SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ TO _______
COMMISSION FILE NO. 0-27436
TITAN PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3171940
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification Number)
400 OYSTER POINT BLVD., SUITE 505, SOUTH SAN FRANCISCO, CALIFORNIA 94080
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(Address of principal executive offices, including zip code)
(650) 244-4990
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(Registrant's telephone number, including zip code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.001 par value
Class A Warrants
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 twelve (12) months (or for such shorter period that
the registrant was required to file such report(s)), and (2) has been subject
to the filing requirements for the past ninety (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 [ ].
The aggregate market value of the voting stock (excluding preferred stock
convertible into and having voting rights on certain matters equivalent to
606,061 shares of common stock) held by non-affiliates of the registrant was
approximately $64,679,956, based on the last sales price of the Common Stock
as of March 27, 1998.
As of March 27, 1998, 13,099,738 shares of Common Stock, $.001 par value, of
the registrant were issued and outstanding.
PART I
Statements in this Form 10-K that are not descriptions of historical
facts are forward-looking statements that are subject to risks and
uncertainties. Actual results could differ materially from those currently
anticipated due to a number of factors, including those set forth under "Risk
Factors" including, but not limited to, the results of research and
development efforts, the results of preclinical and clinical testing, the
effect of regulation by the United States Food and Drug Administration
("FDA") and other agencies, the impact of competitive products, product
development, commercialization and technological difficulties, the results of
financing efforts, the effect of the Company's accounting policies, and other
risks detailed in the Company's Securities and Exchange Commission filings.
ITEM 1. BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS
Titan Pharmaceuticals, Inc. ("Titan" or the "Company") is engaged in the
development of therapeutic products for the treatment of cancer, disorders of
the central nervous system ("CNS") and other serious and life-threatening
diseases.
Titan's lead product, Iloperidone, partnered with Novartis Pharma AG, is
targeted to enter phase III testing this year. Iloperidone is being
developed for the treatment of schizophrenia and related psychotic
disorders--a market expected to exceed $4 billion within two years. Also in
the CNS arena, Titan is developing a unique cell based therapeutic,
Spheramine-TM- for the treatment of Parkinson's disease, and an implantable
drug delivery system with applications in the treatment of CNS disorders.
Titan's cancer therapeutics in clinical testing include three
immunotherapeutics--CeaVac-TM-, TriAb-TM-, and TriGem-TM---that are designed
to stimulate a patient's immune system against cancer cells. Another Titan
product in development, Pivanex-TM-, is a small molecule drug that acts as a
differentiating agent and is targeted to start phase II testing this year for
non-small cell lung cancer. Collectively, this cancer product pipeline has
the potential to address more than half of all solid tumor cancers.
Additionally, Titan is developing gene therapy products for treatment of
prostate cancer, head and neck cancer, and other cancers.
The Company was incorporated in Delaware in February 1992 and has been
funded through various sources, including private placements of its
securities, as well as an initial public offering of its securities (the
"IPO") in January 1996.
A portion of Titan's operations are currently conducted through three
consolidated subsidiaries (the "Operating Companies"): Ingenex, Inc.
("Ingenex"), engaged in the development of proprietary gene-based therapies;
ProNeura, Inc., ("ProNeura"), engaged in research and development activities
relating to a polymeric implantable drug delivery technology; and Theracell,
Inc. ("Theracell"), engaged in the development of cell-based therapeutics
intended for the restorative treatment of neurological diseases and CNS
disorders. A fourth subsidiary, Trilex Pharmaceuticals, Inc., ("Trilex") was
merged with and into the Company in 1997. References to the Company and its
products herein include the operations and products of the Operating
Companies.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company operates in only one business segment.
(c) NARRATIVE DESCRIPTION OF BUSINESS
STRATEGY
The Company's strategy is to acquire and develop therapeutic product
candidates and technologies that address significant unmet medical needs in
the treatment of serious and life threatening diseases. The Company focuses
on product opportunities in clinical and late preclinical testing and may
seek licensing or other collaborative arrangements with one or more
pharmaceutical companies, which will help bear the cost of the regulatory
process and commercialization in the United States and in foreign markets.
When appropriate, the Company will retain rights to market any products which
may be successfully developed and approved for commercialization. The
Company may add additional products to its portfolio through further product
and technology licensing.
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PRODUCT DEVELOPMENT PROGRAMS:
ILOPERIDONE- SCHIZOPHRENIA AND RELATED PSYCHOTIC DISORDERS
In January 1997, the Company entered into a license agreement (the "HMRI
Agreement") with Hoechst Marion Roussel, Inc. ("HMRI"), pursuant to which it
acquired an exclusive worldwide license to Iloperidone, an antipsychotic
agent in development for treatment of schizophrenia and related disorders.
Schizophrenia strikes early in life and is generally viewed as a chronic,
life-long disorder. Schizophrenia is characterized by the presence of
"positive" symptoms, such as delusions, hallucinations and disorganized
speech, and "negative" symptoms such as withdrawal and apathy. According to
the World Health Organization, approximately 45 million people worldwide have
some form of schizophrenia or a related pyschotic disorder.
Iloperidone is one of a new class of antipsychotic medications, referred
to as atypical antipsychotics, which are believed to be more effective
against most of the symptoms of schizophrenia with a lower incidence of side
effects than older medications. The results of Phase II trials, which were
completed in 1996, demonstrate that Iloperidone may provide effective
treatment against both positive and negative symptoms of schizophrenia, with
low incidence of extrapyramidal symptoms, one of the most significant side
effects associated with antipsychotic compounds currently on the market. In
the Phase II trials, Iloperidone was administered to approximately 150
patients in various doses. At the most frequently studied dose of 8 mg per
day, incidence of extrapyramidal symptoms did not differ from placebo treated
patients. At higher doses, administered in the absence of placebo
comparators, there was minimal indication of extrapyramidal symptoms. Phase
II tolerance data also supported the safety of Iloperidone at doses of up to
32 mg per day. During initial dose titration, transient postural
hypotension, a property typical of and shared by most antipsychotics, was
easily controlled by administration concurrent with food. Iloperidone is
expected to enter Phase III clinical trials in 1998.
In November 1997, Titan entered into an agreement (the "Novartis
Sublicense") with Novartis Pharma AG ("Novartis") pursuant to which Novartis
was granted a sublicense for the worldwide (with the exception of Japan)
development, manufacturing and marketing of Iloperidone. Pursuant to the
Novartis Sublicense, Novartis paid Titan approximately $17.4 million in
license fees and reimbursement of research and development expenses and made
a $5 million equity investment in Titan, and is required to make additional
milestone and royalty payments to Titan and HMRI.
The Company has been advised by Novartis that it has expanded Titan's
The Company has been advised by Novartis that it has expanded Titan's
original Phase III clinical development plan to simultaneously pursue a
worldwide (excluding Japan) product development and registration strategy.
Novartis is in the process of manufacturing sufficient new drug substance
that will be used for all the trials and expects to commence clinical trials
in August 1998.
IMMUNOTHERAPEUTICS- COLORECTAL CANCER, BREAST CANCER, AND LUNG CANCER
The Company is engaged in development of cancer therapeutic vaccines
utilizing anti-idiotypic ("anti-id") antibody technology licensed from the
University of Kentucky Research Foundation. The anti-id therapeutics under
development are targeted at a specific epitope (site) that is primarily
present on the targeted cancer cell and is not commonly found on normal
tissue. From a molecular biological perspective the anti-id antibody is
structurally similar to the cancer epitope. When injected into a patient,
the antibody acts as a trigger for the normal immune system's response of
lymphocytes to attack target cancer cells. The amount required to elicit
this response is relatively small at two milligrams per dose, compared with
the tens or hundreds of milligrams per dose utilized in so-called
"traditional" monoclonal therapy or radio imaging.
The Company is developing three separate products that have demonstrated
an immune response in humans against antigens associated with colon cancer,
breast cancer, ovarian cancer, small cell lung cancer, melanoma and other
cancers. All three products have successfully completed Phase I clinical
trials. The products are:
- CeaVac-TM- (3H1). The Company believes this product has potential
utility in the treatment of adenocarcinomas, notably, colorectal
cancer, non-small cell lung cancer, pancreatic cancer and gastric
cancer. Carcinoembryonic antigen ("CEA") is produced by the largest
group of cancers, adenocarcinomas. In particular, this product has
received significant interest in the international oncology community,
as it is the first published report of a vaccine to consistently break
CEA immune tolerance in humans. During 1998, the Company is planning to
initiate a Phase II study in patients with colorectal cancer.
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- TriAb-TM- (11D10). The Company believes this product has potential
utility in the treatment of breast, ovarian and non-small cell lung
cancer. During 1998, the Company is planning to initiate Phase II
studies in patients with breast cancer.
- TriGem-TM- (1A7) antibody. The Company believes this product has
potential utility in the treatment of cancers that express the GD2
ganglioside, including melanoma, small cell lung cancer and sarcoma.
During 1998, the Company is planning to initiate Phase II studies in
patients with small cell lung cancer.
A number of United States and foreign patent applications covering both
therapeutic and diagnostic applications of the anti-id antibody technology
are pending. A U.S. patent has been issued for TriGem-TM-, and claims have
been allowed for a U.S. patent of TriAb-TM-.
PIVANEX-TM-- LUNG CANCER
Pivanex, is derived from a patented analog of butyric acid, and has
demonstrated in laboratory tests the ability to destroy cancer cells through
the mechanism of cellular differentiation. Traditional cytotoxic
chemotherapeutics tend to kill cancer cells preferentially because cancer
cells divide more often and more rapidly than most normal cells.
Unfortunately, such agents may also kill rapidly dividing normal cells,
including blood cells and cells of the intestine lining, which leads to side
effects such as anemia, nausea, vomiting and risk of infection. Unlike
traditional cytotoxic chemotherapy, differentiation therapy represents a
relatively new direction in cancer research, and involves the development of
agents that, in contrast to the function of cytotoxic agents, induce cancer
cells to differentiate, mature and exhibit more normal growth properties.
Differentiation therapy may also lead to apoptosis, or what is known as
normal "programmed cell death," resulting in the destruction of the cancer
cells while sparing normal cells. Pivanex is currently completing Phase I
clinical trials and has already demonstrated a partial response in a
non-small cell lung cancer patient. During 1998, the Company is planning to
initiate Phase II studies in patients with non-small cell lung cancer.
GENE THERAPY PRODUCTS- CANCER
The Company is currently developing two potential gene therapy products
for the treatment of cancer, RB94 and MDRx1, under exclusive worldwide
licenses from the Baylor College of Medicine and the University of Illinois
at Chicago, respectively. RB94 is a gene therapy product in preclinical
development that combines a truncated variant (p94) of a tumor suppressor
gene (the "RB gene") with a viral vector. The Company believes the form of
the RB protein encoded by the RB94 gene therapy product is more effective at
causing suppression of tumor cells than the full-length RB protein, based on
data demonstrating in vitro suppression of numerous tumor types tested to
date, including tumors of the bladder, prostate, cervix, bone, breast, lung
and fibrous tissue. In addition, preliminary experiments indicate the
modified gene is effective in suppressing some cancer cell lines in vitro
that continue to contain the functional native RB gene.
The potential gene therapy product RB94 will consist of the modified RB
gene and an appropriate liposome or viral vector. The product would be
delivered directly to tumor cells through local application. In
collaboration with MD Anderson Cancer Center in Houston, Texas ("MD
Anderson"), the Company is currently testing RB94 in preclinical studies of
solid tumors in mouse models, and, if successful, the Company expects to file
an IND for a pilot clinical trial in prostate cancer patients by the end of
1998.
The Company is also developing a gene-based chemoprotective product,
MDRx1-TM-, to genetically engineer multidrug resistance into blood progenitor
(or stem) cells in order to protect these otherwise sensitive normal cells
from chemotherapy toxicity. MDRx1-TM-utilizes the human multi-drug
resistance gene (MDR1) which encodes "P-glycoprotein," a membrane protein
capable of pumping a variety of chemicals out of cells. MDRx1-TM- involves
the insertion of the MDR1 gene ex vivo into stem cells that have been removed
from cancer patients in order to render some portion of the stem cells
resistant to chemotherapeutic agents. The modified stem cells are then
reinfused into the patients where they repopulate the blood system with
chemo-resistant blood cells. The conferred resistance would potentially
allow patients to be given higher doses of anti-cancer agents than could be
given under normal circumstances (i.e., if the bone marrow was not
protected). Bone marrow suppression is the biggest dose-limiting toxicity
factor in the treatment of cancer patients because chemotherapy must be
interrupted or reduced in order to allow the bone marrow to recover.
MDRx1-TM- may allow for the administration of greater or more frequent doses
of chemotherapy while protecting the bone marrow and peripheral blood cells.
If this approach proves successful, it is also possible that MDR1 will be
utilized as a co-selective gene to help introduce and maintain other genes of
potential therapeutic value in human cells.
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Phase I testing has been performed at MD Anderson using a preliminary
form of MDRx1-TM- with patients being treated for ovarian cancer and with
patients being treated for breast cancer to determine whether the MDR1 gene
can be introduced and maintained in humans. The clinical testing involved
introducing ex vivo the MDR1 gene in human blood stem cells extracted from
the bone marrow of cancer patients and then reintroducing the cells, which
have been made resistant to chemotherapeutic agents, where they quickly
repopulate the hematopoietic system. The results of such testing show that
the MDR1 gene has been successfully introduced into a fraction of the donor
bone marrow of many of the patients in the study. A number of issues remain
to be addressed before initiating phase II clinical studies, including
ascertaining the optimal vector for the MDR1 gene and contracting for large
scale production of the final product.
CELL THERAPY PRODUCTS- PARKINSON'S DISEASE
The Company is engaged in the research and development of cell-based
therapeutics intended for use in the restorative treatment of neurologic
diseases. A majority of neurological disorders, including Parkinson's
disease, Alzheimer's disease, stroke and epilepsy, occur when brain cells
(neurons) die. Because neurons cannot readily regenerate in response to
injury or cell death, most current pharmaceutical therapies are directed
toward amplifying the function of the remaining neurons, an approach which
becomes less effective over time as an increasing number of the neurons die.
The Company's proprietary technologies enable the development of cell-based
therapies for minimally-invasive, site specific (i.e., stereotaxic) delivery
to the central nervous system to replace or provide therapeutic factors
precisely where they are needed in order to treat the neurological disease or
disorder.
One of the Company's technologies, licensed on an exclusive worldwide
basis from New York University, involves the direct implantation into the CNS
of microscopic beads ("microcarriers"), the surfaces of which are coated with
live cells that secrete therapeutic factors useful in the treatment of
certain neurological diseases. The beads provide a matrix, or membrane-like
surface, to which cells attach and grow. The Company believes that this cell
coated microcarrier ("CCM-TM-") technology can facilitate site-specific
delivery of missing or deficient neurotransmitters, growth factors and
replacement tissue to diseased or injured areas of the brain by increasing
the survival and successful engraftment of the cells. The Company's initial
product candidate based on this technology is Spheramine-TM-, microcarriers
coated with dopamine-producing human pigmented retinal epithelial ("HPRE")
cells intended for the treatment of Parkinson's disease. Studies conducted
to date have shown improvement in hemiparkinsonian primates after
implantation of Spheramine. Further preclinical studies in primates are in
progress and the Company is also seeking a corporate partner in support of
Phase I clinical trials of this product.
Complementing CCM-TM- is a technology based on Sertoli cells, which has
been licensed exclusively on a worldwide basis from the University of South
Florida. These unique cells secrete a host of growth factors important to
the repair and resprouting of damaged neurons, and thus may be useful in
restoring function in degenerative diseases, including Parkinson's disease,
Huntington's disease, stroke, Alzheimer's disease, epilepsy and traumatic
brain injuries. Additionally, they are capable of providing an
immunologically privileged and nurturing environment to other types of cells
of interest for transplant, and thus, analogous to CCM-TM-, may facilitate
successful engraftment of such cells.
The Company's development efforts with regard to Sertoli cell technology
are at an early stage and there are a number of issues that must be resolved
including the long-term effects of cell implantation, as well as source of
including the long-term effects of cell implantation, as well as source of
cells in light of continuing controversy regarding the use of porcine tissue
in xenotransplantation due to the possibility of IN VITRO infection of human
cells with retroviruses carried by swine. Product research and development is
being conducted through the University of South Florida and contract research
and manufacturing organizations. Initial product development efforts are
focused towards early-stage Parkinson's disease and Huntington's disease.
The Company's cell therapy efforts are currently performed through
Theracell. Titan currently owns 99% of the outstanding stock of Theracell.
IMPLANTABLE DRUG DELIVERY SYSTEM
The Company is engaged in the development of drug delivery technology
with application in the treatment of a number of neurologic and psychiatric
disorders in which conventional treatment is limited by variability of drug
concentration in blood and poor patient compliance. The technology, which
has been licensed from the Massachusetts Institute of Technology ("MIT"),
consists of a polymeric drug delivery system that potentially can provide
controlled drug release over extended periods (i.e., from three months to
more than one year). The technology involves imbedding the drug
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of interest in a polymer and extruding implantable product, which is then
implanted subcutaneously to provide systemic delivery as body fluids wash
over the implant and the drug is released. This results in a constant rate
of release similar to intravenous administration. The Company believes that
such long-term, linear release characteristics are highly desirable, avoiding
peak and trough level dosing that poses problems for many CNS and other
therapeutic agents.
The MIT technology offers significant potential benefits to patients
suffering from chronic CNS disorders, including Huntington's disease,
Parkinson's disease, schizophrenia and psychosis and chronic pain by
providing long-term, intravenous type dosing in a single administration, in
an ambulatory outpatient setting. Patients that pose compliance concerns,
including those who are impaired or whose socioeconomic circumstances hinder
compliance with traditional chronic drug administration could also
potentially benefit from this technology. There are, however, a number of
factors that will need to be addressed in the research and development phase
of any product that results from this polymer matrix technology, including
(i) flexibility in dosing; (ii) drug potency; (iii) potential negative
effects from long-term continuous drug delivery; and (iv) feasibility of
device implantation and removal. There can be no assurance that such factors
will be successfully resolved.
The Company is conducting further preclinical evaluation of prototype
products through contract research and manufacturing organizations through
its ProNeura subsidiary. Titan currently owns approximately 79% of ProNeura.
SPONSORED RESEARCH AND LICENSE AGREEMENTS
The Company is party to several agreements with research institutions,
companies, universities and other entities for the performance of research
and development activities and for the acquisition of licenses relating to
such activities.
ILOPERIDONE
Effective December 31, 1996, pursuant to the HMRI Agreement, the Company
acquired an exclusive worldwide license under United States and foreign
patents and patent applications relating to the use of Iloperidone for the
treatment of psychiatric and psychotic disorders and analgesia. The HMRI
Agreement provides for the payment of an upfront license fee in cash and
stock aggregating $9,500,000, as well as substantial additional late stage
milestone payments. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations." The HMRI Agreement also
provides for the payment of royalties on net sales and requires the Company
to satisfy certain other terms and conditions in order to retain its rights
thereunder.
IMMUNOTHERAPEUTICS
The Company has acquired an exclusive, worldwide license under certain
United States and foreign patent and patent applications pursuant to a
license agreement with the University of Kentucky Research Foundation (the
"Kentucky Agreement"). These patent and patent applications relate to the
anti-idiotypic antibodies known as 3H1, 1A7 and 11D10 and their fragments,
derivatives or analogs. The Kentucky Agreement obligates the Company to fund
research at the University of Kentucky, at amounts agreed to on an annual
basis, for the five year period ending November 14, 2001. The Kentucky
Agreement provides for the payment of certain license fees totaling up to a
maximum of $370,000 as well as royalties based on net sales of licensed
products by the Company or any sublicensees. The Company must also pay all
costs and expenses incurred in obtaining and maintaining patents. The
Company must also diligently pursue a vigorous development program with
respect to the licensed technology in order to maintain its license rights
under the Kentucky Agreement.
PIVANEX
The Company has acquired from Bar-Ilan Research and Development Co. Ltd.
("Bar-Ilan") an exclusive, worldwide license to an issued United States
patent and certain foreign patents, and patent applications covering novel
analogs of butyric acid owned by Bar-Ilan University and Kupat Hulim Health
Insurance Institution (the "Bar-Ilan Agreement"). The Bar-Ilan Agreement
provides for the payment by the Company to Bar-Ilan of royalties based on net
sales of products and processes incorporating the licensed technology,
subject to minimum annual amounts commencing in 1995, as well as a percentage
of any income derived from any sublicense of the licensed technology. The
Company must also pay all costs and expenses incurred in patent prosecution
and maintenance. The minimum annual royalties for 1998 are $25,000 and
$60,000, annually thereafter.
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The Company must also satisfy certain other terms and conditions set
forth in the Bar-Ilan Agreement in order to retain its license rights
thereunder, including the use of reasonable best efforts to bring any
products developed under the Bar-Ilan Agreement to market, and to continue
diligent marketing efforts for the life of the license, the timely
commencement of toxicology testing on small and large animals, the
development of and compliance with a detailed business plan and the timely
payment of royalty fees.
GENE THERAPY PRODUCTS
Through Ingenex, the Company is a party to several license agreements
with the University of Illinois at Chicago ("UIC") which grant the Company
the exclusive worldwide license under certain issued patents and patent
applications, including those relating to methods for preventing multi drug
resistance and the human MDR1 gene (collectively, the "UIC Licenses"). The
exclusive nature of the licenses is subject in certain instances to certain
reservations, including the use of all or part of the subject matter of the
licenses for research, education and other non-commercial purposes. In
addition, the Company's rights under the MDR1 license are subject to a
non-exclusive right granted to Burroughs-Wellcome to transfect cell lines
with the MDR1 gene, and to use the transfectants for research purposes.
Burroughs-Wellcome does not, however, have the right to sell or transfer the
transfectants or any derivatives thereof, without the written authorization
of UIC.
The UIC Licenses provide for the payment of license issue fees totaling,
in the aggregate, approximately $145,000 and a royalty to UIC based on sales
of products and processes incorporating the licensed technology. Each UIC
License also requires the payment of certain annual minimum amounts during
the time periods provided therein. Furthermore, the Company will pay to UIC
(i) royalties based on sublicensing income, (ii) a percentage of revenues
from research relating to the subject matter of each UIC License that is
performed on a contract basis for third parties and (iii) all costs and
expenses associated with patent prosecution and maintenance. The Company
must also satisfy certain other terms and conditions of the UIC Licenses in
order to retain its license rights thereunder, including the use of best
efforts to bring any products developed under the UIC Licenses to market, the
development of and compliance with a detailed business plan, obtaining all
necessary government approvals and the timely payment of license and royalty
fees. In addition, the Company has the right in all instances to elect to
assume control of patent prosecution of the licensed technology. However,
the Company may determine that the benefits of filing for patent protection
are outweighed by costs, security or other constraints. As a result, there
can be no assurances that the Company will obtain or seek patent protection
in all jurisdictions into which it sells products made under the licenses.
