<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 9, 2000
REGISTRATION NO. 333-44470
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
AEROGEN, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 3845 33-0488580
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
1310 ORLEANS DRIVE
SUNNYVALE, CALIFORNIA 94089
(408) 543-2400
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
JANE E. SHAW, PH.D.
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
AEROGEN, INC.
1310 ORLEANS DRIVE
SUNNYVALE, CALIFORNIA 94089
(408) 543-2400
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
COPIES TO:
<TABLE>
<S> <C>
ROBERT J. BRIGHAM, ESQ. JAMES R. TANENBAUM, ESQ.
KEITH D. PISANI, ESQ. ANNA T. PINEDO, ESQ.
Cooley Godward LLP Stroock & Stroock & Lavan LLP
Five Palo Alto Square 180 Maiden Lane
3000 El Camino Real New York, NY 10038-4982
Palo Alto, California 94306 Phone: (212) 806-5400
Phone: (650) 843-5000 Facsimile: (212) 806-6006
Facsimile: (650) 849-7400
</TABLE>
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the Securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
SUBJECT TO COMPLETION, DATED NOVEMBER 9, 2000
FILED PURSUANT TO RULE 424(A)
PROSPECTUS
3,600,000 SHARES
[AEROGEN LOGO]
COMMON STOCK
This is an initial public offering of common stock by AeroGen, Inc. AeroGen
is selling 3,600,000 shares of common stock. The estimated initial public
offering price is between $13.00 and $15.00 per share.
--------------
Prior to this offering, there has been no public market for our common
stock. We have applied to have our common stock approved for quotation on the
Nasdaq National Market under the symbol AEGN.
--------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----------
<S> <C> <C>
Initial public offering price............................. $ $
Underwriting discounts and commissions.................... $ $
Proceeds to AeroGen before expenses....................... $ $
</TABLE>
AeroGen has granted the underwriters an option for a period of 30 days to
purchase up to 540,000 additional shares of common stock.
--------------
INVESTING IN OUR COMMON SHARES INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 5.
-------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
CHASE H&Q
CIBC WORLD MARKETS
SG COWEN
, 2000
<PAGE>
INSIDE FRONT COVER
Creating Innovative Drug Delivery Products (header, left)
- AeroGen Logo image (upper right)
- Aerosol generator image (center)
- Respiratory Products For Marketing by AeroGen (upper left)
- Systemic Drug Delivery Products For Partners (center right)
- Respiratory Products For Partners (center left)
- Aerosol Generator Our Core Technology (lower center)
- Broad Range of Drug Formulations Solutions or Suspensions of Drugs
(bottom center)
INSIDE FOLDOUT PANEL 1 AND 2
Products (header, upper left)
- Image of man using nebulizer (upper left), annotated with the following:
-- AeroNeb-TM- Nebulizer--Cleared by FDA for delivery of commercially
available nebulizer solutions
- Image of patient using AeroNeb Inline-TM- Nebulizer (upper center),
annotated with the following:
-- AeroNeb Inline-TM- Nebulizer--In development to deliver commercially
available nebulizer solutions and humidification
- Image of man and girl using AeroDose Inhalers (upper right), annotated
with the following:
-- AeroDose-TM- Inhalers--In development--Respiratory products,
Bronchodilators, Anti-infective, Anti-inflammatory--Systemic drug
delivery products--Insulin
Platforms (header, middle left)
- Schematic drawing of nebulizer (middle left), annotated with the
following:
-- Our Home Nebulizer--Quiet, small, lightweight, portable
- Schematic drawing of ventilator nebulizer (middle center), annotated with
the following:
-- Our Ventilator Nebulizer--Efficient drug delivery
- Schematic drawing of inhaler (middle right), annotated with the
following:
-- Our Inhaler--Breath activated, small, lightweight, hand-held,
efficient
Core Technology (header, lower left)
- Image of Aerosol Generator (lower middle)--Aerosol Generator
AeroGen logo (lower left)
INSIDE BACK COVER
Efficiency of AeroDose-TM- Inhaler in Depositing Albuterol in the Lungs (header,
left)
Imaging Study was sponsored and funded by AeroGen and limited to six persons
using radiolabeled albuterol (subhead, left)
- Image of Throat, Lungs, Stomach (upper right)--Throat, Lungs, Stomach
- AeroDose-TM- (middle, right), annotated with the following:
-- Average Lung Deposition 70%
- Metered Dose Inhaler (middle, left), annotated with the following:
-- Average Lung Deposition 18%
- Image of Throat, Lungs, Stomach (lower left)--Throat, Lungs, Stomach
- AeroGen logo (lower right)
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Prospectus Summary.......................................... 1
Risk Factors................................................ 5
Forward-Looking Statements.................................. 14
Use of Proceeds............................................. 14
Dividend Policy............................................. 14
Capitalization.............................................. 15
Dilution.................................................... 16
Selected Consolidated Financial Data........................ 17
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 19
Business.................................................... 24
Management.................................................. 44
Principal Stockholders...................................... 55
Related Party Transactions.................................. 58
Description of Capital Stock................................ 60
Shares Eligible for Future Sale............................. 63
Underwriting................................................ 65
Legal Matters............................................... 68
Experts..................................................... 68
Where You Can Find More Information......................... 68
Index to Consolidated Financial Statements.................. F-1
</TABLE>
"AeroGen," "AeroDose," "AeroNeb," "AeroNeb InLine" and the AeroGen logo are
our trademarks. "TOBI" is a registered trademark of PathoGenesis Corporation.
This prospectus also includes references to registered service marks and
trademarks of other companies.
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY DOES NOT CONTAIN ALL OF THE INFORMATION YOU SHOULD CONSIDER
BEFORE INVESTING IN OUR COMMON STOCK. YOU SHOULD READ THE ENTIRE PROSPECTUS
CAREFULLY, INCLUDING "RISK FACTORS" BEGINNING ON PAGE 5 AND OUR CONSOLIDATED
FINANCIAL STATEMENTS AND RELATED NOTES BEGINNING ON PAGE F-1, BEFORE MAKING AN
INVESTMENT DECISION. EXCEPT AS OTHERWISE NOTED, ALL INFORMATION IN THIS
PROSPECTUS ASSUMES THE UNDERWRITERS' OVER-ALLOTMENT OPTION WILL NOT BE
EXERCISED, THE CONVERSION OF ALL OF OUR PREFERRED STOCK INTO COMMON STOCK UPON
COMPLETION OF THIS OFFERING AND A THREE-FOR-ONE REVERSE STOCK SPLIT OF OUR
COMMON STOCK.
OUR BUSINESS
AeroGen specializes in the development, manufacture and commercialization of
products for the controlled delivery of drugs to the lungs, which is called
pulmonary drug delivery. Drugs can be delivered via a fine mist, or aerosol, to
the lungs to treat breathing-related, or respiratory, conditions such as asthma,
and through the lungs to the bloodstream, or systemically, to treat diseases or
conditions outside of the lungs such as diabetes. Our core technology consists
of a proprietary aerosol generator. When incorporated in our inhaler or
nebulizer platforms, our aerosol generator delivers drugs in an aerosol of a
predetermined particle size. We believe our drug delivery platforms will allow
us to develop products that deliver drugs formulated as liquids in solutions or
suspensions, from single-dose, multi-dose or patient-adjustable dosage forms.
Products in development provide drug delivery from our hand-held
breath-activated inhalers, nebulizers for home use and nebulizers for patients
on ventilators. Ventilators are machines, generally used in hospitals, that
assist patients in breathing when they are unable to breathe on their own. Our
products require regulatory clearance before they can be commercialized, and to
date only one of our products, the AeroNeb portable nebulizer, has received
regulatory clearance for marketing.
We intend to create and market a respiratory disease product portfolio. Our
initial products will focus on treating three respiratory diseases--asthma,
chronic obstructive pulmonary disease and cystic fibrosis--and will improve
treatment for patients currently using inhalers or nebulizers and those
receiving therapy via ventilators. These products will deliver commercially
available respiratory drugs and compounds licensed from third parties. According
to IMS HEALTH's Market Segment Report, the U.S. institutional and pharmacy
expenditures for inhaled respiratory medications were over $3.0 billion in 1999.
We also are developing respiratory products in collaboration with partner
companies who will commercialize those products. For example, in March 2000, we
signed an agreement with PathoGenesis Corporation to develop a small, hand-held
AeroDose inhaler to deliver TOBI, an inhaled tobramycin treatment for cystic
fibrosis. Under the agreement, PathoGenesis received exclusive worldwide rights
to commercialize our AeroDose inhaler for use in combination with TOBI. In
September 2000, PathoGenesis was acquired by Chiron Corporation, a leading
biopharmaceutical company. Chiron has not advised us of any change in the
development plans for the product. However, Pathogenesis has the right to
terminate the agreement at any time. This program provided 47.4% of our research
and development revenues for the nine months ended September 30, 2000.
In addition to our respiratory therapy activities, we intend to develop
novel pulmonary drug delivery products for systemic drug delivery. These
products will be developed in collaboration with pharmaceutical and
biotechnology companies. Systemic drug delivery of biotechnology products via
the lungs provides significant market opportunities for us. Our first product in
development for delivery of drugs through the lungs to the bloodstream is an
AeroDose inhaler delivering insulin to treat diabetes. We have completed our
first clinical trial for this product and are proceeding with additional trials
in the United States and Europe. In May of this year, we entered into an
agreement with Becton, Dickinson and Company under which Becton Dickinson will
develop and supply a patient-adjustable container for use in our AeroDose
insulin product. We plan to partner this product for further development,
clinical testing and commercialization. Medical Data International reported that
the U.S. market for insulin and insulin delivery systems and supplies was over
$1.4 billion in 1998 and is forecasted to be over $2.0 billion in 2002.
1
<PAGE>
We believe that our products will address many of the limitations presented
by traditional and competing new methods of pulmonary drug delivery and will
provide the following benefits:
- OPTIMIZATION AND CUSTOMIZATION OF AEROSOL PARTICLE SIZE. Our aerosol
generator delivers a low-velocity aerosol of precisely defined particle
size, facilitating delivery of drug to the appropriate part of the
respiratory system.
- EASE OF FORMULATION. Drugs can be stored in liquid or dry powder form and
can be aerosolized in solution or suspension.
- FLEXIBILITY OF DOSING. Our AeroDose inhaler technology can be used to
administer drugs as a single dose, as a unit dose from a multi-dose
container or as a patient-adjustable dose.
- BREATH-ACTIVATION. We have developed a breath-activation feature which
triggers aerosol formation and is designed to enable patients to obtain
consistent dosing over one or more breaths.
- DOSAGE GUIDANCE. We can incorporate electronic features to provide
information to the patient.
- CONVENIENCE. Our products are designed to be portable, lightweight and
easy to use.
OUR STRATEGY
Our goal is to become the leading provider of aerosol-based pulmonary drug
delivery products. Key elements of our strategy include:
- Incorporating our core technology into adaptable pulmonary drug delivery
platforms;
- Developing our platforms for multiple product applications;
- Developing and commercializing respiratory products ourselves and with
partners;
- Partnering with pharmaceutical and biotechnology companies for systemic
delivery products; and
- Out-licensing our aerosol generator technology for use outside of the
field of pulmonary drug delivery.
--------------
We were incorporated in the state of California in November 1991 under the
name Fluid Propulsion Technologies, Inc. In April 1997, we changed our name to
AeroGen, Inc. In March 1998, we changed our domicile to the state of Delaware.
Our principal executive offices are located at 1310 Orleans Drive, Sunnyvale,
California 94089, and our telephone number is (408) 543-2400. Our web site is
www.aerogen.com. Information on our web site is not part of this prospectus.
2
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock we are offering................. 3,600,000 shares
Common stock to be outstanding after this 19,376,702 shares
offering...................................
Use of proceeds.............................. We intend to use the net proceeds of this
offering primarily for research, development
and clinical activities, manufacturing and
commercialization of existing and future
products, capital expenditures and general
corporate purposes.
Proposed Nasdaq National Market symbol....... AEGN
</TABLE>
--------------
The share amounts above are based on shares outstanding as of September 30,
2000 and exclude:
- 32,349 shares of common stock issuable upon exercise of warrants
outstanding at a weighted average exercise price of $2.78 per share;
- 1,250,444 shares of common stock issuable upon exercise of options
outstanding at a weighted average exercise price of $2.80 per share;
- 2,036,712 shares of common stock reserved for future grants under our
stock option plans; and
- 250,000 shares of common stock reserved for issuance under our employee
stock purchase plan.
3
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The following table sets forth summary consolidated financial data for the
periods indicated. The data has been derived from the consolidated financial
statements for the three years ended December 31, 1999 and the nine month
periods ended September 30, 1999 and 2000 included elsewhere in this prospectus.
It is important that you read this information together with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
beginning on page 19 and our consolidated financial statements and related notes
beginning on page F-1.
<TABLE>
<CAPTION>
NINE MONTHS CUMULATIVE PERIOD
ENDED FROM 11/18/91
YEARS ENDED SEPTEMBER 30, (DATE
DECEMBER 31, (UNAUDITED) OF INCEPTION)
------------------------------ ------------------- THROUGH 9/30/00
1997 1998 1999 1999 2000 (UNAUDITED)
-------- -------- -------- -------- -------- -----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Research and development revenues.................. $ 328 $ 85 $ 468 $ 31 $ 5,140 $ 6,738
Operating expenses:
Research and development......................... 3,961 4,392 7,910 5,388 12,035 31,087
General and administrative....................... 1,509 1,600 2,076 1,573 2,821 9,399
Purchased in-process research and development.... -- -- -- -- 3,500 3,500
------- ------- ------- ------- -------- --------
Total operating expenses....................... 5,470 5,992 9,986 6,961 18,356 43,986
------- ------- ------- ------- -------- --------
Loss from operations............................... (5,142) (5,907) (9,518) (6,930) (13,216) (37,248)
Interest income, net............................... 87 345 550 444 508 1,671
------- ------- ------- ------- -------- --------
Net loss........................................... (5,055) (5,562) (8,968) (6,486) (12,708) (35,577)
Dividend related to beneficial conversion feature
of preferred stock............................... -- -- -- -- (16,517) (16,517)
------- ------- ------- ------- -------- --------
Net loss available to common stockholders.......... $(5,055) $(5,562) $(8,968) $(6,486) $(29,225) $(52,094)
======= ======= ======= ======= ======== ========
Net loss per common share, basic and diluted....... $ (3.40) $ (3.47) $ (4.95) $ (3.68) $ (13.26)
======= ======= ======= ======= ========
Shares used in computing net loss per common share,
basic and diluted................................ 1,487 1,603 1,811 1,762 2,205
======= ======= ======= ======= ========
Pro forma net loss per common share, basic and
diluted (unaudited).............................. $ (0.81) $ (0.98)
======= ========
Shares used in computing pro forma net loss per
common share, basic and diluted (unaudited)...... 11,099 12,947
======= ========
</TABLE>
The actual column in the following table presents the actual summary
consolidated balance sheet at September 30, 2000.
The as adjusted consolidated balance sheet data summarized below reflects
the sale of 3,600,000 shares of common stock in this offering at an assumed
initial public offering price of $14.00 per share, after deducting underwriting
discounts and commissions and estimated offering expenses, as well as the
conversion of all of our preferred stock into common stock upon the closing of
this offering.
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000
(UNAUDITED)
----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and available-for-sale
securities.............................................. $ 19,580 $ 64,952
Total assets.............................................. 26,570 71,942
Long-term obligations, less current portion............... 272 272
Deficit accumulated during the development stage.......... (35,577) (35,577)
Deferred stock-based compensation, net.................... (6,174) (6,174)
Total stockholders' equity (deficit)...................... (35,042) 68,871
</TABLE>
4
<PAGE>
RISK FACTORS
YOU SHOULD CONSIDER CAREFULLY THE RISKS DESCRIBED BELOW TOGETHER WITH ALL OF
THE OTHER INFORMATION INCLUDED IN THIS PROSPECTUS BEFORE MAKING AN INVESTMENT
DECISION. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCURS, OUR BUSINESS, FINANCIAL
CONDITION OR RESULTS OF OPERATIONS COULD BE HARMED. IN SUCH AN EVENT, THE
TRADING PRICE OF OUR COMMON STOCK COULD DECLINE, AND YOU MAY LOSE PART OR ALL OF
YOUR INVESTMENT.
