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Tapestry Pharmaceuticals, Inc. and Subsidiaries Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

Commission File Number 0-24320

TAPESTRY PHARMACEUTICALS, INC.
(Exact name of Registrant as specified in its charter)

4840 Pearl East Circle, Suite 300W
Boulder, Colorado 80301
(Address of principal executive office, including zip code)

(303) 516-8500
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes ý    No o

As of October 29, 2004, the registrant had 33,335,401 shares of common stock, $0.0075 par value, outstanding.

Tapestry Pharmaceuticals, Inc. and Subsidiaries
Table of Contents

Exhibits

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Part I
FINANCIAL INFORMATION

Item 1. Financial Statements

Tapestry Pharmaceuticals, Inc. and Subsidiaries

Consolidated Condensed Balance Sheets

(In thousands, except per share data)

See accompanying notes to Consolidated Condensed Financial Statements.

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Tapestry Pharmaceuticals, Inc. and Subsidiaries

Consolidated Condensed Statements of Operations

(In thousands, except per share data)

(Unaudited)

See accompanying notes to Consolidated Condensed Financial Statements.

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Tapestry Pharmaceuticals, Inc. and Subsidiaries

Consolidated Condensed Statements of Cash Flows

(In thousands)

(Unaudited)

See accompanying notes to Consolidated Condensed Financial Statements.

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Tapestry Pharmaceuticals, Inc.

Notes to Consolidated Condensed Financial Statements

September 29, 2004

(Unaudited)

Note 1. Basis of Presentation

        The accompanying financial statements are unaudited. However, in the opinion of management, the financial statements reflect all adjustments, consisting of only normal recurring adjustments, necessary for fair presentation. Interim results of operations may not be indicative of results for the full year. These financial statements should be read in conjunction with the Company's Annual Report on Form 10-K, as amended, for the year ended December 31, 2003.

Note 2. Reclassifications

        Certain data in the consolidated condensed financial statements of the prior year have been reclassified to conform to the current year presentation.

Note 3. Discontinued Operations

Sale of Paclitaxel Business

        On December 12, 2003, the Company sold its worldwide generic injectable paclitaxel business to Mayne Pharma (USA) Inc. (f/k/a/ Faulding Pharmaceutical Co.) ("Mayne Pharma"), a subsidiary of Mayne Group Limited, for cash in the amount of $71.7 million minus an inventory adjustment of $4.6 million to reflect the Company's actual inventory as of the closing. The sale resulted in a gain of $54.6 million before taxes, and $54.1 million after taxes. Proceeds from the sale are being used to fund the development and commercialization of therapeutic products and for general corporate purposes. In addition, approximately $21.9 million of the proceeds of the purchase price was paid to Abbott Laboratories ("Abbott") to retire all outstanding debt, interest and payables the Company owed to Abbott. The assets sold to Mayne Pharma included paclitaxel manufacturing assets, yew plantations, domestic and international issued and pending paclitaxel patents, a worldwide registration dossier, worldwide development and supply agreements, inventories and settlement of accounts receivable. The Company retained all of its intellectual property not used in connection with the business sold. This transaction with Mayne Pharma provided that the Company was entitled to a portion of the cash proceeds received in connection with a patent infringement lawsuit against Mylan Laboratories, Inc. ("Mylan Laboratories") (Note 9). This lawsuit was settled in July 2004 and the Company received $3.0 million as its share of the proceeds.

        The paclitaxel business was reported as a discontinued operation in 2003; accordingly, results from the prior year have been reclassified to reflect this. Summary results of operations of the paclitaxel business for the quarter and nine months ended were (in thousands):

        Paclitaxel income in 2004 consisted primarily of the $3.0 million patent infringement settlement with Mylan Laboratories and a $250,000 business interruption insurance claim filed and collected in

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2004 for losses sustained in the third quarter of 2003, resulting from a hurricane that disrupted operations of a contract manufacturer employed by Tapestry.

Gene Isolation and Service Business

        In December 2003, the Company made the decision to sell its gene isolation and service business and, therefore, accounted for it as a discontinued operation. Net operating loss related to this business totaled $0 and $123,000 during the third quarters of 2004 and 2003, respectively. For the first nine months, the net operating loss totaled $221,000 and $388,000 for 2004 and 2003, respectively. In the first quarter of 2004, the Company recorded an impairment loss of $205,000 for all assets that had previously been identified as held for sale.