Through Ingenex, the Company has obtained additional exclusive,
worldwide licenses from UIC to foreign and domestic patent applications
relating to genes and genetic elements associated with (i) sensitivity to
cisplatin in human cells, (ii) neoplastic transformation and (iii)
sensitivity to chemotherapeutic drugs along with the association of kinesin
with chemotherapeutic drug sensitivity. Further development of the
technologies to which the licensed patent applications relate will depend on
the ability of the Company to enter into corporate partnering arrangements on
acceptable terms. All three of these licenses are subject to certain rights
of third parties for non-commercial research and educational purposes. These
licenses provide for the payment of license issue fees totaling $50,000,
royalties based on sales of products and processes incorporating the licensed
technology, subject to certain minimum annual amounts, and a percentage of
all revenue received from any sublicense of the licensed technology. The
obligations of the Company under these agreements are substantially similar
to those contained in the UIC Licenses.
Through Ingenex, the Company has acquired an exclusive license from MIT
(the "MIT License") under an issued patent relating to the use of MDR genes
for creating and selecting drug resistant mammalian cells. The MIT license
is subject to prior grants of (a) an irrevocable, royalty-free, nonexclusive
license granted to the United States government, (b) non-exclusive licenses
granted to Eli Lilly, Inc. ("Eli Lilly") and Genetics Institute, Inc. for
research purposes and (c) non-exclusive, commercial licenses that may be
granted pursuant to options granted to Eli Lilly and Genetics Institute, Inc.
to use aspects of the licensed technology but only to make products that do
not incorporate genes claimed in the patent, proteins expressed by such genes
or antibodies and inhibitors to such genes. The MIT License provides for the
payment of royalties based on net sales of products and processes
incorporating the licensed technology, subject to certain minimum annual
amounts, a percentage of sublicensing income arising from the license of such
products and processes, and the issuance to MIT of shares of Ingenex's Common
Stock. Under the MIT License, the Company must also use reasonable best
efforts to bring any products developed under the MIT License to market,
efforts to bring any products developed under the MIT License to market,
develop and comply with a detailed business plan and make timely payment of
license and royalty fees.
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In October 1992, the Company acquired, through Ingenex, an exclusive,
worldwide license (the "Baylor License") under United States and foreign
patent applications assigned to Baylor College of Medicine relating to the RB
gene, including its use in conferring senescence to tumors that forms the
basis of RB94. The Baylor License provides for royalties based on net sales
of products and processes incorporating the licensed technology, subject to
certain minimum annual amounts and a percentage of sublicensing income
arising from the license of such products and processes. Under the Baylor
License, the Companymust use reasonable best efforts to bring any products
developed under the Baylor License to market, develop and comply with a
detailed business plan, fund research pursuant to the Baylor research
agreement, commence a cancer therapy research program, make timely payment of
royalty fees and pay all costs and expenses incurred in patent filing,
prosecution and maintenance.
CELL THERAPY PRODUCTS
Through Theracell, the Company has acquired an exclusive, worldwide
license under certain United States and foreign patent applications relating
to the CCM-TM- technology pursuant to a research and license agreement (the
"NYU Agreement") with New York University ("NYU"). The NYU Agreement provides
for the payment of royalties based on net sales of products and processes
incorporating licensed technology, as well as a percentage of any income it
receives from any sublicense thereof. Theracell is also obligated to
reimburse NYU for all costs and expenses incurred by NYU in filing,
prosecuting and maintaining the licensed patents and patent applications.
The Company must satisfy certain other terms and conditions of the NYU
Agreement in order to retain its license rights thereunder. These include,
but are not limited to, the use of best efforts to bring licensed products to
market as soon as commercially practicable and to diligently commercialize
such products thereafter, the use of best efforts to carry out the
performance of all efficacy, pharmaceutical, safety, toxicological and
clinical tests and to obtain all appropriate governmental approvals for the
production, use and sale of the licensed products, the development of and
compliance with a detailed business plan and the timely payment of license
and royalty fees.
In March 1996, the Company acquired, through Theracell, an exclusive,
worldwide license under United States and foreign patent applications
relating to the Sertoli cell technology pursuant to a license agreement (the
"USF Agreement") with the University of South Florida and the University of
South Florida Research Foundation, Inc. (collectively, "USF"). The USF
Agreement provides for the payment of royalties based on net sales by the
Company or any sublicensees of products and processes incorporating licensed
technology. The Company is also obligated to reimburse USF for all costs and
expenses incurred by USF in filing, prosecuting and maintaining the licensed
patent rights. The Company must satisfy certain other terms and conditions
of the USF Agreement in order to retain its license rights thereunder. These
include the development and introduction into clinical trials of at least one
product within three years of such date and an additional product every two
years thereafter until commercialization of one product, the timely payment
of license and royalties.
IMPLANTABLE DRUG DELIVERY SYSTEM
Through ProNeura, the Company has acquired from MIT an exclusive
worldwide license to certain United States and foreign patents relating to
the implantable drug delivery system (the "MIT License"). The MIT License
required the Company to invest $1,800,000 in operating capital toward
development of products and processes covered by the MIT License during the
two years ended September 1997. The exclusive nature of the MIT License is
subject to the condition that an IND application had been filed with the FDA
by December 31, 1997. Through December 31, 1997, the Company had spent
approximately $1.3 million on product development and preclinical testing and
had not fully completed the regulatory requirements for an IND application.
The Company is engaged in discussions with MIT regarding the Company's
progress to date and future development plans and does not believe the
foregoing will result in a loss of its exclusivity under the MIT license.
However, there can be no assurance to such effect. The Company must also
satisfy certain other terms and conditions set forth in the MIT License in
order to retain its license rights thereunder, including using its reasonable
best efforts to obtain the necessary regulatory approvals to conduct clinical
testing of the licensed technology and to market such products, if
successfully developed, in the United States and Europe. The MIT License
provides for the payment by the Company of royalties based on sale of
products and processes incorporating the licensed technology, as well as a
percentage of income derived from sublicenses of the licensed technology.
8
PATENTS AND PROPRIETARY RIGHTS
GENERAL
The Company's success will depend, in part, on its ability, and the
ability of its licensor(s), to obtain protection for their products and
technologies under United States and foreign patent laws, to preserve their
trade secrets, and to operate without infringing the proprietary rights of
third parties. The Company has obtained rights to certain patents and patent
applications and may, in the future, seek rights from third parties to
additional patents and patent applications. There can be no assurance that
patent applications relating to potential products or technologies, including
those licensed from others, or that may be licensed in the future, will
result in patents being issued, that any issued patents will afford adequate
protection or not be challenged, invalidated, infringed, or circumvented, or
that any rights granted thereunder will afford competitive advantages to the
Company. Furthermore, there can be no assurance that others have not
independently developed, or will not independently develop, similar products
and/or technologies, duplicate any of the Company's products or technologies,
or, if patents are issued to, or licensed by the Company, design around such
patents.
There can be no assurance that the validity of any of the patents
licensed to the Company would be upheld if challenged by others in litigation
or that the Company's activities would not infringe patents owned by others.
The Company could incur substantial costs in defending suits brought against
Titan or the Operating Companies or any of their licensors, or in suits in
which the Company may assert, against others, patents in which the Company
has rights. Should the Company's products or technologies be found to
infringe patents issued to third parties, the manufacture, use, and sale of
such products could be enjoined and the Company could be required to pay
substantial damages. In addition, the Company may be required to obtain
licenses to patents or other proprietary rights of third parties, in
connection with the development and use of their products and technologies.
No assurance can be given that any licenses required under any such patents
or proprietary rights would be made available on acceptable terms, if at all.
The Company also relies on trade secrets and proprietary know-how, which
it seeks to protect, in part, by confidentiality agreements with employees,
consultants, advisors, and others. There can be no assurance that such
employees, consultants, advisors, or others, will maintain the
confidentiality of such trade secrets or proprietary information, or that the
trade secrets or proprietary know-how of the Company will not otherwise
become known or be independently developed by competitors in such a manner
that the Company will have no practical recourse.
GENE THERAPY PRODUCTS
The Company is aware of a U.S. patent issued to a third party (the
"Riordan patent") relating to a multidrug resistance. The Riordan patent
describes the isolation of two DNA molecules that code for fractional
portions of the hamster protein associated with multidrug resistance (the
"hamster MDR-1 gene"). A patent licensed by Ingenex (the "Roninson patent")
describes and claims the entire human MDR-1 gene, which is the DNA that codes
for the entire protein associated with multidrug resistance in human cells.
Nonetheless, the Riordan patent claims a DNA molecule coding for a protein,
or a fragment of a protein, that is associated with multidrug resistance in
living cells, including human cells. The Riordan patent has an earlier
effective filing date than the Roninson patent, and there can be no assurance
that the Riordan patent will not be asserted against Ingenex. Thus, it may
be necessary to obtain a license under the Riordan patent to pursue
commercialization of its proposed gene therapy products utilizing the MDR-1
gene. There can be no assurance that such a license, if required, will be
made available to the Company on acceptable terms, if at all.
The Company also is aware of a U.S. patent issued to a third party (the
"Anderson patent") relating to EX VIVO gene therapy. The Anderson patent is
reported to be exclusively licensed to Genetics Therapy, Inc. The Company
believes that the Anderson patent could be asserted to cover gene
therapeutics developed by Ingenex, to the extent that the introduction of a
gene into a subject's cells is performed EX VIVO. In January 1996, it was
reported that an interference proceeding had been instituted in the U.S.
Patent and Trademark Office (the "PTO") between the issued Anderson patent
and two pending patent applications. Depending on the outcome of the
interference, it may or may not be necessary for the Company to obtain a
license from a party to the interference (or its licensee) to pursue
commercialization of its proposed gene therapy products utilizing EX VIVO
gene therapy. There can be no assurance that such a license, if required,
will be made available to the Company on acceptable terms, if at all.
The Company has received notice that three companies, Chiron
Corporation, Novartis and Introgene NV, are opposing the grant of a European
patent corresponding to the Roninson patent with claims directed to the human
MDR-1
9
gene and gene fragments. While the Company, through its licensor, intends to
vigorously respond to the oppositions, no assurance can be given as to the
scope of the claims, if any, which the European Patent Office ultimately will
find patentable.
The Company is aware of the existence of a prior art reference (European
Patent Application 0 259 031) ("EP 0 259 031"), which discloses a DNA
sequence corresponding to the sequence of the RB94 DNA molecule that is
claimed in an issued U.S. patent licensed by the Company from Baylor (the
"Baylor patent"). The Baylor patent also contains claims directed to
specific expression vectors containing these DNA molecules. Although a
patent is presumed valid, there can be no assurance that the claims of the
patent is presumed valid, there can be no assurance that the claims of the
Baylor patent, if challenged, will not be found invalid. In any event, given
that EP 0 259 031 relates to DNA molecules but not to methods of gene
therapy, the existence of this reference alone would not, as a matter of U.S.
law, be expected to affect the patentability of claims directed to the use of
the RB94 DNA molecule in gene therapy for certain cancers, which gene therapy
claims presently are pending in a related patent application licensed by the
Company from Baylor.
CELL THERAPY PRODUCTS
The PTO has issued a U.S. patent on the core subject material underlying
the NYU License. An Australian patent on the core material of a patent
application underlying the NYU License was granted in May 1996. Prosecution
of various divisional and continuation applications and their foreign
counterparts continues satisfactorily; there can be no guarantee, however,
that additional patents will be granted. The Company is also aware of an
issued United States patent relating to a method for treating defective or
diseased cells in the mammalian CNS by grafting genetically modified donor
cells in the CNS (i.e., the brain), which cells can produce molecules (i.e.,
dopamine) in a sufficient amount to ameliorate the defect or disease. To the
extent Theracell's commercial activities include the grafting of genetically
modified donor cells, such activities could give rise to issues of
infringement of this patent.
The Company is aware of patent applications relating to use of Sertoli
cells in transplantation filed by Research Corporation Technologies (RCT).
These applications may affect validity of certain claims in the USF patent
applications. The Company and USF believe they may have certain rights in
the RCT patents. The exercise of these rights will depend on an inventorship
determination, the outcome of which is uncertain at this time.
COMPETITION
The pharmaceutical and biotechnology industries are characterized by
rapidly evolving technology and intense competition. Many companies of all
sizes, including major pharmaceutical companies and specialized biotechnology
companies, are engaged in the development and commercialization of
therapeutic agents designed for the treatment of the same diseases and
disorders targeted by the Company. Many of the competitors of the Company
have substantially greater financial and other resources, larger research and
development staffs and more experience in the regulatory approval process.
Moreover, potential competitors have or may have patent or other rights that
conflict with patents covering the Company's technologies. In certain
circumstances, it may be difficult or impossible for the Company to obtain
appropriate licenses, which would thereby hamper or prevent the
commercialization of its proposed products. The failure to obtain such
licenses could have a material adverse affect on the business, results of
operations and financial condition of Titan and such Operating Companies,
which in turn may have an adverse affect on the business, results of
operations and financial condition of the Company.
With respect to the product candidate Iloperidone, a similar class of
products is sold by Janssen Pharmaceuticals, Inc. and Eli Lilly, with other
companies continuing to develop competing compounds.
With regard to the Company's immunotherapeutic products, the Company is
aware of several companies involved in the development of cancer therapeutics
that target the same cancers as the products under development by the
Company. Such companies include Progenics, Biomira, AltaRex, Genentech,
ImClone and Glaxo-Wellcome.
With regard to its gene therapy products, the Company is aware of
several development stage and established enterprises that are exploring the
field of human gene therapy or are actively engaged in research and
development in the area of multidrug resistance, including Genetix
Pharmaceuticals, Inc. ("Genetix") and two research organizations receiving
funding from the National Institutes of Health ("NIH"). There can be no
assurance that Ingenex's MDRx1-TM- product will prove to be more efficacious
as a gene therapy than any gene therapy under development by Genetix or
either of the two research organizations. The Company is aware of other
commercial entities that have produced gene therapy products used in human
trials. Further, it is expected that competition in this field will
intensify.
10
With regard to its CNS technologies, the Company is aware of several new
drugs for Parkinson's disease that are in preclinical and clinical
development. The Company is aware that Amgen is pursuing clinical trials in
Parkinson's patients with GDNF and is collaborating with Medtronics, Inc. in
its delivery to the CNS. In addition, the Company is aware of several
well-funded public and private companies that are actively pursuing
alternative cell transplant technologies, including Somatix Therapy
Corporation ("Somatix"), CytoTherapeutics Inc. and Diacrin, Inc. The
technology under development by Diacrin, Inc. involves using antibodies to
eliminate the need for immunosuppression when transplanting fetal pig cells
into Parkinson's patients, and would directly compete with Spheramine-TM-.
There can be no assurance that any of the products under development by
Somatix, CytoTherapeutics Inc. or Diacrin, Inc., or which might be developed
by other entities, will not prove to be more efficacious in the treatment of
Parkinson's disease than the product under development by Theracell.
With regard to its implantable drug delivery system, the Company is
aware of an implantable therapeutic system being developed by ALZA
Corporation. Additionally, companies such as Medtronics, Inc. are developing
implantable pumps that could be used to infuse drugs into the CNS.
In addition to the foregoing, colleges, universities, governmental
agencies and other public and private research organizations are likely to
continue to conduct research and are becoming more active in seeking patent
protection and licensing arrangements to collect royalties for use of
technology that they have developed, some of which may be directly
competitive with the technologies being developed by the Company. These
institutions also compete with the Company in recruiting highly qualified
scientific personnel. The Company expects therapeutic developments in the
areas of oncology and hematology to occur at a rapid rate and competition to
intensify as advances in this field are made. Accordingly, the Company will
be required to continue to devote substantial resources and efforts to
research and development activities.
GOVERNMENT REGULATION
In order to obtain FDA approval of a new drug, a company generally must
submit proof of purity, potency, safety and efficacy, among others. In most
cases, such proof entails extensive clinical and preclinical laboratory
tests. The testing and preparation of necessary applications is expensive
and may take several years to complete. There is no assurance that the FDA
will act favorably or quickly in reviewing submitted applications, and
significant difficulties or costs may be encountered by the Company in its
efforts to obtain FDA approvals, which difficulties or costs could delay or
the marketing of any products which may be developed. The processing of
those applications by the FDA is a lengthy process and may also take several
years. Any future failure to obtain or delay in obtaining such approvals
could adversely affect the ability of the Company to market its proposed
products. Moreover, even if regulatory approval is granted, such approval
may include significant limitations on indicated uses for which any such
products could be marketed. Further, a marketed drug and its manufacturer
are subject to continued review, and later discovery of previously unknown
problems may result in restrictions on such product or manufacturer,
including withdrawal of the product from the market. In addition, new
government regulations may be established that could delay or prevent
regulatory approval of the products under development.
Among the conditions for clinical studies and IND approval is the
requirement that the prospective manufacturer's quality control and
manufacturing procedures conform to good manufacturing practices ("GMP"),
which must be followed at all times. In complying with standards set forth
in these regulations, manufacturers must continue to expend time, moneys and
effort in the area of production and quality control to ensure full technical
compliance.
The FDA may also require post-marketing testing and surveillance of
approved products, or place other conditions on their approvals. These
requirements could cause it to be more difficult or expensive to sell the
products, and could therefore restrict the commercial applications of such
products. Product approvals may be withdrawn if compliance with regulatory
standards is not maintained or if problems occur following initial marketing.
With respect to patented products or technologies, delays imposed by the
governmental approval process may materially reduce the period during which
the Company will have the exclusive right to exploit such technologies.
The procedure for obtaining FDA approval to market a new drug involves
several steps. Initially, the manufacturer must conduct preclinical animal
testing to demonstrate that the product does not pose an unreasonable risk to
human subjects in clinical studies. Upon completion of such animal testing,
an IND must be filed with the FDA before clinical studies may begin. An IND
application consists of, among other things, information about the proposed
clinical trials. Once the IND is approved (or if FDA fails to act within 30
days), the clinical trials may begin.
11
Human clinical trials on drugs are typically conducted in three
sequential phases, although the phases may overlap. Phase I trials typically
consist of testing the product in a small number of healthy volunteers or in
patients, primarily for safety in one or more doses. During Phase II, in
addition to safety, the efficacy of the product is evaluated in up to several
hundred patients and sometimes more. Phase III trials typically involve
additional testing for safety and efficacy in an expanded patient population
at multiple test sites. The FDA may order the temporary or permanent
discontinuation of a clinical trial at any time.
The results of the preclinical and clinical testing on new drugs are
submitted to the FDA in the form of a new drug application ("NDA") for new
drugs. The NDA approval process requires substantial time and effort and
there can be no assurance that any approval will be granted on a timely
basis, if at all. The FDA may refuse to approve an NDA if applicable
regulatory requirements are not satisfied. Product approvals, if granted,
may be withdrawn if compliance with regulatory standards is not maintained or
problems occur following initial marketing.
In addition, the Company's gene therapy product candidates are subject
to guidelines established by NIH, covering deliberate transfers of
recombinant DNA into human subjects conducted within NIH laboratories or with
NIH funds must be approved by the NIH Director. The Director may approve a
procedure if it is determined that no significant risk to health or the
environment is presented. The NIH has established the Recombinant DNA
environment is presented. The NIH has established the Recombinant DNA
Advisory Committee (the "RAC") to advise the NIH Director concerning approval
of NIH-supported research involving the use of recombinant DNA. A proposal
will be considered by the RAC only after the protocol has been approved by
the investigator's local Institutional Review Board and other committees.
Although the jurisdiction of the NIH applies only when NIH-funded research or
facilities are involved in any aspect of the protocol, the RAC encourages all
gene transfer protocols to be submitted for its review. The Company intends
to comply with RAC and NIH guidelines even when it may not be subject to them.
The Company believes it is in compliance with all material applicable
regulatory requirements.
FOREIGN REGULATORY ISSUES
Sales of pharmaceutical products outside the United States are subject
to foreign regulatory requirements that vary widely from country to country.
Whether or not FDA approval has been obtained, approval of a product by a
comparable regulatory authority of a foreign country must generally be
obtained prior to the commencement of marketing in those countries. Although
the time required to obtain such approval may be longer or shorter than that
required for FDA approval, the requirements for FDA approval are among the
most detailed in the world and FDA approval generally takes longer than
foreign regulatory approvals.
EMPLOYEES
The consolidated Company currently has 28 full-time employees. The
Company's future success depends in significant part upon the continued
service of its key scientific personnel and executive officers, as well as
those of the Operating Companies and all of such entities' continuing ability
to attract and retain highly qualified scientific and managerial personnel.
Competition for such personnel is intense and there can be no assurance that
key employees can be retained or that other highly qualified technical and
managerial personnel can be retained in the future.
None of the Company's employees is represented by a labor union. The
Company has not experienced any work stoppages and considers its relations
with its employees to be good.
RISK FACTORS
HISTORY OF OPERATING LOSSES; NEED FOR ADDITIONAL FINANCING. The Company
has experienced substantial operating losses since its inception in July
1991. As of December 31, 1997, the Company's accumulated deficit was
approximately $43.5 million. Such losses have been principally the result of
the various costs associated with research and development activities and the
Company's provision of financial, administrative, regulatory and management
services to the Operating Companies. At December 31, 1997, the Company had
working capital of approximately $24 million and believes that available
funds will enable it to fund its operations for at least 18-24 months. The
Company will be required to seek substantial additional financing to
commercialize any products that it may successfully develop. The Company has
no bank lines of credit and there can be no assurance that the Company will
be able to obtain any needed additional financing on commercially reasonable
terms.
EARLY STAGE OF DEVELOPMENT OF PROPOSED PRODUCTS. The Company's proposed
products are at various stages of development and will require significant
further research, development, testing and regulatory clearances prior to
12
commercialization. There can be no assurance that any proposed products will
be successfully developed, prove to be safe and efficacious, receive
requisite regulatory approvals, demonstrate substantial therapeutic benefits
in the treatment of any disease or condition, be capable of being produced in
commercial quantities at reasonable costs or be successfully marketed.
Accordingly, the Company must be evaluated in light of the expenses, delays,
uncertainties and complications typically encountered by newly established
biopharmaceutical businesses, many of which may be beyond the Company's
control. These include, but are not limited to, unanticipated problems
relating to product development, testing, regulatory compliance,
manufacturing, marketing and competition, and additional costs and expenses
that may exceed current estimates. There can be no assurance that the
Company will successfully develop and commercialize any products or ever
achieve profitable operations.
