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, 1998
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
-------------------------------
ATLANTIC PHARMACEUTICALS, INC.
(Exact name of issuer as specified in its charter)
DELAWARE 36-3898269
-------- ----------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1017 Main Campus Drive, Suite 3900, Raleigh, North Carolina 27606
- ----------------------------------------------------------- -----
(Address of principal executive offices) Zip Code
(919) 513-7020
--------------
(Issuer's telephone number)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Units, each consisting of one share of Common Stock
and one Redeemable Warrant
Common Stock, $.001 par value
Redeemable Warrants
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 fiscal year ended December 31, 1998 were
$2,500,000
As of March 16, 1999 there were 4,561,038 outstanding shares of common stock,
par value $.001 per share.
The aggregate market value of the voting common stock of the issuer held by
non-affiliates of the issuer on March 16, 1999 based on the closing price of the
common stock as quoted by the Nasdaq SmallCap Market on such date was
$6,841,557.
Transitional Small Business Disclosure Format: YES [ ] NO [X]
<PAGE>
In addition to historical information, this report contains predictions,
estimates and other forward-looking statements that involve a number of risks
and uncertainties that are described below more fully in "Risk Factors". While
the outlook represents our current judgement on the future direction of the
business, these risks and uncertainties are only some of the factors that may
ultimately affect the success of Atlantic Pharmaceuticals, Inc. Actual results
may differ materially from any future performance suggested in this report.
PART I
ITEM 1 - DESCRIPTION OF BUSINESS
GENERAL
Atlantic Pharmaceuticals, Inc. ("Atlantic" or the "Company") is engaged in
the development of biomedical and pharmaceutical products and related
technologies. The Company's strategy consists of: (i) identifying nascent
products and technologies in the medical and related fields 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 products and technologies by either selling or sublicensing
rights or by entering into agreements with one or more pharmaceutical or
biomedical companies for clinical development, manufacturing and/or marketing of
such technology.
The Company has rights to four technologies which it believes may be useful
in the treatment of a variety of diseases, including cancer, infectious disease,
ophthalmic disorders, cardiovascular disorders, pain and inflammation. The
primary focus of the Company's activities for the near future will be the
development of these technologies. The Company periodically may explore entering
into strategic relationships, cross-licensing arrangements or other business
agreements with third parties that are consistent with the development of the
Company's technologies. Currently, all of the Company's potential products and
technologies are in preclinical stages of development and no assurance can be
given as to the successful development, production or commercialization of any
of the Company's technologies. The Company may also explore the acquisition and
subsequent development and commercialization of additional biomedical and
pharmaceutical products and technologies.
OVERVIEW OF THE CORPORATE STRUCTURE
The Company was incorporated in 1993. Each of the Company's technologies is
held either by the Company or by one of its operating subsidiaries, which are
managed by employees of the Company: (1) Optex Ophthalmologics, Inc., a Delaware
corporation ("Optex"), (2) Gemini Technologies, Inc., a Delaware corporation
("Gemini"), and (3) 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
technologies based on the progress of the individual projects. (The terms the
"Company" and "Atlantic" may refer to Atlantic and/or any or all of the
Operating Companies as indicated by the context.) The Company has established a
separate Scientific Advisory Board for each technology or product. The
Scientific Advisory Boards are composed of eminent scientists who provide advice
and expertise to the Company on its research and development activities.
2
<PAGE>
OPTEX OPHTHALMOLOGICS AND THE CATAREXTM TECHNOLOGY
BACKGROUND
One of the most common disorders of aging is the development of a cataract,
or a clouding of the normally 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, may result from aging or
may be caused by injury or disease. Cataract surgery is currently the most
frequently performed therapeutic surgical procedure in the United States among
persons over 65 years of age. Medicare pays $3.4 billion a year for 1 million of
the 1.3 million cataract procedures performed annually in the United States.
Each year approximately 3.6 million cataract surgeries are performed worldwide.
According to the American Academy of Ophthalmology, the chances are 50% that a
person between the ages of 52 and 64 will develop a cataract and by age 75
almost everyone will develop a cataract. The Company anticipates that, in light
of the demographics of an aging population, the number of cataract removal
procedures performed annually will increase for the near future.
Currently, there are two principal technologies that are widely used for
cataract removal: extracapsular cataract extraction ("ECCE") and
phacoemulsification ("phaco"). Until relatively 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 assisted 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 emitting handpiece to sculpt or
carve the lens nucleus. Phaco is less invasive and calls for smaller incisions
in the eye and lens capsule 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 for the surgeon 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 degeneration of such layer.
THE CATAREXTM DEVICE AND ITS APPLICATIONS
The Company is developing its 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 within 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.
The incision in the lens capsule would then need to be slightly enlarged
(because of the limitations of currently available intraocular lenses) and a new
synthetic lens would then be placed in the capsule.
The Company believes that Catarex will provide several advantages over
existing technologies that should facilitate acceptance by the ophthalmic
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 lens capsule that will be smaller than the incisions
required by either ECCE or phaco procedures. The Company anticipates that the
smaller incision in the eye will reduce operative and post-operative time and
trauma, thus
3
<PAGE>
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 lens capsule of the lens is expected
to remain functionally intact, thereby shielding the cells that line the inner
surface of the cornea from damage. The Catarex technology is expected to be
easier for surgeons to learn than phaco 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. Finally, studies to date have indicated that the Catarex device can be
used on cataracts of all degrees of hardness.
RESEARCH AND DEVELOPMENT ACTIVITIES
The feasibility of Catarex has been demonstrated in ex vivo bovine, porcine
and human cataract preparations using a laboratory prototype of the device. In
ex vivo studies using porcine eyes the eye was left intact and the lens nucleus
and cortical material were removed through a 2mm to 3mm capsulorexis (puncture)
in the anterior lens capsule. This prototype device was also demonstrated to be
effective in removing the ocular lens in an in vivo study conducted in a porcine
model. The in vivo study 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. This prototype has been tested in vivo in a
porcine model and in a human cataract model developed by the scientific founders
of Optex. In this model, the human cataract lens and lens capsule are removed
intact and embedded in gelatin. The studies demonstrated the ability of Catarex
to remove cataract lenses of a wide range of hardness while maintaining a
functionally intact lens capsule.
In May 1998, the Company entered into a worldwide licensing deal with
Bausch & Lomb Surgical ("Bausch & Lomb"), a multinational company in the field
of ophthalmology. The agreement provides for the payment by Bausch & Lomb of
up-front and milestone payments as well as the payment of royalties to Optex on
sales of the Catarex device. In addition, the agreement provides that Bausch &
Lomb will reimburse Optex for all of its costs (up to $2.5 million) related to
the development of the Catarex device since the date of the agreement and that
Bausch & Lomb will be responsible for clinical testing, obtaining regulatory
approval worldwide, manufacturing and commercializing the product. As of
December 31, 1998, Optex had received $2.5 million in up-front and milestone
payments and more than $1 million in reimbursement of costs. The next milestone
payment of $4 million will be payable upon a clinical demonstration of the
efficacy of the Catarex device. This payment is anticipated early in the year
2000. See "Risk Factors - Risks Concerning Commercialization of Catarex."
Research and development efforts at this time are focused on developing a
manufacturable device and refining the disposable portions of the device. This
work has been done by both Optex and Bausch & Lomb employees. The Company
anticipates that Bausch & Lomb will file a 510(k) application with the U.S. Food
and Drug Administration (the "FDA") in 1999.
COMPETITIVE BUSINESS ENVIRONMENT
There are several large companies that have significant franchises in the
phaco market. The Company is aware of several other devices under development
for cataract removal. At this time, the Company does not anticipate that these
devices offer any advantages over those foreseen for the Catarex device.
PROPRIETARY RIGHTS
Pursuant to an assignment agreement with the inventor of Catarex 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 and a
U.S. patent application and corresponding foreign applications to a capsulorexis
device to be used in conjunction with Catarex.
4
<PAGE>
EMPLOYEES
Optex currently employs three full time employees who are the inventors of
the Catarex technology and are responsible for its development at its leased
facilities in San Juan Capistrano, California. The Company has also periodically
hired consultants based on its business needs. At this time there are no plans
to hire additional employees of the Company.
ATLANTIC PHARMACEUTICALS AND THE CT-3 TECHNOLOGY
BACKGROUND
Agents for the treatment of pain and inflammation are among the most widely
prescribed pharmaceutical products. Currently available analgesic (anti-pain)
and anti-inflammatory drugs include narcotics, non-narcotic analgesics,
corticosteroids and nonsteroidal anti-inflammatory drugs including COX-2
inhibitors ("NSAIDs"). Although highly effective as analgesics, the usefulness
of narcotics is limited by their addictive potential and other significant
adverse effects. In contrast, non-narcotic analgesics are safer 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 potentially significant side effects. NSAIDs, such
as aspirin, ibuprofen and indomethacin, are generally safer than corticosteroids
for long-term administration, but they too can cause significant side effects
when used chronically. The newer COX-2 inhibitors, e.g. Celebra (G.D. Searle &
Co.), although potentially less ulcerogenic than traditional NSAIDs, do not
appear to be more efficacious for pain relief or inflammation.
Although a major focus of pharmaceutical research for many years has been
the development of safe, powerful anti-inflammatory and analgesic drugs with
minimal adverse side effects, no such universally applicable safe drug has yet
been developed. A variety of compounds are in preclinical and early clinical
development, but it is not clearly evident that an acceptable combination of
high potency and good safety has yet been achieved.
THE CT-3 TECHNOLOGY AND ITS APPLICATIONS
The Company is the licensee of exclusive worldwide rights to three U.S.
patents and one U.S. patent application and corresponding foreign applications
covering a group of compounds, one of which is currently designated "CT-3." The
Company believes that this group of compounds may be potentially useful in the
treatment of inflammation and pain based upon the anti-inflammatory and
analgesic properties exhibited in early preclinical studies. The Company also
believes that this group of compounds has a reduced potential for side effects
based on these early studies.
The Company is developing CT-3, a synthetic derivative of a metabolite of
tetrahydrocannabinol (THC). 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
anti-inflammatory and analgesic effects without the psychoactive effects of THC.
Several in vitro studies have indicated that CT-3 acts by inhibiting a number of
cytokines (mediators of inflammation) and the Company believes this mechanism of
action is potentially useful in the treatment of inflammation. Several in vivo
studies have tested the analgesic activity of CT-3 and the data available, to
date, indicates the potential of CT-3 to have equipotent analgesic activity as
compared to morphine without comparable adverse effects such as constipation and
addiction liability. In addition, CT-3 has been tested in an in vivo model of
rheumatoid arthritis and showed significant anti-inflammatory effects, including
the potential to positively modify the course of joint destruction. The
preliminary data on CT-3 makes it an attractive candidate for development as an
anti-inflammatory agent and an analgesic agent that potentially lacks the major
side effects of
5
<PAGE>
traditional NSAIDs, corticosteroids and narcotics. Initially, the Company plans
to develop an oral formulation of CT-3 as a treatment for acute pain and
possibly acute inflammation, followed by chronic use indications in those
categories. The Company believes that it is not yet known whether this compound
is more clinically efficacious than traditional NSAIDs, corticosteroids, COX-2
inhibitors and the variety of potential competitor compounds in late preclinical
and early clinical development. .
RESEARCH AND DEVELOPMENT ACTIVITIES
The Company is developing CT-3 as the lead compound in the series of
patented compounds. CT-3 has been tested in a number of pre-clinical in vitro
and in vivo studies to profile its potential activity and to elucidate possible
mechanisms of action.
Research activities in 1998 focused on the toxicology work necessary to
begin clinical studies. CT-3 is currently still undergoing formal toxicology
testing. The toxicology program underway is a focused program aimed at beginning
clinical testing in Europe during the third quarter of fiscal 1999. The Company
believes that it is crucial to conduct Phase I studies to determine the
potential for any detrimental central nervous system effects of CT-3. The design
of the clinical program will require additional toxicology testing and
formulation development prior to beginning large-scale clinical studies. To
date, the results of the toxicology testing have not resulted in any data that
would cause the discontinuation of the development program.
In addition to toxicology testing, the Company has begun a series of
studies to attempt to further elucidate the analgesic mechanism of action of
CT-3 and to determine if it has any potential for addiction or tolerance, which
are significant drawbacks of narcotic analgesics. To date, no information is
available from these studies.
As the Company is currently focusing research efforts on advancing CT-3 to
clinical studies, no further work is currently scheduled on analogue or
follow-up compounds for CT-3. See "Risk Factors - Risks Concerning Development
of CT-3."
COMPETITIVE BUSINESS ENVIRONMENT
The market for the treatment of pain and inflammation is large and highly
competitive. Several multinational pharmaceutical companies currently have
significant franchises in this market and many companies have active research
programs to identify and develop more potent and safer anti-inflammatory and
analgesic agents. One notable area of research is in the development of "COX 2
inhibitors" that are claimed to be safer to the stomach than available NSAIDs.
(COX 2 inhibition is not considered a significant contributor to the mechanism
of action of CT-3; in vitro studies have shown very weak COX 2 inhibition.) One
of these COX 2 inhibitor compounds has recently received FDA approval, another
is being reviewed by the FDA in connection with a New Drug Application and
several others are in various stages of clinical development. The Company
believes that the potential advantages of CT-3 merit its development and it
believes that if the development is successful CT-3 could become a significant
new agent in the treatment of pain and inflammation.
The Company is in the process of identifying one or more strategic partners
to assist in the clinical development, regulatory approval filing, manufacturing
and/or marketing of CT-3. 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.
PROPRIETARY RIGHTS
The Company has an exclusive worldwide license to three U.S. patents, a
provisional U.S. patent application and corresponding foreign applications
covering a group of compounds, including CT-3, from Dr. Sumner Burstein, a
professor at the University of Massachusetts (the "License"). This License
extends until the expiration of the underlying patent rights. The primary U.S.
patent expires in 2012. The Company has the right under the License to
sublicense its rights thereunder. The 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
6
<PAGE>
License and a percentage of any income derived from any sublicense of the
licensed technology. Furthermore, pursuant to the terms of the License, the
Company must satisfy certain other terms and conditions in order to retain
license rights thereunder. If the Company fails to comply with certain terms of
the License, its license rights under the License could be terminated.
EMPLOYEES
Atlantic currently employs three full-time employees. All of these
employees are officers of each of Atlantic and the Operating Companies. The
three Atlantic employees are responsible for managing the development of CT-3 in
addition to their managerial responsibilities in Atlantic and all subsidiary
companies. No employees were hired solely to develop CT-3.
GEMINI TECHNOLOGIES AND THE 2-5A ANTISENSE TECHNOLOGY
BACKGROUND
Proteins carry out physiological functions of humans and microorganisms.
For example, in infectious diseases, proteins of invading organisms mediate the
infectious process, and in many malignancies, it is the presence of a
defective/abnormal protein that causes a cell's abnormal growth. The
instructions to produce all of the proteins in the human body are stored in the
cell nuclei in the form of deoxyribonucleic acid ("DNA"). DNA contains the
information that is the blueprint for protein molecules. In order to produce a
protein, a cell must first copy the relevant information in the DNA into a
messenger ribonucleic acid ("mRNA") molecule (a process known as transcription).
Such information is conveyed by the precise sequence of the nucleotide chain
comprising the mRNA molecule. Once the information is transcribed into a mRNA
molecule, it is transported out of the cell's nucleus into the cytoplasm where,
a process known as translation uses the information encoded by the mRNA used to
synthesize a protein. Viruses use either DNA or RNA as their genetic material
that can also be used as a potential target for antisense therapeutic agents.
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 largely 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 alter the production of
disease-causing proteins. They do so by binding specifically to targeted strands
of mRNA or viral genomic RNA (the "sense"). In many pathological conditions, it
is the information encoded by the mRNA (or genomic RNA) that is utilized to
synthesize proteins involved in the causation and even the perpetuation of a
disease. By utilizing the sequence of the target RNA, an antisense molecule (an
"antisense oligonucleotide") capable of binding to the target RNA can be
designed. The effect of this binding is to block the ability of the RNA to
produce disease-causing proteins. The antisense that is bound to the RNA may
directly impair the translation of the RNA into protein, or it may promote RNA
degradation by attracting cellular enzymes known as ribonucleases (RNases) that
cleave RNA. To date, only one such therapeutic has been approved by the FDA but
several dozen antisense compounds are being utilized in human clinical trials by
other companies and the Company expects that one or more of those companies will
apply to the FDA for marketing approval within the next several years.
THE 2-5A CHIMERIC ANTISENSE TECHNOLOGY AND ITS APPLICATION
Gemini is developing a novel antisense technology that combines the
2'-5' oligoadenylate (2-5A) complex with standard antisense compounds to form a
chimeric molecule (the "2-5A Chimeric Antisense Technology"). Two of the key
components of the 2-5A system are 2-5A, a short oligoadenylate, and 2-5A
dependent ribonuclease
7
<PAGE>
L (RNaseL), an enzyme found in most human cells. RNaseL becomes selectively
activated after interacting with a 2-5A antisense chimera; RNaseL then rapidly
and selectively degrades the target RNA.
The catalytic properties of the 2-5A Chimeric Antisense Technology increase
the rate at which a targeted RNA molecule is degraded. The Company believes that
the specificity and the 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 when combined with selected
antisense therapeutics under development by third parties.
RESEARCH AND DEVELOPMENT ACTIVITIES
The Company is currently conducting research at its own laboratory
facilities and is also sponsoring research at the National Institutes of Health
(the "NIH"). The current research is focused on two main objectives: (1) to
continue basic research with the 2-5A Chimeric Antisense Technology in order to
improve the knowledge base of the technology, efficiency of synthesis and to
potentially increase its broad-potential ("platform") clinical utility and (2)
to develop a potential lead product candidate for the treatment of Respiratory
Syncytial Virus ("RSV") infection. Research to date has been conducted primarily
in in vitro systems and has included studies of infectious diseases (RSV,
herpes, human immunodeficiency virus), certain cancers (chronic myelogenous
leukemia, glioblastoma), conditions modulated by 5-alpha reductase and
dihydrotestosterone receptors (acne and androgenic alopecia) and aspects of the
interferon pathway that are mediated by PKR (a protein kinase enzyme). Based on
these data, the Company decided to initially focus more of its efforts on
studies of RSV and telomerase, an enzyme believed to be critical for the growth
and survival of some cancers.
Gemini's research efforts in 1998 were primarily focused on improving the
basic chemistry of the technology and moving the lead RSV molecule into in vivo
proof-of-principle testing. These tests, to be conducted in a primate model of
infection, are expected to be performed in the second quarter of 1999. Data
collected during 1998 indicate that the molecule to be tested has greater in
vitro potency than Ribavarin, one of two FDA-approved treatments for RSV
infections (the other treatment is a monoclonal antibody recommended for use in
high-risk infants only) and were published in The Proceedings of the National
Academy of Sciences, a peer-reviewed research journal. The current molecule has
also been shown to be stable against degradative enzymes and is capable of being
absorbed into lung tissue when administered in a droplet formulation. We
anticipate, but we can give no assurance, that the planned studies will
establish proof-of-efficacy in primates. Further in vivo studies will likely be
necessary to firmly establish optimal dosing regimens. The lead compound against
telomerase demonstrated convincing proof-of-concept in a limited in vivo (nude
mice) model where human glioblastoma (the most common form of primary brain
cancer) cells were transplanted into the animals. The data were subsequently
published in Oncogene, a peer-reviewed journal dedicated to cancer research.
