United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K/A
[X] Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934 (Fee Required)
For the Fiscal Year Ended December 31, 1997
or
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934 (Fee Not
Required) For the Transition Period From
to .
Commission File Number: 0-28402
ARADIGM CORPORATION
California 94-3133088
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
26219 Eden Landing Road, Hayward, CA 94545 (Address
of principal executive offices)
Registrant's telephone number, including area code: (510)
783-0100
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90
days. Yes X No
Indicate by check mark if disclosure of delinquent
filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will
not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
As of January 30, 1998, there were 10,632,133 shares
of common stock outstanding. The aggregate market value
of voting stock held by non-affiliates of the Registrant
was approximately $47,846,983 based upon the closing price
of the common stock on January 30, 1998 on The Nasdaq Stock
Market. Shares of common stock held by each officer,
director and holder of five percent or more of the
outstanding Common stock have been excluded in that such
persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a
conclusive determination for other purposes.
<PAGE 1>
Item 6. SELECTED FINANCIAL DATA
Years Ended December 31,
1997 1996 1995
(In thousands, except per share amounts)
Statements of
Operations
Data:
Contract and $3,685 $730 $155
license
revenues
Operating
expenses:
Research and 12,732 7,981 3,440
development
General and 6,732 2,958 2,334
administrative
Total 19,464 10,939 5,774
expenses
Loss from (15,779) (10,209) (5,619)
operations
Interest 1,329 1,179 206
income
Interest (234) (52) (20)
expense
Net loss $(14,684) $(9,082) $(5,433)
Basic and $ (1.43) $(1.49) $(5.41)
diluted net
loss per share
(1)
Shares used in
computing 10,280 6,098 1,004
basic and
diluted net
loss per share
(1)
Balance Sheet
Data:
Cash, cash $24,305 $28,534 $12,117
equivalents
and
investments
Working 15,999 23,486 11,594
capital
Total assets 30,294 30,733 13,306
Noncurrent
portion of
capital lease
obligations
and equipment
loans 2,139 350 327
Accumulated (35,827) (21,144) (12,069)
deficit
Total 18,659 27,886 12,121
shareholders'
equity
Years Ended 1994 1993
December 31,
(In thousands,
except per
share amounts)
Statements of
Operations
Data:
Contract and $125 $-
license
revenues
Operating
expenses:
Research and 2,198 926
development
General and 1,664 741
administrative
Total 3,862 1,667
expenses
Loss from (3,737) (1,667)
operations
Interest 38 13
income
Interest (34) (1)
expense
Net loss $(3,733) $(1,655)
Basic and $(4.40) $(2.12)
diluted net
loss per share
(1)
Shares used in
computing 849 780
basic and
diluted net
loss per share
(1)
Balance Sheet
Data:
Cash, cash $6,087 $1,932
equivalents
and
investments
Working 5,739 1,781
capital
Total assets 6,343 2,055
Noncurrent
portion of
capital lease
obligations
and equipment
loans - -
Accumulated (6,636) (2,903)
deficit
Total 5,960 1,888
shareholders'
equity
(1) See Note 1 of Notes to Financial Statement
for an explanation of shares used in computing
basic and diluted net loss per share.
<PAGE 2>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial
condition and results of operations of the
Company should be read in conjunction with
the Financial Statements and the related Notes
thereto included elsewhere in this Form 10-K.
Except for historical information contained
herein, the discussion in this section contains
forwardlooking statements, including, without
limitation, statements regarding timing and
results of clinical trials, the establishment of
corporate partnering arrangements, the
anticipated commercial introduction of the
Company's products and the timing of the
Company's cash requirements. These forward-
looking statements involve certain risks and
uncertainties that could cause actual results to
differ materially from those in such
forward-looking statements.
Potential risks and uncertainties include,
without limitation, those mentioned in this
report and in particular, the factors
described in Part II, under the heading "Risk
Factors".
<PAGE 3>
Overview
Since its inception in 1991, Aradigm has been
engaged in the development of pulmonary drug
delivery systems. As of December 31, 1997, the
Company had an accumulated deficit of $35.8
million. The Company has been unprofitable
since inception and expects to incur additional
operating losses over at least the next several
years as the Company's research and development
efforts, preclinical and clinical testing
activities and manufacturing scale-up efforts
expand and as the Company plans and builds its
late-stage clinical and early commercial
production capabilities. To date, Aradigm has
not sold any products and does not
anticipate receiving significant revenue from
products in 1998. The sources of working
capital have been equity financing, financing
of equipment acquisitions, interest earned on
investments of cash and revenues from research
and feasibility agreements and development
contracts.
The Company has performed and has been
compensated for expenses incurred during initial
feasibility work and for work performed under
collaborative agreements. Once feasibility is
demonstrated, the Company's strategy is to enter
into development contracts with pharmaceutical
corporate partners. These partners will pay for
research and development expenses and will make
additional payments to the Company as it achieves
certain significant milestones. The Company also
expects to receive royalties from its corporate
partners based on revenues received from product
sales and to receive revenue from the
manufacturing of unit dose packets and hand-held
devices. However, there can be no assurance that
the Company will be able to generate sufficient
product or contract research revenue to become
profitable or to sustain profitability.
<PAGE 4>
Results of Operations
Years Ended December 31, 1997, 1996 and 1995
Contract and License Revenue.
The Company reported revenues from
contracts
and license fees of $3.7 million in 1997
compared to $730,000 in 1996 and $155,000 in
1995. The increase in 1997 revenue was due
primarily to a development and commercialization
agreement that was executed with SmithKline
Beecham in September 1997 to develop and
commercialize a pulmonary delivery system for
providing breakthrough pain relief using narcotic
analgesics. Under the terms of the agreement,
Aradigm could receive up to approximately $30
million in milestones and development payments
by the time the first product is
commercialized. Additional milestones and
development costs would be paid if SmithKline
Beecham and Aradigm decided to develop additional
narcotic analgesics for delivery with the AERx
Pain Management System. Included in 1996
revenues were $500,000 of license fees from a
human clinical feasibility testing agreement and
$230,000 of contract research revenues. 1995
revenues were derived entirely from contract
research agreements. Costs of development
contract research revenue approximate such
revenue and are included in research and
development expense.
<PAGE 5>
Research and Development Expenses.
Research and development expenses have
increased each year since the Company's
inception; these expenses were $12.7 million
in 1997 compared to $8.0 million in 1996 and
$3.4 million in 1995. Research and development
expenses in 1997, 1996 and 1995 represented
65%, 73% and 60% of total expenses,
respectively. Research and development
expenses in 1997 increased by 60% over 1996,
attributable primarily to hiring of additional
scientific personnel and expenses associated
with the expansion of research and development
efforts on the AERx system. Research and
development expenses in 1996 increased by 132%
over 1995, similarly attributable to hiring
additional scientific personnel, increased
costs associated with the expansion of research
and development efforts on the AERx and
SmartMist
systems and initiation of additional clinical
testing of the AERx and SmartMist systems.
These expenses represent proprietary research
expenses as well as the costs related to
contract research revenue and include salaries
and benefits of scientific and development
personnel, laboratory supplies, consulting
services and the expenses associated with the
development of manufacturing processes. The
Company expects research and development
spending to increase significantly over the next
few years as the Company continues to expand its
development activities under collaborative
agreements, and plans, builds and scales up a
late stage clinical and early stage commercial
manufacturing facility.
<PAGE 6>
General and Administrative Expenses.
General and administrative expenses were $6.7
million in 1997 compared to $3.0 million in 1996
and $2.3 million in 1995. General and
administrative expenses increased by 128% in 1997
compared to 1996 and 27% in 1996 compared to
1995, attributable primarily to support of the
Company's increased research efforts,
additional facilities expense, administrative
staffing, business development and marketing
activities. The Company expects to incur greater
general and administrative expenses in the
future as it expands its research, development
and manufacturing activities and increases its
efforts to develop collaborative relationships
with corporate partners.
Interest Income. Interest income
increased to $1.3 million in 1997 from $1.2
million in 1996 and $206,000 in 1995. Interest
income in 1997 was consistent with that in 1996
due to similar average cash balances during
those two years. Interest income increased
significantly in 1996 compared to 1995
primarily due to increased average cash balances
in 1996 resulting from the sales of preferred
stock in December 1995 and common stock in
June 1996 in conjunction with the Company's
initial public offering.
Interest Expense. Interest expense was
$234,000 in 1997 compared to $52,000 in 1996
and $20,000 in 1995. These increases resulted
primarily from higher outstanding capital lease
and equipment loan balances under the
Company's equipment lines of credit.
Net Operating Loss Tax Carryforwards. As of
December 31, 1997, the Company had federal
net operating loss tax carryforwards of
approximately $35.0 million. These
carryforwards will expire beginning in the
year 2006. Utilization of net operating loss
carryforwards may be subject to substantial
annual limitation due to the ownership change
limitation provided for by the Internal Revenue
Code of 1986. The annual limitation may result
in the expiration of net operating loss
carryforwards before utilization.
