specified in the applicable option agreement). For all purposes of the Plan and any option granted hereunder, "employment" shall be defined in accordance with the provisions of Section 1.421-7(h) of the Income Tax Regulations (or any successor regulations). Notwithstanding the foregoing provisions, no Incentive Stock Option may be exercised after its expiration date. - 6 - 7 12. Additional Provisions. (a) Additional Option Provisions. The Board of Directors may, in its sole discretion, include additional provisions in option agreements covering options granted under the Plan, including without limitation restrictions on transfer, repurchase rights, rights of first refusal, commitments to pay cash bonuses, to make, arrange for or guaranty loans or to transfer other property to optionees upon exercise of options, or such other provisions as shall be determined by the Board of Directors; provided, that such additional provisions shall not be inconsistent with any other term or condition of the Plan and such additional provisions shall not cause any Incentive Stock Option granted under the Plan to fail to qualify as an Incentive Stock Option within the meaning of Section 422 of the Code. (b) Acceleration, Extension, Etc. The Board of Directors may, in its sole discretion, (i) accelerate the date or dates on which all or any particular option or options granted under the Plan may be exercised or (ii) extend the dates during which all, or any particular, option or options granted under the Plan may be exercised; provided, however, that no such extension shall be permitted if it would cause the Plan to fail to comply with Section 422 of the Code or with Rule 16b-3 (if applicable). 13. General Restrictions. (a) Investment Representations. The Company may require any person to whom an option is granted, as a condition of exercising such option, to give written assurances in substance and form satisfactory to the Company to the effect that such person is acquiring the Common Stock subject to the option or award, for his or her own account for investment and not with any present intention of selling or otherwise distributing the same, and to such other effects as the Company deems necessary or appropriate in order to comply with federal and applicable state securities laws, or with covenants or representations made by the Company in connection with any public offering of its Common Stock, including any "lock-up" or other restriction on transferability. (b) Compliance With Securities Law. Each option shall be subject to the requirement that if, at any time, counsel to the Company shall determine that the listing, registration or qualification of the shares subject to such option or award upon any securities exchange or automated quotation system or under any state or federal law, or the consent or approval of any governmental or regulatory body, or that the disclosure of non-public information or the satisfaction of any other condition is necessary as a condition of, or in connection with the issuance or purchase of shares thereunder, such option or award may not be exercised, in whole or in part, unless such listing, registration, qualification, consent or approval, or satisfaction of such condition shall have been effected or obtained on conditions acceptable to the Board of Directors. Nothing herein shall be deemed to require the Company to apply for or to obtain such listing, registration or qualification, or to satisfy such condition. - 7 - 8 14. Rights as a Shareholder. The holder of an option shall have no rights as a shareholder with respect to any shares covered by the option (including, without limitation, any rights to receive dividends or non-cash distributions with respect to such shares) until the date of issue of a stock certificate to him or her for such shares. No adjustment shall be made for dividends or other rights for which the record date is prior to the date such stock certificate is issued. 15. Adjustment Provisions for Recapitalizations, Reorganizations and Related Transactions. (a) Recapitalizations and Related Transactions. If, through or as a result of any recapitalization, reclassification, stock dividend, stock split, reverse stock split or other similar transaction, (i) the outstanding shares of Common Stock are increased, decreased or exchanged for a different number or kind of shares or other securities of the Company, or (ii) additional shares or new or different shares or other non-cash assets are distributed with respect to such shares of Common Stock or other securities, an appropriate and proportionate adjustment shall be made in (x) the maximum number and kind of shares reserved for issuance under or otherwise referred to in the Plan, (y) the number and kind of shares or other securities subject to any then outstanding options under the Plan, and (z) the price for each share subject to any then outstanding options under the Plan, without changing the aggregate purchase price as to which such options remain exercisable. Notwithstanding the foregoing, no adjustment shall be made pursuant to this Section 15 if such adjustment (i) would cause the Plan to fail to comply with Section 422 of the Code or with Rule 16b-3 or (ii) would be considered as the adoption of a new plan requiring stockholder approval. (b) Reorganization, Merger and Related Transactions. All outstanding options under the Plan shall become fully exercisable for a period of sixty (60) days following the occurrence of any Trigger Event, whether or not such options are then exercisable under the provisions of the applicable agreements relating thereto. For purposes of the Plan, a "Trigger Event" is any one of the following events: (i) the date on which shares of Common Stock are first purchased pursuant to a tender offer or exchange offer (other than such an offer by the Company, any Subsidiary, any employee benefit plan of the Company or of any Subsidiary or any entity holding shares or other securities of the Company for or pursuant to the terms of such plan), whether or not such offer is approved or opposed by the Company and regardless of the number of shares purchased pursuant to such offer; (ii) the date the Company acquires knowledge that any person or group deemed a person under Section 13(d)-3 of the Exchange Act (other than the Company, any Subsidiary, any employee benefit plan of the Company or of any Subsidiary or any entity holding shares of Common Stock or other securities of - 8 - 9 the Company for or pursuant to the terms of any such plan or any individual or entity or group or affiliate thereof which acquired its beneficial ownership interest prior to the date the Plan was adopted by the Board), in a transaction or series of transactions, has become the beneficial owner, directly or indirectly (with beneficial ownership determined as provided in Rule 13d-3, or any successor rule, under the Exchange Act), of securities of the Company entitling the person or group to 30% or more of all votes (without consideration of the rights of any class or stock to elect directors by a separate class vote) to which all shareholders of the Company would be entitled in the election of the Board of Directors were an election held on such date; (iii) the date, during any period of two consecutive years, when individuals who at the beginning of such period constitute the Board of Directors of the Company cease for any reason to constitute at least a majority thereof, unless the election, or the nomination for election by the shareholders of the Company, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of such period; and (iv) the date of approval by the shareholders of the Company of an agreement (a "reorganization agreement") providing for: (A) The merger of consolidation of the Company with another corporation where the shareholders of the Company, immediately prior to the merger or consolidation, do not beneficially own, immediately after the merger or consolidation, shares of the corporation issuing cash or securities in the merger or consolidation entitling such shareholders to 65% or more of all votes (without consideration of the rights of any class of stock to elect directors by a separate class vote) to which all shareholders of such corporation would be entitled in the election of directors or where the members of the Board of Directors of the Company, immediately prior to the merger or consolidation, do not, immediately after the merger or consolidation, constitute a majority of the Board of Directors of the corporation issuing cash or securities in the merger or consolidation; or (B) The sale or other disposition of all or substantially all the assets of the Company. (c) Board Authority to Make Adjustments. Any adjustments under this Section 15 will be made by the Board of Directors, whose determination as to what adjustments, if any, will be made and the extent thereof will be final, binding and conclusive. No fractional shares will be issued under the Plan on account of any such adjustments. - 9 - 10 16. Merger, Consolidation, Asset Sale, Liquidation, etc. (a) General. In the event of any sale, merger, transfer or acquisition of the Company or substantially all of the assets of the Company in which the Company is not the surviving corporation, and provided that after the Company shall have requested the acquiring or succeeding corporation (or an affiliate thereof), that equivalent options shall be substituted and such successor corporation shall have refused or failed to assume all options outstanding under the Plan or issue substantially equivalent options, then any or all outstanding options under the Plan shall accelerate and become exercisable in full immediately prior to such event. The Committee will notify holders of options under the Plan that any such options shall be fully exercisable for a period of fifteen (15) days from the date of such notice, and the options will terminate upon expiration of such notice. (b) Substitute Options. The Company may grant options under the Plan in substitution for options held by employees of another corporation who become employees of the Company, or a subsidiary of the Company, as the result of a merger or consolidation of the employing corporation with the Company or a subsidiary of the Company, or as a result of the acquisition by the Company, or one of its subsidiaries, of property or stock of the employing corporation. The Company may direct that substitute options be granted on such terms and conditions as the Board of Directors considers appropriate in the circumstances. 