UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[x] Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 2002
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ___to___
Commission File Number 0-27282
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MANHATTAN PHARMACEUTICALS, INC.
(Exact name of issuer as specified in its charter)
Delaware 36-3898269
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(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
787 Seventh Avenue, 48th Floor, New York, New York 10019
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(Address of Principal Executive Offices) (Zip Code)
(212) 554-4525
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(Issuer's telephone number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE EXCHANGE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE EXCHANGE ACT:
Units, each unit consisting of one share of
Common Stock and one Redeemable Warrant
Common Stock, par value $.001 per share
Redeemable Warrants
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the issuer was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes [X]
No [ ]
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is not contained herein, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
The issuer's revenues for the fiscal year ended December 31, 2002 were $500,000.
As of March 31, 2003 there were 116,811,980 outstanding shares of common stock,
par value $.001 per share.
The aggregate market value of the voting common stock of the issuer held by
non-affiliates of the issuer on March 31, 2003 based on the closing price of the
common stock as quoted by the NASD Over-the-Counter Bulletin Board on such date
was $14,017,438.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
TABLE OF CONTENTS
PAGE
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PART I
Item 1 Description of Business..................................................................... 1
Item 2 Legal Proceedings........................................................................... 17
Item 3 Description of Property..................................................................... 17
Item 4 Submission of Matters to a Vote of Security Holders......................................... 18
PART II
Item 5 Market for Common Equity and Related Stockholder Matters.................................... 18
Item 6 Management's Discussion and Analysis of Financial Condition and Results of Operations or
Plan of Operations.......................................................................... 19
Item 7 Consolidated Financial Statements........................................................... 27
Item 8 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........ 27
PART III
Item 9 Directors, Executive Officers, Promoters and Control Persons; Compliance with Section
16(a) of the Exchange Act................................................................... 29
Item 10 Executive Compensation...................................................................... 32
Item 11 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matter...................................................................................... 38
Item 12 Certain Relationships and Related Transactions.............................................. 39
Item 13 Exhibit List and Reports on Form 8-K........................................................ 40
Item 14 Controls and Procedures..................................................................... 44
Index to Consolidated Financial Statements.................................................. F-1
References to the "Company," the "Registrant," "we," "us," or "our" or in this
Annual Report on Form 10-KSB refer to Manhattan Pharmaceuticals, Inc. (formerly
known as Atlantic Technology Ventures, Inc.), a Delaware corporation, and our
consolidated subsidiaries, together taken as a whole, unless the context
indicates otherwise.
FORWARD-LOOKING STATEMENTS
The statements contained in this Annual Report on Form 10-KSB that are
not historical are forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, including statements regarding the
expectations, beliefs, intentions or strategies regarding the future. We intend
that all forward-looking statements be subject to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995.
In particular, the "Risk Factors" section following Item 1 and the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" section in Item 6 of this annual report include forward-looking
statements that reflect our current views with respect to future events and
financial performance. We use words such as we "expect," "anticipate,"
"believe," and "intend" and similar expressions to identify forward-looking
statements. Investors should be aware that actual results may differ materially
from our expressed expectations because of risks and uncertainties inherent in
future events, particularly those risks identified in the subsection entitled
"Risk Factors" following Item 1 in this Annual Report, and should not unduly
rely on these forward looking statements.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
OVERVIEW
We were incorporated in Delaware on May 18, 1993 under the name
"Atlantic Pharmaceuticals, Inc." and in March 2000, we changed our name to
"Atlantic Technology Ventures, Inc." We are engaged in the business of
developing and commercializing early-stage technologies, particularly biomedical
and pharmaceutical technologies. We aim to acquire proprietary rights to these
technologies, by license or acquiring an ownership interest, fund their research
and development and eventually bring the technologies to market. During 2002, we
had rights to technologies relating to three different drug candidates with
potential application in the areas of cataract, anti-inflammatory and
anti-microbial treatments.
On February 21, 2003, we completed a "reverse" acquisition of
privately-held Manhattan Research Development, Inc. (formerly known as Manhattan
Pharmaceuticals, Inc.), a Delaware corporation. To effect this transaction, we
caused Manhattan Pharmaceuticals Acquisition Corp., our wholly-owned subsidiary,
to merge with and into Manhattan Research Development, with Manhattan Research
Development surviving as our wholly owned subsidiary. In accordance with the
terms of the merger, the outstanding shares of common stock of Manhattan
Research Development automatically converted into the right to receive an
aggregate of approximately 80 percent of our outstanding common stock (after
giving effect to the transaction). For accounting purposes, however, Manhattan
Research Development was treated as the acquiring company. In connection with
the merger, we also changed our name to "Manhattan Pharmaceuticals, Inc."
Since its inception in August 2001, Manhattan Research Development has
been engaged in the development of novel pharmaceutical therapies for the
treatment of obesity. Following our acquisition of
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Manhattan Research Development, we will continue to focus on acquiring
proprietary rights to biomedical and pharmaceutical technologies, by licensing
or acquiring an ownership interest, funding their research and development and
bringing the technologies to market. However, our primary focus since the merger
is the development and commercialization of the technologies owned or licensed
by Manhattan Research Development, while maintaining existing relationships we
have developed with third parties relating to the development of drug candidates
to which we had rights prior to the merger.
OLEOYL-ESTRONE
We currently have no drugs or other products available for commercial
sale and, other than drug candidates being developed by third parties, we have
only one drug candidate, oleoyl-estrone, in development. We acquired our rights
to oleoyl-estrone ("OE"), a hormone that attaches to a fatty acid, as a result
of our merger with Manhattan Research Development in February 2003. OE is an
orally administered small molecule that has been shown to cause significant
weight loss in preclinical animal studies regardless of dietary modifications.
It appears that OE causes weight loss in two ways. First, scientists believe
that weight loss is regulated by a part of the hypothalamus, located in the
brain, called the ponderostat. It is believed that the ponderostat regulates the
body's weight in a manner similar to the way in which a thermostat regulates a
room's temperature. Preclinical studies suggest that OE resets the ponderostat,
telling the body that a lower weight is normal. We believe that this signal then
decreases appetite, which leads to weight loss that may be maintained even after
OE treatment is discontinued. Second, fat cells that have been treated with OE
appear to shrink in size, indicating a local effect of OE acting directly on the
cells. The apparent dual effect of OE leads us to believe that the drug has the
potential to cause weight loss in a variety of obese and overweight patients.
OE was developed by researchers at the University of Barcelona ("UB")
in Spain. Throughout a decade of research, scientists of the Nitrogen-Obesity
Research Group at UB noted that hormones that effect metabolism play a
significant role in body weight regulation. At the same time the obesity
research community suggested that weight is regulated by the ponderostat, a
central mechanism in the hypothalamus of the brain believed to set the point of
ideal weight. Researchers at UB believe that a hormone controls the ponderostat,
raising or lowering body weight by changing the central set point for the entire
body.
After examining the available work related to estrogens and changes in
body weight and body fat percentage (such as during pregnancy), researchers at
UB noted that the estrogen-like hormone, estrone, was elevated in the blood of
both obese men and women. Initially thought to be a simple estrogen, UB
researchers noticed that although estrone levels were elevated, very few obese
men suffer from the effects of high estrogen. Further testing revealed that OE
was the main form of estrone that existed in obese patients. The researchers
suggested that when cells become filled with fat they produce OE, signaling the
brain to lose weight. They further suggested that fat cells in obese people do
not produce sufficiently high levels of OE to signal the ponderostat to suppress
appetite and cause weight loss. Based on this concept, investigators at UB
believed that they could induce weight loss by increasing levels of OE in obese
individuals. When OE was given to rats, the rats lost weight in a dose-dependent
manner, bearing out the idea that OE is a primary weight loss signal produced by
fat cells. No side effects were observed in the rats and, in female rats,
uterine size remained unchanged, indicating that OE did not act as an estrogen.
2002 PRODUCT CANDIDATES
Avantix
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Through Optex Ophthalmologics, Inc., our majority-owned subsidiary
(81.2%), we have the right to receive royalties from Bausch & Lomb Incorporated
on sales of a Catarex technology, known under the trade name "Avantix," which is
designed to help persons overcome the limitations and deficiencies of
traditional cataract-extraction techniques. known by the trade name "Avantix."
In March 2001, Optex sold to Bausch & Lomb substantially all of its assets,
including those related to the Avantix technology. Since then, Bausch & Lomb has
undertaken complete responsibility for developing and marketing Avantix and is
required to pay Optex royalties on sales of the device and associated system.
Bausch & Lomb is also required to meet certain development milestones. Although
we no longer devote any resources to developing Avantix, we will continue to
work closely with Bausch & Lomb to monitor its progress in developing this
technology.
CT-3
In 1994, we acquired the exclusive worldwide rights to CT-3, an
anti-inflammatory/analgesic compound from its inventor, Sumner Burstein. CT-3 is
a patented synthetic derivative of carboxylic tetrahydrocannabinol (THC-7C) and
is an alternative to nonsteroidal anti-inflammatory drugs, or "NSAIDs," such as
aspirin and ibuprofen. CT-3 was designed as a new medication for painful
inflammatory conditions, such as arthritis, post-operative pain, musculoskeletal
injuries, headaches and neuropathic pain. In addition, the compound possesses
activity in preclinical models of multiple sclerosis and the cutaneous
inflammation associated with exposure to the chemical warfare blister agent
sulfur mustard. The U.S. Army Medical Research Institute is pursuing further
work on this application. Pursuant to our license agreement with Dr. Burstein,
we are obligated to pay royalties of 3 percent of the net sales of all licensed
CT-3 products sold by us and 8 percent of the amount of royalties we receive
from the net sales by any sublicensees of CT-3 products and processes.
In June 2002, we licensed exclusive world wide rights to CT-3 to
Indevus Pharmaceuticals, Inc. for which we received from Indevus an initial
licensing fee of $400,000 and an inventory transfer fee of $100,000. Pursuant to
the terms of our license agreement, Indevus is responsible for developing and
commercializing CT-3 and obtaining all required regulatory approvals. Indevus is
obligated to pay us development milestones and royalties. Like Avantix, although
we will continue to work with Indevus to monitor its progress in developing
CT-3, we will no longer devote our own resources to developing this product.
In July 2002, we received notice on Dr. Burstein's behalf claiming that
the $500,000 we received from Indevus triggered our obligation to pay him an 8
percent royalty. In September 2002, we informed Dr. Burstein of our position
that the royalty payment is triggered only upon our receipt of royalties
resulting from sales of CT-3 products by Indevus, our sublicensee. Dr. Burstein
then purported to terminate his license to us. We believe this purported
termination is invalid and, in accordance with the terms of our license
agreement with Dr. Burstein, we have filed a claim for arbitration, which is
pending. For a more complete discussion of our dispute with Dr. Burstein, see
"ITEM 2- LEGAL PROCEEDINGS" in this Form 10-K.
ATV-02 Antimicrobial Agent (N-Chlorotaurine)
Until February 2003, we had licensed from its inventors the worldwide
rights to ATV-02, a potent and broad-spectrum antimicrobial agent for the local
treatment of topical infections. This compound is more commonly known as
N-Chlorotaurine, or "NCT." The compound has completed safety and tolerability
studies in a limited number of subjects and has begun a series of Phase II human
clinical studies for the treatment of several indications, including viral and
bacterial conjunctivitis and acute and chronic sinusitis.
3
Under the terms of the agreement, we had exclusively licensed,
including the right to sublicense, the inventors' rights pertaining to any novel
therapeutic use or formulation of NCT and any of its derivatives or analogs,
including pending and future patent applications for methods of using NCT for a
variety of clinical indications. Under the terms of the agreement there was no
initial license fee, but we were required to pay the inventors milestone
payments payable in cash or company stock at our discretion of (a) $100,000 upon
the first new patent issuance, (b) $250,000 upon successful completion of a
Phase III clinical trial, and (c) $1,000,000 upon receiving new drug approval.
We are also required to pay the inventors a total royalty of 4 percent of the
net sales of the licensed products sold by us, and 20 percent of the royalties
that we received from sublicensees.
In connection with the merger with Manhattan Research Development, we
licensed all of our rights to NCT to an entity controlled by Frederic Zotos,
Joseph Rudick, Michael Ferrari, each of whom were former officers and/or
directors of our company, and Walter Glomb, who has provided us with consulting
services in the past. In exchange for the license to these persons, we are
entitled to receive a 10 percent share of any milestone, royalty or other
revenue generated by NCT. Accordingly, as a result of our transfer of our rights
to the NCT technology, we will no longer devote any of our resources to the
development of NCT.
MARKET AND COMPETITION
According to estimates, the market for prescription anti-obesity drugs
is approximately $10 billion, or equal to that of diabetes. It is estimated that
61 percent of Americans are overweight and that 26 percent are obese. According
to the National Institute of Health's estimate, direct costs for the treatment
of obesity in 1988 were in excess of $45 billion and accounted for nearly 8
percent of the total national cost of health care in the United States. By 1999,
direct costs for the treatment of obesity had reached $102.2 billion dollars.
Meridia(R) and Xenical(R), two currently approved anti-obesity medications,
together accounted for approximately $800 million in sales in 2001. We believe
that the disease currently lacks a treatment that is safe and effective for most
patient groups, and that OE has the potential to meet the needs of this market.
Competition in the pharmaceutical industry, and the anti-obesity drug
market in particular, is intensely competitive. In addition to Abbott
Laboratories, Inc. and Roche Holdings AG, the makers of Meridia(R) and
Xenical,(R) respectively, some of the largest drug companies in the world have
anti-obesity drugs currently in development, including GlaxoSmithKline PLC,
Johnson & Johnson, Inc., Bristol-Myers Squibb Company, Regeneron Pharmaceutical,
Inc., Phytopharm, PLC, Amgen, Inc. These companies are all substantially larger
and more established than we are and have significantly greater financial and
other resources than we do.
INTELLECTUAL PROPERTY
Our goal is to obtain, maintain and enforce patent protection for our
products, formulations, processes, methods and other proprietary technologies,
preserve our trade secrets, and operate without infringing on the proprietary
rights of other parties, both in the United States and in other countries. Our
policy is to actively seek to obtain, where appropriate, the broadest
intellectual property protection possible for our product candidates,
proprietary information and proprietary technology through a combination of
contractual arrangements and patents, both in the U.S. and elsewhere in the
world.
We currently have worldwide, exclusive license rights to the U.S. and
foreign patents and patent applications set forth below pursuant to license
agreements with Oleoyl-estrone Developments, SL ("OED"), a corporation organized
under the laws of Spain, regarding the use of OE for the treatment of human
disease:
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1. US Patent No. 5,798,348 entitled "Fatty-acid monesters of
estrogens for the treatment of obesity and/or overweight." M.
Alemany, Inventor. Application filed, October 30, 1996. Patent
issued August 25, 1998.
2. European Patent No. 771.817 entitled "Fatty-acid monoesters of
estrogens for the treatment of obesity and/or overweight." M.
Alemany, Inventor. Application filed, October 28, 1996. Patent
issued May 7, 1997.
3. Patent Cooperation Treaty and Spanish Patent Application No.
ES 200100785 entitled "Fatty-acid monoesters of estrogens
acting as anti-diabetic and hypolipidemia agents." M. Alemany
Lamana, Francisco Javier Remesar Betiloch, and Jose Antonio
Fernandez Lopez, Inventors. Application filed March 28, 2001.
The US and European patents have numerous, detailed, and specific
claims for both the composition of oleoyl-estrone, and its method of use for
weight loss. Our rights to these patents are subject to the terms of a February
2002 license agreement between us and OED. The license agreement provides us
with an exclusive, worldwide right to the intellectual property covered by the
license agreement, including the right to grant sublicenses. Although we are not
obligated to pay royalties to OED, the license agreement requires us to make
certain performance-based milestone payments.
We also depend upon the skills, knowledge and experience of our
scientific and technical personnel, as well as that of our advisors, consultants
and other contractors, none of which is patentable. To help protect our
proprietary know-how which is not patentable, and for inventions for which
patents may be difficult to enforce, we rely on trade secret protection and
confidentiality agreements to protect our interests. To this end, we require all
employees, consultants, advisors and other contractors to enter into
confidentiality agreements which prohibit the disclosure of confidential
information and, where applicable, require disclosure and assignment to us of
the ideas, developments, discoveries and inventions important to our business.
MANUFACTURING
We do not have any manufacturing capabilities. We have been in contact
with several contract GMP (Good Manufacturing Process) manufacturers for the
supply of OE that will be necessary to conduct Phase I human clinical trials. A
method has been identified for synthesizing OE, and can be done through simple
reactions that produce the substance at above 99 percent purity. We believe that
the production of OE will involve one contract manufacturer for clinical trials.
Bids are being received from multiple providers, so that provider redundancy can
be maintained during product launch.
GOVERNMENT REGULATION
Regulation by government authorities in the United States and foreign
countries is a significant factor in the research, development, manufacture, and
marketing of OE. OE and any future product candidate will require regulatory
approval before they can be commercialized. In particular, human therapeutic
products are subject to rigorous preclinical and clinical trials and other
premarket approval requirements by the FDA and foreign authorities. Many aspects
of the structure and substance of the FDA and foreign pharmaceutical regulatory
practices have been reformed during recent years, and continued reform is under
consideration in a number of forums. The ultimate outcome and impact of such
reforms and potential reforms cannot be reasonably predicted.
Clinical trials are conducted in accordance with certain standards
under protocols that detail the objectives of the study, the parameters to be
used to monitor safety, and the efficacy criteria to be
5
evaluated. Each protocol must be submitted to the FDA. The phases of clinical
studies may overlap. The designation of a clinical trial as being of a
particular phase is not necessarily indicative that such a trial will be
sufficient to satisfy the parameters of a particular phase, and a clinical trial
may contain elements of more than one phase notwithstanding the designation of
the trial as being of a particular phase. We cannot assure you that the results
of preclinical studies or early stage clinical trials will predict long-term
safety or efficacy of our compounds when they are tested or used more broadly in
humans. Various federal and state statutes and regulations also govern or
influence the research, manufacture, safety, labeling, storage, record keeping,
marketing, transport, or other aspects of such products. The lengthy process of
seeking these approvals and the compliance with applicable statutes and
regulations require the expenditure of substantial resources. Any failure by us
or our any future collaborators or licensees to obtain, or any delay in
obtaining, regulatory approvals could adversely affect the marketing of OE and
any other products and our ability to receive product or royalty revenue.
EMPLOYEES
We currently have 3 employees: a president & chief executive officer, a
chief financial officer & chief operating officer, and an administrative
assistant.
RISK FACTORS
An investment in our securities is speculative in nature, involves a high degree
of risk, and should not be made by an investor who cannot bear the economic risk
of its investment for an indefinite period of time and who cannot afford the
loss of its entire investment. You should carefully consider the following risk
factors and the other information contained elsewhere in this Annual Report
before making an investment in our securities.
RISKS RELATED TO OUR BUSINESS
WE CURRENTLY HAVE NO PRODUCT REVENUES AND WILL NEED TO RAISE ADDITIONAL CAPITAL
TO OPERATE OUR BUSINESS.
Although we continue to be entitled to royalties from Indevus
Pharmaceuticals and Bausch & Lomb in connection with their development of
Avantix and CT-3, since our acquisition of Manhattan Research Development, Inc.
in February 2003, the business and operations of Manhattan Research Development
now largely comprises our entire business prospects. Manhattan Research
Development has never generated any product revenues. Until, and if, we receive
approval from the U.S. Federal Drug Administration or FDA, and other regulatory
authorities for OE and future product candidates, we cannot sell our drugs and
will not have product revenues. Therefore, for the foreseeable future, we will
have to fund all of our operations and capital expenditures from our cash on
hand, licensing fees and grants. We will therefore need additional sources of
financing, which may not be available on favorable terms, if at all. If we do
not succeed in raising additional funds on acceptable terms, we may be unable to
complete planned pre-clinical and clinical trials or obtain approval of our
product candidates from the FDA and other regulatory authorities. In addition,
we could be forced to discontinue product development, reduce or forego sales
and marketing efforts and forego attractive business opportunities. Any
additional sources of financing will likely involve the issuance of our equity
securities, which will have a dilutive effect on our stockholders.
WE ARE NOT CURRENTLY PROFITABLE AND MAY NEVER BECOME PROFITABLE.
We have a history of losses and expect to incur substantial losses and
negative operating cash flow for the foreseeable future, and we may never
achieve or maintain profitability. Even if we succeed in
6
developing and commercializing one or more of our product candidates, we expect
to incur substantial losses for the foreseeable future and may never become
profitable. We also expect to continue to incur significant operating and
capital expenditures and anticipate that our expenses will increase
substantially in the foreseeable future as we:
- continue to undertake pre-clinical development and clinical
trials for our product candidates;
- seek regulatory approvals for our product candidates;
- implement additional internal systems and infrastructure;
- lease additional or alternative office facilities; and
- hire additional personnel.
We also expect to experience negative cash flow for the foreseeable
future as we fund our operating losses and capital expenditures. As a result, we
will need to generate significant revenues in order to achieve and maintain
profitability. We may not be able to generate these revenues or achieve
profitability in the future. Our failure to achieve or maintain profitability
could negatively impact the value of our common stock.
WE HAVE A LIMITED OPERATING HISTORY UPON WHICH TO BASE AN INVESTMENT DECISION.
The business and prospects of Manhattan Research Development now
largely represents our business prospects. Until we acquired it in February
2003, Manhattan Research Development was a development-stage company and has not
yet demonstrated any ability to perform the functions necessary for the
successful commercialization of OE or any other product candidates. The
successful commercialization of our product candidates will require us to
perform a variety of functions, including:
- continuing to undertake pre-clinical development and clinical
trials;
- participating in regulatory approval processes;
- formulating and manufacturing products; and
- conducting sales and marketing activities.
Since its inception, Manhattan Research Development's operations have
been limited to organizing and staffing, and acquiring, developing and securing
our proprietary technology and undertaking pre-clinical trials of principal
product candidates. These operations provide a limited basis for you to assess
our ability to commercialize our product candidates and the advisability of
investing in our securities.
WE MAY NOT OBTAIN THE NECESSARY U.S. OR WORLDWIDE REGULATORY APPROVALS TO
COMMERCIALIZE OUR PRODUCT CANDIDATES.
We will need FDA approval to commercialize our product candidates in
the U.S. and approvals from the FDA equivalent regulatory authorities in foreign
jurisdictions to commercialize our product candidates in those jurisdictions. In
order to obtain FDA approval of any of our product candidates, we must submit to
the FDA a New Drug Application, or NDA, demonstrating that the product candidate
is safe for humans and effective for its intended use. This demonstration
requires significant research and animal tests, which are referred to as
pre-clinical studies, as well as human tests, which are referred to as clinical
trials. Satisfaction of the FDA's regulatory requirements typically takes many
years, depends upon the type, complexity and novelty of the product candidate
and requires substantial resources for research, development and testing. We
cannot predict whether our research and clinical approaches will result in drugs
that the FDA considers safe for humans and effective for indicated uses. The FDA
has substantial discretion in the drug approval process and may require us to
conduct additional pre-clinical and clinical testing or to perform
post-marketing studies. The approval process may also be delayed by
7
changes in government regulation, future legislation or administrative action or
changes in FDA policy that occur prior to or during our regulatory review.
Delays in obtaining regulatory approvals may:
- delay commercialization of, and our ability to derive product
revenues from, our product candidates;
- impose costly procedures on us; and
- diminish any competitive advantages that we may otherwise
enjoy.
Even if we comply with all FDA requests, the FDA may ultimately reject
one or more of our NDAs. We cannot be sure that we will ever obtain regulatory
clearance for our product candidate. Failure to obtain FDA approval of any of
our product candidate will severely undermine our business by reducing our
number of salable products and, therefore, corresponding product revenues.
In foreign jurisdictions, we must receive approval from the appropriate
regulatory authorities before we can commercialize our drugs. Foreign regulatory
approval processes generally include all of the risks associated with the FDA
approval procedures described above. There can be no assurance that we will
receive the approvals necessary to commercialize our product candidate for sale
outside the United States.
OUR PRIMARY PRODUCT CANDIDATE IS IN EARLY STAGES OF CLINICAL TRIALS.
Our primary product candidate, OE, is in an early stage of development
and requires extensive pre-clinical testing before we can proceed to clinical
trials. In addition, before we can commence clinical trials in the United States
on OE, we will have to submit an Investigational New Drug application, or IND,
to the FDA. We cannot predict with any certainty if or when we might submit an
NDA for regulatory approval of OE.
CLINICAL TRIALS ARE VERY EXPENSIVE, TIME-CONSUMING AND DIFFICULT TO DESIGN AND
IMPLEMENT.
Human clinical trials are very expensive and difficult to design and
implement, in part because they are subject to rigorous regulatory requirements.
The clinical trial process is also time consuming. We estimate that clinical
trials of our product candidates will take at least several years to complete.
Furthermore, failure can occur at any stage of the trials, and we could
encounter problems that cause us to abandon or repeat clinical trials. The
commencement and completion of clinical trials may be delayed by several
factors, including:
- unforeseen safety issues;
- determination of dosing issues;
- lack of effectiveness during clinical trials;
- slower than expected rates of patient recruitment;
- inability to monitor patients adequately during or after
treatment; and
- inability or unwillingness of medical investigators to follow
our clinical protocols.
In addition, we or the FDA may suspend our clinical trials at any time if it
appears that we are exposing participants to unacceptable health risks or if the
FDA finds deficiencies in our IND submissions or the conduct of these trials.
THE RESULTS OF OUR CLINICAL TRIALS MAY NOT SUPPORT OUR PRODUCT CANDIDATE CLAIMS.
Even if our clinical trials are completed as planned, we cannot be
certain that their results will support our product candidate claims. Success in
pre-clinical testing and early clinical trials does not
8
ensure that later clinical trials will be successful, and we cannot be sure that
the results of later clinical trials will replicate the results of prior
clinical trials and pre-clinical testing. The clinical trial process may fail to
demonstrate that our product candidates are safe for humans and effective for
indicated uses. This failure would cause us to abandon a product candidate and
may delay development of other product candidates. Any delay in, or termination
of, our clinical trials will delay the filing of our NDAs with the FDA and,
ultimately, our ability to commercialize our product candidates and generate
product revenues. In addition, our clinical trials involve a small patient
population. Because of the small sample size, the results of these clinical
trials may not be indicative of future results.
PHYSICIANS AND PATIENTS MAY NOT ACCEPT AND USE OUR DRUGS.
Even if the FDA approves our product candidates, physicians and
patients may not accept and use them. Acceptance and use of our product will
depend upon a number of factors including:
- perceptions by members of the health care community, including
physicians, about the safety and effectiveness of our drugs;
- cost-effectiveness of our product relative to competing
products;
- availability of reimbursement for our products from government
or other healthcare payers; and
- effectiveness of marketing and distribution efforts by us and
our licensees and distributors, if any.
Because we expect sales of our current product candidates, if approved,
to generate substantially all of our product revenues for the foreseeable
future, the failure of any of these drugs to find market acceptance would harm
our business and could require us to seek additional financing.
OUR DRUG-DEVELOPMENT PROGRAM DEPENDS UPON THIRD-PARTY RESEARCHERS WHO ARE
OUTSIDE OUR CONTROL.
We depend upon independent investigators and collaborators, such as
universities and medical institutions, to conduct our pre-clinical and clinical
trials under agreements with us. These collaborators are not our employees and
we cannot control the amount or timing of resources that they devote to our
programs. These investigators may not assign as great a priority to our programs
or pursue them as diligently as we would if we were undertaking such programs
ourselves. If outside collaborators fail to devote sufficient time and resources
to our drug-development programs, or if their performance is substandard, the
approval of our FDA applications, if any, and our introduction of new drugs, if
any, will be delayed. These collaborators may also have relationships with other
commercial entities, some of whom may compete with us. If our collaborators
assist our competitors at our expense, our competitive position would be harmed.
WE RELY EXCLUSIVELY ON THIRD PARTIES TO FORMULATE AND MANUFACTURE OUR PRODUCT
CANDIDATES.
We have no experience in drug formulation or manufacturing and do not
intend to establish our own manufacturing facilities. We lack the resources and
expertise to formulate or manufacture our own product candidates. We currently
have no contract for the manufacture of our product candidate. We intend to
contract with one or more manufacturers to manufacture, supply, store and
distribute drug supplies for our clinical trials. If any of our product
candidates receive FDA approval, we will rely on one or more third-party
contractors to manufacture our drugs. Our anticipated future reliance on a
limited number of third-party manufacturers, exposes us to the following risks:
9
- We may be unable to identify manufacturers on acceptable terms
or at all because the number of potential manufacturers is
limited and the FDA must approve any replacement contractor.
This approval would require new testing and compliance
inspections. In addition, a new manufacturer would have to be
educated in, or develop substantially equivalent processes
for, production of our products after receipt of FDA approval,
if any.
- Our third-party manufacturers might be unable to formulate and
manufacture our drugs in the volume and of the quality
required to meet our clinical needs and commercial needs, if
any.
- Our future contract manufacturers may not perform as agreed or
may not remain in the contract manufacturing business for the
time required to supply our clinical trials or to successfully
produce, store and distribute our products.