The Company believes that the current focus of its antisense program on
primate-oriented RSV will allow it to more effectively pursue corporate
partnerships to further the development of the 2-5A antisense technology. If the
Company can complete such a partnership, the research and development of the
technology may be expanded into some of the aforementioned and additional areas
of potential clinical use.
COMPETITIVE BUSINESS ENVIRONMENT
Several biotechnology companies focus primarily on antisense technology and
a number of multinational pharmaceutical companies have active research programs
and/or collaborations in the area of antisense technology. The Company believes
that these companies are potential partners rather than competitors as data
generated to date shows that the 2-5A Chimeric Antisense Technology can
potentially be used to enhance the efficacy of other antisense oligonucleotides,
or alternatively be capable of independently demonstrating superior activity
against selected disease targets being pursued by other companies.
It is also becoming increasingly apparent to the scientific community that
the more sophisticated, stabilizing backbone technologies being pursued by most
companies are less active in their ability to recruit
8
<PAGE>
RNaseH, a key RNA-degradative enzyme. The 2-5A antisense technology appears to
be highly compatible with newer backbones, without compromising the ability to
recruit and activate RNaseL. No other potential solutions to this apparent
dilemma are currently known.
Antisense technology is still an experimental treatment and, to date, only
one antisense product has been approved by the FDA or other regulatory agencies
for clinical use.
PROPRIETARY RIGHTS
The Company has an exclusive worldwide sublicense (the "Cleveland License")
from The Cleveland Clinic Foundation (the "Cleveland Clinic") 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 RNA. The rights exclusively licensed to 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 Cleveland License extends until the expiration of the underlying
patent rights. The Cleveland License provides for payment of royalties by Gemini
to the Cleveland Clinic based on sales of products and processes incorporating
technology licensed under 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 other terms and conditions in order to retain its license rights
thereunder. 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 cause the termination of the
Cleveland License and, in turn, the company's access to the technology.
EMPLOYEES
Gemini currently has three full-time employees working on research and
development of the 2-5A Chimeric Antisense Technology at its leased research
facility. The Company also hires consultants from time to time to assist in the
research and development of the 2-5A Chimeric Antisense Technology. There are no
plans to hire additional employees at this time. The laboratory is located at
11000 Cedar Avenue, Cleveland, Ohio 44106.
CHANNEL THERAPEUTICS AND THE SULFATED CYCLODEXTRIN TECHNOLOGY
BACKGROUND
Growth factors are generally positively-charged 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
pathological conditions caused by the inappropriate expression of growth factors
which result in smooth muscle cell proliferation and migration. Restenosis is
the renarrowing of the blocked arteries after opening by balloon angioplasty or
any other form of vascular surgery/intervention; 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 major pathological role.
Restenosis occurs in approximately 20-40% of patients within six to twelve
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 30%. There are no currently available 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
9
<PAGE>
demonstrated that stenting has a superior early anti-restenosis effect compared
with balloon angioplasty, vigorous smooth muscle cell growth around the stents
continues to result in late restenosis.
THE CYCLODEXTRIN TECHNOLOGY AND ITS APPLICATIONS
Channel is the licensee under several patents and related patent
applications covering the use of polyanionic cyclodextrins and derivatives
thereof for the fields of use for the treatment and prevention of restenosis and
late vein graft failure from the University of Pennsylvania ("Penn"). Anionic
cyclodextrins have been shown to avidly bind positively charged growth factors
in vitro.
The Company believes that the anionic sulfated derivatives of cyclodextrins
may have the capability of interacting with growth factor proteins and altering
their action on cellular proliferation. Channel is currently developing such
cyclodextrin derivatives and has data from in vivo studies demonstrating in
small animals that the derivatives are absorbable through the gastrointestinal
tract, 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 (unlike unsulfated
cyclodextrins), due to their high water solubility.
If successfully developed, the Company believes that sulfated cyclodextrins
could potentially be useful oral and/or parenteral agents for the treatment of
restenosis and late vein graft failure. Channel is also exploring the
feasibility of coating vascular stents with sulfated cyclodextrins.
RESEARCH AND DEVELOPMENT ACTIVITIES
The Company has sponsored studies in a number of in vivo models of
restenosis and late vein graft failure. Results from rodent and rabbit models
indicated that the sulfated cyclodextrins have potential for the treatment of
restenosis. Based on these preliminary results, the Company conducted more
extensive studies in two large animal models that are believed to be more
predictive of outcomes in humans than small animal models. In one large study of
restenosis in a porcine model, CT-1, the monomeric, soluble form of the sulfated
cyclodextrins, was tested using: continuous intravenous infusion; daily oral
administration; and local intravenous (via angioplasty catheter) application of
the compound. In this study, a highly significant reduction in restenosis rates
was seen for both the continuous infusion and oral dosing groups. The second
study was conducted using CT-2, the polymeric form of the sulfated
cyclodextrins, in an ovine (sheep) model of arteriovenous vascular grafts. In
this study, extensive inflammation related to the polymer was seen in treated
animals. Based on the results of these studies, the development of CT-2 was
discontinued. The Company is currently seeking an alliance to continue the
development of CT-1, but at this time no specific discussions are underway with
any potential collaborator for the further development of the cyclodextrin
technology. See "Risk Factors - Risks Concerning Funding of Development of
Cyclodextrin Technology."
COMPETITIVE BUSINESS ENVIRONMENT
A number of companies have active research and development programs
employing a variety of therapeutic approaches in the area of restenosis and late
vein graft failure, including some compounds in advanced clinical development.
Some of these companies have significantly greater resources than the Company.
Having achieved successful proof-of-concept in four species and acknowledging
the significant additional resources needed in this intensely competitive
environment, the Company is seeking one or more strategic partners for further
development and is not currently planning on financing further research and
development of the cyclodextrins on its own. See "Risk Factors - Risks
Concerning Funding of Development of Cyclodextrin Technology."
PROPRIETARY RIGHTS
Channel has acquired a worldwide exclusive license (the "Penn License") to
several U.S. and corresponding foreign patents and patent applications that Penn
owns, is the sole and exclusive licensee of or is a
10
<PAGE>
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 and late vein graft
failure. 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 a royalty payment to Penn
based on sales of the products and processes incorporating the licensed
technology. Channel is also to 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 termination of
the Penn License. See "Risk Factors--Dependence on License Agreements."
EMPLOYEES
Channel currently has no employees and does not intend to hire employees in
the near future. Research and development of the cyclodextrin technology has
been performed under contracts and Sponsored Research Agreements with third
parties.
EMPLOYEES
As of March 16, 1999, the Operating Companies and we had a total of nine
employees, all of whom are full-time employees. In addition, as of March 16,
1999, the Operating Companies and we in the aggregate utilized 35 consultants,
scientific advisors and directors in their research and development activities
who devote only a portion of their time to our business or that of an Operating
Company.
RISK FACTORS
An investment in our securities involves a high degree of risk. In addition
to the other information in this Form 10-KSB, you should carefully consider the
risks below in evaluating an investment decision in our company. The risks below
are not the only risks facing our company. There may be additional risks and
uncertainties not presently known to us or that we have deemed immaterial which
could also negatively impact our business operations. If any of the following
risks actually occur, our business, financial condition and results of
operations would likely be materially adversely affected. In that event, the
trading price of our securities could decline and you could lose all or part of
your investment. This Form 10-KSB may contain forward-looking statements that
involve risks and uncertainties, such as statements of our plans, objectives,
expectations and intentions. Our actual results could differ materially from
those anticipated in these forward-looking statements for reasons including the
risks described below as well as the other information in this Form 10-KSB.
WE HAVE A DIVIDED BOARD
Certain members of our Board of Directors currently have significant
disagreements with one another, including disagreements concerning the
composition of the board of directors, the strategic direction of our company,
corporate governance and operations matters. Preliminary proxy statements, which
have been filed with the SEC by us and by a group of individuals including one
of our board members, are available for review at http://www.sec.gov, and
describe the directors' disagreements in more detail. We do not know when or how
these disagreements will be resolved. We cannot take any action requiring board
approval until a majority of our board is in agreement on the matter. Actions
that require board approval include election of our president and chief
executive, embarking on significant new research initiatives, issuing our
securities and entering into material agreements.
11
<PAGE>
HOLDERS OF OUR SERIES A PREFERRED STOCK HAVE RIGHTS SUPERIOR TO THOSE OF THE
HOLDERS OF OUR COMMON STOCK
Holders of shares of our outstanding Series A Preferred Stock can convert
each share into 3.27 shares of Common Stock without payment of any cash to us.
The conversion price of the Series A Preferred Stock is $3.06 per share. Both
the conversion rate and the conversion price may be adjusted in favor of the
holders of the Series A Preferred Stock upon certain triggering events.
Accordingly, the number of shares of Common Stock that holders of the Series A
Preferred Stock receive upon conversion may increase, which could adversely
affect the prevailing market price of our other securities.
In addition, each February 7 and August 7 we are obligated to pay
dividends, in arrears, to the holders of the Series A Preferred Stock, and the
dividends consist of 0.065 additional shares of Series A Preferred Stock for
each outstanding share of Series A Preferred Stock. Our obligation to issue
additional shares of Series A Preferred Stock without payment of any cash to us
could adversely affect the prevailing market price of our other securities.
If we are liquidated, sold to or merged with another entity (and we are not
the surviving entity after the merger), we are obligated to pay the holders of
the Series A Preferred Stock a liquidation preference of $13.00 per share before
any payment is made to the holders of the Common Stock. After payment of the
liquidation preference, we might not have any assets remaining to pay the
holders of the Common Stock. The liquidation preference could adversely affect
the market price of our other securities.
We need to obtain the approval of a supermajority (66.67%) of the
outstanding shares of the Series A Preferred Stock, voting separately as a
class, to approve certain actions that we may wish to take. Accordingly, if we
are unable to obtain the required approval on a timely basis from the holders of
the Series A Preferred Stock, our ability to conduct business may be impaired,
which could adversely affect our business, financial condition and results of
operations.
The holders of the Series A Preferred Stock have rights in addition to
those summarily described above. A complete description of the rights of the
Series A Preferred Stock is contained in the Certificate of Designations for
such securities filed with the Secretary of State of the State of Delaware and
attached hereto as an exhibit.
OUR FUTURE PROFITABILITY IS UNCERTAIN
Our company was incorporated in 1993 and has incurred significant operating
losses in each of our fiscal years since then. As of December 31, 1998, our
accumulated deficit was $16,343,584. We have not completed development of any of
our products or generated any product sales to date. All of our technologies and
products under development are in the research and development stage, which
requires substantial expenditures. Our operating revenue of $2,599,932 from
inception through December 31, 1998 consists of a government grant and up-front
and milestone payments made by Bausch & Lomb. Except for additional milestone
payments from Bausch & Lomb, which we do not anticipate receiving until at least
the year 2000, we do not expect to generate any revenues in the near future. It
is possible that we may not receive any additional payments from Bausch & Lomb.
We expect to incur significant operating losses over the next several years,
primarily due to continuation and expansion of our research and development
programs, including preclinical studies and clinical trials for our products and
technologies under development, as well as costs incurred in identifying and,
possibly, acquiring, additional technologies. To generate revenues or profits,
we (alone or with corporate partners) must successfully develop, test, obtain
regulatory approval for, manufacture and commercialize our potential products.
It is possible that our product development efforts may not be successful or
that we may not obtain required regulatory approvals. Even if our products are
developed and introduced, they may not be successfully commercialized.
12
<PAGE>
WE HAVE CONTINUING FUTURE CAPITAL NEEDS; WE ARE UNSURE WHETHER ADDITIONAL
FUNDING WILL BE AVAILABLE
As of December 31, 1998, we had cash, cash equivalents and short-term
investment balances of approximately $5,835,669. Based on a budget prepared by
our management team, we currently anticipate that we will spend all of our
current cash resources by the end of the first quarter of 2000, although
unanticipated expenses could cause us to spend all of our current cash resources
prior to that time. We will require substantial additional resources to continue
to conduct the development and testing of our potential products, to obtain
regulatory approvals and to manufacture and commercialize any products that may
be developed. Our future capital requirements will depend on numerous factors,
including:
o the progress of our research and development programs;
o the cost of acquiring additional products and technologies, if any;
o the progress of our ongoing and planned preclinical and clinical testing;
o the time and costs involved in obtaining regulatory approvals;
o the cost of filing, prosecuting, defending and enforcing patent claims and
other intellectual property rights;
o competing technological and market developments;
o changes in our existing collaborative and licensing relationships;
o our ability to establish additional collaborative relationships for the
development, testing, obtaining regulatory approvals, manufacture and
commercialization of our potential products;
o the status of competitors;
o the level of resources we must devote to the development of manufacturing
and commercialization capabilities; and
o our need, if any, to purchase capital equipment.
We will need to obtain additional funding through public or private equity
or debt financings, collaborative arrangements or from other sources to continue
our research and development activities, to fund operating expenses and to
pursue regulatory approvals and commercialization for our products in
development. Current stockholders may experience significant dilution if we
raise funds by issuing equity securities. In addition, if one of our
subsidiaries raises additional funds by issuing equity securities, our interest
and that of our stockholders in the subsidiary could be diluted. Moreover, if
our voting interest in any of our subsidiaries fell below 50%, we might not be
able to exercise an adequate degree of control over the affairs of the
subsidiary. If we obtain additional funds through collaborative agreements, we
may be required to relinquish rights to certain of our technologies, product
candidates, products or marketing territories that we would otherwise seek to
develop or commercialize ourselves. Additional financing sources may not be
available on acceptable terms, if at all. If adequate funds are not available,
significant reductions in spending and the delay, scaling back or elimination of
one or more of our research, discovery or development programs may be necessary,
which would materially and adversely affect our business, financial condition
and results of operations.
OUR CAPITALIZATION STRUCTURE MAY ADVERSELY AFFECT THE PRICE OF OUR COMMON STOCK
AND IMPEDE OUR ABILITY TO OBTAIN ADDITIONAL FUNDING
As of December 31, 1998, our outstanding convertible securities (other than
those relating to the Series A Preferred Stock), both vested and unvested, were
convertible into 4,663,549 shares of Common Stock at prices ranging from $1.00
to $10.00 per share. As of December 31, 1998, there were outstanding 632,468
shares of Series A Preferred Stock and warrants to purchase 117,195 shares of
Series A Preferred Stock, which may be converted into shares of Common Stock at
a conversion rate of 3.27 shares of Common Stock for each share of Series A
Preferred Stock. The exercise of these convertible securities or the conversion
of the Series A Preferred Stock into shares of Common Stock may adversely affect
the market price of the Common Stock as well as the
13
<PAGE>
market price of the Redeemable Warrants and Units. The Certificate of
Designations of the Series A Preferred Stock provides that we may not issue
securities that have superior rights to the Series A Preferred Stock without the
consent of the holders of the Series A Preferred Stock. Accordingly, so long as
these convertible securities remain unexercised and shares of the Series A
Preferred Stock remain unconverted, the terms under which we could obtain
additional funding, if at all, may be adversely affected.
RISKS CONCERNING COMMERCIALIZATION OF CATAREX
In May 1998, we entered into a worldwide licensing agreement with Bausch &
Lomb to complete the development of Catarex, the cataract removal technology
developed by Optex. Under the terms of the agreement, Optex and Bausch & Lomb
committed to complete jointly the development of Catarex and Bausch & Lomb will
assume responsibility for clinical testing, obtaining regulatory approvals,
manufacturing and commercializing Catarex globally. Bausch & Lomb has reimbursed
some of Optex's development expenses, has paid Optex up-front and milestone
payments and may be obligated to pay Optex additional milestone payments. In
addition, Bausch & Lomb has committed to pay ongoing royalties on sales of
Catarex products. However, Bausch & Lomb and we may not be able to complete the
development of Catarex, the milestones that trigger payment obligations from
Bausch & Lomb might not be reached or Bausch & Lomb might not be able to
successfully complete clinical testing, obtain regulatory approvals, manufacture
and commercialize Catarex and, consequently, pay us royalties.
RISKS CONCERNING DEVELOPMENT OF CT-3
We have decided to focus our research and development resources related to
CT-3 on toxicology testing and subsequent Phase I studies to determine the
potential for any detrimental central nervous systems effects of CT-3. If the
toxicology testing or Phase I studies indicates significant central nervous
effects of CT-3, we may elect to sublicense or relinquish our rights to the CT-3
technology. If the Phase I studies do not indicate significant detrimental
central nervous system effects of CT-3, our current plan, because of the expense
involved in clinical development after Phase I studies, is to withhold
additional development of CT-3 until we reach a collaborative agreement with a
partner to help fund the development of CT-3. We may not be successful in
negotiating or entering into such an agreement on terms favorable to us or at
all, and any agreement, if entered into, may be unsuccessful. A failure to
successfully enter into such an agreement may result in our sublicensing or
relinquishing all of our rights to the CT-3 technology.
RISKS CONCERNING FUNDING OF DEVELOPMENT OF CYCLODEXTRIN TECHNOLOGY
We have decided to focus our research and development resources related to
the cyclodextrin technology on the CT-1 compound and to discontinue research and
development on our other cyclodextrin compounds. We have decided not to fund any
additional research and development on the CT-1 compound until we reach a
collaborative agreement with a partner to help further fund the research and
development of CT-1. We may not be successful in negotiating or entering into
such an agreement on terms favorable to us or at all, and any agreement, if
entered into, may be unsuccessful. A failure to successfully enter into such an
agreement may result in our relinquishing all of our rights to the cyclodextrin
technology.
WE DEPEND ON OTHERS FOR CLINICAL DEVELOPMENT, REGULATORY APPROVALS AND THE
MANUFACTURE AND COMMERCIALIZATION OF OUR PRODUCTS
We do not have the resources to directly conduct full clinical development,
obtain regulatory approvals, manufacture or commercialize any of our proposed
products and we have no current plans to acquire such resources. Our subsidiary,
Optex, has entered into a License & Development Agreement with Bausch & Lomb,
and
14
<PAGE>
we anticipate that we may enter into additional collaborative agreements with
pharmaceutical and/or biotechnology companies for the research and development,
clinical testing, seeking of regulatory approval, manufacturing or
commercialization of our proposed products. If we were unable to acquire such
third party arrangements on commercially acceptable terms it would materially
and adversely affect our business. These agreements could limit our control over
the resources devoted to these activities as well as our flexibility in
considering alternatives for the commercialization of such products. We can give
no assurance that we will be able to enter into any additional arrangements for
the development, clinical testing, seeking of regulatory approval, manufacturing
and commercialization of our products, or that, if such arrangements are entered
into, such future partners will be successful in commercializing products or
that we will derive any revenues from such arrangements.