17. No Special Employment Rights. Nothing contained in the Plan or in any option shall confer upon any optionee any right with respect to the continuation of his or her employment by the Company or interfere in any way with the right of the Company at any time to terminate such employment or to increase or decrease the compensation of the optionee. 18. Other Employee Benefits. Except as to plans which by their terms include such amounts as compensation, the amount of any compensation deemed to be received by an employee as a result of the exercise of an option or the sale of shares received upon such exercise will not constitute compensation with respect to which any other employee benefits of such employee are determined, including, without limitation, benefits under any bonus, pension, profit-sharing, life insurance or salary continuation plan, except as otherwise specifically determined by the Board of Directors. 19. Amendment of the Plan. (a) The Board of Directors may at any time, and from time to time, modify or amend the Plan in any respect; provided, however, that if at any time the approval of the shareholders of the Company is required under Section 422 of the Code or any successor provision with respect to Incentive Stock Options, or under Rule 16b-3, - 10 - 11 the Board of Directors may not effect such modification or amendment without such approval. (b) The modification or amendment of the Plan shall not, without the consent of an optionee, affect his or her rights under an option previously granted to him or her. With the consent of the optionee affected, the Board of Directors may amend outstanding option agreements in a manner not inconsistent with the Plan. The Board of Directors shall have the right to amend or modify (i) the terms and provisions of the Plan and of any outstanding Incentive Stock Options granted under the Plan to the extent necessary to qualify any or all such options for such favorable federal income tax treatment (including deferral of taxation upon exercise) as may be afforded incentive stock options under Section 422 of the Code and (ii) the terms and provisions of the Plan and of any outstanding option to the extent necessary to ensure the qualification of the Plan under Rule 16b-3. 20. Withholding. (a) The Company shall have the right to deduct from payments of any kind otherwise due to the optionee any federal, state or local taxes of any kind required by law to be withheld with respect to any shares issued upon exercise of options under the Plan. Subject to the prior approval of the Company, which may be withheld by the Company in its sole discretion, the optionee may elect to satisfy such obligations, in whole or in part, (i) by causing the Company to withhold shares of Common Stock otherwise issuable pursuant to the exercise of an option or (ii) by delivering to the Company shares of Common Stock already owned by the optionee. The shares so delivered or withheld shall have a Fair Market Value equal to such withholding obligation as of the date that the amount of tax to be withheld is to be determined. An optionee who has made an election pursuant to this Section 20(a) may only satisfy his or her withholding obligation with shares of Common Stock which are not subject to any repurchase, forfeiture, unfulfilled vesting or other similar requirements. (b) The acceptance of shares of Common Stock upon exercise of an Incentive Stock Option shall constitute an agreement by the optionee (i) to notify the Company if any or all of such shares are disposed of by the optionee within two years from the date the option was granted or within one year from the date the shares were issued to the optionee pursuant to the exercise of the option, and (ii) if required by law, to remit to the Company, at the time of and in the case of any such disposition, an amount sufficient to satisfy the Company's federal, state and local withholding tax obligations with respect to such disposition, whether or not, as to both (i) and (ii), the optionee is in the employ of the Company at the time of such disposition. (c) Notwithstanding the foregoing, in the case of a Reporting Person whose options have been granted in accordance with the provisions of Section 3(b) herein, no election to use shares for the payment of withholding taxes shall be effective unless made in compliance with any applicable requirements of Rule 16b-3. - 11 - 12 21. Cancellation and New Grant of Options, Etc. The Board of Directors shall have the authority to effect, at any time and from time to time, with the consent of the affected optionees, (i) the cancellation of any or all outstanding options under the Plan and the grant in substitution therefor of new options under the Plan covering the same or different numbers of shares of Common Stock and having an option exercise price per share which may be lower or higher than the exercise price per share of the cancelled options or (ii) the amendment of the terms of any and all outstanding options under the Plan to provide an option exercise price per share which is higher or lower than the then-current exercise price per share of such outstanding options. 