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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, 1996
OR
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from______________
to____________________
Commission File Number 0-100316
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ATLANTIC PHARMACEUTICALS, INC.
( Exact name of issuer as specified in its charter)
DELAWARE 36-3898269
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1017 Main Campus Drive, Suite 3900, Raleigh, North Carolina 27606
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(Address of principal executive offices) Zip Code
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Title of each class Name of each exchange on which registered
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Units, each consisting of one
share of Common Stock
and one Redeemable Warrant Nasdaq SmallCap Market
Common Stock, $.001 par value Nasdaq SmallCap Market
Redeemable Warrants Nasdaq SmallCap Market
Indicate by check mark whether the issuer (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 issuer
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of issuer'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 year ended December 31, 1996 was $97,644
As of March 19 ,1997 there were 2,913,720 outstanding shares of common stock,
par value $.001 per share.
The aggregate market value of the voting stock of the issuer held by
non-affiliates of the issuer on March 19, 1996 based on the closing sales price
of the stock as quoted by the Nasdaq SmallCap Market on such date was
$14,342,191.
Documents incorporated by reference: The issuer's definitive Proxy statement for
its 1997 annual meeting of stockholders is incorporated by reference in Part III
of this Form 10-KSB.
Transitional Small Business Disclosure Format: YES [ ] NO [X]
<PAGE>
PART I
ITEM 1- BUSINESS
Atlantic Pharmaceuticals, Inc. ("Atlantic" or the "Company") is
engaged in the development of biomedical and pharmaceutical products and
technologies. The Company's strategy consists of: (i) identifying
university-based research projects and other developing technologies in the
medical and biomedical field that it believes have potential commercial
viability and address significant unmet market needs which, if successful, have
the potential to be market leaders; (ii) funding research and development of
such projects in exchange for licenses or other rights to commercialization of
such technologies; and (iii) attempting to commercialize such technology through
the Company's own resources, by sublicensing such technology or by entering into
agreements with one or more pharmaceutical or biomedical companies for clinical
development, manufacturing and marketing of such products. The Company believes
that it can play a role in bridging the clinical development gap between basic
research and commercial distribution channels through sale or sublicense of the
products or technology to other pharmaceutical or biomedical companies.
The Company has identified and acquired four licenses to develop
products and technologies which the Company believes may be useful in the
treatment of a variety of diseases, including cancer, infection, ophthalmic
disorders, inflammation, cardiovascular diseases and dermatological conditions.
The primary focus of the Company's activities for the foreseeable future will be
the research and development of these proposed products and technologies.
Currently, all of the Company's products and technologies are in early stages of
development and no assurance can be given as to the successful development,
production or commercialization of any of the Company's proposed products or
technologies. From time to time, if the Company's resources allow, the Company
may explore the acquisition and subsequent development and commercialization of
additional biomedical and pharmaceutical products and technologies consistent
with the foregoing strategy. The Company does not expect to have sufficient
resources to pursue any such additional products or technologies in the
foreseeable future.
OVERVIEW OF THE CORPORATE STRUCTURE
The Company's products and technologies under development
currently are each held by the Company or by one of its three majority-owned
subsidiary operating companies that are managed by the Company: Optex
Ophthalmologics, Inc., a Delaware corporation ("Optex"), Gemini Technologies,
Inc., a Delaware corporation ("Gemini"), and Channel Therapeutics, Inc., a
Delaware corporation ("Channel") (collectively, the "Operating Companies"). By
providing a centralized management team to oversee the transition of products
and technologies from the preclinical development stage to commercialization,
the Company intends to minimize administrative costs, thereby maximizing capital
available for research and development. In addition, Atlantic intends to budget
and monitor funds and other resources among itself and the Operating Companies,
thereby providing the Company with the flexibility to allocate resources among
products and technologies based on the progress of individual projects. The
Company has four Scientific Advisory Boards composed of scientists who provide
advise to the Company on its four platform technologies.
TECHNOLOGY APPLICATIONS AND PRODUCT CANDIDATES
THE CT-3 TECHNOLOGY (ATLANTIC PHARMACEUTICALS, INC.)
Background
Inflammation is an integral part of the body's response to, and
healing of, injury to cells. Pain and
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swelling, which are cardinal signs of inflammation, occur when cells
release hormone-like substances called prostaglandins in response to arthritis,
bronchial asthma, physical damage or infection. Currently available analgesic
(anti-pain) and anti-inflammatory drugs include narcotics, non-narcotic
analgesics, corticosteroids and nonsteroidal anti-inflammatory drugs ("NSAIDs").
Although highly effective as analgesics, the usefulness of
narcotics is limited by their addictive potential and their adverse respiratory
and circulatory effects. In contrast, non-narcotic analgesics are relatively
free from adverse side-effects but, due to their low potency, have limited
usefulness in cases of severe and/or chronic pain.
Use of corticosteroids, which are highly effective as
anti-inflammatory agents, is limited by their severe side effects. The utility
of corticosteroids is limited in the short-term by the total suppression of
underlying disease symptoms, such as infections, that can continue undetected.
Furthermore, prolonged use can result in degradation of body tissue, causing,
for example, steroid induced osteoporosis. NSAIDs, such as aspirin, ibuprofen
and indomethacin, are generally safer for long-term administration, but they too
can cause significant side effects. NSAIDs prevent pain and inflammation by
inhibiting the enzyme which permits the body to make prostaglandins. However,
most NSAIDs have the side effect of inhibiting the production of protective
prostaglandins in the gut, thereby exposing chronic users to the increased risk
of ulcer formation and gastrointestinal bleeding. (See the Table below). Current
estimates place hospitalizations in excess of 200,000 per year and deaths from
NSAID-induced gastropathy in excess of 10,000 per year on a world-wide basis.
Moreover, it has been estimated that 25% of all patients undergoing chronic
NSAID therapy develop some degree of ulceration.
<TABLE>
<CAPTION>
=============================================================================================================
RELATIVE RISK OF GASTRO-INTESTINAL BLEEDING WITH CURRENT NSAIDS (1)
-----------------------------
Relative Risk of
NSAIDs in Current Use GI Bleeding
-----------------------------
<S> <C>
Azapropazone 23.4
-----------------------------
Piroxicam 18.0
-----------------------------
Multiple NSAIDs 8.9
-----------------------------
Indomethacin 6.3
-----------------------------
Ketoprofen 5.4
-----------------------------
Diclofenac 3.9
-----------------------------
Naproxen 3.1
-----------------------------
Ibuprofen 2.9
-----------------------------
Other 2.9
-----------------------------
No use 1.0
=============================================================================================================
<FN>
Adapted from Lancet, March 26, 1994
1) The table sets forth the relative risk posed by the use of the listed NSAIDs
in chronic NSAID therapy as compared to a base line of no use (assigned value of
1.0), as noted in the table.
2) Metenamic Acid, Fenbuten, Fenoprofen, Flurbiprofen, Diflunisal,
Sulindac, Tenoxicam, Tiaprofenic Acid, Etodolac and Nabumetone.
</TABLE>
Although a major focus of pharmaceutical research for many years has
been the development of safe, powerful anti-inflammatory drugs, no such
universally applicable and safe drug has been developed. Despite the foregoing
complications of chronic use of NSAIDs, in 1994 U.S. prescription sales of
NSAIDs exceeded $1.4 billion.
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The CT-3 Technology and its Application
The Company has acquired an exclusive, worldwide license to a U.S. patent
and corresponding foreign applications covering a group of compounds, one of
which, "CT-3," the Company believes may be useful in the treatment of pain and
inflammation based upon its analgesic and anti-inflammatory properties and its
potential for a reduced side effect profile as compared to current
anti-inflammatory drugs.
The Company is developing CT-3, a 1,1-dimethyheptyl derivative
of the carboxylic tetrahydrocannabinol (THC-7C), and the Company believes CT-3
may have an improved safety profile in comparison to traditional NSAIDs. Animal
studies have shown that CT-3 lacks the ulcerogenic side effects of NSAIDs.
Animal studies using dosages significantly higher than the anticipated
therapeutic dose of CT-3 have indicated a lack of central nervous system side
effects, and the Company believes that CT-3 provides analgesic and
anti-inflammatory effects without the psychoactive effects of THC-7C. Because
CT-3 is derived from THC-7C, which lacks the ulcerogenic effects of NSAIDs, the
Company believes that CT-3 will also lack the ulcerogenic effects of NSAIDs. In
addition, preliminary cellular and animal studies have shown CT-3 to be a more
potent anti-inflammatory agent than THC-7C, exhibiting analgesic and
anti-inflammatory effects at microgram doses. Recent data comparing CT-3 to a
placebo show a significant reduction of inflammation in an animal arthritis
model. The preliminary data on CT-3 makes it an attractive candidate for
development as an analgesic and anti-inflammatory agent with the potential to
overcome the major side effects of traditional NSAIDs. Initially, the Company
intends to explore the development of oral and injectable formulations of CT-3
as a treatment for pain and inflammation associated with arthritis and an
aerosol formulation of CT-3 as a treatment for inflammation associated with
bronchial asthma. The Company believes that it is not yet known whether this
compound is more clinically efficacious than traditional NSAIDs.
Research and Development Activities
The Company may seek one or more corporate partners to clinically
evaluate CT-3 for analgesic and anti-inflammatory indications. No assurance can
be given that the Company will be able to secure such a partner on terms
favorable to the Company, if at all. In vivo experiments are being conducted to
determine comparative activity of the CT-3 compound to that of several
comparative agents. Toxicology studies leading to an IND program are planned to
begin in 1997.
Proprietary Rights
The Company has an exclusive worldwide license to a U.S. patent and
corresponding foreign applications covering a group of compounds, including
CT-3, from Dr. Sumner Burstein (the "Burstein License"). The Burstein License
extends until the expiration of the underlying patent rights. The issued U.S.
patent expires in 2012. The Company has the right under the Burstein License to
sublicense its rights thereunder. The Burstein License provides for the payment
of royalties by the Company to Dr. Burstein based on sales of products and
processes incorporating technology licensed under the Burstein License and a
percentage of any income derived from any sublicense of the licensed technology.
Furthermore, pursuant to the terms of the Burstein License, the Company must
satisfy certain other terms and conditions in order to retain its license rights
thereunder. If the Company fails to comply with certain terms of the Burstein
License, its license rights under the Burstein License could be terminated. See
"Risk Factors -- Dependence on License and Sponsored Research Agreements."
THE CATAREX TECHNOLOGY (OPTEX OPHTHALMOLOGICS, INC.)
Background
One of the most common disorders of aging is the development of a
cataract, or a clouding of the normally clear crystalline lens inside the eye,
resulting in either increased glare, decreased vision or both. Cataracts
progressively degrade visual acuity, eventually requiring surgical extraction of
the affected lens to restore vision. Cataracts may exist at birth, result from
aging or may be caused by injury or disease. Cataract surgery is currently the
most frequently performed surgical procedure in the United States among persons
over the age of 60. Each year, approximately 3.6 million cataract procedures are
performed
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worldwide (approximately one-third in the United States). The Company
anticipates that, in light of the demographics of an aging population, the
number of procedures performed annually will increase during the next 15 years.
Currently there are two principal technologies that are widely used for
cataract removal: extracapsular cataract extraction ("ECCE") and
Phacoemulsification ("Phaco"). Until recently, the majority of cataract
procedures were done as ECCE which is generally a simple and reliable procedure
that is applicable to all densities of cataracts. The ECCE procedure requires
direct surgical extraction of the entire lens nucleus in one step through an
approximately 11 millimeter ("mm") incision in the eye and an approximately 6mm
opening in the lens capsule contained inside the eye. The residual cortical
material (the softer material that surrounds the lens nucleus) is then removed
using a mechanical irrigation/aspiration device. Following complete removal of
the lens, an intraocular synthetic polymer lens is inserted into the eye and
placed in the remaining portion of the lens capsule. Although an effective
procedure, ECCE has a number of disadvantages, including significant surgery
time, post-operative recovery time and visual rehabilitation time. Phaco is an
ultrasound fragmentation of the lens nucleus performed through an approximately
3mm to 5mm surgical incision in the eye, and a slightly smaller opening in the
lens capsule than that used in ECCE. In the Phaco procedure the surgeon uses an
ultrasound handpiece to sculpt or carve out the lens nucleus. Phaco is less
invasive than ECCE, allowing for faster recovery and improved post-operative
outcome by reducing astigmatism induced by wound healing. Phaco, however, also
has disadvantages, including the need for substantial training and skill in
order to perform the procedure. In addition, the ultrasound energy and stray
fragments of the lens nucleus resulting from the Phaco procedure can damage the
cells that line the inner layer of the cornea resulting in the degeneration of
such layer.
The Catarex Technology and its Applications
The Company is developing the Catarex technology to overcome the
limitations and deficiencies of traditional ECCE and Phaco cataract extraction
techniques. Catarex removes the lens nucleus and cortex in a single step through
a small incision in the eye while leaving the lens capsule functionally intact.
The Catarex device is inserted into the eye through an approximately 3mm
incision and advanced into the lens capsule through a 1.5mm incision. Once
positioned in the lens capsule, the device is activated and the lens nucleus and
cortex are removed through the action of fluid vortex forces drawing the lens
material to the device where it is mechanically emulsified and aspirated.
Following lens removal, the incision in the lens capsule is slightly enlarged
and a new synthetic lens is then placed into the lens capsule.