<PAGE 7>
Liquidity and Capital Resources
The Company has financed its operations
since inception primarily through private
placements and public offerings of its capital
stock, proceeds from financings of equipment
acquisitions, contract research revenue and
interest earned on investments. As of December
31, 1997, the Company had received approximately
$54.0 million in net proceeds from sales of its
capital stock. The Company also has a $5.0
million equipment line of credit, of which
approximately $2.9 million remains available
for purchases through September 1998. As of
December 31, 1997, the Company had cash, cash
equivalents and short-term investments of
approximately $24.3 million.
Net cash used in operating activities in
1997, was $7.8 million compared to $7.1 million
in 1996. This increase resulted primarily from
an increase in net loss of $5.6 million and
increases in current assets, largely offset by
net increases in accrued liabilities and deferred
revenue. Net cash used in operating activities in
1996 was $7.1 million compared to $5.2 million
in 1995. This increase resulted primarily from
an increase in net loss of $3.6 million
partially offset by an increase in accrued
liabilities and accounts payable reduced by a
net increase in current assets.
Net cash used in investing activities in
1997 was $463,000 compared to $11.9 million in
1996. This resulted primarily from the Company's
receipt of net proceeds from investment
maturities partially offset by expenditures
made for capital equipment. Net cash used in
investing activities in 1996 was $11.9 million
compared to $535,000 in 1995. The increase
resulted primarily from the Company's net
purchase of investments and additional capital
expenditures.
<PAGE 8>
Net cash provided by financing activities
in 1997 was $6.4 million primarily from the
receipt of proceeds from equipment loans and
issuances of common stock partially offset by
repayment of capital lease obligations. Net cash
provided by financing activities in 1996 of
$24.3 million was due primarily to the receipt
of net proceeds from the Company's initial
public offering. Net cash provided by
financing activities for 1995 was $11.7 million,
primarily a result of $11.6 million in net
proceeds from the issuance of preferred stock.
The development of the Company's technology
and proposed products will require a commitment
of substantial funds to conduct the costly and
timeconsuming research and preclinical and
clinical testing activities necessary to
develop and refine such technology and proposed
products and to bring any such products to
market. The Company's future capital
requirements will depend on many factors,
including continued progress in the research
and development of the Company's
technology and drug delivery systems, the
ability of the Company to establish and
maintain favorable collaborative arrangements
with others, progress with preclinical studies
and clinical trials, the time and costs involved
in obtaining regulatory approvals, the cost of
development and the rate of scale up of the
Company's production technologies, the cost
involved in preparing, filing, prosecuting
maintaining and enforcing patent claims and the
need to acquire licenses or other rights to new
technology.
<PAGE 9>
The Company expects that its existing
capital resources, committed funding from its
existing corporate partnership with SmithKline
Beecham and projected interest income will
enable the Company to maintain current and
planned operations through at least 1998.
However, there can be no assurance that the
Company will not need to raise substantial
additional capital to fund its operations prior
to such time. There can be no assurance that
additional financing will be available on
acceptable terms or at all. The Company's cash
requirements, however, may vary materially from
those now planned because of results of research
and development efforts, including capital
expenditures and funding preclinical and
clinical trials, manufacturing scaleup in
connection with the commercialization of the
SmartMist system, and manufacturing capacity for
preclinical, clinical and full scale
manufacturing requirements of the AERx system.
The Company may seek additional funding
through collaborations or through public or
private equity or debt financings. However,
there cannot be any assurance that additional
financing can be obtained on acceptable terms,
or at all. If additional funds are raised by
issuing equity securities, dilution to
shareholders may result. If adequate funds are
not available, the Company may be required to
delay, to reduce the scope of, or to eliminate
one or more of its research and development
programs, or to obtain funds through
arrangements with collaborative partners or
other sources that may require the Company to
relinquish rights to certain of its technologies
or products that the Company would not otherwise
relinquish.
<PAGE 10>
As the year 2000 approaches, an issue
impacting all companies has emerged regarding
how existing application software programs and
operating systems can accommodate this date
value. In brief, many existing application
software products in the marketplace were
designed to accommodate only a two digit date
position which represents the year (e.g., "95"
is stored on the system and represents the year
1995). As a result, the year 1999 (i.e., "99")
could be the maximum date value systems will
be able to accurately process. Management is
in the process of working with its software
vendors to assure that the Company is prepared
for the year 2000. Management does not
anticipate that the Company will incur
significant operating expenses or be
required to invest heavily in computer system
improvements to be year 2000 compliant.
Risk Factors
Except for historical information contained
herein, the discussion in this section contains
forward-looking statements, including, without
limitation, statements regarding timing and
results of clinical trials, the establishment
of corporate partnering arrangements, the
anticipated commercial introduction of the
Company's products and the timing of the
Company's cash requirements. These forward-
looking statements involve certain risks and
uncertainties that could cause actual results
to differ materially from those in such forward-
looking statements.
<PAGE 11>
Early Stage of Company
Aradigm, incorporated in January 1991, is in
an early stage of development, has a limited
history of operations and has generated only
limited revenues to date. The Company has only
one product, the SmartMist Respiratory Management
System, cleared for commercial sale, and
virtually all of its potential products are
in an early stage of research or development.
There can be no assurance that the Company's
research and development efforts will be
successful, that any potential products will
be proven safe and effective, that regulatory
clearance or approval for the sale of any of
its potential products will be obtained or
that the SmartMist system or any of the
Company's potential products can be manufactured
in commercial quantities or at an acceptable cost
or marketed successfully.
History of Losses; Anticipated Future Losses
The Company has not been profitable since
inception and, through December 31, 1997, has
incurred a cumulative deficit of approximately
$35.8 million. The Company expects to continue
to incur substantial losses over at least the
next several years as the Company's research
and development efforts, preclinical and
clinical testing activities, marketing and
manufacturing scale-up efforts expand and as the
Company plans and builds its late stage clinical
and early commercial production capabilities.
To achieve and sustain profitable operations,
the Company, alone or with others, must
successfully market and sell the SmartMist
Respiratory Management System and develop, obtain
regulatory approval for, manufacture, introduce,
market and sell products utilizing the Company's
AERx technologies. There can be no assurance
that the Company can generate sufficient product
revenue to become profitable or to sustain
profitability.
<PAGE 12>
Uncertainty of Successful Product Development
The Company's AERx systems are at an early
stage of development and are being tested
using patient operated prototypes. The AERx
systems will require substantial additional
development, preclinical and clinical testing and
investment before they can be commercialized.
To further develop its AERx systems, the
Company must address many engineering and
design issues, including ensuring that the
device has the ability to deliver a reproducible
amount of drug into the bloodstream and can be
manufactured successfully as a hand-held
system. No assurance can be made that the
Company will be successful in addressing
these design, engineering and manufacturing
issues. Additionally, the Company may need to
formulate and will need to package drugs for
delivery by its AERx systems. There can be no
assurance that the Company will be able to
successfully formulate and package such drugs.
The Company will need to demonstrate that drugs
delivered by its AERx systems remain safe and
efficacious and that over time and under
differing storage conditions, such drugs will
not be subject to physical or chemical
instability or other problems that would prohibit
the AERx systems from being commercially viable.
While development efforts are at different stages
for different products, there can be no
assurance that the Company will be successful in
any of its product development efforts, or that
the Company will not abandon some or all of its
proposed products. Failure by the Company to
successfully develop its potential products in a
timely manner would have a material adverse
effect on the Company.
<PAGE 13>
Uncertainty of Successful Product
Commercialization
The Company's success in commercializing
its products will be dependent upon many
factors, including acceptance by health care
professionals and patients. Acceptance of the
Company's products will largely depend on
demonstrating that the Company's products are
competitive with alternate delivery systems with
respect to safety, efficacy, ease of use and
price. The Company believes that market
acceptance of its SmartMist system will
depend largely upon health care professionals
and third-party payors determining that the
SmartMist system offers medical and economic
benefits over existing asthma therapies. In
addition, the SmartMist system is specifically
designed for the canisters currently used by
some of the leading manufacturers of MDIs. If,
among other things, manufacturers decide to
change the dimensions of their canisters, the
Company could be adversely affected. Moreover,
MDIs use chlorofluorocarbons("CFCs") as a
propellant for the medication. The Company is
aware of initiatives and international
agreements to ban CFCs, which could have an
adverse effect on the Company. In order to
commercialize the SmartMist system, the company
is pursuing collaborations with pharmaceutical
firms, disease management companies and managed
care organizations in order to develop the
market for this product and to realize its
potential as part of a broader disease
management program. There can be no assurance
that the SmartMist system or the Company's
products in development will prove competitive
or that the Company will be successful in taking
products from their current state of development
to commercial introduction or success. Failure by
the Company to successfully commercialize its
potential products in a timely manner would have
a material adverse effect on the Company.
<PAGE 14>
Dependence Upon Collaborative Partners and Need
for Additional Collaborative Partners
The Company's commercialization strategy is
dependent, in part, on the Company's ability to
enter into agreements with collaborative
partners. The Company's ability to successfully
develop and commercialize its first AERx system,
the AERx Pain Management System, is dependent
on the Company's corporate partnership with
SmithKline Beecham. SmithKline Beecham has
agreed to undertake certain collaborative
activities with the Company, fund research and
development activities with the Company, make
certain payments to the Company upon achievement
of certain milestones and pay royalties to the
Company if and when a product is commercialized.