        Assets held for sale at December 31, 2003 that related to the discontinued operations of the gene isolation and service business were as follows (in thousands):

Note 4. Investments

        Short-term investments consisted of investment grade commercial paper due within one year. Long-term investments consisted of investment grade commercial paper with maturities beyond one year. All investments are classified as available-for-sale and are recorded at market value. Unrealized losses are reflected in comprehensive net loss.

        Comprehensive loss for the Company consists of net loss and unrealized holding gains and losses on available-for-sale investments as presented below (in thousands):

Note 5. Property, Plant and Equipment

        Property, plant and equipment consisted of the following (in thousands):

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Note 6. Investment in ChromaDex, Inc.

        In April 2003, the Company sold its technical and analytical services group to privately held ChromaDex, Inc. in exchange for approximately 15%, on a fully diluted basis, of the then outstanding common stock of ChromaDex, Inc. The Company valued this investment at approximately $1.4 million based upon the fair market value of the net assets sold to ChromaDex. ChromaDex is a supplier of phytochemical reference standards for the nutraceutical, dietary supplement and functional food industries.

Note 7. Net Income (Loss) Per Share

        Basic earnings per share is measured as the income or loss available to common stockholders divided by the weighted average outstanding common shares for the period. Diluted earnings per share is similar to basic earnings per share but presents the dilutive effect on a per share basis of potential common shares (e.g. stock options, warrants and convertible securities) as if they had been converted at the beginning of the periods presented. Potential common shares that have an antidilutive effect are excluded from diluted earnings per share. Net loss per common share is computed using the weighted average number of shares of common stock outstanding. The following is a reconciliation of the shares (denominator) of the basic and diluted per share computations (in thousands):

Note 8. Stock Options

        Tapestry accounts for its stock options to employees and directors in accordance with Accounting Principles Board Opinion No. 25 ("APB 25"), Accounting for Stock Issued to Employees, and related interpretations. Pursuant to APB No. 25, compensation expense to employees is recorded only if the fair value of the underlying stock exceeds the exercise price on the date of grant. Stock options granted to consultants are accounted for under the fair value method, in accordance with Statement of Financial Accounting Standards No. 123 ("SFAS 123"), Accounting for Stock-Based Compensation.

        Pro forma information regarding net income and earnings per share is required by SFAS 123 and Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation Transition and Disclosure, which requires that the information be determined as if the Company had accounted for employee stock options granted subsequent to December 31, 1994 under the fair value method of that statement. Tapestry estimated the fair value for these options at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for the quarters ended September 29, 2004 and October 1, 2003, respectively: risk-free interest rates of 3.81% and 1.98% to 2.65%; no expected dividend; volatility factors of 1.237 and 1.228; and generally an estimated expected life range of four to six years. For the nine months ended September 29, 2004 and October 1, 2003, respectively, Tapestry estimated the fair market value of these options with the following assumptions: risk-free interest rates of 2.51% to 3.81% and 1.98% to 3.22%; no expected dividend;

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volatility factors of 1.028 to 1.237 and 1.187 to 1.228; and generally an estimated expected life range of four to six years.

        For purposes of pro forma disclosures, the Company amortizes to expense the estimated fair value of the options over the options' vesting period. Tapestry's pro forma information is as follows (in thousands, except per share amounts):

Note 9. Mylan Litigation Settlement

        On July 6, 2004, the Company announced Mayne Pharma reached an agreement to settle the patent infringement lawsuit against Mylan Laboratories regarding stabilized formulations of paclitaxel. Pursuant to the terms of the agreement, the Company received a $3.0 million cash payment as its share of the proceeds from this settlement, which was recorded in discontinued operations in the third quarter of 2004 (Note 3).

Note 10. Recent Accounting Pronouncements

        We have evaluated all recent accounting pronouncements and believe that such accounting pronouncements do not have a material effect on our consolidated financial statements.

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

        The following discussion and analysis provides information that management believes is relevant to an assessment and understanding of the results of operations of Tapestry Pharmaceuticals, Inc. You should read this discussion in conjunction with the Financial Statements and Notes included elsewhere in this report and with Management's Discussion and Analysis of Financial Condition and Results of Operations for the year ended December 31, 2003 contained in our 2003 Annual Report on Form 10-K, as amended. Certain statements set forth below constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, referred to as the "Reform Act." See "Special Note Regarding Forward-Looking Statements."