The Company believes that Catarex will provide several advantages over
existing technologies which should enhance acceptance by the ophthalmologic
community. If successfully developed, Catarex will allow the entire cataract,
including the lens nucleus and cortex, to be removed simultaneously through
incisions in the eye and anterior lens capsule that will be smaller than the
incisions required by either the ECCE or the Phaco procedures. The Company
anticipates that the smaller incision in the eye will reduce operative and
post-operative time and trauma, thus hastening visual recovery. This shortened
recovery time could prove to be an advantage for patients and especially
important in an era of managed care and cost containment. In addition, the
anterior capsule of the lens is expected to remain functionally intact, thereby
shielding the cells that line the inner surface of the cornea from unwanted
damage. The Catarex technology is expected to be easy to learn because the
operating principles of the device eliminate the need for skill-intensive
sculpting, which is required in the Phaco procedure. It is anticipated that the
Catarex handpiece will simply be inserted into the lens capsule and the cataract
will be removed in a matter of minutes.
Research and Development Activities
The feasibility of Catarex has been demonstrated in ex vivo bovine,
porcine and human cataract lens preparations. In these studies the lens was
removed intact from the test eye and studied in a special system developed by
Optex's scientific founders. These studies demonstrated complete, effective and
rapid removal of the lens nucleus and cortical material through a 2mm to 3mm
puncture in the anterior lens capsule. Using a clinical prototype of the Catarex
device, Optex recently completed an in vivo study conducted in a porcine model
that demonstrated rapid and complete removal of the lens, and a pathology study
found this lens removal had no observed adverse effects on the structure of the
eye. Optex has completed work on a functional clinical prototype of the Catarex
device. The Company expects the preclinical work on this
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<PAGE>
product to be completed in 1997 and, if successful, a 510(k) application will be
filed as soon as practicable thereafter.
Proprietary Rights
Pursuant to an assignment agreement with the inventor and certain other
individuals and a corporation to which the inventor had previously assigned
rights, Optex owns two U.S. patents and corresponding foreign applications
covering Catarex and its method of use for cataract removal. See "Risk Factors
- -- Dependence on License and Sponsored Research Agreements."
2-5A CHIMERIC ANTISENSE TECHNOLOGY (GEMINI TECHNOLOGIES, INC.)
Background
Physiological functions of humans and microorganisms are carried out by
proteins. For example, in infectious diseases, proteins of invading organisms
carry out the infectious process, and in many malignancies, it is the presence
of a defective protein that causes a cell's abnormal growth. The instructions to
produce the approximately 100,000 different proteins in the human body are
stored in the cell's nucleus in the form of DNA. DNA contains the information
that is the blueprint for protein molecules. In order to produce a protein, a
cell must first copy or transcribe the relevant information from the DNA into a
messenger ribonucleic acid ("mRNA") molecule. Such information is represented by
the precise sequence, or arrangement, of the nucleotide chain comprising the
mRNA molecule. Once the information is transcribed into an mRNA molecule, it is
transported out of the cell's nucleus into the cytoplasm where, by a process
known as translation, the information encoded by the mRNA is used to synthesize
a protein.
One of the key properties of short nucleotide chains
("oligonucleotides") is the ability of complementary sequences ("sense" and
"antisense") to bind to each other. This process is highly specific, with the
specificity being determined by the sequence of the oligonucleotides involved.
The use of antisense molecules as therapeutics is a relatively new and
experimental concept. Generally, antisense therapeutics use oligonucleotides
(the antisense) to alter the production of disease-causing proteins by binding
to specifically targeted strands of mRNA (the sense). In a disease condition, it
is the information encoded by the mRNA that is utilized to synthesize the
disease-causing proteins. By utilizing the sequence of the target mRNA, an
antisense molecule (an "antisense oligonucleotide") capable of binding to the
target mRNA can be designed. The effect of this binding is to block the ability
of the mRNA to produce such disease-causing proteins. The mRNA which is
complexed with the antisense may then be gradually degraded by enzymes known as
ribonucleases (RNases) or the antisense may directly impair the ability of the
mRNA to be decoded into protein. To date, no such therapeutics have been
approved by the FDA but several compounds are being utilized in human clinical
trials by other companies.
The 2-5A Chimeric Antisense Technology and its Application
Gemini is developing a novel antisense technology that combines a type
of 2'-5' oligoadenylate (2-5A) with standard antisense compounds to form a
chimeric molecule (the "2-5A Chimeric Antisense Technology"). Gemini has
licensed a U.S. patent and related patent applications as well as corresponding
foreign applications relating to this technology from The Cleveland Clinic
Foundation (the "Cleveland Clinic"). Two of the key components of the 2-5A
system are 2-5A, a short oligoadenylate, and 2-5A-dependent ribonuclease L
(RNase L), an enzyme. RNase L, found in most human cells, becomes activated
after interacting with a 2-5A molecule; RNase L then rapidly degrades mRNA.
2-5A Chimeric Antisense Technology is based on utilizing the 2-5A
activation of RNase L and the specificity of antisense oligonucleotides. By
coupling a 2-5A molecule with a specific antisense oligonucleotide, a chimeric
molecule is formed that has the capacity to target specific mRNA for rapid
destruction. The Company believes that targeted destruction of specific mRNA
together with the catalytic activity of 2-5A dependent RNase L will make 2-5A
Chimeric Antisense Technology therapeutics more efficacious than antisense
compounds under development by other companies. The catalytic properties of the
2-5A Chimeric Antisense Technology increases the rate at which the targeted mRNA
molecule is degraded. Furthermore, 2-5A Chimeric Antisense Technology has been
shown to cause the catalytic decay
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of mRNA by purified 2-5A dependent RNase L in in vitro assays. The Company
believes that the specificity and catalytic properties of the 2-5A Chimeric
Antisense Technology represent an improvement over existing antisense
therapeutics under development by other companies. In addition, the Company
believes that its 2-5A Chimeric Antisense Technology may be useful in
conjunction with such antisense therapeutics under development by third parties.
The Company is currently assessing the feasibility of targeting its
2-5A Chimeric Antisense Technology as a therapeutic for a number of disease
conditions, including respiratory syncytial virus (RSV), chronic myelogenous
leukemia and conditions modulated by 5-alpha reductase (such as androgenic
alopecia and acne vulgaris).
Research and Development Activities
Gemini's scientific founders, while conducting research at The National
Institutes of Health ("NIH") and the Cleveland Clinic, have been able to exploit
the 2-5A system to amplify the inhibitory effect of conventional antisense
oligonucleotides on protein synthesis. Dr. Robert Silverman at the Cleveland
Clinic is directing a research program that is working toward the in vitro
optimization of catalytic and kinetic parameters for the destruction of mRNA and
the targeted degradation of mRNA in cellular models of human disease. If such in
vitro studies prove successful, the Company intends to initiate pre-clinical
animal studies in mid-1997 to evaluate the 2-5A chimeric antisense molecules as
potential human therapeutics. Gemini pays Dr. Silverman an annual consulting fee
in connection with the research program at the Cleveland Clinic. In addition,
pursuant to the terms of an agreement, effective January 1995, between Gemini
and the Cleveland Clinic covering the terms of the sponsored research program,
Gemini made periodic payments to the Cleveland Clinic of approximately $25,000
per month. In addition, in January 1995 Gemini entered into a Cooperative
Research and Development Agreement (the "CRADA") with the NIH under the
direction of Dr. Paul Torrence, one of the scientific founders of Gemini. This
ongoing program is directed towards the optimization and improvements of the
chemical synthesis of the 2-5A chimeric antisense compounds. Gemini is currently
obligated to make periodic payments of approximately $15,000 per month to the
NIH for the CRADA program, as well as to pay an aggregate of approximately
$16,000 per month to three consultants who contribute to the CRADA program. The
parties are working to establish a new budget for the CRADA program for the
calendar year 1997. If Gemini fails to make such payments in accordance with the
terms of the CRADA or the parties are unable to agree on the terms of the CRADA
for any succeeding year, the NIH may terminate the agreement and no further
research would be performed thereunder. See "Risk Factors -- Dependence on
License and Sponsored Research Agreements."
Proprietary Rights
Gemini has an exclusive worldwide sublicense from the Cleveland Clinic
(the "Cleveland License") to a U.S. patent and related patent applications as
well as corresponding foreign applications relating to 2-5A Chimeric Antisense
Technology and its use for selective degradation of targeted mRNA. The rights
exclusively licensed by Gemini include rights obtained by the Cleveland Clinic
through an interinstitutional agreement (the "Interinstitutional Agreement")
with the NIH, the co-owner of the patent rights. The duration of the Cleveland
License extends until the expiration of the underlying patent rights. The
Cleveland License provides for the payment of royalties by Gemini to the
Cleveland Clinic based on sales of products and processes incorporating
technology licensed under the Cleveland License. Gemini has the right to
sublicense its rights under the Cleveland License, subject to the approval of
the NIH and provided that any sublicensee agrees to be bound by certain terms of
the Cleveland License. A percentage of any income derived from any sublicense of
the licensed technology will be paid to the Cleveland Clinic. Pursuant to the
terms of the Cleveland License, Gemini must satisfy certain other terms and
conditions in order to retain its license rights thereunder. These include, but
are not limited to, funding the research and development of the 2-5A Chimeric
Antisense Technology at the Cleveland Clinic and at the NIH, currently estimated
to total $1,000,000 to $3,000,000, payable over a period of five years, and an
obligation to use reasonable best efforts to bring products developed under the
Cleveland License to market. The Company and the Cleveland Clinic are currently
involved in a discussion concerning their respective rights and obligations
under the terms of the Cleveland license as well as the related sponsored
research agreement. Although the Company does not view these issues as material,
if the discussion is not resolved and the issues were deemed material, then the
Cleveland Clinic would have the right to terminate the Cleveland
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license. Such termination would have a material adverse effect on the
development of the Company's 2-5A Chimeric Antisense technology. A failure by
the Cleveland Clinic to discharge its obligations to the NIH under the
Interinstitutional Agreement, including an obligation by the Cleveland Clinic
and Gemini to take effective steps to achieve practical application of the
licensed technology, could have an adverse effect on the Cleveland License. In
addition, pursuant to the sponsored research agreement, Gemini will have an
exclusive license under the Cleveland License to any patentable technology
related to the 2-5A Chimeric Antisense Technology developed under the sponsored
program, and such license will be subject to the same terms as the Cleveland
License including the payment of royalties. See "Risk Factors -- Dependence on
License and Sponsored Research Agreements."
THE CYCLODEXTRIN TECHNOLOGY (CHANNEL THERAPEUTICS, INC.)
Background
Growth factors are protein molecules that bind to cell surface
receptors initiating a signal that can result in cell growth and
differentiation. Growth factors regulate a variety of physiological and
developmental processes, and their aberrant expression is associated with a
number of disease conditions. Restenosis and late vein graft failure are two
diseases caused by the inappropriate expression of growth factors which result
in smooth muscle proliferation and migration. Restenosis is the renarrowing of
the blocked arteries after opening by balloon angioplasty; late vein graft
failure is often caused by a narrowing of a grafted blood vessel following
bypass surgery. In both restenosis and late vein graft failure, growth factor
induced smooth muscle cell accumulation in the inner part of the vessel wall is
thought to play a pathological role.
Restenosis occurs in approximately 25% to 40% of patients within six
months of undergoing coronary angioplasty. Vein graft wall thickening is a
universal response to bypass surgery and in some patients causes severe
narrowing of the affected vein or artery causing a late failure rate of
approximately 50%. According to the American Heart Association/The 1995
Statistical Supplement Heart & Stroke Facts, more than 350,000 coronary
angioplasties and approximately 450,000 bypass surgeries are performed annually
in the United States. There are no currently available United States Food and
Drug Administration (the "FDA") approved therapeutics for the treatment of
restenosis or late vein graft failure. Several companies are currently marketing
vascular stents, which are metal-based devices that are designed to prevent
restenosis through the mechanical support of the previously blocked blood
vessel. Although recent studies have demonstrated that stenting has a superior
early anti-restenosis effect compared with balloon angioplasty, smooth muscle
growth around the stents continues to result in late restenosis. In addition,
the Company is aware of several competitors that are employing several different
approaches to develop therapeutics for the treatment of restenosis and late vein
graft failure.
The Cyclodextrin Technology and its Applications
Channel has licensed from the University of Pennsylvania ("Penn") a
patent and patent applications covering the use of anionic cyclodextrins and
derivatives thereof and such cyclodextrins combined with other therapeutic
agents (the "Cyclodextrin Technology") for the treatment of restenosis and late
vein graft failure and, potentially, for the treatment of ophthalmic disorders.
Cyclodextrins are a class of small, electrically neutral carbohydrate
molecules. Cyclodextrins as a class have been characterized by attributes which
cast serious doubt on their potential uses in medicine, namely low water
solubility, which can result in marked toxicity to the kidneys, and by their
tendency to destroy red blood cells.
The Company believes that these candidate compounds, which are anionic
sulfated derivatives of a cyclodextrin, may have the capability of interacting
with proteins ("growth factor proteins") and altering their action on cellular
proliferation. Channel is currently developing such cyclodextrin derivatives and
has shown that they are absorbable through the gut, potentially making them
orally active agents for the prevention of restenosis and late vein graft
failure following vascular procedures. In addition, the Company anticipates that
these derivatives will manifest very limited, if any, potential for toxicity to
the kidneys, due to their high water solubility.
If successfully developed, the Company believes that such a compound
could become an important
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oral, parenteral and/or topical treatment for restenosis. Channel is also
exploring other sulfated cyclodextrin compounds. In addition, Channel is
exploring the feasibility and efficacy of coating vascular stents with one of
Channel's proprietary sulfated cyclodextrin compounds. Channel is developing
other formulations of the Cyclodextrin Technology which could be applied at the
point and time of angioplasty or bypass surgery.