RISKS RELATED TO OUR BUSINESS
WE ARE A DEVELOPMENT STAGE COMPANY AND ALMOST ALL OF OUR PRODUCTS ARE IN AN
EARLY STAGE OF RESEARCH AND DEVELOPMENT, WHICH MAKES IT DIFFICULT FOR YOU TO
EVALUATE OUR BUSINESS AND PROSPECTS.
You must evaluate us in light of the uncertainties and complexities present
in a development stage company. Almost all of our products are in an early stage
of research or development. Before we can begin to sell our products
commercially, we will need to invest in substantial additional development and
conduct clinical trials. To further develop our products, we will need to
address engineering and design issues, including ensuring that our products
deliver a consistent and predictable amount of drug to the lung and can be
manufactured successfully. We cannot assure you that:
- our research and development efforts will be successful;
- any of our products will prove safe and effective;
- we will obtain regulatory clearance or approval to sell any of our
products; or
- any of our products can be manufactured in commercial quantities or at an
acceptable cost or marketed successfully.
WE HAVE A HISTORY OF LOSSES, ANTICIPATE FUTURE LOSSES AND MAY NEVER ACHIEVE OR
MAINTAIN PROFITABILITY.
We have never been profitable. Through September 30, 2000, we have incurred
a cumulative deficit of approximately $35.6 million. We expect to continue to
incur substantial losses over at least the next several years as we:
- expand our research and development efforts;
- expand our preclinical and clinical testing activities;
- expand our manufacturing efforts, including our commercial production
capability; and
- build our sales and marketing capabilities and launch our products.
To achieve and sustain profitability, we must, alone or with others,
develop, obtain regulatory approval for, manufacture, market and sell products.
We cannot assure investors that we will generate sufficient product, royalty or
research and development revenue to become profitable or to sustain
profitability.
WE MAY NEED ADDITIONAL CAPITAL. IF WE CANNOT SECURE ADDITIONAL FUNDING ON
ACCEPTABLE TERMS, WE MAY BE REQUIRED TO SLOW OUR PROGRESS, CURTAIL OUR
OPERATIONS OR GIVE UP RIGHTS TO SOME OF OUR TECHNOLOGIES OR PRODUCTS.
Depending on the timing and nature of our marketing efforts and whether and
when we enter into additional collaborations, we may need to raise additional
funds to finance our operations. Our cash requirements may increase because of
our research and development efforts, including clinical trials, capital
expenditures, and the manufacture and marketing of our products. We may need to
seek additional funding through collaborations or through public or private
equity financings. We cannot assure investors that additional financing will be
available on acceptable terms or at all. If adequate funds are not available, we
may be required to delay, reduce the scope of, or eliminate one or more of our
research or development programs. Arrangements with collaborative partners may
require us to relinquish rights to some of our technologies or products.
5
<PAGE>
OUR TECHNOLOGY IS UNPROVEN, SO PRODUCTS USING OUR TECHNOLOGY MAY NOT WORK
EFFECTIVELY.
Our pulmonary drug delivery technology is new and unproven. Most of our
products are currently in the research, development or clinical stages.
Extensive additional testing will need to be performed to demonstrate that:
- drugs may be safely and effectively delivered using our technology;
- our nebulizers and inhalers are safe across a range of drugs and
formulations;
- our products consistently deliver accurate and predictable amounts of
drug over time; and
- drug formulations are stable in our products.
If our products do not prove to be safe and effective, we may be required to
abandon some or all of them. If we cannot develop new products, our business
will suffer.
IF CLINICAL TRIALS OF OUR PRODUCTS ARE NOT SUCCESSFUL, PRODUCTS USING OUR
AERODOSE INHALERS MAY NOT BE COMMERCIALIZED.
Before either we or our partners can file for regulatory approval for the
commercial sale of products using our AeroDose inhalers, the Food and Drug
Administration will require extensive clinical trials to demonstrate their
safety and efficacy. We are developing other drug and inhaler combinations, each
of which will require clinical testing. To date, we have completed limited
clinical trials using prototype patient-operated AeroDose inhalers. If we do not
successfully complete appropriate clinical trials, we will not be able to
commercialize our products.
The results of initial clinical trials do not necessarily predict the
results of more extensive clinical trials. Furthermore, we cannot be certain
that clinical trials of our products will demonstrate that they are safe and
effective to the extent necessary to obtain regulatory approvals. Many companies
in the pharmaceutical and biotechnology industries have suffered significant
setbacks in advanced clinical trials, even after achieving promising results in
earlier trials.
WE HAVE LIMITED MANUFACTURING EXPERIENCE AND MAY NOT BE ABLE TO MANUFACTURE OUR
PRODUCTS IN COMMERCIAL QUANTITIES. WE WILL DEPEND ON KEY SUPPLIERS AND CONTRACT
MANUFACTURERS, AND THEIR FAILURE TO SUPPLY US MAY DELAY OR PREVENT
COMMERCIALIZATION OF OUR PRODUCTS.
We are building our own manufacturing capabilities to produce key components
of our products. We currently plan to produce our aerosol generators. We plan to
use contract manufacturers to produce certain other key components and
subassemblies of our products. We may assemble some or all of our products
ourselves, or we may use contract manufacturers for the final assembly of some
or all of our products. We do not have contracts with any of our key suppliers
or contract manufacturers. In addition, most of them currently are our sole
source of supply. We may not be able to enter into or maintain satisfactory
contracts or arrangements. In addition, manufacturing our products could be
delayed by supply problems at our suppliers or contract manufacturers. There can
be no assurance that we or our contract manufacturers can successfully
manufacture in high volumes in a timely manner, at an acceptable cost or at all.
We cannot assure investors that:
- the design of our products will permit their manufacture on a commercial
scale;
- manufacturing and quality control problems will not arise as we attempt
to scale-up production; or
- any scale-up of production can be achieved in a timely manner or at a
commercially reasonable cost.
Failure to address these issues adequately could delay or prevent clinical
testing and commercialization of our products.
6
<PAGE>
IF OUR COLLABORATION WITH PATHOGENESIS IS NOT SUCCESSFUL, THE AERODOSE TOBI
PRODUCT WILL NOT BE COMMERCIALIZED.
The successful development and commercialization of the AeroDose TOBI
product depends on our development collaboration with PathoGenesis. PathoGenesis
has agreed to:
- fund our AeroDose TOBI development activities;
- design and conduct advanced clinical trials and obtain regulatory
approval;
- purchase the AeroDose TOBI inhaler from us at a defined premium over our
manufacturing cost; and
- pay us royalties if and when the AeroDose TOBI product is commercialized.
The development and commercialization of the AeroDose TOBI product will not
occur if PathoGenesis fails to conduct these activities. PathoGenesis may
terminate the agreement at any time. We cannot assure investors that we will
receive further development funding, that PathoGenesis will commercialize the
product, or that we will receive any manufacturing or royalty payments. If
PathoGenesis terminates the agreement, our business will be impaired. In
September 2000, PathoGenesis was acquired by Chiron Corporation, a
biopharmaceutical company. Chiron has not advised us of any change in the
development plans for the product; however, there is no assurance that Chiron
will elect to continue this collaboration. The development and commercialization
schedule for the product is in the control of Pathogenesis, and even if Chiron
continues the program, the speed at which the program will proceed, the timing
of regulatory approval if the development program is completed, and the timing
of the launch of the product are all uncertain and are not within our control.
OUR INSULIN PRODUCT CURRENTLY IS OUR ONLY PRODUCT IN DEVELOPMENT FOR SYSTEMIC
DELIVERY, AND THERE ARE MANY UNCERTAINTIES WHICH COULD CAUSE THE PRODUCT TO BE
DELAYED OR NOT TO REACH THE MARKET AT ALL.
Our insulin product faces many uncertainties. We have only completed one
Phase I clinical trial, an initial study in 13 normal volunteers. Normal
volunteers, who generally are the subjects in early studies, are people who do
not have the disease for which the product is being studied. Early studies
generally focus on the safety of a product rather than its effectiveness in
treating the disease. We cannot be sure that the results of additional clinical
trials will prove the safety and effectiveness of our product. Ensuring a steady
supply of insulin from a qualified supplier is critical to the success of the
product. We do not have a contract for the supply of insulin, and there are only
a limited number of suppliers of commercial quantities of insulin. If our
agreement with Becton Dickinson terminates or if Becton Dickinson's efforts to
develop a patient-adjustable container are unsuccessful, we will need to develop
or obtain a different patient-adjustable container to use with our insulin
product, and clinical trials and regulatory approval would be delayed. In
addition, we have not yet identified a marketing partner to fund the additional
development and clinical trials necessary to obtain regulatory approval and to
commercialize the product. We cannot assure you that we will be able to enter
into a satisfactory agreement with a marketing partner.
WE MAY NOT BE ABLE TO DEVELOP CERTAIN PRODUCTS IF WE DO NOT ENTER INTO
ADDITIONAL COLLABORATIVE RELATIONSHIPS OR GAIN ACCESS TO COMPOUNDS FROM THIRD
PARTIES.
Our strategy depends partially on our ability to enter into collaborative
relationships with additional partners to conduct the clinical trials,
manufacturing, marketing and sales activities necessary to commercialize
products. To develop products to be marketed by us, we will need to purchase or
license, possibly reformulate and package drugs for use with our AeroDose
inhalers and nebulizers. We cannot assure you that we will be able to establish
these kinds of arrangements on favorable terms or at all, or that our existing
or future collaborative arrangements will be successful.
7
<PAGE>
IF OUR PRODUCTS DO NOT GAIN COMMERCIAL ACCEPTANCE, WE WILL NOT GENERATE
SIGNIFICANT REVENUE.
Our success in commercializing our products depends on many factors,
including acceptance by healthcare professionals and patients. Their acceptance
of our products will depend largely on our ability to demonstrate that our
products can compete with alternative delivery systems with respect to:
- safety;
- efficacy;
- the benefits associated with pulmonary delivery;
- ease of use; and
- price.
We cannot assure investors that our products will compete effectively or
that we or our partners will be able to successfully market any products in a
timely manner.
IF WE ARE UNABLE TO DEVELOP A SUCCESSFUL SALES AND MARKETING PROGRAM, WE WILL
NOT BE ABLE TO COMMERCIALIZE OUR PRODUCTS.
We currently have a very limited sales and marketing staff, and many of our
competitors have substantial sales and marketing programs. Our success in
commercializing our respiratory products in the United States will depend on our
ability to develop a successful sales and marketing program. Successful
worldwide commercialization will depend upon finding strong marketing partners
for our products in other countries.
OUR CORPORATE PARTNERS MAY NOT COMMERCIALIZE OUR PRODUCTS OR MAY DEVELOP
PRODUCTS THAT COMPETE AGAINST OUR PRODUCTS.
We will depend on our corporate partners to commercialize products developed
in collaboration with us. If any of our existing or future corporate partners do
not complete the development of or commercialize products to which they have
obtained rights from us, our business could be impaired. In the drug delivery
area, it is common for corporate partners to conduct feasibility studies with
multiple partners. There can be no assurance that our existing or future
corporate partners will choose our technology over their own technology or that
of our competitors.
IF WE ARE UNABLE TO ATTRACT AND RETAIN THE HIGHLY SKILLED PERSONNEL NECESSARY
FOR OUR BUSINESS, WE MAY NOT BE ABLE TO DEVELOP OUR PRODUCTS SUCCESSFULLY.
Because of the specialized nature of our business, we depend upon qualified
scientific, engineering, technical and managerial personnel. In particular, our
business and prospects depend upon the continued employment of Dr. Jane E. Shaw,
our Chairman and Chief Executive Officer. We do not have an employment agreement
with Dr. Shaw. There is intense competition for qualified personnel in our
business, especially for engineering personnel. In addition, our location in
northern California makes recruiting qualified personnel from outside the San
Francisco Bay area more difficult, due to the very high cost of housing, the
rapid expansion of businesses demanding skilled workers and the low unemployment
rates. Therefore, we may not be able to attract and retain the qualified
personnel necessary to grow our business. The loss of the services of existing
personnel, as well as the failure to recruit additional key scientific,
technical, engineering and managerial personnel in a timely manner, would harm
our research and development programs and our business.
8
<PAGE>
OUR ABILITY TO MARKET AND SELL OUR PRODUCTS DEPENDS UPON RECEIVING REGULATORY
APPROVALS, WHICH WE MAY NOT OBTAIN.
Our products are subject to extensive regulation in the United States by the
Food and Drug Administration, and state and local government agencies, and
abroad by international regulatory authorities. These agencies regulate the
development, testing, manufacture, labeling, storage, approval, advertising,
promotion, sale and distribution of medical devices, drugs and biologics. If we
or our partners fail to obtain regulatory clearances to market our products, our
business will be harmed and we, or our collaborative partners, will not be able
to market and sell our products. Even if granted, regulatory approvals may
include significant limitations on the uses for which products may be marketed.
Once obtained, required approvals may be withdrawn, or we may not remain in
compliance with regulatory requirements. The process for obtaining necessary
regulatory approvals for drugs and biologics is generally lengthy, expensive and
uncertain. Obtaining and maintaining foreign regulatory approvals is expensive,
and we cannot be certain that we will receive approvals in any foreign country
in which we or our partners plan to market our products. If we or our partners
fail to obtain regulatory approval in the United States or in any foreign
country in which we plan to market our products, our revenues will be lower.
The regulatory approval process for many of our products is unclear because
our products may be classified as medical devices, drugs or biologics. As a
result, we may experience greater regulatory uncertainty and longer approval
timelines.
IF OUR MANUFACTURING FACILITIES DO NOT MEET FEDERAL, STATE OR INTERNATIONAL
MANUFACTURING STANDARDS, WE MAY NOT BE ABLE TO SELL OUR PRODUCTS IN THE UNITED
STATES OR INTERNATIONALLY.
Our manufacturing facilities are subject to periodic inspection by
regulatory authorities and our operations will continue to be regulated by the
Food and Drug Administration for compliance with current Good Manufacturing
Practices. We also are required to comply with ISO 9000 series standards in
order to produce products for sale in the European Union. ISO, the International
Organization for Standardization, is a worldwide federation of national
standards bodies. ISO has developed the ISO 9000 family of standards to assist
companies in implementing and operating quality management systems. ISO 9001
provides the requirements for a quality management system that a company must
meet in order for its products to satisfy applicable regulatory requirements. We
only recently received ISO 9001 certification for our California facility.
Maintaining such certification is difficult and costly. If we fail to comply
with Good Manufacturing Practices requirements, ISO 9000 series or other
international regulatory requirements, we may be required to cease all or part
of our operations until we comply with these regulations. We cannot be certain
that our facilities will be found to comply on an ongoing basis with Good
Manufacturing Practices, ISO 9000 series or other international regulatory
requirements.
The state of California requires that we maintain a license to manufacture
medical devices, and our facilities and manufacturing processes may be inspected
from time to time to monitor compliance with the applicable regulations. We will
be subject to licensing requirements and periodic inspections by the California
Department of Health Services, the county of Santa Clara and various
environmental agencies. If we are unable to maintain a license following any
future inspections, we will be unable to manufacture or ship any products.
Currently, we lease our California facility under a lease expiring at the
end of 2001. We intend to use this facility to manufacture our products, which
requires us to qualify the facility with the Food and Drug Administration. If we
are unable to renew our lease on terms satisfactory to us, we may be required to
move to a new facility and dedicate substantial resources to building and
qualifying new manufacturing operations.
9
<PAGE>
OUR PRODUCTS MAY NOT BE COMMERCIALLY VIABLE IF GOVERNMENT HEALTH ADMINISTRATION
AUTHORITIES, PRIVATE HEALTH INSURERS AND OTHER THIRD-PARTY PAYORS DO NOT PROVIDE
ADEQUATE REIMBURSEMENT FOR THE COST OF OUR PRODUCTS.
In both domestic and foreign markets, sales of our potential products 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 often challenge the price and
cost-effectiveness of medical products and services. There is significant
uncertainty about the reimbursement status of newly approved healthcare
products. We cannot assure investors that any of our products will be reimbursed
by third-party payors. In addition, we cannot assure investors that our products
will be considered cost-effective or that adequate third-party reimbursement
will be available to enable us to maintain price levels sufficient to realize a
profit. Legislation and regulations affecting the pricing of health care
products may change before our products are approved for marketing, and any such
changes could further limit reimbursement.