GOVERNMENT REGULATION. The Company's research and development activities
are, and the production and marketing of its products will be, subject to
regulation for safety and efficacy by numerous governmental authorities in
the United States and other countries. In the United States, pharmaceutical
products are subject to rigorous FDA review. The Federal, Food, Drug, and
Cosmetic Act and other federal statutes and regulations govern or influence
the research, testing, manufacture, safety, labeling, storage, recordkeeping,
approval, advertising and promotion of such products. Noncompliance with
applicable requirements can result in fines, recall or seizure of products,
refusal to permit products to be imported into or exported out of the United
States, refusal of the government to approve product approval applications or
to allow a company to enter into government supply contracts, withdrawal of
previously approved applications and criminal prosecution.
There can be no assurance that any required FDA or other governmental
approval will be granted, or if granted, will not be withdrawn. Governmental
regulation may prevent or substantially delay the marketing of the Operating
Companies' proposed products, cause them to undertake costly procedures and
furnish a competitive advantage to more substantially capitalized companies
with which they expect to compete. In addition, the extent of potentially
adverse government regulations, which might arise from future administrative
action or legislation, cannot be predicted.
RELIANCE ON PATENTS AND OTHER PROPRIETARY RIGHTS. The Company's success
will depend, in part, on its ability, and the ability of the Operating
Companies and their licensor(s), to obtain protection for their products and
technologies under United States and foreign patent laws, to preserve their
trade secrets, and to operate without infringing the proprietary rights of
third parties. The Company has obtained rights to certain patents and patent
applications and may, in the future, seek rights from third parties to
additional patents and patent applications. There can be no assurance that
patent applications relating to potential products or technologies, including
those licensed from others, or that the Company may license in the future,
will result in patents being issued, that any issued patents will afford
adequate protection or not be challenged, invalidated, infringed, or
circumvented, or that any rights granted thereunder will afford competitive
advantages to the Company. Furthermore, there can be no assurance that
others have not independently developed, or will not independently develop,
similar products and/or technologies, duplicate any of the Company's products
or technologies, or, if patents are issued to, or licensed by, the Company,
design around such patents.
There can be no assurance that the validity of any of the patents
licensed to the Company would be upheld if challenged by others in litigation
or that the Company's activities would not infringe patents owned by others.
The Company could incur substantial costs in defending itself and/or the
Operating Companies in suits brought against them or any of their licensors,
or in suits in which the Company may assert, against others, patents in which
the Company has rights. Should the Company's products or technologies be
found to infringe patents issued to third parties, the manufacture, use, and
sale of such products could be enjoined and the Company could be required to
pay substantial damages. In addition, the Company may be required to obtain
licenses to patents or other proprietary rights of third parties, in
connection with the development and use of their products and technologies.
No assurance can be given that any licenses required under any such patents
or proprietary rights would be made available on acceptable terms, if at all.
Titan also relies on trade secrets and proprietary know-how, which it
seeks to protect, in part, by confidentiality agreements with employees,
consultants, advisors, and others. There can be no assurance that such
employees, consultants, advisors, or others, will maintain the
confidentiality of such trade secrets or proprietary information, or that the
trade secrets or proprietary know-how of the Company will not otherwise
become known or be independently developed by competitors in such a manner
that the Company will have no practical recourse.
Titan is aware of an issued United States patent (as well as
corresponding patents and patent applications in foreign countries) relating
to multidrug resistance in mammalian cells. This patent claims substantially
the same subject matter as is claimed by certain issued United States patents
that have been licensed by Ingenex. The Company is also aware of an
13
issued United States patent, relating to EX VIVO gene therapy. The Company
believes that this patent claims subject matter that relates to any gene
therapeutic developed by Ingenex to the extent that the introduction of the
gene into the subject's cells is performed EX VIVO. Thus, it may be
necessary for Ingenex to obtain a license under either or both of such
patents to pursue commercialization of its proposed gene therapy products
utilizing the MDR1 gene or EX VIVO therapies, as applicable. There can be no
assurance that Ingenex will be able to obtain such licenses or that such
licenses, if available, can be obtained on terms acceptable to Ingenex.
Failure of Ingenex to obtain such licenses could have a material adverse
effect on the business, financial condition and results of operations of
Ingenex and the Company. Ingenex has received notice that three companies
are opposing the grant of a European patent which has claims directed to the
human MDR1 gene and gene fragments.
COMPETITION AND TECHNOLOGICAL CHANGE. Competition in the pharmaceutical
and biotechnology industries is intense and is expected to increase. The
Company will face competition from numerous companies that currently market,
or are developing, products for the treatment of diseases and disorders
targeted by the Company. Many of these entities have significantly greater
research and development capabilities, experience in obtaining regulatory
approvals and manufacturing, marketing, financial and managerial resources
than the Company. Acquisitions of or investments in competing biotechnology
companies by large pharmaceuticals companies could enhance such competitors'
financial, marketing and other resources. The Company also competes with
universities and other research institutions in the development of products,
technologies and processes. There can be no assurance that competitors of
the Company will not succeed in developing technologies or products that are
more effective than the Company or that will render the Company's products or
technologies noncompetitive or obsolete. In addition, certain of such
competitors may achieve product commercialization or patent protection
earlier than the Company.
DEPENDENCE UPON KEY COLLABORATIVE RELATIONSHIPS AND LICENSE AND
SPONSORED RESEARCH AGREEMENTS. The Company relies significantly on the
resources of third parties to conduct research and development. The Company's
resources of third parties to conduct research and development. The Company's
success will depend, in part, on its ability and the ability of the Operating
Companies to maintain existing collaborative relationships and to develop new
collaborative relationships with third parties. There can be no assurance
that the Company will be successful in maintaining its existing collaborative
arrangements or that any collaborative arrangements will lead to the
successful commercialization of products.
The license agreements relating to the in-licensing of technology that
have been or may in the future be entered into by the Company or the
Operating Companies typically require the payment of an up-front license fee
and royalties based on sales of licensed products and processes under the
license and any sublicense with minimum annual royalties, the use of due
diligence in developing and bringing products to market, the achievement of
funding milestones and, in some cases, the grant of stock to the licensor.
The sponsored research agreements that have been or may in the future be
entered into by generally require periodic payments on an annual or quarterly
basis. Some agreements also may require funding or production facilities
relating to clinical research. Failure to meet financial or other
obligations under either license agreements or sponsored research agreements
in a timely manner, the rights to proprietary technology or the right to have
the applicable university or institution conduct research and development
efforts could be lost.
DEPENDENCE ON THIRD PARTIES FOR MANUFACTURING AND MARKETING ACTIVITIES.
To date, the Company has not introduced any products on the commercial
market. To conduct human clinical trials and ultimately to gain market
acceptance, the products under development must be manufactured in compliance
with regulatory requirements and at acceptable costs. It is not expected
that the Company will have the resources in the foreseeable future to
allocate to the manufacture or direct marketing of any proposed products and,
therefore, it is intended that collaborative arrangements be pursued
regarding the manufacture and marketing of any products that may be
successfully developed. There can also be no assurance that additional
collaborative arrangements to manufacture or market any proposed products
will be entered into or, in lieu thereof, that any manufacturing operations
can be successfully established or that any sales force can be successfully
implemented.
DEPENDENCE ON KEY PERSONNEL. The Company is highly dependent on the
services of Dr. Louis R. Bucalo, President and Chief Executive Officer, as
well as the other principal members of management and scientific staff of the
Company and the Operating Companies. The loss of one or more of such
individuals could substantially impair ongoing research and development
programs and the Company's ability to obtain additional financing. The
future success of the Company depends in large part upon its ability and that
of the Operating Companies to attract and retain highly qualified personnel.
This intense competition for such highly qualified personnel from other
pharmaceutical and biotechnology companies, as well as universities and
nonprofit research organizations, and may have to pay higher salaries to
attract and retain such personnel. There can be no assurance that sufficient
qualified personnel can be hired on a timely basis or
14
retained. The loss of such key personnel or failure to recruit additional
key personnel could have a material adverse effect on the Company's business,
financial condition and results of operations.
POTENTIAL ADVERSE EFFECT OF REDEMPTION OF WARRANTS. The Warrants may be
redeemed by the Company at a redemption price of $.05 per Warrant upon not
less than 30 days' prior written notice if the closing bid price of the
Common Stock shall have averaged in excess of $9.10 per share for 30
consecutive trading days ending within 15 days of the notice. Redemption of
the Warrants could force the holders (i) to exercise the Warrants and pay the
exercise price therefor at a time when it may be disadvantageous for the
holders to do so, (ii) to sell the Warrants at the then current market price
when they might otherwise wish to hold the Warrants, or (iii) to accept the
nominal redemption price which, at the time the Warrants are called for
redemption, is likely to be substantially less than the market value of the
Warrants.
CURRENT PROSPECTUS AND STATE REGISTRATION TO EXERCISE WARRANTS. Holders
of Warrants will be able to exercise the Warrants only if (i) a current
prospectus under the Securities Act relating to the shares of Common Stock
underlying the Warrants is then in effect and (ii) such securities are
qualified for sale or exempt from qualification under the applicable
securities laws of the states in which the various holders of Warrants
reside. Although the Company has undertaken and intends to use its best
efforts to maintain a current prospectus covering the shares underlying the
Warrants following completion of the Offering to the extent required by
Federal securities laws, there can be no assurance that the Company will be
able to do so. The value of the Warrants may be greatly reduced if a
prospectus covering the shares issuable upon the exercise of the Warrants is
not kept current or if the securities are not qualified, or exempt from
qualification, in the states in which the holders of Warrants reside.
Persons holding Warrants who reside in jurisdictions in which such securities
are not qualified and in which there is no exemption will be unable to
exercise their Warrants and would either have to sell their Warrants in the
open market or allow them to expire unexercised. If and when the Warrants
become redeemable by the terms thereof, the Company may exercise its
redemption right even if it is unable to qualify the underlying securities
for sale under all applicable state securities laws.
SHARES ELIGIBLE FOR FUTURE SALE. Future sales of the Company's Common
Stock by existing stockholders pursuant to Rule 144 under the Securities Act,
pursuant to an effective registration statement or otherwise, could have an
adverse effect on the price of the Company's securities.
ITEM 2. PROPERTIES
The Company has a four-year lease, expiring in May 2000, for
approximately 8,200 square feet of office space in South San Francisco,
California. The monthly rental payment is $13,851. Theracell has a three-year
lease, expiring in August 1999, for approximately 1,900 square feet of space
in Somerville, New Jersey, at a monthly rental payment of $4,479. The Company
leases 3,600 square feet of office space in Scottsdale, Arizona, at a monthly
rental payment of $6,788; the lease expires in August 2000.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) PRICE RANGE OF SECURITIES
Titan's Common Stock trades on the Nasdaq SmallCap Market under the
symbol TTNP. The table below sets forth the high and low sales prices of
Titan's Common Stock as reported by the Nasdaq SmallCap 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.
HIGH LOW
---- ---
Fiscal Year Ended December 31, 1996:
First Quarter $ 8.375 $ 6.250
Second Quarter $ 13.000 $ 7.500
Third Quarter $ 12.250 $ 9.875
Fourth Quarter $ 12.000 $ 8.250
Fiscal Year Ended December 31,1997:
First Quarter $ 9.500 $ 2.625
Second Quarter $ 4.000 $ 2.125
Third Quarter $ 5.250 $ 2.375
Fourth Quarter $ 6.688 $ 3.750
(b) APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS
The number of record holders of the Company's Common Stock as of March
23, 1998 was approximately 281.
(c) DIVIDENDS
The Company has never paid a cash dividend on its Common Stock and
anticipates that for the foreseeable future any earnings will be retained for
use in its business and, accordingly, does not anticipate the payment of cash
dividends.
16
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below summarizes certain financial
data which has been derived from and should be read in conjunction with the
more detailed financial statements of the Company and the notes thereto
included elsewhere herein. See "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations."
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ----------- ------------ ----------- ------------
(in thousands)
STATEMENT OF OPERATIONS DATA:
Total revenues $ 17,500 $ 259 $ 140 $ --- $ ---
Total revenues $ 17,500 $ 259 $ 140 $ --- $ ---
Costs and expenses
Research and development 9,310 5,567 5,202 10,602 5,444
Acquired in-process research and development 9,500 --- 686 --- ---
General and administrative 6,514 5,264 3,658 2,504 353
Other income (expense)--net 8,415 (2,294) (2,288) 104 33
Net income (loss) 592 (12,856) (11,693) (12,974) (5,757)
Basic net income (loss) per share
(pro forma in 1995) $ 0.05 $ (1.67) $ (1.74) --- ---
---------- ----------- ----------
---------- ----------- ----------
Diluted net income (loss) per share $ 0.04 $ (1.67) $ (1.74) --- ---
---------- ----------- ----------
---------- ----------- ----------
AS OF DECEMBER 31,
-----------------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ----------- ------------ ----------- ------------
(in thousands)
BALANCE SHEET DATA:
Working capital (deficiency) $ 23,642 $ 12,174 $ (6,232) $ (2,224) $ 9,066
Total assets 25,594 16,366 4,732 3,069 12,807
Long-term debt --- 1,200 2,036 1,011 ---
Accumulated deficit (43,508) (44,100) (31,244) (19,551) (6,577)
Stockholders' equity (deficiency) 17,178 11,411 (5,823) (2,865) 9,980
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.
The following discussion contains certain forward-looking statements,
within the meaning of the "safe harbor" provisions of the Private Securities
Reform Act of 1995, the attainment of which involves various risks and
uncertainties. Forward-looking statements may be identified by the use of
forward-looking terminology such as "may," "will," "expect," "believe,"
"estimate," "anticipate," "continue," or similar terms, variations of those
terms or the negative of those terms. The Company's actual results may
differ materially from those described in these forward-looking statements
due to, among other factors, the results of ongoing research and development
activities and preclinical testing, the results of clinical trials and the
availability of additional financing through corporate partnering
arrangements or otherwise.
OVERVIEW
Since its inception, the Company's efforts have been principally devoted
to acquiring technologies, research, clinical development, securing patent
protection and raising capital. At December 31, 1997, the Company had an
accumulated deficit of approximately $43,500,000, resulting from expenditures
for research and development and general and administrative activities
including professional fees.
In December 1996, Titan and HMRI entered into the HMRI License, pursuant
to which, the Company paid, during 1997, an up-front license fee of
$9,500,000, payable as follows: (i) $2,000,000 in cash in January 1997; (ii)
$5,500,000 through the issuance 594,595 shares of common stock (the "HMRI
Shares") in January 1997; (iii) and $2,000,000 in cash in July 1997. Pursuant
to the HMRI License, the Company was obligated to pay to HMRI the difference
between $5,500,000 and the net proceeds received by HMRI upon sale of the
HMRI Shares. In February 1998, HMRI sold the HMRI Shares for net proceeds of
approximately $2,456,000. Accordingly, in March 1998, the Company paid to
HMRI the approximately $3,044,000 due. As the Company could have been liable
for the entire $5,500,000, it was not included in stockholders' equity. Upon
the payment to HMRI, approximately $2,456,000 was credited to stockholders'
equity. The HMRI License also provides for substantial future late stage
milestone payments to HMRI, as well as royalty payments on net sales, if any.
In November 1997, Titan and Novartis entered into the Novartis
Sublicense pursuant to which the Company granted Novartis a sublicense for
the worldwide (with the exception of Japan) development, manufacturing and
marketing of Iloperidone. Pursuant to the Novartis Sublicense, Novartis paid
to the Company an up-front license fee of $20,000,000, of which $5,000,000
represents an equity investment in a newly authorized series of convertible
preferred stock (the "Preferred Shares"). In addition, approximately $2.4
million in cash was paid by Novartis as reimbursement of research and
development costs incurred by the Company. The Novartis Sublicense provides
for future payments by Novartis contingent upon the achievement of regulatory
milestones as well as royalty payments on net sales, if any. Novartis has
assumed the clinical development, registration and marketing costs of
Iloperidone. The Preferred Shares were issued pursuant to an agreement (the
"Stock Purchase Agreement") which provides for conversion of such shares into
the Company's Common Stock at the option of Novartis at any time after
January 29, 1999. The conversion price will be equal to the market price
during a period to be specified within the first two fiscal quarters of 1999
and is subject to a floor of $7.50 and a ceiling of $9.00. Accordingly, upon
conversion of the Preferred Shares, the Company will issue a minimum of
555,555 and a maximum of 666,666 shares of Common Stock. The Stock Purchase
Agreement provides that such shares may not be sold, transferred or assigned
prior to November 19, 1999.
Titan has assessed the likely impact on its business of the Year 2000
Issue and does not believe that this issue will present a material problem
for the Company's business or will require significant resources to address.
The Company's business is subject to significant risks including, but
not limited to, the success of its product development efforts, obtaining and
enforcing patents important to the Company's business, competition from other
products and the lengthy as well as expensive regulatory approval process.
There can be no assurance that the Company will have the resources necessary
to conduct the several phases of clinical testing in human subjects necessary
to complete the development and commercialization of any of its products.
The Company's strategy will continue to be to seek public or private
financing through the sale of securities, corporate partnering arrangements
and the licensing of product or technology rights, in order to fund product
development activities and enable the Company to continue to expand its
product portfolio through acquisitions. There can be no assurance that
financing from such sources or others will be available. Additional
expenses, delays, and losses of opportunity that may arise out of these and
other risks could have a material adverse impact on the Company's financial
condition and results of operations.
RESULTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
Total revenues for the year ended December 31, 1997 ("1997") were
$17,500,000 compared with $259,000 for
17
the year ended December 31, 1996 ("1996"). The increase was attributable
to one-time, up-front license fees related to the license of Iloperidone to
Novartis.
Through December 31, 1997, research and development expenses totaled
$47,076,000, and general and administrative expenses totaled $18,242,000.
Research and development expenses for 1997 were $18,810,000 (including
$9,500,000 of acquired in-process research and development), as compared to
$5,567,000 for 1996, an increase of $13,243,000, or 238%. The increase
resulted from the expansion of the Company's development activities,
including the acquisition and further development of Iloperidone. General and
administrative expenses for 1997 were $6,514,000, as compared to $5,264,000
for 1996, an increase of $1,250,000, or 24%. The increase reflects
additional administrative support for the Company's expanded development
activities. General and administrative expenses have declined as a
percentage of total operating expenses, from 49% to 26% in 1996 and 1997
respectively.
Other income/(expense), for 1997 was $8,415,000 compared with
$(2,294,000) for 1996. Other income for 1997 includes approximately
$8,400,000 representing the proceeds from the sale of Ingenex's GSX
technology, and interest income of $666,000. Other income for 1996 includes
interest income of $716,000. Interest expense was $227,000 during 1997 as
compared to $2,011,000 for 1996. Approximately $1,408,000 of the 1996
expense reflects a non-recurring charge due to the repayment in January 1996
of notes issued in a bridge financing ("Bridge Notes"). This non-recurring
charge represents the unamortized portion of the $1,800,000 debt discount and
$458,000 of debt issuance costs relating to the Bridge Notes. Other income
for 1997 and 1996 also includes $591,000 and $999,000, respectively, of
losses representing the Company's share of Ansan's losses.
The Company had net income of $592,000 during 1997 compared with a net
loss of $12,856,000 during 1996. None of the Company's products, however,
have yet been commercialized, and the Company does not expect to generate any
significant revenue for the foreseeable future. The Company expects to incur
substantial research and development costs in the future as a result of
funding ongoing (i) product development programs, (ii) manufacturing of
products for use in clinical trials, (iii) patent and regulatory related
expenses, and (iv) preclinical and clinical testing. The Company also
expects that general and administrative costs necessary to support such
research and development activities will increase. The Company will also
seek to identify new technologies and/or product candidates for possible
in-licensing or acquisition. Accordingly, the Company expects to incur
increasing operating losses for the foreseeable future. There can be no
assurance that the Company will ever achieve profitable operations.
Upon completion of the Company's IPO, in January 1996, the Company's
previously outstanding shares of preferred stock were converted automatically
into shares of common stock at adjusted conversion prices per common share
less than the public offering price per common share. The deemed benefit to
the preferred stockholders approximated $5,400,000, which deemed benefit was
recorded by offsetting charges and credits to additional paid-in capital at
the time of conversion. There was no effect on net loss from the mandatory
conversion. However, the amount increased the loss allocable to common stock
in the calculation of net loss per share in the period of the conversion.
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
Total revenues for 1996 were $259,000 and $140,000 for the year ended
December 31, 1995 ("1995") from National Institutes of Health grants.
December 31, 1995 ("1995") from National Institutes of Health grants.
Research and development expenses for 1996 were $5,567,000, as compared
to $5,888,000 for 1995, a decrease of $321,000, or 5%. The decrease reflects
the deconsolidation of Ansan effective August 1995, the cessation of
operations by Geneic Sciences in September 1995 and the completion of certain
sponsored research for Ingenex in 1995, offset by an in-process research and
development charge of $686,000 in 1995, the addition of ProNeura in late 1995
and Trilex in May 1996.
General and administrative expenses for 1996 were $5,264,000, as
compared to $3,658,000 for 1995, an increase of $1,606,000, or 44%. The
increase includes $805,000 reflecting the addition of Trilex in May 1996, as
well as $688,000 of expenses incurred by Ingenex in conjunction with a
financing that was terminated.
As a result of the foregoing expenses, the Company incurred an operating
loss of $12,856,000 during 1996 compared with $11,693,000 during 1995.
Other income includes interest income of $716,000 during 1996 as
compared to $68,000 during 1995. This increase was a result of a substantial
increase in the amount of cash and short-term investments subsequent to the
Company's IPO in January 1996 and a private placement completed in August
1996. Interest expense was $2,011,000 during 1996 as compared to $1,899,000
for 1995. Other income for 1996 and 1995 also includes $999,000
18
and $457,000, respectively, of losses representing the Company's share of
Ansan's losses.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operation from inception primarily through
private placements of its securities, as well as the IPO. During 1997, the
Company also received approximately $25,861,000 from up-front license fees in
the Novartis transaction and the sale of the GSX technology. The Company is
currently negotiating a $5,000,000 bank line of credit.
Titan has entered into various agreements with research institutions,
universities, and other entities for the performance of research and
development activities and for the acquisition of licenses related to those
activities. The aggregate commitments the Company has under these
agreements, including minimum license payments, for the next 12 months is
approximately $1,302,000. Certain of the licenses provide for the payment of
royalties by the Company on future product sales, if any. In addition, in
order to maintain license and other rights while products are under
development, the Company must comply with customary licensee obligations,
including the payment of patent related costs and meeting project-funding
milestones.