- Drug manufacturers are subject to ongoing periodic unannounced
inspection by the FDA, the DEA, and corresponding state
agencies to ensure strict compliance with good manufacturing
practice and other government regulations and corresponding
foreign standards. We do not have control over third-party
manufacturers' compliance with these regulations and
standards.
- If any third-party manufacturer makes improvements in the
manufacturing process for our products, we may not own, or may
have to share, the intellectual property rights to the
innovation.
Each of these risks could delay our clinical trials, the approval, if
any of our product candidates by the FDA or the commercialization of our product
candidates or result in higher costs or deprive us of potential product
revenues.
WE HAVE NO EXPERIENCE SELLING, MARKETING OR DISTRIBUTING PRODUCTS AND NO
INTERNAL CAPABILITY TO DO SO.
We currently have no sales, marketing or distribution capabilities. We
do not anticipate having the resources in the foreseeable future to allocate to
the sales and marketing of its proposed products. Our future success depends, in
part, on our ability to enter into and maintain such collaborative
relationships, the collaborator's strategic interest in the products under
development and such collaborator's ability to successfully market and sell any
such products. We intend to pursue collaborative arrangements regarding the
sales and marketing of our products, however, there can be no assurance that we
will be able to establish or maintain such collaborative arrangements, or if
able to do so, that they will have effective sales forces. To the extent that we
decide not to, or are unable to, enter into collaborative arrangements with
respect to the sales and marketing of its proposed products, significant capital
expenditures, management resources and time will be required to establish and
develop an in-house marketing and sales force with technical expertise. There
can also be no assurance that we will be able to establish or maintain
relationships with third party collaborators or develop in-house sales and
distribution capabilities. To the extent that we depend on third parties for
marketing and distribution, any revenues we receive will depend upon the efforts
of such third parties, and there can be no assurance that such efforts will be
successful. In addition, there can also be no assurance that we will be able to
market and sell our product in the United States or overseas.
IF WE CANNOT COMPETE SUCCESSFULLY FOR MARKET SHARE AGAINST OTHER DRUG COMPANIES,
WE MAY NOT ACHIEVE SUFFICIENT PRODUCT REVENUES AND OUR BUSINESS WILL SUFFER.
The market for our product candidates is characterized by intense
competition and rapid technological advances. If our product candidates receive
FDA approval, they will compete with a number of existing and future drugs and
therapies developed, manufactured and marketed by others. Existing or future
competing products may provide greater therapeutic convenience or clinical or
other benefits for a specific indication than our products, or may offer
comparable performance at a lower cost.
10
If our products fail to capture and maintain market share, we may not achieve
sufficient product revenues and our business will suffer.
We will compete against fully integrated pharmaceutical companies and
smaller companies that are collaborating with larger pharmaceutical companies,
academic institutions, government agencies and other public and private research
organizations. Many of these competitors have product candidates that will
compete with ours already approved or in development. In addition, many of these
competitors, either alone or together with their collaborative partners, operate
larger research and development programs and have substantially greater
financial resources than we do, as well as significantly greater experience in:
- developing drugs;
- undertaking pre-clinical testing and human clinical trials;
- obtaining FDA and other regulatory approvals of drugs;
- formulating and manufacturing drugs; and
- launching, marketing and selling drugs.
DEVELOPMENTS BY COMPETITORS MAY RENDER OUR PRODUCTS OR TECHNOLOGIES OBSOLETE OR
NON-COMPETITIVE.
Companies that currently sell both generic and proprietary anti-obesity
compounds formulations include among others Abbot Laboratories, Inc., Amgen,
Inc., and Regeneron Pharmaceuticals, Inc. Alternative technologies are being
developed to treat obesity and overweight disease, several of which are in
advanced clinical trials. In addition, companies pursuing different but related
fields represent substantial competition. Many of these organizations competing
with us have substantially greater capital resources, larger research and
development staffs and facilities, longer drug development history in obtaining
regulatory approvals and greater manufacturing and marketing capabilities than
we do. These organizations also compete with us to attract qualified personnel,
parties for acquisitions, joint ventures or other collaborations.
WE MAY LOSE OUR RIGHTS TO THE CT-3 TECHNOLOGY.
In connection with our sublicense of the CT-3 technology to Indevus
Pharmaceuticals, Inc., Sumner Burstein, the inventor from whom we license our
rights to the CT-3 technology, has claimed that we have breached the terms of
our license agreement with him and has purported to terminate the license. We
have commenced an arbitration proceeding against Dr. Burstein challenging his
right to terminate our license to CT-3. In the event we are unsuccessful in that
proceeding and an arbitration panel finds that Dr. Burstein is entitled to
terminate our license agreement with him, we will also lose all of our rights to
receive future royalties and milestone payments from Indevus Pharmaceuticals.
Our loss of those potential future payments could have a material adverse effect
on our business prospects.
IF WE FAIL TO ADEQUATELY PROTECT OR ENFORCE OUR INTELLECTUAL PROPERTY RIGHTS OR
SECURE RIGHTS TO PATENTS OF OTHERS, THE VALUE OF OUR INTELLECTUAL PROPERTY
RIGHTS WOULD DIMINISH.
Our success, competitive position and future revenues will depend in
part on our ability and the abilities of our licensors to obtain and maintain
patent protection for our products, methods, processes and other technologies,
to preserve our trade secrets, to prevent third parties from infringing on our
proprietary rights and to operate without infringing the proprietary rights of
third parties.
To date, we hold the exclusive licenses to certain patent rights,
including rights under U.S. patents and U.S. patent applications, as well as
rights under foreign patents and patent applications. We
11
anticipate filing additional patent applications both in the U.S. and in other
countries, as appropriate. However, we cannot predict:
- the degree and range of protection any patents will afford us
against competitors including whether third parties will find
ways to invalidate or otherwise circumvent our patents;
- if and when patents will issue;
- whether or not others will obtain patents claiming aspects
similar to those covered by our patents and patent
applications; or
- whether we will need to initiate litigation or administrative
proceedings which may be costly whether we win or lose.
Our success also depends upon the skills, knowledge and experience of
our scientific and technical personnel, our consultants and advisors as well as
our licensors and contractors. To help protect our proprietary know-how and our
inventions for which patents may be unobtainable or difficult to obtain, we rely
on trade secret protection and confidentiality agreements. To this end, we
require all of our employees, consultants, advisors and contractors to enter
into agreements which prohibit the disclosure of confidential information and,
where applicable, require disclosure and assignment to us of the ideas,
developments, discoveries and inventions important to our business. These
agreements may not provide adequate protection for our trade secrets, know-how
or other proprietary information in the event of any unauthorized use or
disclosure or the lawful development by others of such information. If any of
our trade secrets, know-how or other proprietary information is disclosed, the
value of our trade secrets, know-how and other proprietary rights would be
significantly impaired and our business and competitive position would suffer.
IF WE INFRINGE THE RIGHTS OF THIRD PARTIES WE COULD BE PREVENTED FROM SELLING
PRODUCTS, FORCED TO PAY DAMAGES, AND DEFEND AGAINST LITIGATION.
If our products, methods, processes and other technologies infringe the
proprietary rights of other parties, we could incur substantial costs and we may
have to:
- obtain licenses, which may not be available on commercially
reasonable terms, if at all;
- redesign our products or processes to avoid infringement;
- stop using the subject matter claimed in the patents held by
others;
- pay damages; or
- defend litigation or administrative proceedings which may be
costly whether we win or lose, and which could result in a
substantial diversion of our valuable management resources.
OUR ABILITY TO GENERATE PRODUCT REVENUES WILL BE DIMINISHED IF OUR DRUGS SELL
FOR INADEQUATE PRICES OR PATIENTS ARE UNABLE TO OBTAIN ADEQUATE LEVELS OF
REIMBURSEMENT.
Our ability to commercialize our drugs, alone or with collaborators,
will depend in part on the extent to which reimbursement will be available from:
- government and health administration authorities;
- private health maintenance organizations and health insurers;
and
- other healthcare payers.
Significant uncertainty exists as to the reimbursement status of newly
approved healthcare products. Healthcare payers, including Medicare, are
challenging the prices charged for medical products and services. Government and
other healthcare payers increasingly attempt to contain healthcare costs by
12
limiting both coverage and the level of reimbursement for drugs. Even if our
product candidates are approved by the FDA, insurance coverage may not be
available, and reimbursement levels may be inadequate, to cover our drugs. If
government and other healthcare payers do not provide adequate coverage and
reimbursement levels for any of our products, once approved, market acceptance
of our products could be reduced.
WE MAY NOT SUCCESSFULLY MANAGE OUR GROWTH.
Our success will depend upon the expansion of our operations and the
effective management of our growth, which will place a significant strain on our
management and on our administrative, operational and financial resources. To
manage this growth, we must expand our facilities, augment our operational,
financial and management systems and hire and train additional qualified
personnel. If we are unable to manage our growth effectively, our business would
be harmed.
WE MAY BE EXPOSED TO LIABILITY CLAIMS ASSOCIATED WITH THE USE OF HAZARDOUS
MATERIALS AND CHEMICALS.
Our research and development activities may involve the controlled use
of hazardous materials and chemicals. Although we believe that our safety
procedures for using, storing, handling and disposing of these materials comply
with federal, state and local laws and regulations, we cannot completely
eliminate the risk of accidental injury or contamination from these materials.
In the event of such an accident, we could be held liable for any resulting
damages and any liability could materially adversely effect our business,
financial condition and results of operations. In addition, the federal, state
and local laws and regulations governing the use, manufacture, storage, handling
and disposal of hazardous or radioactive materials and waste products may
require us to incur substantial compliance costs that could materially adversely
effect our business, financial condition and results of operations.
WE RELY ON KEY EXECUTIVE OFFICERS AND SCIENTIFIC AND MEDICAL ADVISORS, AND THEIR
KNOWLEDGE OF OUR BUSINESS AND TECHNICAL EXPERTISE WOULD BE DIFFICULT TO REPLACE.
We are highly dependent on our principal scientific, regulatory and
medical advisors. We do not have "key person" life insurance policies for any of
our officers. The loss of the technical knowledge and management and industry
expertise of any of our key personnel could result in delays in product
development, loss of customers and sales and diversion of management resources,
which could adversely affect our operating results.
IF WE ARE UNABLE TO HIRE ADDITIONAL QUALIFIED PERSONNEL, OUR ABILITY TO GROW OUR
BUSINESS MAY BE HARMED.
We will need to hire additional qualified personnel with expertise in
pre-clinical testing, clinical research and testing, government regulation,
formulation and manufacturing and sales and marketing. We compete for qualified
individuals with numerous biopharmaceutical companies, universities and other
research institutions. Competition for such individuals, particularly in the New
York City area, is intense, and we cannot be certain that our search for such
personnel will be successful. Attracting and retaining qualified personnel will
be critical to our success.
WE MAY INCUR SUBSTANTIAL LIABILITIES AND MAY BE REQUIRED TO LIMIT
COMMERCIALIZATION OF OUR PRODUCTS IN RESPONSE TO PRODUCT LIABILITY LAWSUITS.
The testing and marketing of medical products entail an inherent risk
of product liability. If we cannot successfully defend ourselves against product
liability claims, we may incur substantial liabilities or be required to limit
commercialization of our products. Our inability to obtain sufficient product
13
liability insurance at an acceptable cost to protect against potential product
liability claims could prevent or inhibit the commercialization of
pharmaceutical products we develop, alone or with corporate collaborators. We
currently do not carry clinical trial insurance or product liability insurance.
Although we intend to obtain clinical trial insurance prior to the commencement
of any clinical trials, we, or any corporate collaborators, may not be able to
obtain insurance at a reasonable cost, if at all. Even if our agreements with
any future corporate collaborators entitle us to indemnification against losses,
such indemnification may not be available or adequate should any claim arise.
WE HAVE ONLY APPROXIMATELY 20 MILLION SHARES OF CAPITAL STOCK REMAINING FOR
ISSUANCE.
We currently have approximately 117 million shares of common stock
outstanding and have reserved approximately 13 million additional shares of
common stock for issuance upon outstanding options and warrants. Our certificate
of incorporation only authorizes our company to issue 150 million shares of
capital stock. In the event we need to issue additional shares of our stock in
one or more financing transactions, therefore, we may not issue more than 20
million shares of our common stock without seeking approval of our stockholders
to increase our authorized capital. Accordingly, depending upon the terms of any
proposed financing, we may not have enough authorized shares of stock remaining
that would be sufficient to raise needed capital.
WE ARE CONTROLLED BY CURRENT OFFICERS, DIRECTORS AND PRINCIPAL STOCKHOLDERS.
Our directors, executive officers and principal stockholders
beneficially own approximately 61 percent of our outstanding common stock.
Accordingly, these persons and their respective affiliates will have the ability
to exert substantial influence over the election of our Board of Directors and
the outcome of issues submitted to our stockholders.
RISKS RELATED TO OUR SECURITIES
THE ILLIQUIDITY OF THE MARKET FOR OUR COMMON STOCK COULD ADVERSELY AFFECT OUR
ABILITY TO RAISE FUNDS.
Since being delisted from the Nasdaq SmallCap Market in August 2001,
trading in our securities has been conducted on the National Association of
Securities Dealers' Over-the-Counter Bulletin Board, or "OTC Bulletin Board."
This has adversely effected the liquidity of our securities, not only in terms
of the number of securities that can be bought and sold at a given price, but
also through delays in the timing of transactions and reduction in security
analysts' and the media's coverage of us. This may result in lower prices for
our securities than might otherwise be obtained and could also result in a
larger spread between the bid and asked prices for our securities. In addition,
our delisting could adversely affect our ability to raise funds.
In addition, our common stock is a "penny stock." Broker-dealers who
sell penny stocks must provide purchasers of these stocks with a standardized
risk-disclosure document prepared by the SEC. This document provides information
about penny stocks and the nature and level of risks involved in investing in
the penny-stock market. A broker must also give a purchaser, orally or in
writing, bid and offer quotations and information regarding broker and
salesperson compensation, make a written determination that the penny stock is a
suitable investment for the purchaser, and obtain the purchaser's written
agreement to the purchase. The penny stock rules may make it difficult for you
to sell your shares of our stock. Because of the rules, there is less trading in
penny stocks. Also, many brokers choose not to participate in penny-stock
transactions.
14
OUR STOCK PRICE IS, AND WE EXPECT IT TO REMAIN, VOLATILE, WHICH COULD LIMIT
INVESTORS' ABILITY TO SELL STOCK AT A PROFIT.
The volatile price of our stock makes it difficult for investors to
predict the value of their investment, to sell shares at a profit at any given
time, or to plan purchases and sales in advance. A variety of factors may affect
the market price of our common stock. These include, but are not limited to:
- publicity regarding actual or potential clinical results relating to
products under development by our competitors or us;
- delay or failure in initiating, completing or analyzing pre-clinical
or clinical trials or the unsatisfactory design or results of these
trials;
- achievement or rejection of regulatory approvals by our competitors
or us;
- announcements of technological innovations or new commercial
products by our competitors or us;
- developments concerning proprietary rights, including patents;
- developments concerning our collaborations;
- regulatory developments in the United States and foreign countries;
- economic or other crises and other external factors;
- period-to-period fluctuations in our revenues and other results of
operations;
- changes in financial estimates by securities analysts; and
- sales of our common stock.
We will not be able to control many of these factors, and we believe that
period-to-period comparisons of our financial results will not necessarily be
indicative of our future performance.
In addition, the stock market in general, and the market for
biotechnology companies in particular, has experienced extreme price and volume
fluctuations that may have been unrelated or disproportionate to the operating
performance of individual companies. These broad market and industry factors may
seriously harm the market price of our common stock, regardless of our operating
performance.
TRADING IN OUR STOCK OVER THE LAST 12 MONTHS HAS BEEN LIMITED, SO INVESTORS MAY
NOT BE ABLE TO SELL AS MUCH STOCK AS THEY WANT AT PREVAILING PRICES.
The daily trading volume of our common stock is very small. If limited
trading in our stock continues, it may be difficult for investors to sell their
shares in the public market at any given time at prevailing prices. Also, the
sale of a large block of our securities could depress the price of our
securities to a greater degree than a company that typically has higher volume
of trading of securities.
SALE OF SHARES OF OUR COMMON STOCK TO FUSION CAPITAL MAY CAUSE DILUTION, AND
SALE OF THOSE SHARES BY FUSION CAPITAL COULD CAUSE THE PRICE OF OUR COMMON STOCK
TO DECLINE.
Under an equity-line-of-credit arrangement, Fusion Capital has
committed to purchasing $6,000,000 of our common stock. Our stock price is
currently below the $0.68 minimum required in order for us to be able to sell
shares of our common stock to Fusion, but if in the future our stock price
exceeds this minimum, we may elect to sell shares of our common stock to Fusion
under the equity-line-of-credit arrangement. In addition, in November 2001,
Fusion Capital waived the $0.68 minimum and purchased from us under the
equity-line-of-credit arrangement 416,667 shares of our common stock at a price
per share of $0.24, representing an aggregate purchase price of $100,000. Fusion
Capital again
15
waived the $0.68 minimum in May 2002 and purchased 10,000 shares of common stock
for an aggregate purchase price of $1,666.67.
The purchase price for the common stock to be issued to Fusion Capital
under our common stock purchase agreement with Fusion Capital will fluctuate
based on the closing price of our common stock. Fusion Capital may at any time
sell none, some or all of the shares of common stock purchased from us.
Depending upon market liquidity at the time, sale by Fusion of shares we issue
to them could cause the trading price of our common stock to decline. Sale of a
substantial number of shares of our common stock by Fusion, or anticipation of
such sales, could make it more difficult for us to sell equity or equity related
securities in the future at a time and at a price that it might otherwise wish
to effect sales.
THE EXISTENCE OF THE AGREEMENT WITH FUSION CAPITAL TO PURCHASE SHARES OF OUR
COMMON STOCK COULD CAUSE DOWNWARD PRESSURE ON THE MARKET PRICE OF OUR COMMON
STOCK.
Both the actual dilution and the potential for dilution resulting from
any sales of our common stock to Fusion Capital could cause holders to elect to
sell their shares of our common stock, which could cause the trading price of
our common stock to decrease. In addition, prospective investors anticipating
the downward pressure on the price of our common stock due to the shares
available for sale by Fusion Capital could refrain from purchases or effect
sales in anticipation of a decline of the market price.
WE HAVE NEVER PAID DIVIDENDS
We have never paid dividends on our capital stock and do not anticipate
paying any dividends for the foreseeable future.
16
ITEM 2. LEGAL PROCEEDINGS
We are involved with an arbitration proceeding against Dr. Sumner
Burstein, the inventor from whom we licensed CT-3, concerning a dispute over the
payment of royalties. Under our license agreement with Dr. Burstein, he is
entitled to a royalty of 3 percent of the net sales of all licensed products
sold by us, and a royalty of 8 percent of the royalties that we receive from
sublicensees from net sales by any such sublicensee of the licensed products or
processes.
In connection with the license of our rights to CT-3 to Indevus
Pharmaceuticals, Inc. in June 2002, Indevus paid us an initial licensing fee of
$400,000 and an inventory transfer fee of $100,000. Indevus is further required
to make future payments upon achieving certain development milestones and
royalties. On July 23, 2002, we received a letter from attorneys representing
Dr. Burstein with their analysis of his rights under the Burstein license. In
the letter they concluded that the $500,000 we received from Indevus, as well as
any future milestone payments should trigger our obligation to make royalty
payments to Dr. Burstein pursuant to the terms of our agreement with him,
therefore subject to the 8 percent sublicensing royalty.
On September 16, 2002, our counsel responded by stating that we
recognize our obligation to pay an 8 percent royalty to Dr. Burstein only on
those payments that we receive from Indevus based on the "net sales" of products
and processes covered by the Burstein license. The Indevus license agreement
does not merely include a sublicense to patent rights of CT-3, but also the
transfer of our know-how, FDA regulatory filings, inventory of CT-3 compound and
third party contracts. Presently, there have been no "net sales" on any products
covered by the Burstein license. It is our position that we have not received
any royalty payments pursuant to the Indevus license and, therefore, no payments
are due to Dr. Burstein at this time.
On November 20, 2002, we received a letter from Dr. Burstein's
attorneys purporting to terminate the Burstein license. We believe that this
purported termination is invalid under the terms of the Burstein agreement and
that Dr. Burstein's current royalty and termination claims are without merit. We
intend to vigorously defend our position that the Burstein license is not
terminated. Under the terms of the Burstein license, Dr. Burstein is not
permitted to terminate the agreement over a bona fide dispute regarding the
payment of royalties. Instead, the Burstein license states that disputes
regarding royalty payments are to be settled through binding arbitration.
In accordance with the terms of the Burstein license, we commenced an
arbitration proceeding with the American Arbitration Association in January
2003, which is currently pending. Although we believe we will prevail in this
proceeding, we believe that even an unfavorable binding arbitration ruling that
concludes a breach of the Burstein license by us for failure to pay royalties
would be capable of being readily cured, thereby also avoiding termination of
the Burstein license.
ITEM 3. DESCRIPTION OF PROPERTY
Following the merger with Manhattan Research Development, we moved our
executive offices to 787 Seventh Avenue, 48th Floor, New York, New York 10119.
We currently occupy this space pursuant to an oral understanding under which we
pay rent of approximately $6,400 per month. We are currently negotiating a
longer-term written lease with our landlord and we anticipate our monthly rental
payments to remain at that amount.
We also are party to a lease for office space in Vernon, Connecticut,
which we no longer occupy. The Vernon lease requires monthly payments of $1,250
and expires in May 2003. We have been
17
subleasing approximately 60 percent of the space subject to the Vernon lease
since March 2002 in exchange for $750 per month.
Shortly after our merger with Manhattan Research Development, we moved
our offices from our previous location in the Empire State Building at 350 Fifth
Avenue, New York, New York. Our lease for this space requires monthly payments
of approximately $7,400.
We believe that our existing facilities are adequate to meet our
current requirements. We do not own any real property.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the fourth quarter of our fiscal year ended December 31, 2002,
there were no matters submitted to a vote of our stockholders.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET FOR COMMON STOCK
Our common stock was listed on the Nasdaq SmallCap Market until August
2001, when our stock was delisted. Since that date our common stock has been
listed on the Over-the-Counter Bulletin Board, or "OTC Bulletin Board." Our
common stock trades on the OTC Bulletin Board under the symbol "MHTP.OB." The
following table lists the high and low price for our common stock as quoted, in
U.S. dollars, by the Nasdaq SmallCap Market and the OTC Bulletin Board, as
applicable, during each quarter within the last two fiscal years:
PRICE RANGE
--------------------------------------------
2002 2001
-------------------- --------------------
QUARTER ENDED HIGH LOW HIGH LOW
----------------------------------------------- -------- -------- -------- --------
March 31 $ 0.300 $ 0.160 $ 1.438 $ 0.625
June 30 0.340 0.120 1.000 0.510
September 30 0.190 0.100 0.800 0.160
December 31 0.170 0.050 0.510 0.160
The quotations from the OTC Bulletin Board reflect inter-dealer prices,
without retail mark-up, mark-down or commission, and may not represent actual
transactions.
RECORD HOLDERS
The number of holders of record of our common stock as of March 31,
2003 was 267.
DIVIDENDS
We have not paid or declared any dividends on our common stock and we
do not anticipate paying dividends on our common stock in the foreseeable
future.
18
RECENT SALES OF UNREGISTERED SECURITIES
In April 2002, we issued 75,000 shares of our common stock to a
consultant in exchange for consulting and advisory services valued at $15,000
rendered to us. We relied upon the exemption from federal registration under
Section 4(2) of the Securities Act of 1933 (the "Securities Act"), based on our
belief that the issuance did not involve a public offering, the consultant was
sophisticated in financial and business matters and the consultant had access to
information pertaining to our company.
Pursuant to a common stock purchase agreement dated May 7, 2001,
between us and Fusion Capital Fund II, LLC, we issued 10,000 shares of our
common stock in May 2002 in exchange for aggregate proceeds of $1,666,67. This
issuance was exempt from federal registration requirements pursuant to Section
4(2) of the Securities Act because we had a reasonable basis to conclude that
Fusion Capital Fund II, LLC was an accredited investor, was sophisticated in
financial and business matters and because the issuance did otherwise involve a
public offering.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OR PLAN OF OPERATIONS.
OVERVIEW
We were incorporated in Delaware on May 18, 1993, and commenced
operations on July 13, 1993. We are engaged in developing biomedical and
pharmaceutical products and technologies. We own rights to technology we believe
may be useful in the treatment of a variety of diseases, including pain and
inflammation and we are entitled to royalties and other revenues in connection
with a second technology, relating to the treatment of ophthalmic disorders. Our
existing technologies under development are each held either by us or our
subsidiaries. We have been unprofitable since inception and expect to incur
substantial additional operating losses over the next several years. On February
21, 2003, we completed a reverse acquisition of privately-held Manhattan
Research Development, Inc. In accordance with this transaction we issued
approximately 80 percent of our outstanding common stock (after giving effect to
the transaction) to the former stockholders of Manhattan Research Development.
The following discussion and analysis should be read in conjunction
with the consolidated financial statements and notes thereto appearing elsewhere
in this Form 10-KSB.
RESULTS OF OPERATIONS
From the commencement of operations through December 31, 2002, we have
generated $12,330,379 of revenue.
2002 Versus 2001
In the year ended December 31, 2002, Indevus Pharmaceuticals, Inc. paid
us a $400,000 license fee as part of the consideration for our having licensed
to Indevus, under a license agreement effective June 28, 2002, exclusive
worldwide rights to CT-3, our novel anti-inflammatory and analgesic compound
currently in clinical development. Indevus also paid us $100,000 as a product
transfer fee in connection with the transaction. Indevus will be responsible for
all further development of CT-3, and we will have no future involvement with
Indevus or CT-3 other than in connection with our rights to royalties and
milestone payments under the license agreement. Those milestone payments are
contingent on occurrence of certain events specified in the agreement, including
commencement and completion of various clinical trials, the FDA's acceptance for
filing of an NDA, and Indevus securing other regulatory approvals for CT-3 in
the United States and Europe. In accordance with SAB No. 101, "Revenue
19
Recognition," we recognized $500,000 of licensing revenue during the year ended
December 31, 2002, since we have no further obligations under the license
agreement. We will record as additional revenue any additional payments we
receive under the license agreement.
In accordance with a now-terminated license and development agreement,
Bausch & Lomb Surgical paid our subsidiary, Optex Ophthalmologics, Inc.
("Optex"), for developing its Avantix (formerly known as Catarex) technology.
For the year ended December 31, 2002, this agreement provided no development
revenue and no related cost-of-development revenue as compared with $2,461,922
of development revenue (including $1,067,345 in project-completion bonuses paid
out and recognized at the completion of the project in March 2001) and related
cost-of-development revenue of $2,082,568 for the year ended December 31, 2001.
The decrease in revenues and related expenses from Bausch & Lomb over last year
is due to the fact that there were no revenues and related expenses since
termination of the agreement in March 2001.
Research and development expenditures consist primarily of costs
associated with research and development personnel, the cost of operating our
research and development laboratories, research and development consultants, the
cost of clinical trials and costs related to patent filings and maintenance. For
the year ended December 31, 2002, research and development expense was $539,752
as compared to $886,716 for the year ended December 31, 2001. The cessation of
research and development activities on our antisense technology as a result of
the sale of the assets of Gemini Technologies, Inc., our subsidiary, accounted
for approximately $159,000 of this decrease. In addition, research and
development consulting expense decreased by approximately $99,000, research and
development salaries decreased by approximately $30,000 and patent prosecution
fees decreased by approximately $77,000 primarily as a result of our having
licensed rights to CT-3 in June of 2001. The decreases are partially offset by
an increase in the cost of materials of $18,000, mainly the result of the
purchase of CT-3 compound prior to licensing to Indevus.
Through December 31, 2000, we made an investment in TeraComm Research,
Inc. of $1,000,000 in cash and common stock and warrants valued at $1.8 million.
For the year ended December 31, 2000, we expensed $2,653,382 of this payment as
acquired in-process research and development, since TeraComm's product
development activity was in its very early stages. As a result of TeraComm
failing to meet a technical milestone at December 31, 2000, we made no further
investments in TeraComm, and we are not required to provide TeraComm with any
additional funding. We have recorded our share of TeraComm's losses during 2000
and 2001, which has reduced the carrying value of our investment to zero as of
December 31, 2001.