General

        Tapestry Pharmaceuticals, Inc. ("we," "Tapestry" or "the Company") is a pharmaceutical company focused on the development of proprietary therapies for the treatment of cancer and hereditary disease. We believe that our compounds function by novel biological and/or chemical mechanisms and, therefore, if successful in clinical trials, may add to the amelioration of their specific disease targets.

        We are also actively engaged in evaluating the in-licensing or purchasing of new therapeutic agents and/or related technologies. Our evaluation of new products and technologies may involve the examination of individual molecules, classes of compounds, or platform technologies, in cancer as well as other therapeutic areas. Acquisitions of new products or technologies may involve the purchase or licensing of such products or technologies, or the acquisition of, or merger with, other companies.

        We incur substantial research and development expense related to the development of our proprietary anti-cancer agents, and the development of our proprietary genomic technologies. We incurred significant losses, including losses from continuing operations of $7.8 million and $19.2 million for the three and nine month periods, respectively, ended September 29, 2004. Our accumulated deficit was $81.7 million as of September 29, 2004. We anticipate that losses will continue until such time, if ever, as we are able to generate sufficient revenue to support our development operations, including the research and development activity discussed below.

        Our ability to raise capital to support our operations currently depends upon the successful development and commercialization of products based on our proprietary oncology and genomic technologies. Our oncology program consists of developing both targeted as well as non-targeted compounds for the treatment of cancer. Our lead program in hereditary disease is for the treatment of Huntington's Disease. All of our products and technologies are in the early stages of development and we cannot assure you that our efforts will be successful.

Research and Development

        Our current business is focused on research and development of proprietary therapies for the treatment of cancer and hereditary disease. In 2003, we were also engaged in research and development related to our paclitaxel business, which is aggregated in discontinued operations. The following table lists our research and development expense by division (in thousands):

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        The following chart identifies our four therapeutic products that are in the most advanced stages of development. All of these products are in preclinical research. We are focusing our efforts and resources on the development of these products.

        The chart above does not reflect ongoing research programs for which a development lead has not been advanced into preclinical development. It also excludes the Sickle Cell hereditary disease program and the Bombesin targeted oncology program. These programs have been removed from development status until either additional ongoing research warrants their return to development status or a final decision has been made to cancel research in these programs.

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TPI 287 is a third generation taxane, designed to overcome one of the primary mechanisms leading to taxane drug resistance, specifically the development of multi-drug resistance. To date, we have completed some in vitro and in vivo preclinical studies on TPI 287 that indicate activity of TPI 287 in several cancer cell lines. We are currently conducting additional preclinical studies on TPI 287 designed to better delineate the antineoplastic activity of TPI 287. We are assembling a regulatory package for filing an Investigational New Drug ("IND") application with the FDA. Assuming that we are able to manufacture and formulate sufficient quantities of TPI 287 to complete our preclinical studies, and assuming the results of the currently ongoing preclinical study demonstrate sufficient efficacy and do not demonstrate any safety concerns, we expect to file this IND with the U.S. Food and Drug Administration ("FDA") by the end of 2004. Assuming that the IND is filed by the end of this year, that we are able to manufacture and formulate sufficient quantities of TPI 287 for clinical testing, and that the FDA allows us to proceed with clinical trials under such IND without requiring submission of additional information, we believe we will be able to commence human clinical trials with TPI 287 in the first half of 2005.



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TPI 273 is a proprietary quassinoid analog. Quassinoids are complex polyfunctional, polycyclic natural products of the plant family Simaroubaceae, which exhibit antineoplastic activity. Tapestry has in-licensed several quassinoid compositions as well as their isolation and synthesis from Advanced Research and Technology Institute, Inc. We have completed several in vitro and in vivo preclinical studies on TPI 273 and additional preclinical studies are in progress to better delineate the antineoplastic activity of TPI 273 in vivo. We are assembling a regulatory package for filing an IND application with the FDA. Assuming that the results of the currently ongoing preclinical studies demonstrate sufficient efficacy, and do not demonstrate any safety concerns, we expect to file this IND with the FDA by the end of 2004. Assuming that the IND is filed by year-end and that the FDA allows us to proceed with clinical trials under such IND without requiring submission of additional information, we believe that we will be able to commence human clinical trials with TPI 273 in the first half of 2005.



