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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, 2001
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 Number 0-26534
VION PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3671221
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.)
organization)
4 Science Park
New Haven, Connecticut 06511
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 498-4210
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Title of Class
Common Stock, $0.01 par value (together with associated
Common Stock Purchase Rights)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the common stock held by non-affiliates of the
registrant as of March 19, 2002 was $96,637,534 based on the last sale price for
the common stock on that date as reported by the Nasdaq National Market.
The number of shares outstanding of the registrant's common stock as of March
19, 2002 was 28,883,209.
Portions of the Proxy Statement for the Registrant's Annual Meeting of
Stockholders to be held on June 5, 2002 are incorporated by reference in
Part III of this Form 10-K.
TABLE OF CONTENTS
FORM 10-K
Item Page
- ---- ----
PART I
1. Business........................................................................................1
2. Properties......................................................................................16
3. Legal Proceedings...............................................................................16
4. Submission of Matters to a Vote of Security Holders.............................................16
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters...........................17
6. Selected Financial Data.........................................................................18
7. Management's Discussion and Analysis of Financial Condition and Results of Operations...........18
7A. Quantitative and Qualitative Disclosures About Market Risk......................................28
8. Financial Statements and Supplementary Data.....................................................29
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............52
PART III
10. Directors and Executive Officers of the Registrant..............................................53
11. Executive Compensation..........................................................................53
12. Security Ownership of Certain Beneficial Owners and Management..................................53
13. Certain Relationships and Related Transactions..................................................53
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.................................54
All statements other than statements of historical fact included in this Annual
Report on Form 10-K, including without limitation statements under "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business," regarding our financial position, business strategy, and plans and
objectives of our management for future operations, are forward-looking
statements. When used in this Annual Report on Form 10-K, words such as "may,"
"will," "should," "could," "potential," "seek," "project," "predict,"
"anticipate," "believe," "estimate," "expect," "intend" and similar expressions,
as they relate to us or our management, identify forward-looking statements.
Forward-looking statements are based on the beliefs of our management as well as
assumptions made by and information currently available to our management. These
statements are subject to risks and uncertainties that may cause actual results
and events to differ significantly. A detailed discussion of risks attendant to
the forward-looking statements is included under "Management's Discussion and
Analysis of Financial Condition and Results of Operations." The information
contained in this Annual Report on Form 10-K is believed to be current as of the
date of filing with the Securities and Exchange Commission. We do not intend to
update any of the forward-looking statements after the date of this filing to
conform these statements to actual results or to changes in our expectations,
except as required by law.
PART I
ITEM 1: Business
General
We are a biopharmaceutical company engaged in research, development and
commercialization of therapeutics and technologies for the treatment of cancer.
For the years ended December 31, 2001, 2000 and 1999, we spent $12.5 million,
$12.8 million and $11.5 million, respectively, on research, development and
clinical activities. Our product portfolio consists of one drug delivery
platform and two distinct small molecule anticancer agents.
TAPET'r' (Tumor Amplified Protein Expression Therapy), our
drug delivery system using modified Salmonella bacteria, is
designed to deliver anticancer agents directly to solid
tumors, and is currently being evaluated in Phase I human
safety trials.
Triapine'r' prevents the replication of tumor cells by
blocking a critical step in DNA synthesis and repair. Triapine
is currently being evaluated for its safety in Phase I
combination studies, and safety and efficacy in Phase II single
agent trials.
VNP40101M is a member of the Sulfonyl Hydrazine Prodrug family
and a unique DNA alkylating agent currently being evaluated in
Phase I trials.
Our product development strategy consists of two main approaches.
First, we engage in product development with respect to anticancer technologies
through in-house research and through collaboration with academic institutions.
Second, depending on the drug market conditions and required resources, we
determine the best method and/or partnership to develop, and eventually market,
our
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products. Our current research and development programs are based on
technologies that we license from Yale University (Yale).
Overview of Cancer
Cancer is the second leading cause of death in the United States,
exceeded only by heart disease. Since 1990, nearly five million Americans have
died from cancer. It is a devastating disease with tremendous unmet medical
needs. The American Cancer Society estimates that almost 1.3 million new cases
of cancer will be diagnosed this year in the United States and more than 0.5
million Americans are expected to die from cancer in 2002.
Cancer is characterized by uncontrolled cell division resulting in the
development of a mass of cells, commonly known as a tumor, as well as the
invasion and spreading of these cells. Cancerous tumors can arise in any tissue
or organ within the human body. Cancer is believed to occur as a result of a
number of factors, such as genetic predisposition, chemical agents, viruses and
irradiation. These factors result in genetic changes affecting the ability of
cells to normally regulate their growth and differentiation. When a normal cell
becomes cancerous, it can spread to various sites in the body.
Common Treatment Methods
The three most common methods of treating patients with cancer are
surgery, radiation therapy and chemotherapy. A cancer patient often receives a
combination of these methods. Surgery and radiation therapy are particularly
effective in patients where the disease is localized and has not yet spread to
other tissues or organs. Surgery involves the removal of the tumor and adjacent
tissue. In many cases where the cancer cells have not yet spread, surgery cannot
be performed because of the inaccessible location of the tumor or the danger of
removing too much normal tissue along with the cancerous tissue.
Radiation therapy involves the exposure of the tumor and surrounding
tissue to ionizing radiation. The objective of radiation therapy is to kill the
cancer cells with ionized molecules that are created in the parts of the body
exposed to the ionizing radiation. Radiation, however, also kills or damages
normal cells. Radiation therapy can have varying levels of effectiveness, and
can cause patient weakness, loss of appetite, nausea and vomiting. Radiation can
also result in loss of normal body functions, which may include bone marrow
depression, gastrointestinal complications, kidney damage and damage to the
peripheral nervous system. In some cases, radiation-induced mutations in bone
marrow cells can lead to new secondary cancers, such as leukemia, years after
treatment for other forms of cancer.
Chemotherapy is the principal approach used for tumors that have
spread. Chemotherapy seeks to interfere with the molecular and cellular
processes that control the development, growth and survival of malignant tumor
cells. Chemotherapy involves the administration of drugs designed to kill cancer
cells or the administration of hormone analogs to either reduce the production
of, or block the action of, certain hormones that affect the growth of various
tumors. Chemotherapy, however, can also result in loss of normal body functions
and can result in patient weakness, loss of appetite, nausea and vomiting. In
many cases, chemotherapy consists of the administration of several different
drugs in combination.
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Recent Advances
In recent years, there have been significant advances in molecular
biology, immunology and other related fields of biotechnology that have led to a
better understanding of how malfunctioning genes can result in the formation of
tumors. It is anticipated that these advances will lead to better ways to
diagnose cancer and to prevent tumors from forming or becoming malignant. Other
research has focused on mechanisms to efficiently deliver therapies to tumors.
Ultimately, these emerging technologies may lead to genetic-based therapies
aimed specifically at the genes that have malfunctioned and caused the cancer to
form or spread, and to therapies that can selectively deliver agents to tumors
that prevent the abnormal growth of cells.
Most current anticancer drugs, when introduced into the system by
current delivery methods, affect rapidly growing cells, both cancerous and
normal, throughout the body. The result is often significant side effects that
take a toll on a patient's health and can limit the amount of treatment a
patient may receive. Therefore, a great need exists for new therapies and more
efficient mechanisms to deliver more potent cancer treatments while reducing the
debilitating effects of toxicity to normal tissue.
We believe that, for the foreseeable future, the principal means of
combating cancer will continue to be through the surgical removal of tumors and
the destruction of malignant cells through radiation therapy and chemotherapy,
delivered systemically or in ways that make anticancer agents preferentially
more toxic to tumors. Therefore, we intend to take a balanced approach in our
research and development efforts. We will continue to develop chemically defined
small molecules based upon unique cellular targets discovered through
biotechnology, while also pursuing development of technologies to deliver
therapeutic agents to tumors.
Our Product Development Program
We are currently developing several products for the treatment of
cancer. The discussion below sets forth the development status of our core
product candidates as of December 31, 2001. 'Preclinical' indicates that the
product candidate selected for development has met predetermined criteria for
potency, specificity, manufacturability and pharmacologic activity in vitro, or
cell culture, and in vivo, or animal, models. Clinical evaluation involves a
three-phase process. 'Phase I' indicates safety and proof-of-concept testing
and determination of maximum tolerated dose in a limited patient population.
'Phase II' indicates safety, dosing and efficacy testing in a limited patient
population. 'Phase III' indicates safety, dosing and efficacy testing in a
large patient population.
Drug Delivery Platform: TAPET'r'
TAPET is a proprietary platform technology that uses bioengineered,
genetically altered Salmonella bacteria to deliver cancer-fighting drugs
preferentially to solid tumors. Extensive preclinical studies in animal models
have shown that TAPET bacteria migrate to and penetrate throughout solid tumors.
Inside the tumors, TAPET doubles in quantity every 30 to 45 minutes, achieving
very high bacterial counts, reaching ratios in tumor versus normal tissues of
1000:1. In addition, TAPET can be genetically engineered to deliver anticancer
agents continuously within the tumor. By bringing the "drug factory" to the
tumor, anticancer agents delivered by TAPET are concentrated inside the tumor
and are, therefore, expected to be more efficacious against the tumor, while at
the same time, less toxic
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to normal surrounding tissue. Furthermore, TAPET bacteria are genetically
engineered to reduce the normal, toxic reactions to these bacteria. As an
additional safety measure, TAPET bacteria remain fully sensitive to antibiotic
therapies. Extensive preclinical toxicology studies in several species,
including mice, rats, pigs, dogs and monkeys, have demonstrated these safety
measures to be effective.
Given our preclinical database demonstrating TAPET's potential efficacy
and safety profile, we believe that TAPET may prove to be an effective vector,
or delivery mechanism, for the delivery of specific cancer-fighting drugs
preferentially to solid tumors. We intend to use TAPET to deliver
Vion-developed, anticancer drugs. Some of these drugs will be generic and
non-proprietary, however, when combined with the TAPET system, they could result
in proprietary products for us. In addition, we intend to seek multiple
strategic partnerships with pharmaceutical companies to use TAPET to deliver
their proprietary anticancer drugs.
TAPET First Generation "Unarmed" Vectors: VNP20009
The safety and distribution of VNP20009, our first TAPET bacterial
candidate, is currently being evaluated in four Phase I clinical trials using
two routes of administration: intratumoral (IT) and intravenous (IV). We began a
clinical study of VNP20009, an unarmed TAPET, in November 1999 at the Cleveland
Clinic and at the Beth Israel Deaconess Medical Center, Boston. This initial
trial was designed to determine the safety and maximum tolerated dose of a
single VNP20009 injection into a tumor. The study demonstrated that VNP20009 was
safe to administer with minimal side effects, and that VNP20009 bacteria
remained in the injected tumor for a minimum of two weeks in most patients. The
study was expanded to two additional sites, Montefiore Medical Center in New
York and the Mary Crowley Research Center in Dallas, and additional patients are
being entered to assess the safety and biological effects of higher doses of
VNP20009.
In March 2000, we began the first study of TAPET by IV administration
at the National Cancer Institute (NCI) in Bethesda, Maryland and, two additional
studies were subsequently initiated, including a trial in Europe. The three
studies were of similar design, to determine the safety and maximum tolerated
dose of VNP20009 injected intravenously over 30 minutes, every 35 days. At the
same time, we signed a five-year Cooperative Research and Development Agreement
(CRADA) with the NCI, under the direct supervision of Steven A. Rosenberg, M.D.,
Ph.D., Chief of Surgery in the NCI's Division of Clinical Sciences, a renowned
cancer researcher and a leading authority on the application of cytokines, tumor
vaccines and other biologicals in cancer patients. Under the terms of the CRADA,
our scientific team will work with Dr. Rosenberg's laboratory to evaluate a
number of TAPET vectors, alone and in combination with other anticancer agents,
as well as to explore the mechanisms by which bacterial vectors cause antitumor
activity. This represents a first step in forming a strategic collaboration with
the NCI, which provides us with an excellent setting to further investigate the
safety and biologic effects of our first TAPET vector.
The preliminary results of the IV studies were encouraging. A maximum
tolerated dose was determined which could be administered safely. The bacteria
cleared quickly from the blood, and could not be detected in urine or stool at
any time. Colonization of tumors was detected in some patients. However, it was
determined that an increase in the efficacy and level of colonization would be
desirable before proceeding with later stage clinical development. Thus, in the
first half of 2001, the ongoing clinical studies were amended to explore longer
(four hours, compared to 30 minutes) VNP20009 IV
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infusions, an approach that is known to be safe based on preclinical studies. In
addition, Vion scientists have developed methods to enhance the efficiency of
tumor colonization and have also demonstrated the safety of administering more
frequent and multiple doses of VNP20009. These approaches are expected to enter
clinical testing in 2002.
TAPET-CD: The "Armed" Vector
Vion has successfully modified the TAPET base organism to permit
expression of high intratumoral levels of the enzyme cytosine deaminase.
Cytosine deaminase is an enzyme that converts the relatively nontoxic antifungal
drug 5-fluorocytosine (5-FC) into the anticancer drug 5-fluorouracil. TAPET-CD,
Vion's first armed vector containing the cytosine deaminase pro-drug converting
enzyme, entered clinical trials in January 2002. This initial study is designed
to determine the safety and maximum tolerated dose of TAPET-CD, which is
injected directly into a tumor, and 5-FC, the pro-drug that is given by mouth
beginning after the TAPET-CD injection.
Anticancer Cell Therapeutics
Triapine'r'
Triapine is a potent inhibitor of the enzyme ribonucleotide reductase,
and therefore a potent inhibitor both of DNA synthesis and of DNA repair from
the damage caused by widely used anticancer drugs. Its inhibition arrests the
growth or kills cancer cell lines and enhances the antitumor activity of several
of the standard anticancer agents.
We have completed the initial Phase I studies of Triapine, designed to
determine the safety and maximum tolerated dose of three different schedules in
patients with solid tumors. Two of the schedules, a two-hour intravenous
infusion schedule administered daily for five days, and a 96-hour intravenous
infusion schedule, were chosen for further clinical development. We selected
these schedules based on their safety and tolerability, the demonstration that
both schedules achieved relevant serum concentrations of Triapine at doses at or
below the maximum tolerated dose, and evidence of antitumor activity in several
patients with diverse types of advanced, treatment-refractory tumors (breast,
esophagus, head and neck, islet cell and endometrial cancer).
In the second half of 2001, we initiated a Phase II clinical trial of
the two-hour infusion schedule, administered five times daily every other week
in advanced or metastatic breast cancer. Additional Phase II studies are planned
for the first half of 2002 to include patients with head and neck cancer,
prostate cancer and non-small cell lung cancer.
Based on the preclinical data demonstrating substantial antitumor
activity in hematologic (blood) malignancies, two additional clinical trials of
Triapine were started in patients with treatment-refractory leukemias.
Traditionally, patients with hematologic malignancies receive higher doses of
antitumor drugs compared to solid tumor patients because of the need to induce
maximal effects on the tumor cells in the bone marrow. Therefore, these studies
will determine the maximum tolerated dose and most intense schedule possible
(limited only by toxicity to organs other than the bone marrow) for both the
five times daily and 96-hour infusion regimens.
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In preclinical studies, Triapine showed substantial potential for
enhancing the antitumor activity of various standard anticancer agents. On this
basis, in the second quarter of 2001, we initiated three clinical trials to
determine the safety and maximum tolerated doses of Triapine combined with
gemcitabine, cisplatin, and cisplatin-paclitaxel, respectively, in patients with
treatment-refractory advanced or metastatic solid tumors. The demonstration of
safety and evidence of antitumor activity in these studies will provide
information on additional, potential registration pathways for Triapine.
We are also developing both an oral dosage form and a prodrug version
of Triapine. Initial preclinical studies of the prodrug have shown that it has a
therapeutic half-life that is four to six times longer than Triapine itself.
These alternative dosage forms would be easier to administer and increase the
potential antitumor effect.
Sulfonyl Hydrazine Prodrugs
Sulfonyl Hydrazine Prodrugs (SHPs) are potent alkylating (DNA-damaging)
agents known to be among the most highly effective agents in the treatment of
cancer. Due to the differences in the mechanisms by which alkylating agents
damage DNA, they may have different spectrums of activity and toxicity. SHPs
have unique alkylating agent properties and have demonstrated broad, potent
antitumor activity in mouse models with tolerable toxicity levels.
Alkylating agents of the SHP class exert their killing effects on tumor
cells through a process of crosslinking DNA. This effect is normally a two-step
process involving an initial fast monoalkylation step followed by a slower
second alkylation step that establishes the crosslink. The main problem with
many DNA crosslinking agents is that following the initial monoalkylation event
some tumor cells are capable of repairing the monoalkylated DNA before the
crucial crosslink can be established. They do this through the action of a
protein called Alkyl Guanyl Transferase (AGT). VNP40101M, our clinical
candidate, is unique in that, simultaneously with the release of the alkylating
agent upon drug activation in the tumor, it also releases a relatively potent
inhibitor of AGT. As a result, the agent has a high level of activity against
tumors that have resisted treatment with many commonly used alkylating agents.
We have identified a lead candidate of the sulfonyl hydrazine prodrug
class, VNP40101M, with which to enter clinical development. Promising
preclinical data on VNP40101M showed broad antitumor activity against leukemia,
melanoma, lung and colon carcinomas in animal models. It has been completely
curative in all leukemia models tested to date, including those highly resistant
to standard alkylating agents. It also is very active against solid tumor
models including a xenograft model of human glioma (brain tumor) where it is
curative. The drug has been shown to be capable of crossing the blood brain
barrier with great efficiency, which has been a common obstacle in treating
brain tumors.
In June 2001, we initiated a Phase I trial of VNP40101M, administered
by 15-minute intravenous infusion every four weeks, to patients with
treatment-refractory advanced or metastatic solid tumors. The trial is active at
three sites and is designed to determine safety and the maximum tolerated dose.
An additional Phase I trial to explore a weekly administration schedule is
planned for 2002.