If SmithKline Beecham fails to conduct these
collaborative activities in a timely manner or at
all, the preclinical or clinical development
or commercialization of the AERx Pain Management
System will be delayed. In addition, the
agreement may be terminated by SmithKline
Beecham and there can be no assurance that
development and milestone payments will be
received. Should the Company fail to receive
development funds or achieve milestones set
forth in the agreement, or should SmithKline
Beecham breach or terminate the agreement, the
Company's business, financial condition and
results of operations would be materially
adversely affected.
<PAGE 15>
The Company will need to enter into
additional agreements with corporate partners
to conduct the clinical trials, manufacturing,
marketing and sales necessary to commercialize
its other potential products. In addition, the
Company's ability to apply the AERx system to
any proprietary drugs, including new drugs,
biotechnology drugs or established drugs in
proprietary formulations, will depend on the
Company's ability to establish and maintain
corporate partnerships or other collaborative
arrangements with the holders of proprietary
rights to such drugs. There can be no assurance
that the Company will be able to establish such
additional corporate partnerships or
collaborative arrangements on favorable terms
or at all, or that its existing or any future
corporate partnerships or collaborative
arrangements will be successful. In
addition, there can be no assurance that
existing or future corporate partners or
collaborators will not pursue alternative
technologies or develop alternative products
either on their own or in collaboration with
others, including the Company's competitors.
There can be no assurance that disputes will not
arise in the future with the Company's existing
or future corporate partners or collaborators,
and any such disagreements could lead to delays
in the research, development or commercialization
of any potential products or result in
litigation or arbitration which would be time
consuming and expensive. Should any corporate
partner or collaborator fail to develop or
commercialize successfully any product to which
it has obtained rights from the Company, the
Company's business, financial condition and
results of
operations may be materially adversely affected.
<PAGE 16>
Limited Manufacturing Experience
The Company has only limited experience in
manufacturing. To date, the Company has scaled-up
its manufacturing capabilities to support the
product launch of the SmartMist system. In the
event the SmartMist system achieves market
acceptance, the Company will need to further
increase its current manufacturing capacity. In
addition, the Company is in the process of
increasing the production of disposable drug
packets for the AERx system for later stage
clinical trials. The Company anticipates making
significant expenditures to attempt to provide
for the high volume manufacturing required for
multiple AERx products, if such products are
successfully developed. There can be no
assurance that manufacturing and quality control
problems will not arise as the Company
attempts to scale-up, or that any such
scaleup can be achieved in a timely manner or
at a commercially reasonable cost. Any failure
to surmount such problems could delay or
prevent late stage clinical testing and
commercialization of the Company's products. The
Company's manufacturing facilities and those of
its contract manufacturers will be subject to
periodic regulatory inspections by the FDA and
other federal and state regulatory agencies and
such facilities must comply with good
manufacturing practice ("GMP") requirements of
the FDA. There can be no assurance the Company
will satisfy such regulatory requirements and any
failure to satisfy GMP and other requirements
could have a material adverse effect on the
Company.
<PAGE 17>
The Company uses contract manufacturers to
produce key components, assemblies and
subassemblies for its SmartMist devices and
intends to use contract manufacturers in a
similar way in connection with clinical and
commercial manufacturing of its AERx devices.
There can be no assurance that Aradigm will be
able to enter into or maintain satisfactory
contract manufacturing arrangements. Certain
components of Aradigm's current and potential
products are or will be available initially
only from single sources. While the Company
has contingency plans for alternate suppliers,
there can be no assurance that the Company
could find alternate
suppliers for such components. Even if new
suppliers are secured, there can be no
assurance that this would not significantly
reduce or eliminate the Company's ability to
supply product during any transition. A delay
of or interruption in production could have a
material adverse effect on the Company's
business, financial condition and results of
operations.
Future Capital Needs; Uncertainty of Additional
Funding
The Company's operations to date
have consumed substantial and increasing amounts
of cash. The negative cash flow from
operations is expected to continue in the
foreseeable future. The development of the
Company's technology and proposed products will
require a commitment of substantial funds. In
addition, costly and time consuming research
and preclinical and clinical testing activities
must be conducted to develop, refine and
commercialize such technology and proposed
products. The Company's future capital
requirements will depend on many factors,
including continued progress in the research
and development of the Company's technology and
drug delivery systems, the ability of the
Company to establish and maintain favorable
collaborative arrangements with others, progress
with preclinical studies and clinical trials,
the time and costs involved in obtaining
regulatory approvals, the cost of development and
the rate of scaleup of the Company's production
technologies, the cost involved in preparing,
filing, prosecuting, maintaining and enforcing
patent claims and the need to acquire licenses
or other rights to new technology.
<PAGE 18>
The Company has financed its operations
since inception primarily through private
placements and public offerings of its capital
stock, proceeds from financings of equipment
acquisitions, contract research revenue and
interest earned on investments. The Company
anticipates that its existing resources,
anticipated payments from its existing corporate
partners and projected interest income, will
enable the Company to maintain its current and
planned operations through 1998. However, there
can be no assurance that the Company will not
need to raise substantial additional capital to
fund its operations prior to such time. There can
be no assurance that additional financing will be
available on acceptable terms or at all. If
additional funds are raised by issuing equity
securities, substantial dilution to shareholders
may result. If adequate funds are not
available, the Company may be required to
delay, reduce the scope of, or eliminate one or
more of its research or development programs or
obtain funds through arrangements with
collaborative partners or others that may
require the Company to relinquish rights to
certain of its technologies, product candidates
or products that the Company would not otherwise
relinquish.
<PAGE 19>
Dependence Upon Proprietary Technology;
Uncertainty of Patents and Proprietary Technology
The field of aerosolized drug delivery is
crowded and a substantial number of patents have
been issued in this field. Competitors and
institutions may have applied for other
patents and may obtain additional patents and
proprietary rights relating to products or
processes competitive with those of the Company.
Patents or other publications may hinder or
prevent the Company from obtaining patent
protection being sought or draw into question
the validity of patents already issued to the
Company. In addition, patents issued to others
might provide competitors with the ability to
prevent the Company from making its products
or carrying out processes necessary for use of
its products. The Company may not be able to
obtain a license under any such patent and may
thereby be prevented from making products or
carrying out processes which are important or
essential to the business of the Company.
Although issued patents are presumed valid under
federal law, none of the patents of the
Company has been challenged in litigation. There
can be no assurance that any of such patents will
be found valid if challenged. There also can
be no assurance that any of the applications
will issue or if issued will later be found valid
if challenged. Further, there can be no assurance
that any issued patents or applications which
might later issue as patents will provide the
Company with a degree of market exclusivity
sufficient for the Company to profitably
compete against its competitors. Pending United
States applications are maintained in secret
until they are issued as patents and as such
can not be searched by the Company. There may
be pending applications which will later issue as
patents which will create infringement issues for
the Company. Further, patents already issued to
the Company or applications of the Company
which are pending may become involved in
interferences that could be resolved in favor of
competitors of the Company and involve the
expenditure of substantial financial and human
resources of the Company.
<PAGE 20>
Company policy is to require its
officers, employees, consultants and advisors
to execute proprietary information and invention
assignment agreements upon commencement of their
relationships with the Company. There can be no
assurance, however, that these agreements will
provide meaningful protection for the Company's
inventions, trade secrets or other proprietary
information in the event of unauthorized use or
disclosure of such information. Violations of
such agreements are difficult to police. See
"Business Intellectual Property and Other
Proprietary Rights."
Government Regulation; Uncertainty with
Preclinical and Clinical Testing
All medical devices and new drugs,
including the Company's products under
development, are subject to extensive and
rigorous regulation by the federal government,
principally the FDA, and by state and local
governments. Such regulations govern the
development, testing, manufacture, labeling,
storage, premarket clearance or approval,
advertising, promotion, sale and distribution of
such products. If medical devices or drug
products are marketed abroad, they also are
subject to regulation by foreign governments.
The regulatory process for obtaining
FDA premarket clearances or approvals for medical
devices and drug products is generally lengthy,
expensive and uncertain. Securing FDA marketing
clearances and approvals often requires the
submission of extensive clinical data and
supporting information to the FDA. Product
clearances and approvals, if granted, can be
withdrawn for failure to comply with regulatory
requirements or upon the occurrence of unforeseen
problems following initial marketing.
<PAGE 21>
There can be no assurance that the Company
will be able to obtain necessary regulatory
clearances or approvals on a timely basis, if
at all, for any of its products under
development, and delays in receipt or failure to
receive such clearances or approvals or failure
to comply with existing or future regulatory
requirements could have a material adverse
effect on the Company. Moreover, regulatory
clearances or approvals for products such as
medical devices and new drugs, even if granted,
may include significant limitations on the uses
for which such products may be marketed. Certain
changes to marketed medical devices and new
drugs are subject to additional FDA review and
clearance or approval. There can be no assurance
that any clearances or approvals that are
required, once obtained, will not be
withdrawn or that compliance with other
regulatory requirements can be maintained.