The Company expects to continue to incur substantial additional
operating losses from costs related to continuation and expansion of research
and development, clinical trials, and increased administrative and fund
raising activities over at least the next several years. While the Company
believes it has sufficient working capital to sustain its planned operations
beyond the end of 1998, the Company may seek additional financing sooner,
depending on numerous factors including, but not limited to, the progress of
the Company's research and development programs, the results of clinical
studies,
19
technological advances, determinations as to the commercial potential of the
Company's products, and the status of competitive products. In addition,
certain expenditures will be dependent on the establishment of collaborative
relationships with other companies, the availability of financing, and other
factors. In any event, the Company anticipates that it will require
substantial additional financing in the future. There can be no assurance as
to the availability or terms of any required additional financing, when and
if needed.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The response to this item is included in a separate section of this
Report. See Index to Consolidated Financial Statements on Page F-1.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT.
The following table sets forth the names, ages and positions of the
executive officers and directors of the Company.
NAME AGE POSITION
- ---- --- ---------
Louis R. Bucalo, M.D.(1) 39 President, Chief Executive Officer and Director
Sunil Bhonsle 48 Executive Vice President and Chief Operating Officer
Richard C. Allen, Ph.D. 55 Executive Vice President
Robert E. Farrell 48 Executive Vice President and Chief
Financial Officer
Victor Bauer 62 Executive Director; Corporate Development and Director
Michael K. Hsu(2) 42 Director
Hubert Huckel, M.D.(3) 66 Director
Marvin E. Jaffe, M.D.(2) 61 Director
Lindsay A. Rosenwald, M.D.(1)(3) 42 Director
Konrad M. Weis, Ph.D.(1) 69 Director
Kenneth J. Widder, M.D.(1)(3) 45 Director
Ernst-Gunter Afting 55 Director
(1) Member of Executive Committee
(2) Member of Audit Committee
(3) Member of Compensation Committee
LOUIS R. BUCALO, M.D., is a co-founder of the Company and of each of the
Operating Companies and has served as the Company's President and Chief
Executive Officer since January 1993. Dr. Bucalo has served as a director of
the Company since March 1993. Dr. Bucalo also serves as Chairman of the
Board of each of the Operating Companies and as Chairman and Chief Executive
Officer of ProNeura. From July 1990 to April 1992, Dr. Bucalo was Associate
Director of Clinical Research at Genentech, Inc., a biotechnology company.
Dr. Bucalo holds an M.D. from Stanford University and a B.A. in biochemistry
from Harvard University.
SUNIL BHONSLE joined the Company as Executive Vice President and Chief
Operating Officer in September 1995. Mr. Bhonsle served in various
positions, including Vice President and General Manager, Plasma Supply and
Manager,
20
Inventory and Technical Planning, at Bayer Corporation from July 1975 until
April 1995. Mr. Bhonsle holds an M.B.A. from the University of California at
Berkeley and a B.Tech. in chemical engineering from the Indian Institute of
Technology.
RICHARD C. ALLEN, PH.D., joined the Company in August 1995. He also
currently serves as President and Chief Executive Officer of Theracell, which
he joined in January 1995 and President and Chief Operating Officer of
ProNeura. From June 1991 until December 1994, Dr. Allen was Vice President
and General Manager of the Neuroscience Strategic Business Unit of
Hoechst-Roussel Pharmaceuticals, Inc. Dr. Allen holds a Ph.D. in medicinal
chemistry and a B.S. in pharmacy from the Medical College of Virginia.
ROBERT E. FARRELL joined the Company as Executive Vice President and
Chief Financial Officer in September 1996. Mr. Farrell was employed by
Fresenius USA, Inc. from 1991 until August 1996 where he served in various
capacities, including Vice President Administration, Chief Financial Officer
and General Counsel. His last position was Corporate Group Vice President.
Mr. Farrell holds a B.A. from University of Notre Dame and a J.D. from
Hastings College of Law, University of California.
VICTOR J. BAUER, PhD., has served as a director since November 1997. Dr.
Bauer joined the Company in February 1997, and currently serves as Executive
Director of Corporate Development. Since April 1996, Dr. Bauer has served as
a Director and Chairman of Theracell. From December 1992 until February 1997,
Dr. Bauer was a self-employed consultant to companies in the pharmaceutical
and biotechnology industries. Prior to that time, Dr. Bauer was with
Hoechst-Roussel Pharmaceuticals Inc., where he served as President from 1988
through 1992.
MICHAEL K. HSU has served as a director of the Company since March 1993.
Mr. Hsu is President of Biotechnology Venture Capital Representative for the
government of Taiwan. From November 1994 through October 1995, he served as
Director - Corporate Finance of Coleman and Company Securities. Since March
1989, Mr. Hsu has served as President of APS Bioventures Co., which until
November 1994 was an investment banking division of RAS Securities. Mr. Hsu
previously held various executive positions with Steinberg and Lyman Health
Care Company, Ventana Venture Growth Fund, Asian Pacific Venture Group
(Thailand) and D. Blech Company.
HUBERT HUCKEL, M.D. has served as a director of the Company since
October 1995. From 1964 until his retirement in December 1992, Dr. Huckel
served in various positions with The Hoechst Group. At the time of his
retirement, he was chairman of the Board of Hoechst-Roussel Pharmaceuticals,
Inc., Chairman and President of Hoechst-Roussel Agri-Vet Company and a member
of the Executive Committee of Hoechst Celanese Corporation. He currently
serves on the Board of Directors of Royce Laboratories, Inc. and Sano
Corporation.
MARVIN E. JAFFE, M.D. has served as a director of the Company since
October 1995. From 1988 until April 1994, Dr. Jaffe served as President of
R.W. Johnson Pharmaceutical Research Institute where he was responsible for
the research and development activities in support of a number of Johnson &
Johnson companies, including ORTHO-McNeil Pharmaceuticals, ORTHO Biotech and
CILAG. From 1970 until 1988, he was Senior Vice President of the Merck
Research Laboratories. He currently serves on the Board of Directors of
Research Laboratories. He currently serves on the Board of Directors of
Chiroscience, plc and Immunomedics, Inc.
LINDSAY A. ROSENWALD, M.D., is a co-founder of the Company and has
served as a director of the Company since March 1993. Dr. Rosenwald
co-founded Interneuron Pharmaceuticals, Inc. and has served as its Chairman
since February 1989. Dr. Rosenwald has been the Chairman and President of
The Castle Group, Ltd., a New York medical venture capital firm ("Castle"),
since October 1991 and the Chairman and President of Paramount Capital, Inc.,
an investment banking firm, since February 1992, and the founder, Chairman
and President of Paramount Capital Asset Management, Inc., a money management
firm specializing in the life sciences industry, since June 1994. Dr.
Rosenwald also is a director of the following publicly-traded pharmaceutical
biotechnology companies: Avigen, Inc., BioCryst Pharmaceuticals, Inc., Neose
Technologies, Inc., Sparta Pharmaceuticals, Inc. and VimRx Pharmaceuticals,
Inc. is a director of a number of privately-held companies in the
biotechnology or pharmaceutical fields.
KONRAD M. WEIS, PH.D., has served as a director of the Company since
March 1993. Dr. Weis is Honorary Chairman and former President and Chief
Executive Officer of Bayer Corporation. Dr. Weis serves as a director of PNC
Equity Management Company, Michael Baker Company, and Dravo Company.
KENNETH J. WIDDER, M.D. has served as a director of the Company since
March 1993. Dr. Widder is Chairman and Chief Executive Officer of Molecular
Biosystems, Inc. Dr. Widder serves on the Board of Directors of Wilshire
Technologies, Inc. and Digivision.
ERNST-GUNTER AFTING, M.D., PH.D., has served as a director of the
Company since May 1996. Dr. Afting has served as the President of the
GSF-National Center for Environment and Health, a government research center
in Germany since 1995. From 1984 until 1995, he was employed in various
capacities by the Hoechst Group, serving as Divisional Head
21
of the Pharmaceuticals Division of the Hoechst Group from 1991 to 1993 and as
President and Chief Executive Officer of Roussel Uclaf (a majority
stockholder of Hoechst AG) in Paris from 1993 until 1995.
Directors serve until the next annual meeting or until their successors
are elected and qualified. Officers serve at the discretion of the Board of
Directors, subject to rights, if any, under contracts of employment. See
"Management - Employment Agreements."
DIRECTOR COMPENSATION
Non-employee directors are entitled to receive $2,000 for each Board and
committee meeting attended, although certain directors forego such fees, and
are reimbursed for their expenses in attending such meetings. Directors are
not precluded from serving the Company in any other capacity and receiving
compensation therefor. In addition, directors are entitled to receive
options ("Director Options") pursuant to the Company's 1995 Stock Option
Plan. Director Options are exercisable in four equal annual installments
commencing six months from the date of grant and expire the earlier of 10
years after the date of grant or 90 days after the termination of the
director's service on the Board of Directors. In January 1996, each of the
Company's current directors other than Dr. Afting and Dr. Bauer received
Director Options to purchase 10,000 shares of Common Stock at an exercise
price of $5.00 per share. Dr. Afting received Director Options to purchase
10,000 shares of Common Stock at an exercise price of $8.50 per share when he
joined the Board of Directors in May 1996. Dr. Bauer received Director
Options to purchase 10,000 shares of common stock at an exercise price of
$5.56 when he joined the Board of Directors in November 1997. In July 1997,
each of the directors received Director Options to purchase 2,000 shares at
an exercise price of $2.88 per share.
BOARD COMMITTEES AND DESIGNATED DIRECTORS
The Board of Directors has an Executive Committee, a Compensation
Committee and an Audit Committee. The Executive Committee exercises all the
power and authority of the Board of Directors in the management of the
Company between Board meetings, to the extent permitted by law. The
Compensation Committee makes recommendations to the Board concerning salaries
and incentive compensation for officers and employees of the Company and may
administer the Company's 1995 Stock Option Plan. The Audit Committee reviews
the results and scope of the audit and other accounting related matters.
The Board of Directors met six times during 1997 and also took action by
unanimous written consent. The Executive Committee met two times and also
took action by unanimous written consent, and the Compensation Committee and
Audit Committee each met one time. Each of the current directors of the
Company attended at least 75% of the aggregate of (i) the meetings of the
Board of Directors and (ii) meetings of any Committees of the Board on which
such person served which were held during the time such person served.
The Company has agreed, if requested by D.H. Blair Investment Banking
Corp., the underwriter of the IPO ("Blair"), to nominate a designee of Blair
to the Company's Board of Directors until January 18, 2001.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's executive officers, directors and persons who
beneficially own more than 10% of a registered class of the Company's equity
securities to file with the Securities and Exchange Commission initial
reports of ownership and reports of changes in ownership of common stock and
other equity securities of the Company. Such executive officers, directors,
and greater than 10% beneficial owners are required by SEC regulation to
furnish the Company with copies of all Section 16(a) forms filed by such
reporting persons.
Based solely on the Company's review of such forms furnished to the
Company and written representations from certain reporting persons, the
Company believes that all filing requirements applicable to the Company's
executive officers, directors and greater than 10% beneficial owners were
complied with, with the exception of Richard Allen who filed a Form 4 two
months late and Lindsay Rosenwald who filed a Form 5 one month late.
22
ITEM 11. EXECUTIVE COMPENSATION.
The following summary compensation table sets forth the aggregate
compensation awarded to, earned by, or paid to the Chief Executive Officer
and to executive officers whose annual compensation exceeded $100,000 for the
fiscal year ended December 31, 1997 (collectively, the "named executive
officers") for services during the fiscal years ended December 31, 1997, 1996
and 1995:
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
NAME -------------------------------
AND PRINCIPAL POSITION YEAR SALARY BONUS
- ---------------------- ---- -------- -------
Louis R. Bucalo. . . . . . . . . . . . . . . . . . 1997 $231,525 $58,721
President and Chief Executive Officer 1996 $210,000 $42,000(1)
1995 $188,000(2) $ 0
Sunil Bhonsle. . . . . . . . . . . . . . . . . . . 1997 $190,991 $68,370
Executive Vice President and 1996 $185,000 $ 9,250(1)
Chief Operating Officer 1995 $ 50,104 $ 0
Richard C. Allen . . . . . . . . . . . . . . . . . 1997 $193,984 $77,096
Executive Vice President(3) 1996 $185,000 $15,500(1)
1995 $166,000 $ 0
Robert Farrell. . . . . . . . . . . . . . . . . . 1997 $186,665 $18,500
Executive Vice President and 1996 $ 53,958 $ 0
Chief Financial Officer
____________
(1) Bonuses pertain to fiscal year 1995 and were paid in 1997.
(2) A portion of the cash compensation paid to Dr. Bucalo during 1995 is
allocable to the Operating Companies.
(3) Dr. Allen also serves as President and Chief Executive Officer of
Theracell and President and Chief Operating Officer of ProNeura.
Dr. Allen receives his entire salary from Theracell. Dr. Allen's bonus
included $20,000 paid by Titan.
OPTION GRANTS IN LAST FISCAL YEAR
The following table contains information concerning the stock option
grants made to the named executive officers during the fiscal year ended
December 31, 1997. No stock appreciation rights were granted to these
individuals during such year.
INDIVIDUAL GRANT
NUMBER OF ------------------------------------------
SECURITIES % OF TOTAL
UNDERLYING OPTIONS
OPTIONS GRANTED EXERCISE OR
GRANTED TO EMPLOYEES BASE PRICE EXPIRATION
NAME (#) FISCAL YEAR ($/SH)(1) DATE
- ---- ------- ------------ ---------- -----------
Louis R. Bucalo. . . . . . . . . . . . . 2,000 0.6% $2.88 07/30/2007
- --------------
(1) The exercise price may be paid in cash, in shares of Common Stock valued
at the fair market value on the exercise date or through a cashless
exercise procedure involving a same-day sale of the purchase shares.
The Company may also finance the option exercise by loaning the optionee
sufficient funds to pay the exercise price for the purchased shares,
together with any federal and state income tax liability incurred by the
optionee in connection with such exercise.
23
23
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information concerning option exercises
and option holdings for the fiscal year ended December 31, 1997 with respect
to the named executive officers. No stock appreciation rights were exercised
during such year or were outstanding at the end of that year.
NUMBER OF SECURITIES VALUE OF
UNDERLYING UNEXERCISED UNEXERCISED IN-THE-MONEY
SHARES OPTIONS AT FY-END (#) OPTIONS AT FY-END(1)
ACQUIRED --------------------------------- ----------------------------------
NAME ON EXERCISE(#) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- -------------- ------------ ------------- ------------ -------------
Louis R. Bucalo. . . . . . . . -0- 270,876 360,067 $397,477 $ 25,900
Sunil Bhonsle. . . . . . . . . -0- 128,061 205,038 (2) $222,796 $272,305 (2)
Richard C. Allen . . . . . . . -0- 77,911 55,656 (2) $115,523 $132,025 (2)
Robert Farrell . . . . . . . . -0- 37,500 112,500 $0 $0
________________
(1) Based on the fair market value of the Company's Common Stock at
year-end, $5.625 per share, less the exercise price payable for such
shares.
(2) A portion of employee's options are immediately exercisable. Upon
the employee's cessation of service, the Company has the right to
repurchase any shares acquired pursuant to said grant. The Company's
right to repurchase shares expires in equal monthly installments over the
five year period commencing on the date of grant. Options to which the
Company's repurchase right has not expired are deemed unexercisable for
the purpose of this table.
EMPLOYMENT AGREEMENTS
The Company is a party to employment agreements with each of Dr. Bucalo,
President and Chief Executive Officer, Sunil Bhonsle, Executive Vice
President and Chief Operating Officer of the Company, Robert E. Farrell,
Executive Vice President and Chief Financial Officer of the Company, and
Richard C. Allen, Executive Vice President of the Company. All of the
agreements contain confidentiality provisions.
The agreement with Dr. Bucalo expires in February 2001 (as extended
during 1997) and provides for a base annual salary of $210,000, subject to
annual increases of 5% and bonuses of up to 25% at the discretion of the
Board of Directors. In the event of the termination of the agreement with
Dr. Bucalo, other than for reasons specified therein, the Company is
obligated to make severance payments equal to his base annual salary for the
greater of the balance of the term of the agreement or 18 months.
The agreement with Mr. Bhonsle provides for a base annual salary of
$185,000 subject to automatic annual increases, based on increases in the
consumer price index, and bonuses of up to 20% at the discretion of the Board
of Directors. In the event Mr. Bhonsle's employment is terminated other than
for "good cause" (as defined), the Company is obligated to make severance
payments equal to his base annual salary for six months. Mr. Bhonsle has
also been granted certain options that vest over five years if he remains
employed by the Company.
The agreement with Mr. Farrell provides for a base annual salary of
$185,000 subject to automatic annual increases, based on increases in the
consumer price index, and bonuses of up to 20% at the discretion of the Board
of Directors. In the event Mr. Farrell's employment is terminated other than
for "good cause" (as defined), the Company is obligated to make severance
payments equal to his base annual salary for six months. Mr. Farrell has
also been granted certain options that vest over four years if he remains
employed by the Company.
Dr. Allen receives no salary from the Company (his primary compensation
is from Theracell) but has been granted certain stock options which vest over
five years if he remains employed by the Company.
24
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of March 27, 1998, certain information
concerning the beneficial ownership of the Company's Common Stock by (i) each
shareholder known by the Company to own beneficially five percent or more of
the outstanding Common Stock of the Company; (ii) each director; (iii) each
executive officer of the Company; and (iv) all executive officers and
directors of the Company as a group, and their percentage ownership and
voting power.
SHARES BENEFICIALLY PERCENT OF SHARES
NAME AND ADDRESS OF BENEFICIAL OWNER (1) OWNED (2) BENEFICIALLY OWNED
- ---------------------------------------- -------------------- -------------------
Louis R. Bucalo, M.D.. . . . . . . . . . . 632,012 (3) 4.7%
Ernst-Gunter Afting. . . . . . . . . . . . 5,500 (4) *
Richard C. Allen, Ph.D. . . . . . . . . . 97,148 (5) *
Victor J. Bauer. . . . . . . . . . . . . . 2,500 (4) *
Sunil Bhonsle. . . . . . . . . . . . . . . 226,390 (6) 1.7%
Robert Farrell . . . . . . . . . . . . . . 59,999 (7) *
Michael K. Hsu . . . . . . . . . . . . . . 25,346 (8) *
Hubert Huckel, M.D.. . . . . . . . . . . . 5,500 (4) *
Marvin E. Jaffe, M.D.. . . . . . . . . . . 5,500 (4) *
Lindsay A. Rosenwald, M.D. . . . . . . . . 663,034 (9) 5.0%
Konrad M. Weis, Ph.D.. . . . . . . . . . . 76,852 (10) *
Kenneth J. Widder, M.D.. . . . . . . . . . 18,237 (11) *
Invesco Trust Company. . . . . . . . . . . 1,220,538 (12) 9.3%
7800 E. Union Avenue
Denver, CO 80237
Wisdom Tree Capital, Inc.. . . . . 964,825 7.4%
1633 Broadway, 38th Floor
New York, NY 10019
All executive officers and directors
as a group (10) persons. . . . 1,818,018 13.1%
__________________
*Less than one percent.
(1) Unless otherwise indicated, the address of such individual is c/o Titan
Pharmaceuticals, Inc., 400 Oyster Point Boulevard, Suite 505, South San
Francisco, California 94080.
(2) In computing the number of shares beneficially owned by a person and the
percentage ownership of a person, shares of Common Stock of the Company
subject to options held by that person that are currently exercisable or
exercisable within 60 days are deemed outstanding. Such shares,
however, are not deemed outstanding for purposes of computing the
percentage ownership of each other person. Except as indicated in the
footnotes to this table and
25
pursuant to applicable community property laws, the persons named in the
table have sole voting and investment power with respect to all shares
of Common Stock.
(3) Includes 331,781 shares issuable upon exercise of outstanding options.
(4) Represents shares issuable upon exercise of outstanding options.
(5) Includes 92,148 shares issuable upon exercise of outstanding options.
(6) Includes 214,390 shares issuable upon exercise of outstanding options.
(7) Includes 49,999 shares issuable upon exercise of outstanding options.
(8) Includes 10,617 shares issuable upon exercise of outstanding options.
(9) Includes (i) 90,084 shares held by entities owned by Mr. Rosenwald, and
(ii) 270,154 shares issuable upon exercise of outstanding options and
warrants. Does not include (i) 94,589 shares held by his wife; (ii)
40,536 shares held by his wife in trust for the benefit of their
children; (iii) 585,718 shares held by or underlying warrants held by
Venturetek L.P., a limited partnership, the limited partners of which
include Dr. Rosenwald's wife and children; or (iv) shares underlying
Class A Warrants held by The Aries Trust and The Aries Domestic Fund
L.P. as to which Dr. Rosenwald serves as investment manager and
President of the general partner, respectively. Dr. Rosenwald disclaims
beneficial ownership as to all of such shares. See "Certain
Transactions."
(10) Includes 32,617 shares issuable upon exercise of warrants and outstanding
options.
(11) Includes 10,617 shares issuable upon exercise of outstanding options.
(12) Represents shares held by three mutual funds managed by Invesco Funds
Group, Inc. or Invesco Trust Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In March and April 1993, the Company borrowed an aggregate of $700,000
from Dr. Lindsay A. Rosenwald, the co-founder and a director of the Company.
See "Item 12. Security Ownership of Certain Beneficial Owners and
Management." The loan was evidenced by 10% promissory notes payable on
demand. Dr. Rosenwald received warrants that are currently exercisable to
purchase an aggregate of 20,355 shares of Common Stock at an exercise price
of $4.50 per share. In June 1995, the notes, together with accrued interest,
were cancelled in consideration of the issuance to Dr. Rosenwald of shares of
Series A Preferred Stock which subsequently converted into 215,135 shares of
Common Stock.
In April and May 1993, Dr. Rosenwald made loans to the Company in the
aggregate principal amount of $1,014,000. Such loans were repaid, together
with accrued interest at the rate of 7% per annum, from the proceeds of the
with accrued interest at the rate of 7% per annum, from the proceeds of the
private placement of Series A Preferred Stock described below.
In January 1995, the Company agreed to issue warrants to purchase an
aggregate of 7,395 shares of Common Stock at an exercise price of $3.25 per
share to Ray Dirks Research ("RDR") or its designees for services rendered in
connection with a license transaction. Michael Hsu, a director of the
Company, serves as a consultant to RDR and received one-half of such warrants.