General and administrative expenses consist primarily of expenses
associated with corporate operations, legal, finance and accounting, human
resources and other general operating costs. For the year ended December 31,
2002, general and administrative expense was $1,519,008 as compared to
$2,771,407 for the year ended December 31, 2001. A significant portion of this
decrease is a result of a finder's fee of $120,000 and the $444,000 estimated
fair value of the 600,000 commitment shares we issued to Fusion Capital Fund II,
LLC in conjunction with a common stock purchase agreement with Fusion Capital
Fund II, LLC we entered into during 2001. Fusion's obligation to purchase our
shares under this agreement is subject to certain conditions. A material
contingency that affects our ability to raise funds under this agreement is our
stock price. Currently, our stock price is below the floor price of $0.68
specified in the Fusion agreement and as a result we are currently unable to
draw funds pursuant to that agreement. As the Fusion agreement is currently
structured, we cannot guarantee that we will be able to draw any funds. In
addition, in the year ended December 31, 2001, we had expenses associated with
the issuance of 35,000 shares of our common stock to each of BH Capital
Investments, L.P. and Excalibur Limited Partnership in August 2001 in return for
their commitment to provide us with $3.5 million of financing in connection with
an asset purchase for which we had submitted a bid. We subsequently
20
issued those shares, but we did not ultimately purchase those assets. Those
shares had an estimated fair value of $44,100, which was recorded as a general
and administrative expense for the year ended December 31, 2001. The decrease in
general and administrative expenses was also due to reduced spending as a result
of increased efforts to conserve cash as well as reduced levels of general and
administrative activity. We had a decrease in payroll of approximately $185,000
partially as a result of the sale of substantially all of the assets of Gemini
Technologies in May of 2001, a decrease in legal expenses of approximately
$118,000, a decrease in investor relations services of about $130,000, a
decrease in due diligence fees and Nasdaq fees of approximately $94,000, a
decrease in travel and conference expenses of approximately $71,000 and a
decrease in accounting fees of approximately $46,000.
For the year ended December 31, 2002, we had a reduction in previously
recognized compensation expense relating to stock warrants of $5,845 as compared
to an expense relating to stock warrants of $78,611 in the prior year. This
expense was associated with warrants issued to Dian Griesel during March 2001 as
partial compensation for investor relations services provided to us by IRG. The
reduction of compensation expense associated with these warrants is due to the
decrease in our stock price as compared to 2001 and the reversal of previously
recorded expense associated with 45,000 unvested warrants which were terminated
as of May 31, 2002. Compensation expense relating to these investor relations
services represents a general and administrative expense. With the termination
of the agreement with IRG there will be no more vesting of warrants and
therefore we will not incur any additional compensation expense associated with
the Dian Griesel warrants.
For the year ended December 31, 2002, interest and other income was
$11,212, compared to $42,010 for the year ended December 31, 2001. The decrease
in interest income is primarily due to the decline in our cash reserves.
Net loss applicable to common shares for the year ended December 31,
2002, was $1,612,695 as compared to $2,609,521 for the year ended December 31,
2001. This decrease in net loss applicable to common shares is attributable in
part to the recognition of a gain on the sale of the assets of our subsidiary,
Optex during the year ended December 31, 2001 in the amount of $2,569,451,
partially offset by a distribution to the minority shareholders of Optex of
$837,274. In addition, with the termination of our agreement with Bausch & Lomb,
we no longer have available to us the revenue or profits associated with that
agreement; as a result, we had no profit from this agreement for the year ended
December 31, 2002 as compared with $379,354 of profit for the same period in
2001. We recorded grant revenue of $250,000 for the year ended December 31, 2001
that we did not have in year ended December 31, 2002. In the year ended December
31, 2001, we also recorded a loss of $334,408 on sale of the assets of our
subsidiary Gemini Technologies. Partially offsetting the decrease in net loss,
we recognized $500,000 of licensing revenue we recorded in connection with our
licensing to Indevus exclusive worldwide rights to CT-3. The net loss applicable
to common shares was further decreased by a reduction in research and
development expenses and general and administrative expenses, including
compensation expense relating to stock options and warrants of $346,964 and
$1,336,855, respectively, for the year ended December 31, 2002 as compared with
the year ended December 31, 2001.
Net loss applicable to common shares for the year ended December 31,
2001 also included a beneficial conversion on our Series B preferred stock in
the amount of $600,000 and a dividend of $167,127 paid on our repurchase of the
outstanding Series B preferred stock. We also issued preferred stock dividends
on our Series A preferred stock, for which the estimated fair value of $65,760
and $107,449 was included in the net loss applicable to common shares for the
years ended December 31, 2002 and 2001, respectively. The decrease in the
estimated fair value of these dividends as compared to the prior year is
primarily a reflection of a decline in our stock price.
21
2001 Versus 2000
In accordance with a now-terminated license and development agreement,
Bausch & Lomb Surgical paid our subsidiary, Optex Ophthalmologics, Inc.
("Optex"), for developing its Catarex technology. For the year ended December
31, 2001, this agreement provided $2,461,922 of development revenue (including
$1,067,345 in project-completion bonuses paid out and recognized at the
completion of the project in March 2001) and related cost of development revenue
of $2,082,568. For the year ended December 31, 2000, this agreement provided
$5,169,288 of development revenue and related cost of development revenue of
$4,135,430. The decrease in revenues and related expenses from Bausch & Lomb
over last year was due to the fact that there were no revenues and related
expenses since termination of the agreement in March 2001. With termination of
the above agreement at the conclusion of the sale of substantially all of
Optex's assets (mostly intangible assets with no book value) in March 2001, as
described further below, we will no longer have the revenues or profits
associated with that agreement available to us.
For the year ended December 31, 2001, research and development expense
was $886,716 as compared to $1,130,345 for the year ended December 31, 2000.
This decrease is due mainly to the cessation of research and development
activities on the 2-5A antisense technology as a result of the sale of
substantially all of the assets of Gemini Technologies. This decrease is offset
somewhat by increased expenditures on certain development projects, including
our CT-3 during the first part of the year.
Through December 31, 2000, we made an investment in TeraComm Research,
Inc. of $1,000,000 in cash and common stock and warrants valued at $1.8 million.
For the year ended December 31, 2000, we expensed $2,653,382 of this payment as
acquired in-process research and development, since TeraComm's product
development activity was in its very early stages. As a result of TeraComm's not
meeting a technical milestone at December 31, 2000, we made no further
investments in TeraComm, and we are not required to provide TeraComm with any
additional funding. We have recorded our share of TeraComm's losses during 2000
and 2001, which has reduced the carrying value of our investment to zero as of
December 31, 2001.
For the year ended December 31, 2001, general and administrative
expense was $2,771,407 as compared to $2,235,535 for the year ended December 31,
2000. This increase is primarily due to an increase in expenses incurred in
conjunction with a common stock purchase agreement entered into during the
second quarter of 2001 with Fusion Capital Fund II, LLC. These expenses include
the cost of our issuing 600,000 commitment shares to Fusion Capital ($444,000)
and a finder's fee of $120,000. Fusion's obligation to purchase our shares is
subject to certain conditions, including the effectiveness of a registration
statement covering the shares to be purchased. That registration statement was
declared effective on July 6, 2001. A material contingency that may affect our
operating plans and our ability to raise funds under this agreement is our stock
price. Currently, our stock price is below the floor price of $0.68 specified in
the Fusion Capital agreement and as a result we are currently unable to draw
funds pursuant to that agreement. As the Fusion Capital agreement is currently
structured, we cannot guarantee that we will be able to draw any funds. On
November 30, 2001, Fusion Capital waived the floor price and purchased from us
under the agreement 416,667 shares of our common stock at a price of $0.24,
representing an aggregate purchase price of $100,000. See "Liquidity and Capital
Resources" for further details on this agreement. Fusion Capital's waiver
applied only to the November 30, 2001 purchase, so the $0.68 floor price remains
an obstacle to our obtaining additional financing from Fusion Capital unless our
stock price increases or Fusion Capital elects in the future to again waive the
floor price. Also, rent expense and investor relations expenses increased by
$86,000 and $70,000, respectively. Rent expense for 2001 includes an $11,026
commitment obligation related to rental of space that is no longer being used.
These expenses are partially offset by a reduction of legal and moving expenses
by $200,000 and $50,000, respectively. In addition, we incurred expenses
associated with the issuance of 35,000 shares of
22
our common stock to each of BH Capital Investments, L.P. and Excalibur Limited
Partnership in August 2001 in return for their commitment to provide us with
$3.5 million of financing in connection with an asset purchase for which we had
submitted a bid. We did not ultimately purchase those assets. Those shares had
an estimated fair value of $44,100, which we recorded as a general and
administrative expense for year ended December 31, 2001.
For the year ended December 31, 2001, we had compensation expense
relating to stock warrants of $78,611 as compared to $1,020,128 in the prior
year. The 2001 expense consists of $33,256 associated with warrants issued to
Dian Griesel of The Investor Relations Group during March 2001 as partial
compensation for investor relations services and $45,355 associated with fully
vested warrants issued to Proteus Capital Corp. in August 2001 as partial
compensation for fundraising services. Additional expense associated with the
warrants issued to Dian Griesel will continue to be incurred over the remainder
of the two-year term of the agreement. As long as these warrants continue to
vest, that expense will be directly affected by the movement in the price of our
common stock. For the year ended December 31, 2000, we had $1,020,128 of expense
associated with warrants issued to Joseph Stevens & Company, Inc. as partial
compensation for financial advisory services. Compensation expense relating to
these investor relations and financial advisory services represent a general and
administrative expense.
For the year ended December 31, 2001, interest and other income was
$42,010, compared to $92,670 for the year ended December 31, 2000. The decrease
in interest income is primarily due to the decline in our cash reserves.
Net loss applicable to common shares for the year ended December 31,
2001, was $2,609,521 as compared to $6,847,749 for the year ended December 31,
2000. This decrease in net loss applicable to common shares is attributable in
part to the net effect of (1) the gain of $2,569,451 we recognized on sale of
the assets of our subsidiary Optex, (2) a distribution by Optex to its minority
shareholders of $837,274 of earnings, and (3) the loss of $334,408 recorded on
sale of the assets of our subsidiary Gemini. (These transactions took place
during 2001; see below for further information.) In addition, the decrease is
due to our having acquired in 2000 $2,653,382 of in-process research and
development as part of our investment in TeraComm Research, Inc. and our having
incurred in 2000 compensation expense of $1,020,128 relating to stock warrants
issued to Joseph Stevens. The loss differential is partially reduced by the cost
of our having issued during 2001 600,000 commitment shares to Fusion Capital
Fund II, LLC (valued at $444,000). In addition, with the termination of our
agreement with Bausch & Lomb, we no longer have available to us the revenue or
profits associated with that agreement; as a result, the profit we earned from
this agreement in 2001 was $654,504 less than the profit earned in 2000.
Net loss applicable to common shares for the year ended December 31,
2001 also included a beneficial conversion on shares of our Series B preferred
stock in the amount of $600,000 during the year ended December 31, 2001 and
dividends of $167,127 and $233,757 paid upon the repurchase of the outstanding
shares of Series B preferred stock recorded during the years ended December 31,
2001 and 2000, respectively. We also issued preferred stock dividends on our
Series A preferred stock for which the estimated fair value of $107,449 and
$811,514 was included in the net loss applicable to common shares for the years
ended December 31, 2001 and 2000, respectively. The decrease in the estimated
fair value of these dividends as compared to the prior year is primarily a
reflection of the decline in our stock price and a reduction of the number of
preferred shares issued.
LIQUIDITY AND CAPITAL RESOURCES
From inception to December 31, 2002, we incurred an accumulated deficit
of $28,275,341, and we incurred additional losses through the year ended
December 31, 2002 and expect to for the foreseeable
23
future. We incurred these losses primarily through research and development
activities related to the various technologies under our control.
Pursuant to an asset purchase agreement dated January 31, 2001, among
Bausch & Lomb Incorporated, a Bausch & Lomb affiliate, the Company, and Optex,
on March 2, 2001, Optex sold to Bausch & Lomb substantially all its assets
(mostly intangible assets with no book value), including all those related to
the Avantix (formerly known as Catarex) technology. As a result of this sale, we
no longer have any obligations to Bausch & Lomb in connection with development
of the Avantix technology. The purchase price was $3 million paid at closing
(approximately $564,000 of which was distributed to minority shareholders). In
addition, Optex is entitled to receive additional consideration, namely $1
million once Bausch & Lomb receives regulatory approval to market the Avantix
device in Japan, royalties on net sales on the terms stated in the original
development agreement dated May 14, 1998, between Bausch & Lomb and Optex, as
amended, and minimum royalties of $90,000, $350,000, and $750,000 for the first,
second, and third years, respectively, starting on first commercial use of the
Avantix device or January 1, 2004, whichever is earlier. Optex also has the
option to repurchase the acquired assets from Bausch & Lomb if it ceases
developing the Avantix technology at fair value. Upon the sale of Optex assets,
Bausch & Lomb's development agreement with Optex was terminated. In the asset
purchase agreement, Optex agreed to forgo future contingent payments provided
for in the earlier development agreement. As a result of this transaction, we
recorded a gain on the sale of Optex assets of $2,569,451. During the year ended
December 31, 2001, we made a profit distribution of $837,274 to Optex's minority
shareholders, representing their share of the cumulative profit from the
development agreement with Bausch & Lomb and the proceeds from the sale of
Optex' assets. (This figure includes the $564,000 referred to above.)
On September 28, 2000, pursuant to a convertible preferred stock and
warrants purchase agreement (the "Purchase Agreement"), we issued to BH Capital
Investments, L.P. and Excalibur Limited Partnership (together, the "Investors")
for a purchase price of $2,000,000, 689,656 shares of our Series B convertible
preferred stock and warrants to purchase 134,000 shares of our common stock.
Half of the shares of Series B preferred stock (344,828 shares) and warrants to
purchase half of the shares of common stock (67,000 shares) were held in escrow,
along with half of the purchase price. On December 4, 2000, we and the Investors
entered into a stock repurchase agreement pursuant to which we repurchased from
the Investors for $500,000 137,930 shares of Series B preferred stock and agreed
to the release from escrow to the Investors of the $1,000,000 purchase price of
the 344,828 shares of Series B preferred stock held in escrow. We also allowed
the Investors to keep all of the warrants issued under the purchase agreement
and issued to the Investors warrants to purchase a further 20,000 shares of our
common stock at the same exercise price. On January 19, 2001, 41,380 shares of
Series B preferred stock were converted by the Investors into 236,422 shares of
our common stock. On March 9, 2001, we and the Investors entered into a second
stock repurchase agreement pursuant to which we repurchased from the Investors,
for an aggregate purchase price of $617,067, all 165,518 shares of our Series B
preferred stock held by the Investors. The repurchase price represented 125% of
the purchase price originally paid by the investors for the repurchased shares,
as well as an amount equal to the annual dividend on the Series B preferred
stock at a rate per share of 8% of the original purchase price. The repurchased
shares constitute all remaining outstanding shares of Series B preferred stock;
we have cancelled those shares.
On May 7, 2001, we entered into a common stock purchase agreement with
Fusion Capital Fund II, LLC pursuant to which Fusion Capital agreed to purchase
up to $6.0 million of our common stock over a 30-month period, subject to a
6-month extension or earlier termination at our discretion. This agreement
replaced an earlier common stock purchase agreement between us and Fusion
Capital dated March 16, 2001. Fusion's obligation to purchase shares of our
common stock is subject to certain conditions, including the effectiveness of a
registration statement covering the shares to be purchased. That registration
statement was declared effective on July 6, 2001. The selling price of the
shares will be
24
equal to the lesser of (1) $20.00 or (2) a price based upon the future market
price of the common stock, without any fixed discount to the market price. A
material contingency that may affect our operating plans and ability to raise
funds under this agreement is our stock price. Currently, our stock price is
below the floor price of $0.68 specified in the Fusion Capital agreement and as
a result we are currently unable to draw funds pursuant to the Fusion Capital
agreement. As the Fusion Capital agreement is currently structured, we cannot
guarantee that we will be able to draw any funds. We paid a $120,000 finder's
fee relating to this transaction to Gardner Resources, Ltd. and issued to Fusion
Capital Fund II, LLC 600,000 common shares as a commitment fee. Those shares had
an estimated fair value of $444,000. We have amended our agreement with Fusion
Capital to allow us to draw funds pursuant to the agreement regardless of its
listing status on the Nasdaq SmallCap Market. On November 30, 2001, Fusion
Capital waived the floor price and purchased from us under the agreement 416,667
shares of our common stock at a price of $0.24, representing an aggregate
purchase price of $100,000. On May 13, 2002, Fusion Capital waived the floor
price again and purchased from us under the agreement 10,000 shares of our
common stock at a price of $0.16, representing an aggregate purchase price of
$1,666. Fusion Capital's waiver applied only to the November 30, 2001 and the
May 13, 2002 purchases, so the $0.68 floor price remains an obstacle to our
obtaining additional financing from Fusion Capital unless our stock price
increases or Fusion Capital elects in the future to again waive the floor price.
On November 6, 2001, we entered into an agreement with Joseph Stevens &
Company, Inc. in which Joseph Stevens agreed to act as placement agent for a
private placement of shares of our common stock. In that private placement, the
price of each share of our common stock was $0.24 and the minimum and maximum
subscription amounts were $2,000,000 and $3,000,000, respectively. In addition,
each investor received a warrant to purchase one share of our common stock for
every share of our common stock purchased by that investor. The warrants have an
exercise price of $0.29 and are exercisable for five years from the closing
date. On December 3, 2001, we issued to certain investors an aggregate of
8,333,318 shares of common stock for the minimum subscription of $2,000,000. In
connection with the private placement, we paid Joseph Stevens a placement fee of
$140,000, equal to 7% of the aggregate subscription amount, a warrant to
purchase 833,331 shares of our common stock, which represented 10% of the number
of shares issued to the investors and 833,331 shares of our common stock. The
term of this warrant is five years and the per share exercise price is $0.29. In
conjunction with this private placement, we received net proceeds of
approximately $1,848,000 in December 2001.
On June 28, 2002, we licensed to Indevus Pharmaceuticals, Inc. the
exclusive worldwide rights to CT-3 in exchange for a $500,000 licensing fee. We
are also entitled to additional milestone payments on occurrence of certain
events specified in the license agreement, including commencement and completion
of various clinical trials, the FDA's acceptance for filing of a New Drug
Application, or "NDA," and Indevus securing other regulatory approvals for CT-3
in the United States and Europe, and we will be entitled to royalties once the
compound begins to generate revenue. Under the license agreement, Indevus is
responsible for the clinical development, regulatory activities and
commercializing this compound.
We have financed our operations since inception primarily through
equity and debt financing, our now-terminated collaborative arrangement with
Bausch & Lomb and our licensing of CT-3 to Indevus. During year ended December
31, 2002, we had a net decrease in cash and cash equivalents of $1,475,470
(including the receipt of the $500,000 licensing fee from Indevus in July 2002).
This decrease primarily resulted from net cash used in operating
activities for the year ended December 31, 2002 of $1,432,566. Total cash
resources as of December 31, 2002 were $116,291 compared to $1,591,761 at
December 31, 2001. From November 2002 through February 20, 2003, after giving
effect to our merger with Manhattan Development Research, the combined company
has raised $2,747,600 from financing activities.
25
Our available working capital and capital requirements will depend upon
numerous factors, including progress of our research and development programs,
our progress in and the cost of ongoing and planned pre-clinical and clinical
testing, the timing and cost of obtaining regulatory approvals, the cost of
filing, prosecuting, defending, and enforcing patent claims and other
intellectual property rights, competing technological and market developments,
changes in our existing collaborative and licensing relationships, the resources
that we devote to developing manufacturing and commercializing capabilities,
technological advances, the status of our competitors, our ability to establish
collaborative arrangements with other organizations and our need to purchase
additional capital equipment.
Our current liabilities as of December 31, 2002 were $577,732 compared
to $508,613 at December 31, 2001, an increase of $69,119. The increase was
primarily due to the delay of payment of certain accounts payable in effort to
conserve cash. As of December 31, 2002, our current liabilities exceeded our
current assets and we had a working capital deficit of $402,811, which reflects
our receiving a $500,000 licensing fee from Indevus and our receiving $1,940,000
in net proceeds from two private placements of our common stock during December
2001.
Our continued operations will depend on whether we are able to raise
additional funds through various potential sources, such as equity and debt
financing, other collaborative agreements, strategic alliances, and our ability
to realize the full potential of our technology in development. Such additional
funds may not become available as we need them or be available on acceptable
terms. Through December 31, 2002, a significant portion of our financing has
been through private placements of common and preferred stock and warrants, the
issuance of common stock for stock options and warrants exercised, and debt
financing. Unless our operations generate significant revenues, we will continue
to fund operations from cash on hand and through the similar sources of capital
previously described. We can give no assurances that any additional capital that
we are able to obtain will be sufficient to meet our needs.
We have reported net losses of $1,546,935, $1,734,945 and $5,802,478
for the years ended December 31, 2002, 2001 and 2000, respectively. The net loss
from date of inception, July 13, 1993, to December 31, 2002 amounts to
$27,874,457. On February 21, 2003, we completed a reverse acquisition of
privately-held Manhattan Research Development, Inc., a development stage
company. Management believes that we will continue to incur net losses through
at least December 31, 2003. Based on the current resources of the resulting
company, we will need additional equity or debt financing or we will need to
generate revenues through licensing our products or entering into strategic
alliances to be able to sustain our operations until we can achieve
profitability, if ever. These matters raise substantial doubt about our ability
to continue as a going concern.
The report of our independent auditors on our consolidated financial
statements includes an explanatory paragraph which states that our recurring
losses, and limited liquid resources raise substantial doubt about our ability
to continue as a going concern. Our consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
Subsequent to an oral hearing before a Nasdaq Listing Qualifications
Panel, on August 23, 2001, our securities were delisted from the Nasdaq Stock
Market for failing to meet the minimum bid price requirements set forth in the
NASD Marketplace Rules, as our common stock had traded for less than $1.00 for
more than 30 consecutive business days. Our common stock trades now on the OTC
Bulletin Board under the symbol "MHTP.OB". Delisting our common stock from
Nasdaq could have a material adverse effect on our ability to raise additional
capital, our stockholders' liquidity and the price of our common stock.
26
CRITICAL ACCOUNTING POLICIES
In December 2001, the SEC requested that all registrants discuss their
most "critical accounting policies" in management's discussion and analysis of
financial condition and results of operations. The SEC indicated that a
"critical accounting policy" is one which is both important to the portrayal of
the company's financial condition and results and requires management's most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain. Our
significant accounting policies are described in Note 1 to our consolidated
financial statements included in this annual report; however, we believe that
none of them is considered to be critical.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities." SFAS No.146 addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force ("EITF") issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit and Activity." SFAS No. 146 requires that liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred. This statement also established that fair value is the objective for
initial measurement of the liability. The provisions of SFAS No. 146 are
effective for exit or disposal activities that initiated after December 31,
2002. The Company does not expect that the adoption of SFAS No. 146 will have a
material impact on its consolidated financial statements.
In December 2002, FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation- Transition and Disclosure an Amendment of SFAS No. 123." SFAS No.
148 amends SFAS No. 123 to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock- based
employee compensation and the effect of the method used on reported results. The
Company will adopt SFAS No. 148, effective January 1, 2003. The Company is
currently evaluating the requirements and does not believe that the adoption of
SFAS No. 148 will have any material impact on its consolidated financial
statements.
ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS
For a list of the consolidated financial statements filed as part of
this report, see the Index to Consolidated Financial Statements beginning at
Page F-1 of this annual report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On December 5, 2002, KPMG LLP declined to stand for re-election as our
independent auditors. The audit reports of KPMG on our consolidated financial
statements as of and for the years ended December 31, 2001 and 2000, and for the
period from July 13, 1993 (inception) to December 31, 2001,
27
did not contain any adverse opinion or disclaimer of opinion, nor were they
qualified or modified as to uncertainty, audit scope, or accounting principles,
except as follows:
KPMG's report on our consolidated financial statements as of and for
the year ended December 31, 2001, contained a separate paragraph
stating that "the Company has suffered recurring losses from operations
and has limited liquid resources that raise substantial doubt about its
ability to continue as a going concern. Management's plans in regard to
these matters are also described in Note 1. The consolidated financial
statements do not include any adjustments that might result from the
outcome of this uncertainty."
During the years ended December 31, 2001 and 2000 and the subsequent
interim periods through December 5, 2002, there were no disagreements between us
and KPMG on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure which disagreements, if not
resolved to the satisfaction of KPMG, would have caused KPMG to make reference
to the subject matter of the disagreement with its report.
On December 5, 2002, we requested that KPMG provide a letter addressed
to the Securities and Exchange Commission stating whether KPMG agrees with the
above statements, and, if not, stating the respects in which KPMG does not
agree. A copy of the letter provided by KPMG in response to that request, which
is dated as of December 12, 2002, was filed as an exhibit to our current report
on Form 8-K dated December 5, 2002 and filed with the SEC on December 12, 2002.
On December 9, 2002, we engaged J.H. Cohn LLP as our independent
auditors for the fiscal year ended December 31, 2002 and to audit our
consolidated financial statements. During our two most recent fiscal years and
the subsequent interim period preceding the engagement of J.H. Cohn, we did not
consult J.H. Cohn on any matter requiring disclosure under Item 304(a)(2) of
Regulation S-K. The selection of J.H. Cohn was based on the recommendation of
our audit committee.
28
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
INFORMATION CONCERNING DIRECTORS AND EXECUTIVE OFFICERS
NAME AGE POSITION
---- --- --------
Leonard Firestone.................................... 51 President and Chief Executive Officer and Director
Nicholas J. Rossettos................................ 37 Chief Financial Officer, Treasurer and Secretary
Joshua Kazam......................................... 25 Vice President and Director
Michael Weiser....................................... 38 Vice President and Director
Joan Pons............................................ 53 Director
David M. Tanen....................................... 31 Director
LEONARD FIRESTONE, M.D., has been President, Chief Executive Officer
and a director of our company since completion of the merger transaction with
Manhattan Research Development in February 2003. Prior to the merger, Dr.
Firestone served as president and chief executive officer of Manhattan Research
Development sine January 2003. From 2001 until he joined Manhattan Research
Development, Dr. Firestone served as chief executive officer, director, and
chief medical officer of Innovative Drug Delivery Systems, Inc., a
privately-held, specialty pharmaceutical development company focused on pain
relievers. Dr. Firestone previously was chief executive officer and chairman of
University Anesthesiology and Critical Care Medicine Foundation, Inc., one of
America's largest clinical practice management companies, from 1996 to 2001, as
well as Chair of that Foundation's Pension Trustees from 1996 to 2001. He was
awarded the endowed, University Professorship in his specialty at the University
of Pittsburgh, and also held faculty appointments at Harvard Medical School
(Massachusetts General Hospital), and Yale School of Medicine. Dr. Firestone
received an M.D. from Yale University, where he also was a resident and clinical
Fellow, and remains certified by his specialty Board. Dr. Firestone is a trained
pharmacologist as well as clinician, having served as a National Institutes of
Health (NIH) Postdoctoral Fellow at Harvard University, and has held prestigious
NIH Principal Investigatorships consecutively from 1985 - 2001 and been a member
of numerous NIH review committees and panels.
NICHOLAS J. ROSSETTOS has been our Chief Financial Officer and
Treasurer since April 2000 and our Chief Operating Officer since February 2003.
From February 1999 until joining our company, Mr. Rossettos was Manager of
Finance for Centerwatch, a pharmaceutical trade publisher headquartered in
Boston, Massachusetts, that is a wholly owned subsidiary of Thomson Corporation
of Toronto, Canada. Prior to that, from 1994, he was Director of Finance and
Administration for EnviroBusiness, Inc., an environmental and technical
management-consulting firm headquartered in Cambridge, Massachusetts. Mr.
Rossettos is a certified public accountant and holds an M.S. in Accounting and
M.B.A. from Northeastern University.
JOSHUA KAZAM has been Vice President and a director of our company
since the completion of our merger transaction with Manhattan Research
Development, Inc. in February 2003. He served as a director of Manhattan
Research Development since December 2001. Mr. Kazam is the Director of
Investment for the Orion Biomedical Fund, a New York based private equity fund
focused on
29
biotechnology investments. Prior to joining the firm, Mr. Kazam attended the
Wharton School of the University of Pennsylvania where he focused in finance and
entrepreneurial management.
MICHAEL WEISER, M.D., PH.D., has been Vice President and a director of
our company since the completion of our merger transaction with Manhattan
Research Development, Inc. in February 2003. He served as a director of
Manhattan Research Development since December 2001 and as its Chief Medical
Officer from its inception until August 2001. Dr. Weiser concurrently serves as
the Director of Research of Paramount Capital Asset Management. Dr. Weiser is
also a member of Orion Biomedical GP, LLC, and serves on the board of directors
of several privately held companies. Dr. Weiser received an M.D. from New York
University School of Medicine and a Ph.D. in Molecular Neurobiology from Cornell
University Medical College. Dr. Weiser completed a Postdoctoral Fellowship in
the Department of Physiology and Neuroscience at New York University School of
Medicine and performed his post-graduate medical training in the Department of
Obstetrics and Gynecology and Primary Care at New York University Medical
Center. Dr. Weiser will dedicate only a portion of his time to our business.
JOAN PONS has been a director of our company since February 21, 2003,
the date of our merger with Manhattan Research Development. Prior to the merger,
he served as a director of Manhattan Research Development from 2002. Since 2002,
Mr. Pons has served chief executive officer of Oleoyl-Estrone Development S.L.