Further, failure to comply with applicable FDA
and other regulatory requirements can result in
sanctions being imposed on the Company or the
manufacturers of its products, including warning
letters, fines, product recalls or seizures,
injunctions, refusals to permit products to be
imported into or exported out of the United
States, refusals of FDA to grant premarket
clearance or premarket approval of medical
devices and drugs or to allow the Company to
enter into government supply contracts,
withdrawals of previously approved marketing
applications and criminal prosecutions.
The Company received 510(k) clearance from the
FDA in 1996 for the SmartMist system. The
Company has made modifications to the
SmartMist system since receiving clearance,
which the Company believes do not require the
submission of new 510(k) notifications to the
FDA. There can be no assurance, however, that
the FDA would agree with any of the Company's
determinations not to submit a new 510(k) notice
for any of these changes or would not require
the Company to submit a new 510(k) notice for
any of the changes made to the device. If the
FDA requires the Company to submit a new 510(k)
notice for any modification to the SmartMist
system, the Company may be prohibited from
marketing the modified device until the 510(k)
notice is cleared by the FDA, which could have a
material adverse effect on the Company.
The Company may also be subject to certain user
fees that the FDA is authorized to collect under
the Prescription Drug User Fees Act of 1992 for
certain drugs, including insulin and morphine.
This act expired on September 30, 1997, and
legislation to reauthorize it has been passed by
the House and Senate. It must be reconciled in a
House-Senate conference and signed by the
President to become law.
<PAGE 22>
Before the Company can file for regulatory
approvals for the commercial sale of the
Company's potential AERx products, the FDA will
require extensive preclinical and clinical
testing to demonstrate the safety and
efficacy of such potential products. To date,
the Company has tested an early prototype
patient-operated version of the AERx Pain
Management System with morphine on a limited
number of healthy volunteers in Phase I
clinical trials in the United States. Failure of
the Company to progress to more advanced clinical
trials would have a material adverse effect on
the Company. There can be no assurance that the
Company will be able to manufacture
sufficient quantities of the disposable unit-dose
packets to support any future clinical trials of
the AERx system, or that the design requirements
of the AERx system will make it feasible for
development beyond the prototype currently being
used.
The timing of completion of clinical trials
is dependent upon, among other factors, the
enrollment of patients. Patient recruitment is a
function of many factors, including the size of
the patient population, the proximity of
patients to clinical sites, the eligibility
criteria for the study and the existence of
competitive clinical trials. Delays in planned
patient enrollment in the Company's current
trials or future clinical trials may result in
increased costs, program delays or both, which
could have a material adverse effect on the
Company.
<PAGE 23>
The Company also is developing applications of
its AERx system for the delivery of insulin and
other compounds. These applications are in an
early stage of development and the regulatory
requirements associated with obtaining the
necessary marketing approvals from the FDA and
other regulatory agencies are not known. There
can be no assurance that these applications of
the AERx system will prove to be viable or
that any necessary regulatory approvals will be
obtained in a timely manner, if at all. Although
the Company believes the data regarding the
Company's potential products is encouraging, the
results of initial preclinical and clinical
testing of the products under development by
the Company are not necessarily predictive of
results that will be obtained from subsequent
or more extensive preclinical and clinical
testing. Furthermore, there can be no assurance
that clinical trials of products under
development will demonstrate the safety and
efficacy of such products at all or to the
extent necessary to obtain regulatory approvals.
Companies in the medical device, pharmaceutical
and biotechnology industries have suffered
significant setbacks in advanced clinical
trials, even after promising results in
earlier trials. The failure to demonstrate
adequately the safety and efficacy of a
therapeutic product under development could delay
or prevent regulatory approval of the product and
would have a material adverse effect on
the Company.
<PAGE 24>
In addition, due to limited experience with
chronic administration of drugs delivered via
the lung for systemic effect, the FDA may require
clinical data to demonstrate that such chronic
administration is safe. There can be no assurance
that the Company will be able to present such
data in a timely manner, or at all.
The FDA and other regulatory agency
requirements for manufacturing, product
testing and marketing can vary depending upon
whether the product is a medical device or a
drug. Manufacturers of medical devices and drugs
also are required to comply with the applicable
GMP requirements, which relate to product testing
and quality assurance as well as the
corresponding maintenance of records and
documentation. There can be no assurance that
the Company will be able to comply with the
applicable GMP and other FDA regulatory
requirements as it scales up its manufacturing
operations. Such failure could have a material
adverse effect on the Company.
In addition, in order for the Company to
market its products in Europe and in certain
other foreign jurisdictions, the Company and
its distributors and agents must obtain
required regulatory approvals and clearances
and otherwise comply with extensive
regulations regarding safety and quality. These
regulations, including the requirements for
approvals or clearance to market and the time
required for regulatory review, vary from
country to country. There can be no assurance
that the Company will obtain regulatory approvals
in such countries or that it will not be
required to incur significant costs in
obtaining or maintaining its foreign regulatory
approvals. Delays in receipt of approvals to
market the Company's products, failure to receive
these approvals, or future loss of previously
received approvals could have a material
adverse effect on the Company's business,
financial condition and results of operations.
<PAGE 25>
Because the Company's AERx Pain
Management System clinical studies involve
morphine, the Company is registered with the
Drug Enforcement Agency ("DEA") and its
facilities are subject to inspection and DEA
export, import, security and production quota
requirements. There can be no assurance that the
Company will not be required to incur significant
costs to comply with DEA regulations in the
future or that such regulations will not have
a material adverse effect on the Company.
Highly Competitive Markets; Risk of Alternative
Therapies
The medical device, pharmaceutical and
biotechnology industries are highly competitive
and rapidly evolving. The Company's success
will depend on its ability to successfully
develop products and technologies for pulmonary
drug delivery. If a competing company were to
develop or acquire rights to a better pulmonary
delivery device, the Company could be materially
and adversely affected.
The Company is in competition with
pharmaceutical, biotechnology and drug delivery
companies and other entities engaged in the
development of alternative drug delivery
systems or new drug research and testing, as
well as with entities producing and developing
injectable drugs. The Company is aware of a
number of companies currently seeking to develop
new products and non-invasive alternatives
to injectable drug delivery, including oral,
intranasal and transdermal delivery systems and
colonic absorption systems. The Company also is
aware of other companies currently engaged in
the development and commercialization of
pulmonary drug delivery systems and enhanced
injectable drug delivery systems. Many of the
Company's competitors have greater research and
development capabilities, experience,
manufacturing, marketing, sales, financial and
managerial resources than the Company and
represent significant competition for the
Company. Acquisitions of competing drug delivery
companies by large pharmaceutical companies or
partnering arrangements between such companies
could enhance competitors' financial, marketing
and other resources. The Company's competitors
may succeed in developing competing
technologies, obtaining FDA approval for products
more rapidly than the Company and gaining
greater market acceptance of their products
than the Company's products. There can be no
assurance that developments by others will not
render some or all of the Company's proposed
products or technologies uncompetitive or
obsolete, which would have a material adverse
effect on the Company.
<PAGE 26>
Dependence on Key Personnel
The Company is dependent upon a limited
number of key management and technical
personnel. The loss of the services of one or
more of such
key employees could have a material adverse
effect on the Company. In addition, the
Company's success will depend upon its ability
to attract and retain additional highly
qualified sales, management, manufacturing and
research and development personnel. The Company
faces intense competition in its recruiting
activities, and there can be no assurance that
the Company will be able to attract or retain
qualified personnel.
Exposure to Product Liability
The research, development and
commercialization of medical devices and
therapeutic products entails significant product
liability risks. If the Company succeeds in
commercializing products using the SmartMist
system or the AERx system and if it
succeeds in developing additional devices and
new products, the use of such products in
clinical trials and the commercial sale of such
products may expose the Company to liability
claims. These claims might be made directly by
consumers or by pharmaceutical companies or
others selling such products. Companies often
address the exposure of such risk by obtaining
product liability insurance. Although the Company
currently maintains limited product liability
insurance, there can be no assurance that the
Company will be able to obtain additional or
maintain existing insurance on acceptable
terms, or at all, or in amounts sufficient to
protect the Company. A successful claim brought
against the Company in excess of the Company's
insurance coverage would have a material adverse
effect on the Company's business.
<PAGE 27>
Uncertainty Related to Third-Party Reimbursement
In both domestic and foreign markets,
sales of the Company's current and potential
products, if any, will depend in part on the
availability of reimbursement from third-party
payors such as government health administration
authorities, private health insurers and other
organizations. Third-party payors are
increasingly challenging the price and cost
effectiveness of medical products and services.
Significant uncertainty exists as to the
reimbursement status of newly approved health
care products. There can be no assurance that
any of the Company's current and potential
products will be reimbursable by thirdparty
payors. In addition, there can be no assurance
that the Company's current and potential products
will be considered cost-effective or that
adequate third-party reimbursement will be
available to enable Aradigm to maintain price
levels sufficient to realize a profit.
Legislation and regulations affecting the
pricing of pharmaceuticals may change before
the Company's current and potential products are
approved for marketing and any such changes
could further limit reimbursement.
<PAGE 28>
Hazardous Materials
The Company's operations involve the
controlled use of hazardous materials,
chemicals and various radioactive compounds.
Although the Company believes that its safety
procedures for handling and disposing of such
materials comply with the standards prescribed
by state and federal regulations, the risk
of accidental contamination or injury from
these materials cannot be completely eliminated.