OUR COMPETITORS MAY BE MORE SUCCESSFUL IN DEVELOPING COMPETING TECHNOLOGIES AND
GAINING MARKET ACCEPTANCE.
We compete with pharmaceutical, biotechnology and drug delivery companies,
research organizations, individual scientists and nonprofit organizations
engaged in the development and commercialization of drug delivery systems and
new drug research and testing. We are aware of a number of companies currently
seeking to develop pulmonary delivery devices and other non-invasive
alternatives to injectable drug delivery, including oral delivery systems,
intranasal delivery systems, transdermal systems and infusion systems. Many of
these companies and entities have greater research and development capabilities,
experience, manufacturing, marketing, financial and managerial resources than we
do. Accordingly, our competitors may succeed in developing competing
technologies and products, obtaining regulatory approval for products or gaining
market acceptance more rapidly than we can. If competitors bring effective
products to market before we do, there is a risk that we may not be able to gain
significant market share because our competitors may have firmly established
their products in the market. It is also possible that a competitor may develop
a technology or product that renders our technology or products obsolete.
WE MAY BE UNABLE TO EFFECTIVELY PROTECT OUR INTELLECTUAL PROPERTY, WHICH COULD
ENABLE THIRD PARTIES TO USE OUR TECHNOLOGY AND IMPAIR OUR ABILITY TO COMPETE
EFFECTIVELY.
Our ability to compete effectively depends in part on developing and
maintaining the proprietary aspects of our aerosolization technology. We cannot
assure you that the patents we have obtained, or any patents we may obtain as a
result of our pending U.S. or international patent applications, will provide
any competitive advantages for our products and, in particular, our vibratory
aerosolization technology, which is technology that aerosolizes liquids by
vibrating a metal plate that contains holes. We also cannot assure you that
those patents will not be successfully challenged, invalidated or circumvented
in the future. In addition, we cannot assure you that competitors, many of which
have substantial resources and have made substantial investments in competing
technologies, have not already applied for or obtained, or will not seek to
apply for and obtain, patents that will prevent, limit or interfere with our
ability to make, use and sell our products either in the United States or in
international markets. Patent applications are maintained in secrecy for a
period after filing. We may not be aware of all of the patents and patent
applications potentially adverse to our interests.
A number of pharmaceutical, medical device and other companies, as well as
universities and research institutions, have filed patent applications or have
issued patents relating to methods and apparatuses for aerosolization and
pulmonary drug delivery. We have become aware of, and may become aware of in the
future, patent applications and issued patents that relate to certain aspects of
the technology employed in our products, including certain aspects of vibratory
aerosolization technology. Our pending patent
10
<PAGE>
applications, and those we may file in the future, may not result in patents
being issued. We do not believe that our products currently infringe any valid
and enforceable claims of the issued patents that we have reviewed. However, if
third-party patents or patent applications contain claims infringed by our
technology and such claims are ultimately determined to be valid, we may not be
able to obtain licenses to those patents at a reasonable cost, if at all, or be
able to develop or obtain alternative technology. Our inability to do either
would have a material adverse effect on our business, financial condition,
results of operations and prospects. We cannot assure you that we will not have
to defend ourselves in court against allegations of infringement of third-party
patents, or that such defense would be successful.
In addition to patents, we rely on trade secrets and proprietary know-how,
which we seek to protect, in part, through confidentiality and proprietary
information agreements. We require our employees and key consultants to execute
confidentiality agreements upon the commencement of employment or a consulting
relationship with us. We cannot assure you that employees or consultants will
not breach these agreements, that we would have adequate remedies for any breach
or that our trade secrets will not otherwise become known to or be independently
developed by competitors.
WE MAY BECOME SUBJECT TO PATENT LITIGATION, WHICH WOULD BE COSTLY TO DEFEND AND
COULD INVALIDATE OUR PATENTS.
The pharmaceutical and medical device industries have been characterized by
extensive litigation regarding patents and other intellectual property rights,
and companies in these industries have used intellectual property litigation to
gain a competitive advantage. We cannot assure you that we will not become
subject to patent infringement claims or litigation or interference proceedings
declared by the U.S. Patent and Trademark Office, the USPTO, to determine the
priority of inventions. In 1999 we settled a patent interference with U.S.
Patent No. 5,261,601, assigned to Bespak plc. The settlement provided for a
cross-license between us and Bespak, as a result of which Bespak has a license
to certain of our technology, including the right to sublicense. The scope of
the granted license was limited to products employing technology which was
disclosed by Bespak in U.S. Patent No. 5,261,601.
Our patent position involves complex legal and factual questions and is
generally uncertain. Legal standards relating to the validity and scope of
patent claims in the biotechnology and pharmaceutical field are evolving.
Defending and prosecuting intellectual property suits, USPTO interference
proceedings and related legal and administrative proceedings are costly and
time-consuming. Further litigation may be necessary to enforce our patents, to
protect our trade secrets or know-how or to determine the enforceability, scope
and validity of the proprietary rights of others. Any litigation or interference
proceedings will be costly and will result in significant diversion of effort by
technical and management personnel. An adverse determination in any of the
litigation or interference proceedings to which we may become a party could
subject us to significant liabilities to third parties, require us to license
disputed rights from third parties or require us to cease using such technology,
which would have a material adverse effect on our business, financial condition,
results of operations and future growth prospects. Patent and intellectual
property disputes in the medical device area have often been settled through
licensing or similar arrangements, and could include ongoing royalties. We
cannot assure you that we can obtain the necessary licenses on satisfactory
terms, if at all.
IF WE WERE SUCCESSFULLY SUED FOR PRODUCT LIABILITY, WE COULD FACE SUBSTANTIAL
LIABILITIES THAT EXCEED OUR RESOURCES.
Researching, developing and commercializing medical devices and
pharmaceutical products entails significant product liability risks. The use of
our products in clinical trials and the commercial sale of our products may
expose us to liability claims. These claims might be made directly by consumers
or by our partner companies or others selling such products. Companies often
address the exposure of this risk by obtaining product liability insurance.
Although we currently have product liability insurance, we cannot assure
investors that we can maintain such insurance or obtain additional insurance on
acceptable terms in
11
<PAGE>
amounts sufficient to protect our business or at all. A successful claim brought
against us in excess of our insurance coverage would have a material adverse
effect on our business.
WE USE HAZARDOUS AND TOXIC MATERIALS AND MUST COMPLY WITH ENVIRONMENTAL LAWS AND
REGULATIONS, WHICH CAN BE EXPENSIVE AND RESTRICT HOW WE DO BUSINESS.
Our operations involve use of hazardous and toxic materials and generate
hazardous, toxic and other wastes. In particular, we use a special metal alloy
to build our aerosol generators that is regulated as a hazardous material. The
risk of accidental contamination or injury from hazardous and toxic materials
cannot be completely eliminated. In the event of such an accident, we could be
held liable for any damages that result, and this liability could exceed our
resources. Our operations could be shut down by government officials if we were
not in compliance with environmental laws.
WE WILL NEED TO INTEGRATE EFFECTIVELY THE ACTIVITIES OF OUR NEW IRISH SUBSIDIARY
WITH OUR CALIFORNIA ACTIVITIES IN ORDER TO OPERATE OUR COMPANY EFFICIENTLY.
In May 2000, we acquired Cerus Limited, an Irish company with approximately
ten employees. Cerus was renamed AeroGen (Ireland) Limited and has primary
responsibility for developing and obtaining regulatory approval for our AeroNeb
InLine nebulizer. If the California and Irish locations of our businesses do not
integrate quickly and efficiently, the development and commercialization of our
products could be delayed. Currency fluctuations involving our Irish operations
may cause foreign currency translation gains and losses. We cannot predict the
effect of such exchange rate fluctuations on our combined operations.
RISKS RELATED TO THIS OFFERING
OUR MANAGEMENT WILL HAVE BROAD DISCRETION AS TO THE USE OF PROCEEDS FROM THIS
OFFERING AND MAY SPEND THE PROCEEDS IN WAYS WITH WHICH YOU MAY NOT AGREE.
Our management will have broad discretion over the use of proceeds from this
offering. We currently intend to use the proceeds of this offering for increased
research, development and clinical activities, manufacturing and
commercialization of existing and future products, capital expenditures and
general corporate purposes. Our management may allocate the net proceeds among
these purposes as it determines necessary. In addition, market factors may
require our management to allocate all or portions of the net proceeds for other
purposes. Management may not use the proceeds in a manner in which you agree.
Accordingly, you will be relying on the judgment of our management with regard
to the use of proceeds from this offering.
YOU WILL INCUR IMMEDIATE AND SUBSTANTIAL DILUTION AS A RESULT OF THIS OFFERING.
The initial public offering price of our common stock is substantially
higher than the net tangible book value per share of our common stock. As a
result, investors purchasing common stock in this offering will incur immediate
and substantial dilution in net tangible book value per share of our common
stock. The dilution will be $10.54 per share in the net tangible book value of
the common stock from the initial public offering price (or $10.28 per share if
the underwriters' option to purchase additional shares is exercised in full). In
addition, investors will incur additional dilution upon the exercise of
outstanding stock options and warrants.
OUR STOCK PRICE MAY BE VOLATILE, AND YOU MAY LOSE ALL OR A PART OF YOUR
INVESTMENT.
The market prices for securities of many companies in the life sciences
industry have historically been highly volatile, and the market from time to
time has experienced significant price and volume fluctuations unrelated to the
operating performance of particular companies. As a result, you may be unable to
sell
12
<PAGE>
your shares of common stock at or above the offering price. Prices for our
common stock may be influenced by many factors, including:
- market conditions relating to the life sciences industry;
- investor perception of our company;
- securities analysts' recommendations;
- delays in the development or regulatory approval of our products;
- announcements of technological innovations or new commercial products by
us, our partners or competitors;
- failure to establish new collaborative relationships or termination of
existing collaborative relationships;
- developments or disputes concerning patent or intellectual property
rights;
- regulatory and pricing developments in both the United States and foreign
countries;
- public concern as to the safety of drugs and drug delivery technologies;
- period-to-period fluctuations in financial results; or
- economic and other external factors.
THE SUBSTANTIAL NUMBER OF OUR SHARES THAT WILL BE ELIGIBLE FOR SALE IN THE NEAR
FUTURE MAY CAUSE THE MARKET PRICE FOR OUR COMMON STOCK TO DECLINE.
Sales of a substantial number of shares of our common stock in the public
market following this offering could cause the market price of our common stock
to decline. The number of shares of common stock available for sale in the
public market is limited by restrictions under federal securities laws and under
agreements into which substantially all of our stockholders have entered with
the underwriters or with us. Those lock-up agreements restrict our stockholders
from selling, pledging or otherwise disposing of their shares for a period of
180 days after the date of this prospectus without the prior written consent of
Chase Securities Inc. However, Chase Securities Inc. may, in its sole
discretion, release all or any portion of the common stock from the restrictions
of the lock-up agreements.
WE HAVE IMPLEMENTED ANTI-TAKEOVER PROVISIONS WHICH COULD DISCOURAGE OR PREVENT A
TAKEOVER, EVEN IF AN ACQUISITION WOULD BE BENEFICIAL TO OUR STOCKHOLDERS.
Provisions of our amended and restated certificate of incorporation and
bylaws, as well as provisions of Delaware law, could make it more difficult for
a third party to acquire us, even if doing so would be beneficial to our
stockholders. These provisions also may discourage bids at a premium over the
market price of our common stock and may adversely affect both the market price
of our common stock and the voting rights of our stockholders.
CONCENTRATION OF OWNERSHIP AMONG OUR EXISTING EXECUTIVE OFFICERS, DIRECTORS AND
ENTITIES AFFILIATED WITH OUR DIRECTORS MAY PREVENT NEW INVESTORS FROM
INFLUENCING SIGNIFICANT CORPORATE DECISIONS.
Upon completion of this offering, our executive officers, directors and
entities affiliated with our directors will beneficially own, in the aggregate,
approximately 29.7% of our outstanding common stock. As a result, these
stockholders will be able to exercise control over all matters requiring
stockholder approval, including the election of directors and approval of
significant corporate transactions. This could have the effect of delaying or
preventing a change of control of AeroGen and will make some transactions
difficult or impossible without the support of these stockholders.
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<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. These forward-looking
statements are not historical facts but rather are based on current
expectations, estimates and projections about our industry, our beliefs and our
assumptions. Words such as "anticipates," "expects," "intends," "plans,"
"believes," "seeks" and "estimates," and variations of these words and similar
expressions, are intended to identify forward-looking statements. These
statements are not guarantees of future performance and are subject to risks,
uncertainties and other factors, some of which are beyond our control, are
difficult to predict and could cause actual results to differ materially from
those expressed, implied or forecasted in the forward-looking statements. In
addition, the forward-looking events discussed in this prospectus might not
occur. These risks and uncertainties include, among others, those described in
"Risk Factors" beginning on page 5 and elsewhere in this prospectus. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
reflect our management's view only as of the date of this prospectus. Except as
required by law, we undertake no obligation to update any forward-looking
statement, whether as a result of new information, future events or otherwise.
USE OF PROCEEDS
We estimate that the net proceeds to us from the sale of 3,600,000 shares of
our common stock will be approximately $45.4 million, approximately
$52.4 million if the underwriters' over-allotment option is exercised in full,
at an assumed initial public offering price of $14.00 per share, after deducting
the underwriting discounts and commissions and estimated offering expenses.
Of the net proceeds that we will receive from the offering, we expect to use
approximately:
- $20.0 million for research, development and clinical activities;
- $10.0 million for manufacturing and commercialization of existing and
future products; and
- $7.0 million for capital expenditures.
We intend to use the remainder of the net proceeds for general corporate
purposes. The amounts and timing of these expenditures may vary depending on a
number of factors, including the amount of cash generated by our operations,
competitive and technological developments and the rate of growth, if any, of
our business. We also may use a portion of the net proceeds to acquire
additional businesses, products and technologies, to lease or build additional
facilities, or to establish joint ventures or other collaborative arrangements
that we believe will complement our current or future business. However, we have
no specific plans, agreements or commitments to do so and are not currently
engaged in any negotiations for any acquisition or joint venture.
We will retain broad discretion in the allocation of the net proceeds of
this offering. Pending the uses described above, we will invest the net proceeds
of this offering in short-term, interest-bearing investment-grade securities. We
cannot predict whether the proceeds will be invested to yield a favorable
return. Based upon our current plans, we believe that our available cash, cash
equivalents and available-for-sale securities, together with the estimated net
proceeds of this offering, will be sufficient to meet our capital requirements
for at least the next 24 months.
DIVIDEND POLICY
We have never paid or declared any cash dividends. We currently expect to
retain earnings to support our operations and expand our business, and therefore
we do not anticipate paying any cash dividends for the foreseeable future.
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<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of September 30, 2000:
- on an actual basis derived from our unaudited consolidated financial
statements;
- on an as adjusted basis to reflect our receipt of the net proceeds from
the sale of 3,600,000 shares of common stock in this public offering at
an assumed initial public offering price of $14.00 per share, after
deducting the estimated underwriting discounts and commissions and
estimated offering expenses and the automatic conversion of all of our
preferred stock into an aggregate of 13,003,514 shares of common stock,
which will occur upon the closing of the offering.