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TPI 284 is a HN-1 Taxane conjugate, which consists of a synthetic peptide ligand chemically linked to paclitaxel. We in-licensed intellectual property in this area from the University of Texas M. D. Anderson Cancer Center. This technology is also covered by a patent licensed from the University of Alabama. It is believed that the HN-1 peptide ligand is selectively internalized by squamous cell carcinomas found in head and neck tumors. Thus far, our experiments have not

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indicated that the HN-1 peptide is internalized by any normal cells. To date, we have completed several in vitro and in vivo preclinical studies on TPI 284, which indicate that TPI 284 may have activity in certain cancer cell lines. We are currently conducting additional studies on TPI 284 to further demonstrate the specificity of the peptide. We expect the results from these studies to be completed during the first half of 2005. Assuming that the results of the currently ongoing preclinical studies demonstrate sufficient specificity and efficacy, and do not demonstrate any safety concerns, we believe we will be able to file an IND for TPI 284 with the FDA in mid 2005. Assuming that the IND is filed in mid 2005, and the FDA allows us to proceed with clinical trials under such IND without requiring submission of additional information, we believe that we will be able to commence human clinical trials with TPI 284 by the end of 2005.

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Huntington's disease is a progressive inherited, neurological disorder resulting in degeneration of nerve cells in the brain. It is characterized by a lethal huntingtin protein aggregate formed in neural tissue. Eventually, the patient suffers dementia, uncontrolled movements, and death. There is no known cure for this rare disease. Symptoms usually appear between the ages of 30 and 45, although younger people can also develop the disease. In the United States the disease affects approximately 100 of every one million people. We are developing an oligonucleotide therapy, which may potentially slow the progression of the disease or may eliminate the death of the nerve cells. We are in the early stages of this program and we can provide no assurance that we will be successful in this development effort. To date, we have conducted several in vitro studies to determine the effects of our oligonucleotide therapy in a model neuronal cell based assay and in a biochemical assay that detects molecules that disrupt protein aggregation. In addition to these in vitro experiments, we have also recently concluded a study in an animal model of Huntington's Disease. The data from this animal study indicated that the oligonucleotide therapy might have an effect on mitigating the motor deficits seen in Huntington's Disease. We are currently initiating an additional animal study, which is designed to establish the dose response for the oligonucleotide therapy in a transgenic mouse model of Huntington's disease and may validate the results of previous studies as to the efficacy of the oligonucleotide therapy. We expect to have the data from this new study by the end of the second quarter of 2005. We are currently assessing the feasibility and requirements for entering into clinical trials with our Huntington's oligonucleotide therapy.

        Certain Risks and Limitations.    The clinical development of these drugs has many risks of failure. Drugs must be proven safe and effective before they can be approved for human use. The advancement of all of these drugs into human clinical trials is dependent on the positive outcome of pending preclinical studies, decisions by the FDA, institutional review boards, and other regulatory factors. Patient recruitment for clinical trials drugs can be difficult, and clinical trials may be delayed or prolonged due to inability to recruit a sufficient number of patients. In addition, the manufacture of these drug candidates is a complex process. Manufacturing these drugs for use in clinical trials, according to FDA guidelines, presents a number of significant risks and challenges. The manufacture of TPI 287, in particular, is a very complex and difficult process. If we are unable to manufacture adequate supplies of any of our compounds for our clinical trials, our timelines for development could be delayed significantly. With regard to the oligonucleotide therapy, the search for an appropriate intercranial delivery mechanism may present a significant obstacle to human therapy, even if the oligonucleotide itself proves to be active. Given the uncertainty of drug development, it is impossible to say how long the clinical development of any of these compounds will take.

        We cannot be sure that we will begin clinical testing for these programs at the times stated above. We also cannot estimate the cost of the effort necessary to complete these programs or when, if ever, we will receive material revenues from these programs. Successfully completing these programs and obtaining an approved product for sale in the United States and offshore will be dependent upon our raising additional capital. We cannot be certain that we will be able to obtain capital on acceptable

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terms. We have included a number of the risks and uncertainties associated with completing our product development plans in the Special Note Regarding Forward-Looking Statements, below.