In the event of such an accident, the Company
could be
held liable for any damages that result and
such liability could exceed the resources of the
Company.
Possible Volatility of Stock Price
The market prices for securities of many
companies, including the Company, engaged in
pharmaceutical development activities
historically have been highly volatile and the
market from time to time has experienced
significant price and volume fluctuations that
are unrelated to the operating performance of
particular companies. Prices for the Company's
Common Stock may be influenced by many
factors, including investor perception of the
Company, fluctuations in the Company's
operating results and market conditions relating
to the pharmaceutical industry. In addition,
announcements of technological innovations or
new commercial products by the Company or its
competitors, delays in the development or
approval of the Company's product candidates,
developments or disputes concerning patent or
proprietary rights, publicity regarding actual
or potential developments relating to products
under development by the Company or its
competitors, regulatory developments in both the
United States and foreign countries, public
concern as to the safety of drug technologies
and economic and other external factors, as well
as period-to-period fluctuations in financial
results, may have a significant impact on the
market price of the Common Stock. Finally,
future sales of substantial amounts of Common
Stock by existing shareholders could also
adversely affect the prevailing price of the
Common Stock. In the past, following periods of
volatility in the market price of a company's
securities, class action securities litigation
has often been instituted against such a
company. Any such litigation instigated
against the Company could result in substantial
costs and a diversion of management's attention
and resources, which could have a material
adverse effect on the Company's business,
financial condition and operating results.
<PAGE 29>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Aradigm Corporation
We have audited the accompanying balance
sheets of Aradigm Corporation as of December 31,
1997 and 1996, and the related statements of
operations, shareholders' equity, and cash flows
for each of the three years in the period
ended
December 31, 1997. These financial statements
are the responsibility of the Company's
management. Our responsibility is to express
an opinion on these 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 financial statements referred
to above present fairly, in all material
respects, the financial position of Aradigm
Corporation at December 31, 1997 and 1996, and
the results of its operations and its cash flows
for each of the three years in the period ended
December 31, 1997, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Palo Alto, California
February 6, 1998
<PAGE 30>
Aradigm Corporation
Balance Sheets
(In thousands, except share data)
December 31,
1997 1996
Assets
Current assets:
Cash and cash equivalents $15,517 $17,454
Short-term investments 8,788 8,078
Receivables 261 -
Inventories 520 -
Other current assets 409 451
Total current assets 25,495 25,983
Investments - 3,002
Property and equipment, net 4,417 1,453
Notes receivable from officers 303 220
Other assets 79 75
Total assets $30,294 30,733
Liabilities and shareholders'
equity
Current liabilities:
Accounts payable $ 1,505 $ 601
Accrued clinical and other - 899
studies
Accrued compensation 728 280
Deferred revenue 6,339 169
Other accrued liabilities 342 279
Current portion of
capital lease
obligations 582 269
and equipment loans
Total current liabilities 9,496 2,497
Noncurrent portion of capital
lease obligations 2,139 350
and equipment loans
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par value;
5,000,000 shares authorized; no - -
shares issued or outstanding
Common stock, no par value,
40,000,000 shares authorized;
issued and outstanding shares: 54,976 49,821
1997 - 10,632,133; 1996 -
10,214,054
Shareholder notes receivable (386) (483)
Deferred compensation (104) (308)
Accumulated deficit (35,827) (21,144)
Total shareholders' equity 18,659 27,886
Total liabilities and $30,294 $30,733
shareholders' equity
<PAGE 31>
Aradigm Corporation
Statements of Operations
(In thousands, except share and per share data)
Years ended December 31,
1997 1996 1995
Contract and license $ 3,685 $ 730 $155
revenues
Expenses:
Research and 12,732 7,981 3,440
development
General and 6,732 2,958 2,334
administrative
Total expenses 19,464 10,939 5,774
Loss from operations (15,779) (10,209) (5,619)
Interest income 1,329 1,179 206
Interest expense (234) (52) (20)
Net loss $(14,684) $(9,082) (5,433)
Basic and diluted $(1.43) $(1.49) $(5.41)
net loss per
share
Shares used in
computing basic 10,280,091 6,098,038 1,004,133
and diluted net
loss per share
<PAGE 32>
Aradigm Corporation Statement of Shareholders' Equity
(In thousands, except share data)
Preferred Stock Common Stock
Shares Amount Shares Amount
Balances at 3,503,458 $12,566 936,679 $ 114
December 31,
1994
Issuance of - - 397,375 156
common stock
Repurchase of - - (7,029) (3)
common stock
Repayment of - - - -
notes
receivable
Issuance of
Series E 2,108,452 11,553 - -
convertible
preferred
stock
Net loss - - - -
Balances at 5,611,910 24,119 1,327,025 267
December 31,
1995
Issuance of - - 662,629 350
common stock
Repurchase of - - (2,766) (1)
common stock
Issuance of
common stock
upon (5,611,910) (24,119) 5,727,166 24,119
conversion of
preferred
stock and
warrants, net
Issuance of - - 2,500,000 24,591
common stock
Deferred - - - 495
compensation
Amortization of - - - -
deferred
compensation
Net change in - - - -
unrealized
gain (loss) on
available-for-
sale
investments
Net loss - - - -
Balances at - - 10,214,054 49,821
December 31,
1996
Issuance of - - 432,513 5,164
common stock
Repurchase of - - (14,434) (9)
common stock
Repayment of - - - -
shareholder
notes
Amortization of - - - -
deferred
compensation
Net change in - - - -
unrealized
gain (loss) on
available-for-
sale
investments
Net loss - - - -
Balances at - $ - 10,632,133 $54,976
December 31,
1997
Aradigm Corporation Statement of Shareholders' Equity
(continued)
(In thousands, except share data)
Share- Total
holder Deferred Accumu- Share-
Notes Compen- lated holders
Receiv- sation Deficit Equity
able
Balances at $(84) $ - $(6,636) $ 5,960
December 31,
1994
Issuance of (143) - - 13
common stock
Repurchase of 3 - - -
common stock
Repayment of 28 - - 28
notes
receivable
Issuance of
Series E - - - 11,553
convertible
preferred
stock
Net loss - - (5,433) (5,433)
Balances at (196) - (12,069) 12,121
December 31,
1995
Issuance of (288) - - 62
common stock
Repurchase of 1 - - -
common stock
Issuance of
common stock
upon - - - -
conversion of
preferred
stock and
warrants,
net
Issuance of - - - 24,591
common stock
Deferred - (495) - -
compensation
Amortization - 187 - 187
of deferred
compensation
Net change in - - 7 7
unrealized
gain (loss)
on available-
for-sale
investments
Net loss - - (9,082) (9,082)
Balances at (483) (308) (21,144) 27,886
December 31,
1996
Issuance of - - - 5,164
common stock
Repurchase of 9 - - -
common stock
Repayment of 88 - - 88
shareholder
notes
Amortization - 204 - 204
of deferred
compensation
Net change in - - 1 1
unrealized
gain (loss)
on available-
for-sale
investments
Net loss - - (14,684) (14,684)
Balances at $(386) $(104) $(35,827) $18,659
December 31,
1997
<PAGE 33>
Aradigm Corporation
Statements of Cash Flows
(In thousands)
Years ended December 31,
1997 1996 1995
Cash flows from
operating activities
Net loss $(14,684) $(9,082) $(5,433)
Adjustments to
reconcile net loss
to net cash used in
operating
activities:
Depreciation and 691 389 193
amortization
Amortization of 204 187 -
deferred
compensation
Loss on disposal of - - 18
property and
equipment
Loss on sale- - - 95
leaseback
transaction
Changes in operating
assets and
liabilities:
Receivables (261) 260 (260)
Inventories and (478) (376) (39)
other current assets
Other assets (4) (8) (59)
Accounts payable 904 426 (40)
Accrued liabilities (388) 1,172 118
Deferred revenue 6,170 (61) 230
Cash used in (7,846) (7,093) (5,177)
operating activities
Cash flows from
investing activities
Capital expenditures (2,756) (811) (535)
Purchases of (27,278) (191,767) -
available-
for-sale
investments
Proceeds from 29,571 180,694 -
maturities of
available-for-sale
investments
Cash used in (463) (11,884) (535)
investing activities
Cash flows from
financing activities
Proceeds from - - 11,553
issuance of
preferred stock
Proceeds from 5,164 24,653 13
issuance of common
stock, net
Proceeds from 88 - 28
repayments of
shareholder notes
Proceeds from sale
of equipment in sale- - - 390
leaseback
transaction
Notes receivable (83) (69) (151)
from officers
Proceeds from 1,437 - -
equipment loans
Payments on lease (234) (270) (91)
obligations and
equipment loans
Cash provided by 6,372 24,314 11,742
financing activities
Net (decrease) (1,937) 5,337 6,030
increase in cash and
cash equivalents
Cash and cash 17,454 12,117 6,087
equivalents at
beginning of year
Cash and cash $ 15,517 $17,454 $12,117
equivalents at end
of year
Supplemental
investing and
financing activities
Common stock issued $ - $ 288 $ 143
in exchange for
notes receivable
Common stock
repurchased upon $ 9 $ 1 $ 3
cancellation of
shareholder notes
Acquisition of $ 899 $ 395 $ 585
equipment under
capital leases
<PAGE 34>
Aradigm Corporation Notes to Financial Statements
December 31, 1997
1. Organization and Summary of Significant
Accounting Policies
Organization and Basis of Presentation
Aradigm Corporation (the "Company") was incorporated
in California. Through June 1997, prior to the signing
of the Company's collaborative agreement with SmithKline
Beecham (see Note 7), the Company was in the
development stage. Since inception, Aradigm has been
engaged in the development and commercialization of
noninvasive pulmonary drug delivery systems. The
Company does not anticipate receiving
significant revenue from the sale of products in the
upcoming year. Principal activities to date have
included obtaining financing, recruiting management
and technical personnel, securing operating
facilities, conducting research and development, and
expanding commercial production capabilities. These
factors indicate that the Company's ability to continue
its research, development and commercialization
activities is dependent upon the ability of management
to obtain additional financing as required.