In February 1995, Paramount Capital, Inc. ("Paramount") acted as
placement agent in connection with the Company's private placement of Series
B Preferred Stock. Paramount received $103,125 in commissions and a $45,375
expense allowance for services rendered in connection with such private
placement. In addition, designees of Paramount received Series B Preferred
Stock purchase warrants that currently represent warrants to purchase an
aggregate of 46,350 shares of Common Stock at an exercise price of $3.92 per
share. Dr. Rosenwald serves as the President and Chairman of Paramount and
received warrants to purchase 17,961 of such shares.
Between August and October 1995, The Aries Domestic Fund L.P. and The
Aries Trust loaned the Company an aggregate of $250,000 evidenced by the
promissory notes (the "Investor Notes") which bore interest at the rate of
12% per annum and were payable on the earlier of the closing of an initial
public offering or one year from the date of issuance. In accordance with
their terms, the principal amount of the Investor Notes was converted into
$250,000 principal amount of 10% promissory notes
26
(the "Bridge Notes") and 125,000 Class A Warrants as part of a bridge
financing completed in October 1995. Accrued interest on the Investor Notes
was repaid in January 1996. Repayment of the principal and accrued interest
on the Bridge Notes was made upon completion of the Company's initial public
offering in January 1996. Dr. Rosenwald is the President of the general
partner of The Aries Domestic Fund L.P. and serves as investment manager for
The Aries Trust.
The Company believes that all of the transactions set forth above were
made on terms no less favorable to the Company than could have been obtained
from unaffiliated third parties. The Company has adopted a policy that all
future transactions, including loans, between the Company and its officers,
directors, principal shareholders and their affiliates will be approved by a
majority of the Board of Directors, including a majority of the independent
and disinterested outside directors on the Board of Directors, and will
continue to be on terms no less favorable to the Company than could be
obtained from unaffiliated third parties.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS 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 - Restated Certificate of Incorporation of the Registrant(1)
3.2 - Form of Amendment to Restated Certificate of Incorporation of the
Registrant(1)
3.3 - By-laws of the Registrant(1)
4.3 - Form of Warrant Agreement(1)
4.4 - Form of Underwriter's Unit Purchase Option(1)
4.5 - Form of Investor Rights Agreement between the Registrant and the
holders of Series A and Series B Preferred Stock(1)
4.6 - Form of Placement Agent's Unit Purchase Option(4)
4.7 - Certificate of Designation of Series C Preferred Stock
4.8 - Certificate of Designation of Series D Preferred Stock
10.1 - 1993 Stock Option Plan(1)
10.2 - 1995 Stock Option Plan(1)
10.3 - Employment Agreement between the Registrant and Louis Bucalo dated
February 1, 1993, amended as of February 3, 1994(1)
10.4 - Employment Agreement between Registrant and Richard Allen dated
July 28, 1995(1)
10.5 - Employment Agreement between Registrant and Sunil Bhonsle dated
August 6, 1995(1)
10.6 - Form of Indemnification Agreement(1)
*10.9 - MDR Exclusive License Agreement between Ingenex, Inc. (formerly
Pharm-Gen Systems Ltd.) and the Board of Trustees of the University of
Illinois dated May 6, 1992(1)
*10.11- License Agreement between Theracell, Inc. and New York University
dated November 20, 1992, as amended as of February 23, 1993 and as
of February 25, 1995(1)
*10.12- License Agreement between the Registrant and the Massachusetts
Institute of Technology dated September 28, 1995(1)
*10.14- Exclusive License Agreement between Ingenex, Inc. and the Board
of Trustees of the University of Illinois, dated July 1, 1994(1)
*10.15- Exclusive License Agreement between Ingenex, Inc. and the Board
of Trustees of the University of Illinois, dated July 1, 1994(1)
27
*10.16- License Agreement between Ingenex, Inc. and the Massachusetts
Institute of Technology, dated September 11, 1992(1)
*10.17- License Agreement between Ingenex, Inc. and Baylor College of
Medicine, dated October 21, 1992(1)
10.18 - Lease for Registrant's facilities(2)
*10.19- License Agreement between Theracell, Inc. and the University
of South Florida dated March 15, 1996(3)
*10.20- License Agreement between Trilex Pharmaceuticals, Inc. (formerly
Ascalon Pharmaceuticals, Inc.) and the University of Kentucky
Research Foundation dated May 30, 1996(4)
*10.22- License Agreement between the Registrant and Hoechst Marion
Roussel, Inc. effective as of December 31, 1996(5)
10.23 - Employment Agreement between Registrant and Robert E. Farrell
dated August 9, 1996(5)
10.24 - Financing Agreement between the Registrant and Ansan Pharmaceuticals,
Inc. dated March 21, 1997(6)
10.25 - Agreement for Purchase and Sale of Assets between the Registrant and
Pharmaceuticals Product Development, Inc. dated June 4, 1997(6)
*10.27- License Agreement between the Registrant and Bar-Ilan Research and
Development Company Limited effective November 25, 1997(7)
10.28 - License Agreement between the Registrant and Ansan Pharmaceuticals,
Inc. dated November 24, 1997(7)
10.29 - Stock Purchase Agreement between the Registrant and Ansan
Pharmaceuticals, Inc. effective November 25, 1997(7)
*10.30- Sublicense Agreement between the Registrant and Novartis Pharma AG
dated November 20, 1997(7)
23.2 - Consent of Ernst & Young LLP, Independent Auditors
___________
* Confidential treatment has been granted with respect to portions of this
exhibit.
(1) Incorporated by reference from the Registrant's Registration Statement on
Form SB-2 (File No. 33-99386).
(2) Incorporated by reference from the Registrant's Annual Report on Form
10-KSB for the year ended December 31, 1995.
(3) Incorporated by reference from the Registrant's Quarterly Report on Form
10-QSB for the period March 31, 1996.
(4) Incorporated by reference from the Registrant's Registration Statement
on Form SB-2 (File No. 333-13469).
(5) Incorporated by reference from the Registrant's Annual Report on Form
10-KSB for the year ended December 31, 1996.
(6) Incorporated by reference from the Registrant's Quarterly Report on Form
10-QSB for the period ended March 31, 1997.
(7) Incorporated by reference from the Registrant's Registration Statement
on Form S-3 (File No. 333-42367).
(b) REPORTS ON FORM 8-K
During the fourth quarter 1997, the Company filed one report on Form
8-K.
A current report on Form 8-K was filed on November 20, 1997. This
report announced the sublicense between the Company and Novartis A.E.
28
TITAN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
F-1
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Titan Pharmaceuticals, Inc.
We have audited the accompanying consolidated balance sheets of Titan
Pharmaceuticals, Inc. (a development stage company) as of December 31, 1997
and 1996, and the related consolidated statements of operations,
stockholders' equity (net capital deficiency), and cash flows for each of the
three years in the period ended December 31, 1997 and for the period from
July 25, 1991 (commencement of operations) to December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Titan
Pharmaceuticals, Inc. (a development stage company) at December 31, 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 and for the
period from July 25, 1991 (commencement of operations) to December 31, 1997,
in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Palo Alto, California
February 17, 1998
F-2
TITAN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
--------------------------
1997 1996
------------ ------------
Assets
Current assets
Cash and cash equivalents $ 24,386,872 $ 1,376,532
Short-term investments 500,000 13,000,000
Prepaid expenses and other current assets 58,937 193,324
Receivable from Ansan Pharmaceuticals, Inc. -- 117,881
License fee receivable 371,793 --
------------ ------------
Total current assets 25,317,602 14,687,737
Furniture and equipment, net 253,723 791,579
Deferred financing costs -- 96,349
Investment in Ansan Pharmaceuticals, Inc. -- 590,854
Other assets 22,898 199,830
------------ ------------
$ 25,594,223 $ 16,366,349
------------ ------------
------------ ------------
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable $ 815,449 $ 602,982
Accrued legal fees 244,486 587,800
Accrued sponsored research 65,500 163,905
Accrued payroll and related 257,751 193,478
Accrued professional and accounting fees 100,000 90,000
Other accrued liabilities 192,487 39,566
Current portion of capital lease obligation -- 265,462
Current portion of technology financing - Ingenex, Inc. -- 570,711
------------ ------------
Total current liabilities 1,675,673 2,513,904
Noncurrent portion of capital lease obligation -- 481,676
Noncurrent portion of technology financing - Ingenex, Inc. -- 718,602
Commitments
Minority interest - Series B preferred stock of Ingenex, Inc. 1,241,032 1,241,032
Guaranteed security value (Note 11) 5,500,000 --
Stockholders' Equity
Preferred stock, $0.001 par value per share; 5,000,000 shares authorized, issuable
in series:
Series C, 222,400 shares designated, 222,400 shares issued and outstanding, with
a liquidation preference of $0.01 per share, at December 31, 1997. -- --
Series D, 606,061 shares designated, 606,061 shares issued and outstanding, with
a liquidation preference of $0.05 per share, at December 31, 1997. 5,000,000 --
Common stock, $0.001 par value per share; 50,000,000 and 30,000,000 shares
authorized at December 31, 1997 and 1996, respectively; 13,052,514 and 12,399,037
shares issued and outstanding at December 31, 1997 and 1996, respectively, at
amount paid in 49,622,796 49,619,784
Additional paid-in capital 6,521,353 6,521,353
Deferred compensation (458,340) (630,100)
Deficit accumulated during the development stage (43,508,291) (44,099,902)
------------ ------------
Total stockholders' equity 17,177,518 11,411,135
------------ ------------
$ 25,594,223 $ 16,366,349
------------ ------------
------------ ------------
See accompanying notes.
F-3
TITAN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
PERIOD FROM
COMMENCEMENT OF
YEAR ENDED DECEMBER 31, OPERATIONS (JULY
--------------------------------------- 25, 1991) TO
1997 1996 1995 DECEMBER 31, 1997
----------- ------------ ------------ -----------------
License and grant revenue $17,499,948 $ 258,811 $ 139,522 $ 17,898,281
Costs and expenses:
Research and development 9,309,923 5,566,772 5,201,507 36,890,316
Acquired in-process research and development 9,500,000 -- 686,000 10,186,000
General and administrative 6,513,603 5,263,964 3,657,900 18,341,949
----------- ------------ ------------ -----------------
Total costs and expenses 25,323,526 10,830,736 9,545,407 65,418,265
----------- ------------ ------------ -----------------
Income (loss) from operations (7,823,578) (10,571,925) (9,405,885) (47,519,984)
Other income (expense):
Equity in loss of Ansan Pharmaceuticals, Inc. (590,853) (998,972) (457,114) (2,046,939)
Gain on sale of technology 8,361,220 -- -- 8,361,220
Interest income 666,419 715,984 67,868 1,837,161
Interest expense (226,685) (2,010,664) (1,899,148) (4,389,687)
Gain sale of fixed assets 205,024 -- -- 205,024
----------- ------------ ------------ -----------------
Other income (expense) - net 8,415,125 (2,293,652) (2,288,394) 3,966,779
----------- ------------ ------------ -----------------
Income (loss) before minority interest 591,547 (12,865,577) (11,694,279) (43,553,205)
Minority interest in losses of subsidiaries 64 9,931 825 44,914
----------- ------------ ------------ -----------------
Net income (loss) $ 591,611 $(12,855,646) $(11,693,454) $ (43,508,291)
Deemed dividend upon conversion of preferred stock -- (5,431,871) -- (5,431,871)
----------- ------------ ------------ -----------------
Net income (loss) attributable to common
stockholders $ 591,611 $(18,287,517) $(11,693,454) $ (48,940,162)
----------- ------------ ------------ -----------------
----------- ------------ ------------ -----------------
Basic net income (loss) per common share
(pro forma in 1995) $ 0.05 $ (1.67) $ (1.74)
----------- ------------ ------------
----------- ------------ ------------
Shares used in computing basic net income (loss) per
share 13,002,050 10,936,046 6,719,634
----------- ------------ ------------
----------- ------------ ------------
Diluted net income (loss) per common share $ 0.04 $(1.67) $(1.74)
----------- ------------ ------------
----------- ------------ ------------
Shares used in computing diluted net
income per share 13,476,644 10,936,046 6,719,634
----------- ------------ ------------
----------- ------------ ------------
See accompanying notes.
F-4
TITAN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
DEFICIT
ACCUMULATED
PREFERRED STOCK COMMON STOCK ADDITIONAL DURING THE
----------------------- ---------------------- PAID-IN DEFERRED DEVELOPMENT
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION STAGE
---------- ----------- ---------- ---------- ----------- ------------- ------------
---------- ----------- ---------- ---------- ----------- ------------- ------------
Net loss - Commencement of
operations (July 25, 1991) to
December 31, 1992 -- $ -- -- $ -- $ -- $ -- $ (819,331)
Issuance of shares of common
stock for cash to founders
and investors in February
1993 for $0.005 per share -- -- 998,367 5,853 -- -- --
Issuance of shares of common
stock for cash to an employee
in February 1993 for $0.003
per share -- -- 167,587 563 -- -- --
Issuance of shares of common
stock for cash to investors
in March 1993 for $0.297 per
share, net of issuance costs
of $1,503 -- -- 184,994 52,722 -- -- --
Grant of shares of common
stock to an employee in June
1993 at $0.005 per share -- -- 42,645 250 -- -- --
Issuance of shares of Series A
preferred stock for cash to
investors in November 1993
for $5.868 per share, net of
issuance costs of $2,759,851 3,278,069 16,457,649 -- -- -- -- --
Forgiveness of notes payable
to stockholder -- -- -- -- 40,000 -- --
Net loss - Year ended December
31, 1993 -- -- -- -- -- -- (5,757,296)
---------- ----------- ---------- ---------- ----------- ------------- ------------
Balances at December 31, 1993 3,278,069 16,457,649 1,393,593 59,388 40,000 -- (6,576,627)
Issuance of shares of common
stock for cash to a
consultant in April 1994 for
$0.005 per share -- -- 14,926 88 -- -- --
Increase in paid-in capital
from issuance of common stock
by Ingenex, Inc. -- -- -- -- 128,805 -- --
Net loss - Year ended December
31, 1994 -- -- -- -- -- -- (12,974,175)
---------- ----------- ---------- ---------- ----------- ------------- ------------
Balances at December 31, 1994 3,278,069 16,457,649 1,408,519 59,476 168,805 -- (19,550,802)
TOTAL
STOCKHOLDERS'
EQUITY (NET
CAPITAL
DEFICIENCY)
------------
Net loss - Commencement of
operations (July 25, 1991) to
December 31, 1992 $ (819,331)
Issuance of shares of common
stock for cash to founders
and investors in February
1993 for $0.005 per share 5,853
Issuance of shares of common
stock for cash to an employee
in February 1993 for $0.003
per share 563
Issuance of shares of common
stock for cash to investors
in March 1993 for $0.297 per
share, net of issuance costs
of $1,503 52,722
Grant of shares of common
stock to an employee in June
1993 at $0.005 per share 250
Issuance of shares of Series A
preferred stock for cash to
investors in November 1993
for $5.868 per share, net of
issuance costs of $2,759,851 16,457,649
Forgiveness of notes payable
to stockholder 40,000
Net loss - Year ended December
31, 1993 (5,757,296)
------------
Balances at December 31, 1993 9,980,410
Issuance of shares of common
stock for cash to a
consultant in April 1994 for
$0.005 per share 88
Increase in paid-in capital
from issuance of common stock
by Ingenex, Inc. 128,805
Net loss - Year ended December
31, 1994 (12,974,175)
------------
Balances at December 31, 1994 (2,864,872)
See accompanying notes.
F-5
TITAN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
DEFICIT
ACCUMULATED
PREFERRED STOCK COMMON STOCK ADDITIONAL DURING THE
----------------------- ---------------------- PAID-IN DEFERRED DEVELOPMENT
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION STAGE
---------- ----------- ---------- ---------- ----------- ------------- ------------
Issuance of shares Series B
preferred stock for cash to
investors in February 1995
for $6.761 per share, net of
issuance costs of $506,206 244,043 1,143,794 -- -- -- -- --
Increase in paid-in capital
from issuance of warrants by
Ingenex, Inc. in connection
with bridge financing -- -- -- -- 600,000 -- --
Increase in paid-in capital
from issuance of warrants by
Titan Pharmaceuticals, Inc.
in connection with bridge
financing -- -- -- -- 1,200,000 -- --
Conversion of notes payable to
related parties and accrued
interest into shares of
Series A preferred stock 256,130 1,306,329 -- -- -- -- --
Increase in paid-in capital
from issuance of common stock
by Ansan Pharmaceuticals,
Inc. -- -- -- -- 3,777,548 -- --
Deferred compensation related
to grant of stock options,
net of amortization -- -- -- -- 440,000 (418,000) 22,000
Issuance of shares of common
stock to acquire minority
interest of Theracell -- -- 140,000 686,000 -- -- --
Net loss - Year ended December
31, 1995 -- -- -- -- -- -- (11,693,454)
---------- ----------- ---------- ---------- ----------- ------------- ------------
Balances at December 31, 1995 3,778,242 18,907,772 1,548,519 745,476 6,186,353 (418,000) (31,244,256)
TOTAL
STOCKHOLDERS'
EQUITY (NET
CAPITAL
DEFICIENCY)
------------
Issuance of shares Series B
preferred stock for cash to
investors in February 1995
for $6.761 per share, net of
issuance costs of $506,206 1,143,794
Increase in paid-in capital
from issuance of warrants by
Ingenex, Inc. in connection
with bridge financing 600,000
Increase in paid-in capital
from issuance of warrants by
Titan Pharmaceuticals, Inc.
in connection with bridge
financing 1,200,000
Conversion of notes payable to
related parties and accrued
interest into shares of
Series A preferred stock 1,306,329
Increase in paid-in capital
from issuance of common stock
by Ansan Pharmaceuticals,
Inc. 3,777,548
Deferred compensation related
to grant of stock options,
net of amortization 22,000
Issuance of shares of common
stock to acquire minority
interest of Theracell 686,000
Net loss - Year ended December
31, 1995 (11,693,454)
------------
Balances at December 31, 1995 (5,822,655)
See accompanying notes.
F-6
TITAN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
DEFICIT
ACCUMULATED
PREFERRED STOCK COMMON STOCK ADDITIONAL DURING THE
----------------------- ---------------------- PAID-IN DEFERRED DEVELOPMENT
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION STAGE
---------- ----------- ---------- ---------- ----------- ------------- ------------
Conversion of shares of Series
A & Series B preferred stock
to Common stock in January
1966 (3,778,242) (18,907,772) 5,521,140 18,907,772 -- -- --
Issuance of shares of common
stock for cash in initial
public offering in January
and February 1996, net of
issuance costs of $2,549,643 -- -- 3,680,000 15,850,357 -- -- --
Issuance of shares of common
stock for cash upon exercise
of stock option grants at
$0.30 to $1.35 per share in
May through June 1996. -- -- 16,520 10,664 -- -- --
Issuance of shares of common
stock for cash in private
placement in July and August
1996, net of issuance costs
of $2,260,372 -- -- 1,536,000 13,739,628 -- -- --
Deferred compensation related
to grant of stock options in
August 1996 -- -- -- -- 335,000 (335,000) --
Issuance of shares of common
stock for cash upon exercise
of warrants at $6.20 per
share in September through
December 1996 -- -- 59,014 365,887 -- -- --
Issuance of shares of common
stock upon cashless exercise
of warrants in November and
December 1996 -- -- 37,844 -- -- -- --
Amortization of deferred
compensation -- -- -- -- -- 122,900 --
Net loss - Year ended December
31, 1996 -- -- -- -- -- -- (12,855,646)
---------- ----------- ---------- ---------- ----------- ------------- ------------
Balances at December 31, 1996 -- -- 12,399,037 49,619,784 6,521,353 (630,100) (44,099,902)
TOTAL
STOCKHOLDERS'
EQUITY (NET
CAPITAL
DEFICIENCY)
------------
Conversion of shares of Series
A & Series B preferred stock
to Common stock in January
1966 --
Issuance of shares of common
stock for cash in initial
public offering in January
and February 1996, net of
issuance costs of $2,549,643 15,850,357
Issuance of shares of common
stock for cash upon exercise
of stock option grants at
$0.30 to $1.35 per share in
May through June 1996. 10,664
Issuance of shares of common
stock for cash in private
placement in July and August
1996, net of issuance costs
of $2,260,372 13,739,628
Deferred compensation related
to grant of stock options in
August 1996 --
Issuance of shares of common
stock for cash upon exercise
of warrants at $6.20 per
share in September through
December 1996 365,887
Issuance of shares of common
stock upon cashless exercise
of warrants in November and
December 1996 --
Amortization of deferred
compensation 122,900
Net loss - Year ended December
31, 1996 (12,855,646)
------------
Balances at December 31, 1996 11,411,135
See accompanying notes.
F-7
TITAN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
DEFICIT
ACCUMULATED
PREFERRED STOCK COMMON STOCK ADDITIONAL DURING THE
----------------------- ---------------------- PAID-IN DEFERRED DEVELOPMENT
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION STAGE
---------- ----------- ---------- ---------- ----------- ------------- ------------
Issuance of shares of common
stock in January 1997 in
partial consideration a
technology license -- -- 594,595 -- -- -- --
Issuance of shares of common
stock upon cashless exercise
of warrants in February and
December 1997 -- -- 53,765 -- -- -- --
Issuance of shares of common
stock for cash upon exercise
of stock option grant at
$0.59 per share in February
1997 -- -- 5,117 3,012 -- -- --
Issuance of shares of Series C
preferred stock in October
1997 in connection with the
liquidation and merger of
Trilex 222,400 -- -- -- -- -- --
Issuance of shares of Series D
preferred stock in November
1997 for cash 606,061 5,000,000 -- -- -- -- --
Amortization of deferred
compensation 171,760
Net income - Year ended
December 31, 1997 591,611
---------- ----------- ---------- ----------- ----------- ------------- ------------
Balances at December 31, 1997 828,461 $5,000,000 13,052,514 $49,622,796 $6,521,353 $(458,340) $(43,508,291)
---------- ----------- ---------- ----------- ----------- ------------- ------------
---------- ----------- ---------- ----------- ----------- ------------- ------------
TOTAL
STOCKHOLDERS'
EQUITY (NET
CAPITAL
DEFICIENCY)
------------
Issuance of shares of common
stock in January 1997 in
partial consideration a
technology license --
Issuance of shares of common
stock upon cashless exercise
of warrants in February and
December 1997 --
Issuance of shares of common
stock for cash upon exercise
of stock option grant at
$0.59 per share in February
1997 3,012
Issuance of shares of Series C
preferred stock in October
1997 in connection with the
liquidation and merger of
Trilex --
Issuance of shares of Series D
preferred stock in November
1997 for cash 5,000,000
Amortization of deferred
compensation 171,760
Net income - Year ended
December 31, 1997 591,611
------------
Balances at December 31, 1997 $17,177,518
------------
------------
See accompanying notes.