        We continuously reassess all of our research and development efforts, including those for the therapeutic products described above. At any time, we may expand, delay, terminate or dispose of all or any portion of our research and development program and therapeutic products and may acquire rights to new product candidates.

Quarter Ended September 29, 2004 Compared to Quarter Ended October 1, 2003

        Research and Development Expense.    Research and development expense for the third quarter of 2004 was $5.7 million, an increase of $3.5 million from the prior year quarter. Research and development expense relating to the paclitaxel business was $200,000 in 2003, and is included in discontinued operations. Oncology research and development expense increased $3.6 million to $4.6 million in the third quarter of 2004, and genomics research and development expense increased $100,000 to $1.1 million in the third quarter of 2004. Increased oncology and genomics expense was primarily due to our preclinical development activities consisting of higher contract manufacturing expense ($2.1 million), consulting and outside services expense ($800,000) and compensation and fringe benefits expense ($800,000).

        General and Administrative Expense.    General and administrative expense for the third quarter of 2004 was $2.0 million, a decrease of $1.3 million from the prior year quarter. Approximately $600,000 of our general and administrative expense in 2003 was incurred in connection with our paclitaxel business and is included in discontinued operations. The $1.3 million decrease was primarily due to lower compensation and fringe benefits expense due to fewer employees ($400,000), lower depreciation expense resulting from the disposition of fixed assets ($200,000), lower insurance expense ($200,000) primarily resulting from lower rates and the disposition of fixed assets, lower legal expense ($200,000), and lower maintenance expense ($200,000) due to costs incurred in 2003 with the relocation of our headquarters facility.

        Interest Income.    Interest income for the second quarter of 2004 increased by $200,000 compared to the prior year quarter. The increase was attributable to higher average balances of interest-bearing investments.

        Interest Expense.    Prior year interest on debt owed to Abbott Laboratories of $300,000 is included in discontinued operations.

        Discontinued Operations.    Income from discontinued operations for the third quarter of 2004 was $3.0 million, an increase of $4.1 million from the prior year quarter. Income of $3.0 million in the third quarter of 2004 was our share of the cash proceeds of the Mayne Pharma patent infringement lawsuit against Mylan Laboratories. As a result of the sale of our paclitaxel business in December 2003, we anticipate having no material sales revenue in 2004.

Nine Months Ended September 29, 2004 Compared to Nine Months Ended October 1, 2003

        Research and Development Expense.    Research and development expense for the nine months ended September 29, 2004 was $12.8 million, an increase of $5.0 million from the 2003 period. Research and development expense relating to the paclitaxel business was $900,000 in 2003, and is included in discontinued operations. Oncology research and development expense increased $5.4 million to $9.0 million in the 2004 period, and genomics research and development expense increased $500,000 to $3.8 million in the 2004 period. Increased oncology and genomics expense was primarily due to our preclinical development activities consisting of higher contract manufacturing expense ($3.0 million), consulting and outside services expense ($1.4 million) and compensation and fringe benefits expense ($1.1 million), partially offset by lower supplies expense ($500,000).

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        General and Administrative Expense.    General and administrative expense for the nine months ended September 29, 2004 was $6.2 million, a decrease of $2.9 million from the 2003 period. Approximately $1.0 million of our general and administrative expense in 2003 was incurred in connection with our paclitaxel business and is included in discontinued operations. The $2.9 million decrease was primarily due to lower compensation and fringe benefits expense due to fewer employees ($1.0 million), lower depreciation expense resulting from the disposition of fixed assets ($600,000), lower consulting and outside services expense ($400,000), lower rent and facility costs ($400,000), lower insurance expense due to lower rates and the disposition of fixed assets ($300,000), and lower maintenance expense ($300,000) primarily due to costs incurred in 2003 with the relocation of our headquarters facility.

        Interest Income.    Interest income for the nine months ended September 29, 2004 increased by $400,000 compared to the 2003 period. The increase was attributable to higher average balances of interest-bearing investments.

        Interest Expense.    Prior year interest expense on debt owed to Abbott Laboratories of $1.1 million is included in discontinued operations.