Research and Development Activities
In January 1996 Channel funded a contract research program at Penn. The
program has an approximate duration of 18 months with a budget of approximately
$400,000. The program focuses on (i) the further pre-clinical animal testing of
sulfated beta-cyclodextrins (the CT-1 and CT-2 compounds) and (ii) the design,
synthesis, purification, analysis and characterization of novel cyclodextrins
with differing bioavailability profiles with the goal of identifying a second
generation cyclodextrin compound which may have improved bioavailability for the
treatment of restenosis and late vein graft failure.
To date, a candidate compound of highly water soluble, anionic
cyclodextrin (the CT-1 compound) has been tested in several animal models of
vascular injury. Animals treated for either two or four weeks had reduced
restenosis with no observed side effects or toxic effects identified.
Preliminary pharmacokinetic analysis with a radiolabeled form of CT-1 has
demonstrated substantial bioavailability in rats. A second candidate molecule,
the CT-2 compound, which is a highly insoluble polymeric candidate compound, has
been used to locally treat blood vessels by placing it around the outside of the
vessel at the time of surgery. Studies with several animal protocols have
demonstrated the efficacy of the CT-2 compound in reducing restenosis in
arterial injury models and have demonstrated limited vein graft thickening after
vein graft bypass surgery in a rabbit model. Channel is conducting in vivo
studies with both the CT-1 compound and the CT-2 compound in porcine vascular
injury models.
Proprietary Rights
Channel has acquired a worldwide, exclusive license (the "Penn
License") to a patent and patent applications which Penn owns, is the sole and
exclusive licensee of or is a non-exclusive licensee of. The Penn License covers
the use of sulfated cyclodextrins, and derivatives thereof, and sulfated
cyclodextrins combined with other therapeutic agents for the treatment of
restenosis, late vein graft failure and ophthalmic disorders. The Penn License
expires on a country by country basis at the time when the patent rights
underlying the Penn License expire. The issued patents expire between 2010 and
2012. The Penn License provides for the payment of a royalty to Penn based on
sales of the products and processes incorporating the licensed technology.
Channel will also pay Penn a royalty based on sublicensing income. Channel must
also satisfy certain other terms and conditions specified in the Penn License
including, but not limited to, an obligation to use its best efforts to bring
any products developed under the Penn License to market. Failure to comply with
the terms of the Penn License may cause the termination of the Penn License. See
"Risk Factors -- Dependence on License and Sponsored Research Agreements."
MANUFACTURING AND MARKETING
None of the Company or the Operating Companies has, nor are they
expected to have in the foreseeable future, the resources to manufacture or
directly market any products that they may develop. In connection with their
respective research and development activities, the Company and the Operating
Companies may seek to enter into collaborative arrangements with pharmaceutical,
medical device, health care or chemical companies to assist in further funding
as well as in development, manufacturing and/or marketing of their respective
products. These partners may also be responsible for commercial scale
manufacturing, which may be subject to compliance with applicable FDA
regulations. The Company and each Operating Company anticipate that such
arrangements may involve the granting by it of the exclusive or semi-exclusive
rights to sell specific products and technology applications to specified market
segments or particular geographic territories in exchange for a royalty, joint
venture, future co-marketing or other financial interest.
To date, none of the Company or the Operating Companies has entered
into any collaborative commercial manufacturing or marketing agreements for any
of its proposed products. There can be no assurance that the Company or the
Operating Companies will be able to enter into any such arrangements on
favorable terms, or at all. Such collaborative marketing arrangements, whether
licenses, joint ventures
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or otherwise, may result in lower revenues than would otherwise be
generated if one or more of the Company or the Operating Companies conducted the
marketing of their own products and technology applications. See "Risk Factors
- -- Dependence on Others for Clinical Development of, Regulatory Approvals for
and Marketing of Pharmaceutical Products."
PATENTS AND PROPRIETARY RIGHTS
The success of the Company will depend in large part on its, its licensors'
and its collaborators' ability to obtain patents, defend their patents, maintain
trade secrets and operate without infringing upon the proprietary rights of
others, both in the United States and in foreign countries. The patent position
of companies relying upon pharmaceutical products and biotechnology is highly
uncertain and involves complex legal and factual questions. To date there has
emerged no consistent policy regarding the breadth of claims allowed in
biotechnology patents or the degree of protection afforded under such patents.
The Company relies on certain United States patents and pending United States
and foreign patent applications relating to various aspects of its products and
processes. All of these patents and patent applications are owned by third
parties and are licensed or assigned to the Company or the Operating Companies.
The patent application and issuance process can be expected to take several
years and entail considerable expense to the Company and the Operating
Companies, as they are responsible for such costs under the terms of their
respective license agreements. There can be no assurance that patents will issue
as a result of any such pending applications or that the existing patents and
any patents resulting from such applications will be sufficiently broad to
afford protection against competitors with similar technology. In addition,
there can be no assurance that such patents will not be challenged, invalidated,
or circumvented, or that the rights granted thereunder will provide competitive
advantages to the Company or any of the Operating Companies. The commercial
success of the Company will also depend upon avoiding infringement of patents
issued to competitors. A United States patent application is maintained under
conditions of confidentiality while the application is pending, so the Company
cannot determine the inventions being claimed in pending patent applications
filed by its competitors. Litigation may be necessary to defend or enforce the
Company's and/or the Operating Companies' patent and license rights or to
determine the scope and validity of others' proprietary rights. Defense and
enforcement of patent claims can be expensive and time consuming, even in those
instances in which the outcome is favorable to the Company, and can result in
the diversion of substantial resources from the Company's other activities. An
adverse outcome could subject the Company to significant liabilities to third
parties, require the Company to obtain licenses from third parties, or the
Company to alter its products or processes, or require the Company to cease
altogether any related research and development activities or product sales, any
of which may have a material adverse effect on the Company's and the Operating
Companies' respective businesses, results of operations and financial condition.
The Company and the Operating Companies have certain licenses from
third parties and in the future may require additional licenses from other
parties to develop, manufacture and market commercially viable products
effectively. The Company's commercial success will depend in part on obtaining
and maintaining such licenses. There can be no assurance that such licenses can
be obtained, or maintained, on commercially reasonable terms, if at all, that
the patents underlying such licenses will be valid and enforceable or that the
proprietary nature of the patented technology underlying such licenses will
remain proprietary.
GOVERNMENT REGULATION
The research, preclinical development, clinical trials, product
manufacturing and marketing to be conducted by the Company and each Operating
Company is subject to regulation by the FDA and similar health authorities in
foreign countries. The respective proposed products and technologies of the
Company and the Operating Companies may also be subject to certain other
federal, state and local government regulations, including, but not limited to,
the Federal Food, Drug and Cosmetic Act, the Environmental Protection Act, the
Occupational Safety and Health Act, and state, local and foreign counterparts to
certain of such acts. Compliance with such laws and regulations does not have,
nor is presently expected to have, a material adverse effect on the business of
any of the Company or the Operating Companies. However, neither the Company nor
the Operating Companies can predict the extent of the adverse effect on their
respective businesses or the financial and other cost that might result from any
government regulations arising out of future legislative, administrative or
judicial action. See "Risk Factors -- Government
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Regulation; No Assurance of Product Approval."
Approval Process for Therapeutics
Generally, the steps required before a pharmaceutical agent may be
marketed in the United States include: (i) preclinical laboratory tests, in vivo
preclinical studies in animals and formulation studies; (ii) the submission to
the FDA of an application for human clinical testing of an Investigational New
Drug Application (an "IND"), which must become effective before human clinical
trials commence; (iii) adequate and well-controlled human clinical trials to
establish the safety and efficacy of the drug; (iv) the submission of an New
Drug Application (an "NDA") to the FDA; and (v) the FDA approval of the NDA
prior to any commercial sale or shipment of the drug. In addition to obtaining
FDA approval for each product, each domestic drug manufacturing establishment
must be registered with, and approved by, the FDA. Domestic manufacturing
establishments are subject to biennial inspections by the FDA and must comply
with Good Manufacturing Practices ("GMP") for both drugs and devices. To supply
products for use in the United States, foreign manufacturing establishments must
comply with GMP and are subject to periodic inspection by the FDA or by
corresponding regulatory agencies in such countries under reciprocal agreements
with the FDA.
Preclinical tests include laboratory evaluation of product chemistry
and formulation, as well as animal studies to assess the potential safety and
efficacy of the product. Compounds must be formulated according to GMP, and
preclinical safety tests must be conducted by laboratories that comply with FDA
regulations. The results of the preclinical tests are submitted to the FDA as
part of an IND and are reviewed by the FDA prior to the commencement of human
clinical trials. There can be no assurance that submission of an IND will result
in FDA authorization to commence clinical trials.
Clinical trials involve the administration of the investigational new
drug to patients, under the supervision of a qualified principal investigator.
Clinical trials are conducted in accordance with Good Clinical Practices under
protocols that detail the objectives of the study, the parameters to be used to
monitor safety and the efficacy criteria to be evaluated. Each protocol must be
submitted to the FDA as part of the IND. Further, each clinical study must be
conducted under the auspices of an independent Institutional Review Board
("IRB") at the institution at which the study will be conducted. The IRB will
consider, among other things, ethical factors, the safety of human subjects and
the possible liability of the institution.
Clinical trials are typically conducted in three sequential phases, but
the phases may overlap. In Phase I, the initial introduction of the drug into
healthy subjects, the drug is tested for safety, dosage tolerance, metabolism,
distribution, excretion and pharmacodynamics (clinical pharmacology). Phase II
involves studies in a limited patient population to (i) determine the efficacy
of the drug for specific, targeted indications, (ii) determine dosage tolerance
and optimal dosage and (iii) identify possible adverse effects and safety risks.
When a compound is found to be effective and to have an acceptable safety
profile in Phase II evaluations, Phase III trials are undertaken to further
evaluate clinical efficacy and to further test for safety within an expanded
patient population at geographically dispersed clinical study sites. There can
be no assurance that Phase I, Phase II or Phase III testing will be completed
within any specific time period, if at all, with respect to any of the Company's
products subject to such testing. Furthermore, the Company or the FDA may
suspend clinical trials at any time if it is believed that the subjects or
patients are being exposed to an unacceptable health risk. See "Risk Factors --
Government Regulation; No Assurance of Product Approval."
The results of the pharmaceutical development, preclinical studies and
clinical studies are submitted to the FDA in the form of an NDA for approval of
the marketing and commercial shipment of the drug. The testing and approval
process is likely to require substantial time and effort and there can be no
assurance that any approval will be granted on a timely basis, if at all. The
FDA may deny an NDA if applicable regulatory criteria are not satisfied, require
additional testing or information or require post-marketing testing and
surveillance to monitor the safety of the Company's products if the FDA does not
view the NDA as containing adequate evidence of the safety and efficacy of the
drug. Notwithstanding the submission of such data, the FDA may ultimately decide
that the application does not satisfy its regulatory criteria for approval.
Moreover, if regulatory approval of a drug is granted, such approval may entail
limitations on the indicated uses for which it may be marketed. Finally,
approvals may be withdrawn if compliance with regulatory
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standards is not maintained or if problems occur following initial marketing.
Among the conditions for an NDA approval is the requirement that the prospective
manufacturer's quality control and manufacturing procedures conform to GMP. In
complying with standards set forth in these regulations, manufacturers must
continue to expend time, money and effort in the areas of production and quality
control to ensure full technical compliance.
Approval Process for Medical Devices
The approval process for a new medical device is, in general, less
extensive than that required for a therapeutic. The new device undergoes a
variety of preclinical laboratory tests as well as initial animal testing to
assess its efficacy and safety. The device must be manufactured according to GMP
and the preclinical animal testing must be conducted in laboratories that comply
with FDA regulations. Generally, there are two ways to obtain FDA approval for a
medical device. For novel devices, an Investigational Device Exemption followed
by a Product License Application is generally required. Utilizing this route,
extensive clinical testing is required prior to FDA approval. For devices which
are believed to be "substantially equivalent" to an already FDA approved device,
a 510(k) premarketing notification application can be filed. The intent of the
510(k) premarketing notification is to allow the manufacturer to market a device
if the device is "substantially equivalent" to a similar device legally on the
market. The FDA may require human clinical testing to support "substantial
equivalence" before granting marketing approval for the device. The Company
believes, based on prior FDA precedent, that the Catarex device should qualify
for marketing approval following a 510(k) notification. The Company also
believes that it will be required to perform clinical trials of the Catarex
device to demonstrate "substantial equivalence." No assurance can be given that
Catarex will qualify for a 510(k) premarket notification application or that
Catarex will receive such treatment pursuant to a 510(k) premarket notification
application. Any failure to so qualify or receive such treatment would have a
material adverse effect on Atlantic and Optex Ophthalmologics.
Clinical trials for a new device, if required, are conducted under the
supervision of a qualified principal investigator in accordance with Good
Clinical Practices following the protocol outlined in the 510(k) application.
The objective of the clinical trial is to determine that the new device is
"substantially equivalent" to another legally marketed device in performance,
design or intended use. The manufacturer may begin marketing of the new device
only after the FDA issues a letter confirming "substantial equivalence."
The testing and approval process for the Company's new medical device
products is likely to require substantial time and effort and there can be no
assurance that any approval will be granted on a timely basis, if at all.
For clinical investigation and marketing outside the United States, the
Company also is subject to foreign regulatory requirements governing human
clinical trials and marketing approval for drugs and devices.
COMPETITION
The business of the Company and each Operating Company is characterized
by intensive research efforts and intense competition. Many companies, research
institutes, hospitals and universities are working to develop products and
processes in the Company's fields of research. Most of these entities have
substantially greater financial, technical, manufacturing, marketing,
distribution and other resources than the Company and the Operating Companies.