22. Effective Date and Duration of the Plan. (a) Effective Date. The Plan shall become effective when adopted by the Board of Directors, but no Incentive Stock Option granted under the Plan shall become exercisable unless and until the Plan shall have been approved by the Company's shareholders. If such shareholder approval is not obtained within twelve months after the date of the Board's adoption of the Plan, no options previously granted under the Plan shall be deemed to be Incentive Stock Options and no Incentive Stock Options shall be granted thereafter. Amendments to the Plan not requiring shareholder approval shall become effective when adopted by the Board of Directors; amendments requiring shareholder approval (as provided in Section 21) shall become effective when adopted by the Board of Directors, but no Incentive Stock Option granted after the date of such amendment shall become exercisable (to the extent that such amendment to the Plan was required to enable the Company to grant such Incentive Stock Option to a particular optionee) unless and until such amendment shall have been approved by the Company's shareholders. If such shareholder approval is not obtained within twelve months of the Board's adoption of such amendment, any Incentive Stock Options granted on or after the date of such amendment shall terminate to the extent that such amendment to the Plan was required to enable the Company to grant such option to a particular optionee. Subject to this limitation, options may be granted under the Plan at any time after the effective date and before the date fixed for termination of the Plan. (b) Termination. Unless sooner terminated in accordance with Section 16, the Plan shall terminate upon the earlier of (i) the close of business on the day next preceding the tenth anniversary of the date of its adoption by the Board of Directors, or (ii) the date on which all shares available for issuance under the Plan shall have been issued pursuant to the exercise or cancellation of options granted under the Plan. If the date of termination is determined under (i) above, then options outstanding on such date shall continue to have force and effect in accordance with the provisions of the instruments evidencing such options. 23. Provision for Foreign Participants. The Board of Directors may, without amending the Plan, modify awards or options granted to participants who are foreign nationals or employed outside the - 12 - 13 United States to recognize differences in laws, rules, regulations or customs of such foreign jurisdictions with respect to tax, securities, currency, employee benefit or other matters. 24. Governing Law. The provisions of this Plan shall be governed and construed in accordance with the laws of the State of Delaware without regard to the principles of conflicts of laws. - 13 - EX-21 5 SUBSIDIARIES OF THE REGISTRANT 1 ENTREMED, INC. EXHIBIT 21 SUBSIDIARIES OF ENTREMED, INC.
Subsidiary State of Incorporation ---------- ---------------------- Cytokine Sciences, Inc. Delaware
EX-23.1 6 CONSENT OF INDEPENDENT AUDITORS 1 Exhibit 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement on Form S-8 pertaining to the EntreMed, Inc. 1992 Stock Incentive Plan of our report dated February 5, 1998, with respect to the consolidated financial statements of EntreMed, Inc. included in the Annual Report (Form 10-K) for the year ended December 31, 1997. ERNST & YOUNG LLP Atlanta, Georgia March 27, 1998 EX-27.1 7 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED BALANCE SHEET AND THE CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS 12-MOS 9-MOS DEC-31-1997 DEC-31-1996 DEC-31-1996 DEC-31-1997 DEC-31-1996 SEP-30-1996 18,232,491 33,051,206 53,445,893 27,012,580 19,669,623 0 0 0 0 0 0 0 0 0 0 45,935,774 53,220,464 53,750,746 2,211,263 1,200,373 1,149,376 712,482 375,814 336,569 47,838,663 54,146,339 54,665,214 4,481,403 4,171,340 3,636,288 0 0 0 0 0 0 0 0 0 122,538 120,096 119,939 41,953,094 47,694,191 48,628,653 47,838,663 54,146,339 54,665,214 0 0 0 4,757,488 4,625,000 3,277,500 0 0 0 0 0 0 13,914,429 10,989,294 7,703,668 0 0 0 1,418 27,267 23,755 (6,536,729) (4,769,832) (3,519,432) 0 0 0 (6,536,729) (4,769,832) (3,519,432) 0 0 0 0 0 0 0 0 0 (6,536,729) (4,769,832) (3,519,432) (0.54) (0.50) (0.40) (0.54) (0.50) (0.40)
EX-27.2 8 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED BALANCE SHEET AND THE CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 6-MOS 3-MOS 12-MOS DEC-31-1996 DEC-31-1996 DEC-31-1995 JUN-30-1996 MAR-31-1996 DEC-31-1995 55,497,455 7,600,058 6,885,099 0 0 0 0 0 0 0 0 0 0 0 0 55,840,618 7,715,447 9,389,115 1,054,330 978,818 941,226 283,877 234,408 186,827 56,713,275 8,606,849 10,146,383 4,193,940 3,988,329 3,699,305 0 0 0 0 0 0 0 0 0 119,939 64,606 63,766 50,007,730 2,051,853 3,537,494 56,713,275 8,606,849 10,146,383 0 0 0 2,185,000 1,092,500 711,169 0 0 0 0 0 0 4,552,950 2,834,681 8,398,488 0 0 0 18,190 9,547 65,754 (2,140,345) (1,675,407) (7,708,219) 0 0 0 (2,140,345) (1,675,407) (7,708,219) 0 0 0 0 0 0 0 0 0 (2,140,345) (1,675,407) (7,708,219) (0.30) (0.26) (1.41) (0.30) (0.26) (1.41)
-----END PRIVACY-ENHANCED MESSAGE-----