        Discontinued Operations.    Income from discontinued operations was $3.0 million for the nine months ended September 29, 2004, a decrease of $1.6 million from the 2003 period. As a result of the sale of our paclitaxel business in December 2003, we anticipate having no material sales revenue in 2004. The income recognized in 2004 primarily resulted from our share of the cash proceeds of the Mayne Pharma patent infringement lawsuit against Mylan Laboratories totaling $3.0 million.

Liquidity and Capital Resources

        Our requirements for research and development and other expenditures have been, and will continue to be, significant. As of September 29, 2004, we had a working capital balance of $28.7 million compared to a working capital balance of $47.1 million at December 31, 2003. Our cash, cash equivalents, short-term and long-term investments totaled $41.6 million and $50.8 million at September 29, 2004 and December 31, 2003, respectively. From inception, we have funded our capital requirements primarily with the net proceeds of public offerings of common stock of $21.1 million of private placements of equity and convertible securities of $67.5 million of the exercise of warrants and options of $8.0 million, of debt of $8.1 million, and with the sale of the paclitaxel business resulting in gross proceeds of $71.7 million.

        In August 2003, we filed an equity shelf registration statement with the U.S. Securities and Exchange Commission ("SEC") covering the issuance of up to 6.5 million shares of our common stock and 1.0 million shares of our preferred stock. In March 2004, we issued 2.0 million shares of our common stock under this registration statement, leaving 4.5 million shares of common stock remaining available to be issued. This registration statement is intended to give us the flexibility to take advantage of financing opportunities from time to time when market conditions are favorable. We may sell the stock covered by this registration statement at prices and in a manner we determine from time to time.

        TL Ventures Funds, one of our principal institutional investors, advised us that it believes that completion of the sale of our paclitaxel business to Mayne Pharma entitled it to have its $8.0 million of Company 4% convertible subordinated debentures redeemed. We dispute this position. A legal proceeding to resolve the matter is now pending in Delaware.

        We believe existing resources will be adequate to fund our operations and capital expenditures for at least the next 12 months. However, pharmaceutical development is a costly, risky and time intensive activity. To bring our various programs to completion will require us to raise additional capital in the future. We cannot assure you that we will be able to obtain additional capital on terms that will be acceptable to us. In addition, we may seek to in-license or purchase new products or technologies. The cost and related capital expenditures of acquiring and developing such resources may be significant, and

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we may not be able to obtain capital for the development of these products or technologies on terms acceptable to us.

        Working Capital and Cash Flow:    Cash and cash equivalents were $2.3 million at both September 29, 2004 and December 31, 2003. This was primarily due to $13.6 million of net cash used in operating activities, which includes the receipt of $3.0 million from the settlement of the Mylan litigation, offset by the net proceeds from the sale of common stock totaling $4.8 million and the net proceeds from the sale of short-term and long-term investments totaling $8.9 million. With the sale of the paclitaxel business in December 2003, we no longer generate cash from operating activities.

        In connection with the sale of the paclitaxel business, all related inventories were sold with the business. The majority of our accounts receivable were settled with the sale of the paclitaxel business, as were certain liabilities. We anticipate that the level of our accounts receivable and inventories will remain negligible, as we do not anticipate any material sales revenue during 2004.

Critical Accounting Policies

        The Company's critical accounting policies are presented in its Annual Report on Form 10-K, as amended, for the year ended December 31, 2003. There were no changes to these critical accounting policies during the nine months ended September 29, 2004.

Special Note Regarding Forward-Looking Statements

        The statements in this report that are not historical facts are forward-looking statements that represent management's beliefs and assumptions as of the date of this report, based on currently available information. Forward-looking statements can be identified by the use of words such as "believe," "intend," "estimate," "may," "will," "should," "anticipated," "expected," "trusts" or comparable terminology or by discussions of strategy. Such forward-looking statements may include, among others:

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statements concerning our plans, objectives and future economic prospects, such as matters relative to developing new products;



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the availability of patent and other protection for our intellectual property;



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the completion of preclinical studies, clinical trials and regulatory filings;



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the prospects for, exclusivity provided for, and timing of, regulatory filings, clearances and approvals;



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the need and plans for, and availability of, additional capital;



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the amount and timing of capital expenditures;



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the timing of product introductions and sales;



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the availability of raw materials;



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the ability to manufacture acceptable preclinical and clinical material in adequate quantities;



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the ability to outsource activities;



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the future acquisition of products or business entities;



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prospects for future operations; and



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other statements of expectations, beliefs, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts.