Certain of such companies have experience in undertaking testing and clinical
trials of new or improved products similar in nature to those which the Company
and the Operating Companies are developing. In addition, certain of such
entities have already begun testing of similar compounds or processes and may
introduce such products or processes before any of the Company or the Operating
Companies. Accordingly, other companies may succeed in developing products
earlier than the Company or the Operating Companies or that are more effective
than those proposed to be developed by the Company or the Operating Companies.
Further, it is expected that competition in the Company's and each Operating
Company's field will intensify. See "Risk Factors -- Competition."
EMPLOYEES
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As of February 28, 1997, the Company and the Operating Companies had a
total of eight employees, all of whom are full-time employees. In addition, as
of February 28, 1997, the Company and the Operating Companies in the aggregate
utilized 25 consultants, scientific advisors and directors who devote only a
portion of their time to the business of the Company or an Operating Company.
The Company's future depends in significant part upon the continued service of
its key scientific advisors, consultants and technical and senior management
personnel and its continuing ability to attract and retain highly qualified
individuals. Competition for such individuals is intense and there can be no
assurance that the Company can retain its key personnel or that it can attract,
assimilate or retain other highly qualified individuals in the future. The
Company's employees are not represented by a labor union and are not the subject
of a collective bargaining agreement. The Company has not experienced any work
stoppages and considers its relations with its employees, consultants,
scientific advisors and directors to be good. See "Risk Factors -- Dependence
Upon Key Personnel and Consultants."
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RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS FORM 10-KSB, THE FOLLOWING RISK
FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE COMPANY AND ITS
BUSINESS. THIS FORM 10-KSB CONTAINS FORWARD LOOKING STATEMENTS RELATING TO
FUTURE EVENTS OR FUTURE FINANCIAL PERFORMANCE OF THE COMPANY WITHIN THE MEANING
OF SECTION 27A OF THE SECURITIES EXCHANGE ACT OF 1933 AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934(THE "EXCHANGE ACT"). INVESTORS ARE CAUTIONED
THAT SUCH STATEMENTS ARE ONLY PREDICTIONS AND THAT EVENTS OR RESULTS MAY DIFFER
MATERIALLY. IN EVALUATING SUCH STATEMENTS, INVESTORS SHOULD SPECIFICALLY
CONSIDER THE FOLLOWING FACTORS AND OTHER FACTORS SET FORTH IN THIS FORM 10-KSB
WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE INDICATED BY
SUCH FORWARD LOOKING STATEMENTS.
DEVELOPMENT STAGE COMPANIES; HISTORY OF OPERATING LOSSES; ACCUMULATED
DEFICIT; UNCERTAINTY OF FUTURE PROFITABILITY
The technologies and products under development by the Company are in the
research and development stage and no operating revenue, outside of grant
revenues, have been generated to date. The Company does not expect to generate
any revenues in the near future. As a result, the Company must be evaluated in
light of the problems, delays, uncertainties and complications encountered in
connection with newly established businesses. The Company has incurred operating
losses since its inception. As of December 31, 1996, the Company's working
capital and accumulated deficit were $ 2,012,689 and $8,438,660 , respectively.
Operating losses have resulted principally from costs incurred in identifying
and acquiring the technologies under development, research and development
activities and from general and administrative costs. The Company expects to
incur significant operating losses over the next several years, primarily due to
continuation and expansion of its research and development programs, including
preclinical studies and clinical trials for its pharmaceutical products under
development. The Company's ability to achieve profitability depends upon its
ability to develop pharmaceutical and medical device products, obtain regulatory
approval for its proposed products and enter into agreements for product
development, manufacturing and commercialization. There can be no assurance that
the Company will ever achieve significant revenues or profitable operations from
the sale of its proposed products.
QUALIFICATION OF AUDITOR'S OPINION
The Company's independent accountants have included an explanatory paragraph in
their report on the Company's financial statements at December 31, 1996,
included in the Company's Annual Report on Form 10-KSB, which states that the
Company has suffered recurring losses from operations and has limited capital
resources, both of which raise substantial doubt about the Company's ability to
continue as a going concern.
NEED FOR ADDITIONAL FINANCING; ISSUANCE OF SECURITIES BY THE OPERATING
COMPANIES; FUTURE DILUTION
The Company will require substantial additional financing to continue its
research, to complete its product development and to manufacture and market any
products that may be developed. Based solely upon its currently existing
consulting, license, sponsored research and employment agreements, the Company
currently anticipates that it will spend all of its current cash reserves by
late 1997. There can be no assurance, however, that the Company's current cash
reserves will not be expended prior to that time. The Company anticipates that
further funds may be raised through additional debt or equity financings
conducted either by the Company or by one or more of the Operating Companies, or
through collaborative ventures entered into between the Company or one or more
of the Operating Companies and a corporate partner. There can be no assurance
that the Company will be able to obtain additional financing or that such
financing, if available, can be obtained on terms acceptable to the Company. If
additional financing is not otherwise available, the Company will be required to
modify its business development plans or reduce or cease certain or all of its
operations. In such event, holders of securities of the Company will, in all
likelihood, lose their entire investment.
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Although the Company and each Operating Company will seek to enter into
collaborative ventures with corporate sponsors to fund some or all of such
activities, as well as to manufacture or market the products which may be
successfully developed, neither the Company nor any of the Operating Companies
currently has any such arrangements with corporate sponsors, and there can be no
assurance that the Company or any of the Operating Companies will be able to
enter into such ventures on favorable terms, if at all. In addition, no
assurance can be given that the Company or any of the Operating Companies will
be able to complete a subsequent private placement or public offering of their
securities. Failure by the Company or the Operating Companies to enter into such
collaborative ventures or to receive additional funding to complete its proposed
product development programs either through a public offering or a private
placement would have a material adverse effect on the Company.
In the event that the Company obtains any additional funding, such financings
may have a dilutive effect on the holders of the Company's securities. In
addition, if one or more of the Operating Companies raises additional funds
through the issuance and sale of its equity securities, the interest of the
Company and its stockholders in such Operating Company or Companies, as the case
may be, could be diluted and there can be no assurance that the Company will be
able to maintain its majority interest in any or all of the Operating Companies.
In addition, the interest of the Company and its stockholders in each Operating
Company will be diluted or subject to dilution to the extent any such Operating
Company issues shares or options to purchase shares of its capital stock to
employees, directors, consultants and others. In the event that the Company's
voting interest in any of the Operating Companies falls below 50%, the Company
may not be able to exercise an adequate degree of control over the affairs and
policies of such Operating Company as currently being exercised. In addition,
the Company has outstanding currently exercisable warrants to purchase
[3,765,250] shares of its Common Stock at exercise prices ranging from $5.50 to
$10.00, and the exercise price for most of such warrants is below the per share
price of the Common Stock as currently quoted on Nasdaq. The exercise of such
warrants, if any, may dilute the value of the Common Stock.
NO DEVELOPED OR APPROVED PRODUCTS
To achieve profitable operations, the Company, alone or with others, must
successfully develop, obtain regulatory approval for, introduce and market its
products under development. The great majority of the preclinical and clinical
development work for the products under development of the Company remains to be
completed. The Company has not generated, nor is it expected to generate in the
near future, any operating revenues. In addition, the Company has no
manufacturing or marketing facilities nor any contracts with any commercial
manufacturing or marketing entities. No assurance can be given that any of its
product development efforts will be successfully completed, that required
regulatory approvals will be obtained, or that any such products, if developed
and introduced, will be successfully marketed or achieve market acceptance.
TECHNOLOGICAL UNCERTAINTY AND EARLY STAGE OF PRODUCT DEVELOPMENT
The technologies and products which the Company intends to develop are in the
early stages of development, require significant further research, development
and testing and are subject to the risks of failure inherent in the development
of products based on innovative or novel technologies. These risks include the
possibility that any or all of the Company's proposed technologies and products
will be found to be ineffective or unsafe, that such technologies and products
once developed, although effective, are uneconomical to market, that third
parties hold proprietary rights that preclude the Company from marketing such
technologies and products or that third parties market superior or equivalent
technologies and products.
The Company's agreements with licensors do not contain any representations by
the licensors as to the safety or efficacy of the inventions or discoveries
covered thereby. The Company is unable to predict whether the research and
development activities it is funding will result in any commercially viable
products or applications. Further, due to the extended testing required before
marketing clearance can be obtained from the United States Food and Drug
Administration (the "FDA") or other similar agencies, the Company is not able to
predict with any certainty, when, if ever, the Company will be able to
commercialize any of its proposed technologies or products.
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GOVERNMENT REGULATION; NO ASSURANCE OF PRODUCT APPROVAL
The Company's proposed products and technologies are in very early stages of
development. The research, preclinical development, clinical trials, product
manufacturing and marketing to be conducted by the Company is subject to
regulation by the FDA and similar health authorities in foreign countries. FDA
approval of the Company's products, as well as the manufacturing processes and
facilities, if any, used to produce such products will be required before such
products may be marketed in the U.S. The process of obtaining approvals from the
FDA is costly, time consuming and often subject to unanticipated delays. There
can be no assurance that approvals of the Company's proposed products, processes
or facilities will be granted on a timely basis, or at all. In addition, new
government regulations may be established that could delay or prevent regulatory
approval of the Company's products under development. Any future failure to
obtain or delay in obtaining any such approval will materially and adversely
affect the ability of the Company to market its proposed products and the
business, financial condition and results of operations of the Company.
Even if regulatory approval of the Company's proposed products is granted, such
approval may include significant limitations on indicated uses for which any
such products could be marketed. Further, even if such regulatory approvals are
obtained, a marketed drug or device and its manufacturer are subject to
continued review, and later discovery of previously unknown problems may result
in restrictions on such product or manufacturer, including withdrawal of the
product from the market. Failure of the Company to obtain and maintain
regulatory approval of its proposed products, processes or facilities would have
a material adverse effect on the business, financial condition and results of
operations of the Company.
The Company's proposed products and technologies may also be subject to certain
other federal, state and local government regulations, including, but not
limited to, the Federal Food, Drug and Cosmetic Act, the Environmental
Protection Act, the Occupational Safety and Health Act and state, local and
foreign counterparts to certain of such acts. The Company intends to develop its
business to strategically address regulatory needs. However, the Company cannot
predict the extent of the adverse effect on its business or the financial and
other costs that might result from any government regulations arising out of
future legislative, administrative or judicial action.
DEPENDENCE ON LICENSE AND SPONSORED RESEARCH AGREEMENTS
The Company depends on license agreements that form the basis of its proprietary
technology, and, with the exception of Optex, the Company relies on sponsored
research agreements for its research and development efforts. The license
agreements that have been entered into by the Company typically require the use
of due diligence in developing and bringing products to market and the payment
of certain milestone amounts that in some instances may be substantial. With the
exception of Optex, the Company is also obligated to make royalty payments on
the sales, if any, of products resulting from such licensed technology and, is
responsible for the costs of filing and prosecuting patent applications and
maintaining issued patents. With the exception of Optex, the Company does not
currently have laboratory facilities, and, accordingly, certain research and
development activities of the Company is intended to be conducted by
universities or other institutions pursuant to sponsored research agreements.
The sponsored research agreements entered into and contemplated to be entered
into by the Company generally require periodic payments on an annual, quarterly
or monthly basis.
If the Company does not meet its financial, development or other obligations
under either its license agreements or its sponsored research agreements in a
timely manner, the Company could lose the rights to its proprietary technology
or the right to have the applicable university or institution conduct its
research and development efforts. If the rights of the Company under its license
or sponsored research agreements are terminated, such termination could have a
material adverse effect on the business and research and development efforts of
the Company.
UNCERTAINTY REGARDING PATENTS AND PROPRIETARY RIGHTS
The success of the Company will depend in large part on its or its licensors'
ability to obtain patents, defend their patents, maintain trade secrets and
operate without infringing upon the proprietary rights of
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others, both in the United States and in foreign countries. The patent position
of firms relying upon biotechnology is highly uncertain and involves complex
legal and factual questions. To date there has emerged no consistent policy
regarding the breadth of claims allowed in biotechnology patents or the degree
of protection afforded under such patents. The Company relies on certain United
States patents and pending United States and foreign patent applications
relating to various aspects of its products and processes. All of these patents
and patent applications are owned by third parties and are licensed or
sublicensed to the Company. The patent application and issuance process can be
expected to take several years and entail considerable expense to the Company,
as it is responsible for such costs under the terms of such license agreements.
There can be no assurance that patents will issue as a result of any such
pending applications or that the existing patents and any patents resulting from
such applications will be sufficiently broad to afford protection against
competitors with similar technology. In addition, there can be no assurance that
such patents will not be challenged, invalidated, or circumvented, or that the
rights granted thereunder will provide competitive advantages to the Company.
The commercial success of the Company will also depend upon avoiding
infringement of patents issued to competitors. A United States patent
application is maintained under conditions of confidentiality while the
application is pending, so the Company cannot determine the inventions being
claimed in pending patent applications filed by its competitors. Litigation may
be necessary to defend or enforce the Company's patent and license rights or to
determine the scope and validity of others' proprietary rights. Defense and
enforcement of patent claims can be expensive and time consuming, even in those
instances in which the outcome is favorable to the Company, and can result in
the diversion of substantial resources from the Company's other activities. An
adverse outcome could subject the Company to significant liabilities to third
parties, require the Company to obtain licenses from third parties, or require
the Company to alter its products or processes, or cease altogether any related
research and development activities or product sales, any of which may have a
material adverse effect on the Company's business, results of operations and
financial condition.
The Company has certain licenses from third parties and in the future may
require additional licenses from other parties to develop, manufacture and
market commercially viable products effectively. The Company's commercial
success will depend in part on obtaining and maintaining such licenses. There
can be no assurance that such licenses can be obtained or maintained on
commercially reasonable terms, if at all, that the patents underlying such
licenses will be valid and enforceable or that the proprietary nature of the
patented technology underlying such licenses will remain proprietary.