("OED"), a spin-off of the University of Barcelona. Pursuant to a January 2002
license agreement, we hold an exclusive worldwide license to several patents and
patent applications relating to oleoyl-estrone, which are owned by OED. From
1999 until joining OED, Mr. Pons has served as Director of Franchising of Pans &
Company, a fast-food company. From 1972 until 1999, Mr. Pons was employed in
various finance and sales capacities by Gallina Blanca Purina S.A., a joint
venture between St. Louis, Missouri based Ralston Purina Co. and Spanish based
Agrolimen S.A., most recently serving as its National Sales & Marketing
Director.
DAVID M. TANEN has been a director of our company since January 2002.
Since 1996, Mr. Tanen has served as an associate director of Paramount Capital,
where he has been involved in the founding of a number of biotechnology start-up
companies. Since February 2003, Mr. Tanen has also served as a director of
Chiral Quest, Inc. (OTC: CQST). and he also serves as an officer or director of
several other privately held development-stage biotechnology companies. Mr.
Tanen holds a law degree from Fordham University School of Law.
There are no family relationships among our executive officers or
directors.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires our officers, directors and persons who are the beneficial owners of
more than 10% of our common stock to file with the SEC initial reports of
ownership and reports of changes in ownership of our common stock. Officers,
directors and beneficial owners of more than 10% of our common stock are
required by SEC regulations to furnish us with copies of all Section 16(a) forms
they file. Based solely on a review of the copies of the Forms 3, 4 and 5 and
amendments that we received with respect to transactions during 2002, we believe
that all such forms were filed on a timely basis, except for the following:
Frederic Zotos, a former officer and director, filed a Form 5 on
February 25, 2003 relating to the February 19, 2002 grant of three
options to purchase an aggregate of 750,000 shares and a March 28, 2002
grant an option to purchase 250,000 shares;
30
A. Joseph Rudick, a former officer, filed a Form 5 on February 25, 2003
relating to the February 19, 2002 grant of three options to purchase an
aggregate of 375,000 shares and the March 28, 2002 grant of an option
to purchase 125,000 shares;
Nicholas J. Rossettos filed a Form 5 on February 25, 2003 relating to
the February 19, 2002 grant of three options to purchase an aggregate
of 150,000 shares and the March 28, 2002 grant of an option to purchase
125,000 shares;
David Tanen filed a Form 5 on February 25, 2003 relating to the January
28,2002 grant of two options to purchase 10,000 and 50,000 shares,
respectively;
Peter Kleim, a former director, filed a Form 5 on February 25, 2003
relating to the January 28,2002 grant of an option to purchase 50,000
shares; and
We have not received a copy of a Form 4 or 5 from Steven Kanzer, a
director of our company until February 21, 2003, with respect to a
January 28, 2002 grant of an option to purchase 50,000 shares at a
price of $0.25 per share.
31
ITEM 10. EXECUTIVE COMPENSATION
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth, for the last three fiscal years, the
compensation earned for services rendered in all capacities by our chief
executive officer and the other highest-paid executive officers serving as such
at the end of 2002 whose compensation for that fiscal year was in excess of
$100,000. The individuals named in the table will be hereinafter referred to as
the "Named Officers." No other executive officer of Manhattan received
compensation in excess of $100,000 during fiscal year 2002. No executive officer
who would otherwise have been included in this table on the basis of 2002 salary
and bonus resigned or terminated employment during that year.
Summary Compensation Table
----------------------------------------------------------------------------------------------------------------------------
LONG-TERM ALL OTHER
COMPENSATION COMPENSATION
ANNUAL COMPENSATION AWARDS ($)
----------------------------------------------------------------------------------------------------------------------------
SECURITIES
OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION ($) OPTIONS/SARS(#)
----------------------------------------------------------------------------------------------------------------------------
Frederic P. Zotos (1) 2002 187,500 50,000 10,000(2) 1,000,000 0
Chief Executive Officer and 2001 208,750 50,000 10,000(2) 250,000 0
President 2000 131,250 50,000 10,000(2) 250,000 14,750(3)
----------------------------------------------------------------------------------------------------------------------------
A. Joseph Rudick (4) 2002 56,250 15,000 0 500,000 0
Chief Scientific and Medical 2001 87,500 25,000 0 125,000 0
Officer 2000 123,750 111,174 0 125,000 84,674(5)
----------------------------------------------------------------------------------------------------------------------------
Nicholas J. Rossettos (6) 2002 107,645 25,000 10,000(2) 275,000 0
Chief Financial Officer, 2001 125,000 25,000 10,000(2) 50,000 0
Treasurer and Secretary 2000 91,146 25,000 10,000(2) 50,000 0
----------------------------------------------------------------------------------------------------------------------------
-------------------------
(1) Mr. Zotos was promoted to be our Chief Executive Officer on February
15, 2001. Mr. Zotos became our President on April 3, 2000. Effective as
of February 21, 2003, the date of our acquisition of Manhattan Research
Development, Inc., Mr. Zotos' employment was terminated.
(2) Represents matching contributions by us pursuant to our company's
SAR-SEP retirement plan.
(3) Represents $8,000 in fees paid for consulting services rendered and
$6,750 in director's fees.
(4) Dr. Rudick became Chief Scientific and Medical Officer on February 15,
2001. From April 10, 2000 to February 15, 2001, he was our Chief
Executive Officer. Effective as of February 21, 2003, the date of our
acquisition of Manhattan Research Development, Inc., Dr. Rudick's
employment was terminated.
(5) Represents $86,174 paid to Dr. Rudick in recognition of his role in
negotiating an amendment to Optex's contract with Bausch & Lomb, less
$1,500 returned to us by him due to mistaken overpayment of director's
fees for the 1999 fiscal year.
(6) Mr. Rossettos became our Chief Financial Officer on April 10, 2000. In
addition to the offices of Chief Financial Officer, Treasurer and
Secretary, in February 2003, he was also appointed Chief Operating
Officer.
32
OPTIONS AND STOCK APPRECIATION RIGHTS
The following table contains information concerning the grant of stock
options under the 1995 stock option plan and otherwise to the Named Officers
during the 2002 fiscal year. Except as described in footnote (1) below, no stock
appreciation rights were granted during the 2002 fiscal year.
Option/SAR Grants in Last Fiscal Year (Individual Grants)
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS/SARs
UNDERLYING GRANTED TO
OPTIONS/SARS EMPLOYEES IN FISCAL EXERCISE OR BASE
NAME GRANTED (#) YEAR(1) PRICE ($/SHARE)(2) EXPIRATION DATE
----------------------------- ------------ ------------------- ------------------ ---------------
Frederic P. Zotos.......... 250,000(3) 12.50 0.25 02/19/12
250,000(4) 12.50 0.25 02/19/12
250,000(5) 12.50 0.25 02/19/12
250,000(6) 12.50 0.20 03/28/12
A. Joseph Rudick........... 125,000(3) 6.25 0.25 02/19/12
125,000(4) 6.25 0.25 02/19/12
125,000(5) 6.25 0.25 02/19/12
125,000(6) 6.25 0.20 03/28/12
Nicholas J. Rossettos...... 50,000(3) 2.50 0.25 02/19/12
50,000(4) 2.50 0.25 02/19/12
50,000(5) 2.50 0.25 02/19/12
125,000(6) 6.25 0.20 03/28/12
------------------
(1) Based on total option grants to employees of 2,000,000 in 2002.
(2) Exercise price is based on the closing sale price of our common stock on
the last trading day preceding the grant date.
(3) Option vests 25 percent immediately and in 25 percent annual installments
thereafter.
(4) Option vests in its entirety upon FDA approval of Avantix or 5 years from
grant date.
(5) Option vests in its entirety upon (i) successful completion of Phase II
trial on CT-3, (ii) licensing of CT-3 to third party, or (iii) 5 years from
grant date. As a result of our June 2002 license agreement with Indevus
Pharmaceuticals, inc., these options vested in their entirety.
(6) Options vested immediately upon grant and were awarded in exchange for each
named officer's agreement to defer a portion of their salary.
33
OPTION EXERCISE AND HOLDINGS
The following table provides information with respect to the Named
Officers concerning the exercisability of options during the 2002 fiscal year
and unexercisable options held as of the end of the 2002 fiscal year. No stock
appreciation rights were exercised during the 2002 fiscal year, and, except for
the limited rights described in footnote (1) to the preceding table, no stock
appreciation rights were outstanding at the end of that fiscal year.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End
Option Values
Value of Unexercised In-the-
No. of Securities Underlying Money Options/SARs at FY-End
Unexercised Options/SARs at (Market price of shares at FY-End
Shares FY-End (#) less exercise price) ($)(2)
Acquired Value ------------------------------------------------------------------
Name on Exercise Realized (1) Exercisable Unexercisable Exercisable Unexercisable
--------------------------------------------------------------------------------------------------------------------------------
Frederic P. Zotos 0 -- 912,000 625,000 0 0
--------------------------------------------------------------------------------------------------------------------------------
A. Joseph Rudick 0 -- 534,500 312,000 0 0
--------------------------------------------------------------------------------------------------------------------------------
Nicholas J. Rossettos 0 -- 250,000 125,000 0 0
--------------------------------------------------------------------------------------------------------------------------------
------------------
(1) Equal to the fair market value of the purchased shares at the time of the
option exercise over the exercise price paid for those shares.
(2) Based on the fair market value of our common stock on December 31, 2002 of
$0.06 per share, the closing sales price per share on that date on the OTC
Bulletin Board.
LONG TERM INCENTIVE PLAN AWARDS
No long term incentive plan awards were made to a Named Officer during
the last fiscal year.
COMPENSATION OF DIRECTORS
Non-employee directors are eligible to participate in an automatic
stock option grant program pursuant to the 1995 stock option plan. Non-employee
directors are granted an option for 10,000 shares of common stock upon their
initial election or appointment to the board and an option for 2,000 shares of
common stock on the date of each annual meeting of our stockholders for those
non-employee directors continuing to serve after that meeting. Accordingly, upon
his appointment to the board in January 2002, David M. Tanen received an option
to purchase 10,000 shares at an exercise price of $0.25 per share, which option
vests ratably in three annual installments beginning January 2003.
Additionally, on January 28, 2002, we granted to each of Steve Kanzer,
Peter Kliem and David M. Tanen options for 50,000 shares of common stock at an
exercise price of $0.25 per share, the fair market value of our common stock on
the date of the grant. With respect to each of these options, 25 percent vested
immediately and the remaining vested in three annual installments of 25 percent
each.
The board agreed that effective October 21, 1999, each non-employee
member of the board is to receive $6,000 per year for his services as a
director, payable semi-annually in arrears, plus $1,500 for each board meeting
attended in person, $750 for each board meeting attended via telephone
conference
34
call and $500 for each meeting of a committee of the board attended. In 2002,
each of our directors waived his right to receive these fees. Board members are
also reimbursed for reasonable expenses incurred in connection with attending
meetings of the board and of committees of the board.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL
AGREEMENTS
FREDERIC P. ZOTOS
Mr. Zotos provided services to us pursuant to an employment agreement
dated April 3, 2000. The April 2000 agreement provided for an employment as our
President for a term of three years, an annual base salary of $175,000 and an
annual bonus of at least $50,000. In addition, in the event Mr. Zotos'
employment was terminated by us without "cause" (as defined in the agreement) or
as a result of his death or disability, we were obligated to pay Mr. Zotos
severance in an amount equal to his base salary for a period ending the earlier
of six months or the end of the three-year employment term. The April 2000
agreement was amended on February 20, 2001 to (i) extend the term of employment
to April 3, 2004, (ii) promote Mr. Zotos to the office of Chief Executive
Officer (in addition to President), and (iii) increase his annual base salary to
$225,000. On April 1, 2002, Mr. Zotos employment agreement was amended a second
time to provide for the deferral and accrual of $50,000 of his base salary,
which amount would become payable when determined by us, termination of Mr.
Zotos' employment by us without cause or the expiration of the term of
employment. The 2002 amendment further provided that Mr. Zotos' annual bonus
would be deferred and become payable upon the occurrence of the same events
triggering payment of his deferred salary. In anticipation of our merger with
Manhattan Research Development, Inc., we informed Mr. Zotos that his employment
with our company would be terminated upon completion of the merger. Accordingly,
on February 21, 2003, immediately prior to the merger, Mr. Zotos employment
agreement was amended a third time to provide that upon such termination he
would be entitled to receive (a) his base salary through the termination date
(excluding deferred amounts), (b) his base salary (without any amount deferred)
for a period of 6 months from the date of the merger, (c) the amount of all
deferred base salary and unpaid bonus, one-half of which amount is payable when
we receive $3 million in aggregate cash proceeds from financing activities and
other sources and the remaining one-half of which is payable when we receive an
aggregate of $6 million in aggregate cash proceeds from financing activities and
other sources.
A. JOSEPH RUDICK
Dr. Rudick provided services to us pursuant to an employment agreement
dated April 10, 2000. The April 2000 agreement provided for an employment as our
Chief Executive Officer for a term of three years ending April 2, 2003, an
annual base salary of $125,000 and an annual bonus of at least $25,000. In
addition, in the event Dr. Rudick's employment was terminated by us without
"cause" (as defined in the agreement) or as a result of his death or disability,
we were obligated to pay Dr. Rudick severance in an amount equal to his base
salary for a period ending the earlier of six months from the termination date
or the end of the employment term. The April 2000 agreement was amended on
February 20, 2001 to (i) extend the term of employment to April 2, 2004, (ii)
provide for his appointment as our Chief Medical Officer, reporting directly to
the President and Chief Executive Officer, and (iii) decrease his annual base
salary to $75,000 and his annual minimum bonus to $15,000. On April 1, 2002, Dr.
Rudick's employment agreement was amended a second time to provide for the
deferral and accrual of $25,000 of his base salary, which amount would become
payable when determined by us, termination of Dr. Rudick's employment by us
without cause or the expiration of the term of employment. The 2002 amendment
further provided that Dr. Rudick's annual bonus would be deferred and become
payable upon the occurrence of the same events triggering payment of his
deferred salary. In anticipation of our merger with Manhattan Research
Development, Inc., we informed Dr. Rudick that we would not require his
full-time employment with our company would be terminated upon completion of the
merger. Accordingly,
35
on February 21, 2003, immediately prior to the merger, Dr. Rudick's employment
agreement was amended a third time to provide that upon such termination he
would be entitled to receive (a) his base salary through the termination date
(excluding deferred amounts), (b) his base salary (without any amount deferred)
for a period of 6 months from the date of the merger, (c) the amount of all
deferred base salary and unpaid bonus, one-half of which amount is payable when
we receive $3 million in aggregate cash proceeds from financing activities and
other sources and the remaining one-half of which is payable when we receive an
aggregate of $6 million in aggregate cash proceeds from financing activities and
other sources. Dr. Rudick is still employed by us on a part-time basis, however,
performing services in connection with our relationship with Bausch & Lomb and
that company's development of the Avantix technology.
LEONARD FIRESTONE
Upon completion of the merger transaction with Manhattan Research
Development, Inc. on February 21, 2003, Leonard Firestone, M.D. was appointed
President and Chief Executive Officer. Dr. Firestone's employment with us is
governed by a January 2003 employment agreement originally entered into between
he and Manhattan Research Development, which we assumed following the merger.
The agreement provides for term of employment that may be extended for
additional one (1) year periods thereafter. Dr. Firestone is entitled to receive
a base salary equal to $250,000 and may receive up to an additional $150,000
upon the successful achievement of certain performance based milestones. In
addition, under the agreement Dr. Firestone is entitled to options to purchase a
number of shares of our common stock equal to 2.5 percent of the shares
outstanding immediately following our merger with Manhattan Research
Development. The exercise price of such option shares will be $0.11, the market
price of our common stock at the time of the merger.
NICHOLAS J. ROSSETTOS
Mr. Rossettos' employment with us is pursuant to a February 2003
employment agreement. This agreement has a two-year term ending on February 21,
2005, which may be extended for additional one (1) year periods thereafter.
Under the agreement, Mr. Rossettos is entitled to an annual salary of $150,000
in addition to health, disability insurance and other benefits. Mr. Rossettos is
also entitled to options to purchase a number of shares of our common stock
equal to 1.25 percent of shares outstanding immediately following our merger
with Manhattan Research Development, Inc. Mr. Rossettos reports to the Chief
Executive Officer and President. Mr. Rossettos and his dependents are eligible
to receive paid medical and long term disability insurance and such other health
benefits as we make available to other senior officers and directors.
JOSHUA KAZAM
Mr. Kazam provides services to our company pursuant to a consulting
agreement dated March 1, 2003. The consulting agreement provides that Mr. Kazam
will render services to us in connection with corporate financing activities and
preparation of grant applications that we may from time to time need. We are
required to pay to Mr. Kazam $4,167 per month during the term of the consulting
agreement. The consulting agreement provides for a term of one year, which may
be extended for 30 day periods thereafter. The consulting agreement also
provides that either we or Mr. Kazam may terminate the agreement upon 30 days'
notice.
MICHAEL WEISER
Dr. Weiser provides services to our company pursuant to a consulting
agreement dated March 1, 2003. The consulting agreement provides that Dr. Weiser
will provide scientific advisory services to us
36
in the areas of obesity and drug delivery. We are required to pay to Dr. Weiser
$6,250 per month during the term of the consulting agreement. The consulting
agreement provides for a term of one year, which may be extended for 30 day
periods thereafter. The consulting agreement also provides that either we or Mr.
Kazam may terminate the agreement upon 30 days' notice.
CHANGE OF CONTROL PROVISIONS
The Compensation Committee has the discretion under the 1995 Stock
Option Plan to accelerate options granted to any officers in connection with a
change in control of our company or upon the subsequent termination of the
officer's employment following the change of control. However, in connection
with the merger with Manhattan Research Development, none of the options
outstanding under the 1995 Stock Option Plan were accelerated.
37
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTER
The following table sets forth certain information regarding beneficial
ownership of the our common stock as of March 31, 2003, by (i) each person known
by us to be the beneficial owner of more than 5 percent of the outstanding
common stock, (ii) each director, (iii) each executive officer, and (iv) all
executive officers and directors as a group. Unless otherwise indicated, the
address of each of the following persons is 787 Seventh Avenue, 48th Floor, New
York, New York 10019.
The number of shares beneficially owned is determined under rules
promulgated by the SEC, and the information is not necessarily indicative of
beneficial ownership for any other purpose. Under those rules, beneficial
ownership includes any shares as to which the individual has sole or shared
voting power or investment power and also any shares which the individual has
the right to acquire within 60 days of March 31, 2003, through the exercise or
conversion of any stock option, convertible security, warrant or other right.
Including those shares in the tables does not, however, constitute an admission
that the named stockholder is a direct or indirect beneficial owner of those
shares. Unless otherwise indicated, each person or entity named in the table has
sole voting power and investment power (or shares that power with that person's
spouse) with respect to all shares of capital stock listed as owned by that
person or entity.
SHARES
NAME BENEFICIALLY OWNED (1) PERCENT OF CLASS
---- ---------------------- ----------------
Leonard Firestone............................................. 0 *
Nicholas J. Rossettos(2)...................................... 287,500 *
Joshua Kazam.................................................. 1,220,129 1.0
Michael Weiser................................................ 6,837,806 5.9
Joan Pons(3).................................................. 0 *
David M. Tanen(4)............................................. 1,871,236 1.6
All directors and officers as a group(5)...................... 10,216,671 8.7
Lindsay A. Rosenwald(6)....................................... 13,569,320 11.6
Oleoylestrone Developments, SL(7)............................. 20,785,188 17.8
Josep Samitier 1-5, Barcelona Science Park
08028 Barcelona Spain
Jay Lobell(8)................................................. 18,848,450 16.1
365 West End Avenue
New York, New York 10024
------------------------
* Less than 1.0%
(1) Percentage of beneficial ownership is calculated based on 116,811,980
shares of common stock outstanding as of March 31, 2003.
(2) Represents shares issuable upon the exercise of options that are currently
exercisable or will become exercisable within 60 days.
(3) Does not include any shares beneficially owned by Oleoylestrone
Developments, SL, of which Mr. Pons is chief executive officer.
(4) Includes 28,333 shares issuable upon the exercise of options that are
currently exercisable or will become exercisable within 60 days.
38
(5) Includes 165,833 shares issuance upon the exercise of options. Does not
include any shares held by Oleoylestrone Developments, SL, of which Mr.
Pons is chief executive officer.
(6) Includes 190 shares of common stock held by Huntington Street Corporation
and 190 shares of common stock held by June Street Corporation. Dr.
Rosenwald is the sole owner of both Huntington Street Corporation and June
Street Corporation.
(7) Mr. Pons is the chief executive officer of Oleoylestrone Developments, SL.
(8) Includes 18,721,353 shares of common stock held by eight separate trusts
with respect to which Mr. Lobell is either trustee or manager and in either
case has investment and voting power.
EQUITY COMPENSATION PLAN INFORMATION
The following table summarizes outstanding options under our 1995 Stock
Option Plan, as well as outstanding options that we have issued to certain
officers, directors and employees of our company outside of the 1995 Stock
Option Plan.
WEIGHTED AVERAGE NUMBER OF SECURITIES
NUMBER OF SECURITIES TO EXERCISE PRICE OF REMAINING AVAILABLE FOR
BE ISSUED UPON EXERCISE OUTSTANDING FUTURE ISSUANCE
OF OUTSTANDING OPTIONS, OPTIONS, WARRANTS (EXCLUDING SECURITIES
WARRANTS AND RIGHTS AND RIGHTS REFLECTED IN COLUMN (a))
PLAN CATEGORY (a) (b) (c)
-------------------------------------------- ----------------------- ----------------- ------------------------
Equity compensation plans approved by
stockholders (1)....................... 1,069,200 $1.93 122,555
Equity compensation plans not approved by
stockholders (2)....................... 2,380,000 $0.59 n/a
------------
(1) Represents shares of common stock authorized for issuance under the 1995
Stock Option Plan, as amended.
(2) Represent shares of common stock issuable upon outstanding options issued
to employees and directors outside of any stock option plan.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
OLEOYLESTRONE DEVELOPMENTS, SL
Pursuant to the terms of a license agreement dated February 15, 2002 by
and between Manhattan Research Development, Inc., our wholly owned subsidiary,
and Oleoylestrone Developments, SL ("OED"), we have an exclusive, worldwide
license to U.S. and foreign patents and patent applications relating to certain
technologies. Although we are not obligated to pay royalties to OED, the license
agreement requires us to make certain performance-based milestone payments. See
"Item 1 - Intellectual Property" in this Form 10-KSB. As a result of our
acquisition of Manhattan Research Development in February 2003, OED owns
approximately 16 percent of our outstanding common stock. Additionally, Mr.
Pons, a member of our board of directors, is chief executive officer of OED.
JOSEPH STEVENS & COMPANY, INC.
On January 4, 2000, we entered into a financial advisory and consulting
agreement with Joseph Stevens & Company, Inc. In this agreement, we engaged
Joseph Stevens to provide us with financial advisory services from January 4,
2000 until January 4, 2001. As partial compensation for the services to
39
be rendered by Joseph Stevens, we issued them three warrants to purchase an
aggregate of 450,000 shares of our common stock. The exercise price and exercise
period of each warrant is as follows:
==============================================================================================================
Warrant Number No. of Shares Exercise Price Exercise Period
==============================================================================================================
No.1 150,000 $2.50 1/4/00 through 1/4/05
--------------------------------------------------------------------------------------------------------------
1/4/01 through 1/4/06 (which vested in equal monthly
No.2 150,000 $3.50 increments during 1/4/00-1/4/01)
--------------------------------------------------------------------------------------------------------------
1/4/02 through 1/4/07 (which vested in equal monthly
No.3 150,000 $4.50 increments during 1/4/00-1/4/01)
==============================================================================================================
In addition, each warrant may only be exercised when the market price
of a share of common stock is at least $1.00 greater than the exercise price of
that warrant. In connection with issuance of the warrants, we and Joseph Stevens
entered into a letter agreement granting Joseph Stevens registration rights in
respect of the shares of common stock issuable upon exercise of the warrants.
We believe that the transactions with OED and Joseph Stevens described
above were made on terms no less favorable to us than could have been obtained
from unaffiliated third parties.
ITEM 13. EXHIBITS LIST AND REPORTS ON FORM 8-K
EXHIBITS
The following documents are included or referenced in this report.
Exhibit No. Description
----------- -----------
2.1 Agreement and Plan of Merger among the Company, Manhattan
Pharmaceuticals Acquisition Corp. and Manhattan Research
Development, Inc. (formerly Manhattan Pharmaceuticals, Inc.)
dated December 17, 2002 (incorporated by reference to Exhibit
2.1 from Form 8-K filed March 5, 2003).
3.1 Certificate of incorporation, as amended to date.
3.2 Bylaws, as amended to date (incorporated by reference from
Registrant's registration statement on Form SB-2, as amended
(File No. 33-98478)).
4.1 Form of unit certificate (incorporated by reference from
Registrant's registration statement on Form SB-2, as amended
(File No. 33-98478)).
4.2 Specimen common stock certificate (incorporated by reference
from Registrant's registration statement on Form SB-2, as
amended (File No. 33-98478)).
4.3 Form of redeemable warrant certificate (incorporated by
reference from Registrant's registration statement on Form
SB-2, as amended (File No. 33-98478)).
4.4 Form of redeemable warrant agreement between the Registrant
and Continental Stock Transfer & Trust Company (incorporated
by reference from Registrant's registration statement on Form
SB-2, as amended (File No. 33-98478)).
40
4.5 Form of underwriter's warrant certificate (incorporated by
reference from Registrant's registration statement on Form
SB-2, as amended (File No. 33-98478)).
4.6 Form of underwriter's warrant agreement between the Registrant
and Joseph Stevens & Company, L.P. (incorporated by reference
from Registrant's registration statement on Form SB-2, as
amended (File No. 33-98478)).
4.7 Form of subscription agreement between Registrant and the
selling stockholders (incorporated by reference from
Registrant's registration statement on Form SB-2, as amended
(File No. 33-98478)).
4.8 Form of bridge warrant (incorporated by reference from
Registrant's registration statement on Form SB-2, as amended
(File No. 33-98478)).
4.9 Warrant issued to John Prendergast to purchase 37,500 shares
of Registrant's common stock (incorporated by reference from
Exhibit 10.24 to the Registrant's Form 10-QSB for the quarter
ended March 31, 1997).
4.10 Warrant No. 1 issued to Joseph Stevens & Company, Inc. to
purchase 150,000 shares of Registrant's Common Stock
exercisable January 4, 2000 (incorporated by reference to
Exhibit 10.28 to the Registrant's Form 10-KSB for the year
ended December 31, 1999).
4.11 Warrant No. 2 issued to Joseph Stevens & Company, Inc. to
purchase 150,000 shares of Registrant's Common Stock
exercisable January 4, 2001 (incorporated by reference to
Exhibit 10.29 to the Registrant's Form 10-KSB for the year
ended December 31, 1999).
4.12 Warrant No. 3 issued to Joseph Stevens & Company, Inc. to
purchase 150,000 shares of Registrant's Common Stock
exercisable January 4, 2002 (incorporated by reference to
Exhibit 10.30 to the Registrant's Form 10-KSB for the year
ended December 31, 1999).
4.13 Warrant certificate issued May 12, 2000, by the Registrant to
TeraComm Research, Inc. (incorporated by reference from
Exhibit 10.3 to the registrant's Form 10-QSB for the quarter
ended June 30, 2000).
4.14 Form of stock purchase warrants issued on September 28, 2000
to BH Capital Investments, L.P., exercisable for shares of
common stock of the Registrant (incorporated by reference to
Exhibit 10.6 to the Registrant's Form 10-QSB for the quarter
ended September 30, 2000).
4.15 Form of stock purchase warrants issued on September 28, 2000
to Excalibur Limited Partnership, exercisable for shares of
common stock of the Registrant (incorporated by reference to
Exhibit 10.7 to the Registrant's Form 10-QSB for the quarter
ended September 30, 2000).
4.16 Warrant certificate issued March 8, 2001 by the Registrant to
Dian Griesel (incorporated by reference to Exhibit 10.56 to
the Registrant's Form 10-QSB for the quarter ended March 31,
2001).
10.1 Investors' rights agreement dated July 1995, between
Registrant, Dr. Lindsay A. Rosenwald and VentureTek, L.P.
(incorporated by reference from Registrant's registration
statement on Form SB-2, as amended (File No. 33-98478)).
41
10.2 License and assignment agreement dated March 25, 1994, between
Optex Ophthalmologics, Inc., certain inventors and NeoMedix
Corporation, as amended (incorporated by reference to the
exhibits to the Registrant's registration statement on Form
SB-2, as amended (File No. 33-98478)).
10.3+ License agreement dated March 28, 1994, between Channel
Therapeutics, Inc. and Dr. Sumner Burstein (incorporated by
reference to the exhibits to the Registrant's registration
statement on Form SB-2, as amended (File No. 33-98478)).
10.4 1995 stock option plan, as amended (incorporated by reference
to Exhibit 10.18 to the Registrant's Form 10-QSB for the
quarter ended September 30, 1996).
10.5 Amendment No. 1 to development & license Agreement between
Optex and Bausch & Lomb Surgical, Inc. dated September 16,
1999 (incorporated by reference to Exhibit 10.1 to the
Registrant's Form 10-QSB for the quarter ended September 30,
1999).
10.9 Financial advisory and consulting agreement between Registrant
and Joseph Stevens & Company, Inc. dated January 4, 2000
(incorporated by reference to Exhibit 10.27 to the
Registrant's Form 10-KSB for the year ended December 31,
1999).
10.10 Employment agreement dated as of April 10, 2000, between
Registrant and A. Joseph Rudick (incorporated by reference to
Exhibit 10.7 of the Registrant's Form 10-QSB/A for the quarter
ended June 30, 2000).
10.11 Employment agreement dated as of April 3, 2000, between
Registrant and Frederic P. Zotos (incorporated by reference to
Exhibit 10.8 of the Registrant's Form 10-QSB/A for the quarter
ended June 30, 2000).
10.12 First Amendment to Employment Agreement dated as of February
20, 2001 between the Registrant and Frederic P. Zotos.
10.13 First Amendment to Employment Agreement dated as of February
20, 3002 between the Registrant and A. Joseph Rudick.
10.14 Second Amendment to Employment Agreement dated as of April 1,
2002 between the Registrant and Frederic P. Zotos.
10.15 Second Amendment dated as of April 1, 2002 to Employment
Agreement dated April 3, 2000 between the Registrant and A.
Joseph Rudick.
10.16 Common stock purchase agreement dated March 16, 2001, between
Registrant and Fusion Capital Fund II, LLC (incorporated by
reference from Exhibit 10.55 of the Registrant's Form 10-QSB
for the quarter ended March 31, 2001).
10.17 Common stock purchase agreement dated as of May 7, 2001,
between Registrant and Fusion Capital Fund II, LLC
(incorporated by reference to Exhibit 10.57 of Amendment No. 1
to the Registrant's registration statement on Form SB-2/A
filed June 29, 2001 (File 333-61974)).
42
10.18 Form of registration rights agreement between Registrant and
Fusion Capital Fund II, LLC (incorporated by reference to
Exhibit 10.58 of Amendment No. 1 to the Registrant's
registration statement on Form SB-2/A filed June 29, 2001
(File 333-61974)).
10.19 Asset purchase agreement dated as of January 31, 2001, between
Bausch & Lomb Incorporated, Bausch & Lomb Surgical, Inc.,
Optex Ophthalmologics, Inc. and the Registrant (the "January
31 Asset Purchase Agreement") (incorporated by reference to
Exhibit 10.59 to the Registrant's Form 10-QSB for the quarter
ended September 30, 2001).
10.20 Amendment No. 1 dated March 2, 2001, to the January 31 Asset
Purchase Agreement (incorporated by reference to Exhibit 10.60
to the Registrant's Form 10-QSB for the quarter ended
September 30, 2001).
10.21 Asset purchase agreement dated as of April 23, 2001, between
Registrant, Gemini Technologies, Inc., and IFN, Inc.
(incorporated by reference to Exhibit 10.61 to the
Registrant's Form 10-QSB for the quarter ended September 30,
2001).
10.22 Securities purchase agreement dated November 2, 2001, between
Registrant and certain investors (incorporated by reference to
Exhibit 10.1 to the Registrant's Form 8-K filed on December 6,
2001).
10.23 Placement agreement dated November 6, 2001, between Joseph
Stevens & Company, Inc. and the Company (incorporated by
reference to Exhibit 10.2 to the Registrant's Form 8-K filed
on December 6, 2001).
10.24 Asset purchase agreement dated as of April 23, 2001, among the
Registrant, Gemini Technologies, Inc. and IFN, Inc.
(incorporated by reference to Exhibit 10.64 of the
Registrant's Form 10-KSB for the year ended December 31,
2001).
16.1 Letter of KPMG LLP (incorporated by reference to Exhibit 99
filed with the Registrant's Form 8-K filed on December 12,
2002).
21.1 Subsidiaries of the Registrant.
23.1 Consent of J.H. Cohn LLP
23.2 Consent of KPMG LLP
99.1 Certifications of Chief Executive Officer and Chief Financial
Officer
--------------------
+ Confidential treatment has been granted as to certain portions of exhibit.
REPORTS ON FORM 8-K
On December 12, 2002, we filed a current report on Form 8-K dated
December 5, 2002 disclosing a change in our independent public accountants, as
described in Item 8 of this Form 10-KSB.
43
ITEM 14. CONTROLS AND PROCEDURES
Within 90 days prior to the date of this Report, we carried out an
evaluation, under the supervision and with the participation of our chief
executive and chief financial officers, of the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in Rules
13a-14(c) and 15d-14(c) of the Securities Exchange Act of 1934). Based upon that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures are effective in alerting them on a
timely basis to material information required to be disclosed in our periodic
reports to the Securities and Exchange Commission. There have been no
significant changes in our internal controls or in other factors which could
significantly affect internal controls subsequent to such evaluation.
44
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act,
Manhattan Pharmaceuticals, Inc. has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on April 11, 2003.
Manhattan Pharmaceuticals, Inc.
By: /s/ Leonard Firestone
--------------------------------------------
Leonard Firestone
President and Chief Executive Officer
In accordance with the Securities Exchange Act, this report has been
signed below by the following persons on behalf of Manhattan Pharmaceuticals,
Inc. and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Leonard Firestone President, Chief Executive Officer and April 11, 2003
---------------------------------- Director (principal executive officer)
Leonard Firestone
/s/ Nicholas J. Rossettos Treasurer, Secretary and Chief Financial April 11, 2003
---------------------------------- Officer (principal accounting and financial
Nicholas J. Rossettos officer)
/s/ Joshua Kazam Vice President and Director April 11, 2003
----------------------------------
Joshua Kazam
/s/ Michael Weiser Vice President and Director April 11, 2003
----------------------------------
Michael Weiser
/s/ Joan Pons Director April 11, 2003
----------------------------------
Joan Pons
/s/ David M. Tanen Director April 11, 2003
----------------------------------
David M. Tanen
45
CERTIFICATIONS
I, Leonard Firestone, certify that:
1. I have reviewed this annual report on 10-KSB of Manhattan
Pharmaceuticals, Inc. (formerly Atlantic Technology Ventures,
Inc.);
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
annual report (the "Evaluation Date") and
c) presented in this annual report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this annual report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Dated: April 11, 2003 /s/ Leonard Firestone
------------------------------------------
Leonard Firestone
President and Chief Executive Officer
46
I, Nicholas J. Rossettos, certify that:
1. I have reviewed this annual report on 10-KSB of Manhattan
Pharmaceuticals, Inc. (formerly Atlantic Technology Ventures,
Inc.);
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
annual report (the "Evaluation Date") and
c) presented in this annual report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this annual report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Dated: April 11, 2003 /s/ Nicholas J. Rossettos
----------------------------------------
Nicholas J. Rossettos
Chief Financial Officer and Treasurer
47
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of J.H. Cohn LLP...................................................................................... F-2
Report of KPMG LLP........................................................................................... F-3
Consolidated Balance Sheets as of December 31, 2002 and 2001................................................. F-4
Consolidated Statements of Operations for the Years Ended December 31, 2002, 2001 and 2000
and the cumulative period from July 13, 1993 (inception) to December 31, 2002........................... F-5
Consolidated Statements of Stockholders' Equity (Deficiency) for the Years Ended
December 31, 2002, 2001 and 2000 and the cumulative period from July 13, 1993 (inception)
to December 31, 2002.................................................................................... F-6
Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000
and the cumulative period from July 13, 1993 (inception) to December 31, 2002........................... F-8
Notes to Consolidated Financial Statements................................................................... F-9
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
Manhattan Pharmaceuticals, Inc.
(formerly known as Atlantic Technology Ventures, Inc.)
We have audited the accompanying consolidated balance sheet of Manhattan
Pharmaceuticals, Inc. (formerly known as Atlantic Technology Ventures, Inc.) and
Subsidiaries (A Development Stage Company) as of December 31, 2002, and the
related consolidated statements of operations, stockholders' equity (deficiency)
and cash flows for the year then ended and for the period from January 1, 2002
to December 31, 2002 as related to the period from July 13, 1993 (date of
inception) to December 31, 2002. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the consolidated financial statements referred to above based on our
audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Manhattan
Pharmaceuticals, Inc. (formerly known as Atlantic Technology Ventures, Inc.) and
Subsidiaries (A Development Stage Company) as of December 31, 2002, and their
results of operations and cash flows for the year then ended and for the period
from January 1, 2002 to December 31, 2002 as related to the period from July 13,
1993 (date of inception) to December 31, 2002, in conformity with accounting
principles generally accepted in the United States of America.
The consolidated financial statements referred to above have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
1 to the consolidated financial statements, the Company has suffered recurring
losses from operations and has limited liquid resources. Such matters raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 1. The consolidated
financial statements referred to above do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ J.H. Cohn LLP
Roseland, New Jersey
February 14, 2003, except for Notes 1 and 14
which are as of February 21, 2003 and
Note 13 which is as of March 1, 2003
F-2
Independent Auditors' Report
The Board of Directors and Stockholders
Manhattan Pharmaceuticals, Inc.
(formerly Atlantic Technology Ventures, Inc.):
We have audited the consolidated balance sheet of Manhattan Pharmaceuticals,
Inc. (formerly Atlantic Technology Ventures, Inc.) and subsidiaries (a
development stage company) as of December 31, 2001, and the related consolidated
statements of operations, stockholders' equity (deficiency) and cash flows for
the years ended December 31, 2001 and 2000, and for the period from July 13,
1993 (inception) to December 31, 2001. These consolidated financial statements
are the responsibility of the Company's 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 of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Manhattan
Pharmaceuticals, Inc. (formerly Atlantic Technology Ventures, Inc.) and
subsidiaries (a development stage company) as of December 31, 2001, and the
results of their operations and their cash flows for the years ended December
31, 2001 and 2000, and for the period from July 13, 1993 (inception) to December
31, 2001, in conformity with accounting principles generally accepted in the
United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has suffered recurring losses
from operations and has limited liquid resources that raise substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 1. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ KPMG LLP
Short Hills, New Jersey
March 22, 2002
F-3
MANHATTAN PHARMACEUTICALS, INC., (FORMERLY ATLANTIC TECHNOLOGY VENTURES, INC.)
AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Balance Sheets
AS OF DECEMBER 31,
------------------------------------
2002 2001
---------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 116,291 $ 1,591,761
Prepaid expenses 58,630 38,593
---------------- -------------
Total current assets 174,921 1,630,354
Property and equipment, net 55,881 105,153
Other assets 19,938 22,838
---------------- -------------
Total assets $ 250,740 $ 1,758,345
================ =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable and accrued expenses $ 577,732 $ 508,613
---------------- -------------
Commitments and Contingencies:
Stockholders' equity (deficiency):
Preferred stock, $.001 par value. Authorized 10,000,000
shares; 1,375,000 shares designated as Series A
convertible preferred stock -- --
Series A convertible preferred stock, $.001 par value.
Authorized 1,375,000 shares; 379,152 and 346,357 shares issued and
outstanding at December 31, 2002 and 2001, respectively (liquidation
preference aggregating $4,928,976 and $4,502,641 at
December 31, 2002 and 2001, respectively) 379 346
Convertible preferred stock warrants, 112,896 issued and outstanding at
December 31, 2002 and 2001 520,263 520,263
Common stock, $.001 par value. Authorized 50,000,000
shares; 16,989,596 and 15,965,359 shares issued and outstanding
at December 31, 2002 and 2001, respectively 16,990 15,965
Additional paid-in capital 27,410,717 27,442,106
Deficit accumulated during development stage (28,275,341) (26,728,406)
----------------- -------------
(326,992) 1,250,274
Less common stock subscriptions receivable -- (218)
Less treasury stock, at cost -- (324)
----------------- -------------
Total stockholders' equity (deficiency) (326,992) 1,249,732
----------------- -------------
Total liabilities and stockholders' equity (deficiency) $ 250,740 1,758,345
================ =============
See accompanying notes to consolidated financial statements.
F-4
MANHATTAN PHARMACEUTICALS, INC., (FORMERLY ATLANTIC TECHNOLOGY VENTURES, INC.)
AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Operations
CUMULATIVE
PERIOD FROM
JULY 13, 1993
YEARS ENDED DECEMBER 31, (INCEPTION) TO
--------------------------------------------------- DECEMBER 31,
2002 2001 2000 2002
----------- ------------ ------------ -----------------
Revenues:
Development revenue $ -- $ 2,461,922 $ 5,169,288 $ 8,713,720
License revenue 500,000 -- -- 3,000,000
Grant revenue -- 250,000 189,658 616,659
----------- ------------ ------------ -----------------
Total revenues 500,000 2,711,922 5,358,946 12,330,379
----------- ------------ ------------ -----------------
Costs and expenses:
Cost of development revenue -- 2,082,568 4,135,430 7,084,006
Research and development 539,752 886,716 1,130,345 10,931,378
Acquired in-process research and
development -- -- 2,653,382 2,653,382
General and administrative 1,519,008 2,771,407 2,235,535 20,193,641
Compensation expense (benefit) relating to stock
warrants (general and administrative), net (5,845) 78,611 1,020,128 1,093,631
License fees -- -- -- 173,500
----------- ------------ ------------ -----------------
Total operating expenses 2,052,915 5,819,302 11,174,820 42,129,538
----------- ------------ ------------ -----------------
Operating loss (1,552,915) (3,107,380) (5,815,874) (29,799,159)
----------- ------------ ------------ -----------------
Other (income) expense:
Interest and other income (11,212) (42,010) (92,670) (1,304,358)
Gain on sale of Optex assets -- (2,569,451) -- (2,569,451)
Loss on sale of Gemini assets -- 334,408 -- 334,408
Interest expense -- -- -- 625,575
Equity in loss of affiliate -- 67,344 79,274 146,618
Loss on disposition of assets 5,232 -- -- 5,232
Distribution to minority shareholders -- 837,274 -- 837,274
----------- ------------ ------------ -----------------
Total other (income) expense (5,980) (1,372,435) (13,396) (1,924,702)
----------- ------------ ------------ -----------------
Net loss $(1,546,935) $ (1,734,945) $ (5,802,478) $ (27,874,457)
Imputed convertible preferred stock
dividend -- 600,000 -- 5,931,555
Dividend paid upon repurchase of Series B -- 167,127 233,757 400,884
Preferred stock dividend issued in
preferred shares 65,760 107,449 811,514 1,456,272
----------- ------------ ------------ -----------------
Net loss applicable to common shares $(1,612,695) $ (2,609,521) $ (6,847,749) $ (35,663,168)
=========== ============ ============ =================
Net loss per common share:
Basic and diluted $ (0.10) $ (0.36) $ (1.21)
=========== ============ ============
Weighted average shares of common stock outstanding:
Basic and diluted 16,959,829 7,209,916 5,656,741
=========== ============ ============
See accompanying notes to consolidated financial statements.
F-5
MANHATTAN PHARMACEUTICALS, INC., (FORMERLY ATLANTIC TECHNOLOGY VENTURES, INC.)
AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity (Deficiency)
SERIES A SERIES B CONVERTIBLE
CONVERTIBLE CONVERTIBLE PREFERRED
PREFERRED STOCK PREFERRED STOCK STOCK WARRANTS
-------------------- ------------------- -------------------
SHARES AMOUNT SHARES AMOUNT NUMBER AMOUNT
--------- -------- -------- -------- -------- --------
Common stock subscribed at $.001 per share
July-November 1993 -- $ -- -- $ -- -- $ --
Issued common stock at $.001 per share,
June 1994 -- -- -- -- -- --
Issued and subscribed common stock at $.05
per share, August 1994 -- -- -- -- -- --
Payments of common stock subscriptions -- -- -- -- -- --
Issuance of warrants, September 1995 -- -- -- -- -- --
Issued common stock and warrants at $4 per unit,
December 1995 (net of costs of issuance
of $1,454,300) -- -- -- -- -- --
Conversion of demand notes payable and
the related accrued interest to common stock,
December 1995 -- -- -- -- -- --
Repurchase of common stock -- -- -- -- -- --
Compensation related to grant of stock
options -- -- -- -- -- --
Amortization of deferred compensation -- -- -- -- -- --
Net loss -- -- -- -- -- --
--------- -------- -------- -------- -------- --------
Balance at December 31, 1995 -- -- -- -- -- --
Issuance of warrants, April 1996 -- -- -- -- -- --
Issued common stock and warrants at $6.73
per share, August 1996 (net of costs of
issuance of $76,438) -- -- -- -- -- --
Amortization of deferred compensation -- -- -- -- -- --
Net loss -- -- -- -- -- --
--------- -------- -------- -------- -------- --------
Balance at December 31, 1996 -- -- -- -- -- --
Issued convertible preferred stock at $10 per unit,
May and August 1997 (net of costs of issuance
of $1,758,816) 1,237,200 1,237 -- -- -- --
Channel merger -- -- -- -- -- --
Conversion of preferred to common stock (22,477) (22) -- -- -- --
Issuance of convertible preferred stock
warrants -- -- -- -- 123,720 570,143
Issuance of warrants -- -- -- -- -- --
Amortization of deferred compensation -- -- -- -- -- --
Imputed convertible preferred stock dividend -- -- -- -- -- --
Imputed convertible preferred stock dividend -- -- -- -- -- --
Net loss -- -- -- -- -- --
--------- -------- -------- -------- -------- --------
Balance at December 31, 1997 1,214,723 1,215 -- -- 123,720 570,143
Conversion of preferred to common stock (584,265) (585) -- -- -- --
Cashless exercise of preferred warrants 2,010 2 -- -- (6,525) (30,069)
Exercise of options -- -- -- -- -- --
Exercise of warrants -- -- -- -- -- --
Expense related to grant of stock options -- -- -- -- -- --
Amortization of deferred compensation -- -- -- -- -- --
Imputed convertible preferred stock dividend -- -- -- -- -- --
Imputed convertible preferred stock dividend -- -- -- -- -- --
Net loss -- -- -- -- -- --
--------- -------- -------- -------- -------- --------
Balance at December 31, 1998 632,468 632 -- -- 117,195 540,074
Conversion of preferred to common stock (95,599) (95) -- -- -- --
Preferred stock dividend 73,219 73 -- -- -- --
Net loss -- -- -- -- -- --
--------- -------- -------- -------- -------- --------
Balance at December 31, 1999 610,088 $ 610 -- $ -- 117,195 $540,074
Conversion of preferred to common stock (309,959) (310) -- -- -- --
Preferred stock dividend 59,582 60 -- -- -- --
Cashless exercise of preferred warrants (4,299) (19,811)
Exercise of options -- -- -- -- -- --
Issuance of common stock to TeraComm shareholders -- -- -- -- -- --
Expense related to grant of stock warrants -- -- -- -- -- --
Issuance of Series B convertible preferred stock -- -- 344,828 345 -- --
Costs related to issuance of Series B preferred stock -- -- -- -- -- --
Repurchase of Series B convertible preferred stock -- -- (137,931) (138) -- --
COMMON STOCK
COMMON STOCK SUBSCRIBED ADDITIONAL
----------------------- --------------------- PAID-IN
SHARES AMOUNT NUMBER AMOUNT CAPITAL
---------- --------- --------- ---------- -------------
Common stock subscribed at $.001 per share
July-November 1993 -- $ -- 5,231 $ 5 6,272
Issued common stock at $.001 per share,
June 1994 84 -- -- -- 101
Issued and subscribed common stock at $.05
per share, August 1994 860 1 12 -- 52,374
Payments of common stock subscriptions 5,061 5 (5,061) (5) --
Issuance of warrants, September 1995 -- -- -- -- 300,000
Issued common stock and warrants at $4 per unit,
December 1995 (net of costs of issuance
of $1,454,300) 1,872,750 1,873 -- -- 6,034,827
Conversion of demand notes payable and
the related accrued interest to common stock,
December 1995 785,234 785 -- -- 2,441,519
Repurchase of common stock (269) -- -- -- --
Compensation related to grant of stock
options -- -- -- -- 208,782
Amortization of deferred compensation -- -- -- -- --
Net loss -- -- -- -- --
---------- --------- --------- ---------- -------------
Balance at December 31, 1995 2,663,720 2,664 182 -- 9,043,875
Issuance of warrants, April 1996 -- -- -- -- 139,000
Issued common stock and warrants at $6.73
per share, August 1996 (net of costs of
issuance of $76,438) 250,000 250 -- -- 1,452,063
Amortization of deferred compensation -- -- -- -- --
Net loss -- -- -- -- --
---------- --------- --------- ---------- -------------
Balance at December 31, 1996 2,913,720 2,914 182 -- 10,634,938
Issued convertible preferred stock at $10 per unit,
May and August 1997 (net of costs of issuance
of $1,758,816) -- -- -- -- 10,611,947
Channel merger 103,200 103 -- -- 657,797
Conversion of preferred to common stock 47,651 48 -- -- (26)
Issuance of convertible preferred stock
warrants -- -- -- -- (570,143)
Issuance of warrants -- -- -- -- 159,202
Amortization of deferred compensation -- -- -- -- --
Imputed convertible preferred stock dividend -- -- -- -- (3,703,304)
Imputed convertible preferred stock dividend -- -- -- -- 3,703,304
Net loss -- -- -- -- --
---------- --------- --------- ---------- -------------
Balance at December 31, 1997 3,064,571 3,065 182 -- 21,493,715
Conversion of preferred to common stock 1,367,817 1,367 -- -- (782)
Cashless exercise of preferred warrants -- -- -- -- 30,067
Exercise of options 70,000 70 -- -- 52,430
Exercise of warrants 1,000 1 -- -- 5,499
Expense related to grant of stock options -- -- -- -- 81,952
Amortization of deferred compensation -- -- -- -- --
Imputed convertible preferred stock dividend -- -- -- -- (1,628,251)
Imputed convertible preferred stock dividend -- -- -- -- 1,628,251
Net loss -- -- -- -- --
---------- --------- --------- ---------- -------------
Balance at December 31, 1998 4,503,388 4,503 182 -- 21,662,881
Conversion of preferred to common stock 312,602 313 -- -- (218)
Preferred stock dividend -- -- -- -- (391)
Net loss -- -- -- -- --
---------- --------- --------- ---------- -------------
Balance at December 31, 1999 4,815,990 $ 4,816 182 $ -- 21,662,272
Conversion of preferred to common stock 1,011,038 1,011 -- -- (701)
Preferred stock dividend -- -- -- -- (60)
Cashless exercise of preferred warrants 9,453 9 -- -- 19,802
Exercise of options 85,654 86 -- -- 344,512
Issuance of common stock to TeraComm shareholders 200,000 200 -- -- 1,799,800
Expense related to grant of stock warrants -- -- -- -- 1,020,128
Issuance of Series B convertible preferred stock -- -- -- -- 975,943
Costs related to issuance of Series B preferred stock -- -- -- -- (147,800)
Repurchase of Series B convertible preferred stock -- -- -- -- (399,862)
DEFICIT COMMON TOTAL
ACCUMULATED STOCK STOCK-
DURING DEFERRED SUBSCRIP- HOLDERS'
DEVELOPMENT COMPEN- TIONS TREASURY EQUITY
STAGE SATION RECEIVABLE STOCK (DEFICIENCY)
-------------- ------------ ----------- ---------- ------------
Common stock subscribed at $.001 per share
July-November 1993 -- -- (6,277) -- --
Issued common stock at $.001 per share,
June 1994 -- -- -- -- 101
Issued and subscribed common stock at $.05
per share, August 1994 -- -- (750) -- 51,625
Payments of common stock subscriptions -- -- 6,809 -- 6,809
Issuance of warrants, September 1995 -- -- -- -- 300,000
Issued common stock and warrants at $4 per unit,
December 1995 (net of costs of issuance
of $1,454,300) -- -- -- -- 6,036,700
Conversion of demand notes payable and
the related accrued interest to common stock,
December 1995 -- -- -- -- 2,442,304
Repurchase of common stock -- -- -- (324) (324)
Compensation related to grant of stock
options -- (144,000) -- -- 64,782
Amortization of deferred compensation -- 12,000 -- -- 12,000
Net loss (4,880,968) -- -- -- (4,880,968)
-------------- ------------ ----------- ---------- ------------
Balance at December 31, 1995 (4,880,968) (132,000) (218) (324) 4,033,029
Issuance of warrants, April 1996 -- -- -- -- 139,000
Issued common stock and warrants at $6.73
per share, August 1996 (net of costs of
issuance of $76,438) -- -- -- -- 1,452,313
Amortization of deferred compensation -- 28,800 -- -- 28,800
Net loss (3,557,692) -- -- -- (3,557,692)
-------------- ------------ ----------- ---------- ------------
Balance at December 31, 1996 (8,438,660) (103,200) (218) (324) 2,095,450
Issued convertible preferred stock at $10 per unit,
May and August 1997 (net of costs of issuance
of $1,758,816) -- -- -- -- 10,613,184
Channel merger -- -- -- -- 657,900
Conversion of preferred to common stock -- -- -- -- --
Issuance of convertible preferred stock
warrants -- -- -- -- --
Issuance of warrants -- -- -- -- 159,202
Amortization of deferred compensation -- 28,800 -- -- 28,800
Imputed convertible preferred stock dividend -- -- -- -- (3,703,304)
Imputed convertible preferred stock dividend -- -- -- -- 3,703,304
Net loss (5,151,396) -- -- -- (5,151,396)
-------------- ------------ ----------- ---------- ------------
Balance at December 31, 1997 (13,590,056) (74,400) (218) (324) 8,403,140
Conversion of preferred to common stock -- -- -- -- --
Cashless exercise of preferred warrants -- -- -- -- --
Exercise of options -- -- -- -- 52,500
Exercise of warrants -- -- -- -- 5,500
Expense related to grant of stock options -- -- -- -- 81,952
Amortization of deferred compensation -- 74,400 -- -- 74,400
Imputed convertible preferred stock dividend -- -- -- -- (1,628,251)
Imputed convertible preferred stock dividend -- -- -- -- 1,628,251
Net loss (2,753,528) -- -- -- (2,753,528)
-------------- ------------ ----------- ---------- ------------
Balance at December 31, 1998 (16,343,584) -- (218) (324) 5,863,964
Conversion of preferred to common stock -- -- -- -- --
Preferred stock dividend -- -- -- -- (318)
Net loss (2,446,515) -- -- -- (2,446,515)
-------------- ------------ ----------- ---------- ------------
Balance at December 31, 1999 (18,790,099) -- (218) (324) 3,417,131
Conversion of preferred to common stock -- -- -- -- --
Preferred stock dividend -- -- -- -- --
Cashless exercise of preferred warrants -- -- -- -- --
Exercise of options -- -- -- -- 344,598
Issuance of common stock to TeraComm shareholders -- -- -- -- 1,800,000
Expense related to grant of stock warrants -- -- -- -- 1,020,128
Issuance of Series B convertible preferred stock -- -- -- -- 976,288
Costs related to issuance of Series B preferred stock -- -- -- -- (147,800)
Repurchase of Series B convertible preferred stock -- -- -- -- (400,000)
F-6
SERIES A SERIES B CONVERTIBLE
CONVERTIBLE CONVERTIBLE PREFERRED
PREFERRED STOCK PREFERRED STOCK STOCK WARRANTS
-------------------- ------------------- -------------------
SHARES AMOUNT SHARES AMOUNT NUMBER AMOUNT
--------- -------- -------- -------- -------- --------
Dividend upon repurchase of Series B convertible
preferred stock -- -- -- -- -- --
Reclassification of Series B convertible preferred
stock to redeemable Series B convertible preferred -- -- (206,897) (207) -- --
Net loss -- -- -- -- -- --
--------- -------- -------- -------- -------- --------
Balance at December 31, 2000 359,711 $ 360 -- $ -- 112,896 $520,263
Conversion of preferred to common stock (57,132) (58) -- -- -- --
Preferred stock dividend 43,778 44 -- -- -- --
Issued common stock as commitment shares -- -- -- -- -- --
Issued common stock for services -- -- -- -- -- --
Issued common stock pursuant to Fusion agreement -- -- -- -- -- --
Issued common stock in private placement -- -- -- -- -- --
Conversion of Series B convertible preferred stock
to common stock -- -- -- -- -- --
Repurchase of Series B convertible preferred stock -- -- -- -- -- --
Expense related to grant of stock warrants -- -- -- -- -- --
Net loss -- -- -- -- -- --
--------- -------- -------- -------- -------- --------
Balance at December 31, 2001 346,357 $ 346 -- $ -- 112,896 $520,263
Issued common stock to placement agent -- -- -- -- -- --
Conversion of preferred to common stock (12,000) (12) -- -- -- --
Preferred stock dividend 44,795 45 -- -- -- --
Costs relating to issuance of common stock -- -- -- -- -- --
Common stock issued for contract
termination -- -- -- -- -- --
Issuance of common stock at $0.16 per share -- -- -- -- -- --
Issuance of common stock at $0.15 per share -- -- -- -- -- --
Expense related to grant of stock warrants -- -- -- -- -- --
Reversal of subscriptons receivable -- -- -- -- -- --
Reversal of common stock subscribed -- -- -- -- -- --
Reversal of treasury shares -- -- -- -- -- --
Net loss -- -- -- -- -- --
--------- -------- -------- -------- -------- --------
Balance at December 31, 2002 379,152 379 -- -- 112,896 520,263
========= ======== ======== ======== ======== ========
COMMON STOCK
COMMON STOCK SUBSCRIBED ADDITIONAL
----------------------- --------------------- PAID-IN
SHARES AMOUNT NUMBER AMOUNT CAPITAL
---------- --------- --------- ---------- -------------
Dividend upon repurchase of Series B convertible
preferred stock -- -- -- -- 121,949
Reclassification of Series B convertible preferred
stock to redeemable Series B convertible preferred -- -- -- -- (599,793)
Net loss -- -- -- -- --
---------- --------- --------- --------- -------------
Balance at December 31, 2000 6,122,135 $ 6,122 182 $ -- 24,796,190
Conversion of preferred to common stock 186,817 187 -- -- (129)
Preferred stock dividend -- -- -- -- (1,031)
Issued common stock as commitment shares 600,000 600 -- -- 443,400
Issued common stock for services 70,000 70 -- -- 44,030
Issued common stock pursuant to Fusion agreement 416,667 417 -- -- 99,583
Issued common stock in private placement 8,333,318 8,333 -- -- 1,831,628
Conversion of Series B convertible preferred stock
to common stock 236,422 236 -- -- 119,764
Repurchase of Series B convertible preferred stock -- -- -- -- 30,060
Expense related to grant of stock warrants -- -- -- -- 78,611
Net loss -- -- -- -- --
---------- --------- --------- --------- -------------
Balance at December 31, 2001 15,965,359 $ 15,965 182 $ -- 27,442,106
Issued common stock to placement agent 833,331 833 -- -- (833)
Conversion of preferred to common stock 39,240 40 -- -- (28)
Preferred stock dividend -- -- -- -- (852)
Costs relating to issuance of common stock -- -- -- -- (38,304)
Common stock issued for contract
termination 75,000 75 -- -- 13,425
Issuance of common stock at $0.16 per share 10,000 10 -- -- 1,657
Issuance of common stock at $0.15 per share 66,666 67 -- -- (67)
Expense related to grant of stock warrants -- -- -- -- (5,845)
Reversal of subscriptons receivable -- -- -- -- (218)
Reversal of common stock subscribed -- -- (182) -- --
Reversal of treasury shares -- -- -- -- (324)
Net loss -- -- -- -- --
---------- --------- --------- --------- -------------
Balance at December 31, 2002 16,989,596 16,990 -- -- 27,410,717
========== ========= ========= ========= =============
DEFICIT COMMON TOTAL
ACCUMULATED STOCK STOCK-
DURING DEFERRED SUBSCRIP- HOLDERS'
DEVELOPMENT COMPEN- TIONS TREASURY EQUITY
STAGE SATION RECEIVABLE STOCK (DEFICIENCY)
-------------- ------------ ----------- ---------- ------------
Dividend upon repurchase of Series B convertible
preferred stock (233,757) -- -- -- (111,808)
Reclassification of Series B convertible preferred
stock to redeemable Series B convertible preferred -- -- -- -- (600,000)
Net loss (5,802,478) -- -- -- (5,802,478)
-------------- ------------ ----------- ---------- ------------
Balance at December 31, 2000 (24,826,334) -- (218) (324) 496,059
Conversion of preferred to common stock -- -- -- -- --
Preferred stock dividend -- -- -- -- (987)
Issued common stock as commitment shares -- -- -- -- 444,000
Issued common stock for services -- -- -- -- 44,100
Issued common stock pursuant to Fusion agreement -- -- -- -- 100,000
Issued common stock in private placement -- -- -- -- 1,839,961
Conversion of Series B convertible preferred stock
to common stock -- -- -- -- 120,000
Repurchase of Series B convertible preferred stock (167,127) -- -- -- (137,067)
Expense related to grant of stock warrants -- -- -- -- 78,611
Net loss (1,734,945) -- -- -- (1,734,945)
-------------- ------------ ----------- ---------- ------------
Balance at December 31, 2001 (26,728,406) -- (218) (324) 1,249,732
Issued common stock to placement agent -- -- -- -- --
Conversion of preferred to common stock -- -- -- -- --
Preferred stock dividend -- -- -- -- (807)
Costs relating to issuance of common stock -- -- -- -- (38,304)
Common stock issued for contract
termination -- -- -- -- 13,500
Issuance of common stock at $0.16 per share -- -- -- -- 1,667
Issuance of common stock at $0.15 per share -- -- -- -- --
Expense related to grant of stock warrants -- -- -- -- (5,845)
Reversal of subscriptons receivable -- -- 218 -- --
Reversal of common stock subscribed -- -- -- -- --
Reversal of treasury shares -- -- -- 324 --
Net loss (1,546,935) -- -- (1,546,935)
-------------- ------------ ----------- ---------- ------------
Balance at December 31, 2002 (28,275,341) -- -- -- (326,992)
============== ============ =========== ========== ============
See accompanying notes to consolidated financial statements.
F-7
MANHATTAN PHARMACEUTICALS, INC., (FORMERLY ATLANTIC TECHNOLOGY VENTURES, INC.)
AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Cash Flows
CUMULATIVE
PERIOD FROM
JULY 13, 1993
YEARS ENDED DECEMBER 31, (INCEPTION) TO
---------------------------- DECEMBER 31,
2002 2001 2002
------------ ------------ --------------
Cash flows from operating activities:
Net loss $ (1,546,935) $ (1,734,945) $(27,874,457)
Adjustments to reconcile net loss to
net cash used in operating activities:
Acquired in-process research and development -- -- 1,800,000
Expense relating to issuance of common stock and warrants 13,500 488,100 799,802
Expense relating to the issuance of options -- -- 81,952
Expense related to Channel merger -- -- 657,900
Equity in loss of affiliate -- 67,344 146,618
Compensation expense (benefit) relating to
stock options and warrants (5,845) 78,611 1,301,676
Discount on notes payable - bridge financing -- -- 300,000
Depreciation 49,500 66,226 622,231
Gain on sale of Optex assets -- (2,569,451) (2,569,451)
Distribution to Optex minority shareholders -- 837,274 837,274
Loss on sale of Gemini assets -- 334,408 334,408
Loss on disposal of furniture and equipment 5,232 -- 78,619
Changes in assets and liabilities:
Decrease in accounts receivable -- 192,997 --
Increase in prepaid expenses (20,037) (15,994) (58,630)
Decrease in deferred revenue -- (1,294,615) --
Increase (decrease) in accounts payable and accrued expenses 69,119 (904,383) (49,426)
Increase in accrued interest -- -- 172,305
Decrease (increase) in other assets 2,900 (19,937) (19,938)
------------ ------------ ------------
Net cash used in operating activities (1,432,566) (4,474,365) (23,439,117)
------------ ------------ ------------
Cash flows from investing activities:
Purchase of furniture and equipment (5,460) (108,250) (926,791)
Investment in affiliate -- -- (146,618)
Proceeds from sale of Optex assets -- 3,000,000 3,000,000
Proceeds from sale of furniture and equipment -- -- 6,100
------------ ------------ ------------
Net cash provided by (used in) investing activities (5,460) 2,891,750 1,932,691
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from exercise of warrants -- -- 5,500
Proceeds from exercise of stock options -- -- 397,098
Proceeds from issuance of demand notes payable -- -- 2,395,000
Repayment of demand notes payable -- -- (125,000)
Proceeds from the issuance of notes payable - bridge financing -- -- 1,200,000
Proceeds from issuance of warrants -- -- 300,000
Repayment of notes payable - bridge financing -- -- (1,500,000)
Repurchase of common stock -- -- (324)
Preferred stock dividend paid (807) (987) (2,112)
Net proceeds from the issuance of common stock (36,637) 1,939,961 9,450,872
Proceeds from issuance of convertible preferred stock -- -- 11,441,672
Repurchase of convertible preferred stock -- (617,067) (1,128,875)
Distribution to Optex minority shareholders -- (811,114) (811,114)
------------ ------------ ------------
Net cash provided by (used in) financing activities (37,444) 510,793 21,622,717
------------ ------------ ------------
Net decrease in cash and cash equivalents (1,475,470) (1,071,822) 116,291
Cash and cash equivalents at beginning of period 1,591,761 2,663,583 --
------------ ------------ ------------
Cash and cash equivalents at end of period $ 116,291 $ 1,591,761 $ 116,291
============ ============ ============
Supplemental disclosure of noncash financing activities:
Issuance of common stock in exchange for
common stock subscriptions $ -- $ -- $ 7,027
Conversion of demand notes payable and the related
accrued interest to common stock -- -- 2,442,304
Cashless exercise of preferred warrants -- -- 49,880
Conversion of preferred to common stock 40 423 2,889
Preferred stock dividend issued in shares 65,760 107,449 1,299,089
============ ============ ============
See accompanying notes to consolidated financial statements.
F-8
MANHATTAN PHARMACEUTICALS, INC. (FORMERLY ATLANTIC TECHNOLOGY
VENTURES, INC. AND SUBSIDIARIES)
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
On February 21, 2003, Manhattan Pharmaceuticals, Inc. (formerly known
as "Atlantic Technology Ventures, Inc.") (the "Company") completed a
reverse acquisition of privately-held Manhattan Research Development,
Inc., a Delaware corporation. The merger was effected pursuant to an
Agreement and Plan of Merger dated December 17, 2002 (the "Merger
Agreement") by and among the Company, Manhattan Research Development,
Inc. (formerly Manhattan Pharmaceuticals, Inc.) and Manhattan
Pharmaceuticals Acquisition Corp, our wholly-owned subsidiary ("MPAC").
In accordance with the terms of the Merger Agreement, MPAC merged with
and into Manhattan Research Development, with Manhattan Research
Development remaining as the surviving corporation and a wholly-owned
subsidiary of the Company. Pursuant to the Merger Agreement, upon the
effective time of the merger, the outstanding shares of common stock of
Manhattan Research Development automatically converted into an
aggregate of 93,449,584 shares of the Company's common stock, which
represented 80 percent of the Company's outstanding voting stock after
giving effect to the merger. In addition, immediately prior to the
merger Manhattan Research Development had outstanding options and
warrants to purchase an aggregate of 864,280 shares of its common
stock, which, in accordance with the terms of the merger, automatically
converted into options and warrants to purchase an aggregate of
10,984,719 shares of the Company's common stock. Since the stockholders
of Manhattan Research Development received the majority of the voting
shares of the Company, the merger will be accounted for as a reverse
acquisition whereby Manhattan Research Development will be the
accounting acquirer (legal acquiree) and the Company will be the
accounting acquiree (legal acquirer). Based on the five day average
price of the Company's common stock of $0.10 per share, the purchase
price approximates $2,336,000, which represents 20 percent of the
combined Company's post-merger total outstanding shares of 116,811,980.
In connection with the merger, the Company changed its name from
"Atlantic Technology Ventures, Inc." to "Manhattan Pharmaceuticals,
Inc." Based on the preliminary information currently available,
Manhattan Research Development expects to recognize patents and
licenses for substantially all of the purchase price. Upon completion
of formal purchase price allocation there may be a decrease in the
amount assigned to intangible assets and a corresponding increase in
in-process research and development. As a result of acquiring Manhattan
Research Development, the Company receives new technologies.
The Company was incorporated on May 18, 1993, began operations on July
13, 1993, and is the majority owner of two subsidiaries--Gemini
Technologies, Inc. (Gemini), and Optex Ophthalmologics, Inc. (Optex)
(collectively, the Operating Companies).
Gemini (an 84.7%-owned subsidiary) was incorporated on May 18, 1993, to
exploit a new proprietary technology which combines 2'-5'
oligoadenylate (2-5A) with standard antisense compounds to alter the
production of disease-causing proteins. Pursuant to an asset purchase
agreement dated April 23, 2001, between the Company, Gemini, the
Cleveland Clinic Foundation, or "CCF," and CCF's affiliate IFN, Inc.
("IFN"), on May 4, 2001, Gemini sold to IFN substantially all its
assets (mostly intangible assets with no book value), including all
those related to the 2-5A antisense enhancing technology for future
contingent royalty payments and withdrawal of arbitration proceedings.
F-9
MANHATTAN PHARMACEUTICALS, INC. (FORMERLY ATLANTIC TECHNOLOGY
VENTURES, INC. AND SUBSIDIARIES)
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
Optex (an 81.2%-owned subsidiary) was incorporated on October 19, 1993,
to develop its principal product, a novel cataract-removal device. On
March 2, 2001, the Company concluded the sale of substantially all of
Optex' assets to Bausch & Lomb, Inc. (see note 12).
Channel was incorporated on May 18, 1993, to develop pharmaceutical
products in the fields of cardiovascular disease, pain and inflammatory
disorders. Prior to 1997, Channel was an 88%-owned subsidiary. The
Company purchased the remaining 12% of Channel in 1997 for $657,900
through the issuance of common stock (see note 7). Channel ceased
operations during 1999. The Company also holds a 14.4% ownership
interest in a fiber optic switching company, TeraComm Research, Inc.
(see note 4).
The Company and each of its subsidiaries is in the development stage,
devoting substantially all efforts to obtaining financing and
performing research and development activities.
The consolidated financial statements include the accounts of the
Company and its majority-owned and wholly owned subsidiaries.
Significant intercompany accounts and transactions have been eliminated
in consolidation.
LIQUIDITY
The Company has reported net losses of $1,546,935, $1,734,945 and
$5,802,478 for the years ended December 31, 2002, 2001 and 2000,
respectively. The net loss from date of inception, July 13, 1993, to
December 31, 2002 amounts to $27,874,457. As discussed in Note 14 on
February 21, 2003 the Company completed a reverse acquisition of
privately held Manhattan Research Development, Inc. Based on the
resources available at December 31, 2002 of the combined Company,
management believes that the combined Company will continue to incur
net losses through at least December 31, 2003 and will need additional
equity or debt financing or will need to generate revenues through
licensing its products or entering into strategic alliances to be able
to sustain its operations until it can achieve profitability, if ever.
These matters raise substantial doubt about the Company's ability to
continue as a going concern.
The combined Company's continued operations will depend on its ability
to raise additional funds through various potential sources such as
equity and debt financing, collaborative agreements, strategic
alliances and its ability to realize the full potential of its
technology in development. Additional funds are currently not available
on acceptable terms and may not become available, and there can be no
assurance that any additional funding that the combined Company does
obtain will be sufficient to meet the combined Company's needs in the
short and long term. Through December 31, 2002, a significant portion
of the Company's financing has been through private placements of
common stock, preferred stock and warrants, the issuance of common
stock for stock options and warrants exercised and debt financing.
Until and unless the combined Company's operations generate significant
revenues, the combined Company will attempt to continue to fund
operations from cash on hand and through the sources of capital
previously described. From November 2002 through February 20, 2003, the
combined Company has raised $2,747,600 from financing activities.
The Company's common stock was delisted from the Nasdaq SmallCap Market
effective at the close of business August 23, 2001 for failing to meet
the minimum bid price requirements set forth
F-10
MANHATTAN PHARMACEUTICALS, INC. (FORMERLY ATLANTIC TECHNOLOGY
VENTURES, INC. AND SUBSIDIARIES)
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
in the NASD Marketplace Rules. Since August 23, 2001, the Company's
common stock trades on the Over-the-Counter Bulletin Board (the
"OTCBB"). The Company's ticker symbol is currently "MHTP.OB." The
de-listing of the Company's common stock from the Nasdaq SmallCap
Market could have a material adverse effect on the Company's ability to
raise additional capital.
BASIS OF PRESENTATION
The consolidated financial statements have been prepared in accordance
with the provisions of Statement of Financial Accounting Standards
(SFAS) No. 7, "Accounting and Reporting by Development Stage
Enterprises."
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
The Company considers all highly-liquid investments with an original
maturity of 90 days or less, when acquired, to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is calculated
using the straight-line method over their useful lives, generally five
years, except for leasehold improvements, which are depreciated over
the lesser of five years or the term of the lease.
RESEARCH AND DEVELOPMENT
All research and development costs are expensed as incurred and include
costs of consultants who conduct research and development on behalf of
the Company and its subsidiaries. Costs related to the acquisition of
technology rights and patents for which development work is still in
process are expensed as incurred and considered a component of research
and development costs.
REVENUE RECOGNITION
Revenue under research contracts is recorded as earned under the
contracts as services are provided. In accordance with SEC Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements," revenues from the achievement of research and development
milestones, which represent the achievement of a significant step in
the research and development process, will be recognized when and if
the milestones are achieved. In addition, initial license fees are
recognized immediately when the Company has no further obligations
under the license agreement. Continuation of certain contracts and
grants are dependent upon the Company achieving specific contractual
milestones; however, none of the payments received to date are
refundable regardless of the outcome of the project. Grant revenue is
recognized in accordance with the terms of the grant and as services
are performed, and generally equals the related research and
development expense.
F-11
MANHATTAN PHARMACEUTICALS, INC. (FORMERLY ATLANTIC TECHNOLOGY
VENTURES, INC. AND SUBSIDIARIES)
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to temporary differences between financial
statement carrying amounts of existing assets and liabilities, and
their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the
enactment date.
COMPUTATION OF NET LOSS PER COMMON SHARE
Basic net loss per common share is calculated by dividing net loss
applicable to common shares by the weighted-average number of common
shares outstanding for the period. Diluted net loss per common share is
the same as basic net loss per common share, since potentially dilutive
securities from stock options, stock warrants, stock subscriptions, and
convertible preferred stock would have an antidilutive effect because
the Company incurred a net loss during each period presented. The
amount of potentially dilutive securities excluded from the calculation
were 17,705,984, 12,973,106 and 3,277,625 in 2002, 2001 and 2000,
respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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.
STOCK-BASED COMPENSATION
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations
to account for its fixed plan stock options issued to employees. Under
this method, compensation expense is recorded on the date of grant only
if the current market price of the underlying stock exceeds the
exercise price. SFAS No. 123, "Accounting for Stock-Based
Compensation," established accounting and disclosure requirements using
a fair value-based method of accounting for stock-based employee
compensation plans. As allowed by SFAS No. 123, the Company has elected
to continue to apply the intrinsic value-based method of accounting
described above, and has adopted the disclosure requirements of SFAS
No. 123.
Options or stock awards issued to non-employees and consultants are
recorded at their fair value as determined in accordance with SFAS No.
123 and EITF No. 96-18, "Accounting for Equity Instruments That are
Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services" and recognized as expense over the related
vesting period.
F-12
MANHATTAN PHARMACEUTICALS, INC. (FORMERLY ATLANTIC TECHNOLOGY
VENTURES, INC. AND SUBSIDIARIES)
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
FINANCIAL INSTRUMENTS
At December 31, 2002 and 2001, the fair values of cash and cash
equivalents, prepaid expenses, accounts payable and accrued expenses
approximate carrying values due to the short-term nature of these
instruments.
(3) PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
2002 2001
---------- --------
Furniture and equipment $ 108,194 125,366
Leasehold improvements 24,785 28,635
---------- --------
132,979 154,001
Less accumulated depreciation (77,098) (48,848)
---------- --------
Net property and equipment $ 55,881 105,153
========== ========
(4) INVESTMENT IN AFFILIATE
On May 12, 2000, the Company acquired shares of preferred stock
representing a 35% ownership interest in TeraComm Research, Inc.
(TeraComm), a privately held company that is developing next-generation
high-speed fiberoptic communications technologies. The purchase price
for this ownership interest was $5,000,000 in cash, 200,000 shares of
the Company's common stock, and a warrant to purchase a further 200,000
shares of the Company's common stock. The warrants have a term of 3
years and are exercisable at $8.975 per share of common stock, but only
if the market price of the Company's common stock is $30 or more. Of
the $5,000,000 cash portion of the purchase price, the Company paid
$1,000,000 in 2000. The Company was accounting for its investment in
TeraComm in accordance with the equity method of accounting for
investments since the Company has the ability to exert significant
influence over TeraComm, primarily through its representation on
TeraComm's board of directors.
On July 18, 2000, the Company and TeraComm amended the purchase
agreement. In the amendment, the parties agreed that the $4,000,000
balance of the $5,000,000 cash component of the purchase price would
not be due until TeraComm achieved a specified milestone. Within ten
days after TeraComm achieved that milestone or December 30, 2000,
whichever occurred earlier, the Company was required to pay TeraComm
$1,000,000 and thereafter make to TeraComm three payments of $1,000,000
at the three-month intervals. If the Company failed to make any of
these payments, TeraComm's only recourse would be reducing
proportionately the Company's ownership interest. When the Company
failed to make the first $1,000,000 payment by midnight at the end of
December 30, 2000, the Company was deemed to have surrendered to
TeraComm a proportion of the Company's TeraComm shares equal to the
proportion of the dollar value of the purchase price for the Company's
TeraComm shares ($6,795,000) that was represented by the unpaid
$4,000,000 of the cash portion of the purchase price. This had the
effect of reducing to
F-13
MANHATTAN PHARMACEUTICALS, INC. (FORMERLY ATLANTIC TECHNOLOGY
VENTURES, INC. AND SUBSIDIARIES)
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
14.4% the Company's ownership interest in TeraComm. The Company is
accounting for its investment in TeraComm in accordance with the equity
method of accounting for investments since the Company continues to
hold a seat on TeraComm's board of directors, and continues to have the
ability to exert significant influence through its involvement with
TeraComm management.
Upon acquiring an interest in TeraComm, the Company allocated a portion
of the purchase price based on the fair value of the identifiable
tangible assets acquired and liabilities assumed. At the time of
acquisition, such assets and liabilities were minimal. TeraComm had no
other intangible assets beyond the technology then under development --
a high-speed fiber-optic switch. This technology at the date of
acquisition, was not commercially viable, did not then have any
identifiable revenue stream and did not have any alternate future use.
This high-speed fiber-optic switch is TeraComm's only subscribable
technology. TeraComm is a very early-stage development company with no
identifiable revenue sources, therefore the excess of the purchase
price over the sum of the amounts assigned to identifiable assets
acquired less liabilities assumed is not considered to represent
"goodwill". The Company's acquisition of the interest in TeraComm was
based solely on the value of the future commercialized products and
therefore the excess of the purchase price as described above was
attributed to the research and development activities of TeraComm.
As such, of the $1,000,000 cash and common stock and common stock
warrants valued at $1,800,000 currently invested in TeraComm, the
Company has expensed approximately $2,650,000 as acquired in-process
research and development, as TeraComm's product development activity is
in the very early stages. The Company's share of TeraComm's net equity
at December 31, 2000 was $67,344. During 2001, the entire value of the
investment was written down to zero due to TeraComm's additional
losses. The Company is under no obligation to provide further funding
to TeraComm.
At December 31, 2002, all 200,000 of the warrants described above are
outstanding.
(5) DEMAND NOTES PAYABLE TO RELATED PARTIES
Demand notes payable at December 31, 1994 consisted of advances from
one of the founders of the Company, who served as a director and was,
at that time, the controlling shareholder of the Company (Controlling
Shareholder), totaling $485,000, advances from a partnership including
certain family members of the Controlling Shareholder (the Partnership)
totaling $400,000, and advances under a line of credit agreement with
the Controlling Shareholder totaling $500,000. All unpaid principal and
accrued interest through June 30, 1995, including a note payable of
$1,010,000 issued in 1995, was converted into 785,234 shares of common
stock of the Company upon the consummation of the initial public
offering (IPO).
Demand notes payable at December 31, 1995 totaling $125,000 consisted
of a loan provided to the Company by the Partnership in July 1995. This
loan had an interest rate of 10% annually. Terms of the loan required
the Company to repay the principal amount of such loan, together with
the interest accrued thereon, with a portion of the proceeds received
by the Company in the IPO. This loan and the related accrued interest
was fully repaid in January 1996.
F-14
MANHATTAN PHARMACEUTICALS, INC. (FORMERLY ATLANTIC TECHNOLOGY
VENTURES, INC. AND SUBSIDIARIES)
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
(6) NOTES PAYABLE - BRIDGE FINANCING
On September 12, 1995, the Company closed the sale of thirty units with
each unit consisting of an unsecured 10% promissory note of the Company
in the principal amount of $50,000 and 50,000 warrants, each
exercisable to purchase one share of common stock of the Company at an
initial exercise price of $1.50 per share. The total proceeds received
of $1,500,000 were allocated to the notes payable and warrants based on
the estimated fair value as determined by the Board of Directors of the
Company of $1,200,000 and $300,000, respectively. The warrants were
reflected as additional paid-in capital.
Proceeds from the IPO were used to pay these notes payable, with
$75,000 remaining unpaid at December 31, 1995. This remaining
obligation was paid in January 1996.
(7) STOCKHOLDERS' EQUITY
COMMON STOCK
In 1993, the Company received common stock subscriptions for 5,231
shares of common stock from various individuals, including the
Controlling Shareholder and the Partnership, in exchange for common
stock subscriptions receivable of $6,277. In December 1994, the Company
issued 2,606 shares of common stock upon receipt of payment of $3,127
representing a portion of these common stock subscriptions receivable.
In June 1994, the Company received common stock subscriptions for 84
shares of common stock from various individuals including directors and
employees. Payment of the related common stock subscriptions receivable
in the amount of $101 was received in December 1994, which resulted in
the issuance of 84 shares of common stock.
In August 1994, the Company received common stock subscriptions for 872
shares of common stock from certain investors. Payment of the related
common stock subscriptions receivable in the amount of $33,000 and
$18,625 was received in August 1994 and December 1994, respectively,
which resulted in the issuance of 860 shares of common stock.
In March 1995, June 1995, and August 1995, the Company repurchased 62,
20, and 187 shares of common stock, respectively, for an aggregate
total of $324.
In March 1995, May 1995, and June 1995, the Company issued 2,170, 125,
and 160 shares of common stock, respectively, upon receipt of payment
of $3,682 representing subscriptions receivable.
In December 1995, the Company issued 1,872,750 shares of common stock
through a public offering, resulting in net proceeds, after deducting
applicable expenses, of $6,036,700. Concurrent with this offering,
785,234 shares of common stock were issued upon the conversion of
certain demand notes payable and accrued interest totaling $2,442,304
(see note 5).
F-15
MANHATTAN PHARMACEUTICALS, INC. (FORMERLY ATLANTIC TECHNOLOGY
VENTURES, INC. AND SUBSIDIARIES)
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
In August 1996, the Company sold in a private placement 250,000 shares
of common stock to certain investors resulting in net proceeds of
$1,452,313. In connection with this private placement, the Company paid
Paramount Capital, Inc. (Paramount) a finder's fee of $76,438 and
issued an employee of Paramount a warrant to purchase 12,500 shares of
the Company's common stock at $6.73 per share, which expires August 16,
2001. Paramount is owned by the Controlling Shareholder.
Pursuant to an Agreement and Plan of Reorganization by and among the
Company, Channel, and New Channel, Inc., a Delaware corporation, dated
February 20, 1997, all of the stockholders of Channel (except for the
Company) agreed to receive an aggregate of 103,200 shares of common
stock of the Company in exchange for their shares of common stock, par
values $0.001 per share, of Channel. On February 20, 1997, Channel
became a wholly-owned subsidiary of the Company. Subsequent to this
transaction, Channel issued a dividend to the Company consisting of all
of Channel's rights to the CT-3 technology, which is in the field of
pain and inflammation. On May 16, 1997, the Company issued 103,200
shares of common stock of the Company to stockholders of Channel. In
connection with the issuance of these shares, the Company recognized an
expense in the amount of $657,900. This expense was recorded as
research and development expense in the consolidated statement of
operations for the year ended December 31, 1997.
In May 2000, the Company issued 200,000 shares of common stock to
shareholders of TeraComm (see note 4).
On May 7, 2001, the Company entered into a common stock purchase
agreement with Fusion Capital Fund II, LLC pursuant to which Fusion
Capital agreed to purchase up to $6.0 million of the Company's common
stock over a 30-month period, subject to a 6-month extension or earlier
termination at the Company's discretion. This agreement replaced an
earlier common stock purchase agreement between the Company and Fusion
Capital dated March 16, 2001. Fusion's obligation to purchase shares of
the Company's common stock is subject to certain conditions, including
the effectiveness of a registration statement covering the shares to be
purchased. That registration statement was declared effective on July
6, 2001. The selling price of the shares will be equal to the lesser of
(1) $20.00 or (2) a price based upon the future market price of the
common stock, without any fixed discount to the market price. A
material contingency that may affect the Company's operating plans and
ability to raise funds under this agreement is the Company's stock
price. Currently, the Company's stock price is below the floor price of
$0.68 specified in the Fusion Capital agreement and as a result the
Company is currently unable to draw funds pursuant to the Fusion
Capital agreement. As the Fusion Capital agreement is currently
structured, the Company cannot guarantee that it will be able to draw
any funds. The Company paid a $120,000 finder's fee relating to this
transaction to Gardner Resources, Ltd. and issued to Fusion Capital
Fund II, LLC 600,000 common shares as a commitment fee. Those shares
had an estimated fair value of $444,000, which was recorded as a
general and administrative expense as there is no assurance that Fusion
will ever provide financing to the Company. The Company has amended its
agreement with Fusion Capital to allow the Company to draw funds
pursuant to the agreement regardless of its listing status on the
Nasdaq SmallCap Market, but the $0.68 floor price remains in place. On
November 30, 2001, Fusion Capital waived the $0.68 floor price
specified in the purchase agreement and purchased from the Company
under the agreement 416,667 shares of the Company's common stock at a
price of $0.24, representing an aggregate purchase price of
F-16
MANHATTAN PHARMACEUTICALS, INC. (FORMERLY ATLANTIC TECHNOLOGY
VENTURES, INC. AND SUBSIDIARIES)
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
$100,000. Fusion Capital's waiver applied only to the November 30, 2001
purchase, so the $0.68 floor price remains an obstacle to the Company's
obtaining additional financing from Fusion Capital unless the Company's
stock price increases or Fusion Capital elects in the future to again
waive the floor price.
On August 1, 2001, the Company agreed to issue 35,000 shares of its
common stock to each of BH Capital Investments, L.P. and Excalibur
Limited Partnership in return for their commitment to provide the
Company with $3.5 million of financing in connection with an asset
purchase for which the Company had submitted a bid. The Company
subsequently issued those shares, but the Company did not ultimately
purchase those assets. Those shares had an estimated fair value of
$44,100, which is included as a general and administrative expense for
the year ended December 31, 2001.
On November 6, 2001, the Company entered into an agreement with Joseph
Stevens & Company, Inc. in which Joseph Stevens agreed to act as
placement agent for a private placement of shares of the Company's
common stock. In that private placement, the price of each share of the
Company's common stock was $0.24 and the minimum and maximum
subscription amounts were $2,000,000 and $3,000,000, respectively. In
addition, each investor received a warrant to purchase one share of the
Company's common stock for every share of the Company's common stock
purchased by that investor. The warrants have an exercise price of
$0.29 and are exercisable for five years from the closing date. On
December 3, 2001, the Company issued to certain investors an aggregate
of 8,333,318 shares of common stock for the minimum subscription of
$2,000,000. In connection with the private placement, the Company paid
Joseph Stevens a placement fee of $140,000 equal to 7% of the aggregate
subscription amount plus a warrant to purchase 833,331 shares of the
Company's common stock, which represented 10% of the number of shares
issued to the investors. The term of this warrant is five years and the
per share exercise price is $0.29. In conjunction with this private
placement, the Company received net proceeds of approximately
$1,848,000 in December 2001.
In April 2002 the Company issued 75,000 shares of its common stock at a
price of $0.18 for investor relations services. On May 13, 2002, the
Company issued 10,000 shares of its common stock to Fusion Capital at a
price of $0.16 which is lower than the floor price of $0.68 as
described above.
CONVERTIBLE PREFERRED STOCK
SERIES A PREFERRED STOCK
In May and August 1997, the Company sold in a private placement
1,237,200 shares of Series A convertible preferred stock to certain
investors resulting in net proceeds of $10,613,184.
Prior to August 7, 1998 (the Reset Date), each share of Series A
preferred stock was convertible into 2.12 shares of common stock
initially at a conversion price of $4.72 per share of common stock.
Pursuant to the Certificate of Designations for the Series A preferred
stock, the conversion price was adjusted on the Reset Date such that
each share was convertible into 3.27 shares of common stock at a
conversion price of $3.06.
F-17
MANHATTAN PHARMACEUTICALS, INC. (FORMERLY ATLANTIC TECHNOLOGY
VENTURES, INC. AND SUBSIDIARIES)
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
The conversion price and conversion rate of the Series A preferred
stock is subject to adjustment upon the occurrence of certain events,
including the issuance of common stock at a per-share price less than
either the conversion price or the then market price. Issuances of
stock, options and warrants, including those in connection with the
Company's private placement in 2001, have necessitated that the Company
adjust the conversion rate and conversion price of the Series A
preferred stock. Accordingly, the conversion price of the Series A
preferred stock was decreased from $3.058 to $1.22, and the conversion
rate was increased from 3.27 to 8.21 to reflect issuances of stock
options and warrants through December 31, 2001. In connection with
these changes, the Company issued 66,666 make-up shares of common stock
to certain former Series A preferred stockholders, which are included
in the net loss per common share calculation for the year ended
December 31, 2002. During the year ended December 31, 2002, the
conversion rate was increased further to 8.22 as a result of the
issuance of 75,000 shares to Investor Relations Group ("IRG") and
10,000 shares to Fusion Capital.
Holders of Series A preferred stock will be entitled to receive
dividends, as, when, and if declared by the Board of Directors.
Commencing on the Reset Date, the holders of the Series A preferred
stock are entitled to payment-in-kind dividends, payable semi-annually
in arrears, on their respective shares of Series A preferred stock at
the annual rate of 0.13 shares of Series A preferred stock for each
outstanding share of Series A preferred stock. The Company did not make
the February 7, 1999 dividend payment. On August 9, 1999, the Company
issued a payment-in-kind dividend of 0.13325 of a share of Series A
preferred stock for each share of Series A preferred stock held as of
the record date of August 2, 1999, amounting to an aggregate of 73,219
shares. This dividend included the dividend payment of 0.065 of a share
of Series A preferred stock for each share of Series A preferred stock
held which had not been made on February 7, 1999, and the portion of
the dividend payment due August 9, 1999, was increased from 0.065 of a
share to 0.06825 of a share to reflect non-payment of the February 7,
1999 dividend. In February and August 2002, 2001 and 2000, the Company
issued the respective payment-in-kind dividends based on the holders as
of the record date. The estimated fair value of these dividends in the
aggregate of $65,760, $107,449 and $811,514 were included in the
Company's calculation of net loss per common share for 2002, 2001 and
2000, respectively.
The holders of shares of Series A preferred stock have the right at all
meetings of stockholders of the Company to that number of votes equal
to the number of shares of common stock issuable upon conversion of the
Series A preferred stock at the record or vote date for determination
of the stockholders entitled to vote on such matters.
In connection with the issuance of the Series A preferred stock, the
Company recognized $1,628,251 and $3,703,304 in 1998 and 1997,
respectively, as an imputed preferred stock dividend in the calculation
of net loss per common share to record the difference between the
conversion price of the preferred stock and the market price of the
common stock on the effective date of the private placement.
Upon liquidation, the holders of shares of Series A preferred stock
then outstanding will first be entitled to receive, pro rata, and in
preference to the holders of common stock, Series B preferred stock and
any capital stock of the Company, an amount per share equal to $13.00
plus any accrued but unpaid dividends, if any.
F-18
MANHATTAN PHARMACEUTICALS, INC. (FORMERLY ATLANTIC TECHNOLOGY
VENTURES, INC. AND SUBSIDIARIES)
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
The Certificate of Designations of Series A preferred stock provides
that the Company may not issue securities that have superior rights to
Series A preferred stock without the consent of the holders of Series A
preferred stock. Accordingly, so long as these convertible securities
remain unexercised and shares of Series A preferred stock remain
uncovered, the terms under which the Company could obtain additional
funding, if at all, may be adversely affected.
During 2002, there were conversions of 12,000 shares of the Company's
Series A preferred stock into 39,240 shares of the Company's common
stock.
REDEEMABLE SERIES B PREFERRED STOCK
On September 28, 2000, pursuant to a convertible preferred stock and
warrants purchase agreement (the "Purchase Agreement") the Company
issued to BH Capital Investments, L.P. and Excalibur Limited
Partnership (together, the "Investors") for a purchase price of
$2,000,000, 689,656 shares of the Company's Series B convertible
preferred stock and warrants to purchase 134,000 shares of the
Company's common stock. Half of the shares of the Series B preferred
stock (344,828 shares) and warrants to purchase half of the shares of
common stock (67,000 shares) were held in escrow, along with half of
the purchase price.
On December 4, 2000, the Company and the Investors entered into a stock
repurchase agreement (the "Repurchase Agreement") pursuant to which the
Company repurchased from the investors 137,930 of the outstanding
shares and agreed to the release from escrow to the Investors of the
$1,000,000 purchase price of the 344,828 shares of Series B preferred
stock held in escrow. The Company also allowed the Investors to keep
all of the warrants issued under the purchase agreement including those
released from escrow and warrants for an additional 20,000 shares of
the Company's common stock at the same exercise price. In addition, the
Company was required to pay the legal expenses of the Investors,
totaling $11,807. The carrying amount of the 137,930 shares repurchased
is equal to $400,000; therefore, the amount paid in excess of the
carrying amount plus the value of the warrants given to the Investors,
totaling $233,757, was recorded as a dividend upon repurchase of Series
B preferred stock shares and added to net loss to arrive at net loss
applicable to common shares for the year ended December 31, 2000.
Pursuant to a second amendment to the purchase agreement, executed on
January 9, 2001, the fixed exercise price of the warrants was lowered
from $3.19, the fixed exercise price upon their issuance, to $1.00, the
market price of the Company's common stock at the time of the
renegotiations. Each warrant may be exercised any time during the five
years from the date of granting. The warrants may not be exercised if
doing so would result in the Company's issuing a number of shares of
common stock in excess of the limit imposed by the rules of the Nasdaq
SmallCap Market.
Pursuant to the Company's subsequent renegotiations with the Investors,
the Company was required, among other things, to redeem on March 28,
2002, all outstanding shares of Series B preferred stock for (A) 125%
of the original issue price per share or (B) the market price of the
shares of common stock into which they are convertible, whichever is
greater (the "Redemption Price"). The Company would have been able to
at any time redeem all outstanding shares of Series B preferred stock
at the Redemption Price. As a result of the renegotiations discussed in
this paragraph, the Series B preferred stock was considered redeemable
and the remaining outstanding
F-19
MANHATTAN PHARMACEUTICALS, INC. (FORMERLY ATLANTIC TECHNOLOGY
VENTURES, INC. AND SUBSIDIARIES)
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
shares at December 31, 2000 were classified outside of permanent equity
in the accompanying consolidated balance sheet. At December 31, 2000,
of the shares of Series B preferred stock issued to the Investors,
there were 206,898 shares outstanding at a carrying amount of $2.90 per
share.
Holders of shares of the Company's outstanding Series B preferred stock
could convert each share into shares of common stock without paying the
Company any cash. The conversion price per share of the Series B
preferred stock was also amended by the second amendment to the
Purchase Agreement. The conversion price per share of Series B
preferred stock on any given day is the lower of (1) $1.00 or (2) 90%
of the average of the two lowest closing bid prices on the principal
market of the common stock out of the fifteen trading days immediately
prior to conversion. The change in conversion price upon the
renegotiations on January 9, 2001 resulted in a difference between the
conversion price of the Series B preferred stock and the market price
of the common stock on the effective date of the renegotiation. This
amount, estimated at $600,000, was recorded as an imputed preferred
stock dividend within equity and is added to net loss to arrive at net
loss applicable to common shares during the year ended December 31,
2001.
On January 19, 2001, 41,380 shares of Series B preferred stock were
converted by the Investors into 236,422 shares of the Company's common
stock. On March 9, 2001, the Company and the Investors entered into a
second stock repurchase agreement pursuant to which the Company
repurchased from the Investors, for an aggregate purchase price of
$617,067, all 165,518 shares of the Company's Series B preferred stock
held by the Investors on March 9, 2001. The carrying amount of the
165,518 shares is equal to $480,000; therefore the amount in excess of
the carrying amount, plus the estimated fair value of the warrants
retained by the Investors, which equals $167,127, was recorded as a
dividend upon repurchase of shares of Series B preferred stock and is
added to net loss to arrive at net loss applicable to common shares.
At December 31, 2002, all 154,000 of the warrants described above are
outstanding.
(8) STOCK OPTIONS
In August 1995, in connection with a severance agreement entered into
between the Company and a former CEO, the Company granted options (not
pursuant to the 1995 Stock Option Plan) to purchase 23,557 shares of
common stock at an exercise price of $1.00 per share with immediate
vesting. Total compensation expense recorded at the date of grant with
regards to those options was $64,782 with the offset recorded as
additional paid-in capital.
STOCK OPTION PLAN
In July 1995, the Company established the 1995 Stock Option Plan (the
Plan), which provided for the granting of up to 650,000 options to
officers, directors, employees and consultants for the purchase of
stock. In July 1996, the Plan was amended to increase the total number
of shares authorized for issuance by 300,000 shares to a total of
950,000 shares and beginning with the 1997 calendar year, by an amount
equal to one percent (1%) of the shares of common stock outstanding on
December 31 of the immediately preceding calendar year. At December 31,
2002 and 2001, 1,323,852 and 1,164,198 shares were authorized for
issuance. The options have a maximum term
F-20
MANHATTAN PHARMACEUTICALS, INC. (FORMERLY ATLANTIC TECHNOLOGY
VENTURES, INC. AND SUBSIDIARIES)
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
of 10 years and vest over a period determined by the Company's Board of
Directors (generally 4 years).
The Company applies APB Opinion No. 25 in accounting for its Plan.
Accordingly, compensation cost has been recognized for stock options
granted to employees and directors only to the extent that the quoted
market price of the Company's stock at the date of grant exceeded the
exercise price of the option.
During 1995, the Company granted options to purchase 246,598 shares of
the Company's common stock at exercise prices below the quoted market
prices of its common stock. Deferred compensation expense in the amount
of $144,000 was recorded at the date of grant with the offset recorded
as an increase to additional paid-in capital. Compensation expense in
the amount of $74,400, $28,800, $28,800 and $12,000 was recognized in
1998, 1997, 1996, and 1995, respectively.
In November 1997, the Company granted options to purchase 24,000 shares
of the Company's common stock at $9.50 per share to IRG. These options
expired November 10, 2002. The Company recognized expense of $81,952,
which is included in general and administrative expense in the
consolidated statement of operations for the year ended December 31,
1998. The expense represents the estimated fair market value of the
options, in accordance with SFAS No. 123.
During 2001, the Company granted employees and directors an aggregate
of 404,000 Plan options and 275,000 options outside of the Plan, of
which 70,000 options have been cancelled as a result of termination of
the employment of certain employees.
During 2002, the Company granted employees and directors an aggregate
of 160,000 Plan options. All stock options granted during 2002, 2001
and 2000 were granted at the quoted market price on the date of grant.
Also, during 2002, the Company granted to employees an aggregate of
2,000,000 options outside of the Plan. Of these options, 475,000
options represent the annual issuance of stock options to employees on
terms similar to those of prior year. They vest 25% upon issuance and
the remaining options vest in 25% increments on an annual basis. In
addition, 950,000 of these options were issued as incentive options and
will vest upon the earlier of the achievement of certain milestones by
the Company or five years. The remaining 575,000 options were issued
and fully vested in March 2002 as part of voluntary revisions to
compensation arrangements with certain employees, which principally
resulted in the employees deferring a significant portion of their
salary. Initially, this deferred salary was payable on the earlier of
the Company's discretion, the employee's termination, and, in certain
cases, at the conclusion of the employee's contracts and as such the
Company continued to accrue for those salary costs (see Note 13). The
2,000,000 options were granted at the stock price on the day of
issuance, and are exercisable for a period of ten years regardless of
whether the grantee continues to be employed by the Company.
Had compensation costs been determined in accordance with the fair
value method prescribed by SFAS No. 123 for all options issued to
employees, the Company's net loss applicable to common
F-21
MANHATTAN PHARMACEUTICALS, INC. (FORMERLY ATLANTIC TECHNOLOGY
VENTURES, INC. AND SUBSIDIARIES)
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
shares and net loss per common share (basic and diluted) for plan options would
have been increased to the pro forma amounts indicated below:
2002 2001 2000
------------ ------------ ------------
Net loss applicable to common shares:
As reported $ 1,612,695 $ 2,609,521 $ 6,847,749
Pro forma 2,215,954 3,332,557 8,190,926
Net loss per common share - basic
As reported $ 0.10 $ 0.36 $ 1.21
Pro forma 0.13 0.46 1.45
The fair value of each option granted is estimated on the date of the grant
using the Black-Scholes option pricing model with the following assumptions
used for the grants in 2002, 2001 and 2000: dividend yield of 0%; expected
volatility of 147% for 2002, 110% for 2001 and 94% for 2000; risk-free interest
rate of 4.0% for 2002, 4.5% for 2001 and 6.5% for 2000; and expected lives of
eight years for each year presented.
A summary of the status of the Company's stock options as of December 31, 2002,
2001 and 2000 and changes during the years then ended is presented below:
F-22
MANHATTAN PHARMACEUTICALS, INC. (FORMERLY ATLANTIC TECHNOLOGY
VENTURES, INC. AND SUBSIDIARIES)
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
2002 2001 2000
--------------------- ---------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- --------- ------- --------- --------
Outstanding at
beginning of year 1,313,200 $ 2.40 804,200 $ 3.73 396,200 $ 3.25
Granted 2,160,000 0.24 679,000 0.88 582,000 4.10
Exercised - - - - (14,000) 2.56
Cancelled (24,000) 9.50 (170,000) 2.44 (160,000) 3.97
--------- - -------- --------
Outstanding at end
of year 3,449,200 $ 1.00 1,313,200 $ 2.40 804,200 $ 3.73
========= ====== ========= ======= ======== =======
Options exercisable
at year-end 2,133,367 680,617 354,478
========= ========= ========
Weighted-average
fair value of
options granted
during the year $ 0.01 $ 0.71 $ 4.05
========= ========= ========
F-23
MANHATTAN PHARMACEUTICALS, INC. (FORMERLY ATLANTIC TECHNOLOGY
VENTURES, INC. AND SUBSIDIARIES)
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
The following table summarizes the information about Plan stock options
outstanding at December 31, 2002:
REMAINING NUMBER OF
EXERCISE NUMBER CONTRACTUAL OPTIONS
PRICE OUTSTANDING LIFE EXERCISABLE
-------- ----------- ----------- -----------
$ 0.200 575,000 9.25 years 575,000
0.250 1,585,000 9.08 years 631,250
0.610 4,000 8.61 years 4,000
0.740 20,000 8.35 years 10,000
0.875 555,000 8.15 years 327,500
1.033 30,000 8.03 years 15,000
1.313 50,000 6.61 years 50,000
1.375 20,000 6.41 years 20,000
1.500 75,000 6.81 years 75,000
1.750 6,000 6.73 years 6,000
2.313 2,000 5.66 years 2,000
3.188 54,000 7.75 years 54,000
3.250 10,000 5.61 years 10,000
4.188 448,000 7.28 years 341,750
6.094 10,000 7.22 years 6,667
6.813 1,200 0.19 years 1,200
7.000 2,000 4.46 years 2,000
7.500 2,000 3.56 years 2,000
--------- ---------
3,449,200 2,133,367
========= =========
(9) STOCK WARRANTS
In connection with notes payable - bridge financing, the Company issued
warrants to purchase 1,500,000 shares of common stock at an initial
exercise price of $1.50 per share subject to an upward adjustment upon
consummation of the IPO. Simultaneously with the consummation of the
IPO, these warrants were converted into redeemable warrants at an
exercise price of $5.50 per share on a one-for-one basis (see note 6).
These redeemable warrants expired unexercised on December 13, 2000.
As of December 14, 1996, the redeemable warrants are subject to
redemption by the Company at a redemption price of $0.05 per redeemable
warrant on 30 days prior written notice, provided that the average
closing bid price of the common stock as reported on Nasdaq equals or
exceeds $8.25 per share, subject to adjustment, for any 20 trading days
within a period of 30 consecutive trading days ending on the fifth
trading day prior to the date of notice of the redemption.
In December 1995, in connection with the IPO, the Company issued
redeemable warrants to purchase 1,872,750 shares of common stock at an
exercise price of $5.50 per share. The remainder
F-24
MANHATTAN PHARMACEUTICALS, INC. (FORMERLY ATLANTIC TECHNOLOGY
VENTURES, INC. AND SUBSIDIARIES)
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
of these redeemable warrants expired unexercised on December 13, 2000.
Commencing December 14, 1996, these redeemable warrants are subject to
redemption by the Company at its option, at a redemption price of $.05
per warrant provided that the average closing bid price of the common
stock equals or exceeds $8.25 per share for a specified period of time,
and the Company has obtained the required approvals from the
Underwriters of the Company's IPO. In January 1998, 1,000 warrants were
exercised.
In connection with the IPO, the Company granted to Joseph Stevens &
Co., L.P. (the Underwriter) warrants to purchase from the Company
165,000 units, each unit consisting of one share of common stock and
one redeemable warrant at an initial exercise price of $6.60 per unit.
Such warrants are exercisable during the four-year period commencing
December 13, 1996. The redeemable warrants issuable upon exercise of
these warrants have an exercise price of $6.05 per share. As long as
the warrants remain unexercised, the terms under which the Company
could obtain additional capital may be adversely affected. These
redeemable warrants expired unexercised on December 13, 2000.
The Company entered into an agreement with Paramount effective April
15, 1996 pursuant to which Paramount will, on a non-exclusive basis,
render financial advisory services to the Company. Two warrants
exercisable for shares of the Company's common stock were issued to
Paramount in connection with this agreement. These included a warrant
to purchase 25,000 shares of the Company's common stock at $10 per
share, which warrant expired unexercised on April 16, 2001 and a
warrant to purchase 25,000 shares of the Company's common stock at
$8.05 per share, which warrant expired unexercised on June 16, 2001. In
connection with the issuance of these warrants, the Company recognized
an expense in the amount of $139,000 for the fair value of the
warrants. This expense was recorded as general and administrative in
the consolidated statement of operations for the year ended December
31, 1996.
In connection with the Channel merger discussed in note 7, the Company
issued a warrant to a director of the Company to purchase 37,500 shares
of the Company's common stock at $5.33 per share, which warrant expires
on July 14, 2006. The Company recognized expense of $48,562 for the
fair value of the warrants, which was recorded as a research and
development expense in the consolidated statement of operations for the
year ended December 31, 1997.
The Company entered into an agreement with an investor pursuant to
which the investor will render investor relations and corporate
communication services to the Company. A warrant to purchase 24,000
shares of the Company's common stock at $7.00 per share, which warrant
expired unexercised on November 22, 2001, was issued in 1996. The
Company recognized expense of $110,640 for the fair value of the
warrants, which was recorded as a general and administrative expense in
the consolidated statements of operations for the year ended December
31, 1997.
Concurrent with the private placement offering of Series A preferred
stock in 1997, the Company issued 123,720 warrants to designees of
Paramount, the placement agent. These warrants are initially
exercisable at a price equal to $11.00 per share and may be exercised
at any time during the 10-year period that commenced February 17, 1998.
The rights, preferences and privileges of the shares of Series A
preferred stock issuable upon exercise of these warrants are identical
to those offered to the participants in the private placement. The
warrants contain anti-dilution provisions
F-25
MANHATTAN PHARMACEUTICALS, INC. (FORMERLY ATLANTIC TECHNOLOGY
VENTURES, INC. AND SUBSIDIARIES)
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
providing for adjustment of the number of securities underlying the
Series A preferred stock issuable upon exercise of the warrants and the
exercise price of the warrants under certain circumstances. The
warrants are not redeemable and will remain outstanding, to the extent
not exercised, notwithstanding any mandatory redemption or conversion
of the Series A preferred stock underlying the warrants. In accordance
with SFAS No. 123, the Company determined the fair value of the
warrants using the Black-Scholes Model and allocated this value of
$570,143, to convertible preferred stock warrants with a corresponding
reduction in additional paid-in capital. In April 2000 and June 1998,
4,799 and 6,525 warrants, respectively, were exercised via a cashless
method for 6,955 and 2,010 shares of Series A preferred stock,
respectively.
On January 4, 2000, the Company entered into a Financial Advisory and
Consulting Agreement with the Underwriters. In this agreement, the
Company engaged the Underwriters to provide investment-banking services
for one year commencing January 4, 2000. As partial compensation for
the services to be rendered by the Underwriters, the Company issued the
Underwriters three warrants to purchase an aggregate of 450,000 shares
of its common stock. The exercise price ranges between $2.50 and $4.50
and the exercise period of each warrant is at various times through
2007. In addition, each warrant may only be exercised when the market
price per share of common stock is at least $1.00 greater than the
exercise price of that warrant. In connection with the issuance of the
warrants, the Company and the Underwriters entered into a letter
agreement granting registration rights in respect of the shares of
common stock issuable upon exercise of the warrants. In accordance with
EITF Issue No. 96-18, "Accounting for Equity Instruments That Are
Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services" and other relative accounting literature,
the Company recorded the estimated fair value of the warrants of
$1,020,128, which represents a general and administrative expense, as
compensation expense relating to stock options and warrants over the
vesting period through January 4, 2001.
On March 8, 2001, the Company entered into an agreement with The
Investor Relations Group, Inc. ("IRG") under which IRG provided the
Company investor relations services. Pursuant to this agreement, the
Company issued to Dian Griesel, the principal of IRG, warrants to
purchase 120,000 shares of its common stock at an exercise price of
$0.875 per share and agreed to pay IRG $7,500 per month. These warrants
vested monthly in 5,000 share increments over a 24-month period. As
part of its effort to reduce expenses, the Company terminated the
agreement with IRG as of May 31, 2002 and therefore, the 45,000
unvested warrants have terminated. In addition, in lieu of paying
$15,000 for services rendered in April and May 2002, IRG agreed to
accept 75,000 common shares. The estimated fair value of these shares
of $13,500 was recorded as a general and administrative expense during
the year ended December 31, 2002. In addition, pursuant to EITF Issue
No. 96-18, "Accounting for Equity Instruments That are Issued to Other
Than Employees for Acquiring or in Conjunction with Selling Goods or
Services," the Company recorded compensation expense of $34,666 for the
year ended December 31, 2001 relating to the original issuance of the
stock warrants to purchase 120,000 shares. As a result of a decline in
the Company's common stock price during the year ended December 31,
2002 and the termination of 45,000 warrants, the cumulative expense
associated with these warrants was reduced. The reduction in the
estimated fair value of the warrants previously recorded and the
current period expense resulted in a net reversal of compensation
expense of $5,845, which reversal is recorded as a benefit during the
year ended December 31, 2002.
F-26
MANHATTAN PHARMACEUTICALS, INC. (FORMERLY ATLANTIC TECHNOLOGY
VENTURES, INC. AND SUBSIDIARIES)
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
On August 9, 2001, the Company entered into an agreement with Proteus
Capital Corp ("Proteus") in which Proteus agreed to assist the Company
with raising additional funds. Pursuant to this agreement, the Company
granted Proteus warrants to purchase 100,000 shares of the Company's
common stock at $0.59 per share, which was the average closing stock
price for the two weeks ended August 17, 2001. The warrants were fully
vested on the date of the agreement and were outstanding at December
31, 2002 and 2001. The term of the warrants is five years. As a result,
the Company recorded compensation expense relating to these stock
warrants of $45,355 for the year ended December 31, 2001.
(10) RELATED-PARTY TRANSACTIONS
During 1999, the Company entered into consulting agreements with
certain members of its Board of Directors. Prior to 1999, the Company
had several consulting agreements with directors of the Company. These
agreements, all of which have been terminated, required either monthly
consulting fees or project-based fees. No additional agreements were
entered into as of December 31, 2001. Consulting expense under these
agreements was $0, $0 and $8,000 for the years ended December 31, 2002,
2001 and 2000, respectively.
(11) INCOME TAXES
There was no current or deferred tax expense for the years ended
December 31, 2002, 2001 and 2000 because of the Company's operating
losses.
The components of deferred tax assets and deferred tax liabilities as
of December 31, 2002 and 2001 are as follows:
2002 2001
------------ ----------
Deferred tax assets:
Tax loss carryforwards $ 8,032,415 8,613,260
Research and development credit 800,130 805,633
Deferred compensation 389,375 340,764
Other 458 75,820
------------ ----------
Gross deferred tax assets 9,222,378 9,835,477
Less valuation allowance (9,221,469) (9,830,822)
------------ ----------
Net deferred tax assets 909 4,655
Deferred tax liabilities (909) (4,655)
------------ ----------
Net deferred tax asset (liability) $ -- --
============ ==========
F-27
MANHATTAN PHARMACEUTICALS, INC. (FORMERLY ATLANTIC TECHNOLOGY
VENTURES, INC. AND SUBSIDIARIES)
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
The reasons for the difference between actual income tax benefit for
the years ended December 31, 2002, 2001 and 2000 and the amount
computed by applying the statutory federal income tax rate to losses
before income tax benefit are as follows:
2002 2001 2000
--------------------------- ------------------------- ---------------------------
% OF % OF % OF
PRETAX PRETAX PRETAX
AMOUNT LOSS AMOUNT LOSS AMOUNT LOSS
------------ ---------- ------------ ------- -------------- -------
Income tax benefit
at statutory rate $ (526,000) (34.0%) $ (590,000) (34.0%) $ (1,973,000) (34.0%)
State income taxes,
net of Federal
tax (79,000) (5.1%) (186,000) (10.7%) (640,000) (11.0%)
Change in valuation
allowance (609,000) (39.4%) 885,000 51.0% 1,436,000 24.7%
Credits generated
in current year (8,000) (0.5%) (62,000) (3.6%) (248,000) (4.3%)
In-process R & D -- 0% -- 0% 1,040,000 17.9%
Loss on investment (336,000) (21.7%) -- 0% -- 0%
Adjustment to state
net operating losses
due to sales of
subsidiaries 1,493,000 96.5% -- -- -- --
Other, net 65,000 4.2% (47,000) (2.7%) 385,000 6.7%
------------ ------ ----------- ----- ------------- -----
Income tax benefit $ -- --% $ -- --% $ -- --%
============ ====== =========== ===== ============= =====
A valuation allowance is provided when it is more likely than not that
some portion or all of the deferred tax assets will not be realized.
The net change in the total valuation allowance for the years ended
December 31, 2002, 2001 and 2000 was a decrease of $609,000, an
increase of $885,000, and an increase of $1,436,000, respectively. The
tax benefit assumed using the federal statutory tax rate of 34% has
been reduced to an actual benefit of zero due principally to the
aforementioned valuation allowance.
At December 31, 2002, the Company had potentially utilizable federal
and state net operating loss tax carryforwards of approximately
$22,700,000. The net operating loss carryforwards expire in various
amounts starting in 2008 and 2003 for federal and state tax purposes,
respectively. The Tax Reform Act of 1986 contains provisions, which
limit the ability to utilize net operating loss carryforwards in the
case of certain events including significant changes in ownership
interests. As a result of the merger with Manhattan Research
Development, Inc. in February 2003, the Company incurred a significant
change in its ownership, limiting its ability to utilize net operating
loss carryforwards to approximately $100,000 annually. If the Company
has taxable income in the future which exceeds this permissible yearly
net operating loss carryforward, the Company would incur a federal
income tax liability even though net operating loss carryforwards would
be available in future years.
F-28
MANHATTAN PHARMACEUTICALS, INC. (FORMERLY ATLANTIC TECHNOLOGY
VENTURES, INC. AND SUBSIDIARIES)
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
(12) LICENSE AGREEMENTS
On May 14, 1998, Optex entered into a Development and License Agreement
(the Agreement) with Bausch & Lomb to complete the development of
Avantix (formerly known as Catarex), a cataract-removal technology
owned by Optex. Under the terms of the Agreement, Optex and Bausch &
Lomb intend jointly to complete the final design and development of the
Avantix System. Bausch & Lomb was granted an exclusive worldwide
license to the Avantix technology for human ophthalmic surgery and will
assume responsibility for commercializing Avantix globally. The
Agreement is cancelable by Bausch & Lomb at any time upon six months
written notice.
The Agreement provided that Bausch & Lomb would pay Optex milestone
payments of (a) $2,500,000 upon the signing of the Agreement, (b)
$4,000,000 upon the successful completion of certain clinical trials,
(c) $2,000,000 upon receipt of regulatory approval to market the
Avantix device in the United States (this payment is creditable in full
against royalties), and (d) $1,000,000 upon receipt of regulatory
approval to market the Avantix device in Japan. Pursuant to the
Agreement, Bausch & Lomb would reimburse Optex for its research and
development expenses not to exceed $2,500,000. Bausch & Lomb would pay
Optex a royalty of 7% of net sales and an additional 3% royalty when
certain conditions involving liquid polymer lenses are met.
During 1998, the Company received the first nonrefundable milestone
payment of $2,500,000 and recorded this amount as license revenue. In
addition, the Company recorded $1,047,511 in 1998 as a reduction of
expenses related to the reimbursement of research and development costs
associated with the Avantix device.
On September 16, 1999, the Company and Bausch & Lomb amended the
Agreement to provide for an expanded role for Optex in the development
of the Avantix surgical device. Under the amended Agreement, Optex, in
addition to the basic design work provided for in the original
agreement, was required to deliver to Bausch & Lomb within a stated
period Avantix devices for use in clinical trials, and was required to
assist Bausch & Lomb in connection with development of manufacturing
processes for scale-up of manufacture of the Avantix device.
Additionally, Bausch & Lomb would reimburse Optex for all costs,
including labor, professional services and materials, incurred by Optex
in delivering those Avantix devices and performing manufacturing
services, and would pay Optex a fixed profit component of 25% based
upon certain of those costs.
During 2001 and 2000, Optex recorded revenue pursuant to the amended
Agreement of $2,461,922 and $5,169,288, respectively. The revenue
recorded in 2001 and 2000 pursuant to the amended Agreement is
inclusive of the fixed profit component of 25% presented on a gross
basis with the related costs incurred presented separately as cost of
development revenue on the consolidated statements of operations. Prior
to the amended Agreement, the research and development expenses of the
Avantix device incurred and the related reimbursement were presented by
the Company on a net basis since the reimbursement reflects a dollar
for dollar reimbursement arrangement, effectively being a pass-through
of expenses. The 1999 reimbursement received by the Company prior to
the amendment to the Agreement was $1,229,068. As of December 31, 2000,
the Company recorded $1,294,615 of deferred revenue related to the
amended Agreement, which amount
F-29
MANHATTAN PHARMACEUTICALS, INC. (FORMERLY ATLANTIC TECHNOLOGY
VENTURES, INC. AND SUBSIDIARIES)
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
represents expenses paid in advance by Bausch & Lomb during 2000 at a
rate of 125%. This deferred revenue was recognized when the related
expense was recorded in operations during 2001.
As of December 31, 2000, Optex received reimbursement for costs,
including labor, professional services and materials, incurred by Optex
in delivering Avantix devices and performance manufacturing services
totaling $5 million. The amended agreement provided that Bausch & Lomb
would reimburse Optex for such costs up to $8 million. In connection
with the revised agreement, the Company agreed to pay a bonus to its
President totaling $141,000, payable monthly through March 2001. At
December 31, 2001, this bonus had been paid.
Pursuant to an asset purchase agreement dated January 31, 2001, among
Bausch & Lomb, a Bausch & Lomb affiliate, the Company, and Optex, on
March 2, 2001, Optex sold to Bausch & Lomb substantially all of its
assets (mostly intangible assets with no book value), including all
those related to the Avantix technology. The purchase price was $3
million paid at closing (of which approximately $564,000 has been
distributed to Optex' minority shareholders). In addition, Optex is
entitled to receive additional consideration, namely $1 million once
Bausch & Lomb receives regulatory approval to market the Avantix device
in Japan, royalties on net sales on the terms stated in the original
development agreement dated May 14, 1998, between Bausch & Lomb and
Optex, as amended, and minimum royalties of $90,000, $350,000, and
$750,000 for the first, second, and third years, respectively, starting
on first commercial use of the Avantix device or January 1, 2004,
whichever is earlier. Optex also has the option to repurchase the
acquired assets from Bausch & Lomb at fair value if it ceases
developing the Avantix technology.
Upon the sale of Optex assets, Bausch & Lomb's development agreement
with Optex was terminated and Optex has no further involvement with
Bausch & Lomb. As a result of this transaction, the Company recorded a
net gain on the sale of Optex assets of $2,569,451 for the year ended
December 31, 2001, net of severance payments to former Optex employees
in the amount of $240,000 as described below. The purchase price of
$3,000,000 is nonrefundable and upon the closing of the asset purchase
agreement in March 2001, Optex had no further obligation to Bausch &
Lomb or with regard to the assets sold. In the asset purchase
agreement, Optex agreed to forgo future contingent payments provided
for in the earlier development agreement. Pursuant to the Company's
agreement with the minority shareholders of Optex, Optex has recorded a
profit distribution for the year ended December 31, 2001 of $837,274
representing the minority shareholders' percentage of the cumulative
profit from the Bausch & Lomb development and asset purchase agreements
up to and including proceeds from the sale of Optex' assets.
On May 9, 2001, the Company's board of directors, after consideration
of all the relevant facts and circumstances, including recommendation
of counsel, agreed to authorize an aggregate payment of $240,000 to
three former employees of Optex (who are now employed by Bausch &
Lomb). The payments were made on May 11, 2001, and represented the
settlement of claims made by the employees subsequent to the asset
purchase agreement referred to above for severance monies allegedly due
under their employment agreement. The Company did not believe these
monies were due pursuant to the terms of the transaction itself and the
respective employment agreements. The board of directors elected to
acquiesce to the demands of the former employees and resolve the matter
in light of the potential future royalties from Bausch & Lomb and the
importance of these
F-30
MANHATTAN PHARMACEUTICALS, INC. (FORMERLY ATLANTIC TECHNOLOGY
VENTURES, INC. AND SUBSIDIARIES)
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
individuals to the ongoing development activities. The payment was
recorded as an expense netted against the gain on sale of Optex assets
in the 2001 consolidated statement of operations.
On June 28, 2002, the Company entered into a license agreement with
Indevus Pharmaceuticals, Inc. in which the Company licensed to Indevus
the exclusive worldwide rights to CT-3, its novel anti-inflammatory and
analgesic compound currently in clinical development. Indevus will be
responsible for all further development of CT-3, and the Company will
have no future involvement with Indevus or CT-3 other than its rights
under the license agreement to royalties and milestone payments. Under
the license agreement, the Company received an initial licensing fee of
$500,000. In accordance with SAB No. 101, "Revenue Recognition," the
Company recognized $500,000 of licensing revenue during the year ended
December 31, 2002, since it has no further obligations under the
license agreement. The Company is entitled to additional milestone
payments on occurrence of certain events specified in the license
agreement, including commencement and completion of various clinical
trials, the FDA's acceptance for filing of a New Drug Application, or
"NDA," and Indevus securing other regulatory approvals for CT-3 in the
United States and Europe, and the Company will be entitled to royalties
if the compound begins to generate revenue.
The Company has licensed from its inventors the worldwide rights to
ATV-02, a potent and broad-spectrum antimicrobial agent for the local
treatment of topical infections. This compound is more commonly known
as N-Chlorotaurine, or "NCT." This compound has completed safety and
tolerability studies in a limited number of subjects and has begun a
series of Phase II human clinical studies for the treatment of several
indications, including viral and bacterial conjunctivitis and acute and
chronic sinusitis.
Under the terms of the license agreement, the Company has exclusively
licensed the inventors' rights (including the right to sublicense)
pertaining to any novel therapeutic use or formulation of the compound.
The Company has no clinical-development obligations under the license
agreement, but it plans to continue developing ATV-02 in Europe in
cooperation with the inventors using their philanthropic funding
sources and plans to file an IND in the United States to develop the
compound according to FDA regulations for approval in the United
States. The Company was not required to pay a license fee under the
license agreement, but if the Company proceeds with clinical
development of the compound it would be required to make payments to
the investors upon achieving certain milestones. Such payments would be
payable in cash or company stock, at the Company's discretion. The
milestone payments as set forth in the license agreement include (a)
$100,000 upon the first new patent issuance, (b) $250,000 upon
successful completion of a Phase III clinical trial, and (c) $1,000,000
upon receiving new drug approval. The Company would also be required to
pay the inventors a total royalty of 4% of the net sales of the
licensed products sold by the Company and 20% of the royalties which
the Company receives from sublicensees. The Company is responsible for
preparing, filing, prosecuting, and maintaining the patent applications
and patent rights.
F-31
MANHATTAN PHARMACEUTICALS, INC. (FORMERLY ATLANTIC TECHNOLOGY
VENTURES, INC. AND SUBSIDIARIES)
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
(13) COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
The Company is party to various claims and lawsuits incidental to its
business. Although the outcome of such proceedings cannot be predicted,
the Company's management believes that there is no pending proceeding
involving the Company for which the outcome is likely to materially
affect the consolidated financial position, results of operations or
cash flows of the Company in subsequent years.
CONSULTING AND RESEARCH AGREEMENTS
The Company has entered into consulting agreements, under which stock
options may be issued in the foreseeable future. The agreements are
cancelable with no firm financial commitments.
EMPLOYMENT AGREEMENTS
The Company entered into employment agreements with four executives
during April and May 2000. These agreements provide for the payment of
signing and year-end bonuses in 2000 totaling $225,000, and annual base
salaries aggregating $550,000. Certain agreements were amended in
February 2001 and one executive was terminated in October 2001. As of
December 31, 2002, the annual base salaries of four executives
aggregated $485,000 and year-end bonuses aggregated $105,000. The 2002
and 2001 bonuses are included in accrued liabilities in the
accompanying consolidated balance sheets at December 31, 2002 and 2001,
respectively. Each agreement has an initial term of three years and can
be terminated by the Company, subject to certain provisions, with the
payment of severance amounts that range from two to six months.
On April 1, 2002, the employment agreements were amended to provide for
the deferral and accrual of approximately 22% of employees base salary,
which amount would become payable when determined by the Company,
termination of employment by the Company without cause or the
expiration of the term of employment. The 2002 amendments further
provided that the employees' annual bonus would be deferred and become
payable upon the occurrence of the same events triggering payment of
their deferred salary.
On February 21, 2003, immediately prior to the merger with Manhattan
Development Research, the employment agreements were amended again to
provide that employees would be entitled to receive the amount of their
deferred base salary and unpaid bonus, one-half of which amount would
be payable when the Company receives $3 million in aggregate cash
proceeds from financing activities and other sources and the remaining
one-half of which would be payable when the Company receives an
aggregate of $6 million in aggregate cash proceeds from financing
activities and other sources.
PROPRIETARY RIGHTS
The Company has an exclusive worldwide license to four U.S. patents and
corresponding foreign applications covering a group of compounds,
including CT-3. The licensor is Dr. Sumner Burstein,
F-32
MANHATTAN PHARMACEUTICALS, INC. (FORMERLY ATLANTIC TECHNOLOGY
VENTURES, INC. AND SUBSIDIARIES)
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
a professor at the University of Massachusetts. This license extends
until the expiration of the underlying patent rights. The primary U.S.
patent expires in 2012 and the new analog patent 6,162,829 expires in
2017. The Company has the right under this license to sublicense our
rights under the license. The license requires that the Company pay
royalties of 3% to Dr. Burstein based on sales of products and
processes incorporating technology licensed under the license, as well
as 8% of any income derived from any sublicense of the licensed
technology. Furthermore, pursuant to the terms of the license, the
Company must satisfy certain other terms and conditions in order to
retain the license rights. If the Company fails to comply with certain
terms of the license, our license rights under the license could be
terminated.
OPERATING LEASES
The Company rents certain office space under operating leases, which
expire in 2003.
Aggregate annual minimum lease payments for noncancellable operating
leases are not material.
Beginning in March 2002, the Company entered into a sublease agreement
to cover a portion of its lease obligation. The minimum lease payments
above include noncancellable sublease income of $3,750 expected to be
received in 2003. The Company has sublet 60% of a facility in
Connecticut, which is no longer utilized by the Company. As a result,
the Company recorded an estimated loss on the remaining operating lease
obligation in the amount of $11,026 at December 31, 2001, substantially
all of which has been paid as of December 31, 2002.
Rent expense related to operating leases for the years ended December
31, 2002, 2001 and 2000 was $89,069, $135,662 and $161,810,
respectively.
RESIGNATION OF CEO
In July 1998, the CEO of the Company resigned. The Company recorded
$211,250 of expense for salary continuation through April 1999.
Pursuant to the resignation, all unvested stock options held by the CEO
vested immediately and the unexercised options expired in July 1999.
TERMINATION OF AGREEMENT WITH THE TRUSTEES OF THE UNIVERSITY OF
PENNSYLVANIA
On October 12, 1999, the Company and Channel announced the termination
of the license agreement dated as of June 16, 1994, between the
Trustees of the University of Pennsylvania (Penn) and Channel pursuant
to which Channel received the rights to use cyclodextrin technology.
The Company and Channel, on the one hand, and Penn, on the other hand,
released each other from any further obligations under the license
agreement. The Company paid Penn a portion of the patent costs for
which Penn was seeking reimbursement under the agreement.
CRYOCOMM TECHNOLOGY
In October 2001, the Company stopped work on CryoComm, a wholly-owned
subsidiary of the Company that had been developing superconducting
electronics for Internet packet switching and transport products.
Discontinuing work on CryoComm will allow the Company to focus on its
core
F-33
MANHATTAN PHARMACEUTICALS, INC. (FORMERLY ATLANTIC TECHNOLOGY
VENTURES, INC. AND SUBSIDIARIES)
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
life-sciences technologies, although the Company will continue to
prosecute the patents on the CryoComm technology. As part of this
restructuring, Walter Glomb's position was eliminated effective October
16, 2001, although Mr. Glomb will receive a 7% success fee if he is
able to secure funding to further develop this technology. As stated in
his employment agreement, Mr. Glomb was also entitled to receive a
total of $62,500 in severance payments due under his employment
agreement over the six months following his termination. These amounts
were recorded during the fourth quarter of 2001 and $36,458 of these
severance payments is included in accrued liabilities in the
accompanying consolidated balance sheet as of December 31, 2001. As of
December 31, 2002, these severance payments had been made.
CONSULTING AGREEMENTS
Joshua Kazam provides services to the Company pursuant to a consulting
agreement dated March 1, 2003. The consulting agreement provides that
Mr. Kazam will render services to the Company in connection with
corporate financing activities and preparation of grant applications
that the Company may need from time to time. The Company is required to
pay to Mr. Kazam $4,167 per month during the term of the consulting
agreement. The consulting agreement provides for a term of one year,
which may be extended for 30 day periods thereafter. The consulting
agreement also provides that either the Company or Mr. Kazam may
terminate the agreement upon 30 days' notice.
Michael Weiser, M.D. provides services to the Company pursuant to a
consulting agreement dated March 1, 2003. The consulting agreement
provides that Dr. Weiser will provide scientific advisory services in
the areas of obesity and drug delivery. The Company is required to pay
to Dr. Weiser $6,250 per month during the term of the consulting
agreement. The consulting agreement provides for a term of one year,
which may be extended for 30 day periods thereafter. The consulting
agreement also provides that either the Company or Dr. Weiser may
terminate the agreement upon 30 days' notice.
(14) MERGER
On February 21, 2003, Manhattan Pharmaceuticals, Inc. (formerly known
as "Atlantic Technology Ventures, Inc.") (the "Company") completed a
reverse acquisition of Manhattan Research Development. The merger was
effected pursuant to an Agreement and Plan of Merger dated December 17,
2002 (the "Merger Agreement") by and among the Company, Manhattan
Research Development, Inc. (formerly Manhattan Pharmaceuticals, Inc.)
and Manhattan Pharmaceuticals Acquisition Corp, our wholly-owned
subsidiary ("MPAC"). In accordance with the terms of the Merger
Agreement, MPAC merged with and into Manhattan Research Development,
with Manhattan Research Development remaining as the surviving
corporation and a wholly-owned subsidiary of the Company. Pursuant to
the Merger Agreement, upon the effective time of the merger, the
outstanding shares of common stock of Manhattan Research Development
automatically converted into an aggregate of 93,449,584 shares of the
Company's common stock, which represented 80 percent of the Company's
outstanding voting stock after giving effect to the merger. In
addition, immediately prior to the merger Manhattan Research
Development had outstanding options and warrants to purchase an
aggregate of 864,280 shares of its common stock, which, in accordance
with the terms of the merger, automatically converted into options and
warrants to purchase an aggregate of 10,984,719 shares of the Company's
common stock. Since the
F-34
MANHATTAN PHARMACEUTICALS, INC. (FORMERLY ATLANTIC TECHNOLOGY
VENTURES, INC. AND SUBSIDIARIES)
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
stockholders of Manhattan Research Development received the majority of
the voting shares of the Company, the merger will be accounted for as a
reverse acquisition whereby Manhattan Research Development will be the
accounting acquirer (legal acquiree) and the Company will be the
accounting acquiree (legal acquirer). Based on the five day average
price of the Company's common stock of $0.10 per share, the purchase
price approximates $2,336,000, which represents 20 percent of the
combined Company's post-merger total outstanding shares of 116,811,980.
In connection with the merger, the Company changed its name from
"Atlantic Technology Ventures, Inc." to "Manhattan Pharmaceuticals,
Inc." Based on the preliminary information currently available,
Manhattan Research Development expects to recognize patents and
licenses for substantially all of the purchase price. Upon completion
of formal purchase price allocation there may be a decrease in the
amount assigned to intangible assets and a corresponding increase in
process research and development. Upon completion of formal purchase
price allocation there may be a decrease in the amount assigned to
intangible assets and a corresponding increase in in-process research
and development. As a result of acquiring Manhattan Research
Development, the Company receives new technologies. From November 2002
through February 20, 2003, the combined Company has raised $2,747,600
from financing activities.
F-35
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
2.1 Agreement and Plan of Merger among the Company, Manhattan Pharmaceuticals
Acquisition Corp. and Manhattan Research Development, Inc. (formerly Manhattan
Pharmaceuticals, Inc.) dated December 17, 2002 (incorporated by reference to
Exhibit 2.1 from Form 8-K filed March 5, 2003).
3.1 Certificate of incorporation, as amended to date.
3.2 Bylaws, as amended to date (incorporated by reference from Registrant's
registration statement on Form SB-2, as amended (File No. 33-98478)).
4.1 Form of unit certificate (incorporated by reference from Registrant's registration
statement on Form SB-2, as amended (File No. 33-98478)).
4.2 Specimen common stock certificate (incorporated by reference from Registrant's
registration statement on Form SB-2, as amended (File No. 33-98478)).
4.3 Form of redeemable warrant certificate (incorporated by reference from Registrant's
registration statement on Form SB-2, as amended (File No. 33-98478)).
4.4 Form of redeemable warrant agreement between the Registrant and Continental Stock
Transfer & Trust Company (incorporated by reference from Registrant's registration
statement on Form SB-2, as amended (File No. 33-98478)).
4.5 Form of underwriter's warrant certificate (incorporated by reference from
Registrant's registration statement on Form SB-2, as amended (File No. 33-98478)).
4.6 Form of underwriter's warrant agreement between the Registrant and Joseph Stevens &
Company, L.P. (incorporated by reference from Registrant's registration statement
on Form SB-2, as amended (File No. 33-98478)).
4.7 Form of subscription agreement between Registrant and the selling stockholders
(incorporated by reference from Registrant's registration statement on Form SB-2,
as amended (File No. 33-98478)).
4.8 Form of bridge warrant (incorporated by reference from Registrant's registration
statement on Form SB-2, as amended (File No. 33-98478)).
4.9 Warrant issued to John Prendergast to purchase 37,500 shares of Registrant's common
stock (incorporated by reference from Exhibit 10.24 to the Registrant's Form 10-QSB
for the quarter ended March 31, 1997).
4.10 Warrant No. 1 issued to Joseph Stevens & Company, Inc. to purchase 150,000 shares
of Registrant's Common Stock exercisable January 4, 2000 (incorporated by reference
to Exhibit 10.28 to the Registrant's Form 10-KSB for the year ended December 31,
1999).
4.11 Warrant No. 2 issued to Joseph Stevens & Company, Inc. to purchase 150,000 shares
of Registrant's Common Stock exercisable January 4, 2001 (incorporated by reference
to Exhibit 10.29 to the Registrant's Form 10-KSB for the year ended December 31,
1999).
4.12 Warrant No. 3 issued to Joseph Stevens & Company, Inc. to purchase 150,000 shares
of Registrant's Common Stock exercisable January 4, 2002 (incorporated by reference
to Exhibit 10.30 to the Registrant's Form 10-KSB for the year ended December 31,
1999).
4.13 Warrant certificate issued May 12, 2000, by the Registrant to TeraComm Research,
Inc. (incorporated by reference from Exhibit 10.3 to the registrant's Form 10-QSB
for the quarter ended June 30, 2000).
4.14 Form of stock purchase warrants issued on September 28, 2000 to BH Capital
Investments, L.P., exercisable for shares of common stock of the Registrant
(incorporated by reference to Exhibit 10.6 to the Registrant's Form 10-QSB for the
quarter ended September 30, 2000).
4.15 Form of stock purchase warrants issued on September 28, 2000 to Excalibur Limited
Partnership, exercisable for shares of common stock of the Registrant (incorporated
by reference to Exhibit 10.7 to the Registrant's Form 10-QSB for the quarter ended
September 30, 2000).
4.16 Warrant certificate issued March 8, 2001 by the Registrant to Dian Griesel
(incorporated by reference to Exhibit 10.56 to the Registrant's Form 10-QSB for the
quarter ended March 31, 2001).
10.1 Investors' rights agreement dated July 1995, between Registrant, Dr. Lindsay A.
Rosenwald and VentureTek, L.P. (incorporated by reference from Registrant's
registration statement on Form SB-2, as amended (File No. 33-98478)).
10.2 License and assignment agreement dated March 25, 1994, between Optex
Ophthalmologics, Inc., certain inventors and NeoMedix Corporation, as amended
(incorporated by reference to the exhibits to the Registrant's registration
statement on Form SB-2, as amended (File No. 33-98478)).
10.3+ License agreement dated March 28, 1994, between Channel Therapeutics, Inc. and Dr.
Sumner Burstein (incorporated by reference to the exhibits to the Registrant's
registration statement on Form SB-2, as amended (File No. 33-98478)).
10.4 1995 stock option plan, as amended (incorporated by reference to Exhibit 10.18 to
the Registrant's Form 10-QSB for the quarter ended September 30, 1996).
10.5 Amendment No. 1 to development & license Agreement between Optex and Bausch & Lomb
Surgical, Inc. dated September 16, 1999 (incorporated by reference to Exhibit 10.1
to the Registrant's Form 10-QSB for the quarter ended September 30, 1999).
10.9 Financial advisory and consulting agreement between Registrant and Joseph Stevens &
Company, Inc. dated January 4, 2000 (incorporated by reference to Exhibit 10.27 to
the Registrant's Form 10-KSB for the year ended December 31, 1999).
10.10 Employment agreement dated as of April 10, 2000, between Registrant and A. Joseph
Rudick (incorporated by reference to Exhibit 10.7 of the Registrant's Form 10-QSB/A
for the quarter ended June 30, 2000).
10.11 Employment agreement dated as of April 3, 2000, between Registrant and Frederic P.
Zotos (incorporated by reference to Exhibit 10.8 of the Registrant's Form 10-QSB/A
for the quarter ended June 30, 2000).
10.12 First Amendment to Employment Agreement dated as of February 20, 2001 between the
Registrant and Frederic P. Zotos.
10.13 First Amendment to Employment Agreement dated as of February 20, 3002 between the
Registrant and A. Joseph Rudick.
10.14 Second Amendment to Employment Agreement dated as of April 1, 2002 between the
Registrant and Frederic P. Zotos.
10.15 Second Amendment dated as of April 1, 2002 to Employment Agreement dated April 3,
2000 between the Registrant and A. Joseph Rudick.
10.16 Common stock purchase agreement dated March 16, 2001, between Registrant and Fusion
Capital Fund II, LLC (incorporated by reference from Exhibit 10.55 of the
Registrant's Form 10-QSB for the quarter ended March 31, 2001).
10.17 Common stock purchase agreement dated as of May 7, 2001, between Registrant and
Fusion Capital Fund II, LLC (incorporated by reference to Exhibit 10.57 of
Amendment No. 1 to the Registrant's registration statement on Form SB-2/A filed
June 29, 2001 (File 333-61974)).
10.18 Form of registration rights agreement between Registrant and Fusion Capital Fund
II, LLC (incorporated by reference to Exhibit 10.58 of Amendment No. 1 to the
Registrant's registration statement on Form SB-2/A filed June 29, 2001 (File
333-61974)).
10.19 Asset purchase agreement dated as of January 31, 2001, between Bausch & Lomb
Incorporated, Bausch & Lomb Surgical, Inc., Optex Ophthalmologics, Inc. and the
Registrant (the "January 31 Asset Purchase Agreement") (incorporated by reference
to Exhibit 10.59 to the Registrant's Form 10-QSB for the quarter ended September
30, 2001).
10.20 Amendment No. 1 dated March 2, 2001, to the January 31 Asset Purchase Agreement
(incorporated by reference to Exhibit 10.60 to the Registrant's Form 10-QSB for the
quarter ended September 30, 2001).
10.21 Asset purchase agreement dated as of April 23, 2001, between Registrant, Gemini
Technologies, Inc., and IFN, Inc. (incorporated by reference to Exhibit 10.61 to
the Registrant's Form 10-QSB for the quarter ended September 30, 2001).
10.22 Securities purchase agreement dated November 2, 2001, between Registrant and
certain investors (incorporated by reference to Exhibit 10.1 to the Registrant's
Form 8-K filed on December 6, 2001).
10.23 Placement agreement dated November 6, 2001, between Joseph Stevens & Company, Inc.
and the Company (incorporated by reference to Exhibit 10.2 to the Registrant's Form
8-K filed on December 6, 2001).
10.24 Asset purchase agreement dated as of April 23, 2001, among the Registrant, Gemini
Technologies, Inc. and IFN, Inc. (incorporated by reference to Exhibit 10.64 of the
Company's Form 10-KSB for the year ended December 31, 2001).
16.1 Letter of KPMG LLP (incorporated by reference to Exhibit 99 filed with the
Registrant's Form 8-K filed on December 12, 2002).
21.1 Subsidiaries of the Registrant.
23.1 Consent of J.H. Cohn LLP
23.2 Consent of KPMG LLP
99.1 Certifications of Chief Executive Officer and Chief Financial Officer
--------------------
+ Confidential treatment has been granted as to certain portions of these
exhibits.