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 amounts reported in the financial statements
and accompanying notes. Actual results could differ from
those estimates.
<PAGE 35>
Depreciation and Amortization
The Company records property and equipment at cost
and calculates depreciation using the straight-line
method over the estimated useful lives of the respective
assets, generally four to seven years. Machinery and
equipment acquired under capital leases is amortized
over the useful lives of the assets. Leasehold
improvements are amortized over the shorter of the term
of the lease or useful life of the improvement.
Revenue Recognition
Contract revenues consist of revenue from
collaboration agreements and feasibility studies. The
Company recognizes revenue ratably under the agreements
as costs are incurred. Deferred revenue represents the
portion of research payments received that has not
been earned. In accordance with contract terms,
upfront and milestone payments from collaborative
research agreements are considered reimbursements
for costs incurred under the agreements and,
accordingly, are generally deferred when received
and recognized as revenue based on actual efforts
expended over the remaining terms of the agreements.
Nonrefundable signing or license fee payments that are
not dependent on future performance under
collaborative agreements are recognized as revenue when
received. Costs of contract revenue approximate such
revenue and are included in research and development
expenses.
<PAGE 36>
Net Loss Per Share
Effective December 31, 1997, the Company adopted Statement
of Financial Accounting Standards No. 128, "Earnings Per
Share" ("SFAS 128"). SFAS 128 requires the presentation
of basic earnings (loss) per share and diluted
earnings (loss) per share, if more dilutive, for all
periods presented. In accordance with SFAS 128, basic
net loss per share has been computed using the weighted
average number of shares of common stock outstanding
during the period.
Net loss per share for 1996 and 1995 have been
retroactively restated to apply the requirements of
Staff Accounting Bulletin No. 98, issued by the SEC in
February 1998 ("SAB 98"). Under SAB 98, certain
shares of common stock and options to purchase shares
of common stock issued at prices substantially below the
per share price of shares sold in the Company's initial
public offering previously included in the computation
of shares outstanding pursuant to Staff Accounting
Bulletin Nos. 55, 64 and 83 are now excluded from
the computation.
The following pro forma per share data, as adjusted,
is provided to show the calculation on a consistent
basis for 1997, 1996 and 1995. It has been computed as
described above, but includes the retroactive effect from
the date of issuance of the conversion of convertible
preferred stock to common shares upon the closing of
the Company's initial public offering in June 1996.
A reconciliation of shares used in the calculation
of historical and pro forma, as adjusted, basic and
diluted net loss per share follows:
<PAGE 37>
Year ended December 31,
1997 1996 1995
Net loss $(14,684) $(9,082) $(5,433)
Basic and Diluted
Weighted average common shares
outstanding used in computing
basic and diluted net loss 10,280,091 6,098,038 1,004,133
per share
Basic and diluted net loss per $ (1.43) $(1.49) $(5.41)
share
Pro Forma Basic and Diluted,
as adjusted
Shares used in computing basic
and diluted net loss per 10,280,091 6,098,038 1,004,133
share
Adjusted to reflect the effect - 2,529,456 3,503,468
of the assumed conversion of
preferred stock
Shares used in computing pro
forma basic and diluted net 10,280,091 8,627,494 4,507,601
loss per share, as adjusted
Pro forma basic and diluted
net loss per share, as $ (1.43) $(1.05) $(1.21)
adjusted
Had the Company been in a net income position,
diluted earnings per share would have included the shares
used in the computation of pro forma basic net loss per
share as well as an additional 222,031 shares related
to outstanding options and warrants not included
above (as determined using the treasury stock method).
<PAGE 38>
Employee Benefit Plans
The Company has a 401(k) Plan which stipulates that all
full time employees with at least three months of
employment can elect to contribute to the 401(k) Plan,
subject to certain limitations, up to 20% of salary
on a pretax basis. The
Company has the option to provide matching contributions
but has not done so to date.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No.
130 ("SFAS 130"), "Reporting Comprehensive Income,"
and Statement of Financial Accounting Standards No.
131 ("SFAS 131"),
"Disclosures about Segments of an Enterprise and
Related Information," which require additional
disclosures to be
adopted beginning in the first quarter of 1998 and on
December 31, 1998, respectively. Under SFAS 130,
the Company is required to display comprehensive income
and its components as part of the Company's full set of
financial statements. SFAS 131 requires that the Company
report financial and descriptive information about its
reportable operating segments. The Company is
evaluating the impact, if any, of SFAS 130 and SFAS 131
on its future financial statement disclosures, but does
not believe the additional disclosure will be material
to the financial statements.
Reclassifications
Certain reclassifications of prior year amounts have been
made to conform with current year presentation.
2. Financial Instruments
Cash Equivalents and Investments
The Company considers all highly liquid investments
purchased with an original maturity of three months or
less to be cash equivalents. The Company places its
cash and cash equivalents in money market funds,
commercial paper and corporate master notes. The
Company's shortterm investments consist of
corporate notes and market auction preferred securities
with maturities ranging from 3 to 12 months. Other
investments consist of corporate notes with maturities
greater than 12 months.
<PAGE 39>
The Company classifies its investments as available-for
sale. Available-for-sale investments are recorded at fair
value with unrealized gains and losses reported in
the statement of shareholders' equity. Fair values of
investments are based on quoted market prices, where
available. Realized gains and losses, which have been
immaterial to date, are included in interest and other
income and are derived using the specific identification
method for determining the cost of investments sold.
Dividend and interest income is recognized when
earned. The following summarizes the Company's cash
equivalents and investments:
Estimated
Fair Value
at December 31,
1997 1996
Cash and cash equivalents:
Money market fund $ 6,000 $17,000
Commercial paper 14,331,000 16,939,000
$ 14,337,000 $16,956,000
Short-term investments:
Commercial paper $ 3,272,000 $ -
Corporate notes 3,216,000 6,978,000
Market auction preferred
securities 2,300,000 1,100,000
$ 8,788,000 $8,078,000
Investments:
Corporate notes $ - $3,002,000
As of December 31, 1997 and 1996, the difference between
the estimated fair value and the amortized cost of
available-for sale securities was immaterial. As of
December 31, 1997, the average portfolio duration was
approximately two months, and the contractual maturity
of any single investment did not exceed six months from
the balance sheet date.
<PAGE 40>
3. Inventories
Inventories are stated at the lower of cost (first-in
first out basis) or market. Inventories consist of the
following:
December 31,
1997 1996
Raw materials $479,000 $ -
Finished goods 41,000 -
$520,000 $ -
4. Property and Equipment
Property and equipment consist of the following:
December 31,
1997 1996
Machinery and equipment $3,294,000 $601,000
Furniture and fixtures 434,000 273,000
Lab equipment 1,048,000 594,000
Computer equipment and software 755,000 496,000
Leasehold improvements 288,000 201,000
5,819,000 2,164,000
Less accumulated depreciation and (1,402,000) (711,000)
amortization
$4,417,000 $1,453,000
Property and equipment at December 31, 1997 includes
assets under capitalized leases of approximately
$3,322,000 ($980,000 in 1996). Accumulated amortization
related to leased assets was approximately $392,000 at
December 31, 1997 ($344,000 in 1996).
<PAGE 41>
5. Leases and Commitments
In August 1997, the Company obtained an additional
$5.0 million equipment lease line of credit of which
approximately $2.9 million remains available at
December 31, 1997 for purchases through September 1998.
Amounts borrowed under the Company's equipment lines of
credit bear interest at rates from 10% to 15% and
are collateralized by the equipment purchased. Under
the terms of the lease agreements, the Company has the
option to purchase the leased equipment at a negotiated
price at the end of each lease term. The Company leases
its office and laboratory facilities under several
operating leases expiring through the year 2014. Future
minimum lease payments under noncancelable operating and
capital leases at December 31, 1997 are as follows:
Operating
Capital
Leases Leases
Years ending December 31:
1998 $843,000 $954,000
1999 1,066,000 842,000
2000 1,298,000 723,000
2001 1,620,000 684,000
2002 and thereafter 33,539,000 462,000
Total minimum lease payments $38,366,000 3,665,000
Less amount representing interest (944,000)
Present value of future lease 2,721,000
payments
Current portion of capital lease (582,000)
obligations
Noncurrent portion of capital lease $2,139,000
obligations
Rent expense under these operating leases totaled
$420,000, $197,000, and $76,000 for the years ended
December 31, 1997, 1996, and 1995, respectively.