The Company relies substantially on certain technologies that are not patentable
or proprietary and are therefore available to its competitors. The Company also
relies on certain proprietary trade secrets and know-how that are not
patentable. Although the Company has taken steps to protect its unpatented trade
secrets and know-how, in part through the use of confidentiality agreements with
its employees, consultants and contractors, there can be no assurance that these
agreements will not be breached, that the Company would have adequate remedies
for any breach, or that the Company's trade secrets will not otherwise become
known or be independently developed or discovered by competitors.
The success of the Company is also dependent upon the skills, knowledge and
experience of its scientific and technical personnel. The management and
scientific personnel of the Company has been recruited primarily from other
scientific companies, pharmaceutical companies and academic institutions. In
some cases, these individuals may be continuing research in the same areas with
which they were involved prior to joining the Company. Although the Company has
not received any notice of any claims and knows of no basis for any claims, it
could be subject to allegations of violation of trade secrets and similar claims
which could, regardless of merit, be time consuming, expensive to defend, and
have a material adverse effect on the Company's business, results of operations
and financial condition.
UNCERTAINTY OF PRODUCT PRICING AND REIMBURSEMENT; HEALTH CARE REFORM AND RELATED
MEASURES
The levels of revenues and profitability of pharmaceutical and/or biotechnology
products and companies may be affected by the continuing efforts of governmental
and third party payors to contain or reduce the costs of health care through
various means and the initiatives of third party payors with respect to the
availability of reimbursement. For example, in certain foreign markets, pricing
or profitability of prescription pharmaceuticals is subject to government
control. In the United States there have been, and the Company expects that
there will continue to be, a number of federal and state proposals to implement
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similar governmental control. Although the Company cannot predict what
legislative reforms may be proposed or adopted or what impact actions taken by
federal, state or private payors for health care goods and services in response
to any health care reform proposals or legislation may have on its business, the
existence and pendency of such proposals could have a material adverse effect on
the Company in general. In addition, the Company's ability to commercialize
potential pharmaceutical and/or biotechnology products may be adversely affected
to the extent that such proposals have a material adverse effect on other
companies that are prospective collaborators with respect to any of the
Company's product candidates.
In addition, in both the United States and elsewhere, sales of medical products
and services are dependent in part on the availability of reimbursement to the
consumer from third party payors, such as government and private insurance
plans. Third party payors are increasingly challenging the prices charged for
medical products and services. If the Company succeeds in bringing one or more
products to the market, there can be no assurance that these products will be
considered cost effective and that reimbursement to the consumer will be
available or will be sufficient to allow the Company to sell its products on a
competitive basis.
DEPENDENCE UPON KEY PERSONNEL AND CONSULTANTS
The Company is highly dependent upon its officers and directors, as well as its
Scientific Advisory Board members, consultants and collaborating scientists.
Atlantic has only eight full-time employees, four of whom are officers of
Atlantic, and the loss of any of these individuals would have a material adverse
effect on the Company. Although Atlantic has entered into employment agreements
with each of its officers, such employment agreements do not contain provisions
which would prevent such employees from resigning their positions with Atlantic
at any time. The Company does not maintain key-man life insurance policies on
any of such key personnel. Each of the Company's non-employee directors,
advisors and consultants devotes only a portion of his or her time to the
Company's business. The loss of certain of these individuals could have a
material adverse effect on the Company.
The Company may seek to hire additional personnel. Competition for qualified
employees among pharmaceutical and biotechnology companies is intense, and the
loss of any of such persons, or the inability to attract, retain and motivate
any additional highly skilled employees required for the expansion of the
Company's activities could have a material adverse effect on the Company. There
can be no assurance that the Company will be able to retain its existing
personnel or to attract additional qualified employees.
The Company's scientific advisors are employed on a full time basis by unrelated
employers and some have one or more consulting or other advisory arrangements
with other entities which may conflict or compete with their obligations to the
Company. Inventions or processes discovered by such persons, other than those to
which the licenses may relate, those to which the Company is able to acquire
licenses for or those which were invented while performing consulting services
on behalf of the Company pursuant to a proprietary information agreement or
utilizing the Company's facilities, will not become the property of the Company,
but will remain the property of such persons or of such persons' full-time
employers. Failure to obtain needed patents, licenses or proprietary information
held by others could have a material adverse effect on the Company.
COMPETITION
The Company's business is characterized by intensive research efforts and
intense competition. Many companies, research institutes, hospitals and
universities are working to develop products and technologies in the Company's
fields of research. Most of these entities have substantially greater financial,
technical, manufacturing, marketing, distribution and other resources than the
Company. Certain of such companies have experience in undertaking testing and
clinical trials of new or improved products similar in nature to that which the
Company is developing. In addition, certain competitors have already begun
testing of similar compounds or processes and may introduce such products or
processes before the Company. Accordingly, other companies may succeed in
developing products earlier than the Company or that are more effective than
those proposed to be developed by the Company. Further, it is expected that
competition in the Company's fields will intensify. There can be no assurance
that the Company will be able to compete successfully in the future.
DEPENDENCE ON OTHERS FOR CLINICAL DEVELOPMENT OF, REGULATORY APPROVALS FOR
17
<PAGE>
AND MARKETING OF PHARMACEUTICAL PRODUCTS
The Company currently does not have the resources to directly manufacture,
market or sell any of the Company's proposed products and the Company has no
current plans to acquire such resources. The Company anticipates that it will,
in the future, enter into collaborative agreements with pharmaceutical and/or
biotechnology companies for the development of, clinical testing of, seeking of
regulatory approval for, manufacturing of, marketing of and commercialization of
certain of its proposed products. The Company may in the future grant to its
collaborative partners rights to license and commercialize any products
developed under these collaborative agreements, and such rights would limit the
Company's flexibility in considering alternatives for the commercialization of
such products. Under such agreements, the Company may rely on its respective
collaborative partners to conduct research efforts and clinical trials on,
obtain regulatory approvals for and manufacture, market and commercialize
certain of its products. The Company expects that the amount and timing of
resources devoted to these activities generally will be controlled by each such
individual partner. The inability of the Company to acquire such third party
manufacturing, distribution, marketing and selling arrangements for such
anticipated products would have a material adverse effect on the Company's
business. There can be no assurance that the Company will be able to enter into
any arrangements for the manufacturing, marketing and selling of its products,
or that, if such arrangements are entered into, such future partners will be
successful in commercializing products or that the Company will derive any
revenues from such arrangements.
RISK OF PRODUCT LIABILITY; NO INSURANCE
Should the Company develop and market any products, the marketing of such
products, through third-party arrangements or otherwise, may expose the Company
to product liability claims. The Company presently does not carry product
liability insurance. Upon clinical testing or commercialization of the Company's
proposed products, certain of the licensors require that the Company obtain
product liability insurance. There can be no assurance that the Company will be
able to obtain such insurance or, if obtained, that such insurance can be
acquired in sufficient amounts to protect the Company against such liability or
at a reasonable cost. The Company is required to indemnify the Company's
licensors against any product liability claims incurred by them as a result of
the products developed by the Company. None of the Company's licensors has made,
and are not expected to make, any representations as to the safety or efficacy
of the inventions covered by the licenses or as to any products which may be
made or used under rights granted therein or thereunder.
CONTROL BY EXISTING STOCKHOLDERS
Two principal stockholders of the Company beneficially own approximately [27%]
of the outstanding shares of Common Stock. Accordingly, such holders, if acting
together, may have the ability to exert significant influence over the election
of the Company's Board of Directors and other matters submitted to the Company's
stockholders for approval. The voting power of these holders may discourage or
prevent any proposed takeover of the Company.
NO ASSURANCE OF IDENTIFICATION OF ADDITIONAL PROJECTS
The Company is engaged in the development and commercialization of biomedical
and pharmaceutical products and technologies. From time to time, if the
Company's resources allow, the Company may explore the acquisition and
subsequent development and commercialization of additional biomedical and
pharmaceutical products and technologies. However, there can be no assurance
that the Company will be able to identify any additional products or
technologies and, even if suitable products or technologies are identified, the
Company does not expect to have sufficient resources to pursue any such products
or technologies in the foreseeable future.
CERTAIN INTERLOCKING RELATIONSHIPS; POTENTIAL CONFLICTS OF INTEREST
Three of the five members of the Board of Directors and one of the officers of
the Company are full-time and/or part-time officers of Paramount Capital
Investments, LLC a New York-based, merchant banking and venture capital firm
specializing in biotechnology companies ("Investments"). In the regular course
of its business, Investments identifies, evaluates and pursues investment
opportunities in biomedical and
18
<PAGE>
pharmaceutical products, technologies and companies. Generally, Delaware
corporate law requires that any transactions between the Company and any of its
affiliates be on terms that, when taken as a whole, are substantially as
favorable to the Company as those then reasonably obtainable from a person who
is not an affiliate in an arms-length transaction. Nevertheless, neither
Investments nor any such directors are obligated pursuant to any agreement or
understanding with the Company to make any additional products or technologies
available to the Company, nor can there be any assurance, and the Company does
not expect and security holders should not expect, that any biomedical or
pharmaceutical product or technology identified by Investments or any such
directors in the future will be made available to the Company. In addition,
certain of the officers and directors of the Company may from time to time serve
as officers or directors of other biopharmaceutical or biotechnology companies.
There can be no assurance that such other companies will not, in the future,
have interests in conflict with those of the Company.
The Company has entered into several agreements with Investment as well as with
certain of the Company's directors pursuant to which Investments and such
directors provide financial advisory services to the Company.
RISKS ASSOCIATED WITH PENDING LITIGATION
The Company is a defendant in a legal proceeding alleging causes of action under
the Securities Exchange Act of 1934, as amended, and for common law causes of
action which, if resolved adversely to the Company, would not, in the opinion of
management, have a material adverse effect on the Company's business, financial
condition and results of operations. The results of this proceeding, including
any potential settlement, are uncertain, however, there can be no assurance to
that effect.
NO DIVIDENDS
The Company has not paid any cash dividends on its Common Stock since its
formation and does not anticipate paying any cash dividends in the foreseeable
future. Management anticipates that all earnings and other resources of the
Company, if any, will be retained by the Company for investment in its business.
POSSIBLE DELISTING FROM NASDAQ AND MARKET ILLIQUIDITY
Although the Common Stock is quoted on the Nasdaq SmallCap Market ("Nasdaq"),
continued inclusion of such securities on Nasdaq will require that (i) the
Company maintain at least $2,000,000 in total assets and $1,000,000 in capital
and surplus, (ii) the minimum bid price for the Common Stock be at least $1.00
per share, (iii) the public float consist of at least 100,000 shares of Common
Stock, valued in the aggregate at more than $200,000, (iv) the Common Stock have
at least two active market makers and (v) the Common Stock be held by at least
300 holders. If the Company is unable to satisfy such maintenance requirements,
the Company's securities may be delisted from Nasdaq. In such event, trading, if
any, in the Common Stock would thereafter be conducted in the over-the-counter
market in the "pink sheets" or the NASD's "Electronic Bulletin Board."
Consequently, the liquidity of the Company's securities could be materially
impaired, not only in 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 the Company, which could
result in lower prices for the Company's securities than might otherwise be
attained and could also result in a larger spread between the bid and asked
prices for the Company's securities.
In addition, if the Common Stock is delisted from trading on Nasdaq and the
trading price of the Common Stock is less than $5.00 per share, trading in the
Common Stock would also be subject to the requirements of Rule 15g-9 promulgated
under the Exchange Act. Under such rule, broker/dealers who recommended such
low-priced securities to persons other than established customers and accredited
investors must satisfy special sales practice requirements, including a
requirement that they make an individualized written suitability determination
for the purchaser and receive the purchaser's written consent prior to the
transaction. The Securities Enforcement Remedies and Penny Stock Reform Act of
1990 also requires additional disclosure in connection with any trades involving
a stock defined as a penny stock (generally, according to recent regulations
adopted by the Commission, any equity security not traded on an exchange or
quoted on Nasdaq that has a market price of less than $5.00 per share, subject
to certain exceptions), including the delivery, prior to any penny stock
transaction, of a disclosure schedule explaining the penny stock market and the
risks associated therewith. Such requirements could severely limit the market
liquidity of the Common Stock. There can be no assurance that the Common Stock
will not be delisted or treated as
19
<PAGE>
penny stock.
LIQUIDITY OF INVESTMENT
The Company's securities are traded on the Nasdaq SmallCap Market, and the
Company's securities lack the liquidity of securities traded on the principal
trading markets. Accordingly, an investor may be unable to promptly liquidate an
investment in the Common Stock.
POSSIBLE VOLATILITY OF STOCK PRICE
The market price of the Company's securities, like the stock prices of many
publicly traded biotechnology and smaller pharmaceutical companies, has been and
may continue to be highly volatile.
ENVIRONMENTAL REGULATION
In connection with its research and development activities, the Company is
subject to federal, state and local laws, rules, regulations and policies
governing the use, generation, manufacture, storage, air emission, effluent
discharge, handling and disposal of certain materials and wastes. Although the
Company believes that it has complied with these laws and regulations in all
material respects and has not been required to take any action to correct any
noncompliance, there can be no assurance that the Company will not be required
to incur significant costs to comply with environmental and health and safety
regulations in the future.
POSSIBLE ADVERSE EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE
[788,951] of the shares of Common Stock of the Company currently outstanding are
"restricted securities," and such shares are owned by "affiliates" (the "Selling
Securityholders") of the Company, as those terms are defined in Rule 144
promulgated under the Securities Act. The Company's officers, directors and
certain stockholders, including the Selling Securityholders, have agreed not to
sell or otherwise dispose of any of their shares of Common Stock now owned or
issuable upon the exercise of warrants until June 14, 1997 or such longer period
as may be required by applicable state securities laws, without the prior
written consent of Joseph Stevens & Company, L.P., the underwriter that managed
the Company's initial public offering (the "Underwriter"). Absent registration
under the Securities Act, the sale of such shares is subject to Rule 144 as
promulgated under the Securities Act. The Selling Securityholders are subject to
the 180-day lock-up described above, but may commence selling their securities
at any time, provided prior consent is given by the Company. Finally, the
Company has granted unlimited "piggy-back" and two S-3 registration rights per
year to certain stockholders with respect to such shares of Common Stock and any
shares of Common Stock purchased in the future by such investors, which shares
will be subject to the 180-day lock-up described above. Finally, the Company has
granted to holders of the warrants issued to the Underwriter in connection with
the initial public offering the right on two occasions (one at the expense of
the Company) to file a registration statement under the Securities Act covering
the securities underlying such warrants and the additional right to include such
securities in any registration filed by the Company under the Securities Act.
In connection with the IPO the Company granted to Joseph Stevens & Company, L.P.
(the "Underwriter") to purchase from the Company 165,000 units, each consisting
of one share of Common Stock and one redeemable warrant to purchase one share of
Common Stock 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 warrant 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.
No prediction can be made as to the effect, if any, that sales of units,
warrants and/or Common Stock or the availability of such securities for sale
will have on the market prices prevailing from time to time for the units, the
warrants and/or the Common Stock. Nevertheless, the possibility that substantial
amounts of such securities may be sold in the public market may adversely affect
prevailing market prices for the Company's equity securities and could impair
the Company's ability to raise capital in the future through the sale of equity
securities.
20
<PAGE>
ANTITAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION AND
DELAWARE LAW
Atlantic's Certificate of Incorporation authorizes the issuance of shares of
"blank check" Preferred Stock. The Board of Directors has the authority to issue
the Preferred Stock in one or more series and to fix the relative rights,
preferences and privileges and restrictions thereof, including dividend rights,
dividend rates, conversion rights, voting rights, terms of redemption,
redemption prices, liquidation preferences and the number of shares constituting
any series or the designation of such series. The issuance of Preferred Stock
may have the effect of delaying, deferring or preventing a change in control of
the Company without further action by the stockholders of the Company. The
issuance of Preferred Stock with voting and conversion rights may adversely
affect the voting power of the holders of the Common Stock, including the loss
of voting control to others.
The Company is subject to Section 203 of the Delaware General Corporation Law
which, subject to certain exceptions, prohibits a Delaware corporation from
engaging in any business combination with any interested stockholder for a
period of three years following the date that such stockholder became an
interested stockholder. In general, Section 203 defines an interested
stockholder as any entity or person beneficially owning 15% or more of the
outstanding voting stock of the corporation and any entity or person affiliated
with or controlling or controlled by such entity or person. The foregoing
provisions could have the effect of discouraging others from making tender
offers for the Company's shares and, as a consequence, they also may inhibit
fluctuations in the market price of the Company's shares that could result from
actual or rumored takeover attempts. Such provisions also may have the effect of
preventing changes in the management of the Company.
ITEM 2 - DESCRIPTION OF PROPERTY
Effective March 15, 1997, the Company's executive offices are located
at 1017 Main Campus Drive, Suite 3900, Raleigh, North Carolina 27606. The lease
agreement is for a term of five years, renewable at the Company's option and it
calls for a monthly lease payment of $4,000, with the monthly lease payment
increased annually, in accordance with the Consumer Price Index. Optex has a
lease with a term of twelve months for space at 27292 Calle Arroyo, San Juan
Capistrano, CA 92675. The lease agreement calls for a monthly lease payment of
$1,650.00. Research and development work of the other Operating Companies is
currently being conducted on a contract basis at universities and institutions.
The Company anticipates that in the future each Operating Company may own or
lease its own research facility. The Company believes that its existing
facilities are adequate to meet its current requirements. The Company believes
that its existing insurance coverage adequately covers the Company's interest in
its leased space. The Company does not own any real property.
ITEM 3- LEGAL PROCEEDINGS
A complaint alleging claims under the Exchange Act and common law
causes of action was filed against the Company, certain of its directors and The
Castle Group, Ltd. in the United States District Court for the District of
Delaware on November 8, 1996. The amended complaint alleges that the defendants
issued to the plaintiff an inadequate number of shares of Common Stock, par
value $.001 per share (the "Common Stock"), of the Company in satisfaction of a
contractual obligation. The amended complaint seeks (1) injunctive relief
requiring the transfer of 10,000 shares of Common Stock of the Company, (2)
unspecified actual damages, (3) unspecified exemplary damages, (4) prejudgment
interest and (5) attorneys' fees and costs. The Company believes this action is
without merit and intends to vigorously defend the action.
While management believes that the resolution of this matter will not
have a material adverse effect on the Company's business, financial condition
and results of operation, the results of this proceeding, including any
potential settlement, are uncertain and there can be no assurance to that
effect. See "Risk Factors- Risks Associated with Pending Litigation."
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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<PAGE>
During the Company's fourth fiscal quarter for the year ended
December 31, 1996, no matter was submitted to a vote of the Company's security
holders, either by proxy solicitations or otherwise.
PART II
ITEM 5- MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
(a) Market Information
The Common Stock of the Company began trading on December 14, 1995 on the Nasdaq
SmallCap Market under the symbol ATLC.
The following table sets forth the high and low bid price, as well as the
closing sales price, each as quoted by Nasdaq, during each fiscal quarter since
the Company's initial public offering. Prior to the Company's initial public
offering on December 14, 1995, no established public trading market for the
Company's Common Stock existed.
<TABLE>
<CAPTION>
Common Stock Price
------------------
========================================================================================================================
<S> <C> <C> <C>
Period High Bid Low Bid Last Sales
- ------------------------------------------------------------------------------------------------------------------------
1995
- ------------------------------------------------------------------------------------------------------------------------
Fourth Quarter $6.25 $3.75 $5.50
- ------------------------------------------------------------------------------------------------------------------------
1996
- ------------------------------------------------------------------------------------------------------------------------
First Quarter $10.125 $5.625 $9.00
- ------------------------------------------------------------------------------------------------------------------------
Second Quarter $9.00 $7.00 $7.625
- ------------------------------------------------------------------------------------------------------------------------
Third Quarter $9.125 $6.25 $8.875
- ------------------------------------------------------------------------------------------------------------------------
Fourth Quarter $9.125 $6.00 $6.125
========================================================================================================================
<FN>
(b) Holders
The number of holders of record of the Company's Common Stock as
of March 19, 1997 was 72.
The number of beneficial stockholders of the Company's Common
Stock as of March 19, 1997 was 601.
(c) Dividends
The Company has not paid or declared any dividends on its Common
Stock and the Company does not anticipate paying dividends on its
Common Stock in the foreseeable future
</TABLE>
ITEM 6- MANAGEMENT'S DISCUSSION AND ANALYSIS, PLAN OF
OPERATIONS
General
The Company was incorporated in Delaware on May 18, 1993 and
commenced operations on July 13, 1993. The Company is engaged in the development
of biomedical and pharmaceutical products and technologies. To date the Company
has acquired four licenses to develop products and technologies which
22
<PAGE>
the Company believes may be useful in the treatment of a variety of diseases,
including cancer, infection, ophthalmic disorders, inflammation, cardiovascular
diseases and dermatological conditions. The Company's existing products and
technologies under development are each held by the Company or by one of its
three majority-owned subsidiary operating companies (Optex Ophthalmologics,
Channel Therapeutics and Gemini Technologies, collectively, the "Operating
Companies") which are managed by the Company. The Company has been unprofitable
since inception and expects to incur substantial additional operating losses
over the next several years. The following discussion and analysis should be
read in conjunction with the financial statements and notes thereto appearing
elsewhere in this Form 10-KSB.
Results of Operations
From the commencement of operations through December 31, 1996,
$97,644 of grant revenue has been generated.
In June 1996, Optex Ophthalmologics, Inc. ("Optex"), a
majority-owned subsidiary of the Company, was awarded $100,000 under phase one
of a Small Business Innovation Research Program grant from the National Eye
Institute division of the National Institutes of Health. This grant was paid in
monthly increments of approximately $15,000 and was used for salary and
consulting expenses incurred by Optex.
General and administrative expenses for the year ended December
31, 1996 were $2,747,247, as compared to $2,103,576 for the corresponding period
in 1995, and consisted primarily of expenses associated with corporate
operations, legal, finance and accounting, human resources and other general
operating costs. The Company anticipates that general and administrative
expenses will increase slightly during the year ended December 31, 1997 as
compared to the corresponding period in 1996. Research and development
expenditures consist primarily of the costs of research and development
personnel, payments made under the Company's license agreements and sponsored
research agreements with its licensors and scientific collaborators and costs
related to patent filings and maintenance. Research and development expenses,
inclusive of license fees were $1,069,793 for the year ended December 31, 1996,
as compared to $518,199 for the corresponding period in 1995. The Company
anticipates that its research and development expenses will increase during the
next year as the Company and the Operating Companies continue to fund research
programs and preclinical testing for their products and technologies under
development.
The Company's cumulative net loss since inception through December
31, 1996, was $8,438,660 Liquidity, Capital Resources and Plan of Operations
The Company's available working capital and capital requirements
will depend upon numerous factors, including progress of the Company's research
and development programs; progress and cost of preclinical and clinical testing;
timing and cost of obtaining regulatory approvals; levels of resources that the
Company devotes to the development of manufacturing and marketing capabilities;
technological advances; status of competitors; and ability of the Company to
establish collaborative arrangements with other organizations.
The Company anticipates that its current resources will be
sufficient to finance the Company's currently anticipated needs for operating
and capital expenditures for at least eight months. In addition, the Company
will attempt to generate additional capital through a combination of
collaborative agreements, strategic alliances and equity and debt financing.
However, no assurance can be provided that additional capital will be obtained
through these sources or upon terms acceptable to the Company. The Company's
independent accountants have reported that the Company has suffered recurring
losses from operations and has a limited capital resources, both of which raise
substantial doubt about the Company's ability to continue as a going concern. If
the Company is not able to obtain continued financing, the Company may cease
operations and holders of the Company's securities will, in all likelihood, lose
their entire investment. See "Risk Factors -- Qualification of Auditor's
Opinion".
During the fiscal year ended December 31, 1996, the Company
generated additional capital to
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<PAGE>
finance its operations from a private placement of its Common Stock.
In August 1996, pursuant to a private placement, the Company
received an aggregate of $1,528,751 in consideration of the issuance of 140,000
and 110,000 shares of its Common Stock to Dreyfus Growth and Value Funds, Inc.,
a Maryland corporation,- Dreyfus Aggressive Growth Fund and to Premier Strategic
Growth Funds, a Massachusetts business trust, respectively. In connection with
this private placement, the Company paid Paramount Capital Inc. ("Paramount") a
finder's fee of $76,437 and issued to Paramount a warrant to purchase 12,500
shares of the Company's Common Stock at $6.73 per share, which warrant expires
on August 16, 2001.
Until required for operations, the Company's policy is to keep its
cash reserves in bank deposits, certificates of deposit, commercial paper,
corporate notes, U.S. government instruments and other investment-grade quality
instruments.
At December 31, 1996, the Company had $2,269,532 in cash and cash
equivalents and a working capital of $2,012,689. The Company is also obligated,
and contingently obligated, to pay certain amounts under the Company's and the
Operating Companies' various licensing agreements, employment agreements and
consulting agreements. See Note 10 of Notes to Consolidated Financial
Statements.
ITEM 7-FINANCIAL STATEMENTS
For a list of the financial statements filed as part of this report , see the
Index to Financial Statements at page F-1.
24
<PAGE>
ITEM 8- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
There were no changes or disagreements with the Company's auditors.
PART III
ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16 (A) OF THE EXCHANGE ACT.
The information required by this Item-9 with respect to the
identification of Directors, Executive Officers, Promoters and Control persons
is hereby incorporated by reference from the information under the captions,
"Proposal One- Election of Directors" and "Executive Compensation and Other
Information" in the Company's Proxy Statement for its annual meeting of
stockholders to be held on May 21, 1997 (the "Proxy Statement").
The information required by Section 16(a) of the Exchange Act is hereby
incorporated by reference from the information under the Caption, "Compliance
with Section 16(a) of the Securities Exchange Act of 1934" in the Proxy
Statement.
ITEM-10 EXECUTIVE COMPENSATION
The information required by this item is hereby incorporated by
reference from the information under the caption, "Executive Compensation and
Other Information -- Certain Relationships and Related Transactions" in the
Proxy Statement.
ITEM 11- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this item is hereby incorporated by reference
from the information under the caption, "Security Ownership of Management and
Certain Beneficial Owners" in the Proxy Statement.
ITEM 12- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is hereby incorporated by reference
from the information under the caption, "Executive Compensation and Other
Information -- Certain Relationships and Related Transactions" in the Proxy
Statement.
25
<PAGE>
ITEM 13-EXHIBITS LIST, AND REPORTS ON FORM 8-K
(a) Exhibits
The Following documents are referenced or included in this report.
<TABLE>
<CAPTION>
Exhibit Description
No.
<S> <C>
1.1** Form of Underwriting Agreement by and between the Registrant and Joseph Stevens & Company, L.P.
3.1** Certificate of Incorporation of the Registrant, as amended to date.
3.2** Bylaws of the Registrant, as amended to date.
4.1** Reference is made to Exhibits 1.1, 3.1 and 3.2.
4.2** Form of Unit certificate.
4.3** Specimen Common Stock certificate.
4.4** Form of Redeemable Warrant certificate.
4.5** Form of Redeemable Warrant Agreement, by and between the Registrant and Continental Stock Transfer & Trust
Company.
4.6** Form of Underwriter's Warrant certificate.
4.7** Form of Underwriter's Warrant Agreement by and between the
Registrant and Joseph Stevens & Company, L.P. 4.8** Form of
Subscription Agreement, by and between the Registrant and the
Selling Stockholders.
4.9** Form of Bridge Note.
4.10** Form of Bridge Warrant
10.1** The Registrant's 1995 Stock Option Plan.
10.2** Employment Agreement, dated July 7, 1995, between the Registrant and Jon D. Lindjord.
10.3** Employment Agreement, dated September 21, 1995, between the Registrant and Dr. Stephen R. Miller.
10.4** Employment Agreement, dated September 21, 1995, between the Registrant and Margaret A. Schalk.
10.5** Letter Agreement, dated August 31, 1995, between the Registrant and Dr. H. Lawrence Shaw.
10.6** Consulting Agreement, dated January 1, 1994, between the Registrant and John K.A. Prendergast.
10.8** Investors' Rights Agreement, dated July, 1995, between the Registrant, Dr. Lindsay A. Rosenwald and
VentureTek, L.P.
10.9+** License and Assignment Agreement, dated March 25, 1994,
between Optex Ophthalmologics, Inc., certain inventors and
NeoMedix Corporation, as amended.
10.10+** License Agreement, dated May 5, 1994, between Gemini Gene Therapies, Inc. and The Cleveland Clinic
Foundation.
10.11+** License Agreement, dated June 16, 1994, between Channel
Therapeutics, Inc., the University of Pennsylvania and
certain inventors, as amended.
10.12+** License Agreement, dated March 28, 1994, between Channel Therapeutics, Inc. and Dr. Sumner Burstein.
10.13** Form of Financial Advisory and Consulting Agreement by and between the Registrant and Joseph Stevens &
Company, L.P.
10.14** Employment Agreement, dated November 3, 1995, between the Registrant and Shimshon Mizrachi.
<PAGE>
10.15*** Financial agreement between the Company and Paramount dated September 4, 1996 (effective date of
April 15,1996)
10.16*** Financial agreement between the Company, Paramount and UI USA dated June 23,1996.
10.17*** Consultancy agreement between the Company and Dr. Yuichi Iwaki dated July 31,1996.
10.18*** 1995 Stock Option Plan as amended
10.19*** Warrant to purchase to Paramount for 25,000 shares.
10.20*** Warrant to purchase to Paramount for 25,000 shares.
10.21*** Warrant to purchase to Paramount for 12,500 shares.
21.1** Subsidiaries of the Registrant
24.1** Power of Attorney.
27.1 Financial data Schedule
<FN>
- -----------
+Confidential treatment requested as to certain portions of these exhibits.
** Incorporated by reference to exhibits of Issuer's Registration Statement on
Form SB-2, Registration #33-98478
*** Incorporated by reference to exhibits of
Issuer's Form 10-QSB for the period ended September 30, 1996.
b) Reports on Form 8-K
No Reports on Form 8-K were filed during the fourth quarter of the Company's
fiscal year ended December 31, 1996.
</TABLE>
<PAGE>
Signatures
In accordance with Section 13 or 15(d) of the Exchange Act, the issuer caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized
ATLANTIC PHARMACEUTICALS, INC.
Date: March 29, 1997
By /s/ Jon Douglas Lindjord
--------------------------
Jon Douglas Lindjord
Chief Executive Officer
and President
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the issuer and in the capacities and on the dates
indicated. <TABLE> <CAPTION>
Name Title Date
- ---------------------------- ------------------------------------ ---------------
<S> <C> <C>
/s/ Jon Douglas Lindjord
- ----------------------------
Jon Douglas Lindjord President, Chief Executive Officer March 29 1997
and Director
/s/ Lindsay A. Rosenwald
- ----------------------------
Lindsay A. Rosenwald , M.D. Director March 29 1997
/s/ John K. Prendergast
- ----------------------------
John K. A. Prendergast, Ph.D. Director March 29 1997
/s/ Yuichi Iwaki
- ----------------------------
Yuichi Iwaki, M.D., Ph.D. Director March 29 1997
/s/ Steve H. Kanzer
- ----------------------------
Steve H. Kanzer, Esq. Director March 29 1997
/s/ Shimshon Mizrachi
- ----------------------------
Shimshon Mizrachi Controller and Principal March 29 1997
Financial and Accounting Officer
</TABLE>
21
<PAGE>
ATLANTIC PHARMACEUTICALS, INC. AND SUBSIDIARIES
(a development stage company)
Consolidated Financial Statements
December 31, 1996, 1995 and 1994
(With Independent Auditors' Report Thereon)
<PAGE>
ATLANTIC PHARMACEUTICALS, INC. AND SUBSIDIARIES
Index To Consolidated Financial Statements
<TABLE>
<CAPTION>
Page
----------
<S> <C>
Independent Auditors' Report......................................................................F-1
Consolidated Balance Sheets as of December 31, 1996 and 1995......................................F-2
Consolidated Statements of Operations for the years ended December 31, 1996,
1995, and 1994 and for the period from July 13, 1993
(inception) to December 31, 1996 ............................................................F-3
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended
December 31, 1996, 1995 and 1994 and for the period from
July 13, 1993 (inception) to December 31, 1993...............................................F-4
Consolidated Statements of Cash Flows for the years ended December 31, 1996,
1995, and 1994 and for the period from
July 13, 1993 (inception) to December 31, 1996...............................................F-5
Notes to Consolidated Financial Statements........................................................F-6
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Atlantic Pharmaceuticals, Inc.:
We have audited the accompanying consolidated balance sheets of Atlantic
Pharmaceuticals, Inc. and subsidiaries (a development stage company) as of
December 31, 1996 and 1995, and the related consolidated statements of
operations, stockholders' equity (deficit), and cash flows for each of the years
in the three-year period ended December 31, 1996 and for the period from July
13, 1993 (inception) to December 31, 1996. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Atlantic
Pharmaceuticals, Inc. and subsidiaries (a development stage company) as of
December 31, 1996 and 1995, and the results of their operations and their cash
flows for each of the years in the three-year period ended December 31, 1996,
and for the period from July 13, 1993 (inception) to December 31, 1996, in
conformity with generally accepted accounting principles.
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 capital resources, which raise substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are described in note 1. The consolidated financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
KPMG Peat Marwick LLP
San Francisco, California
March 11, 1997
F-1
<PAGE>
ATLANTIC PHARMACEUTICALS, INC. AND SUBSIDIARIES
(a development stage company)
Consolidated Balance Sheets
December 31, 1996 and 1995
<TABLE>
<CAPTION>
Assets 1996 1995
------ ---- ----
Current assets:
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 2,269,532 5,044,632
Prepaid expenses 24,949 48,000
---------------------------------------------------- ---------
Total current assets 2,294,481 5,092,632
------------- -------------
Furniture and equipment, net of accumulated depreciation of
$75,133 and $26,728 at December 31, 1996 and 1995,
respectively 82,761 55,791
---------------------------------------------------- ---------
$ 2,377,242 5,148,423
============= =============
Liabilities and Stockholders' Equity (Deficit)
----------------------------------------------
Current liabilities:
Accrued expenses 281,792 800,383
Accrued interest -- 115,011
Demand notes payable to related parties (note 3) -- 125,000
Notes payable - bridge financing (note 4) -- 75,000
------------- -------------
Total current liabilities 281,792 1,115,394
------------- -------------
Stockholders' equity (deficit) (note 5):
Preferred stock, $.001 par value. Authorized 50,000,000
shares; none issued and outstanding -- --
Common stock, $.001 par value. Authorized 80,000,000
shares; 2,913,720 and 2,663,720 shares issued and
outstanding at December 31, 1996 and 1995 respectively 2,914 2,664
Common stock subscribed. 182 shares at
December 31, 1996 and 1995 -- --
Additional paid-in capital 10,634,938 9,043,875
Deficit accumulated during development stage (8,438,660) (4,880,968)
Deferred compensation (103,200) (132,000)
------------- -------------
2,095,992 4,033,571
Less common stock subscriptions receivable (218) (218)
Less treasury stock, at cost (324) (324)
------------- -------------
Total stockholders' equity (deficit) 2,095,450 4,033,029
------------- -------------
$ 2,377,242 5,148,423
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
ATLANTIC PHARMACEUTICALS, INC. AND SUBSIDIARIES
(a development stage company)
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Cumulative
period from
July 13, 1993
Year ended (inception) to
December 31, December 31,
---------------------------------------------
1996 1995 1994 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Grant revenue $ 97,644 -- -- 97,644
----------- ------------ ------------- -------------
Total revenue 97,644 -- -- 97,644
Costs and expenses:
Research and development (note 2) 1,059,793 455,699 162,555 1,686,335
License fees (note 10) 10,000 62,500 101,000 173,500
General and administrative 2,747,247 2,103,576 1,125,001 6,220,164
----------- ------------ ------------- -------------
Total operating expenses 3,817,040 2,621,775 1,388,556 8,079,999
Other (income) expense:
Interest income (161,704) (7,566) -- (169,270)
Interest expense -- 545,145 73,391 625,575
----------- ------------ ------------- -------------
Total other (income)
expense (161,704) 537,579 73,391 456,305
----------- ------------ ------------- -------------
Net loss $ (3,557,692) (3,159,354) (1,461,947) (8,438,660)
============ ============ ============= =============
Net loss per share $ (1.29) (26.21) (4,793.27) (11.41)
========== ============ ============ =============
Shares used in calculation
of net loss per share 2,758,241 120,554 305 739,635
=========== ============ ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
ATLANTIC PHARMACEUTICALS, INC. AND SUBSIDIARIES
(a development stage company)
Consolidated Statements of Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
Common stock
Preferred stock Common stock subscribed
------------------------- ------------------------ ------------------------
Shares Amount Shares Amount Shares Amount
--------- --------- -------- -------- -------- --------
<S> <C>
Common stock subscribed at $.001 per share
July - November 1993 -- -- -- -- 5,231 5
Net loss -- -- -- -- -- --
--------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1993 -- -- -- -- 5,231 --
Issued common stock at $.001 per share, June 1994 -- -- 84 -- -- --
Issued and subscribed common stock
at $.05 per share, August 1994 -- -- 860 1 12 --
Payments of common stock subscriptions -- -- 2,606 3 (2,606) (3)
Net loss -- -- -- -- -- --
--------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1994 -- -- 3,550 4 2,637 2
Issuance of warrants, September 1995 (note 4) -- -- -- -- -- --
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 -- --
Conversion of demand notes payable and the
related accrued interest to common stock,
December 1995 -- -- 785,234 785 -- --
Payments of common stock subscriptions -- -- 2,455 2 (2,455) (2)
Repurchase of common stock -- -- (269) -- -- --
Compensation related to grant of stock
options (note 6) -- -- -- -- -- --
Amortization of deferred compensation (note 6) -- -- -- -- -- --
Net loss -- -- -- -- -- --
--------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1995 -- -- 2,663,720 2,664 182 --
Issuance of warrants, April 1996 (note 4) -- -- -- -- -- --
Issued common stock and warrants at $6.73 per
share, August 1996 (net of costs of
issuance of $76,438) -- -- 250,000 250 -- --
Amortization of deferred compensation (note 6) -- -- -- -- -- --
Net loss -- -- -- -- -- --
--------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1996 -- $ -- 2,913,720 $ 2,914 182 $ --
========= ========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Deficit
accumulated Common Total
Additional during stock stockholders'
paid-in development Deferred subscriptions Treasury equity
capital stage compensation receivable stock (deficit)
----------- ---------- -------------- ----------- --------- ----------
<S> <C>
Common stock subscribed at $.001 per share
July - November 1993 6,272 -- -- (6,277) -- --
Net loss -- (259,667) -- -- -- (259,667)
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1993 6,272 (259,667) -- (6,277) -- (259,667)
Issued common stock at $.001 per share, June 1994 101 -- -- -- -- 101
Issued and subscribed common stock
at $.05 per share, August 1994 52,374 -- -- (750) -- 51,625
Payments of common stock subscriptions -- -- -- 3,127 -- 3,127
Net loss -- (1,461,947) -- -- -- (1,461,947)
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1994 58,747 (1,721,614) -- (3,900) -- (1,666,761)
Issuance of warrants, September 1995 (note 4) 300,000 -- -- -- -- 300,000
Issued common stock and warrants at $4 per unit,
December 1995 (net of costs of issuance
of $1,454,300) 6,034,827 -- -- -- -- 6,036,700
Conversion of demand notes payable and the
related accrued interest to common stock,
December 1995 2,441,519 -- -- -- -- 2,442,304
Payments of common stock subscriptions -- -- -- 3,682 -- 3,682
Repurchase of common stock -- -- -- -- (324) (324)
Compensation related to grant of stock
options (note 6) 208,782 -- (144,000) -- -- 64,782
Amortization of deferred compensation (note 6) -- -- 12,000 -- -- 12,000
Net loss -- (3,159,354) -- -- -- (3,159,354)
---------- ---------- --------- ---------- ---------- ----------
Balance at December 31, 1995 9,043,875 (4,880,968) (132,000) (218) (324) 4,033,029
Issuance of warrants, April 1996 (note 4) 139,000 -- -- -- -- 139,000
Issued common stock and warrants at $6.73 per
share, August 1996 (net of costs of
issuance of $76,438) 1,452,063 -- -- -- -- 1,452,313
Amortization of deferred compensation (note 6) -- -- 28,800 -- -- 28,800
Net loss -- (3,557,692) -- -- -- (3,557,692)
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1996 10,634,938 (8,438,660) (103,200) (218) (324) 2,095,450
========== ========== ========== ========== ========== ==========
</TABLE>
F-4
<PAGE>
ATLANTIC PHARMACEUTICALS, INC. AND SUBSIDIARIES
(a development stage company)
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Cumulative from
July 13, 1993
Year ended (inception) to
December 31, December 31,
---------------------------------------
1996 1995 1994 1996
---- ---- ---- ----
Cash flows from operating activities:
<S> <C> <C> <C> <C>
Net loss ..................................... $(3,557,692) (3,159,354) (1,461,947) (8,438,660)
Adjustments to reconcile net loss to net cash
used in
operating activities:
Expense relating to issuance of
warrants ............................. 139,000 -- -- 139,000
Compensation expense relating to stock
options .............................. 28,800 76,782 -- 105,582
Discount on notes payable - bridge
financing ............................ -- 300,000 -- 300,000
Depreciation ........................... 48,405 17,379 6,750 75,133
Changes in assets and liabilities:
(Increase) decrease in prepaid
expenses ........................ 23,051 (48,000) -- (24,949)
Increase (decrease) in accrued
expenses ........................ (518,591) 349,866 308,472 281,792
Increase (decrease) in accrued
interest ........................ (115,011) 328,585 73,391 172,305
----------- ----------- ----------- -----------
Net cash used in operating
activities .................. (3,952,038) (2,134,742) (1,073,334) (7,389,797)
----------- ----------- ----------- -----------
Cash used in investing activities
Acquisition of furniture and equipment ....... (75,375) (56,568) (12,957) (157,895)
----------- ----------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of demand notes payable -- 1,010,000 1,135,000 2,395,000
Repayment of demand notes payable ............ (125,000) -- -- (125,000)
Proceeds from the issuance of notes payable -
bridge financing ........................... -- 1,200,000 -- 1,200,000
Proceeds from issuance of warrants ........... -- 300,000 -- 300,000
Repayment of notes payable - bridge financing (75,000) (1,425,000) -- (1,500,000)
Repurchase of common stock ................... -- (324) -- (324)
Proceeds from the issuance of common stock ... 1,452,313 6,040,382 54,853 7,547,548
----------- ----------- ----------- -----------
Net cash provided by financing
activities ................... 1,252,313 7,125,058 1,189,853 9,817,224
----------- ----------- ----------- -----------
Net increase (decrease) in cash
and cash equivalents ......... (2,775,100) 4,933,748 103,562 2,269,532
Cash and cash equivalents at beginning of period .. 5,044,632 110,884 7,322 --
----------- ----------- ----------- -----------
Cash and cash equivalents at end of period ........ $ 2,269,532 5,044,632 110,884 2,269,532
=========== =========== =========== ===========
Supplemental disclosure of noncash financing
activities:
Issuance of common stock in exchange for
common stock
subscriptions ............................. $ -- -- 750 7,027
Conversion of demand notes payable and the
related
accrued interest to common stock .......... -- 2,442,304 -- 2,442,304
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
ATLANTIC PHARMACEUTICALS, INC. AND SUBSIDIARIES
F(a development stage company)
Notes to Consolidated Financial Statements
December 31, 1996, 1995 and 1994
(1) ORGANIZATION AND BASIS OF PRESENTATION
(a) Organization
Atlantic Pharmaceuticals, Inc. (the Company) was incorporated on May 18,
1993, began operations on July 13, 1993, and is the majority owner of
three operating companies - Gemini Gene Therapies, Inc. (Gemini), Optex
Opthalmologics, Inc. (Optex), and Channel Therapeutics, Inc. (Channel)
(collectively, the Operating Companies).
Gemini (an 85% owned subsidiary) was incorporated on May 18, 1993 to
exploit a new proprietary technology which combines 2'-5' oligoadenylate
(2-5A), a molecule found in nearly all human cells, with standard
antisense compounds to alter the production of disease-causing proteins.
Optex (an 82% owned subsidiary) was incorporated on October 19, 1993 to
develop its principal product, a novel cataract removal device. Channel
(an 88% owned subsidiary) was incorporated on May 18, 1993 to develop
pharmaceutical products in the fields of cardiovascular disease and
inflammatory disorders.
The Company and each of its operating companies are 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 subsidiaries. Significant intercompany
accounts and transactions have been eliminated in consolidation.
(b) Basis of Presentation
The consolidated financial statements have been prepared in accordance
with the provisions of Statement of Financial Accounting Standards No.
7, "Accounting and Reporting by Development Stage Enterprises," which
requires development stage enterprises to employ the same accounting
principles as operating companies.
F-6
<PAGE>
The accompanying consolidated financial statements have been prepared on
a going-concern basis, which contemplates the realization of assets and
the satisfaction of liabilities in the normal course of business. As
shown in the consolidated financial statements, the Company has suffered
recurring losses totaling $8,438,660 since inception and has limited
resources available to fund future operations as of December 31, 1996.
These factors, among others, may indicate that the Company will be
unable to continue as a going concern. The Company's continuation as a
going concern is dependent upon its ability to generate sufficient cash
flow to meet its obligations on a timely basis, continued financial
support from its stockholders, and ultimately to attain successful
operations. The Company is currently in negotiations for a private
placement which would support operations if obtained.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid investments with
original maturities of 90 days or less.
(b) Furniture and Equipment
Furniture and equipment are recorded at cost. Depreciation is calculated
using accelerated methods over their useful lives, generally five years.
(c) Minority Interest
The Company has recorded 100% of the losses of the Operating Companies,
in its consolidated statements of operations as the minority
shareholders are not required to and have not funded their pro rata
share of losses. Some of the minority shareholders consists of related
parties to the Company. Minority interest losses recorded by the Company
since inception total $509,932 as of December 31, 1996 and will only be
recovered if and when the Operating Companies generate income to the
extent of those losses recorded by the Company.
(d) 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 Operating Companies. 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.
(e) Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to 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.
F-7
<PAGE>
(f) Computation of Net Loss per Share
The net loss per common and common equivalent shares for the years ended
December 31, 1996, 1995 and 1994 and for the period from July 13, 1993
(inception) to December 31, 1996, has been computed using the weighted
average number of common shares outstanding for each period. Common
equivalent shares from stock subscriptions, convertible debt, stock
options, and warrants are excluded from the computation because their
effect is antidilutive.
(g) Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure
of contingent assets and liabilities to prepare these financial
statements in conformity with generally accepted accounting principles.
Actual results could differ from those estimates.
(h) Stock-Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," encourages, but does not require companies to
record compensation cost for stock-based employee compensation plans at
fair value. The Company has chosen to continue to account for
stock-based compensation using the method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations. Accordingly, compensation cost
for stock options is measured as the excess, if any, of the quoted
market price of the Company's stock at the date of the grant over the
amount an employee must pay to acquire the stock.
(3) 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 serves as a director and is 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 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-8
<PAGE>
(4) 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.
(5) STOCKHOLDERS' EQUITY (DEFICIT)
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, respectively, of common stock 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 3).
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 (as defined below) a finder's fee of $76,438 and issued to
Paramount a warrant to purchase 12,500 shares of the Company's common
stock at $6.73 per share, which expires on August 16, 2001.
F-9
<PAGE>
(6) STOCK OPTIONS
(a) In August 1995, in connection with a severance agreement entered
into between the Company and the 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.
(b) Stock Option Plan
In July 1995 the Company established the 1995 Stock Option Plan which
provides for the granting of up to 650,000 options to purchase stock to
officers, directors, employees and consultants. 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. The options have a maximum term 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 its stock option
plan 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. 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 $28,000 and $12,000 was recognized in 1996 and 1995,
respectively. Had compensation costs been determined in accordance with
the fair value method prescribed by FASB Statement No. 123, the
Company's net loss and net loss per share would have been increased to
the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Net loss As Reported 3,557,692 3,159,354
Pro forma 4,119,990 3,216,690
Net loss per
Share As Reported $1.29 $26.21
Pro forma $1.49 $26.68
</TABLE>
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 1996 and 1995; dividend yield of 0%;
expected volatility of 75%; risk-free interest rate of 5.6% - 6.7% for
1996 and 5.6% - 6.3% for 1995; and expected lives of 6 years for both
years.
F-10
<PAGE>
A summary of the status of the Company's stock plan as of December 1996
and 1995 and changes during the years then ended is presented below:
<TABLE>
<CAPTION>
1996 Weighted Av. 1995 Weighted Av.
Options Shares Exercise Price Shares Exercise Price
--------- ------ -------------- ------ --------------
<S> <C> <C> <C> <C>
At the beginning
of the year 246,598 $ 2.90 -- $ --
Granted 314,000 5.88 246,598 2.90
Exercised -- -- -- --
Canceled -- -- -- --
------------ ------------- -------
At the end
of the year 560,598 4.57 246,598 2.90
============ =============
Options exercisable
at year-end 150,650 61,650
Weighted-average fair
value of options granted
during the year $4.06 $3.77
</TABLE>
The following table summarizes the information about stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding
-------------------- Number of
Number Remaining options
Exercise price outstanding contractual life exercisable
---------------- ------------- ----------------- -----------
<S> <C> <C> <C> <C>
3.75 110,000 5.6 years 27,500
.75 70,000 5.6 years 17,500
3.75 66,598 5.6 years 16,650
5.81 300,000 6 years 75,000
7.25 10,000 9.6 years 10,000
7.50 4,000 9.6 years 4,000
------------- ----------
Total 560,598 150,650
------------- ----------
</TABLE>
(7) 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 4).
These redeemable warrants expire on December 13, 2000.
F-11
<PAGE>
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. These redeemable warrants expire 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.
In connection with the IPO, the Company granted to Joseph Stevens & Co.,
L.P. (the "Underwriter") 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.
The Company entered into an agreement with Paramount Capital,
Incorporated ("Paramount") effective April 15, 1996 pursuant to which
Paramount will on a non-exclusive basis render financial advisory
services to the Company. A warrant to purchase 25,000 shares of the
Company's common stock at $10 per share, which warrant expires on April
16, 2001 and a warrant to purchase 25,000 shares of the Company's common
stock at $8.05 per share, which warrants expires on June 16, 2001. In
connection with the issuance of these warrants, the Company recognized
an expense in the amount of $139,000. This expense is included in
general and administrative expenses in the consolidated statements of
operations.
(8) RELATED-PARTY TRANSACTIONS
The Company entered into several consulting agreements with directors of
the Company. These agreements, which may be terminated upon ten days
notice by either party, require monthly consulting fees of $2,500.
Consulting expense under these agreements was $72,500, $30,000 and
$30,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.
Three of the five members of the Board of Directors and one of the
officers of the Company are full or part-time officers of Paramount
and/or Paramount Capital Investments, LLC, a New York-based merchant
banking and venture capital firm specializing in biotechnology companies
("Investments"). In the regular course of its business, Investments
identifies, evaluates and pursues investment opportunities in biomedical
and pharmaceutical products, technologies and companies. The Company has
entered into several agreements with Paramount as well as with the
Company's directors pursuant to which Paramount and such directors
provide financial advisory services to the Company.
F-12
<PAGE>
(9) INCOME TAXES
As a result of the losses incurred to date, no Federal or state income
taxes have been recognized in the accompanying consolidated financial
statements. Deferred tax assets arising from the Company's net operating
loss carryforwards and research credits, which expire between 2008 and
2011, of approximately $8,414,000 and $123,000, respectively have been
reduced by a valuation allowance to zero due to uncertainties regarding
the utilization of the net operating loss carryforwards and research
credits. The deferred tax asset relating to the net operating loss
carryforwards and research credits and the corresponding valuation
allowance were approximately $3,488,000, $2,026,000 and $703,000 at
December 31, 1996, 1995 and 1994, respectively. Changes in the Company's
ownership may cause limitations in the amount of loss carryforwards that
can be utilized.
(10) COMMITMENTS AND CONTINGENCIES
The Operating Companies have entered into several consulting and
employment agreements. Under the terms of these agreements $585,000 will
be paid in 1997. Consulting expense under these agreements amounted to
$417,859, $323,210 and $137,454 for the years ended December 31, 1996,
1995 and 1994, respectively.
Channel entered into two license agreements with third parties, one of
which was amended on March 12, 1995, whereby Channel is obligated to
reimburse the licensor, up to $150,000 through 1997 for prior patent
expenses. Prior patent costs paid under this agreement during the year
ended December 31, 1995 were $10,000. Channel also entered into a
sponsored research agreement with the licensor, as amended on June 26,
1995, which requires Channel to fund approximately $400,000 for
sponsored research over an eighteen-month period beginning January 1,
1996. Under this agreement $275,500, $24,500 and $0 was expensed during
the years ended December 31, 1996, 1995 and 1994, respectively.
As of December 31, 1996 the Company is a defendant in a case alleging
breach of contract. Management believes that this case is without merit
and that the outcome of the case will not have a material adverse effect
on the financial position or the results of operations of the Company.
F-13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL STATEMENTS
FOR THE PERIOD ENDED SPETEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,269,532
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,294,481
<PP&E> 157,894
<DEPRECIATION> 75,133
<TOTAL-ASSETS> 2,377,242
<CURRENT-LIABILITIES> 281,792
<BONDS> 0
0
0
<COMMON> 2,914
<OTHER-SE> 10,634,938
<TOTAL-LIABILITY-AND-EQUITY> 2,377,242
<SALES> 0
<TOTAL-REVENUES> 97,644
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,817,040
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (161,704)
<INCOME-PRETAX> (3,557,692)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,557,692)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,557,692)
<EPS-PRIMARY> (1.29)
<EPS-DILUTED> (1.29)
<FN>
<F1>Amounts inapplicable or not disclosed as a separate line on the Statement of
Financial or Results of Operations are reported as 0 herein.
</FN>
</TABLE>