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000
----------------------------
ACTUAL AS ADJUSTED
----------- --------------
(IN THOUSANDS, EXCEPT SHARE
AMOUNTS)
<S> <C> <C>
Cash, cash equivalents and available-for-sale securities.... $ 19,580 $ 64,952
======== ========
Long-term obligations, less current portion................. 272 272
-------- --------
Convertible preferred stock, $0.001 par value,
40,642,430 shares authorized, 39,010,653 shares issued
and outstanding, actual; 5,000,000 shares authorized,
and none issued pro forma............................. 58,541 --
Stockholders' equity (deficit):
Common stock, $0.001 par value; 62,000,000 shares
authorized; 2,773,188 shares issued and outstanding,
actual; 95,000,000 shares authorized and 19,376,702
shares issued and outstanding, pro forma.............. 3 19
Additional paid-in capital.............................. 7,379 111,276
Notes receivable from stockholders...................... (683) (683)
Deferred stock-based compensation, net.................. (6,174) (6,174)
Accumulated other comprehensive income.................. 10 10
Deficit accumulated during the development stage........ (35,577) (35,577)
-------- --------
Total stockholders' equity (deficit)................ (35,042) 68,871
-------- --------
Total capitalization.............................. $ 23,771 $ 69,143
======== ========
</TABLE>
The number of shares of common stock to be outstanding after this offering
is based on the number of shares outstanding as of September 30, 2000, and
excludes:
- 32,349 shares of common stock issuable upon the exercise of warrants
outstanding at a weighted average exercise price of $2.78 per share;
- 1,250,444 shares of common stock issuable upon the exercise of options
outstanding at a weighted average exercise price of $2.80 per share;
- 2,036,712 shares available for issuance or future grant under our stock
option plans; and
- 250,000 shares available for issuance under our employee stock purchase
plan.
The above information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
beginning on page 19 and the consolidated financial statements and related notes
included elsewhere in this prospectus.
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<PAGE>
DILUTION
Our pro forma net tangible book value was approximately $21.6 million, or
$1.37 per share, as of September 30, 2000. Pro forma net tangible book value per
share is equal to the amount of our total tangible assets less total
liabilities, divided by the number of shares of common stock outstanding
assuming the conversion of all shares of convertible stock outstanding as of
September 30, 2000.
Dilution in pro forma net tangible book value per share represents the
difference between the amount per share paid by purchasers for shares of common
stock in this offering and the pro forma as adjusted net tangible book value per
share of our common stock immediately afterwards, after giving effect to the
sale of 3,600,000 shares in this offering and after deducting underwriting
discounts and commissions and estimated offering expenses. This represents an
immediate increase in pro forma net tangible book value of $2.09 per share to
existing stockholders and an immediate dilution in pro forma net tangible book
value of $10.54 per share to new investors. The following table illustrates this
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $ 14.00
Pro forma net tangible book value per share at
September 30, 2000.................................... 1.37
Increase per share attributable to new investors........ 2.09
-------
Pro forma as adjusted net tangible book value per share
after this offering....................................... 3.46
-------
Dilution per share to new investors......................... $ 10.54
=======
</TABLE>
If the underwriters' over-allotment option were exercised in full, the pro
forma as adjusted net tangible book value per share after this offering would be
$3.72 per share, the increase in net tangible book value per share to existing
stockholders would be $2.35 per share and the dilution in net tangible book
value to new investors would be $10.28 per share.
The following table summarizes, on a pro forma basis, as of September 30,
2000, the differences between the total consideration paid and the average price
per share paid by the existing stockholders and the new investors with respect
to the number of shares of common stock purchased from us based on an assumed
initial public offering price of $14.00 per share. We have not deducted the
underwriting discounts and commissions and estimated offering expenses in our
calculations.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ----------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- -------- ------------ -------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders.......... 15,776,702 81.4% $ 54,727,200 52.1% $ 3.47
New investors.................. 3,600,000 18.6 50,400,000 47.9 $14.00
---------- ------ ------------ ------
Total.................. 19,376,702 100.0% $105,127,200 100.0%
========== ====== ============ ======
</TABLE>
The discussion and tables do not assume the exercise of any stock options or
warrants. As of September 30, 2000, there were 1,250,444 shares of common stock
issuable upon exercise of outstanding stock options at a weighted average
exercise price of $2.80 per share and 32,349 shares of common stock issuable
upon the exercise of warrants outstanding at a weighted average exercise price
of $2.78 per share. The exercise of outstanding options and warrants having an
exercise price less than the initial public offering price would increase the
dilutive effect to new investors.
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SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with our consolidated financial statements and related notes
beginning on page F-1 and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" beginning on page 19. The consolidated
statements of operations data for the years ended December 31, 1997, 1998, and
1999, and the consolidated balance sheet data as of December 31, 1998 and 1999,
are derived from our audited consolidated financial statements, which are
included elsewhere in this prospectus. The consolidated statements of operations
data for the nine month periods ended September 30, 1999 and 2000 and our
balance sheet data as of September 30, 2000 are derived from our consolidated
unaudited financial statements included elsewhere in this prospectus.
Unaudited pro forma basic and diluted net loss per share have been
calculated assuming the conversion of all the outstanding shares of preferred
stock into an equal number of shares of common stock, as if the shares had been
converted immediately upon their issuance.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED CUMULATIVE PERIOD
SEPTEMBER 30, FROM 11/18/91 (DATE
YEARS ENDED DECEMBER 31, (UNAUDITED) OF INCEPTION)
---------------------------------------------------- ------------------- THROUGH 9/30/00
1995 1996 1997 1998 1999 1999 2000 (UNAUDITED)
-------- -------- -------- -------- -------- -------- -------- -------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Research and development
revenues................. $ 281 $ 149 $ 328 $ 85 $ 468 $ 31 $ 5,140 $ 6,738
Operating expenses:
Research and
development.......... 716 1,725 3,961 4,392 7,910 5,388 12,035 31,087
General and
administrative....... 376 706 1,509 1,600 2,076 1,573 2,821 9,399
Purchased in-process
research and
development.......... -- -- -- -- -- -- 3,500 3,500
------- ------- ------- ------- ------- -------- -------- --------
Total operating
expenses......... 1,092 2,431 5,470 5,992 9,986 6,961 18,356 43,986
------- ------- ------- ------- ------- -------- -------- --------
Loss from operations... (811) (2,282) (5,142) (5,907) (9,518) (6,930) (13,216) (37,248)
Interest income, net... 57 108 87 345 550 444 508 1,671
------- ------- ------- ------- ------- -------- -------- --------
Net loss............... (754) (2,174) (5,055) (5,562) (8,968) (6,486) (12,708) (35,577)
Dividend related to
beneficial conversion
feature of preferred
stock.................... -- -- -- -- -- -- (16,517) (16,517)
------- ------- ------- ------- ------- -------- -------- --------
Net loss available to
common stockholders...... $ (754) $(2,174) $(5,055) $(5,562) $(8,968) $ (6,486) $(29,225) $(52,094)
======= ======= ======= ======= ======= ======== ======== ========
Net loss per common share,
basic and diluted........ $ (0.51) $ (1.54) $ (3.40) $ (3.47) $ (4.95) $ (3.68) $ (13.26)
======= ======= ======= ======= ======= ======== ========
Shares used in computing
net loss per common
share, basic and
diluted.................. 1,493 1,413 1,487 1,603 1,811 1,762 2,205
======= ======= ======= ======= ======= ======== ========
Pro forma net loss per
common share, basic and
diluted (unaudited)...... $ (0.81) $ (0.98)
======= ========
Shares used in computing
pro forma net loss per
common share, basic and
diluted (unaudited)...... 11,099 12,947
======= ========
</TABLE>
17
<PAGE>
The following table contains a summary of our consolidated balance sheets on
an actual basis at December 31, 1995, 1996, 1997, 1998, 1999 and September 30,
2000.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------- SEPTEMBER 30,
1995 1996 1997 1998 1999 2000
-------- -------- -------- -------- -------- --------------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and
available-for-sale securities......... $ 3,373 $ 1,433 $ 5,904 $ 17,499 $ 7,809 $ 19,580
Working capital......................... 3,210 1,196 5,383 16,825 7,407 19,831
Total assets............................ 3,547 1,726 7,108 18,608 9,674 26,570
Long-term obligations, less current
portion............................... 104 66 778 480 100 272
Convertible preferred stock............. 4,727 5,743 15,819 31,476 31,476 58,541
Deficit accumulated during the
development stage..................... (1,387) (4,077) (10,027) (13,901) (22,869) (35,577)
Total stockholders' deficit............. (1,452) (4,344) (10,285) (14,140) (23,014) (35,042)
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion of our financial condition and
results of operations in conjunction with the consolidated financial statements
and the related notes. This discussion may contain forward-looking statements
that involve risks and uncertainty. As a result of many factors, such as those
set forth under "Risk Factors" and elsewhere in this prospectus, our actual
results may differ materially from those anticipated in these forward-looking
statements.
OVERVIEW
We were incorporated in November 1991. We specialize in the controlled
delivery of drugs to the lungs. Our core technology consists of a proprietary
aerosol generator. We are using our technology to develop respiratory products
for marketing by AeroGen, and we are developing products in collaboration with
pharmaceutical and biotechnology companies for both respiratory therapy and for
the delivery of drugs through the lungs to the bloodstream.
We are in the development stage and since inception have devoted
substantially all of our efforts to develop products. We have an accumulated
deficit of approximately $35.6 million as of September 30, 2000. We expect to
incur significant additional operating losses over the next several years and
expect cumulative losses to increase primarily due to the expansion of our
research and development activities, an increase in the number and size of
clinical trials, the costs associated with manufacturing and marketing of our
products, and the general expansion of our business activities. To date, we have
not had product sales and do not anticipate receiving revenue from product sales
in 2000. We anticipate that our quarterly results will fluctuate for the
foreseeable future. Therefore, period to period comparisons should not be relied
upon as predictive of the results in future periods. Our sources of working
capital have been equity financings, research and development revenues,
equipment lease financings and interest earned on investments.
We perform feasibility and initial development work to customize our
AeroDose inhalers to deliver specific drugs, and we have been compensated for
expenses incurred by us in performing this work in several cases. Once
feasibility is demonstrated with respect to a potential product, we seek to
enter into an agreement with the corporate partner owning the rights to the
compound that will be used in the product. We currently have such an agreement
with PathoGenesis to develop an AeroDose inhaler to deliver TOBI, an inhaled
tobramycin therapy for the treatment of cystic fibrosis.
Our collaborative agreement with PathoGenesis provides for reimbursement of
research and development expenses incurred under an approved workplan. If the
product continues to commercialization, we expect to receive royalties from
PathoGenesis. We expect to receive similar payments from other partners for the
development of products under other collaborations and royalties based on
partner sales of products. We also expect to receive revenue from the
manufacturing of these products. We recognize revenues as reimbursable research
and development expenses are incurred.
In May 2000, we acquired all the voting stock of Cerus Limited, now AeroGen
(Ireland) Limited, for 1,725,000 shares of Series E convertible preferred stock
valued at approximately $6.0 million, including transaction costs of
approximately $150,000. Cerus was a development stage company developing
products under a license from us using our core aerosol generator technology. At
the acquisition date, Cerus had research and development projects underway aimed
at developing two product lines: inline nebulizers, which we now call the
AeroNeb InLine Nebulizer; and a line of drug containers for use in inline
nebulizer products.
The first inline nebulizer product has significant development milestones to
achieve before it can be commercialized. The significant milestones include
completion of the development of the technology incorporated in the product,
completion of the necessary reliability testing, field testing and filing for
and
19
<PAGE>
obtaining regulatory clearance, scale-up of manufacturing of the aerosol
generator by AeroGen and the product manufacturing process by AeroGen Ireland.
Other products in this line are at earlier stages of development.
The drug container project is at a very early stage of development, and the
time and cost to completion may be significant.
The acquisition was accounted for using the purchase method of accounting.
The purchase price, which for financial accounting purposes was valued at
$6.0 million, was allocated to the assets acquired and the liabilities assumed
based on their estimated fair values at the date of acquisition, as determined
by management. As a result of this transaction, we recorded expense associated
with the purchase of in-process research and development of $3.5 million, net
tangible assets of $445,000, and intangible assets (including goodwill) of
$2.0 million, the majority of which will be amortized over six years. Financial
statements of Cerus are included elsewhere in this prospectus.
We have incurred stock-based compensation expenses of $487,000 and $54,000
for the nine months ended September 30, 2000 and 1999, and $110,000, $0, $0 for
the years ended December 31, 1999, 1998 and 1997, respectively. As of
September 30, 2000 there was approximately $6.2 million of deferred compensation
which will be amortized to expense on a straight line basis through 2004. We
anticipate incurring additional stock-based compensation expense in the future
as a result of both additional options or other securities issued to employees
and consultants at below deemed fair market value and fluctuations in the market
value of our stock which will have a direct impact on the value of these
securities held by non-employees.
We had federal and state net operating loss carryforwards as of
December 31, 1999 of approximately $21.8 million and $13.9 million, and
$13.3 million and $10.2 million for 1998, respectively. We also had federal and
state research and development tax credit carryforwards as of December 31, 1999
and 1998 of approximately $407,000 and $212,000, respectively. The net operating
loss and credit carryforwards will expire at various dates through the year
2014, if not utilized. Due to the uncertainty regarding the ultimate utilization
of the net operating loss and credit carryforwards, we have not recorded any
benefit for losses, and a valuation allowance has been recorded for the entire
amount of the net deferred asset. Utilization of net operating losses and
credits may be substantially limited due to the change in ownership provisions
of the Internal Revenue Code of 1986 and similar state provisions. The annual
limitation may result in the expiration of net operating losses and credits
before they can be used.
RESULTS OF OPERATIONS
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999
RESEARCH AND DEVELOPMENT REVENUES. Revenues increased to approximately
$5.1 million for the nine months ended September 30, 2000 from $31,000 for the
nine months ended September 30, 1999. This revenue increase resulted from
development activities performed for PathoGenesis ($2.4 million) and activities
for a biotechnology company ($2.7 million). Revenues from other customers were
not material for these periods. Research and development revenues can be
expected to vary from period to period based on the activities requested by
customers in any particular period, and therefore are not predictable. Based on
agreements we currently have in place, we expect research and development
revenues for the fourth quarter of 2000 to be lower than those for each of the
first three quarters of 2000.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased to $12.0 million for the nine months ended September 30, 2000 from
$5.4 million for the nine months ended September 30, 1999, primarily reflecting
the increase in research and development activities for customers and, to a
lesser extent, expenses associated with our AeroDose insulin product
($2.5 million). The increase is largely attributable to outside professional
services ($4.5 million), including design and engineering services, and to
internal salary and benefit costs ($1.2 million).
20
<PAGE>
Research and development expenses represent expenses related to our own
research and development projects, as well as the costs related to research and
development activities for our customers. Research and development expenses for
customer activities approximated our revenues from those customers. Research and
development expenses include salaries and benefits for scientific and
development personnel, laboratory supplies, consulting services, clinical
expenses and the expenses associated with the development of manufacturing
processes, including related overhead. We expect research and development
spending to increase significantly over the next several years as we increase
clinical trials, expand our research and development activities to support our
products and those we develop in our collaborations, and initiate commercial
manufacturing. The increase in research and development expenditures cannot be
predicted reliably, as it depends in part upon our success in continuing
existing development collaborations, as well as entering into new partnering
agreements.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased to $2.8 million for the nine months ended September 30, 2000 from
$1.6 million for the nine months ended September 30, 1999. Most of the increase
is associated with increased personnel expenses ($400,000), increased facility
rent and related expenses for additional space ($350,000) and professional
services ($230,000). We expect general and administrative expenses to increase
as we expand our research and development efforts, commercialize our products
and operate as a public company.
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT. In conjunction with the
acquisition of Cerus, we recorded a $3.5 million expense during the second
quarter of 2000, which was associated with the purchase of in-process research
and development. The purchased research and development represents the value of
new technologies that were in various stages of development where no alternative
future use was identified. The value of purchased in-process research and
development was determined by management utilizing various methods, including
the income approach.
DIVIDEND RELATED TO BENEFICIAL CONVERSION FEATURE OF PREFERRED
STOCK. Dividends relating to beneficial conversion of our preferred stock of
$16.5 million were recorded in the nine months ended September 30, 2000. These
dividends arose due to the issuance of 961,539 shares of Series E convertible
preferred stock in May 2000 for net proceeds of $2.5 million ($202,000 of
beneficial conversion) and 7,498,223 shares of Series F convertible preferred
stock in July 2000 for net proceeds of $16.3 million ($16.3 million of
beneficial conversion).