<PAGE 42>
6. Shareholders' Equity
Capital Stock
In June 1996, the Company completed the initial
public offering of its common stock. The Company issued
2,500,000 shares for net proceeds of $24.6 million.
Prior to the closing of the initial public offering, the
Company effected a three-for-two split of its
outstanding common stock. Concurrent with the
closing of the initial public offering, previously
outstanding shares of Series A, B, C, D and E
preferred stock were converted into 5,611,911 shares of
common stock. All share and per share data in the
accompanying financial statements has been adjusted
retroactively to give effect to the stock split.
Stock Warrants
In September 1997, in connection with a consulting
agreement, the Company issued a warrant that entitles
the holder to purchase 170,000 shares of common stock
at an exercise price of $8.96 per share. This warrant is
exercisable through August 2003. In June 1995, in
connection with a master lease agreement, the Company
issued a warrant that entitles the holder to
purchase 37,500 shares of common stock at an exercise
price of $4.23 per share. This warrant is exercisable
through June 20, 1998. At December 31, 1997, the Company
has reserved 207,500 shares of its common stock for
issuance upon exercise of these common stock warrants. No
amounts have been recorded for the above warrant
issuances as the amounts were determined to be immaterial
at the time of issuance.
<PAGE 43>
1996 Equity Incentive Plan
In April 1996, the Company's Board of Directors adopted
and the Company's shareholders approved the 1996 Equity
Incentive Plan (the "Plan"), which amended and restated
the 1992 Stock Option Plan. Options granted under the
Plan may be either incentive or nonstatutory stock
options. At December 31, 1997, the Company had
authorized 1,980,000 shares of common stock for issuance
under the Plan. Options granted under the Plan expire
no later than ten years from the date of grant. For
incentive and nonstatutory stock option grants, the option
price shall be at least 100% and 85%, respectively, of
the fair value on the date of grant, as determined by the
Board of Directors. If at any time the Company grants an
option, and the optionee directly or by attribution owns
stock possessing more than 10% of the total combined
voting power of all classes of stock of the Company, the
option price shall be at least 110% of the fair value and
shall not be exercisable more than five years after the
date of grant.
Options granted under the 1996 Equity Incentive Plan
are immediately exercisable and generally vest over a
period of four years from the date of grant. Under the
Plan, employees may exercise options in exchange for a
note payable to the Company. As of December 31, 1997
and
1996, notes receivable from shareholders of $386,000 and
$483,000, respectively, were outstanding. These notes
generally bear interest at 6% and are due and payable
in regular installments over a five year period. Any
unvested stock issued is subject to repurchase agreements
whereby the Company has the option to repurchase
unvested shares upon termination of employment at the
original issue price. The common stock has voting rights
but does not have resale rights prior to vesting. During
1997, the Company granted options to purchase 550,600
shares of common stock none of which were exercised.
The Company has repurchased a total of 24,229 shares in
accordance with these agreements. As of December 31,
1997, 219,410 shares of the Company's common stock
remained subject to repurchase and 985,099 shares were
reserved for issuance upon exercise of options.
<PAGE 44>
The following is a summary of activity under the Plan:
Options Outstanding
Shares
Available Weighted
for Grant Number of Price Per Average
of Shares Share Exercise
Options Price
Balance at 270,825 539,175 $0.10- $0.29
December 31, 1994 $0.37
Shares 150,000 - $ - $ -
authorized
Shares granted (290,550) 290,550 $0.33- $0.43
$0.43
Shares - (335,876) $0.33- $0.38
exercised $0.43
Shares 41,607 (41,607) $0.33- $0.39
cancelled $0.43
Balance at 171,882 452,242 $0.10- $0.30
December 31, 1995 $0.43
Shares 1,005,000 - $- $-
authorized
Shares granted (523,520) 523,520 $0.57- $3.66
$9.88
Shares - (662,629) $0.10- $0.53
exercised $5.33
Balance at 653,362 313,133 $0.10- $5.45
December 31, 1996 $9.88
Shares granted (550,600) 550,600 $6.88- $8.75
$12.88
Shares - (5,625) $5.33 $5.33
exercised
Shares 24,229 - $0.37- $0.49
repurchased $0.57
Shares 26,825 (26,825) $5.33- $6.03
cancelled $9.88
Balance at 153,816 831,283 $0.10- $7.62
December 31, 1997 $12.88
Options Outstanding and Exercisable
Weighted
Weighted Average
Average Remaining
Exercise Price Range Number Exercise Contractual
Price Life
(in years)
$0.10-$2.00 69,033 $0.46 6.6
$4.00-$6.88 188,900 $5.70 8.7
$7.00-$9.88 473,200 $8.42 9.2
$11.13-$12.88 100,150 $12.35 9.8
$0.10-$12.88 831,283 $7.62 9.0
The Company has elected to follow Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"), and the related Interpretations in
accounting for its employee and non-employee director
stock options because, as discussed below, the alternative
fair value accounting provided for under Statement of
Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), requires use of
option pricing valuation models that were not developed for
use in valuing employee stock options. Under APB 25, the
Company has generally recognized no compensation expense
with respect to such awards.
<PAGE 45>
The Company recorded deferred compensation of
approximately $495,000 for the difference between the grant
price and the deemed fair value of certain of the
Company's common stock options granted in 1996. This
amount is being amortized over
the vesting period of the individual options, generally a
48 month period. Deferred compensation expense recognized
in the years ended December 31, 1997 and 1996 was
approximately $204,000 and $187,000, respectively. The
weighted average fair value of options granted during
1996 with an exercise price below the deemed fair value
of the Company's common stock on the date of grant was
$2.15. There were no such grants in 1997. The weighted
average fair value of options granted during 1997 and
1996 with an exercise price equal to the fair value of
the Company's common stock on the date of grant was $3.35
and $5.60,
respectively.
Pro forma information regarding net loss and basic and
diluted net loss per share is required by SFAS 123,
which also requires that the information be determined as
if
the Company had accounted for its employee and non-
employee director stock options granted subsequent to
December 31, 1994 under the fair value method prescribed by
this statement. The fair value of options was estimated at
the date of grant using the Black-Scholes option pricing
model with the following assumptions: a risk-free interest
rate ranging from 5.7%-6.4%, 5.1%-5.8% and 5.5%-7.9% for the
years ending December
31, 1997, 1996 and 1995, respectively; a dividend yield of
0.0%; a volatility factor of the expected market price of
the Company's common stock of 0.7; and a weighted average
expected option life of four years. Options granted prior
to the Company's initial public offering in June 1996 have a
volatility factor of 0.0.
<PAGE 46>
For purposes of pro forma disclosure, the estimated fair
value of the options is amortized to expense over the vesting
period of the options using the straight-line method. Pro
forma information on the above basis is as follows:
Year ended December 31,
1997 1996 1995
Pro forma net loss $(14,960,000) $(9,117,000) $(5,437,000)
Net loss - as reported $(14,684,000) $(9,082,000) $(5,433,000)
Pro forma basic and $ (1.46) $ (1.50) $(5.41)
diluted net loss per
share
Basic and diluted net $ (1.43) $ (1.49) $(5.41)
loss per share - as
reported
The effects of applying SFAS 123 for pro forma disclosures
are not likely to be representative of the effects on
reported net loss for future years. Pro forma net loss for
the year ended December 31, 1997 reflects compensation
expense for three years' vesting, while the year ending
December 31, 1998 will reflect compensation expense for
four years' vesting of outstanding stock options.
Employee Stock Purchase Plan
Under the Employee Stock Purchase Plan (the "Purchase
Plan"), 150,000 shares of common stock have been
authorized for issuance. Shares may be purchased under the
Purchase Plan at 85% of the lesser of the fair market value
of the common stock on the grant date or purchase date.
As of December 31, 1997, 21,824 shares have been issued
under the Purchase Plan.
1996 Non-Employee Directors' Stock Option Plan
The 1996 Non-Employee Directors' Stock Option Plan
(the "Directors' Plan") authorizes the grant of 225,000
options for the Company's common stock. As of December 31,
1997, 52,500 options have been granted under the Directors'
Plan.
<PAGE 47>
7. Collaborative Agreements
In September 1997, the Company executed a development
and commercialization agreement with SmithKline Beecham
covering use of the AERx Pain Management System for the
delivery of narcotic analgesics. The Company and
SmithKline Beecham will collaborate on the development of
the products within this field. Under the terms of the
agreement, SmithKline Beecham has been granted exclusive
worldwide sales and marketing rights to the AERx Pain
Management System for use with such analgesics, and Aradigm
retains all manufacturing rights. If
this system receives regulatory approval, Aradigm expects to
sell devices and drug packets to SmithKline Beecham and to
receive royalties on sales by SmithKline Beecham.
Pursuant to the SmithKline Beecham agreement, Aradigm could
receive up to approximately $30 million in milestone and
product development payments, and $10
million in equity investments if and when the first
product from the collaboration is commercialized. In October
1997, the Company received $14 million from SmithKline
Beecham under the agreement, of which $5 million resulted
from the sale of shares of Aradigm Common Stock.