F-8
TITAN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
PERIOD FROM
PERIOD FROM
COMMENCEMENT OF
YEARS ENDED DECEMBER 31, OPERATIONS (JULY
--------------------------------------- 25, 1991) TO
1997 1996 1995 DECEMBER 31, 1997
----------- ------------ ------------ -----------------
Cash flows from operating activities
Net income (loss) $ 591,611 $(12,855,646) $(11,693,454) $ (43,508,291)
Adjustments to reconcile net income (loss) to net cash provided
by (used) in operating activities:
Depreciation and amortization 385,503 496,466 328,611 1,448,694
Issuance of common stock to acquire in-process technology 5,500,000 5,500,000
Accretion of discount on indebtedness -- 1,407,577 883,333 2,290,910
Equity in loss of Ansan Pharmaceuticals, Inc. 590,854 998,972 457,114 2,046,940
Other -- (9,931) 8,122 (35,653)
Issuance of common stock to acquire minority interest of
Theracell, Inc. -- -- 686,000 686,000
Changes in operating assets and liabilities:
Prepaid expenses and other current assets 134,387 (153,253) 71,425 (58,937)
Receivable - Ansan Pharmaceuticals, Inc. 117,881 (60,090) (57,791) --
Other assets 176,932 (74,486) 45,543 (27,863)
Other receivables (371,793) -- -- (371,793)
Accounts payable 212,467 (111,914) 959,639 1,049,639
Other accrued liabilities (214,525) (466,878) 1,440,640 1,350,640
----------- ------------ ------------ -----------------
Net cash provided by (used in) operating activities 7,123,317 (10,829,183) (8,599,043) (29,629,714)
----------- ------------ ------------ -----------------
Cash flows from investing activities
Purchase of furniture and equipment (78,864) (270,036) (8,073) (1,151,223)
Purchases of short-term investments (100,000) (35,750,000) -- (59,782,493)
Proceeds from sales of short-term investments 12,600,000 22,750,000 -- 59,282,493
Effect of deconsolidation of Ansan Pharmaceuticals, Inc. -- -- (135,934) (135,934)
----------- ------------ ------------ -----------------
Net cash provided by (used in) investing activities 12,421,136 (13,270,036) (144,007) (1,787,157)
----------- ------------ ------------ -----------------
See accompanying notes.
F-9
TITAN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
PERIOD FROM
COMMENCEMENT OF
YEARS ENDED DECEMBER 31, OPERATIONS (JULY
--------------------------------------- 25, 1991) TO
1997 1996 1995 DECEMBER 31, 1997
----------- ------------ ------------ -----------------
Cash flows from financing activities
Issuance of common stock 3,012 29,966,536 -- 30,028,774
Deferred offering costs -- 522,299 (522,299) --
Deferred financing costs 96,349 -- (526,684) (713,899)
Issuance of preferred stock -- -- 1,143,794 17,601,443
Issuance of preferred stock - Novartis 5,000,000 -- -- 5,000,000
Proceeds from notes and advances payable -- -- -- 2,681,500
Repayment of notes payable -- -- -- (1,441,500)
Proceeds from Ansan Pharmaceuticals, Inc. bridge financing -- -- 1,425,000 1,425,000
Proceeds from Titan Pharmaceuticals, Inc. and Ingenex, Inc.
bridge financing -- -- 5,250,000 5,250,000
Repayment of Titan Pharmaceuticals, Inc. and Ingenex, Inc.
bridge financing -- (5,250,000) -- (5,250,000)
Proceeds from capital lease bridge financing -- -- -- 658,206
Payments of principal under capital lease obligation (127,462) (226,713) (209,642) (633,766)
Proceeds from Ingenex, Inc. technology financing -- -- 2,000,000 2,000,000
Principal payments on Ingenex, Inc. technology financing (1,289,313) (494,107) (216,580) (2,000,000)
Increase in minority interest from issuances of preferred
stock by Ingenex, Inc. -- -- -- 1,241,032
Issuance of common stock by subsidiaries -- 9,931 822 173,652
Loss on disposal of assets (216,699) -- -- (216,699)
----------- ------------ ------------ -----------------
Net cash provided by financing activities 3,465,887 24,527,946 8,344,411 55,803,743
----------- ------------ ------------ -----------------
Net increase (decrease) in cash and cash equivalents 23,010,340 428,727 (398,639) 24,386,872
Cash and cash equivalents at beginning of period 1,376,532 947,805 1,346,444 --
----------- ------------ ------------ -----------------
Cash and cash equivalents at end of period $24,386,872 $ 1,376,532 $ 947,805 $ 24,386,872
----------- ------------ ------------ -----------------
----------- ------------ ------------ -----------------
Supplemental cash flow disclosure
Interest paid $ 226,685 $ 558,387 $ 370,864 $ 1,393,309
----------- ------------ ------------ -----------------
----------- ------------ ------------ -----------------
Conversion of notes payable to related parties and accrued
interest into Series A preferred stock $ -- $ -- $ (1,306,329) $ (1,306,329)
----------- ------------ ------------ -----------------
----------- ------------ ------------ -----------------
Acquisition of furniture and equipment pursuant to capital lease $ -- $ -- $ -- $ 595,236
----------- ------------ ------------ -----------------
----------- ------------ ------------ -----------------
Cashless exercise of warrants $ 585,369 $ 286,523 $ -- $ 871,892
----------- ------------ ------------ -----------------
----------- ------------ ------------ -----------------
See accompanying notes.
F-10
TITAN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY AND ITS SEVERAL DEVELOPMENT STAGE SUBSIDIARIES
Titan Pharmaceuticals, Inc. (the "Company" or "Titan"), was incorporated
in February 1992 in the State of Delaware. Titan is a biopharmaceutical
company developing proprietary therapeutics for the treatment of central
nervous system disorders, cancer and other serious and life-threatening
diseases. Titan conducts a portion of its operation through three development
stage biotechnology companies: Ingenex, Inc. ("Ingenex"), Theracell, Inc.
("Theracell") and ProNeura, Inc. ("ProNeura"), collectively, (the "Operating
Companies"). Trilex Pharmaceuticals, Inc. ("Trilex") was incorporated in May
1996, as a wholly owned subsidiary of the Company, to engage in the
development of cancer therapeutic vaccines utilizing anti-idiotypic antibody
technology. In August 1997, Trilex was merged (the "Trilex Merger") with and
into Titan.
INGENEX, INC.
Ingenex is engaged in the development of gene-based therapeutics and the
discovery of medically important genes for the treatment of cancer and viral
diseases. In September 1994, Ingenex issued shares of its Series B
convertible preferred stock to a third party for $1,241,032, net of issuance
costs. In June 1996, Ingenex issued 981,818 shares of common stock to the
Company, converting $5,400,000 of debt payable. Also in June 1996, and in
consideration of a payment to Ingenex of $100,000, Ingenex issued to the
Company an option to purchase an additional 315,789 shares of common stock
which will have an exercise price per share equal to the initial public
offering price of Ingenex common stock and an additional option and a right
of first refusal with respect to future issuances of common stock in order
for the Company to maintain ownership of a majority of the outstanding common
stock. The option expires one year from the date of the consummation of the
initial public offering of Ingenex common stock. In June 1997, Ingenex sold
its GSX System (the "GSX Sale"), a research technology, and certain fixed
assets to Pharmaceutical Product Development, Inc. ("PPD") for $8,722,500 in
cash and the assumption of certain capital lease liabilities and recognized a
gain of $8,361,220. At December 31, 1997, the Company owned 81% of Ingenex,
assuming the conversion of all preferred stock to common.
THERACELL, INC.
Theracell was incorporated in November 1992 to engage in the development
of novel treatments for various neurologic disorders through the
transplantation of neural cells and neuron-like cells directly into the
brain. The Company's ownership in Theracell was 85% through November 1995,
at which time the Company entered into an agreement with the minority
stockholders of Theracell pursuant to which 140,000 shares of the Company's
stock were issued in exchange for all the outstanding shares of Theracell
common stock held by them. In connection with the issuance of the 140,000
shares, the Company recorded a charge for acquired in-process research and
development of $686,000. In November 1995, the former minority stockholders
of Theracell were granted an option to acquire 5% of the issued and
outstanding capital stock of Theracell. These options can be exercised at a
price of $1.59 per share within a period of three years from January 18,
1996. Commencing thirty days after the date Theracell's shares are first
publicly traded, the Theracell options may be subject to redemption under
certain conditions by Theracell on thirty days' written notice at a
redemption price of $0.05 per share if the closing price of Theracell's
common stock for any thirty consecutive trading days ending within fifteen
days of the notice of redemption averages in excess of $3.18 per share. At
December 31, 1997, the Company owned 99% of Theracell.
PRONEURA, INC.
ProNeura was incorporated in October 1995 to engage in the development of
cost effective, long term treatment solutions to neurologic and psychiatric
disorders through an implantable drug delivery system. At December 31, 1997,
the Company owned 79% of ProNeura.
F-11
TITAN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
The accompanying consolidated financial statements include the accounts of
Titan and the majority owned Operating Companies. All significant
intercompany transactions and accounts have been eliminated in consolidation.
The financial statements of the Company include the results of Ingenex from
the date Ingenex was incorporated (July 25, 1991), as the entities were under
common control.
The activities of the Company have primarily consisted of establishing
offices and research facilities, recruiting personnel, conducting research
and development, preclinical and clinical studies, performing business and
financial planning and raising capital. Accordingly, the Company is
considered to be in the development stage. The Company has incurred losses
since inception of $43.5 million and expects to incur increasing losses and
require additional financial resources to achieve commercialization of its
products.
The Company anticipates working on a number of long-term development
projects which will involve experimental and unproven technologies. The
projects may require many years and substantial expenditures prior to
commercialization. Therefore, the Company will need to obtain additional
funds from the issuance of equity or debt securities, from corporate
partners, or from other sources to continue its research and development
activities, fund operating expenses, pursue regulatory approvals and build
production, sales and marketing capabilities, as necessary. Management
believes that sufficient capital will be available to achieve planned
business objectives, including supporting certain preclinical development and
clinical testing, through at least 1998.
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid investments with an original
maturity of 90 days or less to be cash equivalents. Cash equivalents include
$20,124,561 and $896,970 in money market funds at December 31, 1997 and 1996,
respectively. The Company's investment policy is to maintain liquidity and
ensure safety of principal.
At December 31, 1997, short term investments is comprised of auction rate
preferred stock (preferred stock investments in money market funds),
classified as "available for sale." Such investments are carried at cost,
which approximates their fair market value. The Company has not realized any
gains or losses on its investments.
FURNITURE AND EQUIPMENT
Furniture and equipment is stated at cost and is depreciated using the
straight-line method over the estimated useful lives of the assets ranging
from three to five years.
REVENUE RECOGNITION
Revenue consists of revenue from up-front license fees which have been
recognized in accordance with the related license agreement and government
grants which support the Company's research effort in specific research
projects. These grants generally provide for reimbursement of approved costs
incurred as defined in the various agreements.
SPONSORED RESEARCH
Research and development expenses under sponsored research arrangements
are recognized as the related services are performed, generally ratably over
the period of service. Payments for license fees are expensed when paid.
STOCK-BASED COMPENSATION
In accordance with the provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"),
the Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
F-12
TITAN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
interpretations and to adopt the "disclosure only" alternative described in
SFAS 123 in accounting for its employee stock option plans. Under APB 25, if
the exercise price of the Company's employee stock options equals or exceeds
the fair value of the underlying stock on the date of grant, no compensation
expense is recognized.
NET INCOME (LOSS) PER SHARE
Effective December 31, 1997, the Company adopted statement of Financial
Accounting Standards No. 128 "Earnings Per Share" ("SFAS No. 128"). SFAS No.
128 requires the presentation of basic earnings (loss) per share and diluted
earnings (loss) per share, if more dilutive, for all periods presented. In
accordance with SFAS No. 128, basic net income (loss) per share has been
computed using the weighted-average number of shares of common stock
outstanding during the period. Diluted earnings per share includes any
dilutive effects of options, warrants and convertible securities.
The following table sets for the computation of basic and diluted earnings
per share:
1997 1996 1995
----------- ----------- -----------
Weighted-average shares of common stock
outstanding during the period(1) 13,002,050 10,936,046 6,719,634
Effect of dilutive securities:
Employee stock options 284,951 -- --
Unit purchase options 20,615 -- --
Convertible preferred stock 104,110 -- --
Warrants 64,918 -- --
----------- ----------- -----------
Potentially dilutive common shares 474,594 -- --
Shares used in computation of diluted
earnings per share 13,476,644 10,936,046 6,719,634
----------- ----------- -----------
----------- ----------- -----------
(1) Includes in 1995, on a pro forma basis, 5,293,585 shares of preferred
stock (on an as-if-converted to common basis) which automatically converted
to common stock upon the closing of the Company's initial public offering.
Potentially dilutive securities not included in the computation of diluted
earnings per share:
Options to purchase 1,066,799 shares of common stock at various prices per
share were outstanding during 1997 but were not included in the computation
of diluted earnings per share because the exercise prices of the options were
greater than the average market price of the common shares and, therefore,
the effect would be antidilutive.
Options to purchase 307,200 Units (one share of common stock and one Class A
warrant) at $10.42 per unit were outstanding during 1997 but were not
included in the computation of diluted earnings per share because the
exercise price of the units was greater than the average market price of the
common shares and, therefore, the effect would be antidilutive.
Warrants to purchase 7,031,986 shares of common stock at $6.20 per share were
outstanding during 1997 but were not included diluted earnings per share
because the exercise price of the warrants was greater than the average
market price of the common shares and, therefore, the effect would be
antidilutive.
F-13
TITAN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company issued 222,400 shares of a new class of preferred stock (the
"Series C Preferred") (see Note 7) in connection with the Trilex Merger. The
preferred stock will automatically convert to common stock, only if certain
development milestones are achieved, within certain timeframes. As the
milestones have not yet been met, the Series C Preferred is not included in
the computation of diluted earnings per share in 1997.
Had the Company been in a net income position, diluted earnings per share
in 1996 and 1995 would have included the shares used in the computation of
basic net loss per share for 1996 and for 1995 and the dilutive effect of
10,163,950 and 930,191 shares, respectively, related to outstanding options
and warrants (prior to the application of the treasury stock method).
For purposes of computing per share data for the year ended December 31,
1996, the net loss has been increased by a $5,431,871 deemed dividend (see
Note 7).
Basic net loss per share for the year ended December 31, 1995 has been
retroactively restated to apply the requirements of Staff Accounting Bulletin
No. 98, issued by the SEC in February 1998 ("SAB 98"). Under SAB 98, certain
shares of common stock and options and warrants to purchase shares of common
stock issued at prices substantially below the per share price of shares sold
in the Company's initial public offering previously included in the
computation of shares outstanding for periods prior to the Company's initial
public offering are now excluded from the computation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In 1997, Statement of Financial Accounting Standards No. 130 ("SFAS 130"),
"Reporting Comprehensive Income," was issued and is required to be adopted by
the Company in 1998.
In 1997, Statement of Financial Accounting Standards No. 131 ("SFAS 131"),
"Disclosure About Segments of an Enterprise and Related Information," was
issued and is required to be adopted by the Company in 1998.
issued and is required to be adopted by the Company in 1998.
The Company expects the adoption of these statements will not impact
results of operations or financial position, but will require additional
disclosure.
F-14
TITAN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. INVESTMENT IN ANSAN PHARMACEUTICALS, INC.
Ansan was a majority-owned consolidated subsidiary until its public
offering in August 1995, at which time it became an equity method investee of
the Company.
In November 1997, the shareholders of Ansan Pharmaceuticals, Inc.
("Ansan") approved an Agreement and Plan of Reorganization and Merger between
Ansan and Discovery Laboratories, Inc. ("Discovery"), a development stage
biotechnology company, pursuant to which Discovery was merged with and into
Ansan (the "Ansan Merger").
Pursuant to the Ansan Merger, the Company acquired an exclusive worldwide
license to Ansan's butyrate compounds for anti-cancer and certain other
indications in exchange for the Company's payment of a 2% royalty on net
sales and the Company's transfer to Ansan of all of its equity holdings in
Ansan. Upon completion of the Merger, Ansan repaid approximately $1,170,000
of outstanding indebtedness to the Company.
Summarized financial information for Ansan is as follows:
AS A CONSOLIDATED
SUBSIDIARY OF AS AN EQUITY
THE COMPANY INVESTEE OF THE COMPANY
------------ -----------------------------------------------------
SEVEN MONTHS AUGUST 1995 NINE MONTHS
ENDED THROUGH DECEMBER YEAR ENDED ENDED
JULY 31, 1995 DECEMBER 1995 DECEMBER 1996 SEPTEMBER 1997
-------------- ----------------- ------------- ---------------
Net loss.................................... $ (1,777,561) $ (1,043,845) $ (2,280,757) $ (1,469,652)
Company's share of net loss:
As consolidated subsidiary.................. $ (1,777,561)
-------------
-------------
As equity investee (approximately 44%
at December 31, 1995 and 43%
at December 1996 and September 1997)...... $ (457,114) $ (998,972) $ (590,854)
---------- ------------ ------------
---------- ------------ ------------
F-15
TITAN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's share of net loss for the nine months ended September 30, 1997
represents the entire carrying value of the investment at December 31, 1996
as the allocable portion of Ansan's loss exceeded the book value of the
investment.
3. FURNITURE AND EQUIPMENT
Furniture and equipment consisted of the following at December 31:
Depreciation expense was $213,743, $327,309 and 306,611 for the years
ended December 31, 1997, 1996 and 1995, respectively.
4. SPONSORED RESEARCH AND LICENSE AGREEMENTS
The Operating Companies have entered into various agreements with research
institutions, universities, and other entities for the performance of
research and development activities and for the acquisition of licenses
related to those activities. Expenses under these agreements totaled
$2,104,105, $1,827,000 and $1,024,000 in the years ended December 31, 1997,
1996 and 1995, respectively.
At December 31, 1997, the annual aggregate commitments the Company has
under these agreements, including minimum license payments, are as follows:
After 2001, the Company must make annual payments aggregating $325,500 per
year to maintain certain of the foregoing licenses. Certain of the licenses
provide for the payment of royalties by the Company on future product sales,
if any. In addition, in order to maintain license and other rights during
product development, the Company must comply with various conditions
including the payment of patent related costs and obtaining additional equity
investments.
5. INGENEX TECHNOLOGY FINANCING AGREEMENT
In January 1995, Ingenex assigned its rights under certain of its
technology license agreements to a capital management partnership in exchange
for $2,000,000. Ingenex licensed back the technology for research and
development purposes and agreed to make monthly payments of $25,000 through
July 1995 and $60,060 from August 1995 through January 1999. Each payment
included implicit interest at approximately 11.6% per annum. At the end of
the payment term, the assigned license rights could be reacquired by Ingenex
for $1.00. As part of the financing agreement, the Company issued to the
capital management partnership a warrant to purchase 112,375 shares of the
Company's Common Stock at a price of $3.56 per share. The warrant expires
January 31, 2002. The capital management partnership has agreed to not sell,
assign, or transfer any securities of the Company without prior written
consent of the Company's underwriter. In connection with the technology
financing the Company issued a finder and a director
F-16
TITAN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
warrants to purchase an aggregate of 7,395 shares of the Company's common
stock at an exercise price of $3.25 per share. The warrants expire in
January 2002.
Ingenex repaid the entire balance of the Technology Financing Agreement
from the proceeds of the GSX Sale in June 1997.
6. LEASES
The Company leases facilities under operating leases that expire at
various dates through August 2001. Rent expense was $397,133 and $461,815
for years ended December 31, 1997 and 1996, respectively.
The Company was obligated under a capital lease for certain equipment with
an aggregate cost of $1,253,441 at December 31, 1996. Pursuant to the GSX
Sale, the Company's obligation under said lease was assumed by PPD in June
1997. Amortization expense for leased assets is included in depreciation and
amortization expense.
The following is a schedule of future minimum lease payments at December
31, 1997:
7. STOCKHOLDERS' EQUITY
PREFERRED STOCK
In August 1997, Trilex was merged by and into Titan. In connection with
this transaction, in October 1997, the Company issued 222,400 shares of
Series C preferred stock to certain members of Trilex management and certain
consultants of Trilex. The Series C preferred stock will automatically
convert to common stock, on a one-to-one basis, only if certain development
milestones are achieved, within certain timeframes. Holders of Series C
preferred stock are entitled to receive dividends, when, as and if declared
by the board of directors ratably with any declaration or payment of any
dividend on the common stock or other junior securities of the Company. The
series C preferred stock has a liquidation preference equal to $0.01 per
share. No value was assigned to the Series C preferred stock in the
accompanying financial statements.
In November 1997, Titan issued to Novartis Pharma AG ("Novartis") 606,061
shares of Series D convertible preferred stock (the "Series D Shares"),
pursuant to an agreement by which Titan granted certain technology rights to
Novartis (see Note 11). The Series D Shares were issued pursuant to a stock
purchase agreement which provides for conversion of such shares into the
Company's Common Stock at the option of Novartis at any time after January
29, 1999. The conversion price will be equal to the market price during a
period to be specified within the first two fiscal quarters of 1999 and is
subject to a floor of $7.50 and a ceiling of $9.00. Accordingly, upon
conversion of the Series D Shares, the Company will issue a minimum of
555,555 and a maximum of 666,666 shares of Common Stock. The stock purchase
agreement provides that such shares may not be sold, transferred or assigned
prior to November 19, 1999. Holders of Series D preferred stock are entitled
to receive dividends, when, as and if declared by the board of directors
ratably with any declaration or payment of any dividend on the common stock
or other junior securities of the Company. The Series D Preferred Stock has
a liquidation preference equal to $0.05 per share. Holders of Series D
preferred stock are entitled to vote on a one-to-one basis with the common
stock of the Company.
Each share of Series A and Series B preferred stock outstanding prior to
the Company's IPO was originally convertible into (and carried voting rights
equal to) one share of common stock. In October 1995, pursuant to the terms
of the Series B preferred stock agreement and in contemplation of the IPO,
the board of directors and stockholders approved a change in the conversion
ratio of Series A and Series B preferred stock providing that in the event of
an IPO of common stock on or before March 31, 1996, each share of Series A
and Series B preferred stock would automatically be converted into
1.4310444107 and 1.8993878755 shares of common stock, respectively (the "IPO
Conversion Ratio"). The IPO Conversion Ratio was not higher than the ratio
which otherwise would have applied in an IPO during this period. In
conjunction with the IPO in January 1996 all outstanding shares of Series A
and Series B preferred stock were converted into 5,521,140 shares of common
stock.
The holders of the Series A and Series B preferred stock received common
stock in January 1996 with an aggregate fair value (at the $5 per unit value
of the IPO) which exceeded by approximately $5,400,000 the cost of their
initial investment in the Series A and Series B preferred stock. This amount
has been deemed to be the equivalent of a preferred stock dividend. The
Company recorded the deemed dividend at the time of conversion by offsetting
charges and credits to additional paid in capital, without any effect on
total stockholders' equity (net capital deficiency). There was no effect on
1995 or 1996 net loss or pro forma net loss per share from the mandatory
conversion. However, the amount increased the loss allocable to common
stock, in the calculation of net loss per share in 1996.
F-17
TITAN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMMON STOCK
In January 1996, the Company issued 3,200,000 units at $5.00 per unit in
its IPO. Each unit consisted of one share of common stock and one redeemable
Class A warrant. The net proceeds (after underwriter's discount and
expenses, and other costs associated with the IPO) totaled $13,690,357. At
the closing of the offering, all of the Company's then outstanding Series A
and Series B preferred stock automatically converted into common stock. In
February 1996, the Company issued an additional 480,000 units, at $5.00 per
unit, in accordance with the underwriter's over-allotment option. The net
proceeds of the underwriter's over-allotment option totaled $2,160,000.
In July and August 1996, the Company completed a private placement (the
"Private Placement") of 1,536,000 units, each unit consisting of one share of
common stock and one redeemable Class A warrant, for total gross proceeds of
$16,000,000. After deducting placement agent fees and other expenses of the
private placement, the net proceeds to the Company were $13,739,628.
WARRANTS
At December 31, 1997, the Company had a total of 7,507,244 warrants
outstanding to purchase common stock, at a weighted average exercise price of
$6.07. Such warrants expire from November 1998 to January 2001. The
warrants include 7,031,986 Class A warrants issued during 1996 in connection
with the IPO, repayment of a bridge financing and the Private Placement.
They entitle the holder to purchase one share of common stock at an exercise
price of $6.20, subject to adjustment in certain circumstances, at any time
for a period of five years. The warrants are subject to redemption by the
Company at $0.05 per warrant on 30 days' prior written notice if the closing
bid price of the Company's common stock averages in excess of $9.10 per share
for 30 consecutive trading days ending within 15 days of the date of notice
of redemption. The Company has reserved a sufficient number of authorized
but unissued shares of common stock for issuance upon exercise of the
warrants.
F-18
TITAN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
UNIT PURCHASE OPTIONS
In connection with the IPO, the underwriter was granted an option ("Unit
Purchase Option") to acquire 320,000 additional units at a price of $6.20 per
unit, and in connection with the private, the placement agent was granted a
Unit Purchase Option to purchase an additional 307,200 units at a price of
$10.42 per unit. Each unit consists of one share of common stock and one
Class A warrant.
SHARES RESERVED FOR FUTURE ISSUANCE
As of December 31, 1997, shares of common stock reserved by the Company
for future issuance consisted of the following:
8. STOCK OPTION PLANS
Under the terms of the Company's amended and restated stock option plan
(the "1993 Option Plan"), incentive stock options may be granted to
employees, and nonstatutory stock options may be granted to employees,
directors and consultants of the Company and Operating Companies. A total of
558,073 shares of common stock have been reserved and authorized for issuance
under the 1993 Option Plan.
Options granted under the 1993 Option Plan expire no later than ten years
from the date of grant, except when the grantee is a 10% shareholder of the
from the date of grant, except when the grantee is a 10% shareholder of the
Company or an Operating Company, in which case the maximum term is five years
from the date of grant. The exercise price of incentive stock options,
nonstatutory stock options and options granted to 10% shareholders of the
Company (or the Operating Companies), shall be at least 100%, 85% and 110%,
respectively, of the fair market value of the stock subject to the option on
the grant date. The options are exercisable immediately upon grant, however,
the shares issuable upon exercise of the options are subject to repurchase by
the Company. Such repurchase rights will lapse over a period of up to five
years from the date of grant. At December 31, 1997, 114,194 shares of common
stock underlying the options would be subject to repurchase by the Company
should such options be exercised and the optionees' employment or consulting
relationship terminate. No further options will be granted under the 1993
Option Plan.
In November 1995, the Company adopted the 1995 Stock Option Plan (the
"1995 Option Plan"). A total of 1,300,000 shares of common stock are
reserved and authorized for issuance under the 1995 Option Plan. Options
granted under the 1995 Option Plan expire no later than ten years from the
date of grant, except when the grantee is a 10% shareholder of the Company or
an Operating Company, in which case the maximum term is five years from the
date of grant. The exercise price of incentive stock options, nonstatutory
stock options and options granted to 10% shareholders of the Company (or the
Operating Companies), shall be at least 100%, 85% and 110%, respectively, of
the fair market value of the stock subject to the option on the grant date.
The provisions of the 1995 Option Plan provide for the automatic grant of
nonqualified stock options to purchase shares of common stock to directors of
the Company who are not principal (10%) stockholders of the Company
("Eligible Directors"). Each Eligible Director of the Company was granted an
option to purchase 10,000 shares of common stock upon the effective date of
the IPO. Future Eligible Directors will be granted a Director Option to
purchase 10,000 shares of Common
F-19
TITAN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock on the date that such person is first elected or appointed a director.
Each Eligible Director will receive an automatic grant of a Director Option
to purchase 2,000 shares of Common Stock on the day immediately following the
date of each annual meeting of stockholders, as long as such director is a
member of the Board of Directors.
Activity under the 1993 and 1995 Option Plans is summarized below:
OUTSTANDING OPTIONS
SHARES -----------------------------
AVAILABLE NUMBER OF PRICE PER WEIGHTED AVG.
FOR GRANT SHARES SHARE EXERCISE PRICE
--------- ----------- ------------- ---------------
Balance at December 31, 1994 268,880 289,193 $0.29 - $1.17 $0.78
Options granted (218,127) 218,127 $0.59 - $1.35 $1.34
Options canceled 157,243 (157,243) $0.29 - $1.35 $0.97
---------- ---------
Balance at December 31, 1995 207,996 350,077 $0.29 - $1.35 $1.04
Increase in shares reserved 1,080,118 -- -- --
Options granted (1,080,635) 1,080,635 $5.00 - $11.75 $9.93
Options exercised -- (16,520) $0.29 - $1.35 $0.62
Options canceled 11,886 (11,886) $0.59 - $1.35 $0.66
---------- ---------
Balance at December 31, 1996 219,365 1,402,306 $0.59 - $11.75 $7.90
Increase from Substitute Options 452,475 -- -- --
Options granted (588,100) 588,100 $2.88-$9.13 $3.46
Options exercised -- (5,117) $0.59 $0.59
Options canceled 168,256 (168,256) $0.59 - $11.63 $3.99
Plan shares expired (128,693) -- -- --
---------- ---------
Balance at December 31, 1997 123,303 1,817,033 $0.59 - $11.75 $6.88
---------- ---------
---------- ---------
The increase in the shares reserved during 1997 was due to options issued
in conjunction with the liquidation of Trilex. The 1995 Option Plan allows
that stock options issued as the result of a merger or consolidation
("Substitute Options") will be added to the maximum number of shares provided
for in the plan. Consequently, Substitute Options are not returned to the
shares reserved under the plan when cancelled. During 1997, 123,576
Substitute Options were cancelled and are included as shares expired during
the year.
Of the options on 1,402,306 shares outstanding at December 31, 1996,
options on 262,344 shares were exercisable at that date. The options
outstanding at December 31, 1997 have been segregated into three ranges for
additional disclosure as follows:
In addition, the Operating Companies, with the exception of ProNeura, each
have a stock option plan under which options to purchase common stock of the
Operating Companies have been and may be granted.
F-20
TITAN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STOCK COMPENSATION
The Company has elected to follow APB 25 and related interpretations in
accounting for its stock options because, as discussed below, the alternative
fair value accounting provided for under SFAS 123 requires use of option
valuation models that were not developed for use in valuing employee stock
options. Under APB 25, because the exercise price of the Company's employee
stock options equals the market price of the underlying stock on the date of
the grant, no compensation expense is recognized.
Pro forma information regarding the net income and earnings per share is
required by SFAS 123, and has been determined as if the Company had accounted
for its employee stock options granted subsequent to 1994 under the fair
value method of that Statement. The fair value for these options was
estimated at the date of grant using a Black-Scholes option pricing model for
the multiple option approach with the following assumptions for 1997, 1996
and 1995: weighted-average volatility factor of 0.7, 0.6, and 0.6,
respectively; no expected dividend payments; weighted-average risk-free
interest rates in effect of 5.5, 6.38, and 6.00, respectively; and a
weighted-average expected life of 3.79, 4.77, and 4.41, respectively.
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 the Company's employee stock options.
Based upon the above methodology, the weighted-average fair value of
options granted during the years ended December 31, 1997, 1996 and 1995 was
$1.90, $5.71and $0.73, respectively.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to pro forma net loss over the options' vesting period.
The Company's pro forma information is as follows:
DECEMBER 31,
----------------------------------------------
1997 1996 1995
------------ ------------- -------------
Consolidated pro forma net loss attributable
to common stockholders . . . . . . . . . . $ (2,065,259) $ (20,233,716) $ (11,852,518)
Consolidated pro forma net loss per share . . . $ (0.16) $ (1.85) $ (1.76)
The consolidated pro forma net loss calculated above includes the
estimated fair value of the options granted by each of the operating
companies in 1997 and 1996, calculated on substantially equivalent
assumptions.
Because SFAS 123 is applicable only to options granted subsequent to 1994,
its pro forma effect will not be fully reflected until 1998.
9. MINORITY INTEREST
The $1,241,032 received by Ingenex upon the issuance of Series B
convertible preferred stock has been classified as minority interest in the
consolidated balance sheet and has not been reduced by any portion of the
losses of Ingenex.
Amounts invested by outside investors in the common stock of the
Amounts invested by outside investors in the common stock of the
consolidated subsidiaries has been apportioned between minority interest and
additional paid-in capital in the consolidated balance sheets. Losses
applicable to the minority interest holdings of the Operating Companies'
common stock have reduced that interest.
F-21
TITAN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. INCOME TAXES
As of December 31, 1997, the Company had federal net operating loss
carryforwards of approximately $31,300,000, of which approximately
$24,500,000 is attributable to the Operating Companies. The net operating
loss carryforwards will expire at various dates beginning in 2008 through
2012, if not utilized.
Utilization of the net operating losses may be subject to a substantial
annual limitation due to the ownership change limitations provided by the
Internal Revenue Code of 1986. The annual limitation may result in the
expiration of net operating losses before utilization.
As of December 31, 1997, the company had deferred tax assets of
approximately $14,500,000, of which approximately $10,200,000 is attributable
to the Operating Companies. The net deferred tax asset has been fully offset
by a valuation allowance. The net valuation allowance increased by
approximately $4,000,000 during 1996.
Significant components of the Company's deferred tax assets for federal
income taxes as of December 31, 1997 and 1996 are as follows:
Deferred tax assets:
DECEMBER 31,
---------------------
1997 1996
---- ----
Net operating loss carryforwards $ 11,500,000 $ 12,300,000
Research credit carryforwards 1,200,000 900,000
Capitalized research and development 1,200,000 800,000
Other - net 600,000 400,000
------------ ------------
Net deferred tax assets 14,500,000 14,400,000
Valuation allowance (14,500,000) (14,400,000)
------------ ------------
Net deferred tax assets $ - $ -
------------ ------------
------------ ------------
11. ILOPERIDONE LICENSE AGREEMENTS
In January 1997, the Company entered into an exclusive license agreement
with Hoechst Marion Roussel, Inc. ("HMRI"). The license agreement gave the
Company a worldwide license to HMRI's patent rights and know-how related to
the antipsychotic agent Iloperidone-TM-, including the ability to develop,
use, sublicense, manufacture and sell products and processes claimed in the
patent rights. Pursuant to the license, the Company paid, during 1997, an
up-front license fee of $9,500,000, consisting of: (i) $4,000,000 in cash
and (ii) $5,500,000 through the issuance 594,595 shares of common stock.
The Company is obligated to pay to HMRI the difference between $5.5 million
and the net proceeds, if any, received by HMR upon sale of the above
mentioned common stock. Accordingly, the Company has classified the entire
$5.5 million as a non-current liability under the heading Guaranteed Security
Value in the accompanying balance sheet. Any cash paid under the guarantee
agreement will be charged against this balance, and the remaining balance, if
any, will be transferred to common stock (see Note 12). The Company is
required to make additional benchmark payments as specific milestones are
met. Upon commercialization of the product, the license agreement provides
that the Company will pay royalties based on net sales.
In November 1997, Titan and Novartis Pharma AG ("Novartis") entered into
an agreement (the "Novartis Sublicense") pursuant to which the Company
granted Novartis a sublicense for the worldwide (with the exception of Japan)
development, manufacturing and marketing of Iloperidone. Pursuant to the
Novartis Sublicense, Novartis paid to the Company $20 million consisting of
an up-front license fee of $15 million and $5 million for the purchase of
606,061 shares of Series D convertible preferred stock. In addition,
approximately $2.4 million in cash was paid by Novartis as reimbursement of
research and development costs incurred by the Company. The Novartis
Sublicense provides for future payments by Novartis contingent upon the
achievement of regulatory milestones as well as a royalty on net sales, if
any, of the product. Novartis has assumed the clinical development,
registration and marketing costs of Iloperidone.
12. SUBSEQUENT EVENT ("UNAUDITED")
SALE OF THE HMRI SHARES
In February 1998, HMRI sold the HMRI Shares for net proceeds of
approximately $2,456,000. Accordingly, in March 1998, the Company paid to
HMRI approximately $3,044,000, which will be deducted from Guaranteed
Security Value balance. The remaining balance of $2,456,000 will be
transferred to stockholders' equity.
F-22
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
TITAN PHARMACEUTICALS, INC.
Date: March 31, 1998 By: /s/ Louis R. Bucalo
----------------------------------------
Louis R. Bucalo, M.D.,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons in the capacities
and on the dates stated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Louis R. Bucalo President, Chief Executive Officer and
- -------------------------- Director (principal executive officer) March 31, 1998
Louis R. Bucalo, M.D.
/s/ Ernst-Gunter Afting
- -------------------------- Director March 31, 1998
Ernst-Gunter Afting
/s/ Victor J. Bauer
- -------------------------- Director March 31, 1998
Victor J. Bauer
/s/ Michael K. Hsu
- -------------------------- Director March 31, 1998
Michael K. Hsu
/s/ Hubert E. Huckel
- -------------------------- Director March 31, 1998
Hubert E. Huckel, M.D.
/s/ Marvin E. Jaffe
- -------------------------- Director March 31, 1998
Marvin E. Jaffe, M.D.
/s/ Lindsay A. Rosenwald
- -------------------------- Director March 31, 1998
Lindsay A. Rosenwald, M.D.
/s/ Konrad M. Weis
- -------------------------- Director March 31, 1998
Konrad M. Weis, Ph.D.
/s/ Kenneth J. Widder
- -------------------------- Director March 31, 1998
Kenneth J. Widder, M.D.
/s/ Robert E. Farrell Executive Vice President and Chief March 31, 1998
- -------------------------- Financial Officer (principal
Robert E. Farrell financial and accounting officer)
CERTIFICATE OF THE DESIGNATIONS, POWERS,
PREFERENCES AND RIGHTS
OF THE
SERIES C CONVERTIBLE PREFERRED STOCK
(par value $.001 per share)
of
TITAN PHARMACEUTICALS, INC.
a Delaware Corporation
__________
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
__________
The undersigned DOES HEREBY CERTIFY that the following resolution was duly
adopted by the Board of Directors (the "Board of Directors") of Titan
Pharmaceuticals, Inc., a Delaware corporation (the "Corporation"), at a meeting
held on July 29, 1997:
RESOLVED, that one series of the class of authorized preferred stock, $.001
par value, of the Corporation is hereby created and that the designations,
powers, preferences and relative, participating, optional or other special
rights of the shares of such series, and qualifications, limitations or
restrictions thereof, are hereby fixed as follows (this instrument hereinafter
referred to as the "Designation"):
1. NUMBER OF SHARES AND DESIGNATIONS. 222,400 shares of the preferred
stock, $.001 par value, of the Corporation are hereby constituted as a series of
preferred stock of the Corporation designated as Series C Convertible Preferred
Stock (the "Series C Preferred Stock").
2. DIVIDEND PROVISIONS. Subject to the rights of any series of Preferred
Stock that may from time to time come into existence, the holders of share of
Series C Preferred Stock shall be entitled to receive dividends, when, as and if
declared by the Board of Directors, out of any assets legally available
therefor, ratably with any declaration or payment of any dividend (payable other
than solely in Common Stock or other securities and rights convertible into or
entitling the holder thereof to receive, directly or indirectly, additional
shares of Common Stock of this Corporation) on the Common Stock or other junior
securities of this Corporation.
3. LIQUIDATION PREFERENCE.
(a) Upon any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary ("Liquidation"), the holders of
record of the shares of the Series C Preferred Stock shall be entitled to
receive, before and in preference to any distribution or
payment of assets of the Corporation or the proceeds thereof may be made or
set apart for the holders of Common Stock or any other security junior to the
Series C Preferred Stock in respect of distributions upon Liquidation out of
the assets of the Corporation legally available for distribution to its
stockholders, an amount in cash equal to $.01 per share (subject to
adjustment in the event of stock splits, combinations or similar events) plus
an amount equal to all accrued and unpaid dividends, if any, on each share of
Series C Preferred Stock on the date fixed for the distribution of assets of
the Corporation (the "Series C Liquidation Preference"). If, upon such
Liquidation, the assets of the Corporation available for distribution to the
holders of Series C Preferred Stock and any other series of preferred stock
then outstanding ranking on parity with the Series C Preferred Stock upon
liquidation ("Parity Stock") shall be insufficient to permit payment in full
to the holders of the Series C Preferred Stock and Parity Stock, then the
entire assets and funds of the Corporation legally available for distribution
to such holders and the holders of the Parity Stock then outstanding shall be
distributed ratably among the holders of the Series C Preferred Stock and
Parity Stock based upon the proportion the total amount distributable on each
share upon liquidation bears to the aggregate amount available for
distribution on all shares of the Series C Preferred Stock and of such Parity
Stock, if any.
(b) Upon the completion of the distributions required by subparagraph
(a) of this Paragraph 3 and any other distribution that may be required with
respect to series of preferred stock that may from time to time come into
existence, the holders of Common Stock shall be entitled to receive an aggregate
amount equal to the sum of stated capital plus additional paid-in capital
attributable to the Common Stock, as reflected on the Corporation's audited
consolidated balance sheet as of the end of the fiscal year next preceding the
date of such distribution, which aggregate amount shall be distributed ratably
among the holders of Common Stock in proportion to the number of shares of
Common Stock held by each such holder. If, upon the occurrence of such event,
the assets and funds thus distributed among the holders of the Common Stock
shall be insufficient to permit the payment to such holders of the full
aforesaid aggregate amount, then the entire remaining assets and funds of the
Corporation legally available for distribution shall be distributed ratably
among the holders of the Common Stock in proportion to the number of shares of
Common Stock held by each such holder.
(c) Upon the completion of the distributions required by subparagraph
(b) of this Paragraph 3, the remaining assets of the Corporation available for
distribution to stockholders shall be distributed among the holders of Series C
Preferred Stock, Parity Stock and the Common Stock PRO RATA based on the number
of shares of Common Stock held by each and issuable upon conversion of all such
Series C Preferred Stock or Parity Stock.
(d) For purposes of this Paragraph 3, a merger or consolidation or a
sale of all or substantially all of the assets of the Corporation shall be
considered a Liquidation except (i) in the event that in such a transaction, the
holders of the Series C Preferred Stock receive securities of the surviving
corporation having substantially similar rights as the Series C Preferred Stock
and the stockholders of the Corporation immediately prior to such transaction
are holders of at least a majority of the voting securities of the surviving
corporation immediately thereafter or (ii) in the event of a merger or
consolidation in which the Corporation is not the surviving entity, the
-2-
Corporation elects to convert the Series C Preferred Stock into an equal number
of shares of Common Stock as set forth in Paragraph 5(b) below.
4. OPTIONAL REDEMPTION BY CORPORATION. In the event that the outstanding
shares of Series C Preferred Stock have not converted into shares of Common
Stock pursuant to Paragraph 5(a) or (b) below or the Corporation has not
received a notice of Conditional Approval (as defined below), then at any time
after September __, 2004 (the "Original Redemption Date"), the Corporation may
redeem all, but not less than all, of the outstanding shares of Series C
Preferred Stock at a redemption price equal to the aggregate par value of such
shares (the "Redemption Price") plus accrued and unpaid dividends, if any. In
the event that a notification from the United States Food and Drug
Administration (the "FDA") granting a conditional approval (a "Conditional
Approval") of either Cea Vac, TriGem or TriAB (the "Drugs") is received by the
Corporation prior to the Original Redemption Date and the outstanding shares of
Series C Preferred Stock have not converted into shares of Common Stock pursuant
to Paragraph 5(a) or (b) below, the Original Redemption Date shall be extended
until the latest date on which the Corporation has received a withdrawal notice
with respect to each Conditional Approval received prior to the Original
Redemption Date (the "Extended Redemption Date") and, in the event the Original
Redemption Date is extended, the Corporation may redeem all, but not less than
all, of the outstanding shares of Series C Preferred Stock at the Redemption
Price, plus accrued and unpaid dividends, if any, at any time after the Extended
Redemption Date. .
5. CONVERSION.
(a) AUTOMATIC CONVERSION. Upon receipt of notification (the
"Notification") from the FDA that any of the Drugs are approved for final
marketing and commercialization by the Corporation (the "Conversion Event"),
PROVIDED that the Conversion Event occurs prior to the (i) Original Redemption
Date or (ii) the Extended Redemption Date in the event a Conditional Approval
exists at the time of the Notification, each share of Series C Preferred Stock
then outstanding shall, by virtue of and immediately prior to the Conversion
Event and without any action on the part of the holder thereof (except as set
forth in Paragraph 5(c) below), be deemed automatically converted into that
number of shares of Common Stock into which the Series C Preferred Stock would
then be converted at the then effective Conversion Rate (as defined below).