        Although we believe that the expectations reflected in such forward-looking statements are reasonable, we cannot assure you that these expectations will prove to be correct. Such forward-looking

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statements involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance or achievements, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among other things, those identified above under "Research and Development—Certain Risks and Limitations" and the following:

Risks Related to Research and Development

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Our product candidates and technologies are in an early state of development and there is a high risk that they may never be commercialized either because of the costs of continuing development or because our research and development fails to produce any products of value.



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Our research and development efforts over a broad range of new potential products and technologies will materially adversely affect our financial position.



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Our product candidates and technologies must undergo rigorous clinical testing and regulatory approvals, which will substantially delay or prevent us from marketing any products.



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Manufacture of our product candidates for use in clinical trials, particularly TPI 287, can be a complex and difficult process; if we are unable to manufacture adequate quantities of any of these compounds, development could be significantly delayed.



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Our oncology and genomic technologies are still new and in development; very little data exists relative to the amount necessary to have the products approved in the United States and new information may arise which may cause us delays in designing our protocols, submitting applications that satisfy all necessary regulatory review requirements, and ultimately initiating and completing the clinical trials of our products.



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We may be required to obtain rights to proprietary technologies to further develop our business, which may not be available or may be costly.



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Our therapy for Huntington's Disease requires an appropriate intercranial delivery mechanism; failure to identify such a mechanism could be a significant obstacle to human therapy.



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Adverse events in the field of oncology and genomics may negatively impact regulatory approval or public perception of our potential products and technologies resulting in decreased demand.



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Our ability to maintain our licenses for intellectual property is dependent upon our ultimate success in our development programs.



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We may be unable to attract and retain the qualified employees we need to be successful.



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Testing of our product candidates and technologies relies heavily on the voluntary participation of both study centers and patients in our clinical trials, which are not within our control, and could, therefore, substantially delay or prevent us from completing development of our products.



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Our operations may be impaired unless we can successfully manage our growth.



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If we acquire any other products or business operations, we will incur a variety of costs, and we may never realize the anticipated benefits of the acquisition.



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We may not be successful in obtaining required foreign regulatory approvals, which would prevent us from marketing our products internationally.



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We rely on third parties to perform certain services for us and any interruption or termination of these arrangements would adversely affect our business.



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Our use of hazardous materials exposes us to the risk of material environmental liabilities, and we may incur substantial additional cost to comply with environmental laws in connection with the operation of our research and manufacturing facilities.

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Risks Related to the Pharmaceutical Business We May Develop in the Future

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Acceptance of our product candidates in the marketplace is uncertain, and failure to achieve market acceptance will limit our ability to generate revenue and become profitable.



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We expect that we will face significant competition, which may limit our ability to become profitable.



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Technological change may make any products and technologies we develop less attractive or obsolete.



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If we are unable or fail to adequately protect our proprietary technologies, third parties may be able to use our technology, which could impair our ability to commercialize our product candidates, and to compete in the marketplace.



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Litigation or third-party claims of intellectual property infringement would require us to spend substantial time and money and may adversely affect our ability to develop and commercialize future products.



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We have no experience in manufacturing our product candidates, and currently no manufacturing facilities, which raises an uncertainty about our ability to manufacture our product candidates cost-effectively.



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We have no experience in marketing or selling our product candidates and technologies, which raises an uncertainty about our ability to commercialize our product candidates cost-effectively.



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We may be required to rely on strategic partners for the development, marketing and manufacturing of future products and technologies which may delay or impair our ability to generate significant revenue and may otherwise adversely affect our profitability.



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In the event we receive regulatory approval for our product candidates, we will be subject to ongoing regulatory obligations.



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Legislative and regulatory proposals may adversely affect our business.



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If product liability lawsuits are successfully brought against us, we may incur substantial liabilities and may be required to limit commercialization of our product candidates.



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We may be unable to effectively price our products or obtain adequate reimbursement for sales of our products, which would prevent our products from becoming profitable.

Risks Related to Financing Our Operations

•

We have a history of net losses. We expect to continue to incur net losses, and we may not achieve or maintain profitability.



•

If we fail to obtain the capital necessary to fund our operations when needed, we may be forced to reduce or discontinue our operations.



•

The outcome of our dispute with TL Ventures Funds regarding redemption of their debentures could reduce our available cash.

Risks Related to Our Status as a Public Company

•

Our stock price is volatile, and your investment in our stock could decline in value.



•

Future sales and issuances of common stock may dilute our stockholders or cause our stock price to fall.



•

If we fail to continue to meet all applicable Nasdaq SmallCap requirements and Nasdaq determines to delist our common stock, the delisting could adversely affect the market liquidity of our common stock and the market price of our common stock could decrease.

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•

We implemented anti-takeover provisions in 1996 that may reduce the market price of our common stock.

Other Risks Related to Our Business

•

The loss of our Chairman and Chief Executive Officer, Leonard P. Shaykin or other key executives, could severely harm our business.



•

We may be unable to renew or extend the leases on our leased facilities.

        These and other factors related to the Company's business are described in more detail under the caption "Risk Factors" or "Special Note Regarding Forward-Looking Statements" in the Company's documents filed from time to time with the Securities and Exchange Commission. Should one or more of these risks materialize (or the consequences of such a development worsen), or should the underlying assumptions prove incorrect, actual results could differ materially from those forecasted or expected. We undertake no obligation to update any of the forward-looking statements after the date of this Quarterly Report on Form 10-Q to conform such statements to actual results.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

        We currently invest our excess cash balances in money market accounts, and short-term and long-term investments that are subject to interest rate risk. The amount of interest income we earn on these funds will decline with a decline in interest rates. Our investments are subject to a loss of principal with an increase in interest rates if sold prior to their maturity. However, due to the short-term nature of the majority of our investments, the high credit quality of our portfolio and our ability to hold our investments until maturity, an immediate change in interest rates would not have a material impact on our financial position, results of operations or cash flows.

Item 4. Controls and Procedures

        The Company maintains a system of disclosure controls and procedures. The term "disclosure controls and procedures," as defined by regulations of the SEC, means controls and other procedures that are designed to ensure that information required to be disclosed in the reports that the Company files or submits to the SEC under the Securities Exchange Act of 1934, as amended ("the Act"), is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits to the SEC under the Act is accumulated and communicated to the Company's management, including its Chief Executive Officer and its Chief Financial Officer, as appropriate to allow timely decisions to be made regarding required disclosure. The Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of September 29, 2004. Based upon that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company required to be included in the Company's periodic SEC filings.

        Any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

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Part II—Other Information

Item 1. Legal Proceedings

        On July 6, 2004, we announced Mayne Pharma reached an agreement to settle the patent infringement lawsuit against Mylan Laboratories regarding stabilized formulations of paclitaxel. Pursuant to the terms of the agreement, we received a $3.0 million cash payment as our share of the proceeds from this settlement, which we recorded in discontinued operations in the third quarter of 2004.

        See our Form 10-Q for the quarter ended June 30, 2004 for disclosure of a development affecting our legal proceeding with two TL Ventures funds.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

        The Company transferred 18,359 shares of common stock to its Employee Stock Ownership Plan in August 2004. As a transfer by the Company to a noncontributory benefit plan, no sale of securities was involved.

Item 3. Defaults upon Senior Securities

        Not applicable.

Item 4. Submission of Matters to a Vote of Security Holders

        At Tapestry's annual meeting of stockholders on July 6, 2004, the matters listed below were submitted to a vote of Tapestry's stockholders with the following results:

1.

The election of three Class II directors to hold office until the 2007 Annual Meeting:

2.

Approval of the Company's 2004 Equity Incentive Plan:

3.

Approval of the Company's 2004 Non-Employee Directors' Stock Option Plan:

        A fourth proposal, to ratify the selection by the Board of Directors of Ernst & Young LLP as our independent auditors for the year ending December 31, 2003, was included in our proxy statement for the annual meeting but was not voted upon. Ernst & Young LLP resigned as our independent auditors between the mailing of the proxy statement and the date the annual meeting was held. Subsequently, we engaged Grant Thornton LLP as our independent auditors.

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Item 5. Other Information

        Not applicable.

Item 6. Exhibits

*

Filed herewith.

#

This certification "accompanies" the Form 10-Q to which it relates, is not deemed filed with the SEC and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Form 10-Q), irrespective of any general incorporation language contained in such filing.

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Signatures

        Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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