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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, 1995
Commission File Number 0-9314
ACCESS PHARMACEUTICALS, INC
(Exact name of registrant as specified in its charter)
Delaware 82-0221517
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(State of Incorporation) (I.R.S. Employer I.D. No.)
2600 Stemmons Freeway, Suite 210, Dallas, TX 75207
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area code: (214) 905-5100
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Four Cents ($0.04) Par Value
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(Title of Class)
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
requirement for the past 90 days. Yes [check mark] 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 the registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K. [ ]
The aggregate market value of the outstanding voting stock held by
non-affiliates of the registrant as of February 29, 1996 was approximately
$22,000,000.
As of February 29, 1996 there were 22,718,767 shares of ACCESS Pharmaceuticals,
Inc. common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: None
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PART I - FINANCIAL INFORMATION
ITEM 1. DESCRIPTION OF BUSINESS
Operations Prior to January 1996
ACCESS was founded in 1974 as Chemex Corporation, a Wyoming corporation, and in
1983 changed its name to Chemex Pharmaceuticals, Inc ("Chemex"). Chemex changed
its state of incorporation from Wyoming to Delaware on June 30, 1989. In
connection with the merger of ACCESS Pharmaceuticals, Inc., a Texas Corporation
("API"), with and into the Company on January 25, 1996, the name of the Company
was changed to ACCESS Pharmaceuticals, Inc.
ACCESS' principal executive office is at 2600 North Stemmons Freeway, Suite 210,
Dallas, Texas 75207; its telephone number is (214) 905-5100.
In June 1990, ACCESS sold its then lead drug, Actinex(TM), a drug developed by
ACCESS for the treatment of actinic keratoses (pre-malignant lesions of the
skin) to Block Drug Company ("Block") for a total of $8 million in milestone
payments plus future royalties which to date have not been significant. As of
December 31, 1992, all milestones were achieved and paid, and Block began
selling the drug in November 1992. ACCESS has retained the right to the active
ingredient of Actinex(TM) for all applications other than the indications for
premalignant lesions of the skin and basal cell carcinoma.
In June 1991, ACCESS entered into a joint venture agreement with Block for the
development, manufacturing and marketing of certain dermatological products (the
"Joint Venture"). Under this Joint Venture, Amlexanox, a drug for canker sores,
was developed.
Following the dissolution of the Joint Venture as of December 31, 1994, ACCESS
jointly owned the rights to Amlexanox with Block. ACCESS was required to share
certain research and development and other expenses relating to the
commercialization of Amlexanox on a 50/50 basis with Block. These agreements
also provided that if ACCESS was unable to fund its shares of such expenses,
ACCESS would be entitled to receive royalties from future sales of Amlexanox.
Believing that it would not be able to continue to fund its share of the
expenses required for commercialization of Amlexanox and because it was unable
to (a) raise additional equity financing and (b) reach agreement, by letter of
intent or otherwise, on a merger transaction with a third party, ACCESS, on May
30, 1995, exercised an option to sell its rights to Amlexanox to Block. On
September 14, 1995, at a Special Meeting of Stockholders, the ACCESS
Stockholders approved such sale and such transaction was consummated on
September 21, 1995.
As consideration for the sale of ACCESS' share of Amlexanox, Block (a) made a
nonrefundable upfront royalty payment of $2.5 million; (b) is obligated to pay
to ACCESS $1.5 million as a prepaid royalty at the end of the calendar month
during which Block together with any sublicensee has achieved cumulative
worldwide sales of Amlexanox oral products of $25 million; and (c) after the
payment of such $1.5 million royalty, is obligated to pay to ACCESS for all
sales in excess of cumulative worldwide sales of Amlexanox oral products of $45
million:
(1) for all countries where a valid and enforceable patent of Takeda Chemical
Industries, Ltd., ("Takeda"), the licensor of Amlexanox to Block, and or/an
Amlexanox patent for canker sores is in effect at the time of sale:
Ethical formulations: 5%
Over the Counter ("OTC") formulations: 2.5%
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(2) for countries where there is no valid and enforceable Takeda patent or
Amlexanox patent for canker sores in effect at the time of a sale:
Ethical formulations: 2.5%
OTC formulations: 1.25%
ACCESS' obligations following such sale are limited to performing reasonable
activities in support of obtaining FDA approval of Amlexanox until the earlier
of (i) three years after FDA approval of Amlexanox, or (ii) the liquidation or
dissolution of ACCESS. An NDA for Amlexanox was filed in April 1995 and the
Company is awaiting approval of this product. As a result, there have been no
sales of Amlexanox to date.
Until July 1995 and the sale of the drug Amlexanox to Block, ACCESS focused on
the development of novel drugs for the treatment of various skin diseases and
had a diversified portfolio of drugs under development.
Subsequent to the Merger of API into ACCESS, the Company is now managed by the
former management of API and the focus of the Company has changed to the
development of enhanced delivery of parenteral therapeutic and diagnostic
imaging agents through the utilization of its patented and proprietary
endothelial binding technology which selectively targets sites of disease.
This new technology was researched and developed at the University of Texas
Southwestern Medical Center by Dr. David Ranney, API's founder, who was the
Director of the Laboratory of Targeted Diagnosis and Therapy in the departments
of Pathology and Radiology. The technology is being developed to increase the
efficacy and reduce the side effects of therapeutics and diagnostic agents by
selectively targeting them to the sites of disease and accelerating drug
clearance. The principal form of the technology utilizes natural carbohydrates,
glycosaminoglycans ("GLYCOS"), as the carrier system which selectively targets
sites of disease. GLYCOS work by recognizing and adhering to cytokine-induced
adhesive receptors on the walls of local blood vessels.
The therapeutic focus of ACCESS is the development of proprietary
pharmaceuticals for the treatment of cancer and life-threatening infections and
the diagnosis and staging of cancer. ACCESS believes that the unique
pharmacologic profiles and selective targeting properties of GLYCOS could allow
its product candidates to become useful treatments for cancer and
life-threatening infections, and important diagnostic tools in the early
detection, prognosis and monitoring of cancer. The focus on acute care in large
expanding high-value hospital markets, particularly in the areas of oncology and
infectious disease, is designed to more rapidly accelerate development and
regulatory review and lower development cost in these life saving therapeutic
areas.
ACCESS has developed four possible product candidates, two of which are believed
ready to be advanced into human testing. These product candidates are new
formulations of existing compounds which increase therapeutic efficacy and
reduce toxicity, designed to address the clinical shortfalls of available
treatments.
Overview of Current Operations
The ACCESS strategy is to initially focus on utilizing its GLYCOS technology in
combination with approved drug substances to develop novel patentable physical
formulations of potential therapeutic and diagnostic products. It is anticipated
that this will expedite product development, both preclinical and clinical, and
ultimately product approval. To reduce financial risk and equity financing
requirements, ACCESS is directing its resources to the preclinical phase of
development and plans to outlicense to, or co-develop with, marketing partners
its current product candidates during the clinical development phases.
ACCESS has initiated and will continue to expand its internal core capabilities
of physical formulation, analytical methods development, initial process scale
up, carbohydrate analysis, drug/diagnostic targeting screens and project
management capability to maximize product opportunities in a timely manner. The
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manufacturing scale-up, pre-clinical testing and product production will be
contracted to research organizations, contract manufacturers and strategic
partners. Given the current cost containment and managed care environment both
in the United States and overseas and the difficulty for a small company to
effectively market its products, ACCESS does not currently plan to become a
fully integrated pharmaceutical company.
Consequently, ACCESS expects to form strategic alliances for product development
and to outlicense the commercial rights to development partners. By forming
strategic alliances with major pharmaceutical and diagnostic companies, it is
believed that the ACCESS technology can be more rapidly developed and
successfully introduced into the marketplace. Potential strategic partners are
and will continue to be screened based on the technology synergy, development
capabilities, expertise in the therapeutic/diagnostic area and ability to
globally maximize the potential product opportunity. Strategic alliance
agreements are expected to be structured around milestone and diligence payments
commensurate with the opportunity, the level of development partner funding of
clinical development and regulatory costs and ACCESS' receiving a royalty based
on worldwide product revenues.
Scientific Background
Preclinical work to date has demonstrated that ACCESS' technology enhances the
performance of therapeutic and diagnostic/prognostic imaging agents by binding
them to GLYCOS carriers which rapidly target to sites of tissue disease and
cause them to remain there for longer intervals while rapidly clearing the
non-targeted fraction. The GLYCOS technology is patterned after an immune
targeting system present in the body. GLYCOS mimic the body's defense systems
and appear capable of recognizing neovascular receptors selectively at sites of
disease, crossing vascular barriers and targeting drug payloads to tumor sites,
infections, inflammatory lesions, cardiovascular disease and potentially other
disease entities.
ACCESS' GLYCOS carriers are derived from natural sources and comprise the
carbohydrate portions of natural proteoglycans. GLYCOS have favorable toxicity
profiles compared to synthetic molecules. Also, currently they are the only cost
effective carrier substances available in the class of complex carbohydrates.
Examples of ACCESS carriers include heparin and dermatan sulfate, the former an
approved substance worldwide, and the latter a product in advanced clinical
development in Europe.
ACCESS has researched various GLYCOS for their targeting, biodistribution, and
clearance properties. ACCESS is now able to select the combination of GLYCOS and
active substances to provide optimal formulation characteristics, minimize the
dose-related side effects in preclinical testing, optimize clearance rates and
routes of different drugs and potentially obtain site selectivity for different
major classes of disease, beginning with cancer and infection.
Importantly, the binding of drugs and imaging agents to GLYCOS carriers is
typically by noncovalent physical processes. This results in simple formulations
which utilize existing, approved/approvable substances as carriers and are
expected to be compatible with a range of drugs and imaging agents.
ACCESS' proprietary GLYCOS carriers bind first to the body's endothelial
receptors that are induced on the microvascular barrier between the bloodstream
and the tissue sites of disease. Consequently, in a fashion similar to the
body's own cellular immune mechanisms, ACCESS' GLYCOS formulations progressively
accumulate and cross into sites of disease from their initial binding/targeting
sites on induced endothelium and are able to continue such accumulation with
repeated dosing, depending on the nature, severity and persistence of the
disease and the tissue mediators. Being sulphated polysaccharides, these GLYCOS
appear to avoid inducing anticarrier antibodies to themselves except in the
extremely low incidence established for therapeutic heparinoids.
Attaching a GLYCOS carrier to a drug or imaging agent causes the drug or imaging
agent to accumulate at the site of tissue damage more rapidly and to a
significantly greater extent than without the GLYCOS.
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Moreover, by piggybacking on the physiological pathway that allows cells and
molecules to penetrate the endothelial barrier and permeate deep into the
underlying tissue lesion, GLYCOS help bring the drug closer to all sub-regions
and cells of the pathologic lesion.
ACCESS believes that both the polymeric and multivalent binding properties of
GLYCOS are important for optimal disease site-localization of the attached drug
or diagnostic/prognostic. These aspects are important in optimizing
biodistribution, targeting and clearance and may also promote displacement of
the endogenous interfering substances which can be bound to diseased
endothelium, further enhancing the active endothelial translocation of the
GLYCOS drug or diagnostic into underlying sites of disease.
Drug and diagnostic enhancement by ACCESS' GLYCOS occurs by a number of
mechanisms, the principal ones being rapid selective targeting to tissue sites
of disease, stabilization of the active substance during both storage and plasma
transmit, longer retention at the site of disease and rapid clearance of the
non-targeted fraction giving reduced imaging backgrounds and reduced drug
toxicity.
Product Developments
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ACCESS DRUG PORTFOLIO
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Clinical
Compound Originator Indication FDA Filing Stage (1)
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Cancer
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AP 4010 ACCESS Anti-tumor (Cancer) Development Pre-Clinical
AP 2011 ACCESS MRI Contrast Agent Development Pre-Clinical
Radiopharmaceutical ACCESS Cancer Diagnosis Development Research
Masoprocol(3)(5) ACCESS Anti-tumor (Cancer) Development Pre-Clinical
Anti-Fungal
AP 1110 ACCESS Anti-fungal Development Pre-Clinical
Dermatology
Actinex(TM)(2) ACCESS Actinic keratosis FDA Completed
approved
Amlexanox(2) Takeda Oral ulcers NDA filed Completed
(CHX-3673) April 1995
CHX-100 (3)(5) ACCESS Prevention of IND filed Phase II
photoaging of skin 1993
Hypericin(4)(5) VimRx Psoriasis VimRx IND Phase I
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(1) See "Government Regulations" for description of clinical stages.
(2) Sold to Block. Subject to a Royalty Agreement.
(3) Involves the use of NDGA and may be developed by ACCESS pursuant to the
royalty-free, worldwide, exclusive license from Block to ACCESS.
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(4) Option to license compound for dermatological use from VimRx
Pharmaceuticals.
(5) Development currently suspended. Furthered development is under review.
ACCESS currently has rights to three drugs in various stages of human clinical
development covering medical indications for the following disease states:
contact dermatitis, mild to moderate psoriasis and photoaging of the skin
(anti-wrinkling). ACCESS also has an option to license hypericin from Vim Rx
Pharmaceuticals, Inc. for dermatological use. In addition, ACCESS' proprietary
drug, masoprocol, was in preclinical studies to determine the extent of its
potential in treating, in combination with other chemotherapeutic agents,
multiple-drug resistant cancers.
ACCESS begins the product development effort by screening and formulating
potential product candidates, selecting an optimal active and formulation
approach and developing the processes and analytical methods. Pilot stability,
toxicity and efficacy testing are conducted prior to advancing the product
candidate into formal pre-clinical development. Specialized skills are required
to produce these product candidates utilizing the ACCESS technology. ACCESS has
a core internal development capability with significant experience in these
formulations.
Once the product candidate has been successfully screened in pilot testing,
ACCESS' scientists together with external consultants, assist in designing and
performing the necessary preclinical efficacy, pharmacokinetic and toxicology
studies required for IND submission. External investigators and scale-up
manufacturing facilities are selected in conjunction with Company consultants.
ACCESS does not plan to have an extensive clinical development organization as
this would be conducted by a development partner.
Development and Research Projects
With all of ACCESS' product development candidates, there can be no assurance
that the results of the in vitro or animal studies are or will be indicative of
the results that will be obtained when these product candidates are tested in
humans. There can be no assurance that any of these projects will be
successfully completed or that regulatory approval of any product will be
obtained.
Cancer
Chemotherapy, surgery and radiation are the major components in the clinical
management of cancer patients. Chemotherapy is usually the primary treatment of
hematologic malignancies, which cannot be excised by surgery, and is
increasingly used as an adjunct to radiation and surgery, to improve efficacy,
and is used as the primary therapy for some solid tumors and metastases. The
current optimal strategy for chemotherapy involves exposing patients to the most
intensive cytotoxic regimens they can tolerate. Clinicians attempt to design a
combination of drugs, dosing schedule and method of administration to increase
the probability that cancerous cells will be destroyed while minimizing the harm
to healthy cells.