RISKS RELATED TO TECHNOLOGICAL UNCERTAINTY AND THE EARLY STAGE OF OUR PRODUCT
DEVELOPMENT
To achieve profitable operations, we must, alone or with others,
successfully commercialize our technologies and products under development.
However, our technologies and product candidates are in the early stages of
development, will 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. Our product candidate with the most
advanced development is the Catarex technology and we do not anticipate that
this product candidate will enter into clinical testing until the year 2000. The
agreements with our licensors do not contain any representations by the
licensors as to the safety or efficacy of the inventions or discoveries licensed
to us. It is possible that:
o we will not be able to maintain our current research and development
schedules;
o we will not be able to successfully develop any or all of our technologies
and products;
o we will not be able to enter into human clinical trials with any of our
products because of scientific, governmental and/or financial reasons;
o we will encounter problems in clinical trials that will cause us to delay
or suspend product development;
o our technologies and products will be found to be ineffective or unsafe;
o our technologies and products will fail to meet applicable regulatory
standards; or
o our technologies and products will fail to obtain required regulatory
approvals.
Similarly, it is possible that our technologies and product candidates,
once developed, although effective,
o are uneconomical to commercialize;
o are not eligible for third party reimbursement from government or private
insurers;
o cannot be effectively commercialized by us because third parties hold
proprietary rights that preclude us from commercializing such technologies
and products;
o cannot be effectively commercialized by us because third parties market
superior or equivalent technologies and products;
o cannot be effectively commercialized by us because third parties have
superior resources to market similar products or technologies; or
o cannot be effectively commercialized by us because the technologies and
products have undesirable or unintended side effects that prevent or limit
their commercial use.
The failure of any of our product candidates to be commercialized could
materially and adversely affect our business, financial condition and results of
operations.
CERTAIN INTERLOCKING RELATIONSHIPS; POTENTIAL CONFLICTS OF INTEREST
Lindsay A. Rosenwald, M.D., one of our principal stockholders, is the
president and sole stockholder of Paramount Capital, Incorporated, a New
York-based merchant and investment banking firm specializing in the
15
<PAGE>
biotechnology industry. Paramount was the placement agent for our 1997 private
placement of Series A Preferred Stock. Michael S. Weiss, our secretary, is the
Senior Managing Director, Head of Investment Banking of Paramount. Yuichi Iwaki,
M.D., Ph.D., one of our directors, is a director of the Aries Fund, an affiliate
of Paramount. Steven H. Kanzer, one of our directors, was the Senior Managing
Director, Head of Venture Capital of Paramount until December 31, 1998. A.
Joseph Rudick, Jr., M.D., a director of two of our subsidiaries, Channel
Therapeutics, Inc. and Optex Ophthalmologics, Inc., was an associate of
Paramount and Paramount Capital Investments, LLC, a company wholly owned by Dr.
Rosenwald, until December 31, 1998. In the regular course of its business,
Paramount identifies, evaluates and pursues investment opportunities in
biomedical and pharmaceutical products, technologies and companies. Generally,
Delaware corporate law requires that any transactions between us and any of our
affiliates be on terms that, when taken as a whole, are substantially as
favorable to us as those reasonably obtainable from a person who is not an
affiliate in an arms-length transaction. We are bound by agreements with
Paramount pursuant to which Paramount agreed to provide financial advisory
services to us and pursuant to which Paramount agreed to provide placement
advisory services in connection with the private placement of the Series A
Preferred Stock. Nevertheless, none of Paramount, Dr. Rosenwald, Mr. Kanzer, Mr.
Weiss or Dr. Rudick is obligated pursuant to any agreement or understanding with
us to make any additional products or technologies available to us, nor can
there be any assurance, and we do not expect and securityholders should not
expect, that any biomedical or pharmaceutical product or technology identified
by Paramount, Dr. Rosenwald, Mr. Kanzer, Mr. Weiss or Dr. Rudick in the future
will be made available to us. In addition, some of our officers and directors
may from time to time serve as officers or directors of other biopharmaceutical
or biotechnology companies. We can give no assurance that such other companies
will not, in the future, have interests in conflict with ours.
OUR EXISTING STOCKHOLDERS HAVE SIGNIFICANT CONTROL OVER OUR COMPANY
Dr. Rosenwald and VentureTek, L.P., a limited partnership controlled by
certain relatives of Dr. Rosenwald but as to the partnership interests of which
Dr. Rosenwald disclaims beneficial ownership, together beneficially own
approximately [22%] of the outstanding shares of our Common Stock and Dr.
Rosenwald and certain affiliates of Paramount own warrants to purchase
approximately [7%] of the Series A Preferred Stock. Generally, the holders of
the Common Stock and the Series A Preferred Stock vote together as a single
class. Accordingly, such holders, if acting together, may have the ability to
exert significant influence over the election of our Board of Directors and
other matters submitted to our stockholders for approval. The voting power of
these holders may discourage or prevent any proposed takeover of our company.
UNCERTAINTY REGARDING PATENTS AND PROPRIETARY RIGHTS
Our success depends in large part on our ability, alone or with our
collaborative partners, to obtain and maintain patents, protect trade secrets
and operate without infringing upon the proprietary rights of others. However,
others may have filed patent applications, may have been issued patents or may
obtain additional patents and proprietary rights relating to competitive
products or processes. Our patent applications may not be approved, we may be
unable to develop additional proprietary products that are patentable, issued
patents may not provide us with adequate protection for our inventions or they
may be challenged, invalidated or circumvented by others, the patents of others
may impair our ability to commercialize our products or our patents might not
provide us with competitive advantages. The issuance of a patent is not
conclusive as to its validity or enforceability. The patent position of
companies in the biotechnology or pharmaceutical industries is highly uncertain,
involves complex legal and factual questions and has recently been the subject
of much litigation. No consistent policy has emerged from the U.S. Patent and
Trademark Office, or PTO, or the courts regarding the breadth of claims allowed
or the degree of protection afforded under pharmaceutical and biotechnology
patents. There is considerable variation between countries as to the level of
protection afforded under patents and other proprietary rights. Such differences
may expose us to differing risks of commercialization in each foreign country in
which we may sell products. Others may independently develop similar products,
duplicate any of our products or design around any of our patents.
16
<PAGE>
We rely on certain United States patents and pending United States and
foreign patent applications relating to various aspects of our products and
technologies. With the exception of intellectual property owned by Optex, all of
these patents and patent applications are owned by third parties and are
licensed or sublicensed to us. Although Optex owns the patents and the patent
applications relating to the Catarex technology, Optex has licensed those rights
to Bausch & Lomb. Accordingly, our control over these patents may be limited by
our contractual rights. In addition, the patent application and issuance process
can be expected to take several years and entail considerable expense to us
because we are responsible for such costs under the terms of our license
agreements.
Our competitive position is also dependent upon unpatented trade secrets.
Others may independently develop substantially equivalent information and
techniques or otherwise gain access to our trade secrets, our trade secrets may
be disclosed or we may be unable to effectively protect our rights to unpatented
trade secrets. Our management and scientific consultants have been recruited
primarily from other scientific companies, pharmaceutical companies and academic
institutions. Furthermore, most of our scientific consultants are currently
employed by employers unrelated to us. To the extent that we or our consultants
or research collaborators use intellectual property owned by others in their
work with us, disputes may also arise as to the rights in related or resulting
know-how and inventions. Such disputes could, regardless of merit, be time
consuming, expensive to defend, and materially and adversely affect our
business, results of operations and financial condition.
Patent applications in the United States are generally maintained under
conditions of confidentiality until the patents are issued. Because publication
of inventions in the scientific or patent literature tends to lag behind actual
inventions by several months and we cannot evaluate any inventions being claimed
in pending patent applications filed by our competitors, we cannot be certain
that we were the first to invent the inventions covered by our pending patent
applications or the first to file patent applications on such inventions. Our
patent applications may not result in issued patents and issued patents may not
afford comprehensive protection against potential infringement. Litigation,
which could result in substantial cost to us, may be necessary to defend or
enforce our 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 us, and can result in the diversion of substantial resources from
our other activities. An adverse outcome could subject us to significant
liabilities to third parties, require us to obtain licenses from third parties,
require us to alter our products or technologies or require us to cease
altogether any related research and development activities or product sales, any
of which could materially and adversely affect our business, results of
operations and financial condition.
The issuance of a patent does not provide the patent holder with freedom to
operate without infringing the patent rights of others. Accordingly, the
practice of a patentable invention may require litigation to resolve ownership
rights or a license from the holder of dominant patent rights. We have certain
proprietary rights and in the future we may require additional licenses from
other parties to develop, manufacture and commercialize products effectively.
Our commercial success could depend in part on obtaining and maintaining such
licenses. We can give no assurance that such licenses could be obtained or
maintained on commercially reasonable terms, if at all, that the patents
underlying such licenses would be valid and enforceable or that the proprietary
nature of the patented technology underlying such licenses would remain
proprietary.
OUR MARKETS ARE HIGHLY COMPETITIVE
Technological changes in the pharmaceutical and medical device industries
are rapid and substantial, and competition from pharmaceutical and biotechnology
companies and universities is intense. Many of these entities have significantly
greater research and development capabilities, as well as substantial technical,
marketing, manufacturing, distribution, financial and managerial resources and
represent significant competition for us. In addition, some of our competitors
have experience in undertaking testing and clinical trials of new or improved
products similar in nature or that have a similar therapeutic effect to that
which we are developing. Developments by others may render our products or
technologies noncompetitive, and we may not be able to keep pace with
technological developments. Competitors have, and continue to develop,
technologies that are, or in the future may be, the basis for competitive
products and competitors may introduce such products and technologies before we
are
17
<PAGE>
able to do so. Some of these products may have an entirely different approach or
means of accomplishing the desired therapeutic effect than the products we may
develop. These competing products may be more effective, more widely accepted or
less costly than the products we develop. The development of competing
compounds, medical devices and other forms of medical treatment could materially
and adversely affect our business, financial condition and results of
operations. We can give no assurance that developments by others will not render
our products or technologies noncompetitive or that we will be able to keep pace
with technological developments. Further, it is expected that competition in our
fields will intensify. We can give no assurance that we will be able to compete
successfully in the future.
RISKS RELATED TO REGULATORY APPROVALS
The federal government, principally the FDA, and comparable agencies in
state and local jurisdictions and in foreign countries extensively and
rigorously regulates all new drugs and medical devices, including our products
and technologies under development. These authorities, particularly the FDA,
impose substantial requirements upon preclinical and clinical testing,
manufacturing and commercialization of pharmaceutical and medical device
products. Before a drug may be approved for commercialization in the United
States, the manufacturer of the drug must :
o satisfactorily complete preclinical laboratory and animal tests;
o submit to the FDA of an Investigational New Drug Application, or IND, for
human clinical testing;
o conduct adequate and well controlled human clinical trials to establish the
safety and efficacy of the drug;
o submit to the FDA of a New Drug Application, or NDA; and
o satisfactory complete a FDA inspection of the manufacturing facility or
facilities at which the drug or device is made to assess compliance with
Good Manufacturing Practices, or GMP.
We hope to obtain FDA approval for the Catarex device through the
submission of a 510(k) application, which is a procedure allowed if we can show
that the Catarex device is "substantially equivalent" to a medical device that
has already received FDA approval. The FDA recently has been requiring more
rigorous demonstration of "substantial equivalence" than in the past. Although
the FDA generally takes from 4 to 12 months from submission to issue 510(k)
clearance, we do not know how long, if at all, it will us take to obtain FDA
clearance for the Catarex device. If we are able to obtain 510(k) clearance for
the Catarex device, any modifications or enhancements to the device that could
significantly alter safety or effectiveness, or constitute a major change to the
intended use of the device, will require new 510(k) submissions and consequently
delay 510(k) clearance, if it is obtained at all.
There are many costly and time-consuming procedures required for approval
of a new drug, including lengthy and detailed preclinical and clinical testing
and validation of manufacturing and quality control processes. Several years may
be needed to satisfy these requirements, and this time period may vary
substantially depending on the type, complexity and novelty of the product
candidate. Government regulation can delay or prevent marketing of potential
products for a considerable period of time and impose costly procedures upon our
activities. Moreover, the FDA or other regulatory agency may not grant approval
for any products developed or not grant approval on a timely basis, and success
in preclinical or early stage clinical trials does not assure success in later
stage clinical trials.
Data obtained from preclinical and clinical activities are susceptible to
varying interpretations, which could delay, limit or prevent regulatory
approval. Even if regulatory approval of a product is granted, limitations may
be imposed on the indicated uses of a product. Further, later discovery of
previously unknown problems with a product may result in added restrictions on
the product, including withdrawal of the product from the market. Any delay or
failure in obtaining regulatory approvals would materially and adversely affect
our business, financial condition and results of operations.
18
<PAGE>
A drug and medical device manufacturer (either us or one of our third-party
manufacturers) must conform to GMP regulations strictly enforced by the FDA on
an ongoing basis through their facilities inspection programs. Contract
manufacturing facilities must pass a pre-approval inspection of their
manufacturing facilities before the FDA will approve an NDA. Certain material
manufacturing changes that occur after approval are also subject to FDA review
and clearance or approval. FDA or other regulatory agencies may not approve the
process or the facilities by which any of our products may be manufactured. Our
dependence on third parties for the manufacture of our products may adversely
affect our ability to develop and deliver products on a timely and competitive
basis. If we are required to manufacture our own products we will be required to
build or purchase a manufacturing facility, will be subject to the regulatory
requirements described above, to similar risks regarding delays or difficulties
encountered in manufacturing any such products and will require substantial
additional capital. We may be unable to manufacture any such products
successfully or in a cost-effective manner.
The FDA's policies may change and additional government regulations and
policies may be instituted, both of which could prevent or delay regulatory
approval of our potential products. Moreover, increased attention to the
containment of health care costs in the United States could result in new
government regulations that could materially and adversely affect our business.
We are unable to predict the likelihood of adverse governmental regulations that
could arise from future legislative or administrative action, either in the
United States or abroad.
We will also be subject to a variety of foreign regulations governing
clinical trials, registration and sales of our products. Regardless of whether
FDA approval is obtained, approval of a product by comparable regulatory
authorities of foreign countries must be obtained prior to marketing the product
in those countries. The approval process varies from country to country and the
time needed to secure approval may be longer or shorter than that required for
FDA approval. Delays in the approval process or failure to obtain such foreign
approvals would materially and adversely affect our business, financial
condition and results of operations.
RISKS RELATED TO THE UNCERTAINTY OF PRODUCT PRICING AND REIMBURSEMENT; HEALTH
CARE REFORM AND RELATED MEASURES
The continuing efforts of governmental and third party payors to contain or
reduce the costs of health care may adversely affect our revenues and
profitability. For example, in certain foreign markets, pricing or profitability
of health care products is subject to government control. In the United States
there have been, and we expect that there will continue to be, a number of
federal and state proposals to implement similar governmental control. Although
we cannot predict what legislative or regulatory proposals or reforms will be
adopted or what actions will be taken by third party payors, the announcement of
such proposals or reforms could materially and adversely affect our ability to
raise capital or form collaborations and, therefore, the adoption of such
proposals or reforms could materially and adversely affect our business,
financial condition and results of operations.
In addition, in both the United States and elsewhere, sales of health care
products depend in part on the availability of reimbursement from third party
payors, such as government and private insurance plans. Significant uncertainty
exists as to the reimbursement status of newly approved health care products,
and third party payors are increasingly challenging the prices charged for
health care products. Even if we succeed in bringing one or more products to the
market, third party payors may not reimburse us adequately, or at all.
WE DEPEND UPON OUR KEY PERSONNEL AND CONSULTANTS
Our ability to maintain our competitive position depends in part upon the
continued contributions of our officers, directors, Scientific Advisory Board
members, consultants and collaborating scientists and our ability to attract and
retain qualified management and scientific personnel. Our management team
currently consists of only three people. In July 1998, Jon D. Lindjord resigned
as our President and Chief Executive Officer and we have not replaced Mr.
Lindjord, although we are conducting an executive search for a replacement for
him. Competition for qualified management and scientific personnel is intense,
and we may be unable to attract, assimilate, retain or motivate qualified
management and scientific personnel. The loss of key personnel or the failure to
recruit
19
<PAGE>
additional personnel or to develop needed expertise could materially and
adversely affect our business, financial condition and results of operations.
WE DEPEND UPON OUR KEY LICENSE AGREEMENTS
With the exception of the Catarex technology, we depend on license
agreements from third parties that form the basis of our proprietary technology.
If we do not meet our financial, development or other obligations under our
license agreements in a timely manner, we could lose the rights to some or all
of our proprietary technologies, which could materially and adversely affect our
business and financial condition and results of operations. In addition, our
rights to the 2-5A Chimeric Antisense Technology are contingent on the Cleveland
Clinic upholding its obligations concerning the 2-5A Chimeric Antisense
Technology to the National Institutes of Health. We could lose our rights to the
2-5A Chimeric Antisense Technology if the Cleveland Clinic did not properly
discharge its obligations to the National Institutes of Health, which could
materially and adversely affect our business, financial condition and results of
operations.
WE CAN GIVE NO ASSURANCE THAT WE WILL BE ABLE TO IDENTIFY ADDITIONAL PROJECTS
We develop and hope to commercialize biomedical and pharmaceutical product
candidates and technologies. From time to time, if our resources allow, we may
explore the acquisition and subsequent development and commercialization of
additional biomedical and pharmaceutical products and technologies. However, we
cannot assure you that we will be able to identify any additional products or
technologies and, even if suitable products or technologies are identified, we
may not have sufficient resources to pursue them.
RISKS RELATED TO OUR ABILITY TO REDEEM OUR REDEEMABLE WARRANTS
Under certain conditions, we may redeem the Redeemable Warrants. Our stated
intention to redeem the Redeemable Warrants could encourage holders to exercise
the Redeemable Warrants and pay the exercise price at a time when it may be
disadvantageous for the holders to do so, to sell the Redeemable Warrants at the
current market price when they might otherwise wish to hold the Redeemable
Warrants or to accept the redemption price, which may be substantially less than
the market value of the Redeemable Warrants at the time of redemption. The
holders of the Redeemable Warrants will automatically forfeit their rights to
purchase the shares of Common Stock issuable upon exercise of the Redeemable
Warrants unless the Redeemable Warrants are exercised before they are redeemed.
The holders of Redeemable Warrants do not possess any rights as Atlantic
stockholders unless and until the Redeemable Warrants are exercised.
RISKS RELATED TO THE SECURITIES LAW RESTRICTIONS ON THE EXERCISE OF OUR
REDEEMABLE WARRANTS
A holder of Redeemable Warrants has the right to exercise the Redeemable
Warrants for the purchase of shares of Common Stock only if we have filed with
the SEC a current prospectus covering the resale of the shares of Common Stock
issuable upon exercise of the Redeemable Warrants and only if the resale of the
shares of Common Stock has been registered or qualified, or is deemed to be
exempt from registration or qualification under the securities laws of the state
of residence of the holder of the Redeemable Warrant. We have filed and have
undertaken to keep effective and current a prospectus permitting the purchase
and sale of the Common Stock underlying the Redeemable Warrants, but we cannot
assure you that we will be able to keep the prospectus effective and current.