COMPARISON OF YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
RESEARCH AND DEVELOPMENT REVENUES. Research and development revenues were
$468,000 in 1999, $85,000 in 1998 and $328,000 in 1997. Revenue increases in
1999 from 1998 resulted primarily from development activities performed for and
funded by a biotechnology company ($350,000) and, to a lesser extent, from
limited activities performed for other customers. Revenue decreases in 1998 as
compared to 1997 resulted from decreased emphasis on obtaining revenues in
connection with the performance of feasibility studies as we determined to
perform some feasibility studies at no charge to encourage the testing of our
inhaler and nebulizer platforms by potential partners. Research and development
revenues can be expected to vary from period to period, sometimes significantly,
based on the level and timing of activities for customers, and therefore are not
predictable.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were
$7.9 million in 1999, $4.4 million in 1998 and $4.0 million in 1997. Research
and development expenses in 1999 increased over 1998 due to approximately equal
increases in personnel expenses and other research and development costs such as
consulting services, tooling and materials. Research and development expenses in
1998 increased over 1997 due to the expansion of our research and development
efforts, including moving to a larger facility in the second half of 1997.
21
<PAGE>
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were $2.1 million in 1999, $1.6 million in 1998 and $1.5 million in 1997.
General and administrative expenses increased in 1999 primarily due to
professional services ($300,000) and increased staffing ($250,000).
INTEREST INCOME. Interest income was $626,000 in 1999, $467,000 in 1998 and
$117,000 in 1997. The increase in interest income was primarily due to higher
average cash and investment balances, resulting from the completion of private
placements of our convertible preferred stock in April and November 1997 and in
August 1998.
INTEREST EXPENSE. Interest expense was $76,000 in 1999, $122,000 in 1998
and there was minimal interest expense in 1997. The increases from 1997 were due
to borrowings under an equipment lease financing agreement.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily through the
private placement of preferred stock and the interest earned on related
proceeds. We have received approximately $52.7 million aggregate net proceeds
from sales of our preferred stock through September 30, 2000. As of
September 30, 2000, we had cash, cash equivalents and available-for-sale
securities of approximately $19.6 million.
From inception through September 30, 2000, expenditures for operating
activities and capital acquisitions were approximately $33.9 million. The
development of our technology and proposed products will require a commitment of
substantial funds to conduct the costly and time-consuming research and clinical
trials required to develop and refine our technology and proposed products and
to bring any such products to market. Our future capital requirements and
operating expenses will depend on many factors including, but not limited to,
research and development activities, the timing, cost, extent and results of
clinical trials, our success in licensing drugs for use in our products,
regulatory approvals, the status of competitive products, manufacturing and
marketing costs associated with commercialization of products, costs involved in
obtaining and maintaining patents, as well as our ability to enter into
collaborative agreements.
Based upon our current plans, we believe that our cash, cash equivalents and
available-for-sale securities, together with the estimated net proceeds of this
offering, will be sufficient to meet our capital requirements for at least the
next 24 months. Our forecast of the period of time through which our financial
resources will be adequate to support our operations is a forward-looking
statement that involves risks and uncertainties, and actual results could vary
materially. The factors described above will impact our future capital
requirements and the adequacy of our available funds. We may be required to
raise additional funds through public or private financings, collaborative
relationships or other arrangements. We cannot be certain that such additional
funding, if required, will be available on terms attractive to us, or at all.
Furthermore, any additional equity financing may be dilutive to existing
stockholders and debt financing, if available, may involve restrictive
covenants. Collaborative arrangements, if necessary to raise additional funds,
may require us to relinquish rights to certain of our products or technologies,
or marketing territories. Our failure to raise capital when needed could have a
material adverse effect on our business.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK. Our cash equivalents and investments are comprised
primarily of short-term, fixed-rate instruments. Accordingly, we are not subject
to interest rate risk to any material degree.
EXCHANGE RATE RISK. Due to our Irish operations, we have market risk
exposure to adverse changes in foreign exchange rates. The revenues and expenses
of our subsidiary, AeroGen (Ireland) Limited, are denominated in Irish currency.
At the end of each quarter, the revenues and expenses of our subsidiary are
translated into U.S. dollars using the average currency exchange rate for that
quarter, and assets and
22
<PAGE>
liabilities are translated into U.S. dollars using the exchange rate in effect
at the end of that quarter. Fluctuations in exchange rates therefore impact our
financial condition and results of operations, as reported in U.S. dollars. To
date, we have not experienced any significant negative impact as a result of
fluctuations in foreign currency markets. As a policy, we do not engage in
speculative or leveraged transactions, nor do we hold financial instruments for
trading purposes.
We plan to expand our overseas operations. As a result, our operating
results may become subject to more significant fluctuations based on changes in
exchange rates of foreign currencies in relation to the U.S. dollar. We will
periodically analyze our exposure to currency fluctuations and may adjust our
policies to allow for financial hedging techniques to minimize our exchange rate
risk.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB No. 101"), "Revenue Recognition in Financial
Statements," which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements filed with the SEC. SAB No. 101
outlines the basic criteria that must be met to recognize revenue and provides
guidance for disclosures related to revenue recognition policies. We have
complied with the guidance in SAB No. 101 for all periods presented.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 establishes new
standards of accounting and reporting for derivative instruments and hedging
activities. SFAS No. 133 requires that all derivatives be recognized at fair
value in the statement of financial position and that the corresponding gains or
losses be reported either in the statement of operations or as a component of
comprehensive income, depending on the type of relationship that exists. As
amended, SFAS No. 133 will be effective for fiscal years beginning after
June 15, 2000. We do not currently hold derivative instruments or engage in
hedging activities, and we do not believe that the implementation of SFAS
No. 133 will have any significant impact on our financial position or results of
operations.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 ("FIN No. 44"), "Accounting for Certain Transactions
Involving Stock Compensation," an interpretation of the Accounting Principles
Board Opinion No. 25 ("APB No. 25"). This interpretation clarifies the
definition of employee for purposes of applying APB No. 25, "Accounting for
Stock Issued to Employees," the criteria for determining whether a plan
qualifies as a noncompensatory plan, the accounting consequence of various
modifications to the terms of a previously fixed stock option or award and the
accounting for an exchange of stock compensation awards in a business
combination. FIN No. 44 is effective July 1, 2000, but certain conclusions cover
specific events that occur after either December 15, 1998, or January 12, 2000.
The adoption of FIN No. 44 did not have any material impact on our consolidated
financial statements.
23
<PAGE>
BUSINESS
OVERVIEW
AeroGen specializes in the development, manufacture and commercialization of
products for the controlled delivery of drugs to the lungs, which is called
pulmonary drug delivery. Drugs can be delivered via a fine mist, or aerosol, to
the lungs to treat breathing-related, or respiratory, conditions such as asthma,
and through the lungs to the bloodstream, or systemically, to treat diseases or
conditions located outside of the lungs such as diabetes. Our core technology
consists of a proprietary aerosol generator. When incorporated in our nebulizer
or inhaler platforms, our aerosol generator delivers drugs in an aerosol of a
predetermined particle size. We believe our drug delivery platforms will allow
us to develop products that deliver drugs formulated as liquids in solutions or
suspensions, from single-dose, multi-dose or patient-adjustable dosage forms.
Products in development provide drug delivery from our hand-held breath-
activated inhalers, nebulizers for home use and nebulizers for patients on
ventilators.
We believe our technology has the potential to improve therapy by providing
a cost-effective, convenient and patient friendly alternative to existing
respiratory dosage forms, injections and other forms of drug delivery. Our
strategy includes using our core aerosol generator technology to develop
respiratory products for marketing by us as well as collaborating with
pharmaceutical and biotechnology companies to develop products for improved
respiratory therapy and delivery of drugs to the bloodstream. We also
out-license our technology for uses outside the field of pulmonary drug
delivery.
The respiratory products currently under development for marketing by us are
targeted to treat pediatric asthma, chronic obstructive pulmonary disease,
cystic fibrosis and mechanically ventilated patients. These products will
deliver available respiratory drugs and compounds licensed from third parties.
We also are developing respiratory products in collaboration with partner
companies who will market those products. For example, in March 2000, we signed
an agreement with PathoGenesis to develop a small, hand-held AeroDose inhaler to
deliver TOBI, an inhaled tobramycin treatment for cystic fibrosis patients.
Our first product in development to deliver a drug through the lungs to the
bloodstream is an AeroDose inhaler delivering insulin to treat diabetes. We
completed our first clinical trial for the product, and are proceeding with
additional trials. In May of this year we entered into an agreement with Becton
Dickinson under which Becton Dickinson will develop and supply a
patient-adjustable container for use in our AeroDose insulin product.
INDUSTRY BACKGROUND
PULMONARY DRUG DELIVERY
Pulmonary drug delivery is widely used to treat respiratory diseases and is
believed to be a viable means to deliver drugs to the bloodstream via the lungs.
The drugs must be transformed into an aerosol for inhalation by the patient.
This aerosol must be delivered at a low-velocity to deposit drugs in the lungs
effectively. The size of the aerosol particles generally determines where the
drug will be deposited in the lungs. Aerosols containing large particles,
greater than three microns in diameter, typically get deposited in the upper
airways of the lung, where they may be useful in treating diseases such as
asthma, chronic obstructive pulmonary disease and cystic fibrosis. Aerosols
containing small particles, less than three microns in diameter, are more likely
to pass through the upper airways into the deep lung, where they may be absorbed
into the bloodstream to treat diseases such as diabetes.
THE RESPIRATORY DISEASE MARKET
The worldwide prevalence of respiratory diseases was estimated by Front Line
Strategic Management Consulting, Inc. to have exceeded 800 million patients in
1996. The most prevalent respiratory diseases are obstructive airways diseases
such as asthma and chronic obstructive pulmonary disease. Respiratory
24
<PAGE>
diseases are associated with impaired quality of life, reduced life expectancy
and significant treatment costs. Front Line estimated that worldwide
pharmaceutical expenditures for the treatment of obstructive airways diseases
was approximately $6.8 billion in 1996.
According to IMS HEALTH's Market Segment Report, U.S. institutional and
pharmacy expenditures for inhaled respiratory medications were over
$3.0 billion in 1999. IMS HEALTH is a leading provider of healthcare statistics.
Market growth in this area has resulted from increased incidence of disease,
diagnosis, medication expenditures and a shift to newer, costlier therapies. We
currently are focusing on treating three respiratory diseases--asthma, chronic
obstructive pulmonary disease and cystic fibrosis--as well as improving
treatments for patients using nebulizers and those receiving therapy via
ventilators.
Asthma is a chronic inflammatory disorder involving constriction of the
muscles lining the bronchial airways due to external stimuli, such as exercise
or allergens. The World Health Organization estimates that 100 to 150 million
people worldwide suffer from asthma. According to the Centers for Disease
Control and Prevention and the National Center for Environmental Health, the
number of people in the United States diagnosed with asthma more than doubled
from 6.7 million in 1980 to 17.3 million in 1998, and includes an estimated
4.8 million children.
Chronic obstructive pulmonary disease is a general term used to characterize
the presence of chronic bronchitis and emphysema. Chronic bronchitis is
characterized by a persistent, productive cough caused by excessive airway
mucous secretion. As the disease progresses, there is a chronic reduction in
lung function, with at least partial reversibility following administration of
bronchodilators. Emphysema is a chronic disease caused by irreversible
destruction of elastin, a protein in the lungs critical to maintaining integrity
of the alveolar walls, or air sacs. Emphysema is irreversible and treatment is
oriented towards reducing irritation and making the patient more comfortable.
The major cause of chronic bronchitis and emphysema is cigarette smoking,
followed by environmental pollution, genetic makeup and chronic occupational
exposure to high concentrations of irritating gases.
Worldwide, chronic obstructive pulmonary disease is the only leading cause
of death that still has a rising mortality. We estimate, based on published
reports, that by 2020 chronic obstructive pulmonary disease will be fifth
worldwide among the medical conditions most costly to society. The Centers for
Disease Control and Prevention estimated that in 1996 there were 16 million
people in the United States diagnosed with chronic obstructive pulmonary
disease.
Cystic fibrosis is a genetic disorder associated with dysfunction of the
pancreas and liver and is one of the most common life-shortening inherited
diseases in the United States. Cystic fibrosis primarily affects digestion and
nutrition. Secondary effects seen in the lungs include thick mucous secretions
formed and retained in the airways. Most cystic fibrosis patients experience
deterioration in lung function, increased incidence of lung infection and
respiratory failure over time. According to the Cystic Fibrosis Foundation,
cystic fibrosis affects about 30,000 people in the United States. In the 1950s,
the typical life expectancy was four years after diagnosis. Today, however, many
cystic fibrosis patients live well into their 30s. Earlier diagnosis and more
aggressive and effective treatment have been credited with the dramatic increase
in longevity.
We estimate, based on industry data, that in 1999 the U.S. institutional and
pharmacy expenditures for nebulized solutions were over $500 million. Based on
industry data and estimates by Frost & Sullivan, we believe that U.S. sales of
nebulizer devices will exceed $280 million in 2000, with approximately 25% of
the sales for home use.
Ventilated patients require a breathing device because they are not able to
breathe on their own. We estimate, based on data provided by a consultant, that
in the United States in 1998 there were approximately 980,000 patients admitted
to hospitals who required ventilation and on average each patient spent
five days on a ventilator. We estimate, based on information provided by third
parties, that in the United States there are approximately 90,000 ventilators
installed in hospitals and approximately 8,000
25
<PAGE>
ventilators purchased annually. We believe that this growth is based on the high
prevalence of chronic lung diseases and an aging population. Aerosol therapy is
frequently prescribed for patients receiving mechanical ventilation to deliver
drugs and to humidify the air reaching the lungs. We estimate, based on third
party sources, that the United States hospital and alternate care market for
nebulizers and humidifiers in 2000 will exceed $300 million.
THE SYSTEMIC DRUG DELIVERY MARKET
The physiology of the lungs makes pulmonary delivery an attractive method of
delivering drugs to the bloodstream. The absorptive surface area of the lung is
as high as 70 square meters, and is only one to two cells thick. This large
surface area is available for the free exchange of oxygen, carbon dioxide and
other molecules between the air and the bloodstream. This permits drugs
deposited in the lungs through aerosols to be transported rapidly into the
bloodstream.
Pulmonary drug delivery is being evaluated for non-invasive delivery of
drugs to the bloodstream to treat non-respiratory diseases. There is increasing
interest in pulmonary drug delivery as a result of the inability of currently
available dosage forms to deliver molecules such as proteins and peptides to the
bloodstream effectively. For these large molecules, oral delivery is not
feasible due to rapid breakdown of the molecules following ingestion. Dosage
forms such as intravenous or intramuscular injections and implants, while
effective for delivering proteins, have many drawbacks, including pain,
inconvenience, expense, risk of infection and poor compliance. Alternatives like
transdermal and nasal dosage forms do not allow reproducible delivery of large
molecules. We believe that systemic drug delivery of biotechnology products via
the lungs provides significant market opportunities for us.
In addition, pulmonary delivery is being evaluated to deliver drugs such as
insulin, which require rapid input to the bloodstream for optimal therapy.
Medical Data International reported that the U.S. market for insulin and insulin
delivery systems and supplies was over $1.4 billion in 1998 and is forecasted to
be over $2.0 billion in 2002.
TRADITIONAL METHODS OF PULMONARY DRUG DELIVERY AND THEIR LIMITATIONS
Three basic classifications of devices currently are being used for
pulmonary drug delivery: metered dose inhalers, dry powder inhalers and
nebulizers. These devices were developed originally for local treatment of
respiratory diseases, including asthma and chronic obstructive pulmonary
disease, and have inherent limitations in delivering drugs directly to the
bloodstream.
METERED DOSE INHALERS. Metered dose inhalers have been in existence for
over 40 years and are the most widely used devices for pulmonary drug
delivery. They consist of a portable canister containing the drug as a
suspension or solution mixed with a volatile propellant, most often a
chlorofluorocarbon. Metered dose inhalers require a patient to inhale the
drug in a single breath. In order to administer the drug, the patient must
activate the inhaler by pressing down on the canister while simultaneously
inhaling slowly and evenly. Even with repeat training, many patients using
metered dose inhalers have difficulty coordinating activation of the device
with their breathing. Once the inhaler is activated, particles are released
at an initial velocity of at least 30 miles per hour. Metered dose inhalers
deliver only 10% to 20% of the drug to the lungs. Most of the remainder of
the drug is deposited in the mouth and swallowed. To overcome these
limitations, patients are sometimes prescribed holding chambers, or spacers,
to use with their metered dose inhalers. These spacers increase the
complexity of use and reduce the portability of metered dose inhalers.