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Promycin'r'
Promycin is an anticancer cell therapeutic that is designed to improve
the treatment of solid tumors by attacking the hypoxic, or oxygen-depleted,
cells therein. In 1997, the Company and Boehringer Ingelheim International GmbH
(BI) entered into an exclusive worldwide licensing agreement for the development
and marketing of Promycin. The Company received $4.0 million in upfront
technology access fees and net proceeds of $2.9 million from the sale of 448,336
shares of common stock at a premium to the market price at the time of sale.
BI also reimbursed the Company for certain initial development costs and agreed
to share in future worldwide development costs. The Company was required to
use the BI license fee of $4.0 million exclusively for Promycin development
expenses. The original agreement was amended in December 1999 and BI agreed to
assume manufacturing, supply and worldwide development expenses in return for
paying reduced future royalties and milestone payments to the Company.
Vion and BI conducted a Phase III trial of Promycin in patients with
head and neck cancer that was put on hold in June 2000 as an interim evaluation
of the Phase III trial did not meet the predetermined criteria, which would
warrant continuation of accrual. Subsequently, BI confirmed the results of the
initial analyses and made the determination to cease development of Promycin. At
this time, we do not expect to incur any additional expense for costs associated
with Promycin nor do we expect to receive any additional revenues from BI
associated with Promycin.
Licensed Product and Product Candidates
MELASYN'r'
MELASYN is a synthetic form of melanin that dissolves readily in water.
Melanin is a pigment formed by cells in the skin that gives skin its color and
protects it from sun damage by absorbing ultraviolet rays. We believe that
MELASYN is the first water-soluble, synthetic version of melanin, making it a
novel and useful ingredient for formulation of skin care products and cosmetics.
The simplicity of its manufacture allows MELASYN to be produced in commercial
quantities at low cost. In addition, MELASYN blends in and conforms to a
person's skin tone without the orange color associated with most commercially
available self-tanning products.
In 1998, we agreed to be the exclusive selling agent for MELASYN and
sublicensed the MELASYN technology to San-Mar Laboratories (San-Mar). Under the
terms of the amended sublicense agreement expiring February 28, 2003, we granted
to San-Mar a worldwide, non-exclusive sublicense for the manufacture and sale of
products containing MELASYN to a specific customer. We receive a sublicense fee
from products sold by San-Mar with guaranteed minimum annual royalties of
$50,000 per year. Under the terms of the Yale license agreement, the Company
pays a license fee to Yale for products sold by us or our sublicensees.
We have also funded research projects relating to compounds to control
pigmentation and chemotherapeutic products for treating melanoma. To date, such
research has not provided any product candidates that we presently plan to
pursue.
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Novel Nucleoside Analogs
We have licensed the development of a nucleoside analog, or synthetic
molecule, known as (beta)-L-Fd4C. (beta)-L-Fd4C is an antiviral drug capable of
inhibiting the replication of the hepatitis B virus, or HBV, that has produced
preclinical results superior to those of competing antiviral drugs. We expect
(beta)-L-Fd4C to last longer and require less frequent dosage than the current
treatment, 3TC. HBV is a causative agent of both acute and chronic forms of
hepatitis that affects about 300 million people worldwide. HBV also predisposes
its victims to the development of liver cancer.
In October 1996, the U.S. Patent and Trademark Office issued a patent
to Yale covering the composition of matter and method of use of (beta)-L-Fd4C
for treating HBV, and Yale has licensed to us exclusive worldwide rights to the
patent including the use of (beta)-L-Fd4C for the treatment of HBV and AIDS. In
February 2000, we signed a licensing agreement for (beta)-L-Fd4C with Achillion
Pharmaceuticals (Achillion), a privately held biopharmaceutical company located
in New Haven, Connecticut that has commenced operations to develop and
commercialize innovative antiviral therapies. Under the terms of the license
agreement, Achillion will fund the development of (beta)-L-Fd4C, which is
currently in clinical trials. In return, we will receive potential milestone
payments, downstream royalties and a small equity position in Achillion.
Sponsored Research And License Agreements
Yale/Vion Research Agreement - July 1992
We entered into a research agreement with Yale in July 1992 to provide
funding for certain research projects performed under the supervision of Dr.
John W. Pawelek of the Department of Dermatology. Technology licensed by us from
research conducted under this agreement includes the inventions collectively
known as TAPET. We also have an option to obtain an exclusive license for any
inventions that result from research projects by Yale which are related to
synthetic melanin funded by us.
The agreement was renewed in June 1998 for a three-year term and
provided for funding of $0.9 million per year expiring June 30, 2001. In October
2000, we, in conjunction with Yale, restructured the agreement to provide a gift
to Yale of $0.7 million in October 2000 and a second gift of $0.7 million in
July 2001 to support the research projects.
Under this agreement, we have entered into five license agreements with
Yale that grant us exclusive licenses to make, use, sell and practice the
inventions covered by various patents. Each such license agreement requires us
to pay to Yale royalties based on a percentage of net sales of the products
covered and sublicensing income. In addition, four of the five licenses provide
that they are terminable in the event we do not exercise due diligence in
commercializing the licensed technology.
Yale/Vion Agreement - August 1994
Yale granted us a nontransferable worldwide exclusive license to make,
have made, use, sell and practice certain inventions and research for
therapeutic and diagnostic purposes. The term of the license is the expiration
of any patents relating to any inventions or, with respect to non-patented
inventions or research, 17 years. Yale has retained the right to make, use and
practice the inventions and research for non-commercial purposes. This agreement
also provides that if Yale, as a result of its own research,
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identifies potential commercial opportunities for the inventions and research,
Yale will give us a first option to negotiate a commercial license for such
commercial opportunities. Pursuant to this agreement, we issued to Yale 159,304
shares of our common stock and made a payment of $50,000. Yale is entitled to
royalties on sales, if any, of resulting products and sublicensing revenues and,
with regard to one patent, milestone payments based on the status of clinical
trials and regulatory approvals.
In June 1997, this license agreement and another license agreement
dated December 1995 were amended pursuant to which Yale agreed to reduce certain
amounts payable by us in exchange for 150,000 shares of our common stock issued
to Yale valued at $0.6 million. We have agreed with Yale that we will plan and
implement appropriate research and development with respect to commercialization
of products based on the licensed inventions and research. In the event that the
agreement is terminated for breach, all rights under licenses previously granted
terminate. Accordingly, a default as to one product could affect our rights in
other products. In addition, Yale, at its sole option, can terminate any
sublicenses that we grant.
Subsequent to entering into the Yale/Vion Agreement in August 1994,
we have paid approximately $9.2 million to fund certain research at Yale,
including research in the laboratory of Dr. Yung-Chi Cheng, a member of our
scientific advisory board, and of Dr. Alan Sartorelli, one of our directors.
Yale has sole discretion to use these funds to conduct research relating to
products that it desires to pursue. Additionally, to the extent that such
research results in technologies not covered by the Yale/Vion Agreement dated
August 1994, we may be unable to utilize such technologies unless we negotiate
additional license agreements.
Yale/Vion License Agreements - December 1995
In December 1995, we entered into a license agreement with Yale
pursuant to which we received a nontransferable worldwide exclusive license,
expiring over the lives of the patents, to three inventions relating to gene
therapy for melanoma. Pursuant to the license agreement, the Company paid Yale a
$0.1 million fee.
In December 1995, the Company and Yale entered into another license
agreement pursuant to which the Company received a nontransferable worldwide
exclusive license, expiring over the lives of the patents, to an invention
relating to whitening skin.
Under the licensing agreements, Yale is entitled to milestone payments
based on the status of clinical trials and regulatory approvals. In addition,
Yale is entitled to royalties on sales, if any, of resulting products and
sublicense revenues.
Cooperative Research and Development Agreement
On April 1, 2000, the Company entered into a Cooperative Research and
Development Agreement (CRADA) with the National Institutes of Health, National
Cancer Institute, Division of Clinical Sciences, Surgery Branch for "Development
of TAPET-Based Immunotherapies Targeted Against Cancer". Under the terms of the
CRADA, the Surgery Branch will provide materials and supplies for research and
development projects using CRADA funds, personnel and other resources supplied
by the Company. The Company is required to contribute $0.4 million per year for
a period of
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five years, payable quarterly, to be used for material support as well as for
work to be performed by National Cancer Institute staff.
Competition
Competition in the biopharmaceutical industry is intense and based
significantly on scientific and technological factors, the availability of
patent and other protection for technology and products, the ability to
commercialize technological developments and the ability to obtain governmental
approval for testing, manufacturing and marketing. Numerous pharmaceutical and
biotechnology companies have publicly announced their intention to develop drugs
that target the replication of tumor cells including, in some instances, the
development of agents which target ribonucleotide reductase, agents which are
alkylating agents and agents which can be described as drug delivery platforms.
These companies include, but are not limited to, Bristol-Myers Squibb Company,
Pfizer Inc., Amgen Inc., Genentech Inc., ImClone Systems Inc., OSI
Pharmaceuticals, Inc., Eli Lilly and Co., and AstraZeneca PLC. Our competitors
may have substantially greater financial, technical and human resources than
we have and may be better equipped to develop, manufacture and market products.
In addition, many of these companies have extensive experience in preclinical
testing and human clinical trials, and in obtaining regulatory approvals.
In addition, our competitors may succeed in obtaining approval for products more
rapidly than us and in developing and commercializing products that are safer
and more effective than those that we propose to develop. The existence of these
products, other products or treatments of which we are not aware or products
or treatments that may be developed in the future may adversely affect the
marketability of our products by rendering them less competitive or obsolete.
These companies, as well as academic institutions, governmental agencies and
private research organizations, also compete with us in acquiring rights to
products or technologies from universities, and recruiting and retaining highly
qualified scientific personnel and consultants.
The timing of market introduction of our potential products or of
competitors' products will be an important competitive factor. Accordingly, the
relative speed with which we can develop products, complete preclinical testing,
clinical trials and regulatory approval processes and supply commercial
quantities to market will influence our ability to bring a product to market. In
addition, we may apply for Orphan Drug designation by the U.S. Food and Drug
Administration (FDA) for our proposed products. To the extent that a competitor
of ours develops and receives Orphan Drug designation and marketing approval for
a drug to treat the same indication prior to us, we may be precluded from
marketing our product for a period of seven years.
Patents, Licenses And Trade Secrets
Our policy is to protect our technology by, among other means, filing
patent applications for technology that we consider important to the development
of our business. We intend to file additional patent applications, when
appropriate, relating to new developments or improvements in our technology and
other specific products that we develop. We also rely on trade secrets, know-how
and continuing technological innovations, as well as patents we have licensed or
may license from other parties to develop and maintain our competitive position.
Pursuant to the Yale/Vion Research Agreement dated July 1992, we are
the exclusive licensee of a number of issued patents and pending patent
applications, U.S. and foreign, relating to our TAPET
10
platform technology, which include claims for methods of diagnosing and/or
treating various solid tumor cancers, including, but not limited to, melanoma,
lung cancer, breast cancer and colon cancer. We also have rights, either by
license and/or by assignment, to pending patent applications, U.S. and foreign,
relating to our TAPET platform technology. In particular, we have currently
pending and intend to pursue a number of U.S. provisional and non-provisional
patent applications and three International patent applications related to this
technology. One of the international applications is co-owned with Memorial
Sloan Kettering Cancer Center and the remaining two are exclusively owned by us.
We are also the exclusive licensee of one issued U.S. and a number of foreign
utility patents and pending patent applications relating to synthetic melanins
and methods for using synthetic melanins, such as, for sunscreening or
self-tanning agents. The one U.S. patent and the foreign patents and patent
applications are relevant to our MELASYN products.
In connection with a collaboration with Memorial Sloan Kettering Cancer
Center, as indicated above, we have filed a U.S. non-provisional and an
international patent application relating to non-invasive methods to detect
solid tumors in vivo using attenuated tumor-targeted bacteria.
In connection with the Yale/Vion Agreement dated August 1994, we are
the exclusive licensee of ten issued patents relating to our sulfonyl hydrazine
prodrug technology, including patents relating to treatment of trypanosomiasis
and cancer and for controlling neoplastic cell growth. We are also the exclusive
licensee of a number of issued and pending U.S. and foreign patent applications
relating to:
o (beta)-L-Fd4C, its composition and its use for the treatment of HIV and HBV
infections, and its use in combination with other anti-AIDS drugs;
o the use of 3TC or mixtures containing 3TC for the treatment of HBV
infection;
o Triapine and other ribonucleotide reductase inhibitors.
We are aware that BioChem Pharma, Inc. ("BioChem Pharma") has been
granted an issued U.S. patent with claims to methods of use of a compound or a
group of compounds, including 3TC, for treating HBV. BioChem Pharma was
recently merged into a new corporation called Shire BioChem Inc. and BioChem
Pharma's rights were all transferred to this new entity. We believe that the
BioChem Pharma patent (as well as other BioChem Pharma patent applications
and/or patents) is licensed to Glaxo Wellcome Inc. Under the Yale/Vion
Agreement dated August 1994, we have rights in a patent application with claims
directed to methods for the use of 3TC or a mixture containing 3TC for
treating HBV. We requested that the U.S. Patent and Trademark Office declare
an interference (the "BioChem Interference") between the BioChem patent and
the Vion patent application. An interference is a legal proceeding held when
more than one patent application or at least one patent application and one or
more patents, owned by different parties, contain claims to the same subject
matter. An interference proceeding determines which one of the parties is
entitled to a patent containing claims to the common subject matter. On
November 23, 1999, the U.S. Patent and Trademark Office, Board of Patent
Appeals and Interference declared an interference between the Vion-licensed
patent application from Yale University and U.S. patent No. 5,532,246 assigned
to BioChem Pharma, Inc. While the BioChem Interference is ongoing, the U.S.
Patent and Trademark Office has re-declared the interference and placed the
burden of proof on Vion. On April 14, 2000, it also declared another
interference (the "Glaxo Wellcome Interference") between the Vion patent
application and a patent application relating to the use of 3TC to treat HBV
owned by Glaxo Wellcome Inc., in which it placed the burden of proof on Glaxo
Wellcome Inc. In both cases, all parties have an opportunity to argue their
respective positions during the interference proceedings, which are ongoing.
11
We expect many developments during the course of the interference
proceedings and it may be a long time until final determinations are reached.
Depending upon the length of the interference proceedings, which could be
reduced by a mutually agreed upon settlement, costs to each party could be
substantial. Determinations in interference proceedings are subject to appeal in
the appropriate United States federal courts.
Further, even if we were to prevail in both the interferences and were
to obtain a patent with claims directed to the method of use of 3TC or a mixture
containing 3TC for treating HBV, we would only have the right to go to court to
exclude any third party, for example, BioChem Pharma, from using 3TC or a
mixture containing 3TC in a method for treating HBV. It is possible, if we were
to prevail in the interferences, other parties such as BioChem Pharma might be
willing to take a license for the right to use 3TC in a method for treating HBV.
There can be no guarantee that we would be successful in licensing such rights
at acceptable terms.
It should be noted that even if we were to prevail in the
interferences, we would not have any right to make, use, sell or import 3TC in
the United States based on any patent we could obtain by prevailing in the
Interferences.
In addition, we are aware that third parties, including BioChem Pharma,
Glaxo Wellcome Inc. and Emory University, have filed patent applications, some
of which have been issued, relating to 3TC, mixtures containing 3TC, and
methods of preparation and use of 3TC or mixtures containing 3TC as an
antiviral drug. In fact, we are aware that both BioChem Pharma and Emory
University have been granted patents that have claims directed to 3TC, itself,
or a group of compounds including 3TC. Accordingly, even if we had rights to
an issued patent with claims to a method of use of 3TC to treat HBV, we would
not be able to make, use and sell or import 3TC in the United States unless we
obtained a license from one or more third parties. There can be no guarantee
that we could obtain such a license or that if available, the license would be
on acceptable terms.
We have received correspondence from F. C. Gaskin, Inc. alleging that
we may be infringing certain of their patents relating to melanin-containing
compositions and their use. We believe this assertion has no merit.
We or our licensors are prosecuting the patent applications related to
products we license both with the U.S. Patent and Trademark Office and various
foreign patent agencies, but we do not know whether any of our applications will
result in the issuance of any patents or, whether any issued patent will provide
significant proprietary protection or will be circumvented or invalidated.
During the course of patent prosecution, patent applications are evaluated for,
among other things, utility, novelty, nonobviousness and enablement. The U.S.
Patent and Trademark Office may require that the claims of an initially filed
patent application be amended if it is determined that the scope of the claims
include subject matter that is not useful, novel, nonobvious or enabled.
Furthermore, in certain instances, the practice of a patentable invention may
require a license from the holder of dominant patent rights. In cases where one
party believes that it has a claim to an invention covered by a patent
application or patent of a second party, the first party may attempt to provoke
an interference proceeding in the U.S. Patent and Trademark Office or such a
proceeding may otherwise be declared by the U.S. Patent and Trademark Office. In
general, in an interference proceeding, the U.S. Patent and Trademark Office
12
reviews the competing patents and/or patent applications to determine the
validity of the competing claims, including, but not limited to, determining
priority of invention. Any such determination would be subject to appeal in the
appropriate United States federal courts.
We cannot predict whether our or our competitors' patent applications
will result in valid patents being issued. An issued patent is entitled to a
presumption of validity. The presumption may be challenged in litigation; a
court could find any patent of ours or of our competitors invalid and/or
unenforceable. Litigation, which could result in substantial cost to us, may
also be necessary to enforce our patent and proprietary rights and/or to
determine the scope and validity of the proprietary rights of others. We may
participate in interference proceedings that may in the future be declared by
the U.S. Patent and Trademark Office to determine priority of invention.
Interference and/or litigation proceedings could result in substantial cost to
us.
The patent position of biotechnology and biopharmaceutical firms
generally is highly uncertain and involves complex legal and factual questions.
To date, no consistent policy has emerged regarding the breadth of claims
allowed in biotechnology and biopharmaceutical patents.