Each share of Series C Preferred Stock shall be convertable into one share of
Common Stock (the "Conversion Rate"), subject to adjustment as set forth in
Paragraph 5(d).
(b) OPTIONAL CONVERSION BY CORPORATION. At any time the share of
Series C Preferred Stock are outstanding, the Corporation shall have the right
to elect to convert any or all of the shares of Series C Preferred Stock
outstanding immediately prior to such conversion, and upon such election by the
Corporation, and without any action on the part of the holder thereof (except as
set forth in Paragraph 5(c) below), each share of Series C Preferred Stock then
outstanding shall be deemed automatically converted into that number of shares
of Common Stock into which the Series C Preferred Stock would then be converted
at the then effective Conversion Rate.
-3-
(c) MECHANICS OF CONVERSION. In the event that the Series C
Preferred Stock is converted into shares of Common Stock pursuant to Paragraph
(a) or (b) above, the holder of the Series C Preferred Stock shall surrender the
certificate or certificates therefor, duly endorsed, at the office of the
Corporation or of any transfer agent for the Series C Preferred Stock, and shall
give written notice to the Corporation at its principal corporate office, which
notice shall state therein the name or names in which the certificate or
certificates for shares of Common Stock are to be issued. The Corporation
shall, as soon as practicable thereafter, issue and deliver to such holder of
Series C Preferred Stock, or to the nominee or nominees of such holder, a
certificate or certificates for the number of shares of Common Stock to which
such holder shall be entitled as aforesaid. Such conversion shall be deemed to
have been made immediately prior to the close of business on the date of such
surrender of the shares of Series C Preferred Stock to be converted, and the
person or persons entitled to receive the shares of Common Stock issuable upon
such conversion shall be treated for all purposes as the record holder or
holders of such shares of Common Stock as of such date.
(d) CONVERSION RATE ADJUSTMENTS. The Conversion Rate of the Series C
Preferred Stock shall be subject to adjustment from time to time as set forth
below.
(i) In case the Corporation shall (a) issue Common Stock as a
dividend or distribution on any class of the capital stock of the Company,
(b) split or otherwise subdivide its outstanding Common Stock, (c) combine the
outstanding Common Stock into a smaller number of shares, or (d) issue by
reclassification of its Common Stock (except in the case of a merger,
consolidation or sale of all or substantially all of the assets of the Company
as set forth in subparagraph 5(d)(ii) below) the Conversion Rate in effect on
the record date for any stock dividend or the effective date of any such other
event shall be adjusted so that the holder of each share of the Series C
Preferred Stock shall thereafter be entitled to receive, upon the conversion of
such share, the number of shares of Common Stock or other capital stock which it
would own or be entitled to receive immediately after the happening of any of
the events mentioned above had such share of the Series C Preferred Stock been
converted immediately prior to the close of business on such record date or
effective date. The adjustments herein provided shall become effective
immediately following the record date for any such stock dividend or the
effective date of any such other events. There shall be no adjustment in the
Conversion Rate in the event that the Company pays a cash dividend.
(ii) In case of any reclassification or similar change of
outstanding shares of Common Stock of the Company, or in case of the
consolidation or merger of the Company with another corporation, subject to
subparagraph 5(b), or the conveyance of all or substantially all of the assets
of the Company in a transaction in which holders of the Common Stock receive
shares of stock or other property including cash, each share of the Series C
Preferred Stock shall, after such event and subject to the other rights of the
Series C Preferred Stock as set forth elsewhere herein, be convertible only into
the number of shares of stock or other securities or property, including cash,
to which a holder of the number of shares of Common Stock of the Company
deliverable upon conversion of such shares of the Series C Preferred Stock
-4-
would have been entitled upon such reclassification, change, consolidation,
merger or conveyance had such share been converted immediately prior to the
effective date of such event.
(e) The Company shall at all times reserve and keep available, out of
its authorized but unissued shares of Common Stock or out of shares of Common
Stock held in its treasury, solely for the purpose of effecting the conversion
of the shares of the Series C Preferred Stock, the full number of shares of
Common Stock deliverable upon the conversion of all shares of the Series C
Preferred Stock from time to time outstanding. The Company shall from time to
time in accordance with Delaware law take all steps necessary to increase the
authorized amount of its Common Stock if at any time the authorized number of
shares of Common Stock remaining unissued shall not be sufficient to permit the
conversion of all of the shares of the Series C Preferred Stock.
(f) (i) No fractional shares or scrip representing fractional shares
of Common Stock shall be issued upon the conversion of the Series C Preferred
Stock. In lieu of any fractional shares to which a holder would otherwise be
entitled, the Company shall pay cash, equal to such fraction multiplied by the
closing price (determined as provided in subparagraph (ii) of this Paragraph
5(f)) of the Common Stock on the day of conversion.
(ii) For the purposes of any computation under subparagraph
5(f)(i), the current market price per share of Common Stock on any date shall be
deemed to be the average of the daily closing prices for the 20 consecutive
business days prior to the day in question. The closing price for each day
shall be the last sales price regular way or in case no sale takes place on such
day, the average of the closing high bid and low asked prices regular way, in
either case (a) as officially quoted by the Nasdaq SmallCap Market or the Nasdaq
National Market or such other market on which the Common Stock is then listed
for trading, or (b) if, in the reasonable judgment of the Board of Directors of
the Company, the Nasdaq SmallCap Market or the Nasdaq National Market is no
longer the principal United States market for the Common Stock, then as quoted
on the principal United States market for the Common Stock, as determined by the
Board of Directors of the Company, or (c) if, in the reasonable judgment of the
Board of Directors of the Company, there exists no principal United States
market for the Common Stock, then as reasonably determined by the Board of
Directors of the Company.
(g) The Company will not, by amendment of its Certificate of
Incorporation, as amended, or through any reorganization, recapitalization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms to be observed or performed hereunder by the
Company, but will at all times in good faith assist in the carrying out of all
the provisions of this Paragraph 5 and in the taking of all such action as may
be necessary or appropriate in order to protect the conversion rights of the
holders of the Series C Preferred Stock against impairment.
6. VOTING RIGHTS.
-5-
(a) Except as otherwise specifically provided herein or by applicable
law, the Series C Preferred Stock shall have no right to vote with respect to
any question upon which holders of the Corporation's capital stock have the
right to vote.
(b) So long as any shares of the Series C Preferred Stock remain
outstanding, the consent of two-thirds of the holders of the then outstanding
Series C Preferred Stock, voting as one class, either expressed in writing or at
a meeting called for that purpose, shall be necessary to repeal, amend or
otherwise change this Designation or the Certificate of Incorporation of the
Company, as amended, in a manner which would alter or change the powers,
preferences, rights privileges, restrictions and conditions of the Series C
Preferred Stock so as to adversely affect the Series C Preferred Stock. The
Series C Preferred Stock shall have no right to vote with respect to the
authorization and/or issuance by the Company of any new series of preferred
stock whether or not the terms of such preferred stock are junior to, on parity
with, or senior to those of the Series C Preferred Stock.
(c) Each share of the Series C Preferred Stock shall entitle the
holder thereof to one vote on all matters to be voted on by the holders of the
Series C Preferred Stock, as set forth above.
7. STATUS OF REDEEMED OR CONVERTED STOCK. In the event any shares of
Series C Preferred Stock shall be redeemed or converted pursuant to Paragraph 4
or 5 hereof, the shares so redeemed or converted shall be cancelled and shall
not be issuable by the Corporation. The Certificate of Incorporation of the
Corporation, as amended, may be appropriately amended from time to time to
effect the corresponding reduction in the Corporation's authorized capital
stock.
8. TRANSFERABILITY. The holders of the Series C Preferred Stock shall
not sell, assign or otherwise transfer any shares of Series C Preferred Stock
without the written consent of the Corporation.
9. MISCELLANEOUS.
(a) There is no sinking fund with respect to the Series C Preferred
Stock.
(b) The shares of the Series C Preferred Stock shall not have any
preferences, voting powers or relative, participating, optional, preemptive or
other special rights except as set forth above in this Designation and in the
Certificate of Incorporation of the Company, as amended.
10. RIGHT TO ELECT DIRECTORS.
During the period that the Series C Preferred Stock is outstanding and in
the event of a Default, the holders of Series C Preferred Stock shall
immediately have the right to elect two members of the Company's Board of
Directors. "Default" shall be defined to mean the failure of
-6-
the Company to pay any dividend on the Series C Preferred Stock declared by
the Board of Directors when due, which failure shall continue for a period of
two years.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] IN
WITNESS WHEREOF, Titan Pharmaceuticals, Inc. has caused this Designation to
be executed this 23rd day of September, 1997.
TITAN PHARMACEUTICALS, INC.
By: /s/ Louis R. Bucalo
--------------------------------------------
Name: Louis R. Bucalo, M.D.
Title: President and Chief Executive Officer
Attest:
By: /s/ Sunil R. Bhonsle
------------------------------------
Name: Sunil R. Bhonsle
Title: Secretary and Chief Operating
Officer
-7-
CERTIFICATE OF THE DESIGNATIONS, POWERS,
PREFERENCES AND RIGHTS
OF THE
SERIES D CONVERTIBLE PREFERRED STOCK
(par value $.001 per share)
of
TITAN PHARMACEUTICALS, INC.
a Delaware Corporation
__________
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
__________
The undersigned DOES HEREBY CERTIFY that the following resolution was duly
adopted by the Board of Directors (the "Board of Directors") of Titan
Pharmaceuticals, Inc., a Delaware corporation (the "Corporation"), at a meeting
held on November 3, 1997:
RESOLVED, that one series of the class of authorized preferred stock, $.001
par value, of the Corporation is hereby created and that the designations,
powers, preferences and relative, participating, optional or other special
rights of the shares of such series, and qualifications, limitations or
restrictions thereof, are hereby fixed as follows (this instrument hereinafter
referred to as the "Designation"):
1. NUMBER OF SHARES AND DESIGNATIONS. 606,061 shares of the preferred
stock, $.001 par value, of the Corporation are hereby constituted as a series of
preferred stock of the Corporation designated as Series D Convertible Preferred
Stock (the "Series D Preferred Stock").
2. DIVIDEND PROVISIONS. Subject to the rights of any series of Preferred
Stock that may from time to time come into existence, the holders of share of
Series D Preferred Stock shall be entitled to receive dividends, when, as and if
declared by the Board of Directors, out of any assets legally available
therefor, ratably with any declaration or payment of any dividend (payable other
than solely in Common Stock or other securities and rights convertible into or
entitling the holder thereof to receive, directly or indirectly, additional
shares of Common Stock of this Corporation) on the Common Stock or other junior
securities of this Corporation.
3. LIQUIDATION PREFERENCE.
(a) Upon any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary ("Liquidation"), the holders of
record of the shares of the Series D Preferred Stock shall be entitled to
receive, before and in preference to any distribution or
payment of assets of the Corporation or the proceeds thereof may be made or
set apart for the holders of Common Stock or any other security junior to the
Series D Preferred Stock in respect of distributions upon Liquidation out of
the assets of the Corporation legally available for distribution to its
stockholders, an amount in cash equal to $.05 per share (subject to
adjustment in the event of stock splits, combinations or similar events) plus
an amount equal to all accrued and unpaid dividends, if any, on each share of
Series D Preferred Stock on the date fixed for the distribution of assets of
the Corporation (the "Series D Liquidation Preference"). If, upon such
Liquidation, the assets of the Corporation available for distribution to the
holders of Series D Preferred Stock and any other series of preferred stock
then outstanding ranking on parity with the Series D Preferred Stock upon
liquidation ("Parity Stock") shall be insufficient to permit payment in full
to the holders of the Series D Preferred Stock and Parity Stock, then the
entire assets and funds of the Corporation legally available for distribution
to such holders and the holders of the Parity Stock then outstanding shall be
distributed ratably among the holders of the Series D Preferred Stock and
Parity Stock based upon the proportion the total amount distributable on each
share upon liquidation bears to the aggregate amount available for
distribution on all shares of the Series D Preferred Stock and of such Parity
Stock, if any.
(b) Upon the completion of the distributions required by subparagraph
(a) of this Paragraph 3 and any other distribution that may be required with
respect to series of preferred stock that may from time to time come into
existence, the holders of Common Stock shall be entitled to receive an aggregate
amount equal to the sum of stated capital plus additional paid-in capital
attributable to the Common Stock, as reflected on the Corporation's audited
consolidated balance sheet as of the end of the fiscal year next preceding the
date of such distribution, which aggregate amount shall be distributed ratably
among the holders of Common Stock in proportion to the number of shares of
Common Stock held by each such holder. If, upon the occurrence of such event,
the assets and funds thus distributed among the holders of the Common Stock
shall be insufficient to permit the payment to such holders of the full
aforesaid aggregate amount, then the entire remaining assets and funds of the
Corporation legally available for distribution shall be distributed ratably
among the holders of the Common Stock in proportion to the number of shares of
Common Stock held by each such holder.
(c) Upon the completion of the distributions required by subparagraph
(b) of this Paragraph 3, the remaining assets of the Corporation available for
distribution to stockholders shall be distributed among the holders of Series D
Preferred Stock, Parity Stock and the Common Stock PRO RATA based on the number
of shares of Common Stock held by each and issuable upon conversion of all such
Series D Preferred Stock or Parity Stock.
4. REDEMPTION. The Series D Preferred Stock is not redeemable.
5. CONVERSION.
(a) OPTIONAL CONVERSION. The holder shall have the right, at any time
after January 29, 1999, to convert any or all of the shares of Series D
Preferred Stock outstanding immediately prior to such conversion into that
number of shares of Common Stock equal to the
-2-
multiple of the following two fractions: (a) the number of shares of Series D
Preferred Stock to be converted divided by 606,061 and (b) 5,000,000 divided
by the conversion price in effect at the time of conversion (the "Conversion
Price"). The Conversion Price shall mean the average of the closing prices
for the Corporation's Common Stock for any 20 consecutive trading days during
the period from January 1, 1999 through June 30, 1999 (the "Market Price")
chosen by Novartis Pharma AG ("Novartis"); provided, however, if the Market
Price is greater than $9.00 (the "Ceiling"), the Conversion Price will be
$9.00 and if the Market Price is less than $7.50 (the "Floor"), the
Conversion Price will be $7.50. The closing price for each day shall be the
last sales price of the day or in case no sale takes place on such day, the
average of the closing high bid and low asked prices, in either case (a) as
officially quoted by the Nasdaq SmallCap Market or the Nasdaq National Market
or such other market on which the Common Stock is then listed for trading, or
(b) if, in the reasonable judgment of the Board of Directors of the
Corporation, the Nasdaq SmallCap Market or the Nasdaq National Market is no
longer the principal United States market for the Common Stock, then as
quoted on the principal United States market for the Common Stock, as
determined by the Board of Directors of the Corporation, or (c) if, in the
reasonable judgment of the Board of Directors of the Corporation, there
exists no principal United States market for the Common Stock, then as
reasonably determined by the Board of Directors of the Corporation. The
number of shares of Common Stock into which each share of Series D Preferred
Stock is convertible is hereinafter collectively referred to as the
"Conversion Rate." The Conversion Rate is subject to adjustment pursuant to
the provisions of Paragraph 5(d) below.
(b) AUTOMATIC CONVERSION. If at any time the Corporation effects a
merger, consolidation or sale of substantially all of its assets (a "Conversion
Event"), each share of Series D Preferred Stock then outstanding shall, by
virtue of and immediately prior to the Conversion Event and without any action
on the part of the holder thereof (except as set forth in Paragraph 5(c) below),
be deemed automatically converted into that number of shares of Common Stock
into which the Series D Preferred Stock would then be converted at either (i)
the Market Price as of the date of the first public announcement of the
Conversion Event (subject to the Floor and Ceiling set forth in Paragraph 5(a)
above) in the event the Conversion Event occurs prior to the earlier of June 30,
1999 or establishment by Novartis of the Conversion Price or (ii) the Conversion
Price.
(c) MECHANICS OF CONVERSION. In the event that the Series D
Preferred Stock is converted into shares of Common Stock pursuant to Paragraphs
5(a) or 5(b) above, the holder of the Series D Preferred Stock shall surrender
the certificate or certificates therefor, duly endorsed, at the office of the
Corporation or of any transfer agent for the Series D Preferred Stock, and shall
give written notice to the Corporation at its principal corporate office, which
notice shall state therein the name or names in which the certificate or
certificates for shares of Common Stock are to be issued. The Corporation
shall, as soon as practicable thereafter, issue and deliver to such holder of
Series C Preferred Stock, or to the nominee or nominees of such holder, a
certificate or certificates for the number of shares of Common Stock to which
such holder shall be entitled as aforesaid. Such conversion shall be deemed to
have been made immediately prior to the close of business on the date of such
surrender of the shares of Series D Preferred Stock to be converted,
-3-
and the person or persons entitled to receive the shares of Common Stock
issuable upon such conversion shall be treated for all purposes as the record
holder or holders of such shares of Common Stock as of such date.
(d) CONVERSION RATE ADJUSTMENTS. The Conversion Rate shall be
adjusted in case the Corporation shall, at any time prior to conversion of the
Series D Preferred Stock pursuant to Paragraphs 5(a) or 5(b) above, (a) issue
Common Stock as a dividend or distribution on any class of the capital stock of
the Corporation, (b) split or otherwise subdivide its outstanding Common Stock,
(c) combine the outstanding Common Stock into a smaller number of shares, or
(d) issue securities by reclassification of its Common Stock (except in the case
of a merger, consolidation or sale of all or substantially all of the assets of
the Corporation) so that the holder of each share of the Series D Preferred
Stock shall thereafter be entitled to receive, upon the conversion of such
share, the number of shares of Common Stock or other capital stock which it
would own or be entitled to receive immediately after the happening of any of
the events mentioned above had such share of the Series D Preferred Stock been
converted immediately prior to the close of business on such record date or
effective date. There shall be no adjustment in the Conversion Rate in the
event that the Corporation pays a cash dividend.
(e) The Corporation shall at all times reserve and keep available,
out of its authorized but unissued shares of Common Stock or out of shares of
Common Stock held in its treasury, solely for the purpose of effecting the
conversion of the shares of the Series D Preferred Stock, the full number of
shares of Common Stock deliverable upon the conversion of all shares of the
Series D Preferred Stock from time to time outstanding. The Corporation shall
from time to time in accordance with Delaware law take all steps necessary to
increase the authorized amount of its Common Stock if at any time the authorized
number of shares of Common Stock remaining unissued shall not be sufficient to
permit the conversion of all of the shares of the Series D Preferred Stock.
(f) No fractional shares or scrip representing fractional shares of
Common Stock shall be issued upon the conversion of the Series D Preferred
Stock. In lieu of any fractional shares to which a holder would otherwise be
entitled, the Corporation shall pay cash, equal to such fraction multiplied by
the Market Price of the Common Stock on the day of conversion.
(g) The Corporation will not, by amendment of its Certificate of
Incorporation, as amended, or through any reorganization, recapitalization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms to be observed or performed hereunder by the
Corporation, but will at all times in good faith assist in the carrying out of
all the provisions of this Paragraph 5 and in the taking of all such action as
may be necessary or appropriate in order to protect the conversion rights of the
holders of the Series D Preferred Stock against impairment.
6. VOTING RIGHTS.
-4-
(a) In addition to any other rights provided for herein or by law,
the holders of Series D Preferred Stock shall be entitled to vote, together with
the holders of Common Stock as one class, on all matters as to which holders of
Common Stock shall be entitled to vote, in the same manner and with the same
effect as such Common Stock holders. In any such vote each share of Series D
Preferred Stock shall entitle the holder thereof to one vote per share.
(b) So long as any shares of the Series D Preferred Stock remain
outstanding, the consent of two-thirds of the holders of the then outstanding
Series D Preferred Stock, voting as one class, either expressed in writing or at
a meeting called for that purpose, shall be necessary to repeal, amend or
otherwise change this Designation or the Certificate of Incorporation of the
Corporation, as amended, in a manner which would alter or change the powers,
preferences, rights privileges, restrictions and conditions of the Series D
Preferred Stock so as to adversely affect the Series D Preferred Stock. The
Series D Preferred Stock shall have no right to vote with respect to the
authorization and/or issuance by the Corporation of any new series of preferred
stock whether or not the terms of such preferred stock are junior to, on parity
with, or senior to those of the Series D Preferred Stock.
(c) Each share of the Series D Preferred Stock shall entitle the
holder thereof to one vote on all matters to be voted on by the holders of the
Series D Preferred Stock, as set forth above.
7. STATUS OF CONVERTED STOCK. In the event any shares of Series D
Preferred Stock shall be redeemed or converted pursuant to Paragraph 5 hereof,
the shares so converted shall be cancelled and shall not be issuable by the
Corporation. The Certificate of Incorporation of the Corporation, as amended,
may be appropriately amended from time to time to effect the corresponding
reduction in the Corporation's authorized capital stock.
8. MISCELLANEOUS.
(a) There is no sinking fund with respect to the Series D Preferred
Stock.
(b) The shares of the Series D Preferred Stock shall not have any
preferences, voting powers or relative, participating, optional, preemptive or
other special rights except as set forth above in this Designation and in the
Certificate of Incorporation of the Corporation, as amended.
-5-
9. RIGHT TO ELECT DIRECTORS.
During the period that the Series D Preferred Stock is outstanding and in
the event of a Default, the holders of Series D Preferred Stock shall
immediately have the right to elect two members of the Corporation's Board of
Directors. "Default" shall be defined to mean the failure of the Corporation to
pay any dividend on the Series D Preferred Stock declared by the Board of
Directors when due, which failure shall continue for a period of two years.
IN WITNESS WHEREOF, Titan Pharmaceuticals, Inc. has caused this Designation
to be executed this 17th day of November, 1997.
TITAN PHARMACEUTICALS, INC.
By: /s/ Sunil R. Bhonsle
------------------------------------------
Name: Sunil R. Bhonsle
Title: Executive Vice President and Chief
Operating Officer
Attest:
By: /s/ Robert E. Farrell
----------------------------------
Name: Robert E. Farrell
Title: Chief Financial Officer
-6-
Exhibit 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-42533) pertaining to the 1995 Stock Option Plan of Titan
Pharmaceuticals, Inc., as amended and restated, of our report dated
February 17, 1998, with respect to the consolidated financial statements of
Titan Pharmaceuticals, Inc. included in this Annual Report on Form 10-K for
the year ended December 31, 1997, filed with the Securities and Exchange
Commission.
ERNST & YOUNG LLP
Palo Alto, California
March 27, 1998