Although we intend to seek to qualify for sale the resale of the shares of
Common Stock underlying the Redeemable Warrants in those states in which the
securities are to be offered, no assurance can be given that this qualification
will occur. The Redeemable Warrants may be deprived of any value if a prospectus
covering the
20
<PAGE>
shares of Common Stock issuable upon the exercise thereof is not kept effective
and current or if the underlying shares are not, or cannot be, registered in the
applicable states.
WE HAVE NOT DECLARED DIVIDENDS ON OUR COMMON STOCK AND ANY DECLARATION OF
DIVIDENDS ON OUR SERIES A PREFERRED STOCK WILL HAVE A DILUTIVE EFFECT
We have not paid any dividends on the Common Stock and do not anticipate
paying any dividends in the foreseeable future. We are obligated to pay
dividends in shares of Series A Preferred Stock on the outstanding shares of
Series A Preferred Stock, which could have a dilutive effect on the value of the
Common Stock. We anticipate that all of our earnings and other resources, if
any, will be retained by us for investment in its business.
A DELISTING FROM NASDAQ AND THE RESULTING MARKET ILLIQUIDITY COULD ADVERSELY
AFFECT OUR ABILITY TO RAISE FUNDS
Although our Common Stock, Redeemable Warrants and Units are quoted on
Nasdaq, continued inclusion of such securities on Nasdaq will require that (i)
we maintain at least $2,000,000 in net tangible assets, (ii) the minimum bid
price for the Common Stock be at least $1.00 per share, (iii) the public float
consist of at least 500,000 shares of Common Stock, valued in the aggregate at
more than $1,000,000, (iv) the Common Stock have at least two active market
makers, (v) the Common Stock be held by at least 300 holders and (vi) we adhere
to certain corporate governance requirements. If we are unable to satisfy these
maintenance requirements, our securities may be delisted from Nasdaq. In that
event, trading, if any, in the securities would thereafter be conducted in the
over-the-counter market in the "pink sheets" or the National Association of
Securities Dealers' "Electronic Bulletin Board." Consequently, the liquidity of
our securities could be materially impaired, not only in the number of
securities that could be bought and sold at a given price, but also through
delays in the timing of transactions and reduction in security analysts' and the
media's coverage of us, which could result in lower prices for our securities
than might otherwise be attained and could also result in a larger spread
between the bid and asked prices for our securities. In addition, if our
securities were delisted it could materially and adversely affect our ability to
raise funding.
In addition, if our securities are delisted from trading on Nasdaq and the
trading price of the Common Stock is less than $5.00 per share, trading in the
securities would also be subject to the requirements of Rule 15g-9 promulgated
under the Exchange Act. Under this 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 SEC, 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 our
Common Stock, Redeemable Warrants or Units. We can give no assurance that such
securities will not be delisted or treated as penny stock.
RISKS RELATED TO THE REDUCED LIQUIDITY OF YOUR INVESTMENT AND THE LOW TRADING
VOLUME OF OUR SECURITIES
Our securities are traded on the Nasdaq SmallCap Market and lack the
liquidity of securities traded on the principal trading markets. Accordingly, an
investor may be unable to promptly liquidate an investment in our
21
<PAGE>
securities. Similarly, the sale of a larger block of our securities could
depress the price of our securities to a greater degree than a company that
typically has a higher volume of trading in its securities.
OUR STOCK PRICE HAS BEEN AND MAY CONTINUE TO BE VOLATILE
The securities markets have, from time to time, experienced significant
price and volume fluctuations that may be unrelated to the operating performance
of particular companies or industries. Thus, the market price of our securities,
like the stock prices of many publicly traded biotechnology and smaller
companies, has been and may continue to be especially volatile. Announcements
regarding technological innovations, regulatory matters, new commercial products
by us or our competitors, developments or disputes concerning patent or
proprietary rights, publicity regarding actual or potential medical results
relating to products under development by us or our competitors, regulatory
developments in both the United States and foreign countries, public concern as
to the safety of pharmaceutical products and economic and other external
factors, as well as continued operating losses by us and period-to-period
fluctuations in our financial results may have a significant impact on the
market price of our securities.
RISKS RELATED TO POTENTIAL PRODUCT LIABILITY AND OUR LACK OF PRODUCT LIABILITY
INSURANCE
If we develop and commercialize any products, through third-party
arrangements or otherwise, we may be exposed to product liability claims. We
presently do not carry product liability insurance. Some of our license
agreements require us to obtain product liability insurance when we begin
clinical testing or commercialization of our proposed products and to indemnify
our licensors against product liability claims brought against them as a result
of the products developed by us. We may not be able to obtain such insurance at
all, in sufficient amounts to protect us against such liability or at a
reasonable cost. None of our licensors has made, nor is expected to make, any
representations to us as to the safety or efficacy of the inventions covered by
the license agreements or as to any products which may be made or used under
rights granted therein. In addition, Optex is required to indemnify Bausch &
Lomb for certain matters under the terms of their Development & License
Agreement. Product liability claims brought against us or a party that we are
obligated to indemnify could materially and adversely affect our business,
financial condition and results of operations.
RISKS RELATED TO ENVIRONMENTAL REGULATION
Federal, state and local laws, rules, regulations and policies govern our
use, generation, manufacture, storage, air emission, effluent discharge,
handling and disposal of certain materials and wastes. Although we believe that
we have complied with these laws and regulations in all material respects and
have not been required to take any action to correct any noncompliance, we may
be required to incur significant costs to comply with environmental and health
and safety regulations in the future. In addition, our research and development
activities involve the controlled use of hazardous materials and we cannot
eliminate the risk of accidental contamination or injury from these materials,
although we believe that our safety procedures for handling and disposing of
such materials complies with the standards prescribed by state and federal
regulations. In the event of an accident, we could be held liable for any
resulting damages and we do not have insurance to cover this contingency. Such
liability could materially and adversely affect our business, financial
condition and results of operations.
WE HAVE ANTI-TAKEOVER DEFENSES THAT COULD DELAY OR PREVENT AN ACQUISITION OF OUR
COMPANY
Our Restated Certificate of Incorporation authorizes the issuance of shares
of "blank check" preferred stock. Our Board of Directors has the authority to
issue the preferred stock in one or more series and to fix the
22
<PAGE>
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 our company without further action by our stockholders. 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.
We are also 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. This statute could
have the effect of discouraging others from making tender offers for our shares
and, as a consequence, may inhibit fluctuations in the market price of our
shares that could result from actual or rumored takeover attempts. This statute
also may have the effect of preventing changes in our management.
WE HAVE THE ABILITY TO LIMIT THE LIABILITY AND TO INDEMNIFY OUR OFFICERS AND
DIRECTORS FROM LIABILITY
Our Certificate of Incorporation limits, to the maximum extent permitted by
Delaware law, the personal liability of directors for monetary damages for
breach of their fiduciary duties as a director. Our Certificate of Incorporation
and Bylaws provide that we must indemnify our officers and directors and may
indemnify our employees and other agents to the fullest extent permitted by law.
We have entered into indemnification agreements with our officers and directors
containing provisions that are in some respects broader than the specific
indemnification provisions contained in Delaware law. The indemnification
agreements may require us, among other things, to indemnify our officers and
directors against liabilities that may arise by reason of their status or
service as directors or officers (other than liabilities arising from willful
misconduct of a culpable nature) and to advance their expenses incurred as a
result of any proceeding against them as to which they could be indemnified.
Section 145 of the Delaware General Corporation Law provides that a corporation
may indemnify a director, officer, employee or agent made or threatened to be
made a party to an action by reason of the fact that he was a director, officer,
employee or agent of the corporation or was serving at the request of the
corporation against expenses actually and reasonably incurred in connection with
such action if he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the corporation, and, with respect
to any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful. Delaware law does not permit a corporation to eliminate a
director's duty of care, and the provisions of our Certificate of Incorporation
and Bylaws have no effect on the availability of equitable remedies, such as
injunction or rescission, for a director's breach of the duty of care.
POTENTIAL YEAR 2000 PROBLEMS COULD ADVERSELY AFFECT OUR BUSINESS
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, next year
computer systems and/or software used by many companies may need to be upgraded
to comply with the "Year 2000" requirements. Significant uncertainty exists
concerning the potential effects associated with this compliance. We have
reviewed our internal system and have concluded that it is Year 2000 compliant.
All of our hardware and software was purchased or licensed less than four years
ago. We have received verbal assurances from our service providers that they
will be Year 2000 compliant in a timely fashion. Accordingly, we do not expect
Year 2000 issues to have any material effect on our business, financial
condition or operating results.
23
<PAGE>
ITEM 2 - DESCRIPTION OF PROPERTY
The Company's executive offices are located at 1017 Main Campus Drive,
Suite 3900, Raleigh, North Carolina 27606. The lease agreement for such offices
commenced on March 1, 1997, is for a term of five years, is renewable at the
Company's option and calls for a monthly lease payment of $2,646, 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 27452 Calle
Arroyo, San Juan Capistrano, California 92675. The Optex lease agreement
commenced October 1998 and calls for a monthly lease payment of $5,598. Gemini
has a lease with a term of three years for a space at 11000 Cedar Avenue,
Cleveland, Ohio 44106. The Gemini lease agreement commenced October 1, 1997 and
calls for a monthly lease payment of $1,871. Research and development work of
Atlantic and Channel is currently being conducted on a contract basis at
institutions and contract providers. The Company anticipates that in the future
the Company and 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 spaces. The
Company does not own any real property.
ITEM 3 - LEGAL PROCEEDINGS
The Company is not aware of any pending legal proceedings to which the
Company or any Operating Company is a party or to which any of their properties
is subject.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the Company's fourth fiscal quarter for the year ended December 31,
1998, no matter was submitted to a vote of the Company's security holders,
either by proxy solicitations or otherwise.
24
<PAGE>
PART II
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) Market Information
The Common Stock of the Company is listed on the Nasdaq SmallCap Market.
The following table sets forth the high and low bid price for the Company's
Common Stock as quoted by Nasdaq, during each quarter within the last two fiscal
years.
COMMON STOCK PRICE
================================================================================
Period High Bid Low Bid
- --------------------------------------------------------------------------------
1997
- --------------------------------------------------------------------------------
First Quarter $7.25 $5.625
- --------------------------------------------------------------------------------
Second Quarter $7.125 $4.625
- --------------------------------------------------------------------------------
Third Quarter $8.125 $6.562
- --------------------------------------------------------------------------------
Fourth Quarter $10.375 $5.947
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1998
- --------------------------------------------------------------------------------
First Quarter $6.75 $4.875
- --------------------------------------------------------------------------------
Second Quarter $7.81 $3.813
- --------------------------------------------------------------------------------
Third Quarter $4.813 $1.438
- --------------------------------------------------------------------------------
Fourth Quarter $1.969 $1.25
================================================================================
(b) Holders
The number of holders of record of the Company's Common Stock as of March
16, 1999 was 163.
The number of beneficial stockholders of the Company's Common Stock as of
March 16, 1999 was 1,060.
(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. The Certificate of Designations for the Series A
Preferred Stock provides that the Company may not pay dividends on its
Common Stock unless a special dividend is paid on its Series A Preferred
Stock.
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. The Company has rights
to four technologies which it believes may be useful in the treatment of a
variety of diseases, including cancer, infectious disease, ophthalmic disorders,
pain, inflammation and cardiovascular disorders. The Company's existing products
and technologies under development are each held either by the
25
<PAGE>
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
term "Company" may refer to Atlantic and/or the Operating Companies, as
indicated by the context. 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, 1998, $2,599,932
of revenue has been generated.
In accordance with the Bausch & Lomb Agreement (as defined below), Bausch &
Lomb (as defined below) reimbursed Optex (as defined below) in the amount of
$1,047,511 for Optex's costs related to the development of the Catarex
technology and incurred since the date of the Agreement. This reimbursement
reduced the Company's research and development expenses by $899,936 and general
and administrative expenses by $147,575.
General and administrative expenses for the year ended December 31, 1998
were $2,816,083 (net general and administrative expense was $2,668,508 after
deduction of the Bausch & Lomb reimbursement in the amount of $147,575) as
compared to $2,838,331 for the corresponding period in 1997, and consisted
primarily of expenses associated with corporate operations, legal, finance and
accounting, human resources and other general operating costs. In connection
with the resignation of the former Chief Executive Officer and President, Jon D.
Lindjord, the Company recognized an expense for fiscal 1998 of $140,833 for
severance pay in the form of six months of salary continuation during fiscal
1999. The Company anticipates that general and administrative expenses will
decrease slightly during the year ended December 31, 1999 as compared to the
corresponding period in 1998 because of decreased compensation, public relations
and travel expenses.
Research and development expenditures consist primarily of the costs of
research and development personnel; the costs to operate the Company's research
and development laboratories; payments made under the Company's license
agreements, sponsored research agreements, research agreements with institutes
and consultants' agreements to its licensors, its scientific collaborators,
research institutes and its consultants; and costs related to patent filings and
maintenance. Research and development expenses, inclusive of license fees, were
$3,936,291 (net research and development expense was $3,036,355 after deduction
of the Bausch & Lomb reimbursement in the amount of $899,936) for the year ended
December 31, 1998, as compared to $2,560,584 for the corresponding period in
1997. Assuming all of the Company's technologies are developed as currently
planned, the Company anticipates that its research and development expenses will
increase during the next year as the Company continues to fund research programs
and preclinical testing for its products and technologies under development.
The Company's cumulative net loss since inception through December 31,
1998, was $16,343,584.
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 ongoing and planned preclinical and
clinical testing; timing and cost of obtaining regulatory approvals; the cost of
filing, prosecuting, defending and enforcing patent claims and other
intellectual property rights; competing technological and market developments;
changes in the Company's existing collaborative and licensing relationships;
levels of resources that the Company devotes to the development of manufacturing
and commercializing capabilities; technological advances; status of competitors;
the ability of the Company to establish collaborative arrangements with other
organizations; and the Company's need to purchase additional capital equipment.
26
<PAGE>
The Company anticipates that its current resources will be sufficient to
finance the Company's currently anticipated needs for operating and capital
expenditures until the end of the first quarter of fiscal 2000. 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.
In May 1998, the Company's majority-owned subsidiary, Optex
Ophthalmologics, Inc. ("Optex"), entered into a Development & License Agreement
(the "Agreement") with Bausch & Lomb Surgical ("Bausch & Lomb") to complete the
development of Catarex, the cataract-removal technology owned by Optex. Under
the terms of the Agreement, Optex and Bausch & Lomb intend jointly to complete
the final design and development of the Catarex system and Bausch & Lomb, which
was granted an exclusive worldwide license to the Catarex technology for human
ophthalmic surgery, will assume responsibility for commercializing Catarex
globally. The Agreement provides that Bausch & Lomb will pay Optex up-front and
milestone payments of (a) $2,500,000 upon the signing of the Agreement, (b)
$4,000,000 upon the successful completion of certain clinical trials, (c)
$2,000,000 upon receipt of regulatory approval to market the Catarex device in
the United States (and this milestone payment is creditable in full against
royalties) and (d) $1,000,000 upon receipt of regulatory approval to market the
Catarex device in Japan. Pursuant to the Agreement, Bausch & Lomb shall
reimburse Optex for its costs incurred since the date of the Agreement related
to the development of the Catarex device so long as such expenses do not exceed
$2,500,000. During the term (which terminates upon the expiration of the last to
expire of the licensed United States patents) of the Agreement, Bausch & Lomb
shall pay Optex a royalty of 7% of net sales and an additional 3% royalty when
certain conditions involving liquid polymer lenses have been met. This summary
of the Agreement is qualified by reference to the entire Agreement, which is
attached as an exhibit to the Form 8-K filed by the Company on May 22, 1998.
In the second quarter of fiscal 1998, Bausch & Lomb paid Optex an up-front
payment, which is nonrefundable, in the amount of $2,500,000, and this payment
was received and recorded as license revenue. In addition Bausch & Lomb
reimbursed Optex for its operating and research and development activities in
the amount of $1,047,511 during fiscal 1998.
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, 1998, the Company had $5,835,669 in cash and cash
equivalents and working capital of $5,601,791. The Company is also obligated,
and contingently obligated, to pay certain amounts under the Company's 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.
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
27
<PAGE>
ATLANTIC PHARMACEUTICALS, INC.
AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(With Independent Auditors' Report Thereon)
<PAGE>
ATLANTIC PHARMACEUTICALS, INC. AND SUBSIDIARIES
Index To Consolidated Financial Statements
PAGE
----
Independent Auditors' Report F-1
Consolidated Balance Sheets as of December 31, 1998 and 1997 F-2
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996 and for the period
from July 13, 1993 (inception) to December 31, 1998 F-3
Consolidated Statements of Stockholders' Equity (Deficit) for the
years ended December 31, 1998, 1997 and 1996 and for the
period from July 13, 1993 (inception) to December 31, 1995 F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 and for the period from
July 13, 1993 (inception) to December 31, 1998 F-5
Notes to Consolidated Financial Statements F-6
<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, 1998 and 1997, 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, 1998 and for the period from July
13, 1993 (inception) to December 31, 1998. 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, 1998 and 1997, and the results of their operations and their cash
flows for each of the years in the three-year period ended December 31, 1998,
and for the period from July 13, 1993 (inception) to December 31, 1998, in
conformity with generally accepted accounting principles.