DRY POWDER INHALERS. Traditional dry powder inhalers were introduced to
overcome the problems inherent with the use of metered dose inhalers. Dry
powder inhalers are inhalers that deliver dry powdered aerosols without
using a propellant. Dry powder inhalers are breath activated and thus
eliminate the need for the press and breath coordination associated with
metered dose inhalers. We believe that traditional dry powder inhalers have
meaningful limitations that may prevent
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<PAGE>
their broad use in pulmonary drug delivery. Dry powder inhalers usually
require a single strong, deep inhalation to create the aerosol and deliver
the drug. Children, the elderly and patients with breathing difficulties
often cannot achieve the deep inhalation necessary to receive the required
dose. In addition, these devices do not allow the patient to inhale the
desired drug in multiple breaths and moisture entering into the dry powder
inhaler from the environment or a patient's own breath can result in
dose-to-dose variation.
NEBULIZERS. Traditional nebulizers create a continuous aerosol that can
be inhaled by patients through a mask or mouthpiece. Nebulizers allow
patients to breathe regularly, thereby requiring less patient coordination
and cooperation than metered dose inhalers and dry powder inhalers.
Nebulizers typically require an external power source and therefore are
bulky and generally noisy. Nebulizer treatments are time-consuming, with
each treatment typically taking up to 15 minutes, and inefficient, with less
than 20% of the drug reaching the lungs. The remainder of the drug either is
aerosolized during the patient's exhalation and released into the
surrounding air or remains in the nebulizer. Because of these limitations,
nebulizers are only appropriate for relatively inexpensive, small-molecule
drugs that can be formulated and stored as liquids.
Aerosol delivery to mechanically ventilated patients currently uses
either a metered dose inhaler or a nebulizer. Drugs are administered by
opening the tubing connecting the patient to the ventilator, which may
result in infection. In addition, it requires significant time and the
associated expense of an attendant respiratory therapist, and is inefficient
with only a very small amount of the administered drug reaching the lungs.
Ventilator performance may be impaired due to the introduction of additional
air into the ventilator tubing when drug is administered. This can affect
adversely the ability to monitor the patient's pulmonary function.
NEW METHODS OF PULMONARY DRUG DELIVERY
Several companies are developing technology to improve the efficiency and
accuracy of pulmonary drug delivery. Because systemic drug delivery requires the
ability to create and deliver small particles to the deep lung, research has
centered around developing devices capable of consistently delivering fine
particle aerosols. One technique involves the processing of drugs into
sophisticated dry powders. Another uses mechanical pressure to aerosolize custom
formulations of existing liquid drugs. Both of these technologies will require
extensive investment in new formulations, new packaging, new materials, and
customized manufacturing, as well as an extensive validation effort for Good
Manufacturing Practices. The dry powder technology also will face the challenge
of consistently creating a cloud of uniform fine particles in varying
environmental conditions that can include high humidity and electrostatic
charge.
OUR SOLUTION
We have developed a proprietary aerosol generator to facilitate the
consistent and accurate formation of an aerosol to deliver drugs to the lungs.
Our core technology is being incorporated into each of our delivery platforms.
We believe that our platforms overcome many of the limitations presented by
traditional and new methods of pulmonary drug delivery, and may be used to treat
respiratory diseases as well as to deliver drugs to the bloodstream for systemic
therapy. Our AeroDose inhaler is designed to safely and effectively deliver
drugs of various molecular sizes while eliminating many of the limitations
associated with metered dose inhalers, dry powder inhalers and current
commercial nebulizers. Our AeroNeb portable nebulizer incorporates our aerosol
generator technology to provide end users with a small, portable nebulizer that
quietly and efficiently administers currently approved nebulizer solutions. Our
AeroNeb InLine nebulizer also incorporates our aerosol generator technology and
is designed to improve the delivery of medications to patients on ventilators.
We believe our products will provide the following benefits:
OPTIMIZATION AND CUSTOMIZATION OF AEROSOL PARTICLE SIZE. Our aerosol
generator delivers a low-velocity aerosol of precisely defined particle
size. Our aerosol generator enables us to provide
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<PAGE>
either an aerosol with particles averaging three to four microns in diameter
for respiratory therapy, or an aerosol with particles averaging one to two
microns in diameter for deposition in the deep lung for systemic drug
delivery.
EASE OF FORMULATION. Drugs can be stored in liquid or dry powder form
and can be aerosolized in solution or suspension. Our aerosol generator uses
no propellants or pressure, and generates no heat, so it is not likely to
degrade drug molecules. In many cases, we can use existing drug
formulations, eliminating the need to demonstrate the stability of new
formulations.
FLEXIBILITY OF DOSING. Our AeroDose inhaler technology can be used to
administer drugs as a single dose, or as a unit dose from a multi-dose
container. Under collaboration with Becton Dickinson, we are developing an
AeroDose inhaler that will use a patient-adjustable container to deliver the
required dose of insulin.
BREATH-ACTIVATION. We have developed a breath-activation feature which
triggers aerosol formation and is designed to enable patients to obtain
consistent dosing over one or more breaths. This feature is designed so that
drug will be aerosolized only when the patient's inhalation rate has reached
a predetermined threshold, which can be adjusted for a particular target
patient population. If a patient exhales or coughs, the aerosolization will
stop and only resume when the patient begins inhaling again at the
predetermined rate. Our electronic controls are designed to allow us to
customize inhalers for both relaxed and controlled breathing, facilitating
delivery of drug to the desired portion of the lung.
DOSAGE GUIDANCE. We can incorporate electronic features to provide
information to the patient. Lights can indicate when a dose is ready for
inhalation and when the total dose has been inhaled. Additional features may
include indicators of patient compliance with the prescribed regimen and
lock-out features to prevent abuse or overdose.
CONVENIENCE. Our products are designed to be lightweight and easy to
use for patients and care-providers. AeroDose inhalers fit in the palm of
the hand and can be carried in a shirt pocket or small purse. The AeroNeb
nebulizer is portable, quieter and more compact than currently
commercialized nebulizers. The AeroNeb InLine nebulizer is lightweight,
allowing it to be placed close to the ventilated patient's windpipe,
providing efficient generation of aerosol close to the lung. We believe our
products will require minimal patient training, will be easy to use for the
very young and the elderly and have the potential to increase compliance
with prescribed treatment regimens.
Our AeroDose inhaler products are expected to be more expensive than metered
dose inhalers and currently available dry powder inhalers, as our products are
expected to provide significant advantages over currently marketed devices. It
is difficult to predict whether, and to what extent, our products will be
reimbursed by insurance companies, health maintenance organizations and
government healthcare providers. In addition, although we believe that
physicians are likely to recommend our products to their patients, it is
impossible to predict to what extent or how quickly this may occur.
OUR STRATEGY
Our goal is to become the leading provider of aerosol-based pulmonary drug
delivery products. Key elements of our strategy include:
INCORPORATING OUR CORE TECHNOLOGY INTO ADAPTABLE PULMONARY DRUG DELIVERY
PLATFORMS. Our core aerosol generator technology is being incorporated into
our inhaler and nebulizer platforms.
DEVELOPING OUR PLATFORMS FOR MULTIPLE PRODUCT APPLICATIONS. Our
platforms are being customized to develop a wide range of products, from the
pocket-size AeroDose inhalers to the AeroNeb InLine nebulizers for use in
intensive care units.
DEVELOPING AND COMMERCIALIZING RESPIRATORY PRODUCTS OURSELVES AND WITH
PARTNERS. We are developing a line of AeroDose inhaler and nebulizer
products which we will market ourselves. Our
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initial products will deliver available respiratory drugs. We also are
actively working to license proprietary drugs from third parties that will
be combined with our platforms to develop respiratory products for our
portfolio. We believe that the marketing of products that combine our
platforms with generic and in-licensed drugs will make therapy easier and
more convenient for patients, as we will be able to provide both the
customized container or canister holding the drug as well as the inhaler
designed to deliver it. This strategy is designed to enable us to earn
revenues from both sales of our inhalers and sales of the drugs to be used
with them, as well as from our nebulizers. We intend to retain U.S.
marketing rights to our AeroDose inhaler products and to license marketing
rights to partners outside the United States. We plan to market our
nebulizer products, the AeroNeb and the AeroNeb InLine, ourselves in the
United States and to commercialize these products in other countries through
marketing partners or distributors. Our products developed with partner
companies, such as the AeroDose TOBI product, will be marketed by the
partner with whom we collaborate on the development of the product.
PARTNERING WITH PHARMACEUTICAL AND BIOTECHNOLOGY COMPANIES FOR SYSTEMIC
DELIVERY PRODUCTS. We are pursuing collaborative arrangements with
pharmaceutical and biotechnology companies to develop products to deliver
drugs systemically via the lungs. We are developing an AeroDose inhaler for
an inhaled insulin product to treat diabetes. Under an agreement with Becton
Dickinson, this product will incorporate Becton Dickinson's
patient-adjustable container. We intend to enter into a collaboration with a
marketing partner to further develop and commercialize this product. We
currently anticipate commercial introduction of the product by a marketing
partner no sooner than 2004. However, the timing of commercial introduction
of this product will be largely within the control of the marketing partner.
OUT-LICENSING OUR AEROSOL GENERATOR TECHNOLOGY FOR USE OUTSIDE OF THE
FIELD OF PULMONARY DRUG DELIVERY. Our aerosol generator technology has
proven to be of interest to industries focusing outside the field of
pulmonary drug delivery. We have an agreement with a multinational consumer
products company covering the use of our technology in the fields of air
fresheners and insect repellants. Under the terms of this agreement, we are
to receive royalties based on net sales of units and refill cartridges. We
will continue to seek out-licensing opportunities outside the pulmonary drug
delivery field where our technology can provide significant value.
OUR CORE TECHNOLOGY AND PULMONARY DRUG DELIVERY PLATFORMS
AEROSOL GENERATOR
Our aerosol generator contains a domed, or curved, plate which contains
multiple apertures, or holes, of a discrete shape and size. The aperture plate
is produced through an electroforming, or plating, process using a metal alloy
which is strong, corrosion resistant and durable. The plate is placed within a
vibrational element and when energy is applied to this element the plate
vibrates. This creates a micro-pumping action that draws solutions in contact
with the concave surface of the plate through the apertures to form a fine
particle aerosol. The aerosol particle size formed is proportional to the size
and shape of the holes in the aperture plate. The same manufacturing process is
used to produce aperture plates with holes of various sizes. We are able to
optimize the flow rate and produce a low velocity aerosol by controlling the
voltage and frequency applied to the vibrational element. Thus, when the aerosol
generator is incorporated into a delivery platform, it is capable of producing
aerosols of consistent particle size.
[Picture of a cross-section of our aerosol generator, annotated with the
following:
--Vibrational Element
--Aperture Plate]
SCHEMATIC OF AEROGEN'S AEROSOL GENERATOR
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We have demonstrated the ability to aerosolize drugs in solutions or
suspensions. We believe that our core technology will be applicable to
aerosolization of both small- and large-molecule drugs being developed by the
biotechnology industry. Results to date indicate that the aerosol generator does
not affect the stability of proteins and peptides.
AERODOSE INHALERS
Each inhaler consists of our proprietary aerosol generator, electronic
circuitry, batteries, an inhalation sensor and a drug container. These
components are incorporated into a small, compact inhaler that is easy to use
and can be carried in a shirt pocket or small purse.
We are incorporating several dosing options into our AeroDose inhalers. We
believe that this versatility enables us to explore multiple applications of our
platforms to deliver a variety of drugs. Our proprietary valves permit accurate
dosing in the range of 15 to 3,000 microliters. We believe that this wide dosing
range will allow us to deliver the required dose of most drugs of interest for
pulmonary delivery, from small quantities of expensive, potent drugs to large
quantities of less potent drugs that are sometimes needed for effective therapy.
Currently, we are developing four distinct dosing options for our inhalers:
SINGLE-DOSE CANISTER. The single-dose canister can contain dosing volumes
from 100 to 3,000 microliters. When the patient places the canister in the
inhaler, a proprietary adapter punctures the canister and initiates the release
of drug to the aerosol generator. Drug flow is automatically coordinated with a
patient's breathing until all of the prescribed dose is inhaled. We use standard
nebulizer packaging for the single-dose canister. For drugs such as TOBI, which
are already packaged using standard packaging technology, we are able to use
currently available high capacity manufacturing systems to produce the
single-dose canister without having to design and manufacture new drug packaging
materials.
MULTI-DOSE CANISTER. Our multi-dose canister is designed to deliver
multiple small doses of drugs. Our metering valve is designed to maintain
sterility over multiple activations of the canister. The valve is designed to
provide accurate dispensing of small volumes of solutions as well as the
homogeneous suspensions required for the delivery of certain respiratory
steroids. The disposable canister holds up to 6,000 microliters of solution and
reproducibly dispenses a fixed dose which can be set between 15 and 150
microliters. When activated by the patient, the valve dispenses a precise unit
dose of drug-containing solution to the aerosol generator. Each fixed dose
remains on the aperture plate until the patient activates the aerosol generator
by inhaling at a predetermined rate.
DUAL CHAMBER CANISTER. The dual chamber canister is intended to accommodate
drugs that are not stable in solution during storage. While most injected drugs
exist in liquid formulations, some proteins may require storage as a dry powder
to extend shelf life or minimize the need for refrigeration. In a dual chamber
canister, drug is stored as a powder in one chamber and a solvent is stored in
the second chamber. The patient depresses the barrel to mix the solvent with the
drug powder, thereby creating a solution. The dual chamber canister can then
function with the ease of our standard single-dose canister or multi-dose
canister.
PATIENT-ADJUSTABLE CONTAINER. In our collaboration, Becton Dickinson is
developing a patient-adjustable container to enable variable dosing of insulin
by means of our AeroDose inhaler. This container is designed to allow patients
to adjust their insulin dose before each meal based on their anticipated caloric
intake.
We are incorporating electronic controls into our inhalers to provide
flexibility, control and reproducibility of drug delivery that is consistent
across our inhalers. A patient can receive a visual signal that a dose of drug
has been dispensed to the aperture plate and is ready for inhalation. Once the
patient's inhalation rate exceeds a predetermined rate, the aerosol generator is
activated and the drug is aerosolized and inhaled. The patient's inhalation rate
can be monitored throughout the inhalation cycle, allowing drug aerosolization
to occur only while the patient's inhalation rate is above a minimum flow rate
for optimal deposition of drug in the lung. A patient can also stop inhalation
mid-dose and take multiple breaths to inhale a single dose. Our electronic
controls can inform a patient when the complete dose has been
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aerosolized. Additional electronic features to customize an inhaler for a
specific drug application or dosing regimen can include a dose counter, lock-out
features and patient identification to prevent misuse.
We expect that our inhalers will be purchased by patients for use over a
period of six months to a number of years, with periodic replacements of the
aerosol generator. Drug canisters or containers designed to fit into our
inhalers may contain a daily or weekly supply of drug and will be replaced by
the patient when the supply in the canister or container is exhausted. We are
designing our inhaler products to be used with a customized container or
canister intended to fit only with our inhalers.
AERONEB PORTABLE NEBULIZER
Our first commercial product, the AeroNeb portable nebulizer, offers many
improved features compared to standard nebulizers used by patients and care
providers in the home setting. This portable nebulizer weighs less than 12
ounces and can operate on four standard "AA" batteries, a car cigarette lighter
or alternating current. The AeroNeb nebulizer operates silently, in any position
and with less wasted medication and faster medication delivery rates than
standard compressor nebulizers. It incorporates a liquid feed design and
generates negligible heat, minimizing drug degradation. The AeroNeb nebulizer
was designed and approved for use with commercially available nebulizer
solutions of respiratory drugs and is expected to be introduced into the U.S.
market in the first half of 2001.
AERONEB INLINE NEBULIZER
We are developing an application of our aerosol generator technology to
deliver drugs to patients during mechanical ventilation. The AeroNeb InLine
nebulizer is small and lightweight allowing it to be positioned close to the
patient's windpipe, thereby optimizing drug delivery and humidification of the
inhaled air. The AeroNeb InLine nebulizer is designed to allow the addition of
medication to a nebulizer cup without opening the ventilator tubing, thereby
potentially reducing a major source of infections. The drug is aerosolized
without the use of a compressor and avoids the introduction of additional air
into the ventilator tubing when the drug is administered. The AeroNeb InLine
nebulizer can be designed to synchronize with the patient's breathing cycle,
thereby optimizing drug delivery.
PRODUCTS
We intend to incorporate our versatile and flexible core aerosol generator
technology into a portfolio of products, some developed for commercialization by
us and some developed with partners for marketing by them. We also intend to
out-license our technology for applications outside of the field of pulmonary
drug delivery.
OUR PRODUCTS FOR RESPIRATORY DISEASES
We intend to create and market a respiratory disease product portfolio
consisting of our nebulizers and our AeroDose inhalers combined with available
drugs. We have developed an improved, portable and lightweight quiet nebulizer
which we will introduce into the U.S. market in the first half of 2001. We are
also developing nebulizers customized for delivery of drugs to patients on
mechanical ventilators. We are developing our AeroDose inhalers for delivery of
drugs which are currently administered by nebulizers to the lungs of the young
and the elderly. Our initial target diseases are pediatric asthma, chronic
obstructive pulmonary disease and cystic fibrosis. The types of drugs currently
used to treat these diseases include bronchodilators (including beta agonists
and anticholinergics), anti-inflammatories (including steroids) and mucolytics.
Bronchodilators relieve the airway spasms associated with wheezing,
anti-inflammatories reduce airway inflammation and mucolytics cause thinning of
the mucous in the lungs.
PEDIATRIC ASTHMA. We estimate, based on U.S. National Health Interview
Survey data reported from 1980 through 1994, that the U.S. population of asthma
patients under age six will be approximately three million by 2001. Two commonly
prescribed classes of drugs for treatment are beta agonists and steroids. We
estimate based on available data that for pediatric asthma patients under age
six, approximately 45% of albuterol prescriptions specify the use of a
nebulizer.
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CHRONIC OBSTRUCTIVE PULMONARY DISEASE. The Centers for Disease Control and
Prevention estimated that in 1996 there were 16 million people in the United
States diagnosed with chronic obstructive pulmonary disease. Two commonly
prescribed drugs to treat chronic obstructive pulmonary disease are beta
agonists and anticholinergics. We estimate based on available data that
approximately 55% of the prescriptions for these drugs specify the use of a
nebulizer.
CYSTIC FIBROSIS. According to the Cystic Fibrosis Foundation, cystic
fibrosis affects approximately 30,000 patients in the United States. Cystic
fibrosis patients spend up to a total of three and one-half hours per day taking
inhaled medications, oral medications, enzymes, vitamins and receiving chest
physiotherapy. We estimate based on available data that approximately 40% of the
albuterol prescriptions for the treatment of cystic fibrosis specify the use of
a nebulizer.
OUR RESPIRATORY PRODUCTS IN DEVELOPMENT
<TABLE>
<S> <C> <C> <C>
AEROGEN'S PRODUCTS FOR RESPIRATORY THERAPY
PRODUCT DOSING OPTION INTENDED MARKET DEVELOPMENT STAGE
AeroDose (albuterol) Single- and Pediatric asthma, Preclinical
multi-dose canister chronic obstructive development
pulmonary disease
and cystic fibrosis
AeroDose Single- and Pediatric asthma, Preclinical
(ipratropium) multi-dose canister chronic obstructive development
pulmonary disease
and cystic fibrosis
AeroDose (budesonide) Single- and Pediatric asthma, Feasibility
multi-dose canister chronic obstructive
pulmonary disease
and cystic fibrosis
AeroDose (anti- To be determined Pediatric asthma, Feasibility
inflammatory) chronic obstructive
pulmonary disease
and cystic fibrosis
AeroNeb portable Continuous All patients using 510(k) cleared; U.S.
nebulizer nebulizers launch targeted
first half of 2001
AeroNeb InLine Continuous All patients on 510(k) filing
nebulizer mechanical targeted first half
ventilation of 2001
</TABLE>
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Feasibility is the first stage of development of one of our AeroDose
products. In the feasibility stage, we determine the solubility of the drug, the
type of solution we would likely need in order to use the drug in our inhaler,
our ability to aerosolize the drug and the likely stability of the drug when
used in our inhaler. In this stage we conduct laboratory studies primarily
focused on the drug itself.
During the preclinical development stage we focus on the customization of
the AeroDose inhaler for use with a particular drug. We work on the appropriate
container to hold the drug in the inhaler, the method of delivery of the drug to
be aerosolized, the type of breath activation mechanism that is likely to be
needed and the configuration of the aperture plate for the product. Preclinical
development is conducted primarily in the laboratory and is targeted to
developing and building the AeroDose inhaler that will be used in the clinical
studies of the particular product in development.
After feasibility testing and preclinical development, the AeroDose products
listed in the table above will be tested in human subjects. Some of our
products, such as the AeroNeb portable nebulizer and the AeroNeb Inline
nebulizer, do not require human clinical trials before they can be cleared for
marketing. For these products we file a 510(k) application which is reviewed and
cleared by the FDA without human clinical studies. The AeroNeb portable
nebulizer has been cleared by the FDA, and no further regulatory approvals are
required before it can be marketed in the United States. We plan to file a
510(k) application for the AeroNeb Inline nebulizer in the first half of 2001.
AERODOSE INHALER. We believe that our AeroDose inhaler is particularly
suited to address the most common complaints of physicians and their patients
who require aerosolized medication. Our inhaler is designed to combine the
convenience and portability of a metered dose inhaler with the ease of
administration of a nebulizer, while minimizing drug waste and ensuring
reproducible dosing. In a six person imaging study, we compared lung deposition
of drug following delivery of the same dose of albuterol from a metered dose
inhaler and an AeroDose inhaler. The AeroDose inhaler deposited, on average, 70%
of the emitted dose in the lungs, compared to the metered dose inhaler, which
deposited, on average, 18%. Based on these findings, we estimate that our
AeroDose inhalers have the potential to reduce the typical prescribed dose of
drug for a nebulizer or metered dose inhaler by more than half, while still
delivering the same therapeutic dose to a patient's lungs.
Our AeroDose inhalers are designed to be cost competitive inhalers that span
the needs of the youngest and oldest patients in our target markets. We believe
our AeroDose inhalers also will address the coordination problems experienced by
other patients using metered dose inhalers. Even with repeat training, many of
patients using metered dose inhalers have difficulty coordinating the activation
of the device to release a high velocity stream of medication with the quick
breath intake necessary to capture the high velocity stream in the lungs.
Because our AeroDose inhalers will be breath-activated and only deliver a low
velocity aerosol when the intake of breath attains a certain threshold, they are
expected to avoid these problems. The initial version of our breath-activation
mechanism is incorporated into the AeroDose inhalers we are using for clinical
studies. We are developing an improved version of the breath-activation
mechanism for use in commercial AeroDose inhalers.
The initial drugs targeted for development include albuterol, ipratropium
and budesonide. Our activities will be focused on U.S. regulatory approval and
market introduction. The rights to our products outside the United States will
be licensed to partners who will undertake the studies and other activities
necessary to obtain regulatory approvals. We also plan to explore the potential
for commercializing appropriate drug combinations once individual formulations
have been developed including:
- AERODOSE (ALBUTEROL). Albuterol solution for inhalation is approved for
use by the Food and Drug Administration and is marketed by several
different manufacturers. We estimate based on available data that in the
United States, nebulized albuterol sales in 1999 were approximately
$189 million, while metered dose inhaler albuterol sales were
approximately $811 million. We expect that our supplier will purchase
albuterol in bulk, formulate it and package it into single-dose and
multi-dose canisters. We have completed the feasibility stage of our
AeroDose albuterol product
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and have initiated preclinical development activities. Once the
preclinical activities are completed, we intend to file an
Investigational New Drug Application with the FDA to allow us to
clinically test the product in humans. Human clinical trials must then be
completed before a New Drug Application can be filed with the FDA.
- AERODOSE (IPRATROPIUM). Ipratropium solution for inhalation is approved
for use by the Food and Drug Administration and is marketed by several
different manufacturers. We estimate, based on available data, that in
the United States nebulized ipratropium sales in 1999 were approximately
$165 million, while metered dose inhaler ipratropium sales were over
$450 million (including sales in combination with albuterol). We expect
that our supplier will purchase ipratropium in bulk, formulate it and
package it into single-dose and multi-dose canisters. We have completed
the feasibility testing of our AeroDose ipratroprium product and have
initiated preclinical development activities. This product is expected to
follow substantially the same regulatory pathway as the AeroDose
albuterol product.
- AERODOSE (BUDESONIDE). We believe, based on current delivery
limitations, that there is an unmet need for a budesonide dosage form
suitable for use by pediatric asthma and chronic obstructive pulmonary
disease patients. Current treatment options for our target patient
populations are limited to oral delivery, injections and use of a metered
dose inhaler or dry powder inhaler. We have completed feasibility testing
of a suspension of budesonide. We expect that our supplier will purchase
budesonide in bulk, formulate it and package it into single-dose and
multi-dose canisters. We believe that because budesonide is a steroid, it
will likely require more clinical trials prior to regulatory approval
than products using drug solutions of albuterol or ipratropium. We have
completed most of the feasibility testing required for the AeroDose
budesonide product.
- AERODOSE (ANTI-INFLAMMATORY). We are conducting feasibility studies with
a proprietary approved anti-inflammatory drug currently available only in
an oral dosage form. If our studies are successful, we intend to pursue
licensing of the compound. We anticipate that the compound will require
more preclinical studies prior to initiating clinical trials because
inhalation is a novel method of delivery for such compound. The
regulatory path is therefore likely to be more comprehensive and take
longer than for drugs already approved for use in a nebulizer.
AERONEB PORTABLE NEBULIZER. Our quiet and portable AeroNeb nebulizer, which
uses a mouthpiece like other nebulizers, will be our first commercial product.
It has been designed and approved for use with commercially available nebulizer
solutions. The product will provide us with commercial experience in the
respiratory disease market and our initial target clinical disease area for
AeroDose inhalers. We plan to introduce the AeroNeb portable nebulizer in the
U.S. market in the first half of 2001.
The AeroNeb nebulizer may also be used by partners and potential partners in
Phase I clinical studies to evaluate the potential use of our AeroDose inhalers
for delivery of their drugs under appropriate feasibility or development
agreements.
AERONEB INLINE NEBULIZER. The AeroNeb InLine nebulizer incorporates our
proprietary aerosol generator. We believe that the AeroNeb InLine nebulizer has
the potential to provide drug delivery and humidification to hospitalized
patients on ventilators. We have developed a means of integrating the electronic
circuits of the ventilator with our nebulizer. We are in discussions with a
ventilator company to make the AeroNeb InLine nebulizer an integral part of its
line of ventilator products. We expect that our first AeroNeb InLine nebulizer
will be sold as a stand-alone product that can be attached to any ventilator. We
plan to make a 510(k) submission to the Food and Drug Administration for this
version of the AeroNeb InLine nebulizer in the first half of 2001. We intend to
market the product ourselves in the United States and through distributors
elsewhere.
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<PAGE>
OTHER PRODUCTS FOR RESPIRATORY THERAPY
<TABLE>
<S> <C> <C> <C> <C>
OTHER PRODUCTS FOR RESPIRATORY THERAPY
COMPANY PRODUCT DOSING OPTION INTENDED MARKET DEVELOPMENT STAGE
PathoGenesis AeroDose TOBI Single-dose Respiratory infection Phase I
(tobramycin) canister
Biotechnology Company AeroNeb nebulizer Continuous Respiratory Phase I
(undisclosed)
Biotechnology Company AeroDose Single-dose Respiratory Preclinical
(undisclosed) canister development
Pharmaceutical Company Undisclosed To be Respiratory Feasibility
products determined
</TABLE>
"Phase I" means testing the product in a small number of patients or normal
volunteers, primarily for safety, at one or more dosage strengths.
"Preclinical development" means customizing the AeroDose inhaler for a
particular application.
"Feasibility" means formulation studies to ascertain compatibility of compounds
of interest with our aerosol generator.
AERODOSE TOBI (TOBRAMYCIN). We are collaborating with PathoGenesis to
develop a customized version of the AeroDose inhaler to deliver TOBI, an
anti-infective drug used to treat cystic fibrosis. TOBI was approved in late
1997 as a nebulized solution for use by cystic fibrosis patients with
PSEUDOMONAS AERUGINOSA lung infections. According to a program sponsored by MCP
Hahnemann University School of Medicine, more than 60% of cystic fibrosis
patients are chronically infected with PSEUDOMONAS AERUGINOSA by age 17. TOBI
has been designated an orphan drug by the Food and Drug Administration which
provides seven years of marketing exclusivity in the United States for
PathoGenesis. PathoGenesis' sales of TOBI were approximately $39.6 million for
the first six months of 2000. Market studies completed by PathoGenesis have
shown that the total time required for treatments of the cystic fibrosis patient
can have an impact on the patient's compliance with the recommended TOBI
treatment regimen and on the physician's assessment of a patient's likelihood of
compliance. TOBI currently is given via nebulizer twice a day during alternate
months, with each administration taking approximately 15 to 20 minutes per
session.
PathoGenesis and we believe that due to the efficiencies of the AeroDose
inhaler, the administration time per dose of TOBI can potentially be shortened
to five to ten minutes or less. In addition, the breath activation feature of
the AeroDose inhaler will allow for more efficient drug delivery and less drug
waste. By making these improvements, we believe that we can broaden the market
acceptance of TOBI by delivering an effective dose more quickly through our
hand-held, portable AeroDose inhaler.
In March 2000, we entered into a development and supply agreement with
PathoGenesis to develop and commercialize the custom AeroDose inhaler and
PathoGenesis' formulation of TOBI. PathoGenesis is responsible for the
development and manufacture of the portion of the final product that contains
the drug. We are responsible for developing and manufacturing the custom
AeroDose inhaler. PathoGenesis will conduct the clinical testing needed for
regulatory approval of the final product. In July 2000, PathoGenesis announced
that it had begun Phase I testing of the AeroDose TOBI product.
Under the agreement, PathoGenesis received exclusive worldwide
commercialization rights for the AeroDose inhaler when it is sold for use with
TOBI. We also granted PathoGenesis exclusive worldwide commercialization rights
to the AeroDose inhaler for the delivery of all other aminoglycoside drugs,
which are a small subset of antibiotics, provided that we and PathoGenesis agree
upon the terms of development of other drug products and the royalties and other
payments to be made to AeroGen resulting from the sale of these products.
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We receive reimbursement of our costs to develop the AeroDose TOBI product.
We also will receive reimbursement for our manufacturing costs and a small
profit for each inhaler we provide to PathoGenesis, as well as royalties on
product sales. Upon entering into this agreement, PathoGenesis made a
$2.5 million equity investment in our Series E convertible preferred stock.
Unless terminated earlier by either party, the agreement will continue on a
country-by-country basis until the last patent covering the product expires, or
on January 20, 2015, whichever is later.
In September 2000, PathoGenesis was acquired by Chiron Corporation, a
leading biopharmaceutical company. Chiron has not informed us of its intentions
concerning the agreement, and the development program is continuing. Chiron has
the right to terminate the agreement at any time without penalty.
OTHER RESPIRATORY PRODUCTS UNDER DEVELOPMENT WITH PARTNERS. We intend to
collaborate with pharmaceutical and biotechnology companies to develop novel
pulmonary drug delivery products for respiratory therapy. Such collaborations
typically take one of two approaches: either a company contacts us with a
proprietary drug to be delivered to the lungs, or we proactively identify
product opportunities and approach potential partners after obtaining
preclinical data, if possible.
The flexibility of our technology to facilitate improved respiratory therapy
has attracted potential development partners. We currently are working with
three companies exploring respiratory therapies, of which one biotechnology
product is in Phase I trials, one biotechnology product is in preclinical
development and various products with one pharmaceutical company are currently
undergoing feasibility studies. We currently are conducting feasibility
activities with potential partners with both small and large molecules for
respiratory therapy.
Feasibility studies can be paid for by the other company or by us, and can
include IN VITRO (laboratory) testing and drug deposition studies. These studies
may be followed by some early clinical trials. Generally, the agreements and the
activities can be cancelled at any time by the other company. In the drug
delivery area, it is common for pharmaceutical and biotechnology companies to
conduct feasibility studies with multiple partners. Once feasibility of a
particular drug has been established, the pharmaceutical and biotechnology
companies typically fund additional development work and may make an equity
investment. Following collaborative development of a product, the partner will
commercialize the product and pay us a royalty on sales. We currently intend to
manufacture AeroDose inhalers and supply them to our partners at our cost plus a
small profit.
PRODUCTS FOR SYSTEMIC THERAPY
In addition to our respiratory therapy activities, our strategy includes
collaborating with pharmaceutical and biotechnology companies to develop novel
pulmonary drug delivery products for systemic therapy. We will pursue these
opportunities in the same manner as our partnered respiratory products; either
the potential partners will come to us, or we will propose products to them
after obtaining preclinical data, if possible.
AERODOSE (INSULIN). We are developing a special AeroDose inhaler for
delivery of insulin to diabetic patients which will incorporate a
patient-adjustable container being developed by Becton Dickinson. The American
Diabetes Association estimates that there are 500,000 to one million Type I
(insulin dependent) diabetic patients in the United States who require multiple
injections of insulin per day. We estimate, based on industry sources, that only
20% of Type II (non-insulin dependent) patients are currently injecting
themselves with insulin. Type II patients frequently fail to modify their
lifestyle and are reluctant to use injection-based therapy, even though injected
insulin can substantially limit complications of diabetes. We believe that once
a non-invasive form of insulin is approved, a significant portion of Type II
patients may begin treatment. Medical Data International reported that the U.S.
market for insulin and insulin delivery systems and supplies was over
$1.4 billion in 1998 and is forecasted to be over $2.0 billion in 2002.
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Our AeroDose insulin product is designed to be the first patient-adjustable
inhaler allowing a patient to precisely adjust their insulin dose based on
anticipated caloric intake. After extensive focus group testing with patients
and physicians, we believe that the AeroDose insulin inhaler will be an
attractive method for delivering inhaled insulin due to its small size and ease
of use.
We have completed a Phase I clinical study using a prototype
patient-operated AeroDose inhaler with insulin in the United Kingdom in twelve
normal volunteers. The study compared insulin inhalation to subcutaneous
injection, focusing on both the absorption of insulin into the bloodstream and
its glucose-lowering effects. Subjects used separate AeroDose inhalers, which
were configured for slow, deep inhalations and production of a small-particle
aerosol appropriate for systemic drug delivery. Results indicated that the
absorption and glucose-lowering effects of inhaled insulin, relative to injected
insulin, were consistent with the published literature indicating that typically
8% to 15% of inhaled drug reaches the systemic circulation. There were no
reported respiratory complaints and no measurable differences in lung function
after inhalation versus injection. We recently began an additional Phase I
clinical trial in Europe, where we are studying optimal aerosolization
parameters. Phase II trials are planned for the first half of 2001. These
studies, in the United States and Europe, are designed to provide additional
evidence of AeroDose inhaler performance and inter- and intra-subject
variability in circulating levels of insulin following inhalation.
In May of this year, we entered into an agreement with Becton Dickinson
under which Becton Dickinson will develop and supply a patient-adjustable
container for use in our AeroDose insulin inhaler. Under the agreement, we will
develop the customized AeroDose inhaler at our own cost and Becton Dickinson
will develop the container at its own cost. We will have the marketing rights to
the product and Becton Dickinson will receive royalties on product sales and a
portion of any payments we receive from any future marketing partner. Becton
Dickinson will supply the container, without drug. Upon entering into the
agreement, Becton Dickinson made a $2.5 million equity investment in our
Series E convertible preferred stock.
We plan to partner our AeroDose insulin product for further development,
clinical testing and commercialization.
OTHER PHARMACEUTICAL AND BIOTECHNOLOGY COLLABORATIONS FOR SYSTEMIC
THERAPIES. In addition to insulin, we are continuing to evaluate the market
opportunities for other drugs that we believe can be delivered to the
bloodstream using our AeroDose inhaler. We intend to collaborate with
pharmaceutical and biotechnology companies for development, clinical testing and
commercialization of these AeroDose products.
TECHNOLOGY OUT-LICENSING
Our aerosol generator technology has proven to be of value to industries
focusing outside the field of pulmonary drug delivery. In October 1999, we
entered into an exclusive license agreement with a consumer company permitting
them to use our aerosol generator in the fields of air fresheners and insect
repellants worldwide. We expect the initial product will first be introduced in
Europe in 2002. Under the license agreement, we will receive royalties based on
net sales of units and refills, and the license gives us access to any
improvements in our technology made by the consumer company during conduct of
their development and manufacturing activities. We have the right to terminate
the agreement with respect to either the air freshener products or insect
repellant products if such products are not introduced within specific time
limits. We will continue to explore out-licensing opportunities for our
technologies outside the field of pulmonary drug delivery.
MANUFACTURING
We plan to manufacture our aerosol generators and outsource the manufacture
of the other components used in our products. We manufacture the aperture plates
and assemble our aerosol generators
37
<PAGE>
at our facility in Sunnyvale, California. We design the remaining components of
our products, such as molded parts and electronic circuitry, and outsource the
manufacture of these parts to qualified vendors. The manufacture of containers
and sterile drug filling will be outsourced, minimizing the need for capital
investment in specialized drug filling facilities that require Good
Manufacturing Practices approval. We currently are planning to have our AeroNeb
nebulizer and our AeroNeb InLine nebulizer manufactured for us by a qualified
vendor in the European Union, incorporating aerosol generators that we will
supply. We plan to assemble our AeroDose inhalers in our California facilities.
SALES AND MARKETING
We are evaluating options for the sales and marketing of our respiratory
products. We anticipate developing a U.S. sales force, through outsourced or
internal efforts or both, to support our respiratory products. Our strategy
includes maintaining the marketing rights for these products in the United
States and commercializing the products in other countries through marketing
partners or distributors. Using a targeted sales strategy, we plan to market the
AeroNeb portable nebulizer in the United States to certain home medical
equipment dealers, retail pharmacies, physicians and patients. We are
considering medical device distribution companies or respiratory equipment
companies as our partners to commercialize the AeroNeb and AeroNeb InLine
nebulizers. We currently expect that the products we develop in collaboration
with partner companies will be commercialized by our partners.
COMPETITION
There is intense competition in the drug delivery market. We compete with
pharmaceutical and biotechnology companies, hospitals, research organizations,
individual scientists and nonprofit organizations engaged in developing
non-invasive drug delivery dosage forms and new drug research and development.
Competing non-invasive alternatives to injectable drug delivery include oral,
intranasal, transdermal and colonic absorption dosage forms. We also compete
with entities producing and developing injectable drugs. Several of these
entities are working on sustained-release injectable systems. While these
systems still require injections, the lower number of injections could allow
these products to compete effectively with non-invasive therapies.
The pulmonary drug delivery market in particular is intensely competitive.
Several companies, including Aradigm Corporation, Dura Pharmaceuticals, Inc.,
Inhale Therapeutics and Sheffield Pharmaceuticals, Inc., are developing
competing pulmonary drug delivery dosage forms. These competing dosage forms are
designed both to treat respiratory disease and to deliver drugs systemically.
Several of our competitors have collaborative arrangements with partners to
develop inhalers for insulin. We also face competition from existing pulmonary
drug delivery dosage forms such as metered dose inhalers, dry powder inhalers
and nebulizers, which have been used effectively to treat respiratory disease in
certain patient populations for years. There can be no assurance that our
competitors will not develop and introduce products or technologies that are
competitive with or superior to ours.
Many of our competitors have greater research and development capabilities,
experience, manufacturing, marketing, financial and managerial resources than we
do. Accordingly, they may succeed in developing competing products and
technologies, obtaining regulatory approval for products or gaining market
acceptance more rapidly than we can. We believe that our products will compete
on the basis of patient convenience, efficiency, dose reproducibility, safety
and cost.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
Our ability to compete effectively depends in part on developing and
maintaining the proprietary aspects of our aerosolization technology. We own six
issued U.S. patents. In addition, we have 11 pending
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U.S. patent applications and eight pending international patent applications.
None of our issued patents expire earlier than 2009. These patents are directed
at, among other things, the following:
- apparatus and methods for generating aerosols, such as delivering the
liquid to be aerosolized in surface tension with a vibrating membrane,
dispersing the liquid through tapered apertures in the vibrating
membrane, and incorporating the tapered apertures in a dome-shaped
aperture plate;
- particular aspects of the liquid feed system; and
- particular embodiments of the aerosolization devices.
The pending patent applications include coverage for numerous improvements
on the fundamental aspects of our aerosolization technology.
We cannot assure you that the patents we have obtained, or any patents that
we may obtain as a result of our U.S. or international patent applications, will
provide any competitive advantages for our products or that they will not be
successfully challenged, invalidated or circumvented in the future. In addition,
we cannot assure you that competitors, many of whom have substantial resources
and have made substantial investments in competing technologies, will not seek
to apply for and obtain patents that will prevent, limit or interfere with our
ability to make, use and sell our products either in the United States or in
international markets.
A number of other companies, universities and research institutions have
filed patent applications or have issued patents relating to vibratory
aerosolization technology. In addition, we have become aware of, and may become
aware of in the future, patent applications and issued patents that relate to
our products. We do not believe that our products currently infringe any valid
and enforceable claims of the issued patents that we have reviewed. However, if
third-party patents or patent applications contain claims infringed by our
technology and such claims are ultimately determined to be valid, we cannot
assure you that we would be able to obtain licenses to those patents at a
reasonable cost, if at all, or be able to develop or obtain alternative
technology. The inability to do either would have a material adverse effect on
our business, financial condition, results of operations and future growth
prospects. We cannot assure you that we will not have to defend ourselves in
court against allegations of infringement of third-party patents.
In addition to patents, we rely on trade secrets and proprietary know-how,
which we seek to protect, in part, through confidentiality and proprietary
information agreements. We require our employees and key consultants to execute
confidentiality agreements upon the commencement of employment or a consulting
relationship with us. These agreements generally provide that all confidential
information developed or made known to the individual by us during the course of
the individual's relationship with us is to be kept confidential and not
disclosed to third parties. These agreements also provide that inventions
conceived by the individual in the course of rendering services to us will be
our exclusive property. We cannot assure you that employees and consultants will
not breach the agreements, that we would have adequate remedies for any breach
or that our trade secrets will not otherwise become known to or be independently
developed by competitors.
The pharmaceutical and medical device industries have been characterized by
extensive litigation regarding patents and other intellectual property rights,
and companies in these industries have employed intellectual property litigation
to gain a competitive advantage. We cannot assure you that we will not become
subject to patent infringement claims or litigation or interference proceedings
declared by the United States Patent and Trademark Office to determine the
priority of inventions. In 1999 we settled a patent interference involving U.S.
Patent No. 5,261,601, assigned to Bespak concerning methods and apparatus for
dispensing atomized sprays by vibrating a membrane to atomize the liquid in
contact with the membrane through flared holes in the membrane. The settlement
provided for a cross-license between us and Bespak, as a result of which Bespak
has a license to certain of our technology. The scope of the granted license was
limited to products employing technology which was disclosed by Bespak in U.S.
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Patent No. 5,261,601. The license would not extend to any of our technology
which was not disclosed in this patent.
Our patent position involves complex legal and factual questions and is
generally uncertain. The field of aerosolized drug delivery is crowded, and a
substantial number of patents have been issued to others. We are aware of
several issued U.S. and international patents that cover certain aspects of
vibratory aerosolization technology. Legal standards relating to the validity
and scope of patent claims in the biotechnology and pharmaceutical field are
evolving. Therefore, the degree of protection our patents will afford is
uncertain. Patents, if issued, may be challenged, invalidated or designed
around. Thus, any patents that we own or license may not provide any, or
significant, protection against competitors. Our pending patent applications or
those we may file in the future may not result in patents being issued. Also,
patent rights may not provide us with proprietary protection or competitive
advantages against competitors with similar technology. Furthermore, others may
independently develop similar technologies or duplicate any technology that we
have developed.
The defense and prosecution of intellectual property litigation, United
States Patent and Trademark Office interference proceedings and related legal
and administrative proceedings are both costly and time-consuming. If others
violate our proprietary rights, litigation may be necessary to enforce our
patents, to protect trade secrets or know-how owned by us or to determine the
enforceability, scope and validity of the proprietary rights of others. Any
litigation or interference proceedings will be costly and cause significant
diversion of effort by our technical and management personnel. An adverse
determination, other litigation or interference proceedings to which we may
become a party could subject us to significant liabilities to third parties,
require disputed rights to be licensed from third parties or require us to cease
using such technology. Although patent and intellectual property disputes in the
medical device area have often been settled through licensing or similar
arrangements, costs associated with such arrangements may be substantial and
could include ongoing royalties. Furthermore, we cannot be sure that we could
obtain necessary licenses on satisfactory terms, if at all. Adverse
determinations in a judicial or administrative proceeding or failure to obtain
necessary licenses could prevent us from manufacturing and selling our products,
which would have a material adverse effect on our business, financial condition,
results of operations and future growth prospects.
GOVERNMENT REGULATION
Our products are subject to extensive regulation by numerous governmental
authorities, principally the Food and Drug Administration in the United States,
as well as numerous state and foreign regulatory agencies. We need to obtain
clearance of our products by the Food and Drug Administration before we can
begin marketing our products in the United States. Similar approvals also are
required in other countries before our products can be marketed in those
countries.
Product development and approval within this regulatory framework is
uncertain, can take a number of years and requires substantial resources. The
nature and extent of the governmental premarket review process for our products
will vary depending on the regulatory categorization of particular products.
Because our products may be characterized as devices, drugs or biologics, the
regulatory approval path will not be the same for all of our products.
Our products regulated as medical devices will be classified into one of
three classes on the basis of the controls deemed by the Food and Drug and
Administration to be necessary to reasonably ensure their safety and
effectiveness. The class for any particular product, as follows, will determine
the regulatory route:
- CLASS I: general controls, e.g., labeling, premarket notification and
adherence to Good Manufacturing Practices quality system regulation, or
QSR;
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- CLASS II: general controls and special controls, e.g., performance
standards and postmarket surveillance; and
- CLASS III: premarket approval.
510(K) CLEARANCE. Before a new device can be marketed, its manufacturer
must obtain marketing clearance through either a premarket notification under
Section 510(k) of the Federal Food, Drug and Cosmetic Act or approval of a
premarket approval application. A 510(k) clearance typically will be granted if
a company establishes that its device is "substantially equivalent" to a legally
marketed Class I or II medical device or to a Class III device that was on the
market prior to 1976 for which the Food and Drug Administration has not required
the submission of a premarket approval application. A 510(k) clearance must
contain information to support the claim of substantial equivalence, which may
include laboratory test results or the results of clinical studies. An
investigational device exemption (IDE) application generally must be approved
before a clinical trial begins. The IDE must be supported by appropriate data,
such as animal and laboratory testing results. Clinical trials may begin if the
Food and Drug Administration and the appropriate institutional review boards
approve the IDE. Trials must be conducted in conformance with Food and Drug
Administration regulations and institutional review boards' requirements. The
sponsor or the Food and Drug Administration may suspend the trials at any time
if it is believed that they pose unacceptable health risks or the Food and Drug
Administration finds deficiencies in the way they are being conducted. Data from
clinical trials are often subject to varying interpretations that could delay,
limit or prevent Food and Drug Administration approval. Commercial distribution
of a device subject to the 510(k) requirement may begin only after the Food and
Drug Administration issues an order finding the device to be substantially
equivalent to a predicate device. It generally takes from four to 12 months from
the date of submission to obtain clearance of a 510(k) submission, but it may
take longer. The Food and Drug Administration may determine that a proposed
device is not substantially equivalent to a legally marketed device, that
additional information is needed before a substantial equivalence determination
may be made, or that the product must be approved through the premarket approval
process. A Food and Drug Administration determination of "not substantially
equivalent," a request for additional information, or the requirement that a
premarket approval application be filed could delay market introduction of
products that fall into this category. Furthermore, for any devices cleared
through the 510(k) process, modifications or enhancements that could
significantly affect safety or effectiveness, or constitute a major change in
the intended use of the device, require new 510(k) submissions. We have received
510(k) clearance for our AeroNeb portable nebulizer. We plