1
EXHIBIT-99.2
INDEX TO ARONEX PHARMACEUTICALS, INC. CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets as of December 31, 1999 and
2000...................................................... F-3
Consolidated Statements of Operations for the Years ended
December 31, 1998, 1999 and 2000, and the Period from
Inception (June 13, 1986) through December 31, 2000....... F-4
Consolidated Statements of Comprehensive Loss for the Years
ended December 31, 1998, 1999 and 2000.................... F-5
Consolidated Statements of Stockholders' Equity for the
Period from Inception (June 13, 1986) through December 31,
2000...................................................... F-6
Consolidated Statements of Cash Flows for the Years ended
December 31, 1998, 1999 and 2000, and the Period from
Inception (June 13, 1986) through December 31, 2000....... F-11
Notes to Consolidated Financial Statements.................. F-12
Consolidated Balance Sheets -- December 31, 2000 and March
31, 2001 (unaudited)...................................... F-25
Consolidated Statements of Operations:
Three Months Ended March 31, 2000 and March 31, 2001
(unaudited) and for the Period from Inception (June 13,
1986) through March 31, 2001 (unaudited)............... F-26
Consolidated Statements of Comprehensive Income:
Three Months Ended March 31, 2000 and March 31, 2001
(unaudited)............................................ F-27
Consolidated Statements of Cash Flows:
Three Months Ended March 31, 2000 and March 31, 2001
(unaudited) and for the Period from Inception (June 13,
1986) through March 31, 2001 (unaudited)............... F-28
Consolidated Statements of Stockholders' Equity for the
Three Months Ended March 31, 2001 (unaudited)............. F-29
Notes to Consolidated Financial Statements -- March 31, 2001
(unaudited)............................................... F-30
F-1
2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Aronex Pharmaceuticals, Inc.:
We have audited the accompanying consolidated balance sheets of Aronex
Pharmaceuticals, Inc. and subsidiaries (a Delaware corporation in the
development stage), as of December 31, 1999 and 2000, and the related
consolidated statements of operations, comprehensive loss, stockholders' equity
and cash flows for each of the three years in the period ended December 31, 2000
and for the period from inception (June 13, 1986) through December 31, 2000.
These consolidated financial statements are the responsibility of Aronex
Pharmaceuticals' management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Aronex Pharmaceuticals, Inc. as of December 31, 1999 and 2000, and the results
of its operations and its cash flows for each of the three years in the period
ended December 31, 2000 and for the period from inception (June 13, 1986)
through December 31, 2000, in conformity with accounting principles generally
accepted in the United States.
As explained in Note 2 to the consolidated financial statements, effective
January 1, 2000, the Company changed its method of accounting for revenue
recognition.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has operated as a development stage enterprise
since its inception by devoting substantially all of its efforts to raising
capital and performing research and development. In January 2001, the Company
received a non-approval letter from the United States Food and Drug
Administration (FDA) for its New Drug Application (NDA) amendment for
ATRAGEN(R). In order to complete the research and development and other
activities necessary to commercialize its products, additional financing will be
required. The Company has not secured any commitments for any such additional
financing. These events raise substantial doubt as to the Company's ability to
continue as a going concern. Management's plans with regard to these matters are
also described in Note 1. The accompanying financial statements do not include
any adjustments relating to the recoverability and classification of asset
carrying amounts or the amount and classification of liabilities that might
result should the Company be unable to continue as a going concern.
ARTHUR ANDERSEN LLP
Houston, Texas
February 9, 2001
F-2
3
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
----------------------
1999 2000
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 11,528 $ 8,254
Short-term investments.................................... 7,804 --
Prepaid expenses and other assets......................... 453 116
--------- ---------
Total current assets.............................. 19,785 8,370
Long-term investments....................................... 920 821
Furniture, equipment and leasehold improvements, net of
accumulated depreciation of $3,450 and $3,914,
respectively.............................................. 2,029 1,851
--------- ---------
Total assets...................................... $ 22,734 $ 11,042
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses..................... $ 3,502 $ 2,789
Accrued payroll........................................... 644 313
Current portion of notes payable.......................... 340 459
Current portion of deferred revenue....................... -- 1,196
--------- ---------
Total current liabilities......................... 4,486 4,757
Long-term liabilities:
Notes payable, net of current portion..................... 3,517 3,154
Deferred revenue, net of current portion.................. -- 466
--------- ---------
Total long-term liabilities....................... 3,517 3,620
Commitments and contingencies
Stockholders' equity:
Preferred stock $.001 par value, 5,000,000 shares
authorized, none issued and outstanding................ -- --
Common stock $.001 par value, 40,000,000 shares
authorized, 22,853,782 and 25,973,674 shares issued and
outstanding, respectively.............................. 23 26
Additional paid-in capital................................ 113,262 118,697
Common stock warrants..................................... 908 3,439
Treasury stock............................................ (11) (11)
Deferred compensation..................................... (69) --
Unrealized gain on securities available-for-sale.......... 2,147 --
Deficit accumulated during development stage.............. (101,529) (119,486)
--------- ---------
Total stockholders' equity........................ 14,731 2,665
--------- ---------
Total liabilities and stockholders' equity........ $ 22,734 $ 11,042
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
4
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(ALL AMOUNTS IN THOUSANDS, EXCEPT LOSS PER SHARE DATA)
PERIOD FROM INCEPTION
YEARS ENDED DECEMBER 31, (JUNE 13, 1986)
-------------------------------- THROUGH
1998 1999 2000 DECEMBER 31, 2000
-------- -------- -------- ---------------------
Revenues:
Research and development grants and
contracts.......................... $ 6,737 $ 11,052 $ 3,219 $ 26,058
-------- -------- -------- ---------
Total revenues................ 6,737 11,052 3,219 26,058
-------- -------- -------- ---------
Expenses:
Research and development.............. 22,793 21,494 16,611 114,033
Purchase of in-process research and
development........................ -- -- -- 11,625
General and administrative............ 3,354 4,652 3,241 25,051
-------- -------- -------- ---------
Total expenses................ 26,147 26,146 19,852 150,709
-------- -------- -------- ---------
Operating loss.......................... (19,410) (15,094) (16,633) (124,651)
Other income (expense):
Interest income....................... 1,265 1,330 926 9,102
Gain on sale of investments........... -- -- 2,653 2,653
Interest expense and other............ (86) (330) (448) (2,135)
-------- -------- -------- ---------
Other income, net....................... 1,179 1,000 3,131 9,620
Net loss before cumulative effect of
change in accounting principle........ (18,231) (14,094) (13,502) (115,031)
Cumulative effect of change in
accounting principle.................. -- -- (4,455) (4,455)
-------- -------- -------- ---------
Net loss................................ $(18,231) $(14,094) $(17,957) $(119,486)
======== ======== ======== =========
Net loss per share before cumulative
effect of change in accounting
principle............................. $ (1.17) $ (0.65) $ (0.54)
Cumulative effect of change in
accounting principle.................. -- -- (0.18)
-------- -------- --------
Basic and diluted net loss per share.... $ (1.17) $ (0.65) $ (0.72)
======== ======== ========
Weighted average shares used in
computing basic and diluted loss per
share................................. 15,571 21,727 24,847
======== ======== ========
Pro forma amounts assuming the
accounting change is applied
retroactively:
Net loss.............................. $(23,104) $(13,676)
======== ========
Net loss per share.................... $ (1.48) $ (0.63)
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
5
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(ALL AMOUNTS IN THOUSANDS, EXCEPT LOSS PER SHARE DATA)
PERIOD FROM INCEPTION
YEARS ENDED DECEMBER 31, (JUNE 13, 1986)
-------------------------------- THROUGH
1998 1999 2000 DECEMBER 31, 2000
-------- -------- -------- ---------------------
Comprehensive loss:
Net loss.............................. $(18,231) $(14,094) $(17,957) $(119,486)
Unrealized gain (loss) on securities
available for sale:
Unrealized gain....................... 803 1,431 506 2,653
Realized gain......................... -- -- (2,653) (2,653)
Net unrealized gain (loss) on
securities available for sale.... 803 1,431 (2,147) --
-------- -------- -------- ---------
Comprehensive loss...................... $(17,428) $(12,663) $(20,104) $(119,486)
======== ======== ======== =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
6
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (JUNE 13, 1986) THROUGH DECEMBER 31, 2000
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK ADDITIONAL COMMON
-------------------- PAID-IN STOCK TREASURY DEFERRED
SHARES AMOUNT CAPITAL WARRANTS STOCK COMPENSATION
---------- ------ ---------- -------- -------- ------------
Sale of common stock for cash, August
through December 1986 ($1.6396 per
share).................................... 183,334 $-- $ 301 $ -- $ -- $ --
Issuance of common stock for license
agreement rights, October 1986 ($.006 per
share).................................... 60,606 -- 1 -- -- --
Net loss.................................... -- -- -- -- -- --
---------- --- -------- ------- ----- -------
Balance at December 31, 1986................ 243,940 -- 302 -- -- --
Issuance of common stock in exchange for 8%
convertible notes, May 1987 ($3.30 per
share).................................... 90,909 1 299 -- -- --
Net loss.................................... -- -- -- -- -- --
---------- --- -------- ------- ----- -------
Balance at December 31, 1987................ 334,849 1 601 -- -- --
Issuance of common stock for cash, September
and December 1988 ($.066 per share)....... 130,303 -- 8 -- -- --
Net loss.................................... -- -- -- -- -- --
---------- --- -------- ------- ----- -------
Balance at December 31, 1988................ 465,152 1 609 -- -- --
Issuance of common stock for cash, July and
August 1989 ($.066 per share)............. 158,182 -- 10 -- -- --
Issuance of common stock for cash, August
1989 ($3.63 per share).................... 1,220,386 1 4,429 -- -- --
Issuance of common stock for key man life
insurance policies, December 1989
($3.63)................................... 3,862 -- 14 -- -- --
Net loss.................................... -- -- -- -- -- --
---------- --- -------- ------- ----- -------
Balance at December 31, 1989................ 1,847,582 $ 2 $ 5,062 $ -- $ -- $ --
Stock options exercised January 1990 ($.66
per share)................................ 30 -- -- -- -- --
Warrants issued to purchase 9,914 shares of
common stock.............................. -- -- -- -- -- --
Net loss.................................... -- -- -- -- -- --
---------- --- -------- ------- ----- -------
Balance at December 31, 1990................ 1,847,612 2 5,062 -- -- --
Stock options exercised, May 1991 ($.66 per
share).................................... 75 -- -- -- -- --
UNREALIZED DEFICIT
GAIN (LOSS) ACCUMULATED
ON SECURITIES DURING TOTAL
AVAILABLE DEVELOPMENT STOCKHOLDERS'
FOR SALE STAGE EQUITY
------------- ----------- -------------
Sale of common stock for cash, August
through December 1986 ($1.6396 per
share).................................... $ -- $ -- $ 301
Issuance of common stock for license
agreement rights, October 1986 ($.006 per
share).................................... -- -- 1
Net loss.................................... -- (40) (40)
------- --------- --------
Balance at December 31, 1986................ -- (40) 262
Issuance of common stock in exchange for 8%
convertible notes, May 1987 ($3.30 per
share).................................... -- -- 300
Net loss.................................... -- (216) (216)
------- --------- --------
Balance at December 31, 1987................ -- (256) 346
Issuance of common stock for cash, September
and December 1988 ($.066 per share)....... -- -- 8
Net loss.................................... -- (832) (832)
------- --------- --------
Balance at December 31, 1988................ -- (1,088) (478)
Issuance of common stock for cash, July and
August 1989 ($.066 per share)............. -- -- 10
Issuance of common stock for cash, August
1989 ($3.63 per share).................... -- -- 4,430
Issuance of common stock for key man life
insurance policies, December 1989
($3.63)................................... -- -- 14
Net loss.................................... -- (942) (942)
------- --------- --------
Balance at December 31, 1989................ $ -- $ (2,030) $ 3,034
Stock options exercised January 1990 ($.66
per share)................................ -- -- --
Warrants issued to purchase 9,914 shares of
common stock.............................. -- -- --
Net loss.................................... -- (1,825) (1,825)
------- --------- --------
Balance at December 31, 1990................ -- (3,855) 1,209
Stock options exercised, May 1991 ($.66 per
share).................................... -- -- --
F-6
7
COMMON STOCK ADDITIONAL COMMON
-------------------- PAID-IN STOCK TREASURY DEFERRED
SHARES AMOUNT CAPITAL WARRANTS STOCK COMPENSATION
---------- ------ ---------- -------- -------- ------------
Issuance of common stock for cash and notes
payable including accrued interest of
$96,505, October 1991 ($7.26 per share)... 596,095 -- 4,328 -- -- --
Deferred compensation relating to certain
stock options............................. -- -- 326 -- -- (326)
Compensation expense related to stock
options................................... -- -- -- -- -- 138
Net loss.................................... -- -- -- -- -- --
---------- --- -------- ------- ----- -------
Balance at December 31, 1991................ 2,443,782 2 9,716 -- -- (188)
Stock options exercised, January, April,
May, October and December 1992 ($.66 per
share).................................... 37,198 -- 24 -- -- --
Stock warrants exercised April, May and
August 1992 ($3.63 per share)............. 11,364 -- 41 -- -- --
Issuance of common stock for cash in initial
public offering, July 1992 ($14.00 per
share).................................... 850,000 1 10,659 -- -- --
Deferred compensation relating to certain
stock options............................. -- -- 1,644 -- -- (1,644)
Compensation expense related to stock
options................................... -- -- -- -- -- 460
Net loss.................................... -- -- -- -- -- --
---------- --- -------- ------- ----- -------
Balance at December 31, 1992................ 3,342,344 $ 3 $ 22,084 $ -- $ -- $(1,372)
Issuance of common stock for compensation... 5,000 -- 51 -- -- --
Warrants issued to purchase 50,172 shares of
common stock.............................. -- -- -- -- -- --
Stock options exercised, February and
November 1993 ($.66) per share............ 14,465 -- 9 -- -- --
Issuance of common stock for cash, September
1993 ($14.00 per share)................... 357,143 -- 4,538 -- -- --
Issuance of common stock for cash in
secondary public offering November &
December 1993 ($9.00 per share)........... 1,402,250 2 11,462 -- -- --
Compensation expense related to stock
options................................... -- -- -- -- -- 396
Net loss.................................... -- -- -- -- -- --
---------- --- -------- ------- ----- -------
Balance at December 31, 1993................ 5,121,202 5 38,144 -- -- (976)
UNREALIZED DEFICIT
GAIN (LOSS) ACCUMULATED
ON SECURITIES DURING TOTAL
AVAILABLE DEVELOPMENT STOCKHOLDERS'
FOR SALE STAGE EQUITY
------------- ----------- -------------
Issuance of common stock for cash and notes
payable including accrued interest of
$96,505, October 1991 ($7.26 per share)... -- -- 4,328
Deferred compensation relating to certain
stock options............................. -- -- --
Compensation expense related to stock
options................................... -- -- 138
Net loss.................................... -- (2,914) (2,914)
------- --------- --------
Balance at December 31, 1991................ -- (6,769) 2,761
Stock options exercised, January, April,
May, October and December 1992 ($.66 per
share).................................... -- -- 24
Stock warrants exercised April, May and
August 1992 ($3.63 per share)............. -- -- 41
Issuance of common stock for cash in initial
public offering, July 1992 ($14.00 per
share).................................... -- -- 10,660
Deferred compensation relating to certain
stock options............................. -- -- --
Compensation expense related to stock
options................................... -- -- 460
Net loss.................................... -- (4,708) (4,708)
------- --------- --------
Balance at December 31, 1992................ $ -- $ (11,477) $ 9,238
Issuance of common stock for compensation... -- -- 51
Warrants issued to purchase 50,172 shares of
common stock.............................. -- -- --
Stock options exercised, February and
November 1993 ($.66) per share............ -- -- 9
Issuance of common stock for cash, September
1993 ($14.00 per share)................... -- -- 4,538
Issuance of common stock for cash in
secondary public offering November &
December 1993 ($9.00 per share)........... -- -- 11,464
Compensation expense related to stock
options................................... -- -- 396
Net loss.................................... -- (6,225) (6,225)
------- --------- --------
Balance at December 31, 1993................ -- (17,702) 19,471
F-7
8
COMMON STOCK ADDITIONAL COMMON
-------------------- PAID-IN STOCK TREASURY DEFERRED
SHARES AMOUNT CAPITAL WARRANTS STOCK COMPENSATION
---------- ------ ---------- -------- -------- ------------
Deferred compensation relating to certain
stock options............................. -- -- 66 -- -- (66)
Stock options exercised, January through
October 1994 ($.66 per share)............. 15,111 -- 10 -- -- --
Warrants issued to purchase 537 shares of
common stock.............................. -- -- -- -- -- --
Issuance of additional shares of common
stock pursuant to collaborative
agreement................................. 66,163 -- -- -- -- --
Compensation expense related to stock
options................................... -- -- -- -- -- 546
Unrealized loss on available-for-sale
securities................................ -- -- -- -- -- --
Net loss.................................... -- -- -- -- -- --
---------- --- -------- ------- ----- -------
Balance at December 31, 1994................ 5,202,476 $ 5 $ 38,220 $ -- $ -- $ (496)
Deferred compensation relating to certain
stock options............................. -- -- 1,380 -- -- (1,380)
Stock options exercised, January through
December 1995 ($.66 per share)............ 36,958 -- 24 -- -- --
Issuance of common stock and warrants
pursuant to merger agreements )........... 3,868,436 4 11,111 2,844 -- --
Warrants exercised ($4.50 per share)........ 705,614 1 3,402 (226) -- --
Issuance of common stock pursuant to
settlement agreement...................... 531,552 -- 2,046 (1,130) -- --
Issuance of common stock for services
rendered.................................. 37,500 -- 159 -- -- --
Treasury stock purchased ($4.42 per
share).................................... (2,480) -- -- -- (11) --
Compensation expense related to stock
options................................... -- -- -- -- -- 340
Unrealized gain on available-for-sale
securities................................ -- -- -- -- -- --
Net loss.................................... -- -- -- -- -- --
---------- --- -------- ------- ----- -------
Balance at December 31, 1995................ 10,380,056 $10 $ 56,342 $ 1,488 $ (11) $(1,536)
Warrants redeemed January 1996.............. -- -- 269 (269) -- --
Deferred compensation relating to certain
stock options............................. -- -- 966 -- -- (966)
Issuance of common stock for cash in
secondary public offering, March & April
1996 ($10.00 per share)................... 3,450,000 4 32,073 -- -- --
Stock options exercised, January through
December 1996 ($0.04-$9.50 per share)..... 106,041 -- 343 -- -- --
Warrants exercised January through December
1996 ($4.50-$12.00 per share)............. 622,428 1 3,528 (194) -- --
Issuance of common stock pursuant to
settlement agreements..................... 38,722 -- 221 (57) -- --
UNREALIZED DEFICIT
GAIN (LOSS) ACCUMULATED
ON SECURITIES DURING TOTAL
AVAILABLE DEVELOPMENT STOCKHOLDERS'
FOR SALE STAGE EQUITY
------------- ----------- -------------
Deferred compensation relating to certain
stock options............................. -- -- --
Stock options exercised, January through
October 1994 ($.66 per share)............. -- -- 10
Warrants issued to purchase 537 shares of
common stock.............................. -- -- --
Issuance of additional shares of common
stock pursuant to collaborative
agreement................................. -- -- --
Compensation expense related to stock
options................................... -- -- 546
Unrealized loss on available-for-sale
securities................................ (315) -- (315)
Net loss.................................... -- (9,052) (9,052)
------- --------- --------
Balance at December 31, 1994................ $ (315) $ (26,754) $ 10,660
Deferred compensation relating to certain
stock options............................. -- -- --
Stock options exercised, January through
December 1995 ($.66 per share)............ -- -- 24
Issuance of common stock and warrants
pursuant to merger agreements )........... -- -- 13,959
Warrants exercised ($4.50 per share)........ -- -- 3,177
Issuance of common stock pursuant to
settlement agreement...................... -- -- 916
Issuance of common stock for services
rendered.................................. -- -- 159
Treasury stock purchased ($4.42 per
share).................................... -- -- (11)
Compensation expense related to stock
options................................... -- -- 340
Unrealized gain on available-for-sale
securities................................ 199 -- 199
Net loss.................................... -- (17,429) (17,429)
------- --------- --------
Balance at December 31, 1995................ $ (116) $ (44,183) $ 11,994
Warrants redeemed January 1996.............. -- --
Deferred compensation relating to certain
stock options............................. -- -- --
Issuance of common stock for cash in
secondary public offering, March & April
1996 ($10.00 per share)................... -- -- 32,077
Stock options exercised, January through
December 1996 ($0.04-$9.50 per share)..... -- -- 343
Warrants exercised January through December
1996 ($4.50-$12.00 per share)............. -- -- 3,335
Issuance of common stock pursuant to
settlement agreements..................... -- -- 164
F-8
9
COMMON STOCK ADDITIONAL COMMON
-------------------- PAID-IN STOCK TREASURY DEFERRED
SHARES AMOUNT CAPITAL WARRANTS STOCK COMPENSATION
---------- ------ ---------- -------- -------- ------------
Compensation expense related to stock
options................................... -- -- -- -- -- 553
Unrealized gain on available-for-sale
securities................................ -- -- -- -- -- --
Net loss.................................... -- -- -- -- -- --
---------- --- -------- ------- ----- -------
Balance at December 31, 1996................ 14,597,247 15 93,742 968 (11) (1,949)
Warrants exercised February and March 1997
($8.00 per share)......................... 3,499 -- 28 (1) -- --
Reversal of deferred compensation relating
to forfeited stock options................ -- -- (578) -- -- 578
Issuance of common stock for services....... 22,278 -- 130 -- -- --
Stock options exercised, January through
December 1997 ($0.04-$5.50 per share)..... 128,278 -- 215 -- -- --
Stock purchased-employee stock purchase
plan, June and December 1997 ($3.31 and
$3.19 per share).......................... 21,392 -- 69 -- -- --
Issuance of common stock pursuant to
contingent stock agreement................ 686,472 -- 3,000 -- -- --
Compensation expense related to stock
options................................... -- -- -- -- -- 464
Unrealized loss on securities
available-for-sale........................ -- -- -- -- -- --
Net loss.................................... -- -- -- -- -- --
---------- --- -------- ------- ----- -------
Balance at December 31, 1997................ 15,459,166 $15 $ 96,606 $ 967 $ (11) $ (907)
Reversal of deferred compensation relating
to forfeited stock options................ -- -- (28) -- -- 28
Issuance of common stock for services....... 23,494 -- 76 -- -- --
Warrants expired June 1998.................. -- -- 917 (917) -- --
Stock options exercised, January through
December 1998 ($0.04 - $0.68 per share)... 19,144 -- 7 -- -- --
Issuance of shares through the employee
stock purchase plan, June and December
1998 ($3.35 and $1.70 per share).......... 39,516 -- 99 -- -- --
Issuance of shares for cash November 1998
($3.58 per share)......................... 837,989 1 2,977 -- -- --
Compensation expense related to stock
options................................... -- -- -- -- -- 499
Unrealized gain on securities
available-for-sale........................ -- -- -- -- -- --
Net loss.................................... -- -- -- -- -- --
---------- --- -------- ------- ----- -------
Balance at December 31, 1998................ 16,379,309 $16 $100,654 $ 50 $ (11) $ (380)
Reversal of deferred compensation relating
to forfeited stock options................ -- -- (30) -- -- 30
UNREALIZED DEFICIT
GAIN (LOSS) ACCUMULATED
ON SECURITIES DURING TOTAL
AVAILABLE DEVELOPMENT STOCKHOLDERS'
FOR SALE STAGE EQUITY
------------- ----------- -------------
Compensation expense related to stock
options................................... -- -- 553
Unrealized gain on available-for-sale
securities................................ 41 -- 41
Net loss.................................... -- (8,030) (8,030)
------- --------- --------
Balance at December 31, 1996................ (75) (52,213) 40,477
Warrants exercised February and March 1997
($8.00 per share)......................... -- -- 27
Reversal of deferred compensation relating
to forfeited stock options................ -- -- --
Issuance of common stock for services....... -- -- 130
Stock options exercised, January through
December 1997 ($0.04-$5.50 per share)..... -- -- 215
Stock purchased-employee stock purchase
plan, June and December 1997 ($3.31 and
$3.19 per share).......................... -- -- 69
Issuance of common stock pursuant to
contingent stock agreement................ -- -- 3,000
Compensation expense related to stock
options................................... -- -- 464
Unrealized loss on securities
available-for-sale........................ (12) -- (12)
Net loss.................................... -- (16,991) (16,991)
------- --------- --------
Balance at December 31, 1997................ $ (87) $ (69,204) $ 27,379
Reversal of deferred compensation relating
to forfeited stock options................ -- -- --
Issuance of common stock for services....... -- -- 76
Warrants expired June 1998.................. -- -- --
Stock options exercised, January through
December 1998 ($0.04 - $0.68 per share)... -- -- 7
Issuance of shares through the employee
stock purchase plan, June and December
1998 ($3.35 and $1.70 per share).......... -- -- 99
Issuance of shares for cash November 1998
($3.58 per share)......................... -- -- 2,978
Compensation expense related to stock
options................................... -- -- 499
Unrealized gain on securities
available-for-sale........................ 803 -- 803
Net loss.................................... -- (18,231) (18,231)
------- --------- --------
Balance at December 31, 1998................ $ 716 $ (87,435) $ 13,610
Reversal of deferred compensation relating
to forfeited stock options................ -- -- --
F-9
10
COMMON STOCK ADDITIONAL COMMON
-------------------- PAID-IN STOCK TREASURY DEFERRED
SHARES AMOUNT CAPITAL WARRANTS STOCK COMPENSATION
---------- ------ ---------- -------- -------- ------------
Issuance of common stock for cash in
secondary public offering February 1999
($2.1875 per share)....................... 6,000,000 6 11,683 -- -- --
Issuance of common stock for services....... 162,116 -- 475 -- -- --
Issuance of warrants to purchase 600,000
shares of common stock.................... -- -- (758) 758 -- --
Issuance of warrants to purchase 50,000
shares of common stock.................... -- -- -- 150 -- --
Warrants expired December 1999.............. -- -- 50 (50) -- --
Stock options exercised, January through
December 1999 ($0.22 - $4.75 per share)... 241,339 1 869 -- -- --
Issuance of shares through the employee
stock purchase plan, June and December
1999 ($1.65 and $2.66 per share).......... 71,023 -- 141 -- -- --
Compensation expense related to stock
options................................... -- -- 178 -- -- 281
Unrealized gain on securities
available-for-sale........................ -- -- -- -- -- --
Net loss.................................... -- -- -- -- -- --
---------- --- -------- ------- ----- -------
Balance at December 31, 1999................ 22,853,782 $23 $113,262 $ 908 $ (11) $ (69)
Issuance of common stock for cash in
secondary offering ($2.75 per share)...... 2,932,574 3 7,303 -- -- --
Issuance of common stock for services....... 60,107 -- 233 -- -- --
Issuance of warrants to purchase 1,127,524
shares of common stock.................... -- -- (2,561) 2,561 -- --
Stock options exercised, January through
December 2000 ($2.00 - $5.06 per share)... 71,620 -- 280 -- -- --
Stock warrants exercised.................... 14,422 -- 73 (30) -- --
Issuance of shares through the employee
stock purchase plan, June and December
2000 ($2.60 per share).................... 41,169 -- 107 -- -- --
Compensation expense related to stock
options................................... -- -- -- -- -- 69
Unrealized gain on securities
available-for-sale........................ -- -- -- -- -- --
Realized gain on securities
available-for-sale........................ -- -- -- -- -- --
Net loss.................................... -- -- -- -- -- --
---------- --- -------- ------- ----- -------
Balance at December 31, 2000................ 25,973,674 $26 $118,697 $ 3,439 $ (11) $ --
========== === ======== ======= ===== =======
UNREALIZED DEFICIT
GAIN (LOSS) ACCUMULATED
ON SECURITIES DURING TOTAL
AVAILABLE DEVELOPMENT STOCKHOLDERS'
FOR SALE STAGE EQUITY
------------- ----------- -------------
Issuance of common stock for cash in
secondary public offering February 1999
($2.1875 per share)....................... -- -- 11,689
Issuance of common stock for services....... -- -- 475
Issuance of warrants to purchase 600,000
shares of common stock.................... -- -- --
Issuance of warrants to purchase 50,000
shares of common stock.................... -- -- 150
Warrants expired December 1999.............. -- -- --
Stock options exercised, January through
December 1999 ($0.22 - $4.75 per share)... -- -- 870
Issuance of shares through the employee
stock purchase plan, June and December
1999 ($1.65 and $2.66 per share).......... -- -- 141
Compensation expense related to stock
options................................... -- -- 459
Unrealized gain on securities
available-for-sale........................ 1,431 -- 1,431
Net loss.................................... -- (14,094) (14,094)
------- --------- --------
Balance at December 31, 1999................ $ 2,147 $(101,529) $ 14,731
Issuance of common stock for cash in
secondary offering ($2.75 per share)...... -- -- 7,306
Issuance of common stock for services....... -- -- 233
Issuance of warrants to purchase 1,127,524
shares of common stock.................... -- -- --
Stock options exercised, January through
December 2000 ($2.00 - $5.06 per share)... -- -- 280
Stock warrants exercised.................... -- -- 43
Issuance of shares through the employee
stock purchase plan, June and December
2000 ($2.60 per share).................... -- -- 107
Compensation expense related to stock
options................................... -- -- 69
Unrealized gain on securities
available-for-sale........................ 506 -- 506
Realized gain on securities
available-for-sale........................ (2,653) -- (2,653)
Net loss.................................... -- (17,957) (17,957)
------- --------- --------
Balance at December 31, 2000................ $ -- $(119,486) $ 2,665
======= ========= ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-10
11
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(ALL AMOUNTS IN THOUSANDS)
PERIOD FROM
INCEPTION
(JUNE 13,
YEARS ENDED DECEMBER 31, 1986) THROUGH
------------------------------ DECEMBER 31,
1998 1999 2000 2000
-------- -------- -------- -------------
Cash flows from operating activities:
Net loss.................................................. $(18,231) $(14,094) $(17,957) $(119,486)
Adjustments to reconcile net loss to net cash used in
operating activities..................................
Depreciation and amortization........................... 821 611 570 6,028
Loss on disposal of assets.............................. -- -- -- 200
Compensation expense related to stock and stock options... 547 1,084 312 5,179
Charge for purchase of in-process research and
development............................................. -- -- -- 11,547
Unrealized gain on investment............................. 803 1,431 506 2,653
Realized gain on investment............................... -- -- (2,653) (2,653)
Acquisition costs, net of cash received................... -- -- -- (270)
Loss in affiliate......................................... -- -- -- 500
Accrued interest payable converted to stock............... -- -- -- 97
Changes in assets and liabilities:
Increase (decrease) in prepaid expenses and other
assets.................................................. 214 (193) 337 69
Decrease (increase) in accounts receivable................ (32) 132 -- --
Increase (decrease) in accounts payable and accrued
expenses................................................ 3,673 (2,058) (1,044) 3,029
Increase in deferred revenue.............................. -- -- 1,662 1,309
-------- -------- -------- ---------
Net cash used in operating activities..................... (12,205) (13,087) (18,267) (91,798)
Cash flows from investing activities:
Purchases of investments.................................. (42,809) (11,111) (1,567) (262,928)
Sales of investments...................................... 61,682 11,439 9,470 267,842
Purchase of furniture, equipment and leasehold
improvements............................................ (1,958) (377) (401) (6,857)
Proceeds from sale of assets.............................. 9 -- 9 72
Decrease in deposits...................................... 490 -- -- --
Investment in affiliate................................... -- -- -- (500)
-------- -------- -------- ---------
Net cash provided by (used in) investing activities....... 17,414 (49) 7,511 (2,371)
Cash flows from financing activities:
Proceeds from notes payable............................... 1,369 927 182 7,150
Repayment of notes payable and principal payments under
capital lease obligations............................... (353) (301) (426) (3,538)
Purchase of treasury stock................................ -- -- -- (11)
Proceeds from issuance of stock........................... 3,084 12,700 7,726 98,822
-------- -------- -------- ---------
Net cash provided by financing activities................. 4,100 13,326 7,482 102,423
-------- -------- -------- ---------
Net increase (decrease) in cash and cash equivalents...... 9,309 190 (3,274) 8,254
Cash and cash equivalents at beginning of period.......... 2,029 11,338 11,528 --
-------- -------- -------- ---------
Cash and cash equivalents at end of period.................. $ 11,338 $ 11,528 $ 8,254 $ 8,254
======== ======== ======== =========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest.................. $ 81 $ 273 $ 391 $ 1,530
Supplemental schedule of noncash financing activities:
Conversion of notes payable and accrued interest to Common
Stock................................................... $ -- $ -- $ -- $ 3,043
The accompanying notes are an integral part of these consolidated financial
statements.
F-11
12
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Aronex Pharmaceuticals, Inc. ("the Company", "Aronex Pharmaceuticals",
"we", "us" or "our") was incorporated in Delaware on June 13, 1986 and merged
with Triplex Pharmaceutical Corporation ("Triplex") and API Acquisition Company,
Inc. ("API"), formerly Oncologix, Inc. effective September 11, 1995. In 1998, we
formed a subsidiary, Aronex Europe Limited.
Aronex Pharmaceuticals is a development-stage company that has devoted
substantially all of its efforts to research and product development and has not
yet generated any significant revenues, nor is there any assurance of future
revenues. In addition, we expect to continue to incur losses for the foreseeable
future, and there can be no assurance that we will successfully complete the
transition from a development-stage company to successful operations. The
development activities we engage in involve a high degree of risk and
uncertainty. Our ability to successfully develop, manufacture and market our
proprietary products is dependent upon many factors. These factors include, but
are not limited to, the need for additional financing, attracting and retaining
key personnel and consultants, and successfully developing manufacturing, sales
and marketing operations. Our ability to develop these operations may be
immensely impacted by uncertainties related to patents and proprietary
technologies, technological change and obsolescence, product development,
competition, government regulations and approvals, health care reform,
third-party reimbursement and product liability exposure. Further, during the
period required to develop these products, we will require additional funds
which may not be available to us.
We have operated as a development stage enterprise since our inception by
devoting substantially all of our efforts to raising capital and performing
research and development. In order to complete the development and other
activities necessary to commercialize our products, additional financing will be
required. We have not secured any commitments for any such additional financing.
The majority of our clinical trials have reached the stage where we have
completed patient enrollment in their current phase. At the current time, we are
gathering clinical trial data for analysis. We anticipate reporting the data at
appropriate scientific meetings. Before we initiate any new clinical trials, we
will analyze each product's likelihood for approval, the cost of the proposed
clinical trial, cash available at such time and the inherent risk profile. We
anticipate these steps will assist us in maximizing shareholder value.
In January 2001, we received a non-approval letter from the United States
Food and Drug Administration (FDA) for our New Drug Application (NDA) amendment
for ATRAGEN(R) for acute promyelocytic leukemia (APL). Following this event, we
reduced expenditures in our research and development plans and activities.
Additionally, we reduced the number of full-time employees in January 2001 from
77 to 29.
We will continue to require substantial additional funds for our
operations. At December 31, 2000, we had $9.1 million in cash, cash equivalents
and investments. We believe that we can conserve our existing financial
resources to satisfy our capital and operating requirements into the fourth
quarter of 2001.
The factors discussed above raise substantial doubt about our ability to
continue as a going concern. We will, in all likelihood, need to further reduce
our expenditures if we do not obtain additional financial resources by mid 2001.
We retained Robertson Stephens, a San Francisco-based investment bank, to assist
us in pursuing strategic alliances with companies in our industry. Also, we are
actively pursuing other sources of financing. Sources of financing may not be
available, or if available, will be dilutive or may have other adverse effect to
the value of our shares. We may have to close operations and/or seek legal
protection from our creditors. Accordingly, there can be no assurance of our
future success. The accompanying financial statements do not include any
adjustments relating to the recoverability and classification of asset carrying
amounts or the amount and classification of liabilities that might result should
the Company be unable to continue as a going concern. See "Business -- General"
and
F-12
13
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
"Business -- Additional Business Risks" in the Company's Form 10-K for the year
ended December 31, 2000.
2. ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Aronex
Pharmaceuticals, Triplex, API and Aronex Europe Limited. All material
intercompany transactions have been eliminated in consolidation.
Cash, Cash Equivalents and Short- and Long-Term Investments
Debt and equity securities that we have the intent and ability to hold to
maturity are classified as "held to maturity" and reported at amortized cost.
Debt and equity securities that are held for current resale are classified as
"trading securities" and reported at fair value with unrealized gains and losses
included in earnings. Debt and equity securities not classified as either
"securities-held-to-maturity" or "trading securities" are classified as
"securities-available-for-sale" and reported at fair value, with unrealized
gains and losses excluded from earnings and reported as a separate component of
stockholders' equity.
Cash and cash equivalents include money market accounts and investments
with an original maturity of less than three months. Long-term investments at
December 31, 2000 are available for sale securities which are United States
mortgage backed securities with maturity dates over the next 22 years that have
an amortized cost of $821,000 which approximates fair market value and cost. We
currently have no trading securities.
Furniture, Equipment and Leasehold Improvements
Furniture and equipment are carried at cost and depreciation is calculated
on the straight-line method using a five-year estimated useful life. Leasehold
improvements are amortized on the straight-line method over the shorter of the
life of the lease or a five-year estimated useful life. Maintenance and repairs
that do not improve or extend the life of assets are expensed as incurred.
Expenditures which improve or extend the life of assets are capitalized.
A summary of furniture, equipment and leasehold improvements is as follows
(in thousands):
DECEMBER 31,
------------------
1999 2000
------- -------
Office furniture and equipment........................... $ 1,136 $ 1,390
Laboratory equipment..................................... 3,460 3,499
Leasehold improvements................................... 883 876
------- -------
5,479 5,765
Less accumulated depreciation and amortization........... (3,450) (3,914)
------- -------
Furniture, equipment and leasehold improvements, net..... $ 2,029 $ 1,851
======= =======
At December 31, 2000, the cost of all furniture, equipment and leasehold
improvements pledged as collateral on notes payable totaled $1,916,000.
F-13
14
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revenue Recognition
During 2000, we adopted United States Securities and Exchange Commission
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
(SAB 101), which requires up-front, non-refundable license fees to be deferred
and recognized over the performance period. Payments for services under research
and development grants and contracts that are specifically tied to a separate
earnings process are recognized as revenue as the services are performed. In
situations where we receive payment in advance of the performance of services,
such amounts are deferred and recognized as revenue as the related services are
performed. Non-refundable fees, including payments for up-front licensing fees
and milestones (collectively, "Non-refundable Fees"), are recognized as revenue
based on the percentage of costs incurred to date, estimated costs to complete,
and total Non-refundable Fees received. Prior to January 1, 2000, we had
recognized revenue from Non-refundable Fees when we had no obligations to return
the fees under any circumstances, and there were no additional contractual
services to be provided or costs to be incurred by us in connection with the
Non-refundable Fees.
The cumulative effect of adopting SAB 101 at January 1, 2000 resulted in a
one-time, non-cash charge of $4.5 million, with a corresponding increase to
deferred revenue that will be recognized in future periods. The $4.5 million
represents portions of 1998 and 1999 Non-refundable Fees from Abbott
Laboratories in consideration for the exclusive worldwide rights to market and
sell Nyotran(R). For the year ended December 31, 2000, we recognized $2.8
million of research and development grants and contracts revenue that was
included in the cumulative effect adjustment as of January 1, 2000. The balance
of the deferred revenue from this adjustment, $1.7 million, will be recognized
in the future as we incur costs relating to obtaining approval for Nyotran(R)
from the FDA.
Prior period financial statements have not been restated to apply SAB 101
retroactively; however, the pro forma amounts included in the consolidated
statements of operations show the net loss and per share net loss assuming we
had retroactively applied SAB 101 to all prior periods.
Research and Development
Costs incurred in connection with research and development activities are
expensed as incurred. These costs consist of direct and indirect costs
associated with specific projects as well as fees paid to various entities that
perform certain research on our behalf.
Comprehensive Loss
SFAS No. 130, "Reporting Comprehensive Income", establishes standards for
reporting and displaying comprehensive loss and its components in an entity's
financial statements, and is effective for fiscal years beginning after December
15, 1997. Comprehensive loss is the total of net loss and all other non-owner
changes in equity, which for the Company includes unrealized gains and losses on
securities available for sale. A reconciliation of reported net loss to
comprehensive loss is included in the consolidated statements of comprehensive
loss.
Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
F-14
15
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Reclassification
Certain reclassifications have been made to the prior year's financial
statements to be consistent with the presentation in the current year.
3. INVESTMENT IN AFFILIATE
In April 1994, we invested in and entered into a drug development agreement
with RGene Therapeutics, Inc. ("RGene"). We purchased $500,000 of RGene's
preferred stock, which was recorded in the financial statements as investment in
affiliate. The original investment was written off as RGene incurred losses.
This resulted in a zero basis when RGene was acquired by Targeted Genetics
Corporation, a publicly traded company, in June 1996.
We received 440,520 shares of Targeted Genetics common stock from the
acquisition of RGene in June 1996 and an additional 104,496 shares upon the
achievement of certain milestones in October 1998. The Company recorded the
shares at zero value in the financial statements until 1998 when they were
recorded at their fair market value of $716,000. As a result, an unrealized gain
of $2,147,000 is reflected on the Company's balance sheet at December 31, 1999.
In January 2000, we sold all of our shares of Targeted Genetics and realized a
gain of $2,653,000.
4. NOTES PAYABLE
In May 1998, we entered into a master loan agreement for the financing of
furniture, office equipment and laboratory equipment acquisitions. Each loan is
collateralized by the furniture and equipment and is payable in 60 monthly
installments. In June 1998 and February 1999, we borrowed $1,369,000 and
$547,000, respectively, through this agreement bearing interest at 12%. In May
1999, a $2.0 million advance from Genzyme Corporation ("Genzyme") and $500,000
in minimum royalties relating to ATRAGEN(R) due to Genzyme were converted into a
$2.5 million convertible note payable to Genzyme. This note bears interest at
10% per annum with interest payable semi-annually, and the principal is due May
21, 2002. This note can be converted into common stock of the Company at $4.35
per share at Genzyme's option (See note 8). Future principal payments under
these loan agreements at December 31, 2000 are as follows:
YEAR ENDING
DECEMBER 31, NOTE PAYABLE
- ------------ ------------
2001.......................................... $ 459,000
2002.......................................... 2,867,000
2003.......................................... 275,000
2004.......................................... 12,000
----------
Total......................................... $3,613,000
==========
5. STOCKHOLDERS' EQUITY
Common Stock Warrants
At December 31, 2000, we had warrants outstanding, relating to a certain
financing transaction to purchase 2,944 shares of common stock at an exercise
price of $12.00 per share. The warrants expired in March 2001.
F-15
16
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 2000, we had warrants outstanding, relating to our February
1999 common stock offering to purchase 596,772 shares of common stock at a price
of $3.28 per share. These warrants expire in February 2004.
At December 31, 2000, we had warrants outstanding relating to our 1999
financing with Genzyme to purchase 50,000 shares of common stock at an exercise
price of $4.00 per share. These warrants expire in May 2004.
In connection with our April 2000 common stock offering, we issued warrants
to purchase 977,524 shares of common stock at a price of $3.00 per share. At
December 31, 2000, 965,403 of these warrants are outstanding, and they expire in
April 2005. In addition, we issued to a placement agent warrants to purchase
150,000 shares of common stock at an exercise price of $3.25 per share. At
December 31, 2000, all of these warrants are outstanding, and they expire in
April 2007. The fair value of the warrants issued, $2,561,000, has been recorded
in the accompanying financial statements. This amount has been estimated on the
date of grant using the Black-Scholes option pricing model with the following
weighted average assumptions: a risk free interest rate of 5.6% with no expected
dividends, expected lives of five and seven years and expected volatility of
92%.
Financing Agreement
In November 2000, we entered into an agreement with Acqua Wellington North
American Equity Fund Ltd. for an equity financing agreement covering the sale of
up to $24 million of our common stock over a 28-month period ending in March
2003. We have not raised any funds under this agreement. In order to raise any
funds under this agreement, we must maintain a minimum stock price and maximum
market capitalization. At the present time, we do not meet these requirements
and do not expect to meet these requirements in the near future.
6. STOCK OPTION PLANS
In 1989, our stockholders approved the 1989 Stock Option Plan (the "Plan").
The Plan, as amended in 1992 and in May 1997, authorized the issuance of options
through December 31, 1999. The term of each option ranges from five to seven
years from the date of grant. The Plan expired at December 31, 1999 and has not
been extended. Options granted under the Plan continue to be outstanding and
expire at various dates through 2006.
A summary of stock option activity for the Plan follows:
OPTIONS PRICE
OUTSTANDING PER SHARE
----------- ---------------
Balance at December 31, 1997.................... 1,960,717 $0.04 to $14.88
Granted....................................... 336,114 $2.06 to $ 4.63
Exercised..................................... (42,638) $0.04 to $ 0.68
Forfeited..................................... (228,946) $3.88 to $14.88
--------- ---------------
Balance at December 31, 1998.................... 2,025,247 $0.04 to $14.88
Granted....................................... 404,605 $1.94 to $ 5.81
Exercised..................................... (317,433) $0.22 to $ 4.75
Forfeited..................................... (396,944) $0.04 to $14.88
--------- ---------------
Balance at December 31, 1999.................... 1,715,475 $0.16 to $11.50
Exercised..................................... (64,120) $2.38 to $ 5.06
Forfeited..................................... (361,948) $2.38 to $11.50
--------- ---------------
F-16
17
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OPTIONS PRICE
OUTSTANDING PER SHARE
----------- ---------------
Balance at December 31, 2000.................... 1,289,407 $0.16 to $11.50
========= ===============
Exercisable at December 31, 2000................ 1,024,783 $0.16 to $11.50
========= ===============
In June 1998, our stockholders approved the 1998 Stock Option Plan (the
"1998 Plan"). This plan authorizes the issuance of options to purchase up to
750,000 shares of common stock. Shares issued under the 1998 Plan expire 10
years from the date of issuance. In 1998, options to purchase 370,000 shares of
common stock were issued to employees, and 320,000 of these shares will vest at
the earlier of various dates based on the achievement of corporate and personal
goals as determined by the Board of Directors' compensation committee and the
achievement of specific common stock price targets or nine years and ten months
from the date of grant. At December 31, 2000, 28,243 shares were available for
future grant under the Plan. In January 2001, the Board of Directors amended and
restated 1998 Plan authorizing the issuance of options covering the greater of
(i) 2,600,000 shares of common stock or (ii) 10% of the shares of common stock
outstanding on the last day of the preceding fiscal quarter, among other
changes.
A summary of stock option activity for the 1998 Plan follows:
OPTIONS PRICE
OUTSTANDING PER SHARE
----------- --------------
Balance at December 31, 1997..................... -- $ --
Granted........................................ 370,000 $2.44 to $3.88
-------- --------------
Balance at December 31, 1998..................... 370,000 $2.44 to $3.88
Granted........................................ 230,000 $ 3.63
Exercised...................................... (58,800) $2.44 to $3.88
Forfeited...................................... (143,200) $ 3.88
-------- --------------
Balance at December 31, 1999..................... 398,000 $3.63 to $3.88
Granted........................................ 281,807 $2.63 to $5.31
Exercised...................................... (60,107)(i) $ --
Forfeited...................................... (16,850) $3.00 to $3.38
-------- --------------
Balance at December 31, 2000..................... 602,850 $2.63 to $4.06
======== ==============
Exercisable at December 31, 2000................. 130,450 $3.63 to $3.88
======== ==============
- ---------------
(i) Represents stock issued at fair market value for services under consulting
agreements.
During 1993, we adopted the 1993 Non-Employee Director Stock Option Plan
(the "Director Plan"). The Director Plan, as amended effective in May 1997,
authorizes the issuance of options to purchase up to 600,000 shares of common
stock. In January 2001, the Board of Directors amended the Director Plan to
increase the number of shares of our common stock underlying options that may be
granted under the Director Plan to 1,200,000 from 600,000. Shares issued under
the Director Plan expire ten years from the date of issuance. The Director Plan
allows for the issuance of two types of grants: Formula Grants and Discretionary
Grants. Formula Grants are fully-vested when issued and are issued at a price
equal to the fair market value of our stock at the date of issuance. The
following Formula Grants are issued under the Director Plan: (1) options to
purchase 25,000 shares of common stock to each Non-Employee Director upon first
being elected to the Board of Directors and (2) options to purchase 7,500 shares
of common stock annually to each Non-Employee Director who has served as a
director for at least six months. The annual Formula Grants for 2000 were not
granted until January 2001 because insufficient shares were
F-17
18
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
available on December 31, 2000. The expense associated with these annual Formula
Grants for 2000 has been recorded in the December 31, 2000 financial statements.
Discretionary Grants may be issued by the compensation committee of the Board of
Directors and may be issued at less than the fair market value of our stock. In
2000, Discretionary Grants to purchase a total of 80,000 shares of common stock
were issued to two Non-Employee Directors. These options vest over four years
and were issued at the fair market value of our common stock at the date of
grant. At December 31, 2000, 7,500 shares were available for future grant under
the Plan.
A summary of stock option activity for the Director Plan follows:
OPTIONS PRICE
OUTSTANDING PER SHARE
----------- ---------------
Balance at December 31, 1997...................... 367,500 $4.25 to $11.00
Granted......................................... 62,500 $2.00 to $ 2.53
------- ---------------
Balance at December 31, 1998...................... 430,000 $2.00 to $11.00
Granted......................................... 102,500 $2.97 to $ 3.13
Forfeited....................................... (32,500) $5.50 to $ 9.38
------- ---------------
Balance at December 31, 1999...................... 500,000 $2.00 to $11.00
Granted......................................... 80,000 $2.81 to $ 4.75
Exercised....................................... (7,500) $ 2.00
------- ---------------
Balance at December 31, 2000...................... 572,500 $2.00 to $11.00
======= ===============
Exercisable at December 31, 2000.................. 513,167 $2.00 to $11.00
======= ===============
We recorded deferred compensation for the difference between the grant
price and the fair market value of the stock for financial statement
presentation purposes related to options. At December 31, 2000, all of this
compensation had been amortized to expense over the vesting periods of the
options. In 1998, 1999 and 2000, $499,000, $281,000 and $69,000, respectively,
in related expense was recorded.
We account for these plans under APB Opinion No. 25, under which
compensation expense is recorded. Had compensation cost for these plans been
determined consistent with FASB Statement No. 123 ("SFAS 123"), our net loss per
share would have been increased to the following pro forma amounts:
YEAR ENDED DECEMBER 31,
--------------------------------------------
1998 1999 2000
------------ ------------ ------------
Net Loss:
As reported............................ $(18,231,000) $(14,094,000) $(17,957,000)
============ ============ ============
Pro forma.............................. $(19,598,000) $(15,567,000) $(18,812,000)
============ ============ ============
Loss Per Share (basic and diluted):
As reported............................ $ (1.17) $ (0.65) $ (0.72)
============ ============ ============
Pro forma.............................. $ (1.26) $ (0.72) $ (0.75)
============ ============ ============
Because the SFAS 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation may not
be representative of that to be expected in future years. The fair value of each
option grant is estimated on the date of grant using the Black-Scholes options
pricing model with the following weighted-average assumptions used for grants in
1998, 1999 and
F-18
19
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2000, respectively: risk-free interest rates of 5.2%, 5.6% and 6.2%, with no
expected dividends, expected lives of five years, 3.5 years and four years and
expected volatility of 113%, 92% and 97%.
A summary of the status of our three stock option plans as of December 31,
1998, 1999 and 2000 and charges during the years ending on those dates is
presented below:
1998 1999 2000
--------------------- --------------------- ---------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
FIXED OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE
- ------------- --------- --------- --------- --------- --------- ---------
Balance at beginning of year...... 2,328,217 $5.37 2,825,247 $4.96 2,613,475 $4.69
Granted......................... 768,614 $3.52 737,105 $3.30 361,807 $3.35
Exercised....................... (42,638) $0.39 (376,233) $3.27 (131,727) $3.85
Forfeited....................... (228,946) $5.27 (572,644) $5.15 (378,798) $5.95
--------- --------- ---------
Balance at end of year............ 2,825,247 $4.96 2,613,475 $4.69 2,464,757 $4.35
========= ========= =========
Options exercisable at year
end.......................... 1,917,151 $5.40 1,654,649 $5.08 1,668,400 $4.70
========= ========= =========
Weighted-average fair value of
options granted during the
year......................... $2.68 $2.24 $2.36
The following table summarizes information about stock options outstanding
at December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------- ----------------------------------
NUMBER WEIGHTED-AVERAGE WEIGHTED- NUMBER WEIGHTED-
RANGE OF OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
EXERCISE PRICES DECEMBER 31, 2000 CONTRACTUAL LIFE EXERCISE PRICE DECEMBER 31, 2000 EXERCISE PRICE
- --------------- ----------------- ---------------- -------------- ----------------- --------------
$0.16 - $ 3.00 395,253 5.5 $2.62 158,870 $2.39
$3.01 - $ 7.00 1,878,710 4.4 $4.31 1,318,845 $4.46
$7.01 - $11.50 190,794 3.8 $8.30 190,685 $8.30
--------- ---------
2,464,757 1,668,400
========= =========
In addition to the stock option plans in 1997, we issued 100,000 stock
options to a former consultant. These options are vested, have an exercise price
of $7.00 per share and expire in May 2002.
7. FEDERAL INCOME TAXES
We recognize deferred tax liabilities and assets for the expected future
tax consequences of events that have been recognized differently in the
financial statements and tax returns. Under this method, deferred tax
liabilities and assets are determined based on the difference between the
financial statement carrying amounts and tax bases of assets and liabilities
using enacted tax rates and laws in effect in the years in which the differences
are expected to reverse. Deferred tax assets are evaluated for realization based
on a more-likely-than-not criteria in determining if a valuation allowance
should be provided.
F-19
20
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the statutory federal income tax rate to our effective
income tax rate for the periods ended December 31, 1998, 1999 and 2000 is as
follows:
1998 1999 2000
----- ----- -----
Statutory rate.............................................. (34.0)% (34.0)% (34.0)%
Cumulative effect of accounting change not deductible....... 0.0% 0.0% 3.1%
Equity in loss of foreign subsidiary not deductible......... 0.0% 2.2% 0.8%
Deductible stock option compensation........................ 0.0% (0.4)% 0.0%
Other....................................................... 0.9% 0.1% 0.2%
Adjustment due to deferred tax valuation allowance.......... 33.1% 32.1% 29.9%
===== ===== =====
0.0% 0.0% 0.0%
===== ===== =====
Significant components of our net deferred tax asset at December 31, 1999
and 2000 are as follows:
1999 2000
----------- -----------
Deferred tax assets relating to:
Federal net operating loss carryforwards........ $39,023,000 $44,386,000
Financial statement depreciation and
amortization in excess of amount deductible
for income tax purposes...................... 240,400 241,300
Accrued liabilities not currently deductible for
income tax purposes.......................... 748,000 748,000
Equity in loss of affiliate not currently
deductible for income tax purposes........... 170,000 170,000
Other items, net................................ (34,300) (37,600)
----------- -----------
Total deferred items, net......................... 40,147,100 45,507,700
Deferred tax valuation allowance.................. (40,147,100) (45,507,700)
----------- -----------
Net deferred tax asset............................ $ -- $ --
=========== ===========
At December 31, 2000, we had net operating loss ("NOL") carryforwards for
federal income tax purposes of approximately $130.6 million. The Tax Reform Act
of 1986 provided a limitation on the use of NOL and tax credit carryforwards
following certain ownership changes that could limit our ability to utilize
these NOLs and tax credits. Accordingly, our ability to utilize the above NOL
and tax credit carryforwards to reduce future taxable income and tax liabilities
may be limited. As a result of the merger with Triplex and API in 1995, a change
in control as defined by federal income tax law occurred, causing the use of
these carryforwards to be limited and possibly eliminated. Additionally, because
United States tax laws limit the time during which NOLs and the tax credit
carryforwards may be applied against future taxable income and tax liabilities,
we may not be able to take full advantage of our NOLs and tax credit
carryforwards for federal income tax purposes. The carryforwards will begin to
expire in 2001 if not otherwise used. Due to the possibility of not reaching a
level of profitability that will allow for the utilization of our deferred tax
assets, a valuation allowance has been established to offset these tax assets.
The valuation allowance increased $8,108,400, $3,401,700 and $5,360,600 for the
years ended December 31, 1998, 1999 and 2000, respectively. These increases were
primarily due to our losses from operations for such periods and the valuation
allowance for the net operating loss carryforwards acquired in the 1995 mergers
with Triplex and API. We have not made any federal income tax payments since
inception.
F-20
21
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. LICENSE, RESEARCH AND DEVELOPMENT AGREEMENTS
We have two exclusive license agreements with The University of Texas M.D.
Anderson Cancer Center ("M.D. Anderson") that may be terminated in the event of
a material breach of the terms of the agreement or for failure to convert the
licensed subject matter to a commercial form. However, management believes our
ongoing development efforts currently satisfy this obligation to commercialize.
The license agreements require us to pay royalties for licensed patent
products or processes based on net sales percentages. We must also pay M.D.
Anderson $200,000 for each FDA-approved product resulting from certain licensed
research tasks. No royalties have been paid to date since we have had no sales.
For the years ended December 31, 1998, 1999 and 2000, we paid M.D. Anderson
$23,000, $157,000 and $23,000, respectively, for research performed on our
behalf.
In 1993, we entered into a non-exclusive license agreement with a
pharmaceutical company to use a patented process in the manufacture, use and
sale of certain of our products with an initial fee of $30,000. Annual royalty
payments by us are to be computed as a percentage of sales, as defined in the
agreement. The royalty payments shall not exceed $1 million in a calendar year
and expire upon expiration of the licensed patents.
In 1993, we entered into a license and development agreement with Genzyme
to develop and commercialize ATRAGEN(R). In September 1996, Genzyme advanced us
$2.0 million. Early in 1997, the Company amended the agreement through which (1)
we released Genzyme from any further obligation to perform development work for
ATRAGEN(R) and (2) the license granted to Genzyme under the agreement was
converted to an option to acquire the right to market and sell ATRAGEN(R)
worldwide.
In March 1999, Genzyme notified us that they did not intend to exercise
their option to acquire the right to market and sell ATRAGEN(R) worldwide. As a
result of the election, we have regained full marketing rights to ATRAGEN(R) on
a worldwide basis and we were obligated to repay Genzyme the $2.0 million
advance by May 21, 1999 and pay product royalties, including $500,000 in minimum
royalties by April 24, 2000. In May 1999, the $2.0 million advance from Genzyme
and the $500,000 in minimum royalties were converted into a $2.5 million
convertible note payable to Genzyme, which has a maturity date in May 2002. This
note can be converted into our common stock at $4.35 per share at Genzyme's
option. In connection with this financing, we issued Genzyme warrants to
purchase 50,000 shares of common stock at an exercise price of $4.00 per share.
These warrants are exercisable until May 21, 2004. The fair value of the
warrants, $150,000, has been recorded in the accompanying financial statements.
This amount has been estimated on the date of grant using the Black-Scholes
option pricing model with the following weighted-average assumptions: a risk
free interest rate of 5.2% with an expected life of five years and expected
volatility of 114%.
In 1996, we entered into a license agreement with Boehringer Mannheim GmbH
(subsequently acquired by F. Hoffman-LaRoche Ltd. ("Roche")) to develop and
commercialize one of our products, AR209. Under the agreement, Roche was
responsible for funding the costs of all remaining preclinical and clinical
development of AR209 and for manufacturing the product. Roche paid us $150,000
in license fees in connection with this agreement in 1997 and agreed to pay
minimum annual license fees of $100,000 during the term of the agreement. The
agreement was terminated without cause by Roche in September 1998, as a result
of which all rights to AR209 have reverted to us.
On November 12, 1998, we entered into a license agreement with Abbott for
Nyotran(R). The license agreement provides Abbott with exclusive worldwide
rights to market and sell Nyotran(R), subject to rights previously granted to
Grupo Ferrer Internacional, S.A. in Spain and Portugal and certain co-promotion
F-21
22
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
rights retained by us in the United States and Canada. Under the license
agreement, Abbott has paid us up-front payments, development milestones and
development payments. Abbott purchased 837,989 shares of our common stock for
$3.0 million under a related stock purchase agreement on November 30, 1998.
Abbott has provided funding for the clinical development of Nyotran(R) and will
make subsequent milestone payments if specified sales targets are achieved.
Abbott will also pay to us escalating royalties on all product sales of
Nyotran(R).
In December 2000, we entered into a license agreement with Sumitomo
Pharmaceuticals Co., Ltd. that gives us the exclusive right in the United States
to a particular class of DACH platinum compounds. Aroplatin(TM), one of our
products in clinical development, is a liposomal formulation of a novel platinum
compound from this class of drugs. Under this agreement, Sumitomo
Pharmaceuticals received a $500,000 up-front payment from us in 2001, (such
amount was expensed in the 2000 financial statements) and will receive
subsequent milestone payments based on regulatory filings, approval and sales of
Aroplatin(TM), and royalties on the sales of Aroplatin(TM) in the United States.
Except for the treatment of hepatoma, the license agreement gives us the
exclusive right to make, use, develop, import and sell Aroplatin(TM) in the
United States.
9. COMMITMENTS AND CONTINGENCIES
We lease laboratory and office space under operating leases and certain
office equipment on a short-term basis. Under a current building lease, we have
committed to lease 30,000 square feet for ten years beginning in January 1998.
Rental expense relating to these leases was approximately $667,000, $756,000,
and $713,000 for the years ended December 31, 1998, 1999 and 2000, respectively.
Future minimum noncancellable payments under operating leases at December
31, 2000 are as follows:
YEAR ENDING
DECEMBER 31, AMOUNT
- ------------ ----------
2001............................................. $ 713,000
2002............................................. 710,000
2003............................................. 707,000
2004............................................. 692,000
2005............................................. 676,000
Thereafter....................................... 1,379,000
----------
Total............................................ $4,877,000
==========
We are subject to numerous risks and uncertainties because of the nature of
and status of our operations. We maintain insurance coverage for events and in
amounts that we deem appropriate. Management believes that uninsured losses, if
any, will not be materially adverse to our financial position or results of
operations.
Litigation
In the normal course of doing business, we occasionally become a party to
litigation. It the opinion of management, pending or threatened litigation
involving the Company will not have a material adverse material effect on our
financial condition.
F-22
23
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. RELATED PARTY TRANSACTIONS AND EMPLOYMENT AGREEMENTS
We entered into employment agreements with our chief executive officer and
key employees that have initial termination dates ranging from 2001 to 2002.
These agreements are thereafter automatically renewed for successive periods of
12 to 18 months unless terminated by either party. Such agreements provide that
in the case of termination without cause by the Company or termination by the
employee for good reason, the officers are entitled to payments ranging from 100
to 250% of their annual salaries. Additionally, one officer has an outstanding
loan with Aronex Pharmaceuticals with a balance of approximately $10,000 at
December 31, 2000. This loan will be repaid over the next two years. Current
annual salaries relating to these agreements total $1.2 million at December 31,
2000.
In February 1998, we amended a consulting agreement with our chief
scientific advisor for a three-year period ending December 31, 2000, whereby we
were committed to pay consulting fees of $156,000 per year through December 31,
2000. One-half of the amount was paid in cash and one-half was paid in our
common stock. We paid cash of $78,000 for the years ended December 31, 1998,
1999 and 2000, respectively, and issued 18,352, 40,248 and 21,584 shares of our
common stock in 1998, 1999 and 2000, respectively, pursuant to this agreement.
In December 2000, this agreement was renewed for an additional 12-month period.
11. 401(k) PLAN
We maintain a retirement savings plan, effective as amended on January 1,
1991, in which any of our employees who has completed one month of employment
may elect to participate. The plan is an individual account plan providing for
deferred compensation as described in Section 401(k) of the United States
Internal Revenue Service Code and is subject to, and intended to comply with,
the Employee Retirement Income Security Act of 1974, as amended. Each eligible
employee is permitted to contribute up to 20% of his/her annual salary up to the
applicable statutory maximum prescribed in the Code. We may, in our discretion,
contribute an amount equal to the employee's contribution, but our contribution
may not exceed an amount equal to 6% of the employee's compensation. A
participant is 50% vested in the accrued benefits derived from our contributions
after completion of one year of employment following his/her election to
participate in the plan, and 100% vested in such contributions after completion
of two years of employment following such election. Participants may receive
hardship loans under the terms of the plan. The plan provides for distributions
in the event a participant dies, reaches the age of 65, becomes disabled or
terminates his/her employment prior to the age of 65. Aronex Pharmaceuticals
made contributions of approximately $56,500, $65,200 and $64,300 under the
401(k) plan for the years ended December 31, 1998, 1999 and 2000, respectively.
12. EMPLOYEE STOCK PURCHASE PLAN
In December 1996, the Board of Directors adopted the 1997 Employee Stock
Purchase Plan and reserved 250,000 shares of common stock for issuance
thereunder. The plan permits employees to purchase common stock through payroll
deductions of up to 15% of their compensation subject to limitations as defined
by the Internal Revenue Service. Purchases of common stock are made at the lower
of 85% of fair market value at the beginning or end of each six-month offering
period. In 1998, 39,516 shares were purchased by employees at $3.35 and $1.70
per share. In 1999, 71,023 shares were purchases by employees at $1.65 and $2.66
per share. In 2000, 41,169 shares were purchased by employees at $2.60 per
share.
13. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Effective January 1, 2000, we changed our method of accounting for revenue
recognition to conform with the guidance provided by SAB 101 (See Note 2). The
cumulative effect of adopting SAB 101 at
F-23
24
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
January 1, 2000 resulted in a one-time, non-cash charge of $4.5 million, with a
corresponding increase to deferred revenue that will be recognized in future
periods. The $4.5 million represents portions of 1998 and 1999 payments received
from Abbott Laboratories in consideration for the exclusive worldwide rights to
market and sell Nyotran(R). For the year ended December 31, 2000, we recognized
$2.8 million of research and development grants and contracts revenue that was
included in the cumulative effect adjustment as of January 1, 2000.
Summarized quarterly financial data for the years ended December 31, 2000
and 1999 are displayed in the following tables:
FIRST QUARTER ENDED
MARCH 31, 2000
----------------------------
AS PREVIOUSLY
REPORTED AS RESTATED
------------- -----------
(UNAUDITED)
Total revenues.............................................. $ 300 $ 1,451
======= =======
Operating loss.............................................. $(6,199) $(5,048)
======= =======
Other income, net........................................... $ 2,747 $ 2,747
======= =======
Net loss before cumulative effect of change in accounting
principle................................................. $(3,452) $(2,301)
Cumulative effect of change in accounting principle......... -- (4,455)
------- -------
Net loss.................................................... $(3,452) $(6,756)
======= =======
Net loss per share, basic and diluted:
Net loss before cumulative effect of change in accounting
principle................................................. $ (0.15) $ (0.10)
Cumulative effect of change in accounting principle......... -- (0.19)
------- -------
Net loss per share.......................................... $ (0.15) $ (0.29)
======= =======
SECOND QUARTER ENDED THIRD QUARTER ENDED
JUNE 30, 2000 SEPTEMBER 30, 2000
--------------------------- ---------------------------
AS PREVIOUSLY AS PREVIOUSLY FOURTH QUARTER ENDED
REPORTED AS RESTATED REPORTED AS RESTATED DECEMBER 31, 2000
------------- ----------- ------------- ----------- --------------------
(UNAUDITED)
Total revenues.................. $ -- $ 587 $ 26 $ 711 $ 470
Operating loss.................. $(4,636) $(4,049) $(4,270) $(3,585) $(3,951)
Other income, net............... $ 170 $ 170 $ 139 $ 139 $ 75
Net loss........................ $(4,466) $(3,879) $(4,131) $(3,446) $(3,876)
Net loss per share, basic and
diluted....................... $ (0.18) $ (0.16) $ (0.16) $ (0.13) $ (0.15)
FIRST QUARTER ENDED SECOND QUARTER ENDED THIRD QUARTER ENDED FOURTH QUARTER ENDED
MARCH 31, 1999 JUNE 30, 1999 SEPTEMBER 30, 1999 DECEMBER 31, 1999
------------------- -------------------- ------------------- --------------------
(UNAUDITED)
Total revenues............. $ 3,282 $ 6,591 $ 854 $ 325
Operating income (loss).... $(3,437) $ 954 $(5,595) $(7,016)
Other income, net.......... $ 262 $ 315 $ 196 $ 227
Net income (loss).......... $(3,175) $ 1,269 $(5,399) $(6,789)
Net income (loss) per
share, basic and
diluted.................. $ (0.17) $ 0.06 $ (0.24) $ (0.30)
Pro forma amounts assuming
the accounting change is
applied retroactively:
Net loss................... $(4,353) $(1,205) $(3,757) $(4,361)
Net loss per share,basic
and diluted.............. $ (0.23) $ (0.05) $ (0.17) $ (0.19)
F-24
25
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31,
DECEMBER 31, 2001
2000 (UNAUDITED)
------------ -----------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 8,254 $ 4,485
Prepaid expenses and other assets......................... 116 246
--------- ---------
Total current assets.............................. 8,370 4,731
Long-term investments....................................... 821 773
Furniture, equipment and leasehold improvements, net of
accumulated depreciation of $3,914 and $4,020,
respectively.............................................. 1,851 1,679
--------- ---------
Total assets...................................... $ 11,042 $ 7,183
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses..................... $ 2,789 $ 2,011
Accrued payroll........................................... 313 505
Current portion of notes payable.......................... 459 424
Current portion of deferred revenue....................... 1,196 1,196
--------- ---------
Total current liabilities......................... 4,757 4,136
Long-term liabilities:
Notes payable, net of current portion..................... 3,154 3,071
Deferred revenue, net of current portion.................. 466 374
--------- ---------
Total long-term liabilities....................... 3,620 3,445
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock $.001 par value, 5,000,000 shares
authorized, none issued and outstanding................ -- --
Common stock $.001 par value, 40,000,000 shares
authorized, 25,973,674 and 25,973,843 shares issued and
outstanding, respectively.............................. 26 26
Additional paid-in capital................................ 118,697 118,697
Common Stock warrants..................................... 3,439 3,439
Treasury stock............................................ (11) (11)
Deficit accumulated during development stage.............. (119,486) (122,549)
--------- ---------
Total stockholders' equity (deficit).............. 2,665 (398)
--------- ---------
Total liabilities and stockholders' equity
(deficit)....................................... $ 11,042 $ 7,183
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-25
26
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(ALL AMOUNTS IN THOUSANDS, EXCEPT LOSS PER SHARE DATA)
(UNAUDITED)
PERIOD FROM
INCEPTION
THREE MONTHS ENDED (JUNE 13,
MARCH 31, 1986) THROUGH
------------------ MARCH 31,
2000 2001 2001
------- ------- -------------
Revenues:
Research and development grants and contracts............ $ 1,451 $ 92 $ 26,150
------- ------- ---------
Total revenues................................... 1,451 92 26,150
------- ------- ---------
Expenses:
Research and development................................. 5,800 2,090 116,123
Purchase of in-process research and development.......... -- -- 11,625
General and administrative............................... 699 1,009 26,060
------- ------- ---------
Total expenses................................... 6,499 3,099 153,808
------- ------- ---------
Operating loss............................................. (5,048) (3,007) (127,658)
------- ------- ---------
Other income (expense):
Interest income.......................................... 221 106 9,208
Gain on sale of investments.............................. 2,653 -- 2,653
Interest expense and other............................... (127) (162) (2,297)
------- ------- ---------
Other income (expense), net................................ 2,747 (56) 9,564
Net loss before cumulative effect of change in accounting
principle................................................ (2,301) (3,063) (118,094)
Cumulative effect of change in accounting principle...... (4,455) -- (4,455)
------- ------- ---------
Net loss................................................... $(6,756) $(3,063) $(122,549)
======= ======= =========
Net loss per share before cumulative effect of change in
accounting principle..................................... $ (0.10) $ (0.12)
Cumulative effect of change in accounting principle...... (0.19) --
------- -------
Basic and diluted loss per share........................... $ (0.29) $ (0.12)
======= =======
Weighted average shares used in computing basic and diluted
loss per share........................................... 22,881 25,974
The accompanying notes are an integral part of these consolidated financial
statements.
F-26
27
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(ALL AMOUNTS IN THOUSANDS, EXCEPT LOSS PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
------------------
2000 2001
------- -------
Comprehensive income:
Net loss.................................................. $(6,756) $(3,063)
Unrealized gain........................................... 2,147 --
Realized gain............................................. (2,653) --
------- -------
Comprehensive income.............................. $(7,262) $(3,063)
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
F-27
28
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(ALL AMOUNTS IN THOUSANDS)
(UNAUDITED)
PERIOD FROM
INCEPTION
THREE MONTHS ENDED (JUNE 13, 1986)
MARCH 31, THROUGH
------------------ MARCH 31,
2000 2001 2001
-------- ------- ---------------
Cash flows from operating activities:
Net loss.................................................. $ (6,756) $(3,063) $(122,549)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization.......................... 149 132 6,160
Loss on disposal of assets............................. -- 40 240
Compensation expense related to stock and stock
options.............................................. 171 -- 5,179
Technology purchased through acquisition............... -- -- 11,547
Unrealized gain (loss) on investment................... (2,147) -- 2,653
Realized gain on sale of investments................... (2,653) -- (2,653)
Acquisition costs, net of cash received................ -- -- (270)
Accrued interest payable converted to stock............ -- -- 97
Loss in affiliate...................................... -- -- 500
Changes in assets and liabilities:
(Increase) decrease in prepaid expenses and other
assets, net.......................................... 49 (130) (61)
Increase (decrease) in accounts payable and accrued
expenses............................................. (942) (586) 2,443
(Increase) decrease in deferred revenue................ 3,304 (92) 1,217
-------- ------- ---------
Net cash used in operating activities................ (8,825) (3,699) (95,497)
Cash flows from investing activities:
Purchases of investments.................................. -- -- (262,928)
Sales of investments...................................... 10,461 48 267,890
Purchase of furniture, equipment and leasehold
improvements........................................... (68) -- (6,857)
Proceeds from sale of assets.............................. -- -- 72
Investment in affiliate................................... -- -- (500)
-------- ------- ---------
Net cash provided by (used in) investing
activities........................................ 10,393 48 (2,323)
Cash flows from financing activities:
Proceeds from notes payable............................... 12 12 7,162
Repayment of notes payable and principal payments under
capital lease obligations.............................. (72) (130) (3,668)
Purchase of treasury stock................................ -- -- (11)
Proceeds from issuance of stock........................... 122 -- 98,822
-------- ------- ---------
Net cash provided by (used in) financing
activities........................................ 62 (118) 102,305
-------- ------- ---------
Net increase (decrease) in cash and cash equivalents........ 1,630 (3,769) 4,485
Cash and cash equivalents at beginning of period............ 11,528 8,254 --
-------- ------- ---------
Cash and cash equivalents at end of period.................. $ 13,158 $ 4,485 $ 4,485
======== ======= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest.................. $ 177 $ 155 $ 1,685
Supplemental schedule of noncash financing activities:
Conversion of notes payable and accrued interest to common
stock.................................................. $ -- $ -- $ 3,043
The accompanying notes are an integral part of these consolidated financial
statements.
F-28
29
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2001
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
DEFICIT
ACCUMULATED
COMMON STOCK ADDITIONAL COMMON DURING TOTAL
------------------- PAID-IN STOCK TREASURY DEVELOPMENT STOCKHOLDERS'
SHARES AMOUNT CAPITAL WARRANTS STOCK STAGE EQUITY (DEFICIT)
---------- ------ ---------- -------- -------- ----------- ----------------
Balance at December 31,
2000....................... 25,973,674 $26 $118,697 $3,439 $(11) $(119,486) $ 2,665
Stock options exercised
January 2001 ($0.16 per
share)..................... 169 -- -- -- -- -- --
Net loss..................... -- (3,063) (3,063)
---------- --- -------- ------ ---- --------- -------
Balance at March 31, 2001.... 25,973,843 $26 $118,697 $3,439 $(11) $(122,549) $ (398)
========== === ======== ====== ==== ========= =======
The accompanying notes are an integral part of these consolidated financial
statements.
F-29
30
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
(UNAUDITED)
1. ORGANIZATION
Aronex Pharmaceuticals, Inc. ("the Company", "Aronex Pharmaceuticals",
"we", "us" or "our") was incorporated in Delaware on June 13, 1986 and merged
with Triplex Pharmaceutical Corporation ("Triplex") and API Acquisition Company,
Inc. ("API"), formerly Oncologix, Inc. effective September 11, 1995. In 1998, we
formed a subsidiary, Aronex Europe Limited.
In order to address our lack of capital, among other things, we entered
into an agreement and plan of merger dated as of April 23, 2001 (the "Merger")
with Antigenics Inc. ("Antigenics") and Nasa Merger Corp., a newly-formed,
wholly-owned subsidiary of Antigenics. The proposed Merger is subject to
approval of our stockholders. The Merger is expected to be completed in the
third quarter of 2001. Upon closing of the Merger, we will become a wholly-owned
subsidiary of Antigenics.
Aronex Pharmaceuticals is a development stage company that has devoted
substantially all of its efforts to research and product development and has not
yet generated any significant revenues, nor is there any assurance of future
revenues. In addition, we expect to continue to incur losses for the foreseeable
future, and there can be no assurance that we will successfully complete the
transition from a development-stage company to successful operations. The
development activities we engage in involve a high degree of risk and
uncertainty. Our ability to successfully develop, manufacture and market our
proprietary products is dependent upon many factors. These factors include, but
are not limited to, our ability to consummate the Merger, the need for
additional financing in the event the Merger is not completed on a timely basis
or at all, attracting and retaining key personnel and consultants, and
successfully developing manufacturing, sales and marketing operations. Our
ability to develop these operations may be immensely impacted by uncertainties
related to patents and proprietary technologies, technological change and
obsolescence, product development, competition, government regulations and
approvals, health care reform, third-party reimbursement and product liability
exposure. Further, during the period required to develop these products, we will
require additional funds which may not be available to us.
We have operated as a development stage enterprise since our inception by
devoting substantially all of our efforts to raising capital and performing
research and development. In order to complete the development and other
activities necessary to commercialize our products, additional financing will be
required. If we are not able to consummate the Merger, such financing may not be
available.
The majority of our clinical trials have reached the stage where we have
completed patient enrollment in their current phase. At the current time, we are
gathering clinical trial data for analysis. We anticipate reporting the data at
appropriate scientific meetings. Before we initiate any new clinical trials, we
will analyze each product's likelihood for approval, the cost of the proposed
clinical trial, cash available at such time and the inherent risk profile. We
anticipate these steps will assist us in maximizing shareholder value.
In January 2001, we received a non-approval letter from the United States
Food and Drug Administration (FDA) for our New Drug Application (NDA) amendment
for ATRAGEN(R) for acute promyelocytic leukemia (APL). Following this event, we
reduced expenditures in our research and development plans and activities.
Additionally, we reduced the number of full-time employees in January 2001 from
77 to 29.
We will continue to require substantial additional funds for our
operations. At March 31, 2001, we had $5.3 million in cash, cash equivalents and
investments. We believe that we can conserve our existing financial resources to
satisfy our capital and operating requirements until consummation of the Merger.
F-30
31
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 2001
(UNAUDITED)
The factors discussed above raise substantial doubt about our ability to
continue as a going concern. If the Merger is not completed, we will have to
pursue other sources of financing. Sources of financing may not be available, or
if available, will be dilutive or may have other adverse effects to the value of
our shares. If we are not able to secure such financing, we may have to close
operations and/or seek legal protection from our creditors. Accordingly, there
can be no assurance of our future success. The accompanying financial statements
do not include any adjustments relating to the recoverability and classification
of asset carrying amounts or the amount and classification of liabilities that
might result should the Company be unable to continue as a going concern. See
"Business -- General" and "Business -- Additional Business Risks" in the
Company's Form 10-K for the year ended December 31, 2000.
The consolidated balance sheet at March 31, 2001 and the related
consolidated statements of operations and cash flows for the three month periods
ending March 31, 2001 and 2000 and the period from inception (June 13, 1986)
through March 31, 2001 are unaudited. These interim financial statements should
be read in conjunction with the audited financial statements and related notes
included in our 2000 Form 10-K. The financial statements included in our 2000
Form 10-K have been audited by Arthur Andersen LLP, independent public
accountants. In order to complete the development and other activities to
commercialize our products, additional financing will be required. Accordingly,
our independent public accountants' report on the financial statements for the
year ended December 31, 2000 includes an explanatory fourth paragraph expressing
substantial doubt about our ability to continue as a going concern. The
unaudited interim consolidated financial statements reflect all adjustments
which are, in the opinion of management, necessary for a fair statement of
results for the interim periods presented and all such adjustments are of a
normal recurring nature. Interim results are not necessarily indicative of
results for a full year.
2. ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Aronex
Pharmaceuticals, Triplex, API and Aronex Europe Limited. All material
intercompany transactions have been eliminated in consolidation.
Cash, Cash Equivalents and Short- and Long-Term Investments
Cash and cash equivalents include money market accounts and investments
with an original maturity of less than three months. Long-term investments at
March 31, 2001 are available for sale securities which are United States
mortgage-backed securities with maturity dates over the next 23 years that have
an amortized cost of $773,000, which approximates fair market value and cost.
Aronex Pharmaceuticals currently has no trading securities.
Revenue Recognition
During 2000, United States Securities and Exchange Commission (SEC) Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB
101) which requires up-front, non-refundable license fees to be deferred and
recognized over the performance period. We adopted SAB 101 which required us to
recognize payments for services under research and development grants and
contracts that are specifically tied to a separate earnings process as revenue
as the services are performed. In situations where we receive payment in advance
of the performance of services, such amounts are deferred and recognized as
revenue as the related services are performed. Non-refundable fees, including
payments for up-front licensing fees and milestones (collectively,
"Non-refundable Fees"), are recognized as revenue based on the percentage of
costs incurred to date, estimated costs to complete, and total Non-refundable
Fees received. Prior to January 1, 2000, we had recognized revenue from
Non-refundable Fees when we
F-31
32
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 2001
(UNAUDITED)
had no obligations to return the fees under any circumstances, and there were no
additional contractual services to be provided or costs to be incurred by us in
connection with the Non-refundable Fees.
The cumulative effect of adopting SAB 101 at January 1, 2000 resulted in a
one-time, non-cash charge of $4.5 million, with a corresponding increase to
deferred revenue that will be recognized in future periods. The $4.5 million
represents portions of 1998 and 1999 Non-refundable Fees received from Abbott
Laboratories in consideration for the exclusive worldwide rights to market and
sell Nyotran(R). For the quarters ended March 31, 2000 and 2001, we recognized
$1.2 million and $92,000, respectively, of research and development grants and
contracts revenue that was included in the cumulative effect adjustment as of
January 1, 2000. The balance of the deferred revenue from this adjustment, $1.6
million, will be recognized in the future as we incur costs relating to
obtaining approval for Nyotran(R) from the FDA.
Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Reclassification
Certain reclassifications have been made to the prior year's financial
statements to be consistent with the presentation in the current year.
3. FEDERAL INCOME TAXES
At December 31, 2000, we had net operating loss ("NOL") carryforwards for
federal income tax purposes of approximately $130.6 million. The Tax Reform Act
of 1986 provided a limitation on the use of NOL and tax credit carryforwards
following certain ownership changes that could limit our ability to utilize
these NOLs and tax credits. Accordingly, our ability to utilize the above NOL
and tax credit carryforwards to reduce future taxable income and tax liabilities
may be limited. As a result of the merger with Triplex and API, a change in
control as defined by federal income tax law occurred, causing the use of these
carryforwards to be limited and possibly eliminated. Additionally, because
United States tax laws limit the time during which NOLs and the tax credit
carryforwards may be applied against future taxable income and tax liabilities,
we may not be able to take full advantage of our NOLs and tax credit
carryforwards for federal income tax purposes. The carryforwards will begin to
expire in 2001 if not otherwise used. Due to the possibility of not reaching a
level of profitability that will allow for the utilization of our deferred tax
assets, a valuation allowance has been established to offset these tax assets.
We have not made any federal income tax payments since inception.
4. SEVERANCE AGREEMENTS
In January 2001, we entered into severance agreements with all employees
who do not have employment contracts with us. Under such agreements, all
employees are entitled to at least three months severance if they are terminated
as a result of a reduction in staff, merger or acquisition or sale of the
Company, including the Merger with Antigenics. At March 31, 2001, there are
employment and severance agreements which could require severance payments of
$2.3 million relating to the salaries of current employees.
F-32