February 26, 1999
F-1
<PAGE>
ATLANTIC PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
ASSETS 1998 1997
Current assets: ------------ ------------
<S> <C> <C>
Cash and cash equivalents $ 5,835,669 8,543,495
Prepaid expenses 42,108 1,250
Account receivable (note 11) 381,015 --
------------ ------------
Total current assets 6,258,792 8,544,745
------------ ------------
Property and equipment, net (note 3) 262,173 250,961
------------ ------------
Total assets $ 6,520,965 8,795,706
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accrued expenses 657,001 392,566
------------ ------------
Total current liabilities 657,001 392,566
------------ ------------
Stockholders' equity (note 6):
Preferred stock, $.001 par value. Authorized 10,000,000
shares; 1,375,000 shares designated as Series A
convertible preferred stock -- --
Series A convertible preferred stock, $.001 par value
Authorized 1,375,000 shares; 632,468 and 1,214,723
shares issued and outstanding at December 31,
1998 and 1997, respectively 632 1,215
Convertible preferred stock warrants, 117,195 and 123,720
shares issued and outstanding at December 31, 1998 and 1997,
respectively (note 8) 540,074 570,143
Common stock, $.001 par value. Authorized 50,000,000
shares; 4,503,388 and 3,064,571 shares issued and
outstanding at December 31, 1998 and 1997, respectively 4,503 3,065
Common stock subscribed. 182 shares at December 31, 1998
and 1997 -- --
Additional paid-in capital 21,662,881 21,493,715
Deficit accumulated during development stage (16,343,584) (13,590,056)
Deferred compensation (note 7) -- (74,400)
------------ ------------
5,864,506 8,403,682
Less common stock subscriptions receivable (218) (218)
Less treasury stock, at cost (324) (324)
------------ ------------
Total stockholders' equity 5,863,964 8,403,140
------------ ------------
Total liabilities and stockholders' equity $ 6,520,965 8,795,706
============ ============
</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 DECEMBER 31, (INCEPTION) TO
------------------------------------------- DECEMBER 31,
1998 1997 1996 1998
----------- ----------- ----------- -----------
Revenue:
<S> <C> <C> <C> <C> <C>
License revenue (note 11) $ 2,500,000 -- -- 2,500,000
Grant revenue -- 2,288 97,644 99,932
----------- ----------- ----------- -----------
Total revenue 2,500,000 2,288 97,644 2,599,932
----------- ----------- ----------- -----------
Costs and expenses:
Research and development
(note 6) 3,036,355 2,560,584 1,059,793 7,283,274
License fees (note 12) -- -- 10,000 173,500
General and administrative 2,668,508 2,838,331 2,747,247 11,727,003
----------- ----------- ----------- -----------
Total operating expenses 5,704,863 5,398,915 3,817,040 19,183,777
Other (income) expense:
Interest income (451,335) (245,231) (161,704) (865,836)
Interest expense -- -- -- 625,575
----------- ----------- ----------- -----------
Total other income (expense) (451,335) (245,231) (161,704) (240,261)
----------- ----------- ----------- -----------
Net loss (2,753,528) (5,151,396) (3,557,692) (16,343,584)
----------- ----------- ----------- -----------
Imputed convertible preferred stock
dividend (note 6) 1,628,251 3,703,304 -- 5,331,555
----------- ----------- ----------- -----------
Net loss applicable to common shares $(4,381,779) (8,854,700) (3,557,692) (21,675,139)
=========== =========== =========== ===========
Net loss per common
share - basic $ (1.13) (2.97) (1.29) (12.14)
=========== =========== =========== ===========
Shares used in calculation of net
loss per common share - basic 3,883,412 2,979,664 2,758,241 1,785,989
=========== =========== =========== ===========
</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>
CONVERTIBLE CONVERTIBLE
PREFERRED STOCK STOCK WARRANTS
------------------------ ------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ---------- ---------- ----------
Common stock subscribed at $.001 per shares
<S> <C> <C> <C> <C>
July-November 1993 (note 6) -- $ -- -- $ --
Issued common stock at $.001 per share,
June 1994 (note 6) -- -- -- --
Issued and subscribed common stock at $.05
per share, August 1994 (note 6) -- -- -- --
Payments of common stock subscriptions (note 6) -- -- -- --
Issuance of warrants, September 1995 (note 5) -- -- -- --
Issued common stock and warrants at $4 per unit,
December 1995 (net of costs of issuance
of $1,454,300) (note 8) -- -- -- --
Conversion of demand notes payable and the related
accrued interest to common stock, December 1995
(note 4) -- -- -- --
Repurchase of common stock -- -- -- --
Compensation related to grant of stock options (note 7) -- -- -- --
Amortization of deferred compensation (note 7) -- -- -- --
Net loss -- -- -- --
---------- ---------- ---------- ----------
Balance at December 31, 1995 -- -- -- --
Issuance of warrants, April 1996 (note 8) -- -- -- --
Issued common stock and warrants at $6.73 per share,
August 1996 (net of costs of issuance of $76,438)
(note 6) -- -- -- --
Amortization of deferred compensation (note 7) -- -- -- --
Net loss -- -- -- --
---------- ---------- ---------- ----------
Balance at December 31, 1996 -- -- -- --
Issued convertible preferred stock at $10 per unit,
May and August 1997 (net of
costs of issuance
of $1,758,816) (note 6) 1,237,200 1,237 -- --
Channel merger (note 6) -- -- -- --
Conversion of preferred to common stock (22,477) (22) -- --
Issuance of convertible preferred stock warrants (note 8) -- -- 123,720 570,143
Issuance of warrants (note 8) -- -- -- --
Amortization of deferred compensation (note 7) -- -- -- --
Imputed convertible preferred stock dividend -- -- -- --
Imputed convertible preferred stock dividend -- -- -- --
Net loss -- -- -- --
---------- ---------- ---------- ----------
Balance at December 31, 1997 1,214,723 1,215 123,720 570,143
Conversion of preferred to common stock (584,265) (585) -- --
Cashless exercise of preferred warrants (note 8) 2,010 2 (6,525) (30,069)
Exercise of options -- -- -- --
Exercise of warrants (note 8) -- -- -- --
Expense related to grant of stock options (note 7) -- -- -- --
Amortization of deferred compensation (note 7) -- -- -- --
Imputed convertible preferred stock dividend -- -- -- --
Imputed convertible preferred stock dividend -- -- -- --
Net loss -- -- -- --
---------- ---------- ---------- ----------
Balance at December 31, 1998 632,468 $ 632 117,195 $ 540,074
========== ========== ========== ==========
PREFERRED COMMON STOCK
COMMON STOCK SUBSCRIBED
------------------------ ------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ---------- ---------- ----------
Common stock subscribed at $.001 per shares
July-November 1993 (note 6) -- $ -- 5,231 $ 5
Issued common stock at $.001 per share,
June 1994 (note 6) 84 -- -- --
Issued and subscribed common stock at $.05
per share, August 1994 (note 6) 860 1 12 --
Payments of common stock subscriptions (note 6) 5,061 5 (5,061) (5)
Issuance of warrants, September 1995 (note 5) -- -- -- --
Issued common stock and warrants at $4 per unit,
December 1995 (net of costs of issuance
of $1,454,300) (note 8) 1,872,750 1,873 -- --
Conversion of demand notes payable and the related
accrued interest to common stock, December 1995
(note 4) 785,234 785 -- --
Repurchase of common stock (269) -- -- --
Compensation related to grant of stock options (note 7) -- -- -- --
Amortization of deferred compensation (note 7) -- -- -- --
Net loss -- -- -- --
---------- ---------- ---------- ----------
Balance at December 31, 1995 2,663,720 2,664 182 --
Issuance of warrants, April 1996 (note 8) -- -- -- --
Issued common stock and warrants at $6.73 per share,
August 1996 (net of costs of issuance of $76,438)
(note 6) 250,000 250 -- --
Amortization of deferred compensation (note 7) -- -- -- --
Net loss -- -- -- --
---------- ---------- ---------- ----------
Balance at December 31, 1996 2,913,720 2,914 182 --
Issued convertible preferred stock at $10 per unit,
May and August 1997 (net of
costs of issuance
of $1,758,816) (note 6) -- -- -- --
Channel merger (note 6) 103,200 103 -- --
Conversion of preferred to common stock 47,651 48 -- --
Issuance of convertible preferred stock warrants (note 8) -- -- -- --
Issuance of warrants (note 8) -- -- -- --
Amortization of deferred compensation (note 7) -- -- -- --
Imputed convertible preferred stock dividend -- -- -- --
Imputed convertible preferred stock dividend -- -- -- --
Net loss -- -- -- --
---------- ---------- ---------- ----------
Balance at December 31, 1997 3,064,571 3,065 182 --
Conversion of preferred to common stock 1,367,817 1,367 -- --
Cashless exercise of preferred warrants (note 8) -- -- -- --
Exercise of options 70,000 70 -- --
Exercise of warrants (note 8) 1,000 1 -- --
Expense related to grant of stock options (note 7) -- -- -- --
Amortization of deferred compensation (note 7) -- -- -- --
Imputed convertible preferred stock dividend -- -- -- --
Imputed convertible preferred stock dividend -- -- -- --
Net loss -- -- -- --
---------- ---------- ---------- ----------
Balance at December 31, 1998 4,503,388 $ 4,503 182 $ --
========== ========== ========== ==========
DEFICIT
ACCUMULATED COMMON
ADDITIONAL DURING STOCK
PAID IN DEVELOPMENT DEFERRED SUBSCRIPTIONS
CAPITAL STAGE COMPENSATION RECEIVABLE
---------- ---------- ---------- ----------
Common stock subscribed at $.001 per shares
July-November 1993 (note 6) 6,272 -- -- (6,277)
Issued common stock at $.001 per share,
June 1994 (note 6) 101 -- -- --
Issued and subscribed common stock at $.05
per share, August 1994 (note 6) 52,374 -- -- (750)
Payments of common stock subscriptions (note 6) -- -- -- 6,809
Issuance of warrants, September 1995 (note 5) 300,000 -- -- --
Issued common stock and warrants at $4 per unit,
December 1995 (net of costs of issuance
of $1,454,300) (note 8) 6,034,827 -- -- --
Conversion of demand notes payable and the related
accrued interest to common stock, December 1995
(note 4) 2,441,519 -- -- --
Repurchase of common stock -- -- -- --
Compensation related to grant of stock options (note 7) 208,782 -- (144,000) --
Amortization of deferred compensation (note 7) -- -- 12,000 --
Net loss -- (4,880,968) -- --
---------- ---------- ---------- ----------
Balance at December 31, 1995 9,043,875 (4,880,968) (132,000) (218)
Issuance of warrants, April 1996 (note 8) 139,000 -- -- --
Issued common stock and warrants at $6.73 per share,
August 1996 (net of costs of issuance of $76,438)
(note 6) 1,452,063 -- -- --
Amortization of deferred compensation (note 7) -- -- 28,800 --
Net loss -- (3,557,692) -- --
---------- ---------- ---------- ----------
Balance at December 31, 1996 10,634,938 (8,438,660) (103,200) (218)
Issued convertible preferred stock at $10 per unit,
May and August 1997 (net of
costs of issuance
of $1,758,816) (note 6) 10,611,947 -- -- --
Channel merger (note 6) 657,797 -- -- --
Conversion of preferred to common stock (26) -- -- --
Issuance of convertible preferred stock warrants (note 8) (570,143) -- -- --
Issuance of warrants (note 8) 159,202 -- -- --
Amortization of deferred compensation (note 7) -- -- 28,800 --
Imputed convertible preferred stock dividend (3,703,304) -- -- --
Imputed convertible preferred stock dividend 3,703,304 -- -- --
Net loss -- (5,151,396) -- --
---------- ---------- ---------- ----------
Balance at December 31, 1997 21,493,715 (13,590,056) (74,400) (218)
Conversion of preferred to common stock (782) -- -- --
Cashless exercise of preferred warrants (note 8) 30,067 -- -- --
Exercise of options 52,430 -- -- --
Exercise of warrants (note 8) 5,499 -- -- --
Expense related to grant of stock options (note 7) 81,952 -- -- --
Amortization of deferred compensation (note 7) -- -- 74,400 --
Imputed convertible preferred stock dividend (1,628,251) -- -- --
Imputed convertible preferred stock dividend 1,628,251 -- -- --
Net loss -- (2,753,528) -- --
---------- ---------- ---------- ----------
Balance at December 31, 1998 21,662,881 (16,343,584) -- (218)
========== ========== ========== ==========
TOTAL
STOCKHOLDERS'
TREASURY EQUITY
STOCK (DEFICIT)
---------- ----------
Common stock subscribed at $.001 per shares
July-November 1993 (note 6) -- --
Issued common stock at $.001 per share,
June 1994 (note 6) -- 101
Issued and subscribed common stock at $.05
per share, August 1994 (note 6) -- 51,625
Payments of common stock subscriptions (note 6) -- 6,809
Issuance of warrants, September 1995 (note 5) -- 300,000
Issued common stock and warrants at $4 per unit,
December 1995 (net of costs of issuance
of $1,454,300) (note 8) -- 6,036,700
Conversion of demand notes payable and the related
accrued interest to common stock, December 1995
(note 4) -- 2,442,304
Repurchase of common stock (324) (324)
Compensation related to grant of stock options (note 7) -- 64,782
Amortization of deferred compensation (note 7) -- 12,000
Net loss -- (4,880,968)
---------- ----------
Balance at December 31, 1995 (324) 4,033,029
Issuance of warrants, April 1996 (note 8) -- 139,000
Issued common stock and warrants at $6.73 per share,
August 1996 (net of costs of issuance of $76,438)
(note 6) -- 1,452,313
Amortization of deferred compensation (note 7) -- 28,800
Net loss -- (3,557,692)
---------- ----------
Balance at December 31, 1996 (324) 2,095,450
Issued convertible preferred stock at $10 per unit,
May and August 1997 (net of
costs of issuance
of $1,758,816) (note 6) -- 10,613,184
Channel merger (note 6) -- 657,900
Conversion of preferred to common stock -- --
Issuance of convertible preferred stock warrants (note 8) -- --
Issuance of warrants (note 8) -- 159,202
Amortization of deferred compensation (note 7) -- 28,800
Imputed convertible preferred stock dividend -- (3,703,304)
Imputed convertible preferred stock dividend -- 3,703,304
Net loss -- (5,151,396)
---------- ----------
Balance at December 31, 1997 (324) 8,403,140
Conversion of preferred to common stock -- --
Cashless exercise of preferred warrants (note 8) -- --
Exercise of options -- 52,500
Exercise of warrants (note 8) -- 5,500
Expense related to grant of stock options (note 7) -- 81,952
Amortization of deferred compensation (note 7) -- 74,400
Imputed convertible preferred stock dividend -- (1,628,251)
Imputed convertible preferred stock dividend -- 1,628,251
Net loss -- (2,753,528)
---------- ----------
Balance at December 31, 1998 (324) 5,863,964
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
ATLANTIC PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
CUMULATIVE
PERIOD FROM
JULY 13, 1993
YEAR ENDED DECEMBER 31, (INCEPTION) TO
------------------------------------------- DECEMBER 31,
1998 1997 1996 1998
----------- ----------- ----------- -----------
Cash flows from operating activities:
<S> <C> <C> <C> <C>
Net loss $(2,753,528) (5,151,396) (3,557,692) (16,343,584)
Adjustments to reconcile net loss to
net cash used in operating activities:
Expense relating to issuance of warrants -- 159,202 139,000 298,202
Expense relating to the issuance of options 81,952 -- -- 81,952
Expense related to Channel merger -- 657,900 -- 657,900
Compensation expense relating to
stock options 74,400 28,800 28,800 208,782
Discount on notes payable - bridge financing -- -- -- 300,000
Depreciation 166,553 74,953 48,405 316,639
Changes in assets and liabilities:
(Increase) decrease in prepaid expenses (40,858) 23,699 23,051 (42,108)
Increase (decrease) in accrued expenses 264,435 110,774 (518,591) 657,001
Increase (decrease) in accrued interest -- -- (115,011) 172,305
Increase in account receivable (381,015) -- -- (381,015)
----------- ----------- ----------- -----------
Net cash used in operating activities (2,588,061) (4,096,068) (3,952,038) (14,073,926)
----------- ----------- ----------- -----------
Cash used in investing activities:
Acquisition of furniture and equipment (177,765) (243,153) (75,375) (578,813)
----------- ----------- ----------- -----------
Cash flows from financing activities:
Proceeds from exercise of warrants 5,500 -- -- 5,500
Proceeds from exercise of stock options 52,500 -- -- 52,500
Proceeds from issuance of demand notes payable -- -- -- 2,395,000
Repayment of demand notes payable -- -- (125,000) (125,000)
Proceeds from the issuance of notes payable
- bridge financing -- -- -- 1,200,000
Proceeds from issuance of warrants -- -- -- 300,000
Repayment of notes payable - bridge financing -- -- (75,000) (1,500,000)
Repurchase of common stock -- -- -- (324)
Proceeds from the issuance of common stock -- -- 1,452,313 7,547,548
Proceeds from issuance of convertible preferred stock -- 10,613,184 -- 10,613,184
----------- ----------- ----------- -----------
Net cash provided by financing activities 58,000 10,613,184 1,252,313 20,488,408
----------- ----------- ----------- -----------
Net increase (decrease) in cash and
cash equivalents (2,707,826) 6,273,963 (2,775,100) 5,835,669
Cash and cash equivalents at beginning of period 8,543,495 2,269,532 5,044,632 --
----------- ----------- ----------- -----------
Cash and cash equivalents at end of period $ 5,835,669 8,543,495 2,269,532 5,835,669
=========== =========== =========== ===========
Supplemental disclosure of noncash financing activities:
Issuance of common stock in exchange for
common stock subscriptions $ -- -- -- 7,027
Conversion of demand notes payable and the related
accrued interest to common stock $ -- -- -- 2,442,304
Cashless exercise of preferred warrants $ 30,069 -- -- 30,069
Conversion of preferred to common stock $ 1,367 48 -- 1,415
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
ATLANTIC PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(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 two
operating companies - Gemini Technologies, Inc. (Gemini), Optex
Opthalmologics, Inc. (Optex), and has one wholly-owned subsidiary - 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), 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 was incorporated on May 18, 1993 to develop
pharmaceutical products in the fields of cardiovascular disease, pain and
inflammatory disorders. Prior to 1997, Channel was an 88%-owned subsidiary.
The Company purchased the remaining 12% of Channel in 1997 for $657,900
through the issuance of common stock. See note 6 for further discussion.
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 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.
The accompanying financial statements have been prepared assuming that the
Company will operate as a going concern. Management expects to raise
adequate capital to fund its research, product development and
administrative expenses. The ability of the Company to raise these funds is
dependent on raising adequate funds from investors and corporate partners.
The financial statements do not include any adjustments that might be
necessary if the Company is unable to raise these funds.
F-6
<PAGE>
ATLANTIC PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of 90 days or less to be cash equivalents.
(B) PROPERTY AND EQUIPMENT
Property 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.
Minority interest losses recorded by the Company since inception total
$577,488 as of December 31, 1998 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
Company and 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>
ATLANTIC PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(F) COMPUTATION OF NET LOSS PER COMMON SHARE
For the year ended December 31, 1998, the Company adopted SFAS No. 128,
"Earnings Per Share" ("SFAS No. 128"). In accordance with this statement,
primary net loss per common share is replaced with basic loss per common
share which is calculated by dividing net loss by the weighted-average
number of common shares outstanding for the period. Fully diluted net
income per common share is replaced with diluted net income per common
share reflecting the maximum dilutive effect of common stock issuable upon
exercise of stock options, stock warrants, stock subscriptions, and
conversion of preferred stock. Diluted net loss per common share is not
shown, as common equivalent shares from stock options, stock warrants,
stock subscriptions, and convertible preferred stock would have an
antidilutive effect. Prior period per share data has been restated to
reflect the adoption of SFAS No. 128.
(G) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
(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) PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
1998 1997
--------- ---------
Furniture and equipment $ 530,024 352,259
Leasehold improvements 48,788 48,788
--------- ---------
578,812 401,047
Less accumulated depreciation (316,639) (150,086)
--------- ---------
Net property and equipment $ 262,173 250,961
========= =========
F-8
<PAGE>
ATLANTIC PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(4) DEMAND NOTES PAYABLE TO RELATED PARTIES
Demand notes payable at December 31, 1994 consisted of advances from one of
the founders of the Company who served as a director and 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,
including a note payable of $1,010,000 issued in 1995, was converted into
785,234 shares of common stock of the Company upon the consummation of the
initial public offering (IPO).