Additional milestone and product development payments will
be paid if Aradigm and SmithKline Beecham decide to
jointly develop additional AERx products which incorporate
other opiates or opioids. Through December 31, 1997, the
Company has
recognized total contract revenue of $2.7 million.
<PAGE 48>
In December 1996, the Company entered into a
feasibility agreement with a pharmaceutical company to
determine the feasibility of using the Company's AERx(TM)
Pulmonary Drug Delivery System for the delivery of a
specified drug. The agreement provides for a $169,500
research and development payment and a $237,500 payment
upon acceptance by the pharmaceutical company of certain
specified deliverables. All revenue under this agreement was
recognized in 1997.
In December 1995, the Company entered into a
feasibility agreement with a pharmaceutical company to
determine the feasibility of using the Company's AERx
Pulmonary Drug Delivery System for the delivery of a
specified drug. The agreement provided for a $260,000
research and development payment. Under this
agreement, revenues of $30,000 and
$230,000 were recognized in 1995 and 1996, respectively.
In November 1996, the Company entered into a second
such agreement with the pharmaceutical company that provided
for a $140,000 research and development payment. Costs
associated with research and development activities
attributable to these agreements are expected to
approximate the revenues
recognized. The agreement also provided for a
nonrefundable license fee of $500,000 upon execution of the
agreement, which was recognized as revenue in 1996.
8. Related Party Transactions
<PAGE 49>
At December 31, 1997, the Company has notes
receivable, including accrued interest, totaling $303,000
from officers of the Company. Included therein are $153,000
of promissory notes bearing interest at 6%-7% per annum,
generally due and payable three years from the date of the
notes, and collateralized by certain personal assets of
the officers and a $90,000 full recourse promissory note
bearing no interest and due and payable in September
1998.
At December 31, 1997, the fair value of these notes is
not materially different from their carrying values. The
fair values were estimated using discounted cash flow
analyses, using interest rates currently offered for loans
with similar terms and to borrowers of similar credit
quality.
9. Income Taxes
The Company uses the liability method to account for
income taxes as required by Statement of Financial
Accounting Standards No. 109, "Accounting for Income
taxes". Under this method, deferred tax assets and
liabilities are determined based on differences between
financial reporting and tax bases
of assets and liabilities and are measured using enacted tax
rules and laws that are expected to be in effect when the
differences are expected to reverse.
Significant components of the Company's deferred tax assets
are as follows:
December 31,
1997 1996
Net operating loss carryforward $13,735,000 $7,336,000
Research and development credit 1,769,000 851,000
carryforward
Other 36,000 611,000
Gross deferred tax assets 15,540,000 8,798,000
Valuation allowance (15,540,000) (8,798,000)
Net deferred tax assets $ - $ -
The valuation allowance increased by $6,742,000 and
$3,751,000
in 1997 and 1996, respectively.
<PAGE 50>
At December 31, 1997, the Company had net operating
loss carryforwards of approximately $35,000,000 for federal
income tax purposes expiring in the years 2006 through 2012
and net operating losses for state income tax purposes of
$33,000,000 expiring in the years 1998 through 2002. At
December 31, 1997, the Company had research and development
credit carryforwards for federal income tax purposes of
approximately $1,380,000, which expire in the years 2006
through 2012.
Because of the "change in ownership" provisions of the
Tax Reform Act of 1986, utilization of the Company's tax
net operating loss carryforwards and tax credit carryforwards
may be subject to an annual limitation in future periods. As
a result of the annual limitation, a portion of these
carryforwards may expire before ultimately becoming available
to reduce future income tax liabilities.
<PAGE 51>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1)Financial Statements.
Included in Part II of this Report: Page in Form 10-K
Report of Ernst & Young LLP, Independent Auditors 33
Balance Sheets --- December 31, 1997 and 1996 34
Statements of Operations ---
Years ended December 31, 1997, 1996, and 1995 35
Statements of Shareholders' Equity ---
Years ended December 31, 1997, 1996 and 1995 36
Statements of Cash Flows ---
Years ended December 31, 1997, 1996 and 1995 37
Notes to Financial Statements 38
(2) Financial Statement Schedules.
None.
(3) Exhibits.
23.1 (5)Consent of Ernst & Young L.L.P., Independent
Auditors.
27.1 Financial Data Schedule for the year ended December
31, 1997.
27.2 Restated Financial Data Schedule for the year ended
December 31, 1996.
(1)Incorporated by reference to the indicated exhibit in the
Company's Registration Statement on Form S-1 (No. 333-4236),
as amended.
(2) Represents a management contract or compensatory plan or
arrangement.
(3) Incorporated by reference to the Company's Form 8-K filed
on November 11, 1997.
(4) Confidential treatment requested.
(b) Reports on Form 8-K.
A Form 8-K dated September 30, 1997, was filed on November
11, 1997. On September 30, 1997, the Company entered into a
Product Development and Commercialization Agreement (the
"Agreement") with SmithKline Beecham PLC ("SB") for the purpose
of developing and commercializing
a pulmonary drug delivery system for providing immediate
pain relief using narcotic analgesics. In connection
with the Agreement, the Company sold and issued to SB
pursuant to a Stock Purchase Agreement 405,064 shares of
the Company's common stock at an aggregate purchase price
of $5,000,008.75.
(c) Index to Exhibits.
See Exhibits listed under Item 14 (a) (3).
(d) Financial Statement Schedules.
None.
<PAGE 52>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of
the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City
of Hayward, State of California, on the 19th day of June, 1998.
ARADIGM CORPORATION
By:/s/Richard P. Thompson
Richard P. Thompson
President and Chief
Executive Officer
Pursuant to the requirements of the Securities and
Exchange Act of 1934, this Report has been signed
below by the following persons on behalf of the
Registrant and in the capacities and on the dates
indicated.
Signature Title Date
/s/Richard P. Thompson President, Chief June 19,1998
Richard P. Thompson Executive Officer
and Director
(Principal Executive
Officer)
/s/Mark A. Olbert* Vice President, June 19,1998
Mark A. Olbert Finance and
Administration
and Chief Financial
Officer (Principal
Financial and
Accounting Officer)
/s/Reid M. Rubsamen* Vice President, June 19, 1998
Reid M. Rubsamen, M.D. Medical Affairs,
Secretary
and Director
/s/Burton J. McMurtry* Director June 19, 1998
Burton J. McMurtry, Ph.D.
/s/Gordon W. Russell* Director June 19, 1998
Gordon W. Russell
/s/Fred E. Silverstein* Director June 19, 1998
Fred E. Silverstein, M.D.
/s/Virgil D. Thompson* Director June 19,1998
Virgil D. Thompson
*By:/S/Richard P. Thompson
Richard P. Thompson
Attorney-in-Fact
<PAGE 53>
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION OF DOCUMENT
23.1 Consent of Ernst & Young LLP, Independent Auditors.
27.1 Financial Data Schedule for the year ended December 31, 1997.
27.2 Restated Financial Data Schedule for the year ended
December 31, 1996.
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the
Registration Statement on Form S-8 No. 333-15947 pertaining
to the 1996 Equity Incentive Plan of Aradigm Corporation,
the Employee Stock Purchase Plan of Aradigm Corporation,
and the Non-Employee Directors' Stock Option Plan of
Aradigm Corporation of our report dated February 6, 1998,
with respect to the financial statements of Aradigm
Corporation included in the Annual Report (Form 10-K/A) for
the year ended December 31, 1997.
ERNST & YOUNG LLP
Palo Alto, California
June 19, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> EPS PRIMARY REPRESENTS BASIC NET LOSS PER SHARE
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 15517
<SECURITIES> 8788
<RECEIVABLES> 261
<ALLOWANCES> 0
<INVENTORY> 520
<CURRENT-ASSETS> 25495
<PP&E> 4417
<DEPRECIATION> 0
<TOTAL-ASSETS> 30294
<CURRENT-LIABILITIES> 9496
<BONDS> 0
0
0
<COMMON> 54976
<OTHER-SE> (490)
<TOTAL-LIABILITY-AND-EQUITY> 30294
<SALES> 0
<TOTAL-REVENUES> 3685
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 19464
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (234)
<INCOME-PRETAX> (14684)
<INCOME-TAX> 0
<INCOME-CONTINUING> (14684)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (14684)
<EPS-PRIMARY> (1.43)
<EPS-DILUTED> (1.43)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> EPS PRIMARY REPRESENTS BASIC NET LOSS PER SHARE
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 18,553,831
<SECURITIES> 9,979,776
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 25,982,382
<PP&E> 2,164,351
<DEPRECIATION> (711,383)
<TOTAL-ASSETS> 30,733,191
<CURRENT-LIABILITIES> 2,496,849
<BONDS> 0
0
0
<COMMON> 49,821,157
<OTHER-SE> (791,044)
<TOTAL-LIABILITY-AND-EQUITY> 30,733,191
<SALES> 0
<TOTAL-REVENUES> 730,000
<CGS> 0
<TOTAL-COSTS> 10,938,886
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 52,075
<INCOME-PRETAX> (9,082,161)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,082,161)
<EPS-PRIMARY> (1.49)
<EPS-DILUTED> (1.49)
</TABLE>