Government Regulation
Overview. Regulation by state and federal governmental authorities in
the United States and foreign countries is a significant factor in the
manufacture and marketing of our products and in our ongoing research and
product development activities. All of our products will require regulatory
clearances or approvals prior to commercialization. In particular, drugs,
biologicals and medical devices are subject to rigorous preclinical testing and
other approval requirements by the FDA pursuant to the Federal Food, Drug, and
Cosmetic Act and the Public Health Service Act and regulations promulgated
thereunder, as well as by similar health authorities in foreign countries.
Various federal statutes and regulations also govern or influence the testing,
manufacturing, safety, labeling, packaging, advertising, storage, registration,
listing and recordkeeping related to marketing of such products. The process of
obtaining these clearances or approvals and the subsequent compliance with
appropriate federal statutes and regulations require the expenditure of
substantial resources. We cannot be certain that any required FDA or other
regulatory approval will be granted or, if granted, will not be withdrawn.
Drugs and Biologicals. Preclinical development of diagnostic and
therapeutic drugs and biological products is generally conducted in the
laboratory to evaluate the safety and the potential efficacy of a compound by
relevant in vitro and in vivo testing. When a product is tested prospectively to
determine its safety for purposes of obtaining FDA approvals or clearances, such
testing must be performed in accordance with good laboratory practices for
nonclinical studies. The results of preclinical testing are submitted to the FDA
as part of an IND. The IND must become effective, informed consent must be
obtained from clinical subjects, and the study must be approved by an
institutional review board before human clinical trials can begin.
Regulatory approval often takes a number of years and involves the
expenditure of substantial resources. Approval time also depends on a number of
factors, including the severity of the disease in question, the availability of
alternative treatments and the risks and benefits demonstrated in clinical
trials. Typically, clinical evaluation involves a three-phase process. In Phase
I, clinical trials are conducted with a small number of subjects to determine
the tolerated drug dose, early safety profile,
13
proper scheduling and the pattern of drug distribution, absorption and
metabolism. In Phase II, clinical trials are conducted with groups of patients
afflicted with a specific disease in order to determine efficacy, dose-response
relationships and expanded evidence of safety. In Phase III, large-scale,
multi-center, controlled clinical trials are conducted in order to:
o provide enough data for statistical proof of safety and efficacy;
o compare the experimental therapy to existing therapies;
o uncover any unexpected safety problems, such as side-effects; and
o generate product labeling.
In the case of drugs for cancer and other life-threatening diseases,
the initial human testing is generally conducted in patients rather than in
healthy volunteers. Because these patients are already afflicted with the target
disease, it is possible that such studies will provide results traditionally
obtained in Phase II trials. These trials are referred to as 'Phase I/II'
trials.
Tests of our product candidates and human clinical trials may be
delayed or terminated due to factors such as unfavorable results or insufficient
patient enrollment. Furthermore, the FDA may suspend clinical trials at any time
on various grounds. Delays in tests and trials may have a material adverse
effect on our business.
The results of the preclinical and clinical testing are submitted to
the FDA either as part of a new drug application, or NDA, for drugs, or a
product license application, or PLA, for biologics, for approval to commence
commercial distribution. For a biological, the manufacturer generally must also
obtain approval of an establishment license application. In responding to an NDA
or PLA, the FDA may grant marketing approval, request additional information or
deny the application if it determines that the application does not satisfy its
regulatory approval criteria. It may take several years to obtain approval after
submission of an NDA or PLA, although approval is not assured. The FDA also
normally conducts a pre-approval inspection and other occasional inspections of
an applicant's facilities to ensure compliance with current good manufacturing
practices. Further, stringent FDA regulatory requirements continue after a
product is approved for marketing, and changes to products or labeling can
require additional approvals. If any of our products is approved for marketing,
we will be subject to stringent post-marketing requirements.
We also will be subject to widely varying foreign regulations governing
clinical trials and pharmaceutical sales. Whether or not FDA approval has been
obtained, approval of a product by the comparable regulatory authorities of
foreign countries must be obtained before marketing the product in those
countries. The approval process varies from country to country and the time may
be longer or shorter than that required for FDA approval. We intend, to the
extent possible, to rely on foreign licensees to obtain regulatory approval to
market our products in foreign countries.
Orphan Drug Designation. Under the Orphan Drug Act, a sponsor may
obtain designation by the FDA of a drug or biologic as an 'orphan' drug for a
particular indication. Orphan Drug designation is granted to drugs for rare
diseases or conditions, including many cancers, with a prevalence of less than
14
200,000 cases in the United States. The sponsor of a drug that has obtained
Orphan Drug designation and which is the first to obtain approval of a marketing
application for such drug is entitled to marketing exclusivity for a period of
seven years for the designated indication. This means that no other company can
market the same Orphan Drug for the same indication approved by the FDA for
seven years after approval unless such company proves its drug is clinically
superior or the approved Orphan Drug marketer cannot supply demand for the drug.
Legislation is periodically considered that could significantly affect the
Orphan Drug law. We received Orphan Drug designation for Promycin in September
1995 to treat head and neck cancer and in May 1997 received FDA approval of our
request for Orphan Drug status for the use of Promycin to treat cervical cancer.
We intend to seek this designation for other products where appropriate. There
can be no assurance that future changes to the Orphan Drug Act would not
diminish the value of any Orphan Drug designation obtained by us.
Drugs for Life-Threatening Illnesses. FDA regulatory procedures
established in 1988 are intended to speed further the availability of new drugs
intended to treat life-threatening and severely debilitating illnesses. These
procedures provide for early and continuous consultation with the FDA regarding
preclinical and clinical studies necessary to gain marketing approval. This
regulatory framework also provides that if Phase I results are promising, Phase
II clinical trials may be designed that obviate the need for lengthy, expensive
Phase III testing. Notwithstanding the foregoing, approval may be denied by the
FDA or traditional Phase III studies may be required. The FDA may also seek our
agreement to perform post-approval Phase IV studies, which confirm product
safety and efficacy.
Environmental Matters. We are subject to federal, state and local
environmental laws and regulations, including those promulgated by the
Occupational Safety and Health Administration (OSHA), the Environmental
Protection Agency (EPA) and the Nuclear Regulatory Commission (NRC), that govern
activities or operations that may have adverse environmental effects, such as
discharges to air and water, as well as handling and disposal practices for
solid and hazardous wastes. These laws also impose strict liability for the
costs of cleaning up, and for damages resulting from, sites of past spills,
disposals or other releases of hazardous substances and materials for the
investigation and remediation of environmental contamination at properties
operated by us and at off-site locations where we have arranged for the disposal
of hazardous substances.
Our facilities have made, and will continue to make, expenditures to
comply with current and future environmental laws. To date, we have not incurred
significant costs and are not aware of any significant liabilities associated
with our compliance with federal, state and local environmental laws and
regulations. However, environmental laws have changed in recent years and we may
become subject to stricter environmental standards in the future and may face
large capital expenditures to comply with environmental laws. We have limited
capital and are uncertain whether we will be able to pay for significantly large
capital expenditures. Also, future developments, administrative actions or
liabilities relating to environmental matters may have a material adverse effect
on our financial condition or results of operations.
All of our operations are performed under strict environmental and
health safety controls consistent with OSHA, EPA and NRC regulations. We cannot
be certain that we will be able to control all health and safety problems. If we
cannot control those problems, we may be held liable and may be required to pay
the costs of remediation. These liabilities and costs could be material.
Manufacturing and Marketing
We do not have experience in manufacturing or marketing products and
have not yet commercially introduced any products. We do not currently have the
resources to manufacture or market on a commercial scale any products that we
develop. We currently use third parties to manufacture limited quantities of our
products for use in clinical activities.
If our products are approved for sale by regulatory authorities, we
will need to develop manufacturing and marketing capability or make arrangements
with third parties to manufacture, distribute and sell our products. In the
event we decide to establish a manufacturing and distribution facility or a
marketing and sales force, we will require substantial additional funds and will
be required to hire and retain additional personnel.
15
Employees
As of December 31, 2001, we had 50 full-time employees, of which 36
were engaged in research, development and clinical development, and 14 in
administration and finance.
ITEM 2. Properties
Our principal facility consists of approximately 20,000 square feet of
leased laboratory and office space in New Haven, Connecticut. The lease expires
in October 2006. The current annual rental rate is approximately $237,000. We
believe our space is sufficient for our development, clinical and administrative
activities.
ITEM 3. Legal Proceedings
In the normal course of business, the Company may be subject to
proceedings, lawsuits and other claims. We are not a party to any legal
proceedings that may have a material adverse effect on our business.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
16
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters
Market Information for Common Stock
Our common stock has traded on the Nasdaq National Market since October
25, 1999, and traded on The Nasdaq SmallCap Market'sm' from April 29, 1996 until
October 25, 1999, under the symbol "VION". From August 14, 1995 to April 26,
1996, the common stock traded on The Nasdaq SmallCap Market'sm' under the symbol
"OCRX". The following table reflects the range of high and low closing sales
prices of the common stock for each of the calendar quarters in 2001 and 2000.
This information is based on closing sales prices as reported by the Nasdaq
National Market.
2001 2000
-------------------------- -------------------------------
High Low High Low
---- --- ---- ---
First Quarter $12.1875 $3.25 $ 29.00 $5.875
Second Quarter 8.82 3.44 16.875 6.00
Third Quarter 7.97 3.25 18.00 6.625
Fourth Quarter 5.48 4.20 16.375 7.00
Recent Sales of Unregistered Securities
We made no sales of unregistered securities during the fiscal year
ended December 31, 2001.
Shelf Registration
We filed a Shelf Registration Statement on Form S-3 on April 3, 2001
with the Securities and Exchange Commission (SEC) which was declared effective
as of June 26, 2001. The Registration Statement allows us from time to time
to sell up to an aggregate of 4.7 million shares of common stock. In
August 2001, we sold 2.5 million shares of common stock at $5.00 per share,
in an underwritten public offering. The net proceeds from this offering were
approximately $11.4 million.
Holders
At March 19, 2002, there were 378 holders of record of our common
stock.
Dividends
We have never paid cash dividends on our common stock. We currently
intend to retain all earnings for use in our business and do not anticipate
paying cash dividends in the foreseeable future.
17
ITEM 6. Selected Financial Data
The following selected financial data for each of the five years in the
period ended December 31, 2001, and for the period from May 1, 1994 (inception)
through December 31, 2001, are derived from our audited financial statements.
The selected financial data should be read in conjunction with the financial
statements, related notes and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere herein.
For the Period
From May 1, 1994
(Inception)
through December
2001 2000 1999 1998 1997 31, 2001
------------ ------------- ------------ ----------- ----------- ------------------
(In thousands, except per share data)
Statement of Operations Data:
Total revenues $ 650 $ 947 $ 3,154 $ 1,956 $ 5,271 $ 12,031
Total operating expenses 15,664 17,078 14,189 12,912 10,914 88,894
Loss from operations (15,014) (16,131) (11,035) (10,956) (5,643) (76,863)
Net loss (13,810) (14,803) (10,769) (10,478) (5,343) (72,818)
Preferred stock dividends and
accretion - (606) (710) (4,414) (1,132) (18,489)
----------------------------------------------------------------------------------
Loss applicable to common
shareholders $(13,810) $(15,409) $(11,479) $(14,892) $(6,475) $(91,307)
==================================================================================
Basic and diluted loss applicable
to common shareholders per share $(0.51) $(0.64) $(0.74) $(1.24) $(0.75)
Weighted-average number of shares
of common stock outstanding 27,212 24,089 15,544 11,977 8,671
Balance Sheet Data:
Cash, cash equivalents and
short-term investments $22,644 $24,357 $11,038 $6,416 $10,979
Working capital 20,518 22,050 9,911 5,045 10,678
Total assets 23,601 25,660 13,934 9,269 13,580
Long-term obligations and
redeemable preferred stock - - 5,185 5,035 473
Total shareholders' equity 21,098 22,657 5,853 1,504 11,959
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Overview
We are a development stage biopharmaceutical company committed to the
discovery, development and commercialization of therapeutics and technologies
for the treatment of cancer. Our activities to date have consisted primarily of
research and product development, obtaining regulatory approval for clinical
trials, conducting clinical trials, negotiating and obtaining collaborative
agreements, and obtaining financing in support of these activities. Our revenues
currently consist of contract research grants and technology license fees. Since
inception, we have generated minimal revenues and have incurred substantial
operating losses from our activities. We expect to incur substantial operating
losses for the next several years due to expenses associated with our
activities.
Our plan of operations for the next 12 months includes the following
elements:
o Continue to conduct internal research and development with respect to our
core technologies and other product candidates that we may identify;
18
o Conduct Phase I clinical "optimization" TAPET'r' studies of the "unarmed
base vector" for further safety and "optimized" selective accumulation of
bacteria in the tumor;
o Conduct Phase I clinical studies of the "armed" TAPET vector for safety and
selective accumulation of the bacteria and the anticancer agent within
tumors;
o Conduct Phase I studies for safety and dosage of Triapine'r' in conjunction
with standard chemotherapy treatments;
o Conduct Phase II clinical studies of Triapine;
o Conduct Phase I clinical studies of VNP40101M, a member of the Sulfonyl
Hydrazine Prodrug class, for safety and dosage;
o Continue to support research and development being performed at Yale
University and by other collaborators; and
o Continue to seek collaborative partnerships, joint ventures, co-promotional
agreements or other arrangements with third parties.
Critical Accounting Policies and Estimates
The financial statements are prepared in conformity with accounting
principles generally accepted in the United States, which require us to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates. Our significant accounting policies are described in Note 2 to the
financial statements included in Item 8 of this Form 10-K. We believe our
critical accounting policies include revenue recognition, research and
development expenses, investments in debt and equity securities, and income
taxes.
Revenue Recognition
We record revenue from contract research grants as the costs are
incurred. We are reimbursed for allowable grant-related costs upon submission of
monthly grant reports. We are subject to annual grant audits as required by the
Department of Health and Human Services. Audits may result in adjustments to the
amount of grant revenues recorded and funds received.
We record revenue under technology license agreements with several
parties. Revenues are recorded using estimates based on historical sales by
sublicensees. Actual license fees received may vary from recorded estimated
revenues.
The effect of any change in the contract research grant revenues or
technology license fee revenues would be reflected in revenues in the period
such determination was made.
Research and Development Expenses
We record research and development expenses as incurred. We disclose
clinical trials expenses and other research and development expenses as separate
components of research and development expense in our statement of operations in
order to provide more meaningful information to our investors. The
classification of expenses into these components of research and development
expense are based, in part, on estimates of certain costs when incurred. The
effect of any change in the clinical trials expenses and other research and
development expenses would be reflected in the period such determination was
made.
Investments in Debt and Equity Securities
We account for investments in accordance with Statement of Financial
Accounting Standards No. 115, Accounting for Certain Investments in Debt and
Equity Securities ("SFAS 115"). Our investment securities are classified as
available for sale and carried at fair market value. Unrealized gains or losses
are recorded in other comprehensive income until the securities are sold or
otherwise disposed of. However, in accordance with SFAS 115, a decline in fair
market value below cost that is other than temporary would be accounted for as a
realized loss in the period such determination was made. As of December 31,
2001, the gross unrealized losses on our investment securities were
approximately $58,000.
Income Taxes
We account for income taxes under the liability method in accordance
with Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes. Under this method, deferred income taxes are recognized for the future
tax consequences of temporary differences between the financial statement
carrying amounts and the tax bases of assets and liabilities, as well as
operating loss and tax credit carryforwards. We have not recorded a provision or
benefit for income taxes in the financial statements due to recurring
historical losses and based on judgments regarding the timing of future
profitability. Accordingly, we have provided a full valuation allowance against
our deferred tax asset as of December 31, 2001. In the event we were to
determine that we would be able to realize deferred tax assets in the future,
an adjustment to the deferred tax asset would increase income in the period
such determination was made.
Results of Operations
Year Ended December 31, 2001 Compared to the Year Ended December 31, 2000
Revenues. Revenues for the year ended December 31, 2001 were $0.7
million as compared to $0.9 million for 2000. The decrease was due primarily to
lower 2001 revenues from Small Business Innovation and Research ("SBIR") and
other research grants partially offset by higher technology license fee
revenues. Technology license fee revenue increased to $0.2 million for the year
ended December 31, 2001, from $0.1 million for 2000. The Company reported $0.1
million in 2000 for revenue from laboratory support services no longer rendered
after September 2000.
Research and Development. Total research and development expenses were
$12.5 million for the year ended December 31, 2001, compared to $12.8 million
for 2000. Clinical trials expenses were $3.9 million for the year ended December
31, 2001 as compared to $3.3 million for 2000. The increase in 2001 was due to
costs associated with patient enrollment and drug production for expanded
clinical trials of TAPET and Triapine and the initiation of clinical trials for
VNP40101M. Other research and development expenses decreased to $8.6 million for
the year ended December 31, 2001 from $9.6 million for 2000. The decrease was
due primarily to lower research support provided to Yale University under a
funding arrangement, which was restructured in the fourth quarter of 2000.
General and Administrative. General and administrative expenses were
$3.1 million for the year ended December 31, 2001, as compared to $4.3 million
in 2000. The decrease in 2001 was due to lower professional and patent-related
fees and, to a lesser extent, lower officer bonuses.
Interest Income and Expense. Interest income was $1.2 million for the
year ended December 31, 2001, compared to $1.3 million for 2000. The decrease
was due to lower levels of invested funds.
19
Preferred Stock Dividends and Accretion. Preferred stock dividends and
accretion for the year ended December 31, 2001 were $0 as compared to $0.6
million for the comparable 2000 period. Dividends and accretion primarily
represented non-cash dividends and the accretion of dividends related to the
Company's preferred stock. During 2000, all outstanding shares of preferred
stock were converted or redeemed.
Loss Applicable to Common Shareholders. The loss applicable to common
shareholders was $13.8 million, or $0.51 per share on a higher number of shares
outstanding, for the year ended December 31, 2001 as compared to $15.4 million,
or $0.64 per share, for 2000 as a result of the net loss and preferred dividends
and accretion reported.
Year Ended December 31, 2000 Compared to the Year Ended December 31, 1999
Revenues. Revenues for the year ended December 31, 2000 were $0.9
million as compared to $3.2 million for 1999. The decrease was primarily due to
non-recurring revenues of $2.6 million in 1999 from reimbursed Promycin'r'
development costs under the terms of a collaboration agreement with Boehringer
Ingelheim International GmbH ("BI"), which was revised in December 1999. Under
the revised contractual arrangements, BI assumed all development costs for the
drug Promycin beginning in 2000, while continuing to pay Vion for certain
laboratory support services through September 2000. 2000 revenues from Small
Business Innovation and Research ("SBIR") and other research grants increased to
$0.8 million as compared to $0.3 million for the comparable 1999 period due to
additional research grants received in 2000. Technology license fee revenue
decreased to $78,000 for the year ended December 31, 2000, from $155,000 for
1999. The Company recorded approximately $82,000 in laboratory support service
revenue for the year ended December 31, 2000 as compared to $35,000 for 1999.
Research and Development. Total research and development expenses were
$12.8 million for the year ended December 31, 2000, compared to $11.5 million
for 1999. Clinical trials expenses were $3.3 million for the year ended December
31, 2000, compared to $4.1 million for 1999. The decrease was due to BI's
assumption of Promycin development costs beginning in 2000 under the revised
contractual arrangements for which the Company recorded expenses of $3.4 million
in 1999, partially offset by increased costs of $2.6 million associated with
patient accumulation for clinical trials of TAPET and Triapine. Other research
and development expenses increased to $9.6 million for the year ended December
31, 2000 from $7.4 million for 1999. The increase was primarily due to
scientific personnel hired in 2000, preclinical activities related to the
Company's Sulfonyl Hydrazine Prodrug technology and other research support
related to a cooperative research agreement ("CRADA") with the National Cancer
Institute and a research gift to Yale University ("Yale").
General and Administrative. General and administrative expenses were
$4.3 million as compared to $2.7 million in 1999. The increase was primarily due
to higher professional and patent-related fees.
Interest Income and Expense. Interest income increased to $1.3 million
for the year ended December 31, 2000, from 1999 interest income of $0.3 million.
The increase was due to higher levels of
20
invested funds as a result of net proceeds received from a public offering in
October 1999 and from option and warrant exercises in 2000.
Preferred Stock Dividends and Accretion. Preferred stock dividends and
accretion for the year ended December 31, 2000, decreased to $0.6 million from
$0.7 million for the comparable 1999 period. Dividends and accretion primarily
represent non-cash dividends and the accretion of dividends related to the
Company's preferred stock. During 2000, all outstanding shares of preferred
stock were converted or redeemed.
Loss Applicable to Common Shareholders. The loss applicable to common
shareholders increased to $15.4 million, or $0.64 per share on a higher number
of shares outstanding, for the year ended December 31, 2000, from $11.5 million,
or $0.74 per share, for 1999 as a result of the net loss and preferred dividends
and accretion reported.
Liquidity and Capital Resources
At December 31, 2001, we had cash, cash equivalents and short-term
investments of $22.6 million, compared to $24.4 million at December 31, 2000.
The decrease in cash, cash equivalents and short-term investments in 2001 was
primarily the result of cash used to fund operating activities of $13.6 million
partially offset by net proceeds to the Company of $11.4 million from a public
offering of its common stock. In August 2001, the Company completed the sale of
2.5 million newly issued shares of common stock at $5.00 per share, in an
underwritten public offering.
During the year ending December 31, 2002, the Company is required to
make payments totaling $0.4 million under the CRADA agreement and will
contribute $0.4 million for the balance of the Yale research gifts.
We lease our facility for laboratory and office use in New Haven,
Connecticut. The lease agreement requires annual lease payments of approximately
$0.2 million per year increasing to approximately $0.3 million per year during
the original term, which expires in October 2006. The lease also requires us to
pay real estate taxes and common area maintenance charges of approximately $0.1
million per year. In addition to the operating lease for our facility, we also
have operating leases for various office and laboratory equipment.
Capital expenditures for the year ended December 31, 2001 were
approximately $0.3 million. Capital expenditures for 2002 are not expected to
exceed $0.3 million.
We currently estimate that our existing cash, cash equivalents and
short-term investments totaling $22.6 million at December 31, 2001, will be
sufficient to fund our planned operations into the second quarter of 2003. As
of December 31, 2001, we estimate that we will need approximately $17
million for the next twelve months to fund all our operations net of cash
inflows from research grants, technology licenses, interest and stock option
exercises. However, our cash requirements may vary materially from those
now planned because of the results of research, development, clinical trials
and product testing, relationships with strategic partners, changes in focus and
direction of our research and development programs, competitive and
technological advances, the regulatory process in the United States and abroad,
and other factors. In the future, we will need to complete our product
development and clinical trials and raise substantial capital to fund
operations, however, there is no assurance about raising additional capital or
what the terms may be.
Risk Factors
This Annual Report on Form 10-K contains, in addition to historical
information, forward-looking statements that involve risks and uncertainties.
Our actual results could differ materially. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
below, as well as those discussed elsewhere in this Annual Report on Form 10-K,
including the documents incorporated by reference.
21
If we continue to incur operating losses, we may be unable to continue our
operations.
We have incurred losses since inception. As of December 31, 2001, we
had an accumulated deficit of approximately $91.6 million. If we continue to
incur operating losses and fail to become a profitable company, we may be unable
to continue our operations. Since we began our business, we have focused on
research and development of product candidates. We expect to continue to operate
at a net loss for at least the next several years as we continue our research
and development efforts, continue to conduct clinical trials and develop
manufacturing, sales, marketing and distribution capabilities. Our future
profitability depends on our receiving regulatory approval of our product
candidates and our ability to successfully manufacture and market approved
drugs. The extent of our future losses and the timing of our profitability are
highly uncertain.
If we fail to obtain the capital necessary to fund our operations, we will be
unable to continue or complete our product development.
We will need to raise substantial additional capital to fund operations
and complete our product development. As of December 31, 2001, we had $22.6
million in cash, cash equivalents and short-term investments to fund our
operations and continue our product development. We believe that we will need
approximately $17 million for the next twelve months to fund all our operations
net of cash inflows from research grants, technology licenses, interest and
stock option exercises. We will not have an approved and marketable product at
that time. As we will not have a product that generates significant revenues,
we will need additional financing to sustain our operations.
We may not get funding when we need it or on favorable terms. If we
cannot raise adequate funds to satisfy our capital requirements, we may have to
delay, scale-back or eliminate our research and development activities or future
operations. We might have to license our technology to others. This could result
in sharing revenues which we might otherwise retain for ourselves. Any of these
actions may harm our business, financial condition and results of operations.
The amount of capital we may need depends on many factors, including:
- - the progress, timing and scope of our research and development programs;
- - the progress, timing and scope of our preclinical studies and clinical
trials;
- - the time and cost necessary to obtain regulatory approvals;
- - the time and cost necessary to further develop manufacturing processes,
arrange for contract manufacturing or build manufacturing facilities and
obtain the necessary regulatory approvals for those facilities;
- - the time and cost necessary to develop sales, marketing and distribution
capabilities; and
- - any new collaborative, licensing and other commercial relationships that we
may establish.
22
If we do not obtain regulatory approval for our products, we will not be able to
sell our products and the value of our company and our financial results will be
harmed.
We cannot sell or market our drugs without regulatory approval. If we
cannot obtain regulatory approval for our products, the value of our company and
our financial results will be harmed. In the United States, we must obtain
approval from the U.S. Food and Drug Administration, or FDA, for each drug that
we intend to sell. The current status of our products is as follows:
- - VNP20009, TAPET bacteria without an anticancer agent, is currently in human
trials;
- - TAPET, with cytosine deaminase, an enzyme that can activate an inactive
form of an anticancer agent, is currently in human trials;
- - Triapine is currently being evaluated in solid tumors both as a single
agent and in combination with standard therapies. Triapine is also being
evaluated in leukemia which is a blood type (non-solid) cancer. As a
single agent, Triapine is currently in one second phase trial in breast
cancer with three additional second phase trials planned for 2002 in head
and neck, non-small cell lung and prostate cancer. In combination with
other standard therapies, Triapine is currently in three first phase
trials. In leukemia, Triapine is being evaluated in two trials, one of
which is a first phase and the other is a first/second phase
trial; and
- - Human safety trials of VNP40101M have commenced at hospital test sites.
If and when we complete the several phases of clinical testing for each drug
candidate, we will submit our test results to the FDA. FDA review may generally
take up to two years and approval is not assured. Foreign governments also
regulate drugs distributed outside the United States. A delay in obtaining
regulatory approvals for any of our drug candidates will also have a material
adverse effect on our business.
If our drug trials are delayed or achieve unfavorable results, we will not be
able to obtain regulator approvals for our products.
We must conduct extensive testing our of our product candidates before
we can obtain regulatory approval for our products. We need to conduct human
clinical trials. These tests and trials may not achieve favorable results. We
would need to reevaluate any drug that did not test favorably and either alter
the drug or dose, or abandon the drug development project. In such
circumstances, we would not be able to obtain regulatory approval on a timely
basis, if ever.
Factors that can cause delay or termination in our clinical trials
include:
- - slow patient enrollment;
- - long treatment time required to demonstrate safety and effectiveness;
- - lack of sufficient supplies of the product candidate;
- - adverse medical events or side effects in treated patients;
- - lack of effectiveness of the product candidate being tested; and
- - lack of sufficient funds.
23
If our TAPET technology causes unacceptable side effects, we will not be able to
commercialize TAPET.
TAPET uses genetically altered Salmonella bacteria for delivery of
genes or gene products to tumors. The use of bacteria in general, or Salmonella
in particular, to deliver genes or gene products is a new technology, and
existing preclinical and clinical data on the safety and efficacy of this
technology are very limited. Unacceptable side effects may be discovered during
preclinical and clinical testing of our potential products utilizing TAPET.
While certain formulations of TAPET have been tested in limited human clinical
trials, the results of preclinical studies and the limited human clinical trials
performed to date may not be predictive of safety or efficacy in humans.
Possible serious side effects of TAPET include bacterial infections,
particularly the risk of septic shock, a serious and often fatal result of
bacterial infection of the blood. If side effects of TAPET are determined
unacceptable, we will not be able to commercialize TAPET.
If we are found to be infringing on patents or trade secrets owned by others, we
may be forced to cease or alter our drug development efforts, obtain a license
to continue the development or sale of our products and/or pay damages.
Our processes and potential products may conflict with patents that
have been or may be granted to competitors, universities or others, or the trade
secrets of those persons and entities. As the biopharmaceutical industry expands
and more patents are issued, the risk increases that our processes and potential
products may give rise to claims that they infringe the patents or trade secrets
of others. These other persons could bring legal actions against us claiming
damages and seeking to enjoin clinical testing, manufacturing and marketing of
the affected product or process. If any of these actions are successful, in
addition to any potential liability for damages, we could be required to obtain
a license in order to continue to conduct clinical tests, manufacture or market
the affected product or use the affected process. Required licenses may not be
available on acceptable terms, if at all, and the results of litigation are
uncertain. If we become involved in litigation or other proceedings, it could
consume a substantial portion of our financial resources and the efforts of our
personnel.
We rely on confidentiality agreements to protect our trade secrets. If these
agreements are breached by our employees or other parties, our trade secrets may
become known to our competitors.
We rely on trade secrets that we seek to protect through
confidentiality agreements with our employees and other parties. If these
agreements are breached, our competitors may obtain and use our trade secrets to
gain a competitive advantage over us. We may not have any remedies against thse
competitors and any remedies that may be available to us may not be adequate to
protect our business and compensate us for the damaging disclosure. In addition,
we may have to expend resources to protect our interests from possible
infringement by others.
If we fail to recruit and retain key personnel, our research and development
programs may be delayed.
We are highly dependent upon the efforts of our senior management and
scientific personnel, particularly, Alan Kessman, our president, chief executive
officer and director; Mario Sznol, M.D., our vice president, clinical affairs;
Terrence W. Doyle, Ph.D., our vice president of research and
24
development; Bijan Almassian, Ph.D., our vice president of development; and Ivan
King, Ph.D., our vice president of research. There is intense competition in the
biotechnology industry for qualified scientific and technical personnel. Since
our business is very technical and specialized, we need to continue to attract
and retain such people. We may not be able to continue to attract and retain
the qualified personnel necessary for developing our business. We have no key
man insurance policies on any of the officers listed above and we only have
an employment agreement with Mr. Kessman. If we lose the services of our
management and scientific personnel or fail to recruit other scientific and
technical personnel, our research and product development programs would be
significantly and detrimentally affected.
We face intense competition in the market for anticancer products, and if we are
unable to compete successfully, our business will suffer.
Numerous pharmaceutical and biotechnology companies have publicly
announced their intention to develop drugs that target the replication of tumor
cells including, in some instances, the development of agents which target
ribonucleotide reductase, agents which are alkylating agents and agents which
can be described as drug delivery platforms. These companies include, but are
not limited to, Bristol-Myers Squibb Company, Pfizer Inc., Amgen Inc., Genentech
Inc., ImClone Systems Inc., OSI Pharmaceuticals, Inc., Eli Lilly and Co., and
AstraZeneca PLC. These and other large pharmaceuticals companies have
substantially greater financial and other resources and development capabilities
than we do and have substantially greater experience in undertaking preclinical
and clinical testing of products, obtaining regulatory approvals, and
manufacturing and marketing pharmaceutical products. In addition, our
competitors may succeed in obtaining approval for products more rapidly than
us and in developing and commercializing products that are safer and more
effective than those that we propose to develop. The existence of these
products, other products or treatments of which we are not aware or products
or treatments that may be developed in the future may adversely affect the
marketability of our products by rendering them less competitive or obsolete.
In addition to competing with universities and other research institutions in
the development of products, technologies and processes, we may compete with
other companies in acquiring rights to products or technologies from
universities.
If the testing or use of our potential products harms people, we could be
subject to costly and damaging product liability claims.
Our business exposes us to potential product liability risks that are
inherent in the testing, manufacturing and marketing of drug products including,
but not limited to, unacceptable side effects. These risks are particularly
inherent in human trials of our proposed products. Side effects and other
liability risks could give rise to viable product liability claims against us.
While we have obtained insurance coverage for patients enrolled in clinical
trials, we may not be able to maintain this product liability insurance on
acceptable terms, insurance may not provide adequate coverage against potential
liabilities and we may need additional insurance coverage for expanded clinical
trials and commercial activity. As a result, product liability claims, even if
successfully defended, could have a material adverse effect on our business,
financial condition and results of operations.
25
If our corporate partners, licensors, licensees, collaborators at research
institutions and others do not conduct activities in accordance with our
arrangements, our research and development efforts may be delayed.
Our strategy for the research, development and commercialization of our
products entails entering into various arrangements with corporate partners,
licensors, licensees, collaborators at research institutions and others. We
currently depend on the following third parties:
- - Yale University for collaborative research and for technologies that are
licensed by Yale to us.
- - Healthcare facilities in the United States and overseas to perform human
safety trials of our products, including the Albert Einstein College of
Medicine/Montefiore Medical Center, Beth Israel Deaconess Medical Center
and Cleveland Clinical Foundation.
- - National Cancer Institute under a cooperative research and development
agreement for the development of TAPET-based immunotherapies targeted
against cancer.
If the third parties do not conduct activities in accordance with the
arrangements we have with them, our research and development efforts may be
delayed. We may also rely on other collaborative partners to obtain regulatory
approvals and to manufacture and market our products. The amount and timing of
resources to be devoted to these activities by these other parties may not be
within our control.
If Yale University does not conduct research relating to products we would like
to pursue, we may never realize any benefits from our funding provided to Yale.
We had previously agreed to reimburse Yale University, or Yale, for its
costs in connection with certain research projects in an amount equal to
$1.1 million per year. Technology licensed by us from research conducted under
this agreement includes TAPET. This arrangement was restructured effective
October 1, 2000 to provide a gift of $0.7 million to support Yale's research
projects for each of the years ending September 30, 2002 and 2001. In addition,
we provided a gift to Yale of $0.2 million payable in four quarterly
installments beginning April 2001.
Through December 31, 2001, we have paid over $9.2 million in total to
Yale, and we may continue to support Yale's research projects. We generally do
not have the right to control the research that Yale is conducting pursuant to
our agreement, and our funds may not be used to conduct research relating to
products that we would like to pursue. Additionally, if the research being
conducted by Yale results in technologies that Yale has not already licensed or
agreed to license to us, we may need to negotiate additional license agreements
or we may be unable to utilize those technologies.
If environmental laws become stricter in the future, we may face large capital
expenditures in order to comply with environmental laws.
We cannot accurately predict the outcome or timing of future
expenditures that we may be required to expend to comply with comprehensive
federal, state and local environmental laws and regulations. We must comply with
environmental laws that govern, among other things, all emissions, waste water
discharge and solid and hazardous waste disposal, and the remediation of
contamination associated with generation, handling and disposal activities. To
date, we have not incurred significant costs and are not aware of any
significant liabilities associated with our compliance with federal, state and
local laws and regulations. However, environmental laws have changed in recent
years and we may
26
become subject to stricter environmental standards in the future and may face
large capital expenditures to comply with environmental laws. We have limited
capital and are uncertain whether we will be able to pay for significantly large
capital expenditures. Also, future developments, administrative actions or
liabilities relating to environmental matters may have a material adverse effect
on our financial condition or results of operations.
All of our operations are performed under strict environmental and
health safety controls consistent with the Occupational Safety and Health
Administration, the Environmental Protection Agency and the Nuclear Regulatory
Commission regulations. We cannot be certain that we will be able to control all
health and safety problems. If we cannot control those problems, we may be held
liable and may be required to pay the costs of remediation. These liabilities
and costs could be material.
Even if we obtain regulatory approval for our products, we currently lack the
ability and resources to commercialize the products.
If our products are approved for sale by regulatory authorities, we
will need to develop manufacturing and marketing capability or make arrangements
with third parties to manufacture, distribute and sell our products. We do not
currently have and are not seeking arrangements for manufacturing or marketing
products on a commercial basis.
The rights that have been and may in the future be granted to our stockholders
may allow our Board and management to deter a potential acquisition in which the
Board and management are to be replaced.
We have in place a stockholder rights plan, or "poison pill", which
enables our board of directors to issue rights to purchase common stock when
someone acquires 20% or more of the outstanding shares of our common stock. As a
result of the plan, anyone wishing to take over the company would most likely be
forced to negotiate a transaction with our Board and management in order not to
trigger the pill. The need to negotiate with the Board or management could
frustrate a proposed takeover particularly where the Board and management wish
to remain entrenched. This would prevent our stockholders from participating in
a takeover or tender offer, which might be of substantial value to them.
There may be an adverse effect on the market price of our common stock as a
result of shares being available for sale in the future.
Sales of a substantial amount of common stock in the public market, or
the perception that these sales may occur, could adversely affect the market
price of our common stock prevailing from time to time. This could also impair
our ability to raise additional capital through the sale of our equity
securities. We had approximately 28.9 million shares of common stock outstanding
as of March 19, 2002. Options and warrants to purchase approximately 1.6 million
shares were exercisable at December 31, 2001 and the remaining options to
purchase approximately 2.3 million shares become exercisable at various times
through 2005.
27
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
We account for investments in debt and equity securities
in accordance with Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities ("SFAS
115"). Our investments are treated as available-for-sale under SFAS 115.
Our exposure to market risk is primarily confined to our cash
equivalents and investments, which mature in twelve months or less. Investments
in fixed-rate, interest-earning instruments carry a degree of interest rate
risk. Fixed rate securities may have their fair market value adversely impacted
due to a rise in interest rates. Due in part to these factors, our future
investment income may fall short of expectations due to changes in interest
rates or we may suffer losses in principal if forced to sell securities that
have declined in market value due to changes in interest rates. Our investments
are held for purposes other than trading and we believe that we currently have
no material adverse market risk exposure.
28
ITEM 8. Financial Statements and Supplementary Data
Report of Independent Auditors
The Board of Directors and Shareholders
Vion Pharmaceuticals, Inc.
We have audited the accompanying balance sheet of Vion Pharmaceuticals, Inc. (a
development stage company) as of December 31, 2001 and 2000, and the related
statements of operations, changes in shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 2001 and the period
from May 1, 1994 (inception) to December 31, 2001. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Vion Pharmaceuticals, Inc. at
December 31, 2001 and 2000, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2001 and the period
from May 1, 1994 (inception) to December 31, 2001, in conformity with accounting
principles generally accepted in the United States.
/s/ Ernst & Young LLP
Stamford, Connecticut
January 17, 2002
29
Vion Pharmaceuticals, Inc.
(A Development Stage Company)
Balance Sheet
December 31,
(In thousands, except share and per share data) 2001 2000
- ------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 6,645 $ 6,197
Short-term investments 15,999 18,160
--------------------
Total cash, cash equivalents and short-term investments 22,644 24,357
Interest receivable 193 300
Accounts receivable 54 145
Other current assets 130 251
--------------------
Total current assets 23,021 25,053
Property and equipment, net 550 577
Security deposits 30 30
--------------------
Total assets $23,601 $25,660
====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 2,503 $ 2,997
Obligation under capital leases -- 6
----------------------
Total current liabilities 2,503 3,003
----------------------
Redeemable Preferred Stock:
5% convertible preferred stock Series 1998, $0.01 par value, authorized:
15,000 shares; issued and outstanding: none - -
Shareholders' Equity:
Preferred stock, $0.01 par value, authorized: 5,000,000 shares;
issued and outstanding: none - -
Common stock, $0.01 par value, authorized: 100,000,000 shares;
issued and outstanding: 28,873,373 and 26,167,642 shares
at December 31, 2001 and 2000, respectively 289 262
Additional paid-in capital 112,377 100,027
Accumulated other comprehensive (loss) income (6) 120
Accumulated deficit (91,562) (77,752)
--------------------
21,098 22,657
--------------------
Total liabilities and shareholders' equity $23,601 $25,660
====================
The accompanying notes are an integral part of these financial statements.
30
Vion Pharmaceuticals, Inc.
(A Development Stage Company)
Statement of Operations
For the Period
from May 1, 1994
(Inception)
For the Year Ended through
December 31, December 31,
(In thousands, except share and per share data) 2001 2000 1999 2001
- ----------------------------------------------------------------------------------------------------------------------------
Revenues:
Contract research grants $ 481 $ 787 $ 336 $ 2,013
Technology license fees 169 78 155 4,403
Laboratory support services - 82 35 117
Research support - - 2,628 5,498
---------------------------------------------------------------------------
Total revenues 650 947 3,154 12,031
---------------------------------------------------------------------------
Operating expenses:
Research and development 8,638 9,568 7,387 52,959
Clinical trials 3,891 3,259 4,109 16,470
---------------------------------------------------------------------------
Total research and development 12,529 12,827 11,496 69,429
General and administrative 3,135 4,251 2,693 19,465
---------------------------------------------------------------------------
Total operating expenses 15,664 17,078 14,189 88,894
Interest income (1,204) (1,341) (301) (4,253)
Interest expense - 13 35 208
---------------------------------------------------------------------------
Net loss (13,810) (14,803) (10,769) (72,818)
Preferred stock dividends and accretion - (606) (710) (18,489)
---------------------------------------------------------------------------
Loss applicable to common shareholders
$(13,810) $(15,409) $(11,479) $(91,307)
===========================================================================
Basic and diluted loss applicable to common
shareholders per share $(0.51) $(0.64) $(0.74)
---------------------------------------------------------------------------
Weighted-average number of shares of common stock
outstanding 27,212,034 24,089,164 15,543,701
---------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
31
Vion Pharmaceuticals, Inc.
(A Development Stage Company)
Statement of Changes in Shareholders' Equity
Class A Class B
Convertible Convertible
Preferred Stock Preferred Stock Common Stock
(In thousands, except share and per -----------------------------------------------------------
share data) Shares Amount Shares Amount Shares Amount
- ----------------------------------------------------------------------------------------------------
Common stock issued for cash - July 1994 - $ - - $- 2,693,244 $27
Common stock issued for services -
August 1994 159,304 2
Net loss
-----------------------------------------------------------
Balance at December 31, 1994 - $ - - $- 2,852,548 $29
-----------------------------------------------------------
Stock options issued for compensation -
February 1995
Reverse acquisition of MelaRx
Pharmaceuticals, Inc. - April 1995 2,000,000 20
Shares repurchased pursuant to
employment agreements - April 1995 (274,859) (3)
Private placement of common stock -
April 1995 76,349 -
Warrants issued with bridge notes -
April 1995
Initial public offering of units of one
common share, one Class A warrant
and one Class B warrant at $4.00 per
unit - August 1995 and September 1995 2,875,000 29
Issuance of common stock 1,250 -
Receipts from sale of unit purchase
option
Net loss
-----------------------------------------------------------
Balance at December 31, 1995 - $ - - $- 7,530,288 $75
-----------------------------------------------------------
Issuance of Class A convertible
preferred stock 1,250,000 13
Conversion of Class A convertible
preferred stock (164,970) (1) 458,255 5
Class A convertible preferred stock
dividend 21,998 -
Issuance of common stock 29,418 -
Compensation associated with stock
option grants
Amortization of deferred compensation
Net loss
-----------------------------------------------------------
Balance at December 31, 1996 1,107,028 $12 - $- 8,017,961 $80
-----------------------------------------------------------
Conversion of Class A convertible
preferred stock (396,988) (4) 1,102,757 11
Class A convertible preferred stock
dividend 47,592 -
Issuance of Class B convertible
preferred stock 4,850 -
Conversion of Class B convertible
preferred stock (258) - 64,642 1
Accretion of dividend payable on Class
B convertible preferred stock
Extension/reassurance of underwriter
warrants
Exercise of warrants 238 -
Issuance of common stock 598,336 6
Exercise of stock options 50,000 -
Compensation associated with stock
option grants
Amortization of deferred compensation
Net loss
-----------------------------------------------------------
Balance at December 31, 1997 757,632 $ 8 4,592 $- 9,833,934 $98
-----------------------------------------------------------
Accumulated
Additional Other Total
(In thousands, except share and per Treasury Paid-in Deferred Comprehensive Accumulated Shareholders'
share data) Stock Capital Compensation Income (Loss) Deficit Equity
- ---------------------------------------------------------------------------------------------------------------------------
Common stock issued for cash - July 1994 $- $ - $ - $- $ (20) $ 7
Common stock issued for services -
August 1994 (1) 1
Net loss (476) (476)
----------------------------------------------------------------------------------
Balance at December 31, 1994 $- $ - $ - $- $ (497) $ (468)
----------------------------------------------------------------------------------
Stock options issued for compensation -
February 1995 540 540
Reverse acquisition of MelaRx
Pharmaceuticals, Inc. - April 1995 4,300 4,320
Shares repurchased pursuant to
employment agreements - April 1995 2 (1)
Private placement of common stock -
April 1995 205 205
Warrants issued with bridge notes -
April 1995 200 200
Initial public offering of units of one
common share, one Class A warrant
and one Class B warrant at $4.00 per
unit - August 1995 and September 1995 9,667 9,696
Issuance of common stock 1 1
Receipts from sale of unit purchase
option - -
Net loss (9,531) (9,531)
----------------------------------------------------------------------------------
Balance at December 31, 1995 $- $14,913 $ - $- $(10,026) $ 4,962
----------------------------------------------------------------------------------
Issuance of Class A convertible
preferred stock 22,890 (11,371) 11,532
Conversion of Class A convertible
preferred stock (4) -
Class A convertible preferred stock
dividend 256 (256) -
Issuance of common stock 104 104
Compensation associated with stock
option grants 190 (190) -
Amortization of deferred compensation 83 83
Net loss (7,609) (7,609)
----------------------------------------------------------------------------------
Balance at December 31, 1996 $- $38,349 $(107) $- $(29,262) $ 9,072
----------------------------------------------------------------------------------
Conversion of Class A convertible
preferred stock (7) -
Class A convertible preferred stock
dividend 623 (623) -
Issuance of Class B convertible
preferred stock 4,852 (370) 4,482
Conversion of Class B convertible
preferred stock (1) -
Accretion of dividend payable on Class
B convertible preferred stock 138 (138) -
Extension/reassurance of underwriter
warrants 168 168
Exercise of warrants - -
Issuance of common stock 3,464 3,470
Exercise of stock options 20 20
Compensation associated with stock
option grants 56 56
Amortization of deferred compensation 35 35
Net loss (5,344) (5,344)
----------------------------------------------------------------------------------
Balance at December 31, 1997 $- $47,662 $(72) $- $(35,737) $11,959
----------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
32
Vion Pharmaceuticals, Inc.
(A Development Stage Company)
Statement of Changes in Shareholders' Equity (continued)
Class A Class B
Convertible Convertible
Preferred Stock Preferred Stock Common Stock
(In thousands, except share and per ----------------------------------------------------------- Treasury
share data) Shares Amount Shares Amount Shares Amount Stock
- ------------------------------------------------------------------------------------------------------------------
Accretion of dividend payable on Class
B convertible preferred stock
Conversion of Class B convertible
preferred stock (4,592) - 1,205,178 12
Premium on Conversion dividend on Class
B convertible preferred stock 585,898 6
Conversion of Class A convertible
preferred stock (174,981) (2) 486,062 5
Class A convertible preferred stock
dividend 34,005 -
Discount on Series 1998 convertible
preferred stock
Series 1998 convertible preferred stock
accretion
Common stock issued in exchange for
cancellation of outstanding warrants 1,792,952 18
Exercise of stock options 32,750 -
Exercise of warrants 16,272 -
Compensation associated with stock
option grants
Amortization of deferred compensation
Net loss
-------------------------------------------------------------------------
Balance at December 31, 1998 616,656 $ 6 - $- 13,953,046 $139 $-
-------------------------------------------------------------------------
Conversion of Class A convertible
preferred stock (144,612) (1) 401,707 4
Class A convertible preferred stock
dividend 26,150 -
Series 1998 convertible preferred stock
accretion
Common stock issued in exchange for
cancellation of outstanding warrants 102 -
Exercise of stock options 470,886 5 (196)
Retirement of treasury stock (35,659) - 196
Exercise of warrants 26,296 -
Issuance of common stock 3,425,741 34
Amortization of deferred compensation
Net loss
-------------------------------------------------------------------------
Balance at December 31, 1999 498,194 $ 5 - $- 18,242,119 $182 $-
-------------------------------------------------------------------------
Conversion of Class A convertible
preferred stock (502,928) (5) 1,397,035 14
Redemption of Class A convertible
preferred stock (545) -
Class A convertible preferred stock
dividend 5,279 -
Series 1998 convertible preferred stock
accretion
Conversion of Series 1998 convertible
preferred stock 1,507,024 15
Exercise of stock options 650,409 7
Exercise of warrants 4,371,055 44
Compensation associated with stock
option grants
Amortization of deferred compensation
Change in net unrealized gains and
losses
Net loss
-------------------------------------------------------------------------
Balance at December 31, 2000 - $- - $- 26,167,642 $262 $-
-------------------------------------------------------------------------
Accumulated
Additional Other Total
(In thousands, except share and per Paid-in Deferred Comprehensive Accumulated Shareholders'
share data) Capital Compensation Income (Loss) Deficit Equity
- ----------------------------------------------------------------------------------------------------------------------
Accretion of dividend payable on Class
B convertible preferred stock 287 (287) -
Conversion of Class B convertible
preferred stock (12) -
Premium on Conversion dividend on Class
B convertible preferred stock 2,044 (2,049) 1
Conversion of Class A convertible
preferred stock (3) -
Class A convertible preferred stock
dividend 329 (329) -
Discount on Series 1998 convertible
preferred stock 1,597 (1,597) -
Series 1998 convertible preferred stock
accretion - (151) (151)
Common stock issued in exchange for
cancellation of outstanding warrants 8,441
(8,502) (43)
Exercise of stock options 120 120
Exercise of warrants 11 11
Compensation associated with stock
option grants 51 51
Amortization of deferred compensation 35 35
Net loss (10,478) (10,478)
-----------------------------------------------------------------------------
Balance at December 31, 1998 $ 52,025 $(37) $ - $(50,628) $ 1,505
-----------------------------------------------------------------------------
Conversion of Class A convertible
preferred stock (3) -
Class A convertible preferred stock
dividend 385 (385) -
Series 1998 convertible preferred stock
accretion (325) (325)
Common stock issued in exchange for
cancellation of outstanding warrants - -
Exercise of stock options 650 (40) 419
Retirement of treasury stock (196) -
Exercise of warrants - -
Issuance of common stock 14,955 14,989
Amortization of deferred compensation 34 34
Net loss (10,769) (10,769)
-----------------------------------------------------------------------------
Balance at December 31, 1999 $ 68,012 $ (3) $ - $(62,343) $ 5,853
-----------------------------------------------------------------------------
Conversion of Class A convertible
preferred stock (9) -
Redemption of Class A convertible
preferred stock (5) (5)
Class A convertible preferred stock
dividend 248 (248) -
Series 1998 convertible preferred stock
accretion (358) (358)
Conversion of Series 1998 convertible
preferred stock 5,523 5,538
Exercise of stock options 2,868 2,875
Exercise of warrants 23,270 23,314
Compensation associated with stock
option grants 120 120
Amortization of deferred compensation 3 3
Change in net unrealized gains and
losses 120 120
Net loss (14,803) (14,803)
-----------------------------------------------------------------------------
Balance at December 31, 2000 $100,027 $ - $120 $(77,752) $ 22,657
-----------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
33
Vion Pharmaceuticals, Inc.
(A Development Stage Company)
Statement of Changes in Shareholders' Equity (continued)
Class A Class B
Convertible Convertible
Preferred Stock Preferred Stock Common Stock
(In thousands, except share and per ----------------------------------------------------------- Treasury
share data) Shares Amount Shares Amount Shares Amount Stock
- ------------------------------------------------------------------------------------------------------------------
Public offering of common stock -
August 2001 2,500,000 25
Exercise of stock options 191,527 2
Exercise of warrants 4,015 -
Compensation associated with stock
option grants
Issuances under employee benefit plans 10,189 -
Change in net unrealized gains and
losses
Net loss
-------------------------------------------------------------------------
Balance at December 31, 2001 - $- - $- 28,873,373 $289 $-
=========================================================================
Accumulated
Additional Other Total
(In thousands, except share and per Paid-in Deferred Comprehensive Accumulated Shareholders'
share data) Capital Compensation Income (Loss) Deficit Equity
- ---------------------------------------------------------------------------------------------------------------------
Public offering of common stock -
August 2001 11,386 11,411
Exercise of stock options 777 779
Exercise of warrants 14 14
Compensation associated with stock
option grants 111 111
Issuances under employee benefit plans 62 62
Change in net unrealized gains and
losses (126) (126)
Net loss (13,810) (13,810)
----------------------------------------------------------------------------
Balance at December 31, 2001 $112,377 $- $ (6) $(91,562) $ 21,098
============================================================================
The accompanying notes are an integral part of these financial statements.
34
Vion Pharmaceuticals, Inc.
(A Development Stage Company)
Statement of Cash Flows
For The Period From
May 1, 1994
(Inception) through
For the Year Ended December 31, December 31,
(In thousands) 2001 2000 1999 2001
- ------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $(13,810) $(14,803) $(10,769) $(72,818)
Adjustments to reconcile net loss to net cash
used in operating activities-
Depreciation and amortization 283 450 495 2,181
Loss on fixed asset disposals 4 - - 4
Decrease (increase) in receivables and other
current assets 319 1,073 (409) (376)
Decrease (increase) in other assets - 438 1 (27)
(Decrease) increase in accounts payable and
accrued expenses (494) 262 297 2,468
Non-cash compensation 111 123 35 1,068
Purchased research and development - - - 4,481
Amortization of financing costs - - - 346
Extension/reissuance of placement agent
warrants - - - 168
Stock issued for services - - - 600
-------------------------------------------------------------------
Net cash used in operating activities (13,587) (12,457) (10,350) (61,905)
-------------------------------------------------------------------
Cash flows from investing activities:
Purchases of marketable securities (18,048) (38,299) - (81,054)
Maturities of marketable securities 20,083 20,259 2,594 65,049
Acquisition of fixed assets (260) (368) (129) (1,791)
--------------------------------------------------------------------
Net cash provided by (used in) investing
activities 1,775 (18,408) 2,465 (17,796)
--------------------------------------------------------------------
Cash flows from financing activities:
Initial public offering - - - 9,696
Net proceeds from issuance of common stock 12,252 2,875 15,408 33,819
Net proceeds from issuance of preferred stock - - - 20,716
Net proceeds from exercise of Class A Warrants - 5,675 - 5,675
Net proceeds from exercise of Class B Warrants - 17,538 - 17,538
Net proceeds from exercise of placement agent
warrants 14 101 - 115
Repayment of equipment capital leases (6) (160) (306) (927)
Other financing activities, net - (5) - (286)
--------------------------------------------------------------------
Net cash provided by financing activities 12,260 26,024 15,102 86,346
--------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 448 (4,841) 7,217 6,645
Cash and cash equivalents, beginning of period 6,197 11,038 3,821 -
--------------------------------------------------------------------
Cash and cash equivalents, end of period $ 6,645 $ 6,197 $ 11,038 $ 6,645
====================================================================
Supplemental schedule of non-cash investing and financing activities:
o Cash paid for interest was $0, $13 and $35 for the years ended
December 31, 2001, 2000 and 1999, and $208 for the period from May 1,
1994 (inception) through December 31, 2001.
The accompanying notes are an integral part of these financial statements.
35
Vion Pharmaceuticals, Inc.
(A Development Stage Company)
Notes to Financial Statements
1. The Company
Vion Pharmaceuticals, Inc. (the "Company") is a development stage
biopharmaceutical company engaged in the research, development and
commercialization of therapeutics and technologies for the treatment of cancer.
The Company was incorporated in March 1992 as a Delaware Corporation and began
operations on May 1, 1994.
In April 1995, the Company merged into OncoRx Research Corp., a wholly-owned
subsidiary of MelaRx Pharmaceuticals Inc. ("MelaRx") and the Company's name was
changed to OncoRx, Inc. The stockholders of the Company were issued 2,654,038
common and 23,859 preferred shares of MelaRx in exchange for all 2,000,000
outstanding shares of common stock of the Company valued at $2.16 per share
(fair value). As the shareholders of the Company obtained a majority interest in
the merged company, for accounting purposes the Company is treated as the
acquirer. Therefore, the transaction was recorded as a purchase in the Company's
financial statements, which include the results of operations of the Company
from inception and MelaRx from the date of acquisition. The $4.5 million excess
of cost over the fair value of MelaRx's net tangible assets was treated as
purchased research and development and expensed immediately.
In August 1995, the Company completed an initial public offering (refer to Note
4) resulting in net proceeds to the Company of $9.7 million.
In April 1996, the Company's name was changed to Vion Pharmaceuticals, Inc.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash Equivalents
Cash equivalents include investments with original maturities of three months or
less.
Fair Value of Financial Instruments
The estimated fair value of amounts reported in the financial statements has
been determined by using available market information and appropriate valuation
methodologies. All current assets and current liabilities are carried at cost,
which approximates fair value, because of their short-term nature, except
short-term investments, which are carried at market.
36
Investments
The Company accounts for investments in accordance with Statement of Financial
Accounting Standards No. 115, Accounting for Certain Investments in Debt and
Equity Securities. The Company's investments in debt and equity securities,
which typically mature in one year or less, are classified as available for sale
and are carried at fair value. Unrealized holding gains and losses, net of the
related tax effect, on available-for-sale securities are excluded from earnings
and are reported as a separate component of shareholders' equity until realized.
The cost, gross unrealized holding gains, gross unrealized holding losses and
fair value for available-for-sale securities at December 31, 2001 and 2000 were
as follows (in thousands):
Gross Gross
Unrealized Unrealized
Cost Holding Gains Holding Losses Fair Value
------------------- ------------------- -------------------- ---------------
Debt Securities:
As of 12/31/01 $16,005 $52 $(58) $15,999
==========================================================================
As of 12/31/00 $18,040 $140 $(20) $18,160
==========================================================================
No realized gains or losses related to investments have been incurred to date.
Property and Equipment
Property and equipment are stated at cost. Depreciation of equipment is computed
under the straight-line method over the estimated useful lives of the assets
ranging from three to seven years. Leasehold improvements are carried at cost
and amortized on a straight-line basis over the shorter of the lease term or the
estimated useful lives of the assets.
The following is a summary of property and equipment as of December 31 (in
thousands):
2001 2000
-----------------------------------
Office and computer equipment $ 378 $ 379
Furniture and fixtures 211 205
Laboratory equipment 1,684 573
Leasehold improvements 371 367
Equipment under capital lease -- 951
-----------------------------------
2,644 2,475
Accumulated depreciation and amortization (2,094) (1,898)
-----------------------------------
Property and equipment, net $ 550 $ 577
===================================
Depreciation expense was $0.3 million, $0.5 million and $0.5 million for the
years ended December 31, 2001, 2000 and 1999, respectively, and $2.2 million for
the period from inception (May 1, 1994) through December 31, 2001.
37
Income Taxes
The Company accounts for income taxes under the liability method in accordance
with Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes. Under this method, deferred income taxes are recognized for the future
tax consequences of temporary differences between the financial statement
carrying amounts and the tax bases of assets and liabilities.
Revenue Recognition
Contract Research Grants. In 1998 and 1999, the Company was awarded Small
Business Innovation Research ("SBIR") grants from the National Cancer Institute
for the Reduced Toxicity of Tumor-Targeted Salmonella and the Inhibitors of
Ribonucleotide Reductase programs. The grants allowed reimbursement of direct
costs of up to $0.9 million and expired in 2000. For the years ended December
31, 2000 and 1999, revenues of $0.2 million and $0.3 million, respectively, from
these grants have been recognized as the costs were incurred.
In January 2000, the Company received a two-year SBIR grant from the National
Institutes of Health/National Cancer Institute for TAPET research. The grant
allowed reimbursement of direct costs of up to $0.8 million and expired in 2001.
For each of the years ended December 31, 2001 and 2000, revenues of $0.4 million
from this grant have been recognized as the costs were incurred.
In April 2000, the Company received a six-month SBIR grant for $0.1 million from
the National Institutes of Health/National Cancer Institute for TAPET research.
For the year ended December 31, 2000, revenue of $0.1 million from this grant
has been recognized as the costs were incurred.
In August 2000, the Company and Memorial Sloan-Kettering Cancer Center ("MSKCC")
were awarded a $0.1 million research contract by the National Cancer Institute
to study the use of Vion's TAPET bacterial vector technology (Tumor Amplified
Protein Expression Therapy) for the diagnostic imaging of tumors. The focus of
this joint effort by MSKCC and Vion is to perform a preliminary investigation of
TAPET-based tumor diagnostic imaging in preclinical animal models, as well as to
determine the suitability of this approach for tumor diagnosis based on defined
molecular signatures. For the years ended December 31, 2001 and 2000, revenues
of approximately $0 and $0.1 million, respectively, have been recognized as the
costs were incurred.
In July 2001, the Company received a six-month SBIR grant from the National
Institutes of Health/National Cancer Institute for Sulfonyl Hydrazine Prodrug
research. The grant allows reimbursement of direct costs of up to $0.1 million.
For the year ended December 31, 2001, revenue of approximately $0.1 million has
been recognized as the costs were incurred.
Technology License Fees. The Company has recognized revenue from fees, including
nonrefundable upfront fees, under license agreements with Boehringer Ingelheim
International GmbH, San-Mar Laboratories and others (refer to Note 3) totaling
$0.2 million, $0.1 million, $0.2 million and $4.4 million for the years ended
December 31, 2001, 2000 and 1999, and the period from May 1, 1994 (inception)
through December 31, 2001, respectively. During the fourth quarter of 2000, the
Company adopted, as required, the Securities and Exchange Commission's Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB
101"). SAB 101 requires companies to recognize the receipt of certain
nonrefundable upfront fees over the life of the related collaboration agreement.
There was no impact from the
38
adoption of SAB 101 on the Company's financial statements for the years ended
December 31, 2001, 2000 and 1999.
Per Share Data
The following table sets forth the computation of basic and diluted loss
applicable to common shareholders per share (in thousands, except per share
amounts):
2001 2000 1999
----------------------------------------------
Numerator:
Net loss $(13,810) $(14,803) $(10,769)
Preferred stock dividends and accretion -- (606) (710)
----------------------------------------------
Numerator for basic and diluted loss applicable to common
shareholders per share (13,810) (15,409) (11,479)
Denominator:
Weighted-average number of shares of common stock outstanding
27,212 24,089 15,544
----------------------------------------------
Basic and diluted loss applicable to common
shareholders per share $(0.51) $(0.64) $(0.74)
==============================================
For additional disclosures regarding warrants and preferred stock, refer to Note
4. For additional disclosures regarding stock options, refer to Note 5. These
potentially dilutive securities were not included in the calculation of the
diluted loss applicable to common shareholders per share as the effect would be
antidilutive.
Comprehensive Loss
Comprehensive loss has been calculated in accordance with Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income. The Company has
determined total comprehensive loss to be $13.9 million, $14.7 million and $10.8
million for the years ended December 31, 2001, 2000 and 1999, respectively, and
$72.9 million for the period from May 1, 1994 (inception) through December 31,
2001. The Company's total comprehensive loss represents net loss plus the change
in net unrealized gains and losses for the periods presented.
3. Research and License Agreements
Yale/Vion License Agreement - September 1990
Pursuant to a license agreement between the Company and Yale University
("Yale"), the Company obtained rights to a synthetic form of melanin, which the
Company has named MELASYN'r'. In 1998, the Company agreed to be the exclusive
selling agent for MELASYN and sublicensed its MELASYN technology in an agreement
with San-Mar Laboratories ("San-Mar"), a manufacturer of private label cosmetics
and pharmaceuticals. Under the terms of the amended sublicense agreement
expiring February 28, 2003, the Company granted to San-Mar a worldwide,
non-exclusive sublicense for the manufacture and sale of products containing
MELASYN to a specific customer. The Company receives a sublicense fee from
products sold by San-Mar with guaranteed minimum annual royalties of $50,000 per
year. Under the terms of
39
the Yale license agreement, the Company pays a license fee to Yale for products
sold by the Company or its sublicensees.
Yale/Vion Research Agreement - July 1992
In July 1992, the Company entered into a research agreement with Yale to provide
funding for certain research projects performed under the direction and
supervision of Dr. John Pawelek of the Department of Dermatology. The research
agreement was renewed in July 1998 and provided for funding of $0.9 million per
year expiring June 30, 2001. Technology licensed by the Company from research
conducted under this agreement includes the inventions collectively known as
TAPET. The Company also has an option to obtain an exclusive license for any
inventions that result from research projects by Yale which are related to
synthetic melanin funded by the Company.
In October 2000, the Company, in conjunction with Yale, restructured the
Research Agreement funding. The Company provided to Yale a gift of $0.7 million
in October 2000 and a second gift of $0.7 million in July 2001 to support the
research projects. In accordance with Statement of Financial Accounting
Standards No. 116, Accounting for Contributions Received and Contributions Made,
the Company recorded $0.7 million in the fourth quarter of 2000 and $0.7 million
in the third quarter of 2001 as research and development expense. Included in
the Company's total current liabilities at December 31, 2001 and 2000, is $0.3
million for the balance of the gifts to be paid to Yale.
The Company was granted exclusive licenses by Yale to inventions made in the
performance of the research funded under this agreement in countries where
patents are effective and nonexclusive licenses elsewhere expiring over the
lives of the patents and 20 years, respectively. The Company is obligated to pay
royalties on sales of licensed products. No amounts have been paid or are due to
Yale through December 31, 2001 under this agreement.
Yale/Vion License Agreement - August 1994
In August 1994, Yale granted to the Company a nontransferable worldwide
exclusive license to make, have made, use, sell and practice certain inventions
and research for therapeutic and diagnostic purposes. The term of the license is
the expiration of any patents relating to any inventions or, with respect to
non-patented inventions or research, 17 years. Pursuant to this agreement, the
Company issued to Yale 159,304 shares of the Company's common stock and made a
payment of $50,000. Yale is entitled to royalties on sales, if any, of resulting
products and sublicensing revenues and, with regard to one patent, milestone
payments based on the status of clinical trials and regulatory approvals.
In June 1997, this and another license agreement dated December 1995 were
amended pursuant to which Yale agreed to reduce certain amounts payable by the
Company in exchange for 150,000 shares of the Company's common stock issued to
Yale valued at $0.6 million.
40
Yale/Vion License Agreements - December 1995
In December 1995, the Company and Yale entered into a license agreement pursuant
to which the Company received a nontransferable worldwide exclusive license,
expiring over the lives of the patents, to three inventions relating to gene
therapy for melanoma. Pursuant to the license agreement, the Company paid Yale a
$0.1 million fee.
In December 1995, the Company and Yale entered into another license agreement
pursuant to which the Company received a nontransferable worldwide exclusive
license, expiring over the lives of the patents, to an invention relating to
whitening skin.
Under the licensing agreements, Yale is entitled to milestone payments based on
the status of clinical trials and regulatory approvals. In addition, Yale is
entitled to royalties on sales, if any, of resulting products and sublicense
revenues.
Cooperative Research and Development Agreement
On April 1, 2000, the Company entered into a Cooperative Research and
Development Agreement ("CRADA") with the National Institutes of Health, National
Cancer Institute, Division of Clinical Sciences, Surgery Branch for "Development
of TAPET-Based Immunotherapies Targeted Against Cancer". Under the terms of the
CRADA, the Surgery Branch will provide materials and supplies for research and
development projects using CRADA funds, personnel and other resources supplied
by the Company. The Company is required to contribute $0.4 million per year for
a period of five years, payable quarterly, to be used for material support as
well as for work to be performed by National Cancer Institute staff. For the
years ended December 31, 2001 and 2000, $0.4 million and $0.3 million,
respectively, have been recorded as research and development expense under the
CRADA.
Boehringer Ingelheim Agreement
In 1997, the Company and Boehringer Ingelheim International GmbH ("BI") entered
into an exclusive worldwide licensing agreement for the development and
marketing of Promycin(R), an anticancer agent. The Company received $4.0 million
in upfront technology access fees and net proceeds of $2.9 million from the sale
of 448,336 shares of common stock at a premium to the market price at the time
of sale. BI also reimbursed the Company for certain initial development costs
and agreed to share in future worldwide development costs. The Company was
required to use the BI license fee of $4.0 million exclusively for Promycin
development expenses. The Company recorded $2.6 million of Promycin development
expenses as research support revenue under the original agreement for 1999.
The original agreement was amended in December 1999 and BI agreed to assume
manufacturing, supply and worldwide development expenses in return for paying
reduced future royalties and milestone payments to the Company.
In June 2000, patient accrual into Promycin clinical studies sponsored by BI was
put on hold as an interim evaluation of a Phase III trial of Promycin did not
meet the predetermined criteria, which would warrant continuation of accrual.
Subsequently, BI confirmed the results of the initial analyses and made the
determination to cease development of Promycin. At this time, the Company does
not expect to incur any additional expense for costs associated with Promycin
nor does the Company expect to receive any additional revenues from BI
associated with Promycin.
41
Covance Agreement
In 1997, the Company entered into a Clinical Development Agreement (the
"Agreement") with Covance Clinical Research Unit Ltd. and Covance Inc.
("Covance"). Pursuant to the Agreement, the Company contracted to Covance the
selection and management of clinical sites and the preparation of clinical trial
reports related to the Company's product candidate Promycin. During the fourth
quarter of 1999, the Company and Covance agreed to terminate the Agreement
subject to the assumption of clinical site management responsibilities by BI.
The Company incurred expenses for Promycin-related costs paid to Covance and
other parties under these agreements of $3.5 million for the year ended December
31, 1999, which has been recorded as clinical trials expenses, a component of
total research and development expense.
4. Shareholders' Equity
In April 1995, 2,000,000 shares of common stock valued at $2.16 per share were
issued in conjunction with the merger with MelaRx (refer to Note 1). Shortly
prior to the consummation of the merger, the Company issued 76,349 shares of
common stock for net proceeds of $0.2 million.
In August 1995, the Company completed an initial public offering ("IPO") of
2,875,000 Unit Purchase Options ("UPOs"), consisting of an aggregate of
2,875,000 shares of common stock, 2,875,000 redeemable Class A Warrants and
2,875,000 redeemable Class B Warrants at $4.00 per UPO. The net proceeds to the
Company from the IPO were $9.7 million before repayment of certain bridge
financing. Each Class A Warrant entitled the holder to purchase one share of
common stock and one Class B Warrant. Each Class B Warrant entitled the holder
to purchase one share of common stock. The Class A and Class B warrants were
exercisable through August 14, 2000, and were exchanged, exercised or redeemed
prior to that date. In conjunction with the IPO, the Company granted the
underwriter an option to purchase up to 250,000 UPOs at $5.20 per UPO,
subsequently adjusted due to antidilution provisions. All underwriter UPOs were
exercised prior to their expiration on August 14, 2000.
Commencing with its IPO through December 31, 2001, the Company has raised gross
proceeds of $87.2 million through the issuance of common stock, preferred stock
and warrants.
Increase in Authorized Shares of Common Stock
At the Company's 2001 Annual Meeting of Stockholders, the stockholders approved
an increase in the Company's authorized shares of common stock from 35 million
shares to 100 million shares.
Class A Convertible Preferred Stock
In May 1996, the Company completed a private placement of 1,250,000 shares of
Class A Convertible Preferred Stock ("Class A Stock"), at $10.00 per share,
resulting in net proceeds to the Company of $11.5 million. Each share of Class A
Stock was immediately convertible into 2.777777 shares of the Company's common
stock. The Company recorded an imputed one-time
42
non-cash dividend of approximately $11.4 million as a result of the difference
between the conversion price and the quoted market price of the Company's common
stock as of the date of issuance as required by the Financial Accounting
Standards Board Emerging Issues Task Force D-60, Accounting for the Issuance of
Convertible Preferred Stock and Debt Securities with a Nondetachable Conversion
Feature (EITF D-60). The $11.4 million has been recognized as a charge against
accumulated deficit with a corresponding increase in additional paid-in capital.
The imputed non-cash dividend has been included in the dividend requirement on
Preferred Stock and the loss applicable to common shareholders. In connection
with the foregoing transaction, the Company issued warrants to the placement
agent, expiring May 22, 2001 (the "Expiration Date"), to purchase an aggregate
of 546,875 shares of the Company's common stock at prices ranging from $3.96 to
$12.00. As of the Expiration Date, holders of warrants to purchase 257,321
shares elected cash or cashless exercises into 174,572 shares of common stock
and the remaining warrants to purchase 289,554 shares expired. The shares of
Class A Stock paid semi-annual dividends of 5% per annum, payable in additional
shares of Class A Stock, which were immediately convertible into common stock of
the Company. The Company has recorded non-cash dividends as a charge against the
accumulated deficit and a credit to additional paid-in capital based on the
quoted market price of the common stock as of the date of the issuance of the
preferred dividends of approximately $0.2 million and $0.4 million in 2000 and
1999, respectively. The non-cash dividend has been included in the dividend
requirement on Preferred Stock and the loss applicable to common shareholders.
The issuance of the Class A Stock at closing also triggered certain antidilution
adjustment provisions of the Company's outstanding warrants, resulting in the
issuance of additional warrants.
The Company's common stock traded above $9.9375 for a period of 20 consecutive
trading days ending on February 17, 2000 and, in accordance with the terms of
the Class A Stock, on November 22, 2000 ("Notice Date"), the Company notified
the holders of outstanding shares of its intention to redeem their Class A stock
on December 26, 2000 ("Redemption Date"), at a redemption price of $10.00 per
share. From the Notice Date to the Redemption Date, 1,405 shares of Class A
Stock were converted by the holders and 3,906 shares of common stock were issued
upon conversion. The remaining 545 shares of Class A Stock were redeemed for
$5,450 in the aggregate and have been cancelled as of the Redemption Date.
Class B Convertible Preferred Stock
In August 1997, the Company completed a private placement of 4,850 shares of
non-voting Class B Convertible Preferred Stock ("Class B Stock"), at $1,000 per
share, resulting in net proceeds to the Company of $4.5 million. Shares of Class
B Stock were immediately convertible into shares of common stock including an
accretion of 8% per annum. The difference between the conversion price and the
quoted market price of the Company's common stock at the date of issuance of
$0.4 million was recognized upon the issuance of the Class B Stock as a charge
against accumulated deficit, with a corresponding increase in additional paid-in
capital. The imputed non-cash dividend has been included in the dividend
requirement on Preferred Stock and the loss applicable to common shareholders.
Shares of the Class B Stock were eligible, under certain circumstances, to
receive dividends paid in Class C Convertible Preferred Stock ("Class C Stock").
The Class C Stock was immediately convertible into shares of common stock at the
average closing bid price of the Company's common stock for thirty consecutive
business days ending on the private placement closing date and was not entitled
to dividends.
43
Conversions of Class B Stock from January 1, 1998 through August 10, 1998,
resulted in Class C dividends representing 180,141 shares of common stock valued
at $0.6 million. In addition, the Company recorded accretion of 37,168 shares of
common stock valued at $0.1 million in 1997, and 61,078 shares of common stock
valued at $0.3 million through August 10, 1998. These dividends were recorded as
a charge against accumulated deficit, with a corresponding increase in paid-in
capital. The dividends have been included in the dividend requirement on
Preferred Stock and the loss applicable to common shareholders.
In August 1998, the Company reached agreement with each of the holders of its
Class B Stock to convert an aggregate of 2,892 shares of Class B Stock,
constituting all of the outstanding Class B Stock, into an aggregate of
1,070,423 shares of common stock. This included Class C dividends representing
304,188 shares of common stock valued at $1.1 million, and accretion of 6,553
shares of common stock valued at $23,000. As part of this agreement, an
additional 101,569 common shares were issued to holders of the Class B Stock. In
accordance with Financial Accounting Standards Board Emerging Issues Task Force
D-42, The Effect on the Calculation of Earnings Per Share for the Redemption or
Induced Conversion of Preferred Stock, the excess of the fair value of the
common stock issued upon conversion over the fair value of the common stock
issuable pursuant to the original conversion terms of $0.4 million, has been
added to the dividend requirement to arrive at loss applicable to common
shareholders. In addition, holders of the Class B Stock waived their
antidilution rights arising from the issuance of the 5% Redeemable Convertible
Preferred Stock Series 1998.
5% Redeemable Convertible Preferred Stock Series 1998
In June 1998, the Company completed a private placement of 5,000 shares of
non-voting 5% Redeemable Convertible Preferred Stock Series 1998 ("Series 1998
Preferred Stock"). The Series 1998 Preferred Stock was issued at $1,000 per
share, resulting in net proceeds to the Company of $4.7 million. The shares of
Series 1998 Preferred Stock accrued dividends of 5% per annum payable in-kind.
Each share of Series 1998 Preferred Stock was convertible into common stock
based on the formula of issued price plus accrued dividends divided by $3.60. In
connection with the sale of the Series 1998 Preferred Stock, the Company imputed
a one-time non-cash dividend of approximately $1.6 million as a result of the
difference between the conversion price and the quoted market price of the
Company's common stock at the date of issuance as required by EITF D-60. Such
amount was recognized upon issuance of the Series 1998 Preferred Stock as a
charge against the accumulated deficit with a corresponding increase to
additional paid-in capital. The imputed non-cash dividend has been included in
the dividend requirement on Preferred Stock and the loss applicable to common
shareholders. The dividend requirement on Preferred Stock also reflects the
amortization of the costs of completing the offering and the accretion of the 5%
per annum dividend. The 5% accretion resulted in a charge against the
accumulated deficit with a corresponding increase to additional paid-in-capital
of $0.4 million and $0.3 million for the years ended December 31, 2000 and 1999,
respectively. The issuance of the Series 1998 Preferred Stock at closing also
triggered certain antidilution adjustment provisions of the Company's
outstanding warrants, resulting in the issuance of additional warrants.
The Company's common stock traded above $7.20 for a period of 20 consecutive
trading days ending on February 7, 2000 and, in accordance with the terms of the
Series 1998 Preferred Stock, all of the outstanding preferred shares having a
redemption value of $5.4 million were
44
automatically converted into 1,507,024 common shares at the $3.60 conversion
price, effective February 22, 2000.
Private Placement of Common Stock - April 1999
In April 1999, the Company consummated a private placement of the Company's
common stock and issued 893,915 shares of common stock at approximately $4.47
per share, for gross proceeds of approximately $4 million.
Public Offering of Common Stock - October 1999
In October and November 1999, the Company completed the sale of 2,530,000 newly
issued shares of common stock (including shares sold to the underwriter upon the
exercise of its over-allotment option) at $5.00 per share, in an underwritten
public offering. The net proceeds from this offering were approximately $11.1
million. In conjunction with the offering, the underwriter was granted warrants
to purchase 220,000 shares of common stock at $6.00 per share, expiring October
25, 2004. As of December 31, 2001, holders of warrants to purchase 12,000 shares
had elected a cashless exercise into 6,786 shares of common stock.
Public Offering of Common Stock - August 2001
In August 2001, the Company completed the sale of 2.5 million newly issued
shares of common stock at $5.00 per share, in an underwritten public offering.
The net proceeds from this offering were approximately $11.4 million.
Antidilution Adjustment to Class A and Class B Warrants
As a result of the sale in May 1996 of Class A Stock, an antidilution adjustment
was made to the exercise price of the Class A Warrants and the Class B Warrants
and there was a corresponding distribution of additional Class A Warrants and
Class B Warrants. Specifically, on July 12, 1996 (the "Payment Date") each
holder of a Class A Warrant at the close of business on July 3, 1996 (the
"Record Date") was issued an additional 0.1 Class A Warrant and the exercise
price of the Class A Warrants was reduced from $5.20 to $4.73. In addition, on
the Payment Date each holder of a Class B Warrant on the close of business on
the Record Date was issued an additional 0.1 Class B Warrant and the exercise
price of the Class B Warrants was reduced from $7.00 to $6.37.
Subsequently, as a result of the sale in June 1998 of 5,000 shares of Series
1998 Preferred Stock, an additional antidilution adjustment was made to the
exercise price of the Class A Warrants and the Class B Warrants with a
corresponding distribution of additional Class A Warrants and Class B Warrants.
Specifically, on September 8, 1998 (the "Payment Date") each holder of a Class A
Warrant at the close of business on August 26, 1998 (the "Record Date") was
issued an additional 0.02 Class A Warrant and the exercise price of the Class A
Warrants was reduced from $4.73 to $4.63. In addition, on the Payment Date, each
holder of a Class B Warrant on the close of business on the Record Date was
issued an additional 0.02 Class B Warrants and the exercise price of the Class B
Warrant was reduced from $6.37 to $6.23.
45
Class A and Class B Warrant Exchange Offers
In 1998, the Company commenced an offer to exchange each outstanding Class A
Warrant, at the holder's option, for either 0.438 shares of common stock or
0.254 shares of common stock and $0.66 in cash. The Company simultaneously
offered to exchange each outstanding Class B Warrant, at the holder's option,
for either 0.212 shares of common stock or 0.123 shares of common stock and
$0.32 in cash. As a result of the exchange offers, 3,209,806 Class A Warrants
and 1,881,835 Class B Warrants were exchanged for 1,395,027 and 397,925 shares
of the Company's common stock and $39,000 and $3,700 in cash, respectively.
Conversions of Unit Purchase Options
In connection with Vion's initial public offering in 1995, UPOs and underlying
Class A and Class B Warrants exercisable through August 14, 2000 were granted to
underwriters. Prior to their expiration, option holders exercised the remaining
113,333 UPOs and underlying Class A and B Warrants resulting in aggregate net
proceeds to the Company of approximately $2.8 million. The UPOs were exercised
for 127,161 shares of common stock for net proceeds of $0.6 million, 127,161
Class A Warrants and 127,161 Class B Warrants. These Class A Warrants were
immediately exercised for 127,161 shares of common stock for net proceeds of
$0.6 million and 127,161 Class B warrants. All of the 254,322 Class B warrants
were immediately exercised for 254,322 shares of common stock resulting in net
proceeds to the Company of $1.6 million.
Redemption of Class A Warrants
On February 11, 2000, the Company notified registered holders of its outstanding
Class A Warrants of its intention to redeem the warrants on March 13, 2000 (the
"Redemption Date"). The Class A Warrants entitled the holder to purchase one
share of common stock and one Class B Warrant for an exercise price of $4.63. As
of the Redemption Date, the Company had received net proceeds of $5.1 million
from the exercise of 1.2 million Class A Warrants. Subsequently, the Company
received net proceeds of $0.6 million from the exercise of 0.1 million Class A
Warrants as a result of the exercises of UPOs.
Redemption of Class B Warrants
On March 27, 2000, the Company notified registered holders of its outstanding
Class B Warrants of its intention to redeem the warrants on April 27, 2000 (the
"Redemption Date"). The Class B Warrants entitled the holder to purchase one
share of common stock at an exercise price of $6.23. As of the Redemption Date,
the Company had received net proceeds of $15.9 million from the exercise of 2.6
million Class B Warrants. Subsequently, the Company received net proceeds of
$1.6 million from the exercise of 0.3 million Class B Warrants as a result of
the exercises of UPOs.
Issuance and Extension of Placement Agent Warrants
In connection with its role as placement agent for two private financings of the
Company's predecessor, MelaRx, Inc., D.H. Blair Investment Banking Corporation
was issued warrants to purchase 202,486 shares of common stock at prices ranging
from $3.56 to $4.44 per share,
46
expiring on July 5, 1998 (the "Expiration Date"). As of the Expiration Date,
holders of warrants to purchase 94,336 shares elected a cashless exercise into
13,949 shares of common stock and the remaining warrants to purchase 108,150
shares expired.
5. Employee Stock Option Plans
The Company has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB 25") and related Interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS
123"), requires use of option valuation models that were not developed for use
in valuing employee stock options. Under APB 25, if the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized.
In July 1995, the Board of Directors of the Company adopted the Amended and
Restated 1993 Stock Option Plan (the "Option Plan"). The Option Plan, as
subsequently amended, provides for the granting of both incentive stock options
and nonqualified stock options to employees, officers, directors and consultants
of the Company to purchase up to an aggregate of 4.285 million shares of common
stock. Incentive options granted under the Option Plan are exercisable for a
period of up to ten years from the date of grant at an exercise price which is
not less than the fair market value of the common stock on the date of the grant
except that the term of an incentive option granted under the Option Plan to a
stockholder owning more than 10% of the outstanding voting power may not exceed
five years and its exercise price may not be less than 110% of the fair market
value of the common stock on the date of grant. Options granted to date under
the Option Plan become exercisable in no less than four equal annual
installments commencing no earlier than the first anniversary of the date of
grant except for certain options granted in 2001 that become exercisable in
either one or two equal annual installments. No option may be granted under the
Option Plan after April 14, 2003. The Company recognized compensation expense of
$0.1 million, $0.1 million and $0 for the years ended December 31, 2001, 2000
and 1999, respectively, related to options granted under the Option Plan.
Options granted outside the Option Plan include stock options to purchase
980,000 shares of common stock granted to the Company's Chief Executive Officer
under the Senior Executive Stock Option Plan. There are no additional shares
available for issuance under this plan.
The provisions of the Option Plan provide for the automatic grant of
non-qualified stock options to purchase shares of common stock ("Director
Options") to directors of the Company who are not employees or principal
stockholders of the Company ("Eligible Directors"). Eligible Directors are
granted a Director Option to purchase 20,000 shares of common stock on the date
such person is first elected or appointed a director (an "Initial Director
Option"). Each Eligible Director, other than directors who received an Initial
Director Option since the last annual meeting, is granted a Director Option to
purchase 15,000 shares (20,000 shares for the Chairman of the Board) 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.
The exercise price for each share subject to a Director Option shall be equal to
the fair market value of the common stock on the date of grant. Director Options
are exercisable in two equal annual installments for 2000 grants and in four
equal annual installments for grants prior to 2000,
47
commencing one year from the date of grant. Eligible Directors agreed to accept
options exercisable in one year in lieu of cash payments for board fees for
meetings held from December 2001 to December 2002. Director Options expire the
earlier of ten years after the date of grant or ninety days after the
termination of the director's service on the Board of Directors. The number of
Director Options granted were 104,346, 115,000 and 110,000 in 2001, 2000 and
1999, respectively.
Pro forma information regarding 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 under the fair value method. The fair value of options
granted under the Option Plan was estimated at the date of grant using the
Black-Scholes option-pricing model with the following assumptions for 2001, 2000
and 1999, respectively: risk-free interest rates of 4.6%, 6.0% and 5.1%;
volatility factors of the expected market price of the Company's common stock of
1.002, 1.455 and 0.656; weighted-average expected option life of 7 years; and no
dividend yield.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that do not have vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options and, because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion the existing models do not necessarily provide a reliable single measure
of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information is as follows (in thousands, except per share amounts):
2001 2000 1999
--------- ---------- --------
Pro forma net loss $(16,031) $(17,123) $(12,213)
Pro forma preferred stock dividends and accretion - (606) (710)
--------------------------------------
Pro forma loss applicable to common shareholders $(16,031) $(17,729) $(12,923)
======================================
Pro forma basic and diluted loss applicable to common
shareholders per share $(0.59) $(0.74) $(0.83)
======================================
A summary of the Company's stock option activity under the Option Plan, and
related information for the years ended December 31 is as follows:
2001 2000 1999
-------------------------- -------------------------- --------------------------
Weighted- Weighted- Weighted-
Average Average Average
Options Exercise Options Exercise Options Exercise
(in 000's) Price (in 000's) Price (in 000's) Price
---------- ---------- ----------- ----------- ---------- ----------
Outstanding at beginning of year 2,330 $7.94 1,557 $4.31 1,260 $3.91
Granted 1,081 5.88 1,186 11.43 661 5.00
Exercised (191) 4.09 (355) 4.10 (150) 3.15
Cancelled (457) 8.83 (33) 10.94 - -
Expired - - (25) 5.00 (214) 4.90
-----------------------------------------------------------------------------------
Outstanding at end of year 2,763 $7.26 2,330 $7.94 1,557 $4.31
===================================================================================
Exercisable at end of year 828 $6.48 595 $4.21 661 $4.04
===================================================================================
Weighted-average fair value of
options granted during the year $5.08 $11.01 $3.63
===================================================================================
48
A summary of the Company's ranges of exercise prices and weighted-average
remaining life and exercise price of options outstanding and of weighted-average
exercise price of options currently exercisable under the Option Plan as of
December 31, 2001, is as follows:
Options Options
Outstanding Exercisable
--------------------------------------------------- ---------------------------------
Weighted-Average
Outstanding Remaining Life Weighted-Average Exercisable Weighted-Average
Exercise Price (in 000's) (Years) Exercise Price (in 000's) Exercise Price
- --------------- ------------- --------------- --------------- ---------------- ----------------
$2.22 - $3.03 125 5.8 $2.83 89 $2.83
$3.63 - $5.10 1,117 7.8 4.64 421 4.44
$5.38 - $7.15 552 8.9 6.79 78 5.94
$7.20 - $10.63 484 9.0 7.62 98 7.64
$12.25 - $17.88 485 8.0 14.59 142 14.33
------------------------------------------ --------------------------
2,763 8.2 $7.26 828 $6.48
========================================== ==========================
A summary of the Company's stock option activity outside the Option Plan and
related information for the years ended December 31 is as follows:
2001 2000 1999
--------------------------- ------------------------ -------------------------
Weighted Weighted- Weighted-
Average Average Average
Options Exercise Options Exercise Options Exercise
(in 000's) Price (in 000's) Price (in 000's) Price
----------- --------- ---------- --------- ----------- --------
Outstanding at beginning of year 949 $5.66 1,011 $5.41 347 $0.18
Granted - - - - 980 5.62
Exercised - - (53) 1.70 (316) 0.50
Cancelled - - - - - -
Expired - - (9) 2.50 - -
--------------------------------------------------------------------------------
Outstanding at end of year 949 $5.66 949 $5.66 1,011 $5.41
================================================================================
Exercisable at end of year 569 $5.59 379 $5.50 251 $4.30
================================================================================
As of December 31, 2001:
Exercise price range of options
outstanding and exercisable $5.00-$5.78
===========
Weighted-average remaining life
of options outstanding 3.1 years
===========
49
6. 401(k) Savings Plan
Beginning April 1, 2000, the Company commenced matching contributions under a
401(k) Savings Plan in either cash or its common stock, at the election of the
employee. For stock matches, the contribution rate is 40% of an employee's
contribution, up to an annual maximum match of stock valued at $1,500. For cash
matches, the contribution rate is 30% of an employee's contributions, up to an
annual maximum match of $1,000. The expense for the matching contribution for
the years ended December 31, 2001 and 2000 was $46,000 and $56,000,
respectively. 5,732 shares were issued in 2001 for the 401(k) stock match.
7. Stock Purchase Plan
A total of 450,000 shares of common stock are authorized for issuance under the
Company's employee stock purchase plan (the "Stock Plan") effective January 1,
2001. The Stock Plan permits eligible employees to purchase up to 2,000 shares
of common stock at the lower of 85% of the fair market value of the common stock
at the beginning or at the end of each six-month offering period. 4,457 shares
were issued in 2001 under the Stock Plan.
8. Income Taxes
At December 31, 2001, the Company has available for federal income tax purposes
net operating loss carryforwards, subject to review by the Internal Revenue
Service, totaling $56.6 million and a general business tax credit of $2.2
million expiring in 2010 through 2021. The difference between the deficit
accumulated during the development stage for financial reporting purposes and
the net operating loss carryforwards for tax purposes is primarily due to
certain costs which are not currently deductible for tax purposes and
differences in accounting and tax basis resulting from the merger described in
Note 1. Significant differences have resulted from amortizing previously
capitalized research and development expenses. The ability of the Company to
realize a future tax benefit from a portion of its net operating loss
carryforwards and general business credits may be limited due to changes in
ownership of the Company. The U.S. statutory rate is 34%; however, the Company
has recorded no provision or benefit for income taxes in the financial
statements due to recurring losses. Accordingly, the Company has provided a full
valuation allowance against its deferred tax assets. The valuation allowance
increased by $6.2 million and $6.3 million during 2001 and 2000, respectively.
The significant components of the Company's deferred tax assets and liabilities
are as follows (in thousands):
December 31,
2001 2000
--------- ---------
Deferred tax assets:
Operating loss carryforwards $ 22,028 $ 16,597
Research and development costs 3,205 3,205
General business tax credit 2,164 1,587
AMT tax credit 10 10
Contributions 579 286
Compensation related 185 351
Other 171 172
---------------------------
Total deferred tax assets 28,342 22,208
Total deferred tax liabilities - (60)
---------------------------
Total deferred tax assets and liabilities 28,342 22,148
Valuation allowance (28,342) (22,148)
---------------------------
Deferred tax assets, net $ - $ -
===========================
50
9. Commitments and Contingencies
Leases. The Company has noncancelable operating leases for its facility and
laboratory and office equipment expiring through 2006. Rental expense under the
operating leases amounted to $0.2 million, $0.3 million, $0.3 million and $1.5
million for the years ended December 31, 2001, 2000 and 1999, and for the period
from May 1, 1994 (inception) through December 31, 2001, respectively. As of
December 31, 2001, future minimum lease payments due under noncancelable
operating lease agreements with initial terms in excess of one year are $0.3
million each year for 2002 to 2005 and $0.2 million for 2006.
The Company's capital leases for equipment expired in 2001. The cost of assets
and accumulated amortization under capital leases amounted to $1.0 million at
December 31, 2000, including $0.4 million under a sale and leaseback agreement
with FINOVA Technology Finance, Inc., which was depreciated over the three-year
lease term, which expired on January 1, 2001. Amortization expense for the
equipment under capital leases was $6,000, $0.2 million, $0.3 million and $1.0
million for the years ended December 31, 2001, 2000 and 1999, and for the period
from May 1, 1994 (inception) through December 31, 2001, respectively.
Agreements. Under the terms of an employment agreement, the Company is obligated
to pay its Chief Executive Officer a minimum annual salary of $400,000 through
December 2003.
A former director of the Company is a party to a Consulting and Finder's
Agreement dated June 4, 1992 and amended February 17, 1995 with the Company.
This agreement entitles him to receive an annual fee equal to 10% of the net
after-tax profits of the Company attributable to the sale or licensing of
products or technology licensed pursuant to the Company's agreement with Yale
(refer to Note 3), until the cumulative total of such fees equals $3 million.
Such fee continues to be payable notwithstanding the director's death or
incapacity until the $3 million has been paid. No amounts are due or have been
paid to date under the agreement.
The Company has various commitments relating to its research agreements (refer
to Note 3).
10. Related Party Transactions
The Company and one of its directors, an affiliate of Yale University, entered
into a one year consulting agreement in January 2001, renewable for one
additional year, providing for various advisory services. Under the agreement,
the director receives a fee on a per diem basis for services rendered. The
Company paid the director $36,000 for the year ended December 31, 2001 and,
under a prior consulting agreement, paid $48,000 per year for the years ended
December 31, 2000 and 1999.
In connection with the retention of its Chief Executive Officer, the Company
granted options in 1999 to purchase an aggregate amount of 980,000 shares of the
Company's common stock. The options have exercise prices ranging from the fair
market value on the date of grant to 110% of the fair market value on the date
of grant.
51
A former director of the Company is a principal of a management consulting firm
that has rendered consulting services for the Company. The Company paid the firm
$60,000 for services rendered for the year ended December 31, 1999.
11. Selected Quarterly Financial Data (Unaudited)
The following is a summary of unaudited selected quarterly financial data for
the years ended December 31, 2001 and 2000 (in thousands, except per share
amounts):
Quarter
---------------------------------------------------------- Year
2001 First Second Third Fourth 2001
- ---- ----- ------ ----- ------ ----
Revenues $ 144 $ 181 $ 222 $ 103 $ 650
Net loss and loss applicable to common
shareholders per share (3,726) (3,233) (3,695) (3,156) (13,810)
Basic and diluted loss applicable to
common shareholders per share $ (0.14) $ (0.12) $ (0.13) $ (0.11) $ (0.51)
Quarter
---------------------------------------------------------- Year
2000 First Second Third Fourth 2000
- ---- ----- ------ ----- ------ ----
Revenues $ 198 $ 220 $ 368 $ 161 $ 947
Net loss (2,720) (3,168) (3,246) (5,669) (14,803)
Preferred stock dividends and accretion (358) (243) - (5) (606)
Loss applicable to common shareholders (3,078) (3,411) (3,246) (5,674) (15,409)
Basic and diluted loss applicable to
common shareholders per share $ (0.16) $ (0.14) $ (0.13) $ (0.22) $ (0.64)
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
52
PART III
ITEM 10. Directors and Executive Officers of the Registrant
The information required by Item 10 is incorporated by reference from
the information contained in the sections captioned "Election of Directors"
and "Management" in our definitive Proxy Statement for the Annual Meeting of
Stockholders to be held June 5, 2002 (the "Proxy Statement"), a copy of which
will be filed with the Securities and Exchange Commission before the meeting
date.
ITEM 11. Executive Compensation
The information required by Item 11 is incorporated by reference from
the information contained in the section captioned "Executive Compensation" in
the Proxy Statement.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The information required by Item 12 is incorporated by reference from
the information contained in the section captioned "Beneficial Ownership of
Common Stock" in the Proxy Statement.
ITEM 13. Certain Relationships and Related Transactions
The information required by Item 13 is incorporated by reference from
the information contained in the section captioned "Executive Compensation" in
the Proxy Statement.
53
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Financial Statements
The following is a list of the Financial Statements included in Item 8 of Part
II of this Report:
Page
----
Report of Independent Auditors.........................................................................29
Balance Sheet as of December 31, 2001 and 2000.........................................................30
Statement of Operations for the Years Ended December 31, 2001, 2000 and 1999 and
for the Period from May 1, 1994 (Inception) Through December 31, 2001..................................31
Statement of Changes in Shareholders' Equity for the Period from May 1, 1994 (Inception) Through
December 31, 2001 .....................................................................................32
Statement of Cash Flows for the Years Ended December 31, 2001, 2000 and 1999 and
for the Period from May 1, 1994 (Inception) Through December 31, 2001 ...............................35
Notes to Financial Statements..........................................................................36
2. Financial Statement Schedules
Schedules not included herein are omitted because they are inapplicable or
not required or because the required information is given in the financial
statements and notes thereto.
3. Exhibits
The exhibits required by this item and included in this report or
incorporated herein by reference are as follows:
Exhibit No. Description
- -------------------------------------------------------------------------------------------------------------------
2.1 -- Agreement and Plan of Merger among MelaRx Pharmaceuticals, Inc., OncoRx Research Corp. and
OncoRx, Inc. dated as of April 19, 1995 (1)
2.2 -- Certificate of Merger, dated April 20, 1995 (1)
3.1 -- Restated Certificate of Incorporation, as amended (2)
3.2 -- By-laws, as amended (2)
3.3 -- Certificate of Amendment to the Certificate of Incorporation of Vion Pharmaceuticals, Inc.
dated as of July 26, 2001 (13)
4.1 -- Rights Agreement dated as of October 26, 1998 between Vion Pharmaceuticals, Inc. and American
Stock Transfer & Trust Company (includes form of Right Certificate attached as Exhibit A and a
Summary of Rights to Purchase Common Shares attached as Exhibit B thereto) (3)
4.2 -- Revised form of Warrant Agreement by and between Vion Pharmaceuticals, Inc. and Brean Murray &
Co., Inc. (4)
4.3 -- Form of Underwriter's Warrant (included as Exhibit A to Exhibit 4.4 above) (4)
10.1 -- License Agreement between Yale University and OncoRx, Inc. dated as of August 31, 1994 (1)
54
10.2 -- Letter Agreement between Yale University and OncoRx, Inc. dated August 19, 1994 (1)
10.3 -- Extension Agreement between Yale University and MelaRx Pharmaceuticals, Inc., dated as of July 1,
1992 (1)
10.4 -- Form of License Agreement between Yale University and MelaRx Pharmaceuticals, Inc. (1)
10.5 -- Letter Agreement between Yale University and MelaRx Pharmaceuticals, Inc., dated as of
February 2, 1995 (1)
10.6 -- Employment Letter from MelaRx Pharmaceuticals, Inc. to Thomas Mizelle, dated as of July 29, 1994
(1)
10.7 -- Marketing Services Agreement between MelaRx Pharmaceuticals, Inc. and Creative Polymers, Inc.
dated as of March 21, 1994 (1)
10.8 -- Amended and Restated 1993 Stock Option Plan of the Registrant (5)
10.9 -- Lease Agreement between Science Park Development Corporation and Vion Pharmaceuticals, Inc.,
dated as of February 1, 1996 (6)
10.10 -- Option Agreement between the Registrant and PMP, Inc., dated April 27, 1995 (1)
10.11 -- Agreement between MelaRx Pharmaceuticals, Inc. and certain shareholders, dated February 17, 1995
(1)
10.12 -- Consulting and Finder's Agreement between MelaRx Pharmaceuticals, Inc. and Jacob A. Melnick,
dated June 4, 1992, as amended by Agreement dated February 17, 1995 (1)
10.13 -- Form of Indemnification Agreement (1)
10.14 -- Letter Agreement between Yale University and OncoRx, Inc. (formerly MelaRx Pharmaceuticals,
Inc.), dated July 5, 1995 (1)
10.15 -- Lease between Science Park Development Corporation and OncoRx, Inc. dated August 10, 1995 (7)
10.16 -- Master Lease Agreement between Citicorp Leasing, Inc. and OncoRx, Inc. dated September 27, 1995
(7)
10.17 -- Sale and Leaseback Agreement and Master Equipment Lease Agreement between FINOVA Technology
Finance, Inc. and Vion Pharmaceuticals, Inc. dated as of October 17, 1996 (8)
10.18 -- Clinical Development Agreement between Vion Pharmaceuticals, Inc., Covance Clinical Research Unit
Ltd. And Covance Inc. (Confidential treatment has been granted with respect to portions of this
exhibit) (9)
10.19 -- Amendment No. 1 to License Agreement between Yale University and Vion Pharmaceuticals, Inc.
(f/k/a OncoRx, Inc.) dated as of June 12, 1997 (9)
10.20 -- Amendment No. 2 to License Agreement between Yale University and Vion Pharmaceuticals, Inc.
(f/k/a OncoRx, Inc.) dated as of June 12, 1997 (9)
10.21 -- Collaborative Development and Distribution Agreement between Boehringer Ingelheim International
GmbH and Vion Pharmaceuticals, Inc. dated November 24, 1997 (Confidential treatment has been
granted with respect to portions of this exhibit) (6)
10.22 -- Sale and Leaseback Agreement between FINOVA Technology Finance, Inc. and Vion Pharmaceuticals,
Inc. dated as of December 10, 1997 (6)
10.23 -- License Agreement dated February 9, 1998 between Vion Pharmaceuticals, Inc. and San-Mar
Laboratories Inc. (10)
55
10.24 -- Amendment No. 3 to a License Agreement between Yale University and Vion Pharmaceuticals, Inc.
(f/k/a OncoRx, Inc.) dated as of September 25, 1998 (10)
10.25 -- Form of Severance Agreement between the Company and Terrence W. Doyle, Thomas E. Klein and Thomas
Mizelle (11)
10.26 -- Form of Employment Agreement between the Company and Alan Kessman (4)
10.27 -- Senior Executive Stock Option Plan (11)
10.28 -- Separation and Release Agreement between the Company and John Spears, dated April 7, 1999 (4)
10.29 -- Development and License Agreement dated December 1, 1999 between the Company and Boehringer
Ingelheim International GmbH (confidential treatment has been
granted with respect to portions of this exhibit) (12)
10.30 -- Amendment to Clinical Development Agreement between the Company and Covance Clinical Research
Unit Ltd. Dated October 27, 1999 (confidential treatment has been granted with respect to
portions of this exhibit) (12)
10.31 -- Amendment No. 4 to a License Agreement between Yale University and Vion Pharmaceuticals, Inc.
(f/k/a OncoRx, Inc.) dated as of January 31, 2000 (confidential treatment has been granted with
respect to portions of this exhibit) (13)
10.32 -- Lease between Science Park Development Corporation and Vion Pharmaceuticals, Inc. dated
November 1, 2001
10.33 -- Vion Pharmaceuticals, Inc. Amended and Restated 1993 Stock Option Plan, As Amended
21.1 Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP
24.1 Power of Attorney (included on signature page)
- -------------
(1) Incorporated by reference to the Company's Registration Statement on
Form SB-2 (File No. 33-93468), effective August 14, 1995.
(2) Incorporated by reference to the Company's Quarterly Report on form
10-QSB for the quarterly period ended June 30, 1998.
(3) Incorporated by reference to the Company's Current Report on Form 8-K
filed on October 26, 1998.
(4) Incorporated by reference to the Company's Registration Statement on
Form S-1 (File No. 333-83837), effective October 26, 1999.
(5) Incorporated by reference to the Company's Registration Statement on
Form S-8 (Filed No. 333-39407), effective November 4, 1997.
(6) Incorporated by reference to the Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1997.
(7) Incorporated by reference to the Quarterly Report on Form 10-QSB for
the quarter ended September 30, 1995.
(8) Incorporated by reference to the Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1996.
(9) Incorporated by reference to the Quarterly Report on Form 10-QSB for
the quarter ended June 30, 1997.
56
(10) Incorporated by reference to the Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1998.
(11) Incorporated by reference to the Quarterly Report on Form 10-QSB for
the quarter ended March 31, 1999.
(12) Incorporated by reference to the Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1999.
(13) Incorporated by reference to the Quarterly Report on Form 10-Q for the
quarter ended June 30, 2001.
(b) Reports on Form 8-K
The Registrant filed the following reports on Form 8-K during the quarter ended
December 31, 2001:
1. On November 1, 2001, the Company announced the third quarter and
nine-month financial results for the period ended September 30, 2001.
57
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: March 28, 2002 Vion Pharmaceuticals, Inc.
----------------------------
By: /s/ ALAN KESSMAN
---------------------
Alan Kessman
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Alan Kessman and Howard B. Johnson,
jointly and severally, his true and lawful attorneys-in-fact and agents, each
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments to
this Annual Report, and to file the same, with exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite or
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that each of said attorneys-in-fact and agents, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
58
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title
/s/ WILLIAM R. MILLER Chairman of the Board
- ----------------------------------------------
William R. Miller
/s/ ALAN KESSMAN Director, Chief Executive Officer
- ---------------------------------------------- (Principal Executive Officer)
Alan Kessman
/s/ HOWARD B. JOHNSON Vice President, Finance and Chief Financial Officer
- ---------------------------------------------- (Principal Financial and Accounting Officer)
Howard B. Johnson
/s/ KAREN SCHMEDLIN Controller and Secretary
- ----------------------------------------------
Karen Schmedlin
/s/ STEPHEN K. CARTER Director
- ----------------------------------------------
Stephen K. Carter
/s/ FRANK T. CARY Director
- ----------------------------------------------
Frank T. Cary
/s/ CHARLES K. MACDONALD Director
- ----------------------------------------------
Charles K. MacDonald
/s/ ALAN C. SARTORELLI Director
- ----------------------------------------------
Alan C. Sartorelli
/s/ WALTER B. WRISTON Director
- ----------------------------------------------
Walter B. Wriston
Date: March 28, 2002
59
STATEMENT OF DIFFERENCES
The registered trademark symbol shall be expressed as.................... 'r'
The service mark symbol shall be expressed as............................ 'sm'
The section symbol shall be expressed as................................. 'SS'