Demand notes payable at December 31, 1995 totaling $125,000 consisted of a
loan provided to the Company by the Partnership in July 1995. This loan had
an interest rate of 10% annually. Terms of the loan required the Company to
repay the principal amount of such loan, together with the interest accrued
thereon, with a portion of the proceeds received by the Company in the IPO.
This loan and the related accrued interest was fully repaid in January
1996.
(5) 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.
(6) STOCKHOLDERS' EQUITY
COMMON STOCK
In 1993, the Company received common stock subscriptions for 5,231 shares
of common stock from various individuals, including the Controlling
Shareholder and the Partnership, in exchange for common stock subscriptions
receivable of $6,277. In December 1994, the Company issued 2,606 shares of
common stock upon receipt of payment of $3,127 representing a portion of
these common stock subscriptions receivable.
F-9
<PAGE>
ATLANTIC PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
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 4).
In August 1996, the Company sold in a private placement 250,000 shares of
common stock to certain investors resulting in net proceeds of $1,452,313.
In connection with this private placement, the Company paid Paramount
Capital, Incorporated ("Paramount") a finders fee of $76,438 and issued an
employee of Paramount a warrant to purchase 12,500 shares of the Company's
common stock at $6.73 per share, which expires August 16, 2001. Paramount
is owned by a majority shareholder of the Company.
Pursuant to an Agreement and Plan of Reorganization by and among the
Company, Channel, and New Channel, Inc., a Delaware corporation, dated
February 20, 1997, all of the stockholders of Channel (except for the
Company) agreed to receive an aggregate of 103,200 shares of common stock
of the Company in exchange for their shares of common stock, par values
$0.001 per share, of Channel. On February 20, 1997, Channel became a
wholly-owned subsidiary of the Company. Subsequent to this transaction,
Channel issued a dividend to the Company consisting of all of Channel's
rights to the CT-3 technology, which is in the field of pain and
inflammation. On May 16, 1997, the Company issued 103,200 shares of common
stock of the Company to stockholders of Channel. In connection with
issuance of these shares, the Company recognized an expense in the amount
of $657,900. This expense is included in research and development expenses
in the accompanying consolidated statements of operations.
F-10
<PAGE>
ATLANTIC PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
CONVERTIBLE PREFERRED STOCK
In May and August, 1997, the Company sold in a private placement 1,237,200
shares of Series A convertible preferred stock ("Series A Preferred") to
certain investors resulting in net proceeds of $10,613,184. Holders of
Series A Preferred will be entitled to receive dividends, as, when, and if
declared by the Board of Directors. Prior to August 7, 1998 (the "Reset
Date"), each share was convertible into a share of common stock initially
at a conversion price of $4.72.
The conversion price was adjusted on the Reset Date such that now each
share is convertible into a share of common stock at a conversion price of
$3.06. This conversion price is subject to adjustment.
Commencing on the Reset Date, the holders of the Series A Preferred are
entitled to payment-in-kind dividends, payable semi-annually in arrears, on
their shares of Series A Preferred at the rate of 0.13 shares of Series A
Preferred for each outstanding share of Series A Preferred. As of December
31, 1998, no dividends had been declared.
In connection with the issuance of the convertible preferred stock, the
Company recognized $1,628,251 and $3,703,304 in 1998 and 1997,
respectively, as an imputed preferred stock dividend to record the
difference between the conversion price of the preferred stock and the
market price of the common stock on the effective date of the private
placement. These imputed dividends were non-cash charges.
(7) STOCK OPTIONS
(A) In August 1995, in connection with a severance agreement entered into
between the Company and a former CEO, the Company granted options (not
pursuant to the 1995 Stock Option Plan) to purchase 23,557 shares of
common stock at an exercise price of $1.00 per share with immediate
vesting. Total compensation expense recorded at the date of grant with
regards to those options was $64,782 with the offset recorded as
additional paid-in capital.
F-11
<PAGE>
ATLANTIC PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(B) STOCK OPTION PLAN
In July 1995, the Company established the 1995 Stock Option Plan (the
"Plan"), which provides for the granting of up to 650,000 options to
officers, directors, employees and consultants for the purchase of stock.
In July 1996, the Plan was amended to increase the total number of shares
authorized for issuance by 300,000 shares to a total of 950,000 shares and
beginning with the 1997 calendar year, by an amount equal to one percent
(1%) of the shares of common stock outstanding on December 31 of the
immediately preceding calendar year. At December 31, 1998, 1,009,783 shares
were authorized for issuance. 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). During 1998, 70,000 options were exercised.
The Company applies APB Opinion No. 25 in accounting for its plan.
Accordingly, compensation cost has been recognized for its stock options
only to the extent that the quoted market price of the Company's stock at
the date of grant exceeded the exercise price of the option.
During 1995, the Company granted options to purchase 246,598 shares of the
Company's common stock at exercise prices below the quoted market prices of
its common stock. Deferred compensation expense in the amount of $144,000
was recorded at the date of grant with the offset recorded as an increase
to additional paid in capital. Compensation expense in the amount of
$74,400, $28,800 and $28,800 was recognized in 1998, 1997 and 1996,
respectively.
In November 1997, the Company granted options to purchase 24,000 shares of
the Company's common stock at $9.50 per share to Investor Relations Group
("Investor"). These options expire November 10, 2002. The Company
recognized expense of $81,952, which is included in general and
administrative expense in the consolidated statements of operations for the
year ended December 31, 1998. The expense represents the estimated fair
market value of the options, in accordance with FAS 123.
All stock options granted in 1998 were granted at the quoted market price.
F-12
<PAGE>
ATLANTIC PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
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:
1998 1997 1996
----------- --------- ---------
Net loss
applicable to As Reported $ 2,753,528 8,854,700 3,557,692
common shares Pro forma $ 3,410,475 9,537,916 4,119,990
Net loss per As Reported $ 0.71 2.97 1.29
common share- Pro forma $ 0.88 3.20 1.49
basic
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 1998, 1997, and 1996; dividend yield of 0%; expected
volatility of 95% for 1998, 46% for 1997 and 75% for 1996; risk-free
interest rate of 5.0% for 1998 and 1997, and 5.6% - 6.7% for 1996; and
expected lives of 6 to 10 years for each year.
A summary of the status of the Company's stock plan as of December 1998,
1997 and 1996 and changes during the years then ended is presented below:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
1998 EXERCISE 1997 EXERCISE 1996 EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
-------- -------- -------- -------- -------- --------
At the beginning of
<S> <C> <C> <C> <C> <C> <C>
the year 715,598 $ 5.16 560,598 $ 4.57 246,598 $ 2.90
Granted 192,200 3.19 155,000 7.29 314,000 5.88
Exercised (70,000) 0.75 -- -- -- --
Canceled -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
At the end of the
year 837,798 5.06 715,598 5.16 560,598 4.57
Options exercisable
at year-end 574,660 375,461 150,650
Weighted-average
fair value of
options granted
during the year $ 2.84 $ 3.74 $ 4.06
</TABLE>
F-13
<PAGE>
ATLANTIC PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
The following table summarizes the information about stock options
outstanding at December 31, 1998:
OPTIONS OUTSTANDING
--------------------------------
REMAINING NUMBER OF
NUMBER CONTRACTUAL OPTIONS
EXERCISE PRICE OUTSTANDING LIFE EXERCISABLE
-------------- ------------- ----------- -------------
1.656 10,000 10 years 10,000
2.31 6,000 9.7 years 6,000
3.25 175,000 9.6 years 24,500
3.75 66,598 3.7 years 54,610
3.75 110,000 0.5 years 110,000
5.81 60,000 0.5 years 60,000
5.81 240,000 4 years 177,600
6.625 75,000 5 years 36,750
6.625 40,000 0.5 years 40,000
6.813 1,200 4.2 years 1,200
7.00 6,000 8.5 years 6,000
7.25 10,000 7 years 10,000
7.50 4,000 7 years 4,000
9.50 24,000 3.9 years 24,000
9.875 10,000 8.8 years 10,000
============= =============
837,798 574,660
============= =============
(8) 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 5). These redeemable
warrants expire on December 13, 2000.
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 for a specified period of time, and the
Company has obtained the required approvals from the Underwriter's of the
Company's IPO. In January 1998, 1,000 warrants were exercised.
F-14
<PAGE>
ATLANTIC PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
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 effective April 15,
1996 pursuant to which Paramount will, on a non-exclusive basis, render
financial advisory services to the Company. Two warrants exercisable for
shares of the Company's common stock were issued to Paramount in connection
with this agreement. These included a warrant to purchase 25,000 shares of
the Company's common stock at $10 per share, which warrant 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 warrant expires on June 16, 2001. In
connection with the issuance of these warrants, the Company recognized an
expense in the amount of $139,000 for the fair market value of the
warrants, in accordance with FAS 123. This expense is included in general
and administrative expenses in the consolidated statements of operations
for the year ending December 31, 1996.
In connection with the Channel merger discussed in note 6, the Company
issued a warrant to a director of the Company to purchase 37,500 shares of
the Company's common stock at $5.33 per share, which warrant expires on
July 14, 2006. The Company recognized expense of $48,562, which is included
in research and development expenses in the consolidated statements of
operations for the year ended December 31, 1997.
The Company entered into an agreement with Investor pursuant to which
Investor will render investor relations and corporate communication
services to the Company. A warrant to purchase 24,000 shares of Company's
common stock at $7.00 per share, which warrant expires on November 22,
2001, was issued in 1996. The Company recognized expense of $110,640, which
is included in general and administrative expense in the consolidated
statements of operations for the year ended December 31, 1997. The expense
represents the fair market value of the warrants, in accordance with FAS
123.
Concurrent with the private placement offering of convertible preferred
stock in 1997, the Company issued 123,720 warrants to designees of
Paramount, the placement agent. In accordance with SFAS No. 123, the
Company determined the fair value of the warrants using the Black Scholes
Model and recognized costs of $570,143, which offset the proceeds and
increased the Company's stockholders' equity (deficit). In June 1998, 6,525
warrants were exercised via a cashless method for 2,010 shares of
convertible preferred stock.
F-15
<PAGE>
ATLANTIC PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(9) RELATED-PARTY TRANSACTIONS
The Company has 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. Consulting expense under
these agreements was $96,000, $60,000, and $30,000 for the years ended
December 31, 1998, 1997 and 1996, respectively.
One of the five members of the Board of Directors of the Company is a
full-time officer of Paramount. In the regular course of its business,
Paramount identifies, evaluates and pursues investment opportunities in
biomedical and pharmaceutical products, technologies and companies. The
Company had 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. Consulting expense under these agreements
was $36,000, $28,000 and $42,500 for the years ended December 31, 1998,
1997 and 1996, respectively.
(10) INCOME TAXES
There was no current or deferred tax expense for the years ended December
31, 1998, 1997 and 1996 because of the Company's operating losses.
The components of deferred tax assets and deferred tax liabilities as of
December 31, 1998, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
Deferred tax assets:
<S> <C> <C> <C>
Tax loss carryforwards $6,542,380 5,462,686 3,365,000
Research and development credit 421,217 238,000 123,000
Fixed assets 18,924 26,757 --
---------- ---------- ----------
Gross deferred tax assets 6,982,521 5,727,443 3,488,000
Less valuation reserve 6,982,521 5,727,443 3,488,000
---------- ---------- ----------
Net deferred tax assets -- -- --
---------- ---------- ----------
Deferred tax liabilities -- -- --
---------- ---------- ----------
Net deferred tax asset (liability) $ -- -- --
========== ========== ==========
</TABLE>
F-16
<PAGE>
ATLANTIC PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
The reasons for the difference between actual income tax expense (benefit)
for the years ended December 31, 1998, 1997 and 1996 and the amount
computed by applying the statutory federal income tax rate to losses before
income tax (benefit) are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------- ---------------------- ----------------------
% OF % OF % OF
PRETAX PRETAX PRETAX
AMOUNT EARNINGS AMOUNT EARNINGS AMOUNT EARNINGS
----------- ------ ----------- ------ ----------- ------
Income tax expense at
<S> <C> <C> <C> <C> <C> <C>
statutory rate $ (936,000) (34.0%) $(1,752,000) (34.0%) $(1,210,000) (34.0%)
State income taxes, net
of federal tax benefit (165,000) (6.0%) (309,000) (6.0%) (213,000) (6.0%)
Change in valuation reserve 1,255,000 45.6% 2,239,000 43.4% 1,462,000 41.1%
Credits generated in current
year (183,000) (6.6%) (171,000) (3.3%) -- - %
Other, net 29,000 1.0% (7,000) (0.1%) (39,000) (1.1%)
----------- ------ ----------- ------ ----------- ------
Income tax benefit $ -- -- % $ -- -- % $ -- -- %
=========== ====== =========== ====== =========== ======
</TABLE>
At December 31, 1998, the Company had net operating loss tax carryforwards
of approximately $16,355,949. The net operating loss carryforwards expire
in various amounts starting in 2008 and 1998 for federal and state tax
purposes, respectively. The Tax Reform Act of 1986 contains provisions
which limit the ability to utilize net operating loss carryforwards in the
case of certain events including significant changes in ownership
interests. If the Company's net operating loss carryforwards are limited,
and the Company has taxable income which exceeds the permissible yearly net
operating loss carryforward, the Company would incur a federal income tax
liability even though net operating loss carryforwards would be available
in future years.
(11) LICENSE AGREEMENT
On May 14, 1998, Optex entered into a Development and License Agreement
(the "Agreement") with Bausch & Lomb Surgical (Bausch & Lomb) to complete
the development of Catarex, a cataract-removal technology owned by Optex.
Under the terms of the Agreement, Optex and Bausch & Lomb intend jointly to
complete the final design and development of the Catarex System. Bausch &
Lomb was granted an exclusive worldwide license to the Catarex technology
for human ophthalnic surgery and will assume responsibility for
commercializing Catarex globally.
F-17
<PAGE>
ATLANTIC PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
The Agreement provides that Bausch & Lomb will pay Optex milestone payments
of (a) $2,500,000 upon the signing of the Agreement, (b) $4,000,000 upon
the successful completion of certain clinical trials, (c) $2,000,000 upon
receipt of regulatory approval to market the Catarex device in the United
States (this payment is creditable in full against royalties), and (d)
$1,000,000 upon receipt of regulatory approval to market the Catarex device
in Japan. Pursuant to the Agreement, Bausch & Lomb shall reimburse Optex
for its research and development expenses not to exceed $2,500,000. Bausch
& Lomb shall pay Optex a royalty of 7% of net sales and an additional 3%
royalty when certain conditions involving liquid polymer lenses are met.
During 1998, the Company received the first milestone payment of
$2,500,000, which is nonrefundable, and recorded this amount as license
revenue. In addition, the Company recorded $1,047,511 as a reduction of
expenses related to the research and development of the Catarex device. Of
this amount, $381,015 is recorded as an account receivable at December 31,
1998.
(12) COMMITMENTS AND CONTINGENCIES
CONSULTING AND RESEARCH AGREEMENTS
The Operating Companies have entered into several research, consulting and
employment agreements. Under the terms of these agreements $687,504 will be
paid in 1999. Consulting expense under these agreements amounted to
$1,407,549, $1,037,648 and $693,359 for the years ended December 31, 1998,
1997 and 1996, respectively.
The Company has entered into consulting agreements, under which stock
options may be issued in the foreseeable future.
OPERATING LEASES
The Company rents certain office space under operating leases which expire
in various years through 2002.
Aggregate annual lease payments for noncancelable operating leases are as
follows:
YEAR ENDING DECEMBER 31,
------------------------
1999 $53,427
2000 32,427
2001 31,200
2002 10,400
F-18
<PAGE>
ATLANTIC PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
Rent expense related to operating leases for the years ended December 31,
1998, 1997, and 1996 was $97,756, $62,683, and $22,984, respectively.
RESIGNATION OF CEO
In July 1998, the CEO of the Company resigned. The Company recorded
$211,250 of expense for salary continuation through April 1999. Of this
amount, $140,833 is recorded in accrued expenses at December 31, 1998.
Pursuant to the resignation, all unvested stock options held by the CEO
vested immediately and expire in July 1999.
F-19
<PAGE>
PART III
ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16 (A) OF THE EXCHANGE ACT
INFORMATION CONCERNING DIRECTORS AND EXECUTIVE OFFICERS
Certain information about the Company's current directors and executive
officers as of March 16, 1999 is set forth below:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Martin D. Cleary 53 Director
Robert A. Fildes, Ph.D. 60 Director, Chairman of the Board
Yuichi Iwaki, M.D., Ph.D. 49 Director
Steven H. Kanzer, C.P.A., Esq. 35 Director
Stephen R. Miller, M.D. 41 Senior Vice President, Chief Scientific and Medical Officer
Margaret A. Schalk 41 Vice President, Investor Relations and Project Management
Shimshon Mizrachi 45 Chief Financial Officer, Treasurer and Assistant Secretary
</TABLE>
BUSINESS EXPERIENCE OF DIRECTORS AND EXECUTIVE OFFICERS
MARTIN D. CLEARY has served as a director of the Company since December
1998. He is currently a private consultant to biotech and healthcare companies.
Mr. Cleary was co-founder, President and CEO of CardioGene Therapeutics, a
cardiovascular gene therapy company, from its inception in 1996 until its
successful merger with Boston Scientific Corporation in 1998. From 1994 to 1995,
Mr. Cleary served as President, Chief Executive Officer and a member of the
Board of Directors of IMRE Corporation, a public biotechnology company
specializing in products of immune-mediated diseases and cancer. From 1993 to
1994, he was President, Chief Executive Officer and a Director of Theragen, a
gene-therapy company, which merged with GenVec, Inc. He was Group Vice President
and Chief Financial Officer of Cytogen Corporation from 1986 to 1993. He was
also President and Chief Executive Officer of CytoRad, Inc., a public
corporation engaged in the research and development of antibody-based drug
delivery systems. Prior to joining Cytogen, Mr. Cleary was with Johnson &
Johnson, Inc. for 14 years. From 1982 to 1986, he served as Vice President,
Operations and a Director of Iolab Corporation, a subsidiary of Johnson &
Johnson and as its Vice President, Finance and a Director from 1980 to 1982.
From 1973 to 1979, Mr. Cleary held several senior management positions in
Johnson & Johnson International.
ROBERT A. FILDES, PH.D. has served as a director of the Company since
October 1997. Dr. Fildes was appointed as Chairman of the Board of the Company
in [June] 1998 and from July [10], 1998 to December 31, 1998 he served as
interim President and Chief Executive Officer of the Company. Since August 1997,
Dr. Fildes has been an independent business consultant in the pharmaceutical
industry. Dr. Fildes served as Chairman of the Board and Chief Executive Officer
of Scotgen Biopharmaceuticals Inc., a biotechnology company, from February 1993
to August 1997, during which time Scotgen filed a bankruptcy petition. From
August 1990 to January 1993, he was an independent business consultant in the
pharmaceutical industry. Dr. Fildes was President and Chief Executive Officer of
Cetus
28
<PAGE>
Corporation, a biopharmaceutical company, from 1982 to 1990. From 1980 to 1982,
he was President of Biogen, Inc., the United States subsidiary of Biogen, N.V.,
Geneva, Switzerland. Dr. Fildes is a director of two publicly traded
biopharmaceutical companies: Carrington Laboratories, Inc., and La Jolla
Pharmaceutical Co., and several privately held companies.