Most current drugs have significant limitations. Certain cancers are inherently
unresponsive to chemotherapeutic agents, other cancers initially respond but
subgroups of cancer cells acquire resistance to the drug during the course of
therapy, with the resistant cells surviving and resulting in relapse. As the
cells acquire resistance to a specific agent, they often simultaneously become
resistant to a wide variety of agents through a phenomenon known as multi-drug
resistance. Another limitation of current anti-cancer drugs is that serious
toxicity, including bone marrow suppression or irreversible cardiotoxicity, can
prevent their administration in curative doses.
ACCESS' cancer program is aimed at formulating generic chemotherapy agents and
proprietary products to enhance efficacy and reduce the toxicity compared with
the currently available chemotherapeutics.
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Product in Development
AP-4010 - ACCESS currently has one product in development, a GLYCOS-based
doxorubicin formulation for intravenous administration.
The most widely used cancer agents are anthracyclines, such as doxorubicin,
which are broadly effective against proliferating cancer cells. Anthracyclines
have a number of limitations, certain cancer types are unresponsive and can
cause severe toxic effects, including myelosuppression, mucositis and cumulative
irreversible cardiotoxicity.
ACCESS' animal studies have shown that higher doses of the product can be
tolerated with less acute toxicity and hence greater efficacy than standard
doxorubicin. It is possible that AP-4010 may have a better pharmacokinetic
profile than existing formulations of doxorubicin.
ACCESS is currently conducting pilot scale up of production of AP-4010 for
animal toxicity testing prior to submission of an IND which ACCESS anticipates
filling in approximately 12 months. The clinical indications are currently under
evaluation by external company consultants.
Infectious Diseases
Systemic fungal infections are a major problem for patients with impaired immune
defense mechanisms, particularly cancer patients, diabetics and AIDS patients.
Available agents for the treatment of systemic fungal infections include
amphotericin B and fluconazole. Despite the availability of these agents,
serious fungal infections remain difficult to treat. Because fluconazole is not
effective in treating many strains of fungi and amphotericin B toxicities remain
difficult to manage at effective doses, mortality rates among such patients
remain high.
Product in Development
AP-1110 - ACCESS' product development is focused on a GLYCOS-based formulation
of Amphotericin B, an effective cytocidal compound whose effectiveness and
regimens are limited by severe nephrotoxicity and prolonged blood and body
clearance. Amphotericin B remains the standard in the treatment of fungal
infections, however, because of nephroxicity, limitations on intensive higher
dosing regimens, it is difficult to cure many deep fungal infections.
The GLYCOS formulation significantly reduces kidney toxicity by redirecting the
clearance of the drug through the liver, where no new hepatotoxicity has been
observed (in subacute mouse toxicity tests). The clearance in animals of
amphotericin B appears accelerated from 120 hours to 24 hours with the GLYCOS
formulation. Based on its improved tolerance and clearance, in animal testing it
was possible to sufficiently increase the dosing and regimen intensity of the
GLYCOS formulation to achieve cures in animals, whereas none could be achieved
with the standard formulation.
An additional animal study to confirm the findings with a second fungal model is
required prior to formulation scale-up and proceeding toward an IND. This
project had been scheduled as a subsequent development, pending further
definition of the market potential and the interest of a strategic partner. The
Company now anticipates that this product candidate will be moved into clinical
development.
MRI Diagnostic Agents
Preoperative diagnostic imaging technologies are used to determine the existence
and the extent of disease. The principal diagnostic imaging technologies are CT
Scanning and Magnetic Resonance Imaging ("MRI"). Both methods produce images
that show anatomic boundaries between the tissue suspected of being malignant
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and the surrounding tissue, to reveal potential disease. Neither method gives
information allowing a clear distinction of malignant from nonmalignant tissue.
A more recently developed technology, immunoscintigraphy, uses a gamma-ray
detection camera externally to identify internally localized radiolabeled
antibodies potentially specific to certain cancers. Although immunoscintigraphy
with certain radiolabeled antibodies appears capable of distinguishing malignant
tumors from nonmalignant lesions and surrounding tissues, none of the external
imaging technologies, including immunoscintigraphy, is effective in consistently
identifying primary tumors smaller than one centimeter, in precisely locating
the site or margins of the tumor, in consistently identifying all metastatic
tumor nodules, or in distinguishing pre-invasive from functionally invasive
tumor behaviors.
The currently available contrast agents for MRI are nonselective gadolinium
based extracellular agents predominantly used in imaging the central nervous
system.
ACCESS is focused on expanding the utility of MRI imaging to include body
imaging by developing a site-selective intravenous contrast agent with improved
localization and performance outside as well as within the central nervous
system. ACCESS believes that improved site selectivity, longer site contrast
with rapid blood clearance, the ability to clearly delineate tumor boundaries
and metastases and the opportunity to obtain additional valuable information on
prognosis, function, therapeutic response monitoring and anatomy at high
resolution, could be major competitive advantages of the GLYCOS formulations.
Product in Development
AP-2011 - A pilot formulation utilizing the GLYCOS carrier, a chelating agent
and gadolinium has been prepared and an acceptable acute toxicity profile
obtained.
Prior to advancing this product candidate further, additional toxicity and
animal efficacy studies are required. Encouraging initial results, including the
successful, rapid contrast enhancement of tumors of the liver and nonliver
tumors have been obtained in four different animal models and in three different
species. Acute toxicity studies have been completed. Production of GMP materials
and sub-acute toxicity testing is required before submission of an IND.
Radiopharmaceuticals
Given currently available technologies, diagnostic techniques such as CT, MRI
and immunoscintigraphy are projected to be used by a large number of physicians
to detect, stage and monitor cancer. CT and MRI currently have not effectively
distinguished malignant from non-malignant tissue. Several biotechnology-based
companies are developing antibody products for immunoscintigraphy in colorectal,
ovarian, small cell lung, melanoma and breast cancer. Although
immunoscintigraphy with antibody agents and peptides has the capacity to
distinguish malignant from non-malignant tissue, none of the technologies is
effective in consistently identifying tumors smaller than one centimeter or in
precisely locating the site of a tumor. They only indicate that cancer may be
present within a general area. Because of these limitations, the physician may
frequently be making decisions concerning surgery and other therapy with
incomplete information.
To date, radiopharmaceuticals have been limited to diagnostic indications and
bone pain management in patients with metastatic prostate cancer. There has been
little use in therapy due to the toxicities associated with the radionuclides
necessary to achieve therapeutic benefits, and also due to the heterogeneity of
tumor-specific antigens on tumor cells and subregions, with the prominent
exception of B-cell lymphomas.
Diagnostic Applications
A pilot GLYCOS radiopharmaceutical diagnostic imaging agent has been prepared
and tested utilizing Gallium(67). Animal studies have shown that the GLYCOS have
the ability to rapidly target and permeate AT-1
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prostate tumors in grown rats. These studies also showed fast clearance by the
renal route and negligible liver uptake. These characteristics support the
development of radiolabeled agents for tumor imaging. The pilot studies indicate
selective tumor localization of the radiolabeled agent within 5 minutes of
injection allowing optimal imaging between 15 minutes and 1 hour post injection.
GLYCOS may provide the key additional information of tumor function and
prognosis in a way which can improve clinical diagnosis and staging, and allow
rapid early decision-making on patient management and therapeutic approaches,
including intraoperative approaches.
Before advancing to preclinical development, product optimization, including the
selection of a radionuclide, chelator and GLYCOS carrier, must be finalized in
conjunction with an external advisory group.
Patents
ACCESS believes that the value of technology both to ACCESS and to potential
corporate partners is established and enhanced by its strong, broad and specific
intellectual property positions. Consequently, ACCESS already has issued and
seeks to obtain additional U.S. and foreign patent protection for products under
development and for new discoveries. Patent applications are filed with the U.S.
Patent and Trademark Office and, when appropriate, with the Paris Convention's
Patent Cooperation Treaty (PCT) Countries (most major countries in Western
Europe and the Far East) for its inventions and prospective products.
ACCESS holds U.S. and European patents with broad composition of matter claims
encompassing glycosaminoglycan, acidic saccharide, carbohydrate and other
endothelial-binding and targeting carriers in combination with drugs and
diagnostic agents formulated by both physical and chemical covalent means. Eight
patents have issued commencing in 1990 (six U.S. and two European) and an
additional eight patent applications are pending (five U.S. and three PCT).
These patents and applications broadly cover the in vivo medical uses of drugs
and diagnostic carrier formulations which bind and cross endothelial and
epithelial barriers at sites of disease, including but not limited to treatment
and medical imaging of tumor, infarct, infection and inflammation. They further
disclose the body's induction of endothelial, epithelial, tissue and blood
adhesins, selectins, integrins, chemotaxins and cytotaxins at sites of disease
as a mechanism for selective targeting, and they claim recognized usable carrier
substances which selectively bind to these induced target determinants.
ACCESS has a strategy of maintaining an ongoing line of continuation
applications for each major category of patentable carrier and delivery
technology. By this approach, ACCESS is extending the intellectual property
protection of its basic targeting technology and initial agents to cover
additional specific carriers and agents, some of which are anticipated to carry
the priority dates of the original applications.
The intellectual property around which API was founded was originally licensed
by way of a License Agreement from the inventor and principal shareholder Dr.
David Ranney. A Patent Purchase Agreement dated April 5, 1994, (the "Patent
Purchase Agreement") terminated the License Agreement and provided for
assignment of the rights to the original patents to ACCESS. The terms of the
Patent Purchase Agreement were amended effective January 25, 1996 reducing the
minimum royalty payments due to Dr. David Ranney. Additional patents covering
the technology were purchased from the University of Texas system on October 31,
1990 and applied for directly by ACCESS. The technology was developed by Dr.
David Ranney during his tenure at the University of Texas Southwestern Medical
School which retains a royalty free non-exclusive right to use the patent rights
for its own research, teaching and other educationally-related purposes. See
"Certain Relationships and Related Transactions."
Dr. David Ranney has signed an Assignment of Intellectual Property Agreement
whereby all rights, title and interest in and to all subsequent inventions and
confidential information will become the sole and exclusive
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property of ACCESS at the earlier of the date of conception or development,
while he remains an employee of ACCESS and for a period of two years after he
ceases employment for inventions relating to the ACCESS technology.
Under the terms of the Patent Purchase Agreement as amended, Dr. David Ranney
has retained certain rights and interests in the intellectual property,
including a non-exclusive right to use the inventions and technology covered by
or relating to the patents for his own research, teaching or other academic
related purposes, and after he is no longer a full-time employee of ACCESS for
research and development of uses or implementations of the inventions and
technology improvements. ACCESS maintains the first right to negotiate the
acquisition of any new inventions or technology improvements developed by Dr.
David Ranney relating to the technology. Beginning in 1994, ACCESS has agreed to
pay Dr. David Ranney a royalty of three quarters of one percent (0.75%) of
ACCESS' gross revenues derived from products covered by the patents and pay
certain minimum payments.
In addition, the Patent Purchase Agreement, as amended, establishes certain
additional rights of Dr. David Ranney. The patent assignment will terminate in
the event ACCESS fails to pay the amounts due to Dr. David Ranney pursuant to
the Agreement, files a petition in bankruptcy, fails to commercially develop the
patents or creates a security interest in the patents without Dr. David Ranney's
approval. Also, in the event that parts of the ACCESS technology are not being
developed prior to January 2000, Dr. David Ranney has the right of first refusal
to license or acquire at fair market value development rights to such parts of
the ACCESS technology.
Government Regulations
ACCESS is subject to extensive regulation by the Federal Government, principally
by the FDA, and, to a lesser extent, by other Federal and State agencies as well
as comparable agencies in foreign countries where registration of products will
be pursued. Although a number of ACCESS GLYCOS formulations incorporate
extensively tested drug substances, because the resulting GLYCOS formulations
make claims of enhanced efficacy and/or improved side effect profiles they are
expected to be classified as new drugs by the FDA.
The Federal Food, Drug and Cosmetic Act and other federal, state and foreign
statutes and regulations govern the testing, manufacturing, safety, labeling,
storage, shipping and record keeping of ACCESS' products. The FDA has the
authority to approve or not approve new drug applications and inspect research
and manufacturing records and facilities.
Among the requirements for drug approval and testing is that the prospective
manufacturer's facilities and methods conform to the FDA's Code of Good
Manufacturing Practices regulations which establish the minimum requirements for
methods to be used in, and the facilities or controls to be used during the
production process and the facilities are subject to ongoing FDA inspection to
insure compliance.
The steps required before a pharmaceutical product may be produced and marketed
in the U.S. include preclinical tests, the filing of an IND with the FDA, which
must become effective pursuant to FDA regulations before human clinical trials
may commence, and the FDA approval of an NDA prior to commercial sale.
Preclinical tests are conducted in the laboratory, usually involving animals, to
evaluate the safety and efficacy of the potential product. The results of
preclinical tests are submitted as part of the IND application and are fully
reviewed by the FDA prior to granting the sponsor permission to commence
clinical trials in humans. Clinical trials typically involve a three-phase
process. Phase I, the initial clinical evaluations, consists of administering
the drug and testing for safety and tolerated dosages as well as preliminary
evidence of efficacy in humans. Phase II involves a study to evaluate the
effectiveness of the drug for a particular indication and to determine optimal
dosage and dose interval and to identify possible adverse side effects and risks
in a larger patient group. When a product is found effective in Phase II, it is
then evaluated in Phase III clinical trials.
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Phase III trials consist of expanded multi-location testing for efficacy and
safety to evaluate the overall benefit-to-risk index of the investigational drug
in relationship to the disease treated. The results of preclinical and human
clinical testing are submitted to the FDA in the form of an NDA for approval to
commence commercial sales.
The process of doing the requisite testing, data collection, analysis and
compilation of an IND and an NDA is labor intensive and costly and may take a
protracted time period. In some cases tests may have to be re-done or new tests
instituted to comply with FDA requests. Review by the FDA may also take a
considerable time period and there is no guarantee an NDA will be approved.
Hence, ACCESS cannot with any certainty estimate how long the approval cycle may
take.
Current U.S. government revisions to the U.S. healthcare system are not yet
known in detail, but could have an impact on the pharmaceutical industry,
possibly in the form of pricing restrictions. Although ACCESS is developing new
novel drugs in the field of cancer and infectious disease that are currently not
treated effectively, there still can be no assurance that certain pricing
constraints would not pertain.
ACCESS is also governed by other federal, state and local laws of general
applicability, such as laws regulating working conditions, employment practices,
as well as environmental protection.
Competition
The pharmaceutical and biotechnology industry is highly competitive. Most
pharmaceutical and biotechnology companies have considerably greater research
and development, financial, technical and marketing resources than ACCESS.
Although ACCESS' proposed products utilize a novel drug delivery system, they
will be competing with established pharmaceutical companies' existing and
planned new product introductions and alternate delivery forms of the active
substance being formulated by ACCESS.
A number of companies are developing or may, in the future, engage in the
development of products competitive with the ACCESS delivery system. Currently,
in the therapeutic area, liposomal formulations being developed by Nexstar,
Inc., The Liposome Company, Inc. and Sequus Pharmaceuticals, Inc. are the major
competitive intravenous drug delivery formulations which utilize similar drug
substances. A number of companies are developing or evaluating enhanced drug
delivery systems. ACCESS expects that technological developments will occur at a
rapid rate and that competition is likely to intensify as various alternative
delivery system technologies achieve certain if not identical advantages.
The principal current competitors to ACCESS' technology fall into three
categories: monoclonal antibodies, liposomes and peptides. ACCESS believes its
technology represents a significant advance over these older technologies
because it is the only system with a favorable pharmacokinetic profile which has
been shown to effectively bind and cross neovascular barriers and to deeply
penetrate the major classes of deep tissue and organ disease, which remain
partially inaccessible to older technologies.
Even if ACCESS' products are fully developed and receive required regulatory
approval, regarding which there is no assurance, ACCESS believes that its
products can only compete successfully if marketed by a company having expertise
and a strong presence in the therapeutic area. Consequently, ACCESS does not
currently plan to establish an internal marketing organization. By forming
strategic alliances with major pharmaceutical and diagnostic medical imaging
companies, management believes that ACCESS' development risks should be
minimized and the technology will potentially be more rapidly developed and
successfully introduced into the marketplace.
11
Employees
As of March 18, 1996 ACCESS has 9 full time employees and one part time employee
three of whom have advanced scientific and medical degrees. ACCESS believes that
it maintains good relations with its personnel. In addition, to complement its
internal expertise, ACCESS contracts with scientific consultants, contract
research organizations and university research laboratories that specialize in
various aspects of drug development including toxicology, sterility testing and
preclinical testing to complement its internal expertise.
Risk Factors
Certain of the statements contained in this Annual Report on Form 10-K are
forward looking statements that involve risks and uncertainties. Such statements
are subject to important factors that could cause actual results to differ
materially, including the following risk factors:
Research and Development Focus ACCESS' focus is on commercializing
proprietary biopharmaceutical patents. Although ACCESS is projected to have
royalty income, it is still in the development stage, and its proposed
operations are subject to all the risks inherent in the establishment of a new
business enterprise, including the need for substantial capital. ACCESS has
recorded minimal revenue to date. In addition, royalties received by ACCESS for
sales of Actinex(TM) and Amlexanox have not been significant to date. It is
anticipated that ACCESS will remain principally engaged in research and
development activities for an indeterminate, but substantial, period of time. As
a non-revenue producing company, normal credit arrangements are unavailable to
ACCESS and, therefore, it is likely that ACCESS would be forced to accept
unfavorable terms if it should attempt to raise additional needed funds through
borrowing. There can be no assurance that any such credit arrangements would be
available. Further, it is anticipated that additional losses will be incurred in
the future, and there can be no assurances that ACCESS will ever achieve
significant revenues.
Uncertainties Associated with Research and Development Activities
Research and development activities, by their nature, preclude definitive
statements as to the time required and costs involved in reaching certain
objectives. Actual research and development costs, therefore, could exceed
budgeted amounts and estimated time frames may require extension. Cost overruns
due to unanticipated regulatory delays or demands, unexpected adverse side
effects or insufficient therapeutic efficacy will prevent or substantially slow
the research and development effort and ultimately could have a material adverse
effect on ACCESS.
Absence of Operating Revenue Royalties received by ACCESS for sales of
Actinex(TM) and Amlexanox have not been significant to date. There can be no
assurance of revenue or profits in the future. ACCESS currently has no products
approved for sale and there can be no assurance as to the expenditures of time
and resources that may be required to complete the development of potential
ACCESS products and obtain approval for sale or if such completion and approval
can be realized.
History of Losses ACCESS has sustained net operating losses since its
inception. Since the development and commercialization of current and new
products will require substantial expenditures for the foreseeable future,
ACCESS expects to incur further losses. If ACCESS' losses continue, its ability
to continue its operations will depend upon its ability to secure additional
funds. ACCESS' revenue trend and future additional cash needs may display
significant variations due to the introduction of new research and development
agreements and licensing arrangements, the completion or termination of those
agreements and arrangements, the timing and amounts of milestone payments, and
the timing of regulatory approvals and market introduction of products.
12
Future Capital Requirements ACCESS will require substantial funds for
its research and product development programs, the pursuit of regulatory
approvals, operating expenses, working capital and expansion of its production
capabilities. There can be no assurance that ACCESS will be profitable in the
future and if ACCESS has insufficient funds for its capital needs, there can be
no assurance that additional funds can be obtained on acceptable terms, if at
all. If necessary funds are not available, ACCESS' business would be materially
adversely affected.
Dependence on Others; Collaborations The Company's strategy for the
research, development and commercialization of its potential pharmaceutical
products may require the Company to enter into various arrangements with
corporate and academic collaborators, licensors, licensees and others, in
addition to those already established, and may therefore be dependent upon the
subsequent success of outside parties in performing their responsibilities.
There can be no assurance that the Company will be able to establish additional
collaborative arrangements or license agreements that the Company deems
necessary or acceptable to develop and commercialize its potential
pharmaceutical products, or that any of its collaborative arrangements or
license agreements will be successful.
No Marketing, Sales, Clinical Testing or Regulatory Compliance
Activities In view of the early stage of the Company and its research and
development programs, the Company has restricted hiring to research scientists
and a small administrative staff and has made no investment in marketing,
product sales or regulatory compliance resources. If the Company successfully
develops any commercially marketable pharmaceutical products, it may seek to
enter joint venture, sublicense or other marketing arrangements with parties
that have an established marketing capability or it may choose to pursue the
commercialization of such products on its own. There can be no assurance,
however, that the Company will be able to enter into such marketing arrangements
on acceptable terms, if at all. Further, the Company will need to hire
additional personnel skilled in the clinical testing and regulatory compliance
process and in marketing or product sales if it develops pharmaceutical products
with commercial potential that it determines to commercialize itself. There can
be no assurance, however, that it will be able to acquire such resources or
personnel.
Protection of Proprietary Technology ACCESS' ability to compete
effectively with other companies will depend, in part, on its ability to
maintain the proprietary nature of its technology. Although ACCESS has been
awarded eight patents involving glycosaminoglycan, acidic saccharide,
carbohydrate and other endothelial-binding and targeting carriers in combination
with drugs and diagnostic agents formulated by both physical and chemical
covalent means; and eight applications are pending, there can be no assurance
that these patents will not be declared invalid or circumvented, or that pending
patents will be issued. In addition, there may be other patents issued covering
technologies and products which may be required by ACCESS to manufacture, use or
sell any potential products. There can be no assurance that ACCESS could obtain
a license under any such patent on commercially acceptable terms or at all. To
protect their rights in these areas, ACCESS generally requires its respective
employees, consultants, advisors and collaborators to enter into confidentiality
agreements. There can be no assurance, however, that these agreements will
provide meaningful protection for ACCESS' trade secrets, know-how or other
proprietary information in the event of any unauthorized use or disclosure of
such trade secrets, know-how or other proprietary information. Litigation may be
necessary to protect trade secrets or know-how currently owned by ACCESS to
determine the scope and validity of the proprietary rights of others and could
result in substantial cost and diversion of effort by ACCESS.
Regulation by Government Agencies The pharmaceutical industry is
subject to regulation by the FDA and comparable agencies in foreign countries
prior to commercial marketing. The process of obtaining approvals from such
agencies for any potential products of ACCESS can be costly, complicated and
time consuming and there can be no assurance that such approvals will be granted
on a timely basis, if ever. The regulatory process may delay the marketing of
any new products for lengthy periods, impose substantial additional costs and
furnish an advantage to competitors who have greater financial resources. In
addition, the extent of potentially adverse governmental regulations which might
arise from future legislative,
13
administrative or judicial action cannot be determined. ACCESS cannot predict at
this time what effect FDA actions may have on the approval process to which
ACCESS' potential products may be subject.
Drug-related Risks Adverse side effects of treatment of diseases and
disorders in both human and animal patients are business risks in the
pharmaceutical industry. Adverse side effects can occur during the clinical
testing of a new drug on humans or animals which may delay ultimate FDA approval
or even cause a company to terminate its efforts to develop the drug for
commercial use. Even after FDA approval of an NDA, adverse side effects may
develop to a greater extent than anticipated during the clinical testing phase
and could result in legal action against a company. Drug developers and
manufacturers, including ACCESS, may face substantial liability for damages in
the event of adverse side effects or product defects identified with their
products used in clinical tests or marketed to the public. There can be no
assurance that ACCESS will be able to satisfy any claims for which it may be
held liable resulting from the use or misuse of products which it has developed,
manufactured or sold.
Competition The domestic and international markets for the
pharmaceutical industry are highly competitive. Many of ACCESS' competitors have
significantly greater financial, technical, research and development and
marketing resources than ACCESS. ACCESS' ability to compete depends primarily
upon scientific and technical superiority, patent protection, timely regulatory
approvals and effective pricing and marketing. ACCESS' future success will also
depend upon, among other factors, its ability to develop, introduce, manufacture
and obtain regulatory approvals on a timely basis for new or potential products.
Other substances or technologies currently existing or developed in the future
may be the basis for competitive products that will render ACCESS' technology
obsolete or non-competitive. There can be no assurance that any potential
products or processes will compete successfully. Additionally, there can be no
assurance that ACCESS' competitors will not substantially increase the resources
devoted to the development and marketing of products competitive with those of
ACCESS.
Dependence Upon Skilled Personnel The business of ACCESS depends
heavily upon the active participation of Dr. David Ranney and Kerry P. Gray.
Loss of the services of either of these individuals would adversely affect the
operation of ACCESS' business. In addition, both the long and short term success
of ACCESS depend in large part upon its continued ability to attract and retain
skilled scientific, and managerial employees, which may prove difficult because
the market for the services of such individuals is highly competitive.
ITEM 2. PROPERTIES
ACCESS maintains one facility of administrative offices and laboratories in
Dallas, Texas. ACCESS has a lease agreement for the facility which has
approximately 5,500 square feet, which terminates in January 1998 however the
Company has an option for early termination. Adjacent space is available for
expansion which would accommodate the growth planned for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
ACCESS is not a party to any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
A Special Meeting in lieu of the 1995 Annual Meeting of Stockholders of the
Company was held at 10:00 a.m., January 25, 1996 to consider and vote upon
proposals to (i) approve and adopt that certain Agreement of Merger and Plan of
Reorganization, dated as of October 3, 1995, as amended and restated as of
October 31, 1995 (the "Merger Agreement") by and between the Company and API,
pursuant to which, among other matters, API would be merged with and into the
Company with the Company the surviving corporation (the "Merger") and each
share of API's common stock, $.01 par value per share, would be converted into
approximately 3.7744 shares
14
of the Company's common stock, $.04 par value per share ("Company Common Stock")
(subject to adjustment as provided in the Merger Agreement); (ii) approve an
amendment to the Certificate of Incorporation of the Company increasing the
number of authorized shares of the Company Common Stock to 40,000,000 shares and
the number of authorized shares of the preferred stock, $.01 par value per
share, of the Company to 10,000,000 shares; (iii) approve an amendment to the
Certificate of Incorporation of the Company to effect a change of the name of
the Company from Chemex Pharmaceuticals, Inc. to "ACCESS Pharmaceuticals, Inc.";
(iv) approve the establishment of the ACCESS 1995 Stock Option Plan (the "1995
Stock Option Plan"), under which an aggregate of 2,000,000 shares of ACCESS
Common Stock will be issuable pursuant to the terms of such plan; (v) ratify the
selection by the Board of Directors of ACCESS of ACCESS' independent auditors;
(vi) elect three directors; and (vii) approve an adjournment of the Special
Meeting, if necessary, to permit further solicitation of proxies in the event
that there are not sufficient votes at the Special Meeting to consider and
approve any or all of the above proposals. All proposals were approved by the
stockholders.
The voting with respect to each of such matters was as follows:
For Withhold
--- --------
Item 1
Greetham 7,587,633 232,047
Taylor 7,586,547 233,133
Woolard 7,587,633 232,047
For Against
--- -------
Item 2 5,146,576 49,075
Item 3 5,097,671 84,407
Item 4 7,708,188 62,635
Item 5 4,849,452 537,159
Item 6 7,717,348 65,156
15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
During the time periods shown on the table below, ACCESS' Common Stock was
traded on the National Association of Securities Dealers, Inc. Automated
Quotation System ("Nasdaq") SmallCap market under the trading symbol CHMX until
April 27, 1995. ACCESS' securities were delisted from the Nasdaq SmallCap Market
on April 27, 1995 for failure to meet certain financial requirements. ACCESS
Common Stock now trades on Nasdaq Over-the-Counter ("OTC") Bulletin Board and as
of February 1, 1996 trades under the trading symbol AXCS. The following tables
set forth the high and low closing prices for ACCESS' Common Stock for the
periods indicated as reported by Nasdaq.
Common Stock
------------
High Low
---- ---
Fiscal Year Ended
December 31, 1995
----------------
First quarter 3/4 7/16
Second quarter (1) 1/2 7/16
Second quarter (2) 9/16 1/16
Third quarter 19/32 9/32
Fourth quarter 1-1/8 1/4
Fiscal Year Ended
December 31, 1994
-----------------
First quarter 1-13/16 1/16
Second quarter 13/16 1/8
Third quarter 1 9/16
Fourth quarter 11/16 7/16
(1) Through April 27, 1995 on NASDAQ SmallCap Market.
(2) After April 27, 1995 on OTC Bulletin Board.
The number of record holders of ACCESS' Common Stock at March 18, 1996 was
approximately 3,000 and the closing price on that date was $2.5625.
In January, 1996 the stockholders authorized an increase from five to ten
million shares of preferred stock as part of the Company's merger with API.
To date, no preferred shares have been issued.
ACCESS has never paid any cash dividends on its ACCESS Preferred Stock or Common
Stock. The payment of dividends, if any, in the future is within the discretion
of the Board of Directors and will depend upon ACCESS' earnings, its capital
requirements and financial condition, and other relevant facts. ACCESS does not
plan any cash dividends in the near future.
ACCESS was notified by Nasdaq on April 26, 1995 that its request for a temporary
exemption from certain continued listing financial requirements was denied.
ACCESS has been de-listed from the Nasdaq Small-Cap Market and the ACCESS Common
Stock now trades on the OTC Bulletin Board under the sale stock symbol "AXCS."
ACCESS' appeal to Nasdaq's decision was denied on July 31, 1995. ACCESS plans to
reapply when Nasdaq qualifications are met.
16
ITEM 6. SELECTED FINANCIAL DATA (Thousands, Except for Net Income (Loss) per Share)(1)
As of or for the Year Ended December 31, 1995 1994 1993 1992 1991
- ---------------------------------------- ------ ------ ------ ------ ------
Balance Sheet Data:
Total Assets $2,129 $1,704 $3,016 $6,535 $1,676
Total Liabilities 443 377 986 1,010 890
Stockholders' Equity 1,686 1,327 2,030 5,525 786
- -------------------------------------------------------------------------------------------------------------------------
Income Statement Data:
Total Revenues 2,945 3,162 1,656 9,046 3,103
Total Expenses 2,604 4,121 5,223 4,361 3,783
Net Income (Loss) 341 (959) (3,567) 4,254 (680)
- -------------------------------------------------------------------------------------------------------------------------
Common Stock Data(2).
Net Income (Loss) Per Share .04 (.11) (.43) .48 (.08)
Average Number of Common
Shares and Common Equivalent
Shares Outstanding 8,717 8,543 8,385 8,843 8,107
- -------------------------------------------------------------------------------------------------------------------------
(1) Does not reflect the merger of ACCESS Pharmaceuticals, Inc., a
Texas corporation, with and into the Company on January 25, 1996
(2) Restated to reflect the 1992 one for four reverse stock split and 100% stock dividend
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
In connection with the merger of ACCESS Pharmaceuticals, Inc. a Texas
corporation ("API") with and into the Company on January 25, 1996, the name of
the Company was changed to ACCESS Pharmaceuticals, Inc.
Until July 1995 and the sale of the drug Amlexanox to Block, ACCESS focused on
the development of novel drugs for the treatment of various skin diseases and
had a diversified portfolio of drugs under development.
As consideration for the sale of ACCESS' share of Amlexanox, Block (a) made an
initial non-refundable upfront royalty payment of $2.5 million; (b) is obligated
to pay to ACCESS $1.5 million as a prepaid royalty at the end of the calendar
month during which Block together with any sublicensee has achieved cumulative
worldwide sales of Amlexanox oral products of $25 million; and (c) after the
payment of such $1.5 million royalty, is obligated to pay ACCESS a royalty on
all sales in excess of cumulative worldwide sales of Amlexanox oral products of
$45 million, as defined in the agreement.
ACCESS' obligations following such sale are limited to performing reasonable
activities in support of obtaining FDA approval of Amlexanox until the earlier
of (i) three years after FDA approval of Amlexanox, or (ii) the liquidation or
dissolution of ACCESS. An NDA for Amlexanox was filed in April 1995 and the
Company is awaiting approval of this product. As a result, there have been no
sales of Amlexanox to date.
Subsequent to the Merger of API into ACCESS, the Company is now managed by the
former management of API and the focus of the Company has changed to the
development of enhanced delivery of parental therapeutic and diagnostic imaging
agents through the utilization of its patented and proprietary endothelial
binding technology which selectively targets sites of disease.
ACCESS Pharmaceuticals is an emerging pharmaceutical company with a broad
platform technology for enhancing the site targeting of intravenous therapeutic
drugs, MRI contrast agents and radiopharmaceutical diagnostic and therapeutic
agents. The ACCESS technology is based on natural carbohydrate carriers.
The technology development of ACCESS is currently focused on increasing the
therapeutic benefit of oncology agents and improving the efficiency of oncology
diagnosis by selectively targeting sites of disease and accelerating drug
clearance.
ACCESS has developed four possible product candidates, two of which are believed
ready to be advanced into human testing. These product candidates are new
formulations of existing compounds which increase therapeutic efficacy and
reduce toxicity, designed to address the clinical shortfalls of available
treatments.
Forward-looking narratives included herein are subject to and should be read in
conjunction with the "Risk Factors" section of this Form 10-K.
Liquidity and Capital Resources
Working capital as of March 18, 1996 was $6,559,000, an increase of $4,866,000
as compared to the working capital as of December 31, 1995 of $1,693,000. The
increase in working capital was principally due to the $6 million private
placement of 8.57 million shares of common stock concluded in March 1996. The
cash infusion will be used to continue the advancement of the product portfolio
which focuses on increasing the therapeutic benefit and improving the efficiency
of oncology therapeutics and diagnostic agents by selectively targeting sites of
disease and accelerating drug clearance. The shares issued in the private
placement have not been registered, however the Company has agreed to file a
registration statement within 90 days of the date of
18
issuance. The investors have agreed not to sell any of the shares purchased in
the offering until 180 days after the closing.
Management believes its working capital will cover planned operations through
December 1997.
There are no royalty revenues expected during 1996 but there are planned
research and development expenditures to advance products into human testing.
Expenditures will remain high for several years and there can be no assurance
that the Company will be successful in attaining a partner or future equity
financing to complete the testing of its products.
Results of Operations
Comparison of Years Ended December 31, 1995 and 1994
- ----------------------------------------------------
Net Revenues for the twelve months ended December 31, 1995 were $2,945,000,
$217,000 lower than the 1994 comparable period. The change in revenues from year
to year is explained as follows: the one-time non-refundable receipt of upfront
royalties in 1995 for the sale of Amlexanox rights by the Company to Block of
$2,500,000, offset by the one-time sale of 10% of a Joint Venture between the
Company and Block in the amount of $1,700,000 in June 1994; and the reduction
from 1994 to 1995 of joint venture/Amlexanox project research revenues of
$981,000 principally due to the termination of the ACCESS/Block Joint Venture in
December 1994 which effectively reduced research reimbursement (of 50%) of a
majority of the Company development projects (with the exception of Amlexanox
which was funded 50/50 until the sale of Amlexanox rights by the Company to
Block in September 1995).
Research and development expenses were $1,253,000 for the twelve months ended
December 31, 1995 as compared to $2,591,000 for the same period in 1994. The
reduction of overall research and development spending in 1995 from 1994 of
$1,338,000 was principally due to the completion of Phase III clinical trials in
the third quarter of 1994 for Amlexanox which was the most expensive phase in
the development of the drug. The Company terminated all other research and
development during the third quarter of 1995 in anticipation of the proposed
merger of API with and into the Company.
Effective July 1, 1995, operating expenses were reduced to a minimum in
contemplation of the Merger. Operating expenses were $1,341,000 in 1995, a
reduction of $40,000 as compared to the prior year. The change in spending may
be summarized as follows: the elimination of litigation fees which were incurred
in 1994-$131,000; lower compensation expenses in 1995 due to a voluntary salary
reduction of the CEO/Chairman and elimination of positions-$135,000; the
elimination of investment banking fees incurred in 1994-$92,000; the
elimination of product liability insurance in 1995-$29,000; offset by higher
legal fees due to the termination agreement for the Joint Venture and the
agreement to sell the rights to Amlexanox to Block-$174,000; professional fees
related to the merger-$140,000; and the settlement as to the termination of the
New Jersey lease-$79,000.
Professional fees-related party were $13,000 for the twelve months ended
December 31, 1995, a reduction of $14,000 from the prior year.
Stock awards decreased $125,000 in 1995 as no such awards were granted in 1995.
Accordingly, total expenses were $2,604,000 for 1995, a reduction of $1,517,000
from 1994.
Comparison of Years ended December 31, 1994 and 1993
- ----------------------------------------------------
In June 1994, the Company sold 20% of its share of the Joint Venture (or 10% of
the total Joint Venture) to Block for $1,700,000. Effective December 31, 1994,
the Company re-acquired its 10% ownership of the
19
Joint Venture from Block in return for giving certain proprietary rights to
Amlexanox to Block. The effect of the December transactions was to allow the
Company to retain the $1.7 million it had received in June 1994. The Joint
Venture was then dissolved. The dissolution of the Joint Venture established the
transfer of the following ownership rights: the Company returned its rights to
Penederm's retinoic acid product (Acticin) to Block, which had been sublicensed
to the Joint Venture by Block; Block returned its share of the ownership of the
balance of the dermatology drug portfolio to ACCESS (CHX-100, CHX-108, and
EPC-K1); and Block and the Company entered into a joint ownership arrangement
for Amlexanox. Accordingly, total 1994 revenues were $3,162,000, an increase of
$1,506,000 over 1993. Partially offsetting the one time sale of rights for
$1,700,000 was the following: a net reduction in Joint Venture billing
principally due to projects canceled in 1994 as compared to 1993-a reduction of
$97,000; lower interest income due to an average lower level of cash on hand-
$74,000; and lower royalty income for Actinex due to disappointing sales results
by Block-$23,000.
Total research and development expenses were $2,591,000 for 1994, a reduction of
$315,000 as compared to fiscal 1993. The reduction of spending was in part due
to lower spending associated with Joint Venture projects (down $233,000) which
is due to a net change in spending by project as follows: Amlexanox-up $234,000
due to completion of Phase III studies; EPC-K1-down $29,000 as the program was
delayed due to the decision by the FDA that the compound could not be studied in
adolescents as planned; PAF Antagonist-down $210,000 due to the discontinuance
of the project in late 1993; CHX-100-increase of $224,000 due to the
commencement of studies in photoaging; and Zinc/Durascreen-down $278,000 due to
the cancellation of these projects. Projects outside the Joint Venture totaled
$153,000 in 1994 a reduction of $171,000 as compared to 1993. The decrease is
principally due to the cancellation of Cytarabine which had been studied as a
treatment for genital warts which was discontinued in late 1993.
General and administrative operating expenses were $1,381,000 in 1994, a
reduction of $514,000 as compared to 1993. The reduction was due to a number of
cost reduction activities implemented in late 1993 which positively impacted
1994. A summary of the principal expense reductions are as follows: lower
compensation of $144,000 chiefly due to a reduction in the Chief Executive
Officers' salary of $42,000 and the elimination of bonuses paid to executive
officers of $92,000; the elimination of the use of public relations firm and the
elimination of developing a formal annual report-savings of $118,000; and the
elimination of litigation legal fees resulting from the settlement of a lawsuit
against three former directors/officers-savings of $194,000; and a reduction in
other outside legal fees-$46,000.
Related party professional fees decreased from $108,000 in 1993 to $27,000, and
in 1994 a further reduction of $81,000. The reduction was principally due to
legal fees to a former directors' law firm, which firm's services were
terminated in July 1993.
Amortization of stock awards was an expense in 1994 of $122,000, and represented
the difference in the fair market value of the Company's common stock as of the
date of grants of SARs which were issued in 1994 at zero value. SARs were issued
to employees who were not corporate officers in lieu of a cash bonus, and to
corporate officers which are to vest based on certain performance criteria. For
financial statement purposes, the excess of the market value over the zero
exercise price was expensed in 1994. In 1993, amortization of stock awards was a
credit of $161,000, which reflected the difference between the stock price of
the common stock on the date that certain SARs were exercised and the market
value of the SARs as originally expensed.
In March 1994, the Company contributed $475,000 to the final settlement of a
lawsuit against three former officers/directors. This amount had been accrued in
fiscal 1993.
Total expenses were $4,121,000 for fiscal 1994, as compared to $5,223,000 in
1993, a reduction of $1,102,000. The net loss in 1994 was $959,000 or a
reduction in loss of $2,608,000 from 1993. The reduction in net loss for 1994 as
compared to 1993 was principally due to the sale of proprietary rights to Block
for $1,700,000; the reduction of certain litigation expenses of $475,000; and
the net effect of general cost reductions.
20
Consequently, the net loss for 1994 was $959,000, or $.11 loss per common share,
as compared to a net loss of $3,567,000, or $.43 loss per common share in 1993.
API ---
Since the company merged with API in January 1996 in a transaction
accounted for as a "reverse acquisition," management is including a brief
summary of API's operations for the past two years.
The following summarizes API's results of operations for the years indicated:
Years Ended December 31,
------------------------
1995 1994
---- ----
Revenues $845,000 $1,048,000
--------- ----------
Expenses
Research and development 675,000 714,000
Other Expenses 752,000 695,000
Depreciation 121,000 115,000
--------- ---------
1,548,000 1,524,000
--------- ---------
Net loss ($703,000) ($476,000)
========= =========
Revenues in 1995 were $845,000, as compared to the same period in 1994 of
$1,048,000, a reduction of $203,000. The lower revenues in 1995 are due to a
project cancellation in June 1995 by a pharmaceutical company.
Research and development expenses for 1995 were $675,000 as compared to $714,000
for the same period in 1994, a decrease in spending of $39,000. The decrease is
due mainly to reduced project activity from the cancellation of a project by a
pharmaceutical company which funded part of the costs. Research and development
expenses are expected to increase in 1996 due to the funding received from the
$6 million private placement in March 1996 (see Liquidity and Capital
Resources).
Other expenses for 1995 were $57,000 higher than the comparable 1994 period.
Expenses are generally higher due to costs associated with higher patent
costs-$43,000 associated with increased technology development and higher
royalty costs; higher scientific consulting costs-$34,000 due to costs to
evaluate the API projects; higher rent and maintenance-$15,000 due to increased
rent under the rental agreement; offset by lower investment banker costs-$43,000
due to the termination of the investor banker relationship and lower travel
cost-$15,000 due to less travel as a result of the cancellation of the R&D
project by a pharmaceutical company. Other expenses are anticipated to increase
in 1996 as compared to 1995. Most of the emphasis will be on research and
development for the company's products.
SFAS No.123, "Accounting for Stock-Based Compensation", issued in October
1995, established financial accounting and reporting standards for stock-based
employee compensation plans. These plans include all arrangements by which
employees receive shares of stock or other equity investments of the employer or
the employer incurs liabilities to employees in amounts based on the price of
the employer's stock. This statement also applies to transactions in which an
entity issues its equity instruments to acquire goods or services from
non-employees. The Company will select the disclosure requirements only of FASB
123 and such additional disclosure requirements are not effective for the
Company until 1996.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this Item is submitted as a separate section of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There has been no Form 8-K filed within 24 months prior to the date of the most
recent financial statements reporting a change of accountants or reporting
disagreements on any matter of accounting principle, practice, financial
statement disclosure or auditing scope or procedure.
21
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Officers and Directors
- ----------------------
Name Age Position Held with ACCESS
- ---- --- -------------------------
Herbert H. McDade, Jr. 68 Chairman of the Board of Directors
Kerry P. Gray 43 President, Chief Executive Officer, Treasurer, Director
David F. Ranney, M.D. 53 Executive Vice President, Director
Stephen B. Thompson 42 Chief Financial Officer
J. Michael Flinn 61 Director
Elizabeth M. Greetham 46 Director
Business and Experience of Directors and Executive Officers
- -----------------------------------------------------------
The Board of Directors of the Company is divided into three classes. Members of
each class serve a term of three years until the respective annual meeting of
stockholders and election and qualification of their successors. There are
currently no members of Class 1 whose term expires upon the Annual Meeting of
Stockholders in 1996. Dr. David F. Ranney and Elizabeth M. Greetham are Class 2
directors to serve as such until their successors shall be elected and
qualified. Messrs. Gray, McDade and Flinn are Class 3 directors to serve as such
until the 1998 Annual Meeting of Stockholders and until their successors shall
be elected and qualified. Each officer of the Company is selected by the Board
of Directors for a term of one year. There is no family relationship among any
of the Directors or Executive Officers.
Mr. Herbert H. McDade, Jr. was elected a Director of the Company in January
1988. In February 1989, he was elected Vice-Chairman of the Board of Directors
and Chief Executive Officer of the Company. In June 1989, he was elected
Chairman of the Board of Directors and Treasurer in addition to his
responsibilities as Chief Executive Officer, and in May 1990 he assumed the
position of President of the Company. Mr. McDade served in such capacities until
January 25, 1996. He is also a member of the Audit & Finance and Compensation
Committees of the Board of Directors. He is currently President and Chief
Executive Officer of the Thoma Corporation, a closely-held health care
consulting company. In addition, he also serves on the Boards of CytRx
Corporation, Shaman Pharmaceutical Co., Vaxcel Inc. and Clarion Pharmaceuticals,
Inc. From 1986 to 1987 he served as Chairman of the Board of Directors and
President of Armour Pharmaceutical Co., a wholly-owned subsidiary of Rorer
Group, Inc. Prior to 1986 he served for approximately 13 years in various
executive positions at Revlon, Inc., including President of the International
Division of the Revlon Health Care Group from 1979 to 1986. He was also
previously associated for twenty years in various executive capacities with The
Upjohn Company. From January 1989 to July 1995 he served on the Board of API.
Mr. Kerry P. Gray, has been President and a Chief Executive Officer and a
Director of the Company since January 25, 1996. Prior to such time he served as
President and Chief Executive Officer of API since June 1993. Previously, Mr.
Gray served as Vice President and Chief Financial Officer of PharmaSciences,
Inc., a company he co-founded to acquire technologies in the drug delivery area.
From May 1990 to August 1991, Mr. Gray was Senior Vice President, Americas,
Australia and New Zealand of Rhone-Poulenc Rorer, Inc.
22
Prior to the Rorer/Rhone Poulenc merger, he had been Area Vice President
Americas of Rorer International Pharmaceuticals. Previously, from January 1986
to May 1988, he was Vice President, Finance of Rorer International
Pharmaceuticals, having served in that same capacity for the Revlon Health Care
Group of companies before their acquisition by Rorer Group. Between 1975 and
1985, he held various senior financial positions in Revlon Health Care Group.
Mr. Gray's experience in the pharmaceutical industry totals 20 years.
David F. Ranney, M.D., has been Executive Vice President and a Director of the
Company since January 25, 1996. He was the founder and Chairman of the Board of
Directors of API since inception in 1988, and was Executive Vice President
commencing August 1995 and Vice President, Research and Development since June
1993. Previously, he was President and Chief Executive Officer of API since
founding API in March 1988. Until November 1989, Dr. Ranney directed the
Laboratory of Targeted Diagnosis and Therapy at the University of Texas
Southwestern Medical Center, where he held a joint faculty appointment in
Radiology and Pathology. Dr. Ranney received a B.A. degree in Chemistry from
Oberlin College and an M.D. from Case Western Reserve Medical School. He has
postdoctoral training in Biochemistry (Case Western Reserve), Cardiovascular and
Microvascular Surgery (Stanford University Medical Center), Immunology and
Cancer Biology (NIH), and Pathology (University Of Texas Southwestern Medical
Center).
Mr. Stephen B. Thompson, has been Chief Financial Officer of the Company since
January 25, 1996. Previously from November 1990 he was Controller and
Administration Manager of API. From 1989 to 1990, he was Controller of Robert E.
Woolley, Inc. a hotel real estate company where he was responsible for
accounting, finances and investor relations. Previously, from 1985 to 1989, he
was Controller of OKC Limited Partnership, an oil and gas company where he was
responsible for accounting, finances and SEC reporting. Between 1975 and 1985 he
held various accounting and finance positions with Santa Fe International
Corporation.
Mr. J. Michael Flinn has served as a Director of the Company since 1983. He also
is a member of the Audit & Finance and Compensation Committees of the Board of
Directors. Since 1970 he has been an investment counselor. He is a principal
with the investment counseling firm of Sirach Capital Management, Inc. He
assists in the management of pension, profit sharing, individual, corporate and
foundation accounts totaling over $4.5 billion.
Mrs. Elizabeth M. Greetham has served as a Director of the Company since 1992
and is President of Libracorn Financial Consultants. One of her present clients
is Weiss, Peck & Greer, a New York-based money management firm. With over twenty
years of worldwide experience as a health care analyst and portfolio manager,
she currently is responsible for Weiss, Peck & Greer's health care investments
for institutional, mutual, and selected individual accounts. Prior to her
association with Weiss, Peck & Greer, Mrs. Greetham consulted for a number of
years for F. Eherstadt & Co., a New York institutional brokerage house. She is a
member of the Board of Directors of Repligen Corporation, a pharmaceutical
development company. She is a member of the Company's Audit & Finance and
Compensation Committees.
Compliance with Section 16(a) of the Securities Act of 1934
- -----------------------------------------------------------
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
Directors, Executive officers and persons who own more than ten percent of a
registered class of the Company's equity securities ("10% holders"), to file
with the Securities and Exchange Commission initial reports of ownership and
reports of changes in ownership of common stock and other equity securities of
the Company. Directors, officers and 10% holders are required by SEC regulation
to furnish the Company with copies of all of the Section 16(a) reports they
file.
Based solely on a review of reports furnished to the Company or written
representatives from the Company's Directors and executive officers during the
fiscal year ended December 31, 1995, all Section 16(a) filing requirements
applicable to its Directors, officers and 10% holders for such year were
complied with.
23
ITEM 11. EXECUTIVE COMPENSATION
Each Director who is not an employee of the Company receives the sum of $500 for
each meeting of the Board of Directors attended. Each Director who is not an
employee of the Company but is a member of the Executive Committee or the Audit
and Finance Committee receives the sum of $400 for each committee meeting
attended.
Summary Compensation Table
- --------------------------
The following table sets forth the aggregate compensation paid by the Company to
each of the most highly compensated executive officers of the Company whose
aggregate salary and bonus exceeded $100,000 for services rendered in all
capacities to the Company for the year ended December 31, 1995.
================================================================================================================================
Long-term
Annual Compensation Compensation Awards
- --------------------------------------------------------------------------------------------------------------------------------
Name and Securities Underlying All Other
Principal Position Year Salary(1) Bonus Options/SARs (#) Compens.
------------------ ---- ------ ----- ---------------- --------
Herbert H. McDade, Jr. 1995 $110,571 $ 0 0 $57,165(2)
Chairman & Former CEO(5) 1994 131,714 0 226,829 46,122(2)
1993 174,000 62,500 50,000 60,371(2)
Atul S. Khandwala 1995 $103,751 $ 0 0 $57,173(6)
Former Executive Vice 1994 153,960 0 107,715 19,620(4)
President(5) 1993 160,626 30,519 25,000 28,662(3)
================================================================================================================================
(1) These amounts are prior to reduction for deferred employer
contributions under the Company's Employee Stock Ownership Plan
Pursuant to Section 401(k) of the Internal Revenue Code of 1986, as
amended (the "Code").
(2) Pursuant to Mr. McDade's employment agreement, Mr. McDade was
reimbursed for certain expenses. In 1995, he was reimbursed for
insurance payments ($49,682) and auto allowance ($6,000) and auto
insurance reimbursement ($440). In addition, the Company made ESOP
contributions in stock of $1,043. In 1994, he was reimbursed for life
insurance payments ($23,000) and auto allowance ($6,000) and auto
insurance reimbursement ($658). In addition, the Company made ESOP
contributions in stock of $16,464. In 1993, he was reimbursed for life
insurance payments ($31,220) and auto allowance ($6,000) and auto
insurance reimbursement ($1,254). In addition, the Company made ESOP
contributions in stock of $21,897.
(3) Represents Company ESOP contributions in stock of $20,560 and
relocation expenses of $8,102.
(4) Represents Company ESOP contributions made in stock.
(5) Effective January 25, 1996 and August 31, 1995, Mr. McDade, Mr.
Khandwala, respectively, resigned as officers of the Company. Mr.
McDade remains as Chairman of the Board of Directors.
(6) Pursuant to Mr. Khandwala's severance agreement payments of $53,542
were made to during 1995. Represents company ESOP contributions made
in stock of $3,631.
24
Options/SARs Year-End Value Table
This table includes the number of shares covered by both exercisable and
non-exercisable stock options/SARs as of December 31, 1995. Also reported are
the values for "in-the-money" stock options/SARs which represent the positive
spread between the exercise price of any such existing stock options/SARs and
the year-end price of the Company's common stock. There were no SARs granted or
exercised by the officers during 1995.
================================================================================================================================
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END
OPTION/SAR VALUES
- --------------------------------------------------------------------------------------------------------------------------------
Number of Value of
Securities Underlying Unexercised In-
Unexercised The-Money
Shares Acquired Value Options/SARs at Options/SARs at
Name on Exercise (#) Realized ($) Fiscal Year-End (#) Fiscal Year-End ($)
Exercisable/ Exercisable/
Unexercisable Unexercisable
- --------------------------------------------------------------------------------------------------------------------------------
H. McDade, Jr. - - 490,004/0 $184,756/$0
- --------------------------------------------------------------------------------------------------------------------------------
A. Khandwala - - 268,965/0 $73,572/$0
================================================================================================================================
Long-Term Incentive Awards Table
Not applicable.
Compensation Pursuant to Agreements and Plans
Employment Agreements
Mr. Herbert H. McDade, Jr. Effective February 1, 1989 the Company and Mr. McDade
entered into an employment agreement, as amended (the "McDade Agreement"), which
provided that he would serve as the Chief Executive Officer of the Company and
Vice Chairman or Chairman of the Board of Directors. The McDade Agreement was
amended, effective June 25, 1991, to provide for a term ending June 30, 1994,
and was extended to January 31, 1996. Mr. McDade left the company as President
and Chief Executive Officer on January 25, 1996 after the Merger was completed.
See Item 13 Certain Relationships and Related Transactions - Transactions with
Management and Others. Mr. McDade was eligible to participate in all company
employee benefit and welfare programs available to executives. The Company also
paid insurance premiums on $1 million of life insurance payable to his estate,
medical expenses coverage for Mr. McDade and his spouse and long-term disability
coverage for Mr. McDade. The McDade Agreement provided that, upon termination, a
cash severance payment equal to one year's salary would be paid if Mr. McDade
was terminated by the Company without cause and a cash severance equal to two
years' salary would be paid if he terminated his employment for good reason. Mr.
McDade waived the severance provisions when leaving the company.
Pursuant to the McDade Agreement and in accordance with the Company's 1987 Stock
Awards Plan, the Company granted to Mr. McDade (i) on February 1, 1989 options
(the "February Options") for the purchase of 50,000 shares of common stock, and
(ii) on December 31, 1989 options ("the December Options") for the purchase of
37,500 shares of common stock, upon vesting and payment of the exercise price.
The February
25
Options and December Options are referred to collectively herein as the "New
Options." On July 31, 1991, Mr. McDade exchanged 87,500 previously granted
options for 80,625 New Options. The New Options are identical to the exchanged
options, except that the New Options have a lower exercise price. All of the New
Options have vested. On March 31, 1992, Mr. McDade was granted 65,000 options at
market value, which have vested as of December 31, 1994. On July 29, 1993, Mr.
McDade was granted 50,000 options at market value, which vest based on certain
performance criteria. On April 29, 1994, Mr. McDade voluntarily accepted a
salary reduction of approximately $64,000 on an annualized basis. In exchange
for this salary reduction, Mr. McDade was granted 75,000 options at market
value, to vest in one year from the date of the grant. On July 29, 1994, Mr.
McDade was granted 50,000 options, which vest based on certain performance
criteria, all of which have vested. On December 31, 1994, Mr. McDade was granted
101,829 SARs with zero base value or exercise price, based on certain
performance criteria. Upon Mr. McDade's termination of employment (other than
termination by the Company for cause or by Mr. McDade without good reason), all
options shall immediately vest and become exercisable. All Options and SARS are
vested. Mr. McDade also holds 17,550 vested options for the purchase of common
stock granted pursuant to the Non-Employee Directors Stock Option Plan. Mr.
McDade has the right to request (subject to certain limitations by the
underwriters) that all shares of common stock which he owns or may acquire in
the future be included in registration statements of company securities filed
with the Securities and Exchange Commission.
The McDade Agreement also contained a provision for stock appreciation rights
("SARS") pertaining to 50,000 shares of common stock with a zero base value or
exercise price. All of the stock appreciation rights have vested. Appreciation
on SARs is to be paid in shares of common stock; as of December 31, 1991, Mr.
McDade waived his right under the provision of the 1987 Stock Awards Plan to
request the Board to authorize a cash payment for any SARs he elects to
exercise.
26
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth beneficial ownership of Common Stock as of
February 29, 1996 by all Directors and named Executive Officers of the Company
and all Directors and Executive Officers as a group, and all owners of 5% or
more of the Common Stock:
Common Stock Beneficially Owned
-------------------------------
Name Number of Shares (1) % of Class
- -------------- -------------------- ----------
Herbert H. McDade. Jr. 1,008,062 (2) 4.1%
Kerry P. Gray 1,070,790 4.7%
David F. Ranney 9,147,608 40.4%
Stephen B. Thompson 55,451 .2%
Michael Flinn 63,500 (3) .3%
Elizabeth M. Greetham 32,667 (4) .1%
David Blech and Certain Related Parties 2,275,700 (5) 9.5%
All Directors and Executive
Officers as a group (consisting
of 6 persons) 11,378,078 49.0%
- --------------------------------------------------------------------------------
(1) Includes common stock held plus all options and warrants exercisable
within 60 days after February 1, 1996. Unless otherwise indicated, the
persons listed have sole voting and investment powers with respect to
all such shares.
(2) Including presently exercisable options for the purchase of 17,550
shares of Common Stock pursuant to the Non-Employee Director Plan, and
320,625 shares of Common Stock and 151,829 SARs exercisable pursuant to
the 1987 Stock Option Plan and 69,270 shares issued in connection with
the ESOP.
(3) Including presently exercisable options for the purchase of 54,000
shares of Common Stock pursuant to the Non-Employee Director Plan.
(4) Including presently exercisable options for the purchase of 26,667
shares of Common Stock pursuant to the Non-Employee Director Plan.
(5) Sentinel Charitable Remainder Trust ("Sentinel"), 599 Lexington Avenue,
New York, New York, is known to ACCESS to be the beneficial owner of
more than five percent of the Common Stock. Mr. David Blech is the
direct and indirect owner of 1,075,700 shares of Common Stock which
represents 4.75% of the outstanding shares of Common Stock as of
January 31, 1996. Of such shares, 5,000 (.02%) are owned directly by
Mr. Blech, 1,020,000 (4.5%) are owned by Sentinel, 25,950 (.12%) are
owned by Lake Charitable Remainder Trust and 24,750 (.11%) are owned
by Ocean Charitable Remainder Trust, Mr. Blech is the sole income
beneficiary of the trusts, and as such may be deemed to be the
beneficial owner of the securities held by them. Mr. Nicholas
Madonia is the trustee of the trusts and as such may be deemed to be a
beneficial owner of the securities held by them.
In addition to the 1,020,000 shares of Common Stock held by Sentinel,
Sentinel additionally has an option to purchase until January 1, 1999,
up to 500,000 units at $2.50 per unit. The units consist of 500,000
shares of Common Stock, 500,000 warrants with an expiration date of
January 1, 2000 and an exercise price of $6.25 and 200,000 Warrants
with an expiration date of January 1, 2000 and an exercise price of
$2.50. Information is based on Form 4 as filed by D. Blech in October
1994.
27
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions with Management and Others
Mr. David Blech. Mr. Blech became a financial consultant to ACCESS on October 1,
1990. His contract terminated in 1991 and under the terms of the agreement,
ACCESS paid Mr. Blech $75,000 in 1991 and $25,000 in 1990. In 1992, Mr. Blech
performed consulting services for ACCESS and ACCESS paid him $50,000. In
addition, ACCESS paid $25,000 to Mr. Blech in January 1995 for consulting
services rendered.
As of December 14, 1995, ACCESS, D. Blech & Co., and Sentinel Remainder Trust
(each affiliates of Mr. Blech), entered into a Letter Agreement which provided
that Sentinel Remainder Trust would forfeit its rights to representation on the
Board of Directors of ACCESS in consideration of the extension of the expiration
date of (i) 500,000 Units exercisable in the aggregate for 500,000 shares of
Common Stock and warrants exercisable in the aggregate for 700,000 shares of
Common stock pursuant to the terms of the Conversion Agreement from July 31,
1996 to January 1, 1999 and (ii) the warrants underlying the Units from July 31,
1997 to January 1, 2000.
As of January 29, 1996, ACCESS has retained Mr. Blech as a consultant to the
Company for one year to advise on structuring transactions including equity
placements, licensing agreements and research and development collaborations.
Under the terms of the agreement Mr. Blech was paid $480,000 and received
warrants to purchase 600,000 shares of Common Stock at an exercise price of
$1.00 per share exercisable until the year 2000.
As of February 29, 1996, Mr. Blech is the direct and indirect owner of 1,075,700
Shares of Common Stock which represents 4.75% of the outstanding Shares of
Common Stock. Additionally Sentinel a related party of Mr. Blech has an option
to purchase until January 1, 1999, up to 500,000 units which consist of 500,000
shares of Common Stock and 700,000 warrants with an expiration date of January
1, 2000. See "Security Ownership of Certain Beneficial Owners and Management.
Dr. David Ranney. Dr. David Ranney, the Executive Vice President and a Director
of ACCESS beneficially owns, approximately 9,147,608 shares of Common Stock. See
"Management and Security Ownership of Certain Beneficial Owners and Management."
Dr. David Ranney and ACCESS have entered into a Stockholder's Agreement
providing for, among other matters, (1) certain rights of Dr. David Ranney to be
nominated or to have his nominee nominated for election to the Board of
Directors of ACCESS at any election of ACCESS Directors; (2) a right of first
refusal of Dr. David Ranney to license or purchase certain technology and
intellectual property of ACCESS under certain conditions; and, (3) a certain
Patent Purchase Agreement, dated as of April 5, 1994, as amended January 25,
1996 between Dr. David Ranney and ACCESS, regarding certain royalties payable to
Dr. David Ranney relating to certain technology and intellectual property of
ACCESS and an agreement, subject to certain conditions, by Dr. David Ranney not
to sell, transfer or otherwise dispose of his shares of the capital stock of
ACCESS through July 25, 1996. ACCESS has agreed to pay Dr. David Ranney a
royalty of three quarters of one percent ((0.75%) of ACCESS' gross revenues
derived from products covered by the patents and pay certain minimum payments.
Herbert McDade. In consideration for the termination of his employment with
ACCESS, Mr. McDade and ACCESS entered into an agreement on October 4, 1995,
pursuant to which, among other things, (i) Mr. McDade became a consultant to
ACCESS, providing consulting services to ACCESS at least four days each month;
(ii) Mr. McDade is paid a base of $1,500 per day of consulting; (iii) ACCESS
will use its best efforts to retain Mr. McDade's enrollment under its healthcare
plan and (iv) the period for exercise of all options and SARs owned by Mr.
McDade was extended from three months after the termination of his employment
with ACCESS to the expiration of the option or SAR. See "Security Ownership of
Certain Beneficial Owners and Management."
28
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
a. Financial Statements and Exhibits. Page
---------------------------------- ----
1. Financial Statements. The following financial statements
are submitted as part of this report:
Independent Auditors' Report 34
Balance Sheets - December 31, 1995 and 1994 35
Statements of Operations - Years Ended December 31,
1995, 1994 and 1993 36
Statements of Stockholders' Equity - Years Ended
December 31, 1995, 1994 and 1993 37
Statements of Cash Flows - Years Ended December 31,
1995, 1994 and 1993 38
Notes to Financial Statements 39
2. Financial Statement Schedule. 70
3. Exhibits.
--------
4. Exhibit Number
-------------
2.1 Amended and Restated Agreement of Merger and Plan of
Reorganizatin betwwen ACCESS Pharmaceuticals, Inc and
Chemex Pharmaceuticals, Inc., dated as of October 31,
1995 (Incorporated by reference to Exhibit A of the
Company's Registration Statement on Form S-4 dated
December 21, 1995, Commission File No. 33-64031)
3.0 Articles of incorporation and bylaws:
3.1 Certificate of Incorporation (Incorporated by
Reference to Exhibit 3(a) of the Chemex Form 8-B
dated July 12, 1989, Commission File Number 9-9134)
3.2 Bylaws (Incorporated by referenced to Exhibit 3(b) of the
Chemex Form 8-B dated July 12, 1989, Commission File
Number 0-9314)
3.3 Certificate of Amendment of Certificate of Incorporation
filed August 21, 1992. 51
3.4 Certificate of Merger filed January 25, 1996. (Incorporated
by reference to Exhibit E of the Company's Registration
Statement on Form S-4 dated December 21, 1995,
Commission File No. 33-64031)
29
Exhibit Number Page
-------------- ----
3.5 Certificate of Amendment of Certificate of
Incorporation filed January 25, 1996. (Incorporated
by reference to Exhibit E of the Company's
Registration Statement on Form S-4 dated December 21,
1995, Commission File No.
33-64031)
10.0 Material contracts:
* 10.1 Employee Stock Ownership Plan (Incorporated by the
reference to Exhibit 10 of the Company's Form 10-K
for the year ended December 31, 1986, commission
File Number 0-9314)
* 10.2 Employee Stock Ownership Trust (Incorporated by
reference to Exhibit 10 of the Company's form 10-K
for the year ended December 31, 1986, commission File
Number 0-9314)
* 10.3(a) Employment Agreement of Mr. Herbert H. McDade, Jr.
(Incorporated by reference to Exhibit 10 of the Company's
Form 10-K for the year ended December 31, 1988,
Commission File Number 0-9314)
* 10.3(b) First Amendment to Employment Agreement of Mr.
Herbert H. McDade, Jr. Dated July 31, 1989 (Incorporated
by reference to Exhibit 10.5(b) of the Company's Form S-1
dated November 7, 1989, Commission File Number 33-
30685)
* 10.3(c) Second Amendment to Employment Agreement of Mr.
Herbert H. McDade, Jr. dated December 13, 1989
(Incorporated by reference to Exhibit 10.3(a) of the
Company's form 10-K for the year ended December 31,
1990)
* 10.3(d) Third Amendment to Employment Agreement of Mr.
Herbert H. McDade, Jr. dated July 11, 1990 (Incorporated
by reference to Exhibit 10.3(a) of the Company's Form 10-
K for the year ended December 31, 1990)
* 10.3(e) Fourth Amendment to Employment Agreement of Mr.
Herbert H. McDade, Jr. dated June 25, 1991 (Incorporated
by reference to Exhibit 10 of the Company's Form 10-K for
the year ended December 31, 1991)
* 10.3(f) Fifth Amendment to Employment Agreement of Mr.
Herbert H. McDade, Jr. Dated December 31, 1991
(Incorporated by reference to Exhibit 6 of the Company's
Form 10-Q for the quarter ended June 30, 1994)
* 10.3(g) Sixth Amendment to Employment Agreement of Mr.
Herbert H. McDade, Jr. dated April 29, 1994 (Incorporated
by reference to Exhibit 6 of the Company's Form 10-Q for
the quarter ended June 30, 1994)
10.4 Joint Venture and General Partnership Agreement
between Block Drug Company and Chemex
Pharmaceuticals, Inc., dated June 20, 1990,
(Incorporated by reference to Exhibit 28.1 of the
Company's Form S-3 dated August 5, 1991, Commission
File Number 33-42052)
30
Exhibit Number Page
-------------- ----
10.5 Products Development Agreement between Block/Chemex,
G.P. and Chemex Pharmaceuticals, Inc. dated June 20,
1991, Incorporated by reference to Exhibit 28.2 of the
Company's Form S-3 dated August 5, 1991, Commission
File Number 33-42052)
10.6 Patent Purchase Agreement between Block Drug Company,
Inc. and ACCESS Pharmaceuticals, Inc. dated June 20,
1992, (Incorporated by reference to Exhibit 28.2 of the
Company's Form S-3 dated August 5, 1991, Commission
File Number 33-42052)
10.7 Irrevocable Assignment of Proprietary Information with Dr.
Charles G. Smith (Incorporated by reference to Exhibit
10.6 of the ACCESS Form 10-K for the year ended
December 31, 1991)
* 10.8 Option Agreement with Mr. Vernon Taylor III dated
September 25, 1990 (Incorporated by reference to Exhibit
10 of the Company's Form 10-K for the year ended
December 31, 1990)
10.9 Conversion Agreement with Sentinel Charitable
Remainder Trust dated June 18, 1990 (Incorporated by
reference to Exhibit 10 of the Company's Form 10-K
for the year ended December 31, 1990)
10.10 Advisory Agreement with D. Blech & Company, Inc. dated
November 8, 1990 (Incorporated by reference to Exhibit 10
of the Company's Form 10-K for the year ended December
31, 1990)
10.11 Asset Purchase Agreement with Block Drug Company
dated June 29, 1990 (Incorporated by reference to
Exhibit 10 of the Company's Form 10-K for the year
ended December 31, 1990)
10.12 Assignment by Block Drug to Joint Venture of
Block/Penederm, Inc. Agreement dated March 24, 1993
(Incorporated by reference to Exhibit 10 of the Company's
Form 10-K for the year ended December 31, 1993)
10.13 Sale of 10% interest in the Block/Chemex Joint Venture by
Chemex Pharmaceuticals, Inc. to the Block Drug Company,
Inc. (Incorporated by reference to Exhibit 6 of the Chemex
Form 10-Q for the quarter ended June 30, 1994)
10.14 1995 Stock Option Plan (Incorporated by reference to
Exhibit F of the Company's Registration Statement on
Form S-4 dated December 21, 1995, Commission File No.
33-64031)
10.15 Stockholder's Agreement dated October 1995 between
ACCESS Pharmaceuticals, Inc. and Dr. David F. Ranney.
(Incorporated by reference to Exhibit A of the
Company's Registration Statement on Form S-4
dated December 21 1995, Commission File No. 33-64031)
10.16 Patent Purchase Agreement dated April 5, 1994 between
David F. Ranney and ACCESS Pharmuceuticals, Inc. 53
10.17 First Amendment to Patent Purchase Agreement dated
January 23, 1996 between David F. Ranney and ACCESS
Pharmaceuticals, Inc. 67
23.0 Consent of experts and counsel
23.1 Consent of Independent Auditors 69
* Management contract or compensatory plan required to be filed
as an Exhibit to this Form pursuant to Item 14(c) of the report
b. Reports on Form 8-K.
-------------------
There were no reports on 8-K during the fourth quarter of 1995.
31
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.
ACCESS PHARMACEUTICALS, INC.
Date March 29, 1996 By /s/ Kerry P. Gray
------------------- -----------------
Kerry P. Gray
President and Chief Executive
Officer, Treasurer
Date March 29, 1996 By /s/ Stephen B. Thompson
------------------- -----------------------
Stephen B. Thompson
Chief Financial Officer
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 Company and in
the capacities and on the dates indicated.
Date March 29, 1996 By /s/ Kerry P. Gray
------------------ -----------------
Kerry P. Gray
President and Chief Executive
Officer, Treasurer
Date March 29, 1996 By /s/ Herbert H. McDade, Jr.
------------------ --------------------------
Herbert H. McDade, Jr., Director
Date March 29, 1996 By /s/ David F. Ranney
------------------ -------------------
David F. Ranney, Director
Date March 29, 1996 By /s/ J. Michael Flinn
------------------ --------------------
J. Michael Flinn, Director
Date March 29, 1996 By /s/ Elizabeth M. Greetham
------------------ -------------------------
Elizabeth M. Greetham, Director
32
Independent Auditors' Report
The Board of Directors and Stockholders
ACCESS Pharmaceuticals, Inc.:
We have audited the financial statements of ACCESS Pharmaceuticals, Inc.
(formerly Chemex Pharmaceuticals, Inc.) as of December 31, 1995 and 1994, and
the related statements of operations, stockholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ACCESS Pharmaceuticals, Inc.,
as of December 31, 1995 and 1994, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1995, in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Dallas, Texas
March 29, 1996
33
ACCESS PHARMACEUTICALS, INC.
Balance Sheets
Assets December 31, 1995 December 31, 1994
- ------ ----------------- -----------------
Current Assets:
Cash and cash equivalents (Note 1) $1,888,000 $1,335,000
Accounts receivable (Note 1) 48,000 136,000
Loan to API (Note 6) 100,000 -
Prepaid expenses and other assets 93,000 151,000
------------ -----------
Total current assets 2,129,000 1,622,000
------------ -----------
Furniture and Equipment at cost - 123,000
Less accumulated depreciation - (61,000)
------------ ------------
- 62,000
------------ -----------
Other Assets - 20,000
------------ -----------
Total Assets $2,129,000 $1,704,000
============ ===========
Liabilities and Stockholders' Equity
------------------------------------
Current Liabilities
Accounts payable $136,000 $190,000
Accrued lease settlement (Note 5) 30,000 -
Financed insurance premium 73,000 90,000
Accrued merger closing expenses (Note 9) 140,000 -
Other accrued liabilities 57,000 85,000
------------ -----------
Total current liabilities 436,000 365,000
------------ -----------
Long-term liabilities 7,000 12,000
------------ -----------
Total liabilities 443,000 377,000
------------ -----------
Commitments (Note 5)
Stockholders' Equity (Notes 2 and 3)
Preferred stock, $.01 par value.
Authorized 5,000,000 shares;
none issued or outstanding - -
Common stock, $.04 par value.
Authorized 22,000,000 shares;
outstanding 8,737,788 and
8,678,660 shares 350,000 347,000
Additional paid-in capital 40,367,000 40,352,000
Treasury stock, 1,677 shares (5,000) (5,000)
Deficit (39,026,000) (39,367,000)
------------ ------------
Total Stockholders' Equity 1,686,000 1,327,000
------------ -----------
Total Liabilities and Stockholder's Equity $2,129,000 $1,704,000
============ ===========
- ----------
See accompanying notes to financial statements.
34
ACCESS PHARMACEUTICALS, INC
Statements of Operations
Years ended December 31,
----------------------------------------------
1995 1994 1993
----------------------------------------------
Revenues:
Sale of proprietary rights (Note 8) $2,500,000 $1,700,000 -
Joint Venture project revenue (Note 8) 11,000 1,371,000 $1,468,000
Amlexanox project revenue 379,000 - -
Actinex royalty (Note 7) 1,000 26,000 49,000
Interest and dividend income 54,000 65,000 139,000
------------ ------------ ------------
2,945,000 3,162,000 1,656,000
------------ ------------ -----------
Expenses:
Research and Development (Notes 2, 3, 7 and 8):
Amlexanox/Joint Venture (Note 8) 587,000 2,438,000 2,582,000
ACCESS proprietary 666,000 153,000 324,000
General, Administrative and Other:
Operating expenses 1,341,000 1,381,000 1,895,000
Professional fees-related parties (Note 6) 13,000 27,000 108,000
Amortization of stock awards (Note 3) (3,000) 122,000 (161,000)
Settlement of litigation 475,000
------------ ------------ -----------
2,604,000 4,121,000 5,223,000
------------ ------------ -----------
Income (loss) before income taxes 341,000 (959,000) (3,567,000)
Provision for income taxes (Note 4) - - -
------------- ------------- ------------
Net income (loss) $341,000 ($959,000) ($3,567,000)
============= ============ ============
Net income (loss) per common share (Note 1) $0.04 ($0.11) ($0.43)
============ =========== ===========
Average number of common and equivalent
common shares outstanding (Note 1) 8,717,402 8,543,003 8,384,904
=========== =========== ===========
- ------------
See accompanying notes to financial statements
35
ACCESS PHARMACEUTICALS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1995, 1994, 1993
- ----------------------------------------------------------------------------------------------------------------------------------
Common Add'l. Total
Common Stock Paid-in Treasury Stockholders'
Shares Amount Capital Deficit Stock Equity
- -------------------------------------- -----------------------------------------------------------------------------------
Balances at December 31, 1992 8,314,563 $333,000 $40,038,000 ($34,841,000) ($5,000) $5,525,000
- -------------------------------------- -----------------------------------------------------------------------------------
Issuance of common stock for ESOP
[Note 3(c)] 117,763 5,000 156,000 161,000
Exercise of stock options/SARs
[Note 3(a) and 3(b)] 66,750 2,000 20,000 22,000
Stock award amortization [Note 3(d)] (161,000) (161,000)
Issuance of common stock for services
[Note 2(a)] 25,000 1,000 49,000 50,000
Net loss - 1993 (3,567,000) (3,567,000)
- -------------------------------------- -----------------------------------------------------------------------------------
Balances at December 31, 1993 8,524,076 $341,000 $40,102,000 ($38,408,000) ($5,000) $2,030,000
- -------------------------------------- -----------------------------------------------------------------------------------
Issuance of common stock for ESOP
[Note 3(c)] 154,580 6,000 95,000 101,000
Stock/SARs award expense [Note 3(d)] 155,000 155,000
Warrants exercised 4 0
Net loss - 1994 (959,000) (959,000)
- -------------------------------------- -----------------------------------------------------------------------------------
Balances at December 31, 1994 8,678,660 $347,000 $40,352,000 ($39,367,000) ($5,000) $1,327,000
- -------------------------------------- -----------------------------------------------------------------------------------
Issuance of common stock for ESOP
[Note 3(c)] 44,325 2,000 19,000 21,000
Issuance of stock on exercise of SARs
[Note 3(a) and 3(b)] 14,803 1,000 (4,000) (3,000)
Net income - 1995 341,000 341,000
- -------------------------------------- -----------------------------------------------------------------------------------
Balances at December 31, 1995 8,737,788 $350,000 $40,367,000 ($39,026,000) ($5,000) $1,686,000
- -------------------------------------- -----------------------------------------------------------------------------------
- ----------
See accompanying notes for financial statements
36
ACCESS PHARMACEUTICALS, INC
Statements of Cash Flows
Years ended December 31,
---------------------------------------------
1995 1994 1993
---------------------------------------------
Cash Flows from Operating Activities:
Net income (loss) $341,000 ($959,000) ($3,567,000)
Adjustments to reconcile net income (loss)
to cash provided by (used by) operating activities:
Depreciation 15,000 25,000 24,000
Common stock issued in payment for services 50,000
Common stock contributed to Employee Stock Ownership Plan 20,000 101,000 161,000
Stock award amortization (3,000) 155,000 (161,000)
Change in assets and liabilities:
Accounts receivable 136,000 217,000 (102,000)
Prepaid expenses and other assets 78,000 43,000 (78,000)
Accounts payable (54,000) (94,000) (35,000)
Accrued taxes - - (431,000)
Accrued lease settlement 30,000 - -
Accrued litigation settlement - (475,000) 475,000
Accrued merger closing expenses 140,000 - -
Other accrued liabilities (45,000) (36,000) (48,000)
---------- ------------ ------------
Net cash provided by (used by) operating activities 658,000 (1,023,000) (3,712,000)
----------- ------------ ------------
Cash Flows from Investing Activities:
Capital expenditures - - (3,000)
----------- ------------- ------------
Net cash used by investing activities - - (3,000)
----------- ------------- ------------
Cash Flows from Financing Activities:
Proceeds from exercising of stock options - - 22,000
Principal payments on capital leases (5,000) (4,000) (5,000)
Loan to API (100,000) - -
------------ ------------ -----------
Net cash provided by (used by) financing activities (105,000) (4,000) 17,000
------------ ------------- -----------
Net increase (decrease) in cash and cash equivalents $553,000 ($1,027,000) ($3,698,000)
------------ ------------- -----------
Cash and cash equivalents at beginning of period 1,335,000 2,362,000 6,060,000
------------ ------------ -----------
Cash and cash equivalents at end of period $1,888,000 $1,335,000 $2,362,000
============= ============ ===========
Cash paid for interest $6,174 $5,233 $3,300
Cash paid for income taxes $431,000
- -----------
See accompanying notes to financial statements
37
ACCESS PHARMACEUTICALS, INC.
Notes to Financial Statements
(1) The Company and Summary of Significant Accounting Policies
----------------------------------------------------------
(a) The Company
-----------
ACCESS Pharmaceuticals, Inc. ("ACCESS" or the "Company"),
formerly known as Chemex Pharmaceuticals, Inc. ("Chemex"), is
engaged in research and development activities with a broad
platform technology for enhancing the site targeting of
intravenous therapeutic drugs, MRI contrast agents and
radiopharmaceutical diagnostic and therapeutic agents. The
ACCESS technology is based on natural carbohydrate carriers.
Chemex merged with ACCESS Pharmaceuticals, Inc. ("API") on
January 25, 1996 and in March 1996 concluded a $6 million
private placement of 8.57 million shares of common stock. On
January 25, 1996, Chemex changed its name to ACCESS (see note
9).
Prior to the merger, the Company was engaged in research and
development activities for certain dermatological products
relating to the determination of the potential use, if any, of
elements of certain natural product and synthetic compounds
for therapeutic purposes. To commercialize these activities, a
joint venture, (the "Joint Venture") was signed with Block
Drug Company, Inc. ("Block") in June 1991 and represented the
commencement of planned operations. The Joint Venture was
dissolved effective December 31, 1994, and pursuant to such
dissolution, the original compounds that had been contributed
to the Joint Venture by the Company were returned to the
Company, with the exception of Amlexanox. The Company
transferred its rights to Amlexanox to Block for a
non-refundable upfront royalty payment of $2.5 million plus
future royalties, with the consent of Takeda Chemicals (the
licensor) and approval of Chemex shareholders on September 14,
1995 (see Note 8).
The Company's products will require clinical trials, FDA
approval and acceptance in the marketplace prior to
commercialization. Although the Company believes its patents
and patent applications are valid, the invalidation of its
major patents would have a material adverse effect upon its
business. The Company competes with specialized biotechnology
companies and major pharmaceutical companies. Many of these
competitors have substantially greater resources than does the
Company.
(b) Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid debt instruments with
an original maturity of three months or less to be cash
equivalents for purposes of the statements of cash flows.
(c) Depreciation
------------
Depreciation of furniture and equipment was provided using the
straight-line method based on estimated useful lives of 5
years. Depreciation expense for the years ended December 31,
1995, 1994 and 1993, amounted to $15,000, $25,000 and $24,000,
respectively. In connection with the merger, the Company sold
the remainder of its fixed assets to API at book value in the
fourth quarter of 1995.
38
ACCESS PHARMACEUTICALS, INC.
Notes to Financial Statements
(continued)
(d) Net Income (Loss) Per Common Share
----------------------------------
Net income (loss) per common share is calculated based upon
the weighted average number of common shares and common
equivalent shares outstanding during the years ended December
31, 1995, 1994 and 1993 of 8,717,402, 8,543,003 and 8,384,904,
respectively. In 1995, 1994 and 1993 any common equivalent
shares were either not material or anti-dilutive.
(e) Revenues
--------
The Company entered into three separate agreements with Block
under which it performed contract research and development.
The first agreement represented the sale of Actinex(R) to
Block, whereby the Company was reimbursed for any outside
costs it incurred in connection with the further development
of Actinex(R). The second agreement with Block was the Joint
Venture, under which the Company was responsible for
performing all research and development of the Joint Venture
products. Through December 31, 1994 (the effective date of the
dissolution of the Joint Venture), the Company shared equally
with Block all research and development expenses, after the
first $3 million of expenditures which was paid by Block,
however, this agreement was terminated by mutual consent on
December 31, 1994 (see note 8 for further discussion). On June
7, 1995, the Company entered into the third agreement with
Block to sell its rights to Amlexanox for a non-refundable
upfront royalty payment of $2.5 million plus future royalties,
if any, which was approved by the Company's shareholders on
September 14, 1995. Until the completion of the agreement, 50%
of research conducted for Amlexanox was paid for by Block.
(f) Research and Development Expenses
---------------------------------
All costs of research and development are expensed in the
period incurred.
(g) Accounts Receivable
-------------------
Accounts receivable as of December 31, 1995 and December 31,
1994 were $48,000 and $136,000, respectively, and in 1995 was
due from API in connection with the sale of the Company's
furniture and computer equipment and in 1994 were entirely due
from Block for the Joint Venture research and development
expenses and Actinex(R) royalty.
(h) Use of Estimates
----------------
Management of the Company has made a number of estimates and
assumptions relative to the reporting of assets and
liabilities to prepare these financial statements in
conformity with generally accepted accounting principles.
Actual results could differ from those estimates.
39
ACCESS PHARMACEUTICALS, INC.
Notes to Financial Statements
(continued)
(2) Stockholders' Equity
--------------------
(a) Common Stock
------------
From time to time, the Company has issued restricted shares of
its common stock as payment for various costs and services.
These shares were valued by the Company's Board of Directors
(the Board) based upon the quoted market price on the date of
issue, discounted as considered appropriate by the Board, for
the restricted nature of the stock. During the years ended
December 31, 1995 and 1994, the Company did not issue any
shares of common stock as payment for any obligations. During
the year ended December 31, 1993, the Company issued 25,000
shares at a value of $50,000 as payment of outside investment
banking services.
(b) Warrants
--------
The Company has authorized the issuance of up to 500,000
Units, consisting in the aggregate of 500,000 shares of Common
Stock and warrants exercisable in the aggregate for 700,000
shares of Common Stock. The authorization of the Units was
made in connection with a Conversion Agreement, dated June 18,
1990, by and between ACCESS and Sentinel Charitable Remainder
Trust (the "Conversion Agreement"). Pursuant to the terms of
the Conversion Agreement, each Unit has an exercise price of
$2.50 and the rights of Sentinel Charitable Remainder Trust to
subscribe for the Units were to expire on July 31, 1996. This
Conversion Agreement was amended as of December 14, 1995 by
the Letter Agreement to provide that the right of Sentinel
Charitable Remainder Trust to subscribe for the Units now
expire on January 1, 1999.
Each warrant issuable in connection with the Units described
above is exercisable for one share of Common Stock (subject to
adjustment as provided in the warrant), with 500,000 of the
warrants excisable at $6.25 and the remaining 200,000 warrants
exercisable at $2.50, all upon the terms and conditions set
forth in the Conversion Agreement. The warrants expire on
January 1, 2000.
Under the terms of merger on January 25, 1996, a maximum of
750,000 warrants exercisable at $0.75 per share with a 5 year
expiration from the date of issue, may be issued to the former
holders of record of API Common Stock upon the occurrence of
certain conditions.
(3) Stock Option Plan and Employee Stock Ownership Plan
---------------------------------------------------
(a) Stock Option Plan
-----------------
The Company adopted a stock option plan (the "1987 Stock
Awards Plan") and reserved 1,725,000 shares of the Company's
common stock for issuance to optionees including officers,
40
ACCESS PHARMACEUTICALS, INC.
Notes to Financial Statements
(continued)
employees, and other individuals performing services for the
Company. The 1987 StockAwards Plan replaced the previously
approved Restated Non-Qualified Stock Option Plan (the
"Restated Plan") and includes stock appreciation rights, which
vested based on the achievement of certain financial and
operational benchmarks. Options granted under the plans were
generally exercisable over a ten-year period from the date of
grant, however, as a result of certain events occurring in
1995, all issued options became vested and exercisable. The
shareholders replaced the 1987 Plan on January 25, 1996 with
the 1995 Stock Option Plan. No further grants have been or can
be made under the 1987 Plan.
Under the 1995 Stock Option Plan, 2,000,000 shares of ACCESS
Common Stock are reserved for issuance to employees, officers,
directors and consultants at the Company.
Summarized information for the 1987 Plan is as follows:
1987 Plan
----------------------------
Incentive
Stock Options SARs(1)
------------- -------
Outstanding options
at December 31, 1994 1,092,602 360,161
Granted 0 0
Forfeited (116,505) (6,693)
Exercised 0 (14,803)
---------- ---------
Outstanding options
at December 31, 1995 976,097 338,665
========== =========
At December 31, 1995:
o Average exercise price of
outstanding options $2.42 $0.00
o Exercisable options 976,097 338,665
(1) See Note [3(d)]
(b) Non-employee Director Stock Option Plan
---------------------------------------
The Company adopted the Non-Employee Director Stock Option
Plan during 1987 and reserved 467,500 shares of the Company's
common stock for options awarded under the plan. Directors who
had options in the Restated Plan relinquished those options
for equivalent options in the Non-Employee Director Stock
Option Plan. During 1995, there were no options granted by the
Company. Shares under option at December 31, 1995 are as
follows:
41
ACCESS PHARMACEUTICALS, INC.
Notes to Financial Statements
(continued)
1987 Non-Employee Director Plan
-------------------------------
Outstanding options at December 31, 1994 299,054
Granted 0
Forfeited (19,937)
Exercised 0
--------
Outstanding options at December 31, 1995 279,117
========
At December 31, 1995
o Average exercise price of
outstanding options $2.90
o Exercisable options 279,117
Both of the Plans described in (a) and (b) above provide for
shares to be purchased for cash or with shares of the
Company's common stock owned by the optionee with a market
value equal to the aggregate option price.
Stock options and stock appreciation rights vest to the
optionees immediately upon a change in control of the Company.
Change in control is generally defined as the acquisition of
25% or more of the common stock of the Company by an
individual or a group. Change in control did occur at the date
of the merger, January 25, 1996, and as a result, all unvested
options vested.
(c) Employee Stock Ownership Plan ("ESOP")
--------------------------------------
Effective January 1, 1986, the Company adopted a qualified
Employee Stock Ownership Plan (ESOP) in which all employees
are eligible to participate. The ESOP provides that the
Company may elect to match employee contributions at varying
percentage rates designated by the Company (50% in 1993, 1994,
and 1995) and may make an annual contribution to the ESOP as
determined by the Board, with a maximum contribution not to
exceed the amount deductible under the Internal Revenue Code.
Contributions to the ESOP can be made in cash, mutual funds or
in common stock of the Company. During the years ended
December 31, 1995, 1994 and 1993, the Company contibuted
41,427, 151,608 and 116,202 shares of common stock to the ESOP
valued at $18,460, $98,006 and $158,064, respectively.
Employee contributions to the ESOP during the year ended
December 31, 1993 totalled $71,645, of which $2,744 was used
to purchase 1,561 shares and $68,901 was invested in mutual
funds; during the year ended December 31, 1994, contributions
totalled $73,222 of which $2,535 was used to purchase 2,972
shares, and $70,687 was invested in mutual funds; and during
the year ended December 31, 1995, contributions totalled
$36,921 of which $1,354 was used to purchase 2,898 shares and
$35,567 was invested in mutual funds. The Company intends to
terminate the Plan and no Company contributions are
anticipated in 1996.
42
ACCESS PHARMACEUTICALS, INC.
Notes to Financial Statements
(continued)
(d) Stock Award Amortization/Cancellation
-------------------------------------
The Company amortizes stock award compensation expense for the
difference between the issuance or exercise price of stock
options granted and the fair market value of the common stock
on the date of the grant, over the period benefitted. SARs are
treated in the same manner, however, for SARs that were
payable in cash, a further amortization expense (or credit to
expense) was recorded for the difference between the fair
market value of the common stock at the current period end and
the fair market value on the grant date or the last fiscal
period, whichever is later. In addition, forfeited stock
options for employees that terminate from the Company prior to
full vesting of their stock options are recorded as a
reduction to stock awards expense, representing the original
difference between fair market value of the common stock and
the exercise price of the stock option on the grant date, for
any forfeited unvested options.
In 1992, the Board of Directors passed a resolution that no
SARs were to be paid in cash. During 1993, 50,000 SARs were
exercised. The difference between the fair market value of the
stock as originally recorded and the market value as of the
date the SARs were exercised was recorded as a reduction of
stock award amortization of $161,000. In 1994, bonuses were
paid to employees in the form of SARs totalling 35,210
options. In addition, 223,829 SARs were awarded to the three
former corporate officers contingent on operational
milestones. The difference between the fair market value of
the SARs as of the date of the grant and the zero exercise
price was recorded as stock award expense of $122,000 in 1994.
In 1995, no SARs were awarded. In 1995, the difference between
the fair market value of the stock as originally recorded and
the market value as of the date the SARs were exercised was
recorded as a reduction of stock award amortization expense of
$3,000.
(4) Income Taxes
------------
The Company follows Statement of Financial Accounting Standards Number
109 - Accounting for Income Taxes ("FASB 109"). No provision for
federal income taxes has been made since inception due to the
operating losses incurred for income tax purposes. At December 31,
1995, 1994 and 1993, the Company had deferred tax assets primarily
comprised of the tax benefits of net operating loss carry-forwards and
temporary differences relating to compensation expense. Because the
Company has a history of losses, a 100% provision against the deferred
tax assets was recorded. At December 31, 1995, the Company's regular
and alternative minimum tax net operating loss carry-forwards for
federal income tax purposes approximate $34 million, which, if not
utilized, will expire in varying amounts through the year 2009.
However, as a result of the merger on January 25, 1996, (see note 9),
a change in control occurred for federal income tax purposes which
limited the utilization of net operating loss carry-forwards to
approximately $530,000 per year.
(5) Commitments
-----------
The Company is not currently a party to any material legal
proceedings.
Rent expense was $217,551, $201,552 and $202,028 for the years ended
December 31, 1995, 1994 and 1993 respectively. Effective as of
November 2, 1995 the Company terminated its lease agreement for
43
ACCESS PHARMACEUTICALS, INC.
Notes to Financial Statements
(continued)
its former principal office space in Fort Lee, New Jersey. Pursuant to
the settlement agreement, approximately $79,000 in consideration of
the termination of the lease has been expensed of which $30,000
remains as an accrual at December 31, 1995. Limited temporary office
space was leased in Tarrytown, New York, until the merger.
Effective January 25, 1996 the Company relocated to API's corporate
offices in Dallas, Texas. API's office lease annual minimum rental for
1996 is approximately $58,767 and for 1997 is approximately $17,046.
(6) Related Party Transactions
--------------------------
The following is a table of related party transactions for the years
ended December 31, 1995, 1994 and 1993.
Year ended December 31,
--------------------------------------
1995 1994 1993
---- ---- ----
Legal fees-Company's former law
firm of which a Partner was also a
Director $44,228
Consulting fees-Director $13,000 $26,950 54,132
Consulting fees-Director 10,000
An attorney for the Company's former law firm was, and two consultants
were members of the Company's Board of Directors. As of July 29, 1993,
the attorney did not stand for reelection to the Board and his law
firm is no longer retained by the Company.
Pursuant to the terms of the merger agreement, the Company was
obligated to loan, at any time prior to the closing of the
transaction, an aggregate amount of up to $250,000 to API, upon
request of API. On October 4, 1995, the Company made a loan to API of
$100,000 which is evidenced by a 7% promissory note (see note 9).
(7) Sale of Actinex(R) Technology
-----------------------------
On June 29, 1990, the Company signed a definitive agreement to sell
Actinex(R), a product developed by the Company for the treatment and
prevention of actinic keratoses to Block. As of December 31, 1990, the
Company received a total of $2 million in non-refundable payments from
Block for the sale of Actinex(R). The Company received from Block
during fiscal 1992 the following additional milestone payments: $1
million upon receipt of the "approvable" letter from the FDA, $3
million upon receipt of the "approval" letter from the FDA, $2 million
upon first sale of the product by Block. An additional milestone of $2
million to be paid on the first two anniversaries of the first sale
was waived since the FDA did not grant the approval of the drug by
June 29, 1992. In its place, Block has agreed
44
ACCESS PHARMACEUTICALS, INC.
Notes to Financial Statements
(continued)
to pay a 2.5% royalty on the fist $40 million of cumulative sales of
Actinex(R) (equivalent to $1 million). The Company is also entitled to
receive royalties on the sale of the product worldwide (5% on sales in
countries where the patent is protected and 2.5% on sales in countries
where the patent is not protected) after the first $40 million of
cumulative sales are achieved. The Company recorded royalties of
$1,000 in 1995, $26,000 in 1994 and $49,000 in 1993.
(8) Block Joint Venture and Subsequent Dissolution
----------------------------------------------
On June 20, 1991 the Company and Block entered into a Joint Venture
and for such purpose established an equally-owned New Jersey general
partnership. The objective of the Joint Venture was to develop,
manufacture and market products developed by the Joint Venture. Both
Companies were to share equally in the profits of the Joint Venture.
The Company contributed all of its dermatological products to the
Joint Venture and agreed to dedicate its current research staff to the
performance of the Joint Venture research and development of up to $17
million during the five years of the research and development
agreement. The initial $3 million of research and development funding
was paid for by Block after which each partner was obligated to
contribute 50% of research and development cost up to an aggregate of
$14 million. Each party was obligated to offer all of their respective
new dermatological products to the Joint Venture during the five year
period. In addition, under the terms of the agreement, Block paid the
Company $2 million for certain of its proprietary assets and Block
contributed such assets to the Joint Venture.
As a result of entering into the Joint Venture, the Company's research
and development staff activities were then directed almost exclusively
to the Joint Venture effort. The Joint Venture was developing
Amlexanox (aphthous ulcers), EPC-K (inflammation of the skin), CHX-100
(anti-wrinkling), and CHX-108 (mild/moderate psoriasis).
In June 1994, Block purchased an additional 10% of the Joint Venture
from the Company (20% of the Company's share) for $1,700,000, thereby
changing the Joint Venture ownership to a 60/40 split in favor of
Block. The Company retained the right to re-purchase the 10% interest
for up to eighteen months after the purchase by Block.
As of December 31, 1994, by mutual consent, Block and the Company
agreed to terminate the Joint Venture. As part of the dissolution, the
Company returned to Block for $1,700,000, the 10% Joint Venture
ownership purchased by Block in June 1994 in return for the sale of
certain proprietary rights for Amlexanox to Block for a like amount;
Block returned its 50% share of all of the Joint Venture dermatology
drug portfolio (except Amlexanox); the Company returned its ownership
share of Penderm's Acticin to Block; and Block and the Company entered
into separate joint ownership agreements for Amlexanox.
Block and the Company have concluded several agreements as part of the
Joint Venture dissolution: (1) Asset Distribution Agreement ("ADA")
which effectively dissolves the Joint Venture and specifies the
distribution of assets of the Joint Venture; (2) Product Development
Agreement ("PDA") and Manufacturing, Marketing and Distribution
Agreement ("MMS") which established the joint ownership
45
ACCESS PHARMACEUTICALS, INC.
Notes to Financial Statements
(continued)
of Amlexanox and the responsibilities of each party; and (3) a
separate agreement giving the Company an option to transfer its share
of the ownership rights to Amlexanox to Block for a non-refundable
upfront royalty payment plus future royalties, subject to consent by
Takeda Chemicals (the licensor of Amlexanox) and the Company
shareholder approval.
The ADA distributes the following rights to products: the Company
received Block's share of the rights to EPC-K1 a drug under license
from Senju Pharmaceuticals for atopic dermatitis; CEDE-108-
potentially for psoriasis; and CHX-100 for the treatment of photoaging
of the skin; and Block received the Company's share to the rights for
Penederm's retinoic acid product.
The PDA and MMS Agreements outline the responsibilities of the parties
in terms of the development and commercialization of any Amlexanox
product for all oral use. The Company was responsible for all
development and regulatory activities and Block was responsible for
manufacturing, marketing and distribution of any Amlexanox products.
The MMS Agreement also defines the sharing of any profits or losses of
any Amlexanox product and further allows the Company the option, on a
country by country basis, to agree to a profit and loss arrangement or
a royalty.
On June 7, 1995, the Company entered into an agreement with Block to
sell its rights to Amlexanox for a non-refundable upfront royalty
payment of $2.5 million plus future royalties, if any, which was
approved by the Company shareholders on September 14, 1995.
(9) Subsequent Events
-----------------
On January 25, 1996, the Company's Shareholders, at a Special
Shareholders Meeting, approved the merger with API. Under the terms of
the agreement, API was merged into Chemex with Chemex as the surviving
legal entity. Chemex acquired all of the outstanding shares of API in
exchange for 13,919,979 shares of registered common stock of Chemex.
Chemex also changed its name to ACCESS Pharmaceuticals, Inc. and the
operations of the consolidated company are now based in Dallas, Texas.
Shareholders of both companies approved the merger. As of December 31,
1995, the Company accrued $140,000 for estimated costs to complete the
merger.
As a result of the merger, the former API Stockholders own
approximately 60% of the issued and outstanding shares of Chemex.
Generally accepted accounting principles require that a company whose
stockholders retain the controlling interest in a combined business be
treated as the acquiror for accounting purposes. As a consequence, the
merger is being accounted for as a "reverse acquisition" for financial
reporting purposes and API has been deemed to have acquired an
approximate 60% interest in Chemex. Despite the financial reporting
requirement to account for the acquisition as a "reverse acquisition,"
Chemex remains the continuing legal entity and registrant for
Securities and Exchange Commission reporting purposes.
46
ACCESS PHARMACEUTICALS, INC.
Notes to Financial Statements
(continued)
The following summarizes API's results of operations for the years indicated:
Years Ended December 31,
--------------------------
1995 1994
---- ----
Revenues $845,000 $1,048,000
-------- ----------
Expenses
Research and development 675,000 714,000
Other Expenses 752,000 695,000
Depreciation 121,000 115,000
--------- ---------
1,548,000 1,524,000
--------- ---------
Net loss ($703,000) ($476,000)
========== =========
In March 1996 the Company concluded a $6 million Private Placement of 8.57
million shares of common stock. The cash infusion will be used to continue the
advancement of the product portfolio which focuses on increasing the therapeutic
benefit and improving the efficiency of oncology therapeutics and diagnostic
agents by selectively targeting sites of disease and accelerating drug
clearance. The shares issued in the private placement have not been registered,
however the company has agreed to file a registration statement within 90 days
of the issuance covering such shares. The investors have agreed not to sell any
of the shares purchased in the offering until 180 days after the closing.
As of January 29, 1996, ACCESS retained Mr. David Blech, the income beneficiary
of the Sentinel Charitable Remainder Trust (see Note 2(b)), as a consultant to
the Company for one year to advise on structuring transactions including equity
placements, licensing agreements and research and development collaborations.
Under the terms of the agreement Mr. Blech was paid $480,000 in 1996 and
received immediately exercisable warrants to purchase 600,000 shares of Common
Stock at an exercise price of $1.00 per share, which warrants expire in the year
2000.
47
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
CHEMEX PHARMACEUTICALS, INC., a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY:
FIRST: That a meeting of the Board of Directors of Chemex Pharmaceuticals, Inc.
resolutions were duly adopted setting forth a proposed amendment of the
Certificate of Incorporation of said corporation, declaring said amendment to be
advisable and calling a meeting of the stockholders of said corporation for
consideration thereof. The resolution setting forth the proposed amendment is as
follows:
"RESOLVED, that Article V, Section A of the Certificate of
Incorporation of this corporation be amended by deleting said Article
V, Section A in its entirety and substituting the following therefor:
'A. The aggregate number of shares of common stock which the
Corporation shall have authority to issue is twenty-two
million (22,000,000) shares with a par value of four cents
($0.04) per share."
SECOND: That thereafter, pursuant to the resolution of its Board of Directors, a
meeting of the stockholders of said corporation was duly called and held, upon
notice in accordance with Section 222 of the General Corporation Law of the
State of Delaware at which meeting the necessary number of shares as required by
statute were voted in favor of the amendment.
THIRD: That said amendment was duly adopted in accordance with the provisions
of Section 242 of the General Corporation Law of the State of Delaware.
FOURTH: That the capital of said corporation shall not be reduced under or by
reason of said amendment.
IN WITNESS WHEREOF, said Chemex Pharmaceuticals, Inc. has caused this
certificate to be signed by Herbert H. McDade, Jr., its President, Ralph L.
Poucher, its Secretary, this 13th day of August, 1992.
BY: /s/Herbert H. McDade, Jr.
------------------------------
Herbert H. McDade, Jr.
ATTEST: /s/Ralph L. Poucher
---------------------
Ralph L. Poucher
48