YUICHI IWAKI, M.D., PH.D. has served as a director of the Company since
August 1996. He has been a Director of the Transplantation Immunology and
Immunogenetics Laboratory in the Department of Urology at the University of
Southern California and a Professor of Urology and Pathology at the University
of Southern California School of Medicine since 1992. Prior to that, Dr. Iwaki
held various academic appointments at the University of Southern California
School of Medicine, the University of Pittsburgh, the University of California
at Los Angeles, Sapporo Medical School and Nihon University School of Medicine.
Dr. Iwaki, who received his M.D. and Ph.D. from Sapporo Medical School in Japan,
also serves as a director of Avigen, Inc., a publicly traded biotechnology
company, and of a second privately held company.
STEVEN H. KANZER, C.P.A., ESQ. has served as a director of the Company
since its inception in 1993. Since December 1997, Mr. Kanzer has been President,
Chief Executive Officer and a member of the board of directors of the Institute
for Drug Research, Inc., a private 350-employee pharmaceutical research and
development company with offices in Budapest, Hungary and New York. From 1992
until December 1998, Mr. Kanzer was a founder and Senior Managing Director of
Paramount Capital, Inc. ("Paramount"), an investment bank specializing in the
biotechnology and biopharmaceutical industries, and Senior Managing Director and
Head of Venture Capital of Paramount Capital Investments, LLC ("Paramount
Investments"), a biotechnology and biopharmaceutical venture capital and
merchant banking firm that is associated with Paramount. Mr. Kanzer is a founder
and Chairman of the Board of Discovery Laboratories, Inc. and a member of the
Board of Directors of Endorex Corp., two publicly traded pharmaceutical research
and development companies. From 1993 until June 1998, Mr. Kanzer was a founder
and a member of the board of directors of Boston Life Sciences, Inc., a
publicly-traded pharmaceutical research and development company. Mr. Kanzer is
also a founder and member of the board of directors and has been a Chairman and
Interim President of several private pharmaceutical research and development
companies. Prior to joining Paramount, Mr. Kanzer was an attorney associated
with Skadden, Arps, Slate, Meagher & Flom LLP in New York, New York from
September 1988 to October 1991. Mr. Kanzer received his J.D. from New York
University School of Law in 1988 and a B.B.A. in Accounting from Baruch College
in 1985.
STEPHEN R. MILLER, M.D. assumed the position of Vice President and Chief
Medical Officer in September 1995 and was promoted to Senior Vice President,
Chief Scientific and Medical Officer in September 1996. Commencing September
1995, Dr. Miller also had served as Vice President and Chief Medical Officer of
each of the Company's subsidiaries, Optex, Gemini and Channel and, commencing
September 1996, Dr. Miller was promoted to Senior Vice President, Chief
Scientific and Medical Officer of each of Optex, Gemini and Channel. From
December 1985 through August 1995, Dr. Miller served in a variety of positions
of increasing responsibility in the research and development and the marketing
divisions of G.D. Searle, a pharmaceutical company ("G.D. Searle"), including
Senior Director, Technology Planning; Senior Director, International Marketing
Operations; Director, Cardiovascular Marketing; and Associate Director, Clinical
Research and Development. Dr. Miller is board certified in Internal Medicine and
has been an Instructor of Clinical Medicine at the Chicago Medical School since
1985. Dr. Miller received his M.D., summa cum laude, from the University of
Witwatersrand Medical School, Johannesburg, South Africa.
MARGARET A. SCHALK assumed the position of Senior Director, Project
Management in September 1995 and was promoted to Vice President, Investor
Relations and Project Management in September 1996. Commencing September 1995,
Ms. Schalk also had served as Senior Director, Project Management of each of the
Company's subsidiaries, Optex, Gemini and Channel and, commencing September
1996, Ms. Schalk was promoted to Vice President, Investor Relations and Project
Management of each of Optex, Gemini and Channel. From 1987 to September 1995,
Ms. Schalk held positions of increasing responsibility in the areas of project
management, drug development and marketing at G.D. Searle, including Senior
Product Manager, International Marketing Operations; Director of Project
Management, Corporate Medical and Scientific Affairs; and Associate Director,
Drug Development, Corporate Medical and Scientific Affairs. Ms. Schalk received
her B.S. and M.S. from the University of Wisconsin, Milwaukee.
29
<PAGE>
SHIMSHON MIZRACHI assumed the position of Controller in November 1995 and
was promoted to Chief Financial Officer, Treasurer and Assistant Secretary in
September 1997. Since November 1995, Mr. Mizrachi also has served as Controller
of each of the Company's subsidiaries, Optex, Gemini and Channel. From April
1994 to November 1995, Mr. Mizrachi served as Assistant Manager for Caldor
Corp., a regional retail company. From 1987 to April 1994, Mr. Mizrachi held
management positions of increasing responsibility for MidIsland Department
Stores, a regional retail company. Mr. Mizrachi is a Certified Public
Accountant. He received his B.A. from Tel Aviv University, his M.B.A. from
Adelphi University and his second B.A. from Queens College in New York.
There are no family relationships among the executive officers or directors of
the Company.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's officers, directors and persons who are the beneficial owners of
more than 10% of the Company's Common Stock to file initial reports of ownership
and reports of changes in ownership of the Common Stock with the Securities and
Exchange Commission (the "SEC"). Officers, directors and greater than 10%
stockholders are required by SEC regulations to furnish the Company with copies
of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms furnished to the
Company , the Company believes that, during the period from January 1, 1998 to
December 31, 1998, all officers, directors and beneficial owners of more than
10% of the Company's Common Stock complied with all Section 16(a) requirements,
except that each of Dr. Rosenwald and Dr. Fildes filed a Form 3 after the filing
due date for such form, and Dr. Rosenwald has not filed a Form 4 in connection
with his transfer of certain shares of Company Common Stock. Dr. Miller filed a
Form 5 after the filing date for such form.
ITEM 10 - EXECUTIVE COMPENSATION
DIRECTOR COMPENSATION
Non-employee Board members are eligible to participate in the automatic
stock option grant program pursuant to the Company's 1995 Stock Option Plan.
Non-employee directors are granted an option for 10,000 shares of the Company's
Common Stock upon their initial election or appointment to the Board and an
option for 2,000 shares of the Company's Common Stock on the date of each annual
meeting of the Company for those non-employee directors continuing to serve
after such meeting. Pursuant to the automatic stock option grant program, the
Company granted each of Drs. Iwaki and Fildes and Mr. Kanzer an option on August
28, 1998 for 2,000 shares of Common Stock at an exercise price of $2.313 per
share, the fair market value of the Company's Common Stock on the date of grant.
Also pursuant to the automatic stock option grant program, the Company granted
Mr. Cleary an option on December 17, 1998 for 10,000 shares of Common Stock at
an exercise price of $1.656 per share, the fair market value of the Company's
Common Stock on the date of grant.
Subject to the approval of the holders of 66.67% of the Company's Series A
Preferred Stock, effective October 24, 1997, each non-employee member of the
Board is to receive $6,000 per year for his services as a director, payable
semi-annually in arrears, plus $1,500 for each Board meeting attended in person,
$750 for each Board meeting attended via telephone conference call and $500 for
each meeting of a Committee of the Board attended. The Board of Directors
submitted this matter to the holders of the Series A Preferred Stock for their
approval at the Company's 1998 annual meeting of stockholders; however, an
insufficient number of holders of Series A Preferred Stock voted on this matter
and it was not approved. Accordingly, this matter is expected to be resubmitted
to the holders of Series A Preferred Stock in conjunction with the 1999 annual
meeting of stockholders.
Board members are reimbursed for reasonable expenses incurred in connection
with attendance at meetings of the Board and of Committees of the Board.
30
<PAGE>
Subject to the approval of the holders of 66.67% of the Company's Series A
Preferred Stock, on March 13, 1998 the Board (with Dr. Iwaki and another
director abstaining) approved a Financial Services Agreement and a Consultancy
Agreement, each between the Company and Dr. Iwaki. Pursuant to the terms of the
Financial Services Agreement, Dr. Iwaki is to provide financial advisory
services to the Company and the Company is to pay Dr. Iwaki a fee of five
percent of the value of the compensation (whether cash or securities or a
combination thereof) received by the Company in the event Dr. Iwaki is
instrumental to the Company in consummating certain financing or strategic
transactions. Such Financial Services Agreement is to supersede a financial
services agreement, previously entered into between the Company and Dr. Iwaki,
under which Dr. Iwaki had not received any compensation from the Company.
Pursuant to the terms of the Consultancy Agreement, Dr. Iwaki is to provide
medical and scientific consultation and advice to the Company and the Company is
to pay Dr. Iwaki a retainer of $5,000 per month, as well as a per diem of $1,000
per day when Dr. Iwaki is providing services pursuant to the Consultancy
Agreement or the Financial Services Agreement, and is to grant Dr. Iwaki a
fully-vested option, exercisable for 30,000 shares of the Company's Common
Stock, at an exercise price of $6.8125 per share, the fair market value of the
Company's Common Stock on March 13, 1998. Such Consultancy Agreement is to
supersede a consultancy agreement previously entered into between the Company
and Dr. Iwaki pursuant to which the Company has been paying Dr. Iwaki a
consulting fee of $2,500 per month. The Board of Directors submitted this matter
to the holders of the Series A Preferred Stock for their approval at the
Company's 1998 annual meeting of stockholders; however, an insufficient number
of holders of Series A Preferred Stock voted on this matter and it was not
approved. Accordingly, this matter is expected to be resubmitted to the holders
of Series A Preferred Stock in conjunction with the 1999 annual meeting of
stockholders.
The Company and Mr. Cleary entered into a Consultancy Agreement, effective
as of December 1, 1998, pursuant to which Mr. Cleary provides business
consultation and advice to the Company and the Company pays Mr. Cleary a
retainer of $1,000 per month.
No current employee of the Company is also a director of the Company.
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth the compensation earned, for services
rendered in all capacities to the Company, for the last three fiscal years, by
the two individuals who served as Chief Executive Officer of the Company during
fiscal 1998 and the three other highest paid executive officers serving as such
at the end of 1998 whose compensation for that fiscal year was in excess of
$100,000. The individuals named in the table will be hereinafter referred to as
the "Named Officers." No other executive officer of the Company received
compensation in excess of $100,000 during fiscal year 1998. No executive officer
who would otherwise have been included in such table on the basis of 1998 salary
and bonus resigned or terminated employment during the year.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
=======================================================================================================================
Long-Term
Annual Compensation Compensation Awards
--------------------------------------------------------------------
Other Annual Securities
Name and Principal Position Year Salary($)(1) Bonus($) Compensation($) Underlying
Options/SARs(#)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Robert A. Fildes, Ph.D. (2) 1998 63,500 0 0 77,000
Interim President and 1997 0 0 0 10,000
Chief Executive Officer
Jon D. Lindjord (3) 1998 256,554 35,000 9,500 0
President and Chief 1997 225,000 0 9,500 40,000
Executive Officer 1996 195,833 62,500 -- 60,000
Stephen R. Miller, M.D. 1998 163,833 20,000 9,500 20,000
Senior Vice President, Chief 1997 164,200 0 9,500 30,000
Scientific and Medical Officer 1996 145,175 20,000 -- 100,000
Margaret A. Schalk 1998 128,933 17,000 8,584 20,000
31
<PAGE>
Vice President, Investor 1997 115,000 0 6,785 25,000
Relations and Project 1996 104,375 15,000 -- 90,000
Management
Shimshon Mizrachi 1998 146,667 15,000 9,500 20,000
Chief Financial Officer, 1997 122,000 0 5,900 20,000
Treasurer and Assistant 1996 91,250 10,000 -- 50,000
Secretary
=======================================================================================================================
</TABLE>
(1) Does not include amounts deferred under the Company's SAR-SEP retirement
plan pursuant to payroll deductions and matching contributions of the
Company.
(2) Dr. Fildes acted as interim President and CEO from July 10 to December 31,
1998. He received $63,500.00 as salary and in addition received 75,000
options at an exercise price of $3.25 per share. In addition he received
2,000 options on August 28, 1998 as an automatic grant for serving as a
Director of the Company at an exercise price of $2.31 per share.
(3) Mr. Lindjord resigned as the Company's CEO and as a member of the Company's
Board of Directors and from all officer and director positions held with
the Company's subsidiaries, effective July 7, 1998.
OPTIONS AND STOCK APPRECIATION RIGHTS
The following table contains information concerning the grant of stock
options under the Company's 1995 Stock Option Plan to the Named Officers during
the 1998 fiscal year. Except as described in footnote (1) below, no stock
appreciation rights were granted during the 1998 fiscal year.
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
====================================================================================================================
Individual Grants
- --------------------------------------------------------------------------------------------------------------------
Number of Securities % of Total Options/SARs
Underlying Options/ Granted to Employees in Exercise Price Expiration
Name SARs Granted(#)(1) Fiscal Year(2) ($/Share)(3) Date
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Robert A. Fildes, Ph.D. 75,000 54% $3.25 03/12/08
2,000 1% $2.31 08/27/08
Stephen R. Miller, M.D. 20,000 15% $3.25 03/12/08
Margaret A. Schalk 20,000 15% $3.25 03/12/08
Shimshon Mizrachi 20,000 15% $3.25 03/12/08
====================================================================================================================
</TABLE>
(1) Each option has a maximum term of seven years, subject to earlier
termination in the event of the optionee's cessation of service with the
Company. The grant date for the option grant of 2,000 shares to Dr. Fildes
was August 28, 1998, and the grant date for the rest of the options is
August 7, 1998. Except for the grants to Dr. Fildes, each option becomes
exercisable as follows: one-third of the shares underlying the option vest
on August 7, 1999 and the remainder of the shares underlying the option
vest in 24 equal monthly installments commencing September 7, 1999. Dr.
Fildes' option for 75,000 shares becomes exercisable in a series of 36
equal monthly installments commencing September 7, 1998. Dr. Fildes option
for 2,000 shares was vested immediately. Each option will become
immediately exercisable in full upon an acquisition of the Company by
merger or asset sale, unless the option is assumed by the successor entity.
Each option includes a limited
32
<PAGE>
stock appreciation right pursuant to which the optionee may surrender the
option, to the extent exercisable for vested shares, upon the successful
completion of a hostile tender for securities possessing more than 50% of
the combined voting power of the Company's outstanding voting securities.
In return for the surrendered option, the optionee will receive a cash
distribution per surrendered option share equal to the excess of (i) the
highest price paid per share of the Company's Common Stock in such hostile
tender offer over (ii) the exercise price payable per share under the
cancelled option.
(2) Calculated based on total option grants to employees of 137,000 shares of
Common Stock during the 1998 fiscal year.
(3) The exercise price may be paid in cash or in shares of Common Stock (valued
at fair market value on the exercise date) or through a cashless exercise
procedure involving a same-day sale of the purchased shares. The Company
may also finance the option exercise by loaning the optionee sufficient
funds to pay the exercise price for the purchased shares and the federal
and state income tax liability incurred by the optionee in connection with
such exercise. The optionee may be permitted, subject to the approval of
the Plan Administrator, to apply a portion of the shares purchased under
the option (or to deliver existing shares of Common Stock) in satisfaction
of such tax liability.
OPTION EXERCISES AND HOLDINGS
The following table provides information with respect to the Named Officers
concerning the exercisability of options during fiscal year 1998 and
unexercisable options held as of the end of fiscal year 1998. No stock
appreciation rights were exercised during such fiscal year, and, except for the
limited rights described in footnote (1) to the preceding table, no stock
appreciation rights were outstanding at the end of that fiscal year.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
=======================================================================================================================
Shares No. of Securities Value of Unexercised In-the-Money
Acquired Value Underlying Unexercised Options/SARs at FY-End (Market
Name on Exercise Realized (1) Options/SARs at FY-End (#) price of shares at FY-End less
exercise price) ($)(1)
------------------------------------------------------------------
Exercisable Unexercisable Exercisable Unexercisable
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Robert A. Fildes, Ph.D. 0 - 20,333 66,667 0 0
- -----------------------------------------------------------------------------------------------------------------------
Jon D. Lindjord 70,000 $57,763(2) 210,000 0 0 0
- -----------------------------------------------------------------------------------------------------------------------
Stephen R. Miller, M.D. 0 - 119,969 69,980 0 0
- -----------------------------------------------------------------------------------------------------------------------
Margaret A. Schalk 0 - 99,979 61,660 0 0
- -----------------------------------------------------------------------------------------------------------------------
Shimshon Mizrachi 0 - 47,500 42,500 0 0
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Equal to the excess of the fair market value of the purchased shares at the
time of the option exercise over the exercise price paid for those shares.
(2) Based on the fair market value of the Company's Common Stock on December
31, 1998 of $1.50 per share, the closing sales price per share on that date
on the Nasdaq SmallCap Market.
33
<PAGE>
LONG TERM INCENTIVE PLAN AWARDS
No long term incentive plan awards were made to a Named Officer during the
last fiscal year.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL
AGREEMENTS
Effective September 19, 1995, Dr. Miller became Vice President, Chief
Medical Officer of the Company and of each of the Company's subsidiaries
pursuant to a Letter Agreement, dated September 19, 1995. Pursuant to such
Agreement, the Company agreed to pay Dr. Miller an initial annual salary of
$145,000. In the event that the Company terminates Dr. Miller's employment
without cause, the Company is obligated to continue to pay his salary for nine
months, subject to Dr. Miller's duty to mitigate damages by seeking alternative
employment. Finally, Dr. Miller and his dependents will be eligible to receive
paid medical and long-term disability insurance and such other health benefits
as the Company makes available to its other senior officers and directors.
Effective September 19, 1995, Ms. Schalk became Senior Director, Project
Management of the Company and of each of the Company's subsidiaries pursuant to
a Letter Agreement, dated September 19, 1995. Pursuant to such Agreement, the
Company agreed to pay Ms. Schalk an initial annual salary of $100,000. In the
event that the Company terminates Ms. Schalk's employment without cause, the
Company is obligated to continue to pay her salary for nine months, subject to
Ms. Schalk's duty to mitigate damages by seeking alternative employment.
Finally, Ms. Schalk and her dependents will be eligible to receive paid medical
and long-term disability insurance and such other health benefits as the Company
makes available to its other senior officers and directors.
Effective November 15, 1995, Mr. Mizrachi became Controller of the Company
and of each of the Company's subsidiaries pursuant to a Letter Agreement, dated
November 6, 1995. Pursuant to such Agreement, the Company agreed to pay Mr.
Mizrachi an initial annual salary of $90,000. In the event that the Company
terminates Mr. Mizrachi's employment without cause, the Company is obligated to
continue to pay his salary for six months, subject to Mr. Mizrachi's duty to
mitigate damages by seeking alternative employment. Finally, Mr. Mizrachi and
his dependents will be eligible to receive paid medical and long-term disability
insurance and such other health benefits as the Company makes available to its
other senior officers and directors.
The Compensation Committee has the discretion under the 1995 Stock Option
Plan to accelerate options granted to the Named Officers in connection with a
change in control of the Company or upon the subsequent termination of the
officer's employment following the change of control.
ITEM 11 - SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth certain information known to the Company
with respect to the beneficial ownership of the Company's Stock as of March 16,
1999 by (i) all persons who are beneficial owners of five percent or more of the
Company's Common Stock, (ii) each director and executive officer of the Company
and (iii) all current directors and executive officers as a group. The Company
does not know of any person who beneficially owns more than five percent of the
Preferred Stock, and none of the Company's directors or executive officers owns
any shares of Preferred Stock. The number of shares beneficially owned by each
director or executive officer is determined under rules of the SEC and the
information is not necessarily indicative of beneficial ownership for any other
purpose. Shares of the Company's Common Stock subject to convertible securities
that are currently exercisable or convertible or that will become exercisable or
convertible within sixty (60) days are deemed to be beneficially owned by the
person holding such convertible security for computing the percentage ownership
of such person, but are not treated as outstanding for computing the percentage
of any other person. Except as otherwise indicated, the Company believes that
the beneficial owners of the Company's Stock listed below, based upon such
information furnished by such owners, have sole investment power with respect to
such shares, subject to community property laws where applicable.
34
<PAGE>
Number Percent of Total
Name and Address of Shares Shares Outstanding(1)
- ---------------- --------- ---------------------
Lindsay A. Rosenwald, M.D.(2 499,487 ........ 7.6 %
787 7th Avenue
New York, NY 10019
VentureTek, L.P.(3) 438,492 ........ 6.7 %
39 Broadway
New York, NY 10006
Joseph Stevens & Co. Inc.(4) 330,000 ........ 5.0 %
33 Maiden Lane, 8th floor
New York, NY 10038
Jon D. Lindjord (5) 280,000 ........ 4.3 %
Stephen R. Miller, M.D. (5) 119,969 ........ 1.8 %
John K.A. Prendergast, Ph.D.(6) 41,553.. *%
Margaret A. Schalk (5) 99,979.. 1.5 %
Yuichi Iwaki, M.D., Ph.D. (5). 14,000 ........ * %
Shimshon Mizrachi (5) 47,500 ........ * %
Robert A. Fildes, Ph.D. (5) 20,333 ........ * %
Steve H. Kanzer, Esq. (5). 6,121 ........ * %
All current executive officers
and directors as a group
(6 persons) (5) 307,902 ........ 4.7 %
- -----------------------------
* Less than 1.0%
(1) Percentage of beneficial ownership is calculated assuming 6,571,178 shares
of Common Stock were outstanding on March 16, 1999. Beneficial ownership is
determined in accordance with the rules of the Commission and includes
voting and investment power with respect to shares of Common Stock.
(2) Includes 570 shares owned by Dr. Rosenwald's wife and trusts in favor of
his minor children. Dr. Rosenwald disclaims beneficial ownership of such
shares. Does not include 84 shares collectively owned by Dr. Rosenwald's
mother and two brothers, of which Dr. Rosenwald disclaims beneficial
ownership. Includes 380 shares owned by two companies of which Dr.
Rosenwald is the sole stockholder. Includes 154,410 shares of Common Stock
into which shares of Series A Preferred may be converted upon exercise of a
warrant, exercisable within 60 days of March 16, 1999, for 47,202 shares of
Series A Preferred.
35
<PAGE>
(3) The general partner of VentureTek, L.P. is Mr. C. David Selengut. Mr.
Selengut may be considered a beneficial owner of the shares owned by
VentureTek, L.P. by virtue of his authority as general partner to vote
and/or dispose of such shares. VentureTek, L.P. is a limited partnership,
the limited partners of which include Dr. Rosenwald's wife, children,
sisters of Dr. Rosenwald's wife and their husbands and children. Dr.
Rosenwald disclaims beneficial ownership of such shares.
(4) Represents shares of Common Stock underlying a warrant, exercisable within
60 days of March 16, 1999, for shares of Common Stock and securities
convertible into Common Stock. Does not include any units, shares of common
stock or redeemable warrants that may be held in the market making account.
(5) Represents options exercisable within 60 days of March 16, 1999.
(6) Includes 53 shares of Common Stock held in trust for the benefit of the
children of Dr. Prendergast. Dr. Prendergast disclaims beneficial ownership
of such shares. Includes 4,000 shares of Common Stock underlying options
exercisable within 60 days of, March 16, 1999. Includes 37,500 shares of
Common Stock underlying a warrant exercisable within 60 days of March 16,
1999.
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company's Restated Certificate of Incorporation and Bylaws provide for
indemnification of directors, officers and other agents of the Company. At the
1997 Annual Meeting of the Stockholders of the Company, the stockholders
approved the Company entering into an indemnification agreement with each of its
directors and executive officers. Accordingly, the Company has entered into an
indemnification agreement with each of its directors and executive officers.
Prior to a private financing consummated in September 1995, the Company's
operations had been financed primarily through loans provided by Lindsay A.
Rosenwald, M.D., a principal stockholder and former director of the Company, and
VentureTek, L.P. ("VentureTek"), a principal stockholder of the Company. The
principal amount of such loans that had been advanced during the period from
July 25, 1993 to June 30, 1995 together with the interest thereon through June
30, 1995, was $1,085,027 to Dr. Rosenwald and $1,357,277 to VentureTek, L.P.
(such indebtedness, including accrued interest through June 30, 1995, is
collectively referred to as the "Stockholder Loans"). On December 31, 1995,
Stockholder Loans aggregating $2,442,304 in principal and interest were
converted into an aggregate of 785,234 shares of the Company's Common Stock.
In addition to the Stockholder Loans, VentureTek provided a loan to the
Company in July 1995 in an aggregate principal amount of $125,000, bearing
interest at the rate of 10% annually. This loan, together with $115,011 interest
accrued on such loan and on the Stockholder Loans (from July 1, 1995 until the
conversion thereof into shares of Common Stock), was repaid on January 15, 1996
from the proceeds of the Company's initial public offering.
Joseph Stevens & Co., Inc. ("Joseph Stevens"), a principal stockholder of
the Company, was the underwriter in the Company's initial public offering. In
connection with the initial public offering, Joseph Stevens and the Company
entered into an Underwriting Agreement. In connection with a bridge financing
that occurred shortly before the initial public offering, Joseph Stevens acted
as placement agent and received fees and expenses totaling $195,000. In
addition, the Company granted Joseph Stevens, for nominal consideration, a
warrant (the "Joseph Stevens Warrant") exercisable for 165,000 units (each, a
"Unit"), the security issued by the Company in its initial public offering, each
Unit consisting of one share of Common Stock and a redeemable warrant
exercisable for one share of Common Stock. The Joseph Stevens Warrant is
exercisable until December 13, 2000 at an exercise price of $6.60 per Unit. In
addition, the Company and Joseph Stevens entered into a Financial Advisory and
Consulting Agreement and related Indemnity Agreement pursuant to which the
Company paid Joseph Stevens a monthly consulting fee of $2,000 (which obligation
36
<PAGE>
terminated on December 18, 1997) and agreed to pay Joseph Stevens additional
consideration in the event Joseph Stevens assists the Company in connection with
certain financing or strategic transactions.
On April 15, 1996 the Company entered into a letter agreement with
Paramount. Dr. Rosenwald is the sole stockholder of Paramount. Paramount
formerly employed Mr. Kanzer, a director of the Company, and currently employs
Michael Weiss, Esq., the Secretary of the Company. Dr. Iwaki is a director of a
hedge fund that is affiliated with Paramount. Pursuant to such letter agreement,
Paramount agreed to render financial advisory services to the Company and the
Company agreed to compensate Paramount for such services by paying Paramount a
retainer of $5,000 per month, issuing a warrant to Paramount's designee to
purchase 25,000 shares of the Company's Common Stock at an exercise price of
$10.00 per share and paying Paramount additional consideration in the event
Paramount assisted the Company in connection with certain financing or strategic
transactions. Pursuant to the terms of the letter agreement, (1) upon the
renewal of the term of the letter agreement, the Company issued a warrant to
Paramount's designee exercisable for 25,000 shares of the Company's Common Stock
at an exercise price of $8.05 and (2) upon the consummation of a financing
transaction, the Company paid $76,438 to Paramount and issued a warrant to
Paramount's designee exercisable for 12,500 shares of the Company's Common Stock
at an exercise price of $6.73 per share. The term of the letter agreement has
expired.
On June 24, 1996, the Company, Paramount and a second financial advisor
(Paramount and the second financial advisor are collectively referred to as the
"Financial Advisor") entered into a Financial Services Agreement pursuant to
which the Financial Advisor agreed to render financial advisory services.
Pursuant to the agreement, the Company paid the Financial Advisor a $30,000
retainer and agreed to pay additional consideration in the event the Financial
Advisor assisted the Company in connection with certain financing or strategic
transactions. The term of this Financial Services Agreement has expired,
although the Company may be obligated to pay fees to the Financial Advisor in
the event certain financing or strategic transactions are consummated pursuant
to the terms of the Financial Services Agreement.
Effective February 26, 1997, the Company and Paramount entered into a
letter of intent whereby Paramount agreed to act as placement agent for the
Company in connection with the private placement of Series A Preferred (the
"Private Placement"). Thereafter, the Company entered into an agreement (the
"Placement Agreement") with Paramount, pursuant to which the Company agreed to
pay Paramount, for its services, compensation in the form of (i) cash
commissions equal to nine percent of the gross proceeds from the sale of the
Series A Preferred issued in the Private Placement and (ii) a non-accountable
expense allowance equal to four percent of the gross proceeds from the sale of
the Series A Preferred. In addition, upon the final closing date of the sale of
the Series A Preferred, the Company sold to Paramount and/or its designees, for
$0.001 per warrant, warrants exercisable for an aggregate of 123,720 shares of
Series A Preferred, at an exercise price of $11.00 per share of Series A
Preferred. Such warrants are exercisable for 10 years and contain certain
anti-dilution provisions. Under the Placement Agreement, the Company has agreed
to indemnify Paramount against certain liabilities, including liabilities under
the Securities Act.
In connection with the Private Placement, the Company and Paramount will
enter into an advisory agreement (the "Placement Advisory Agreement") pursuant
to which Paramount will act as the Company's non-exclusive financial advisor.
Such engagement will provide that Paramount receive (i) a monthly retainer of
$4,000 commencing June 1, 1997 (with a minimum engagement of 24 months), (ii)
out-of-pocket expenses incurred in connection with services performed under the
Placement Advisory Agreement and (iii) standard success fees in the event
Paramount assists the Company in connection with certain financing and strategic
transactions. Paramount has agreed that, in the event it is entitled to
compensation under the letter agreement dated April 15, 1996 or the Financial
Services Agreement dated June 24, 1996, each described above, and the Placement
Advisory Agreement, it will seek payment under only one of the agreements.
37
<PAGE>
All transactions between Atlantic and its officers, directors, principal
stockholders and their affiliates are approved by a majority of the Board of
Directors, including a majority of the independent and disinterested outside
directors on the Board of Directors. The Company believes that all of the
transactions set forth above were made on terms no less favorable to the Company
than could have been obtained from unaffiliated third parties.
ITEM 13-EXHIBITS LIST, AND REPORTS ON FORM 8-K
(a) Exhibits
The Following documents are referenced or included in this report.
Exhibit No. Description
3.1(1) Certificate of Incorporation of the Registrant, as amended to date.
3.2(1) Bylaws of the Registrant, as amended to date.
3.3(5) Certificate of Designations of Series A Convertible Preferred Stock.
3.4(6) Certificate of Increase of Series A Convertible Preferred Stock.
4.2(1) Form of Unit certificate.
4.3(1) Specimen Common Stock certificate.
4.4(1) Form of Redeemable Warrant certificate.
4.5(1) Form of Redeemable Warrant Agreement, by and between the Registrant
and Continental Stock Transfer & Trust Company.
4.6(1) Form of Underwriter's Warrant certificate.
4.7(1) Form of Underwriter's Warrant Agreement by and between the
Registrant and Joseph Stevens & Company, L.P.
4.8(1) Form of Subscription Agreement, by and between the Registrant and
the Selling Stockholders.
4.9(1) Form of Bridge Note.
4.10(1) Form of Bridge Warrant
4.11(2) Investors' Rights Agreement by and among the registrant, Dreyfus
Growth and Value Funds, Inc. and Premier Strategic Growth Fund.
4.12(2) Common Stock Purchase Agreement by and among the registrant, Dreyfus
Growth and Value Funds, Inc. and Premier Strategic Growth Fund.
10.2(1) Employment Agreement dated July 7, 1995, between the Registrant and
Jon D. Lindjord.
10.3(1) Employment Agreement, dated September 21, 1995, between the
Registrant and Dr. Stephen R. Miller.
10.4(1) Employment Agreement dated September 21, 1995, between the
Registrant and Margaret A. Schalk.
10.5(1) Letter Agreement, dated August 31, 1995, between the Registrant and
Dr. H. Lawrence Shaw.
10.6(1) Consulting Agreement dated January 1, 1994, between the Registrant
and John K.A. Prendergast.
10.8(1) Investors' Rights Agreement, dated July 1995, between the
Registrant, Dr. Lindsay A. Rosenwald and VentureTek, L.P.
10.9(1) License and Assignment Agreement, dated March 25, 1994, between
Optex Ophthalmologics, Inc., certain inventors and NeoMedix
Corporation, as amended.
10.10(1) License Agreement, dated May 5, 1994, between Gemini Gene Therapies,
Inc. and The Cleveland Clinic Foundation.
10.11(1)+ License Agreement, dated June 16, 1994, between Channel
Therapeutics, Inc., the University of Pennsylvania and certain
inventors, as amended.
10.12(1)+ License Agreement, dated March 28, 1994, between Channel
Therapeutics, Inc. and Dr. Sumner Burstein.
10.13(1) Form of Financial Advisory and Consulting Agreement by and between
the Registrant and Joseph Stevens & Company, L.P.
10.14(1) Employment Agreement dated November 3, 1995, between the Registrant
and Shimshon Mizrachi.
10.15(3) Financial advisory agreement between the Company and Paramount dated
September 4, 1996 (effective date of April 15, 1996)
10.16(3) Financial agreement between the Company, Paramount and UI USA dated
June 23, 1996.
38
<PAGE>
Exhibit No. Description
10.17(3) Consultancy agreement between the Company and Dr. Yuichi Iwaki dated
July 31, 1996.
10.18(3) 1995 Stock Option Plan as amended
10.19(3) Warrant issued to an employee of Paramount Capital, LLC to purchase
25,000 shares of Common Stock of the Registrant
10.20(3) Warrant issued to an employee of Paramount Capital, LLC to purchase
25,000 shares of Common Stock of the Registrant
10.21(3) Warrant issued to an employee of Paramount Capital, LLC to purchase
12,500 shares of Common Stock of the Registrant
10.22(4) Letter Agreement between the Registrant and Paramount Capital, Inc.
dated February 26,1997.
10.23(4) Agreement and Plan of Reorganization by and among Atlantic
Pharmaceuticals, Inc., Channel Therapeutics, Inc. and New channel.
Inc. dated February 20,1997.
10.24(4) Warrant issued to John Prendergast to purchase 37,500 shares of the
Registrant's Common Stock.
10.25(4) Warrant issued to Dian Griesel to purchase 24,000 shares of the
Registrant's Common Stock.
21.1(1) Subsidiaries of the Registrant
23.1* Consent of KPMG LLP.
24.1 Power of Attorney (included in part II of this Report under the
caption "Signatures")
27.1 Financial data Schedule
- ------
+ Confidential treatment has been granted as to certain portions of these
exhibits.
o Previously Filed
(1) Incorporated by reference to exhibits of registrant's Registration
Statement on Form SB-2, Registration #33-98478, as filed with the
Securities and Exchange Commission (the "Commission") on October 24, 1995
and as amended by Amendment No. 1, Amendment No. 2, Amendment No.3,
Amendment No. 4 and Amendment No. 5, as filed with the Commission on
November 9, 1995, December 5, 1995, December 12, 1995, December 13, 1995
and December 14, 1995, respectively.
(2) Incorporated by reference to exhibits of the registrant's Current Report on
Form 8-KSB, as filed with the Commission on August 30, 1996.
(3) Incorporated by reference to exhibits of registrant's Form 10-QSB for the
period ended September 30,1996.
(4) Incorporated by reference to exhibits of registrant's Form 10-QSB for the
period ended March 31, 1996.
(5) Incorporated by reference to exhibits of the registrant's Current Report on
Form 8-KSB, as filed with the Commission on June 9, 1997.
(6) Incorporated by reference to exhibits of the registrant's Registration
Statement on Form S-3 (Registration No.333-34379), as filed with the
Commission on August 26, 1997, and as amended by Amendment No. 1 as filed
with the Commission on August 28, 1997.
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, 1998.
39
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the issuer has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized
ATLANTIC PHARMACEUTICALS, INC.
Date: March 19, 1999
By /s/ Robert A. Fildes
-------------------- Robert A. Fildes, Ph.D.
Chairman of the Board
KNOW ALL MEN BY THESE PRESENTS, that each person who signature appears
below constitutes and appoints jointly and severally, Robert A. Fildes, Ph.D.
and Shimshon Mizrachi, or either of them as his true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstititution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments to this Report on Form 10-KSB, and to
file the same with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any of them, or their or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney as of the date indicated.
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.
Name Title Date
- ---- ----- ----
/s/ Robert A. Fildes Chairman of the Board March 19, 1999
- --------------------------- And Director
Robert A. Fildes, Ph.D.
/s/ Shimshon Mizrachi Chief Financial Officer March 19, 1999
- ---------------------------
Shimshon Mizrachi
/s/ Martin D. Cleary Principal Financial and March 19, 1999
- --------------------------- Accounting Officer
Martin D. Cleary
/s/ Yuichi Iwaki Director March 19, 1999
- ---------------------------
Yuichi Iwaki, M.D., Ph.D.
Director March 19, 1999
- ----------------------------
Steve H. Kanzer, Esq., CPA
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 5,835,669
<SECURITIES> 0
<RECEIVABLES> 381,015
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,258,792
<PP&E> 262,173
<DEPRECIATION> 316,639
<TOTAL-ASSETS> 6,520,965
<CURRENT-LIABILITIES> 657,001
<BONDS> 0
0
632
<COMMON> 4,503
<OTHER-SE> 5,858,829
<TOTAL-LIABILITY-AND-EQUITY> 6,520,965
<SALES> 0
<TOTAL-REVENUES> 2,500,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 5,704,863
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (451,335)
<INCOME-PRETAX> (2,753,528)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,753,528)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,753,528)
<EPS-PRIMARY> (1.13)
<EPS-DILUTED> (1.13)
</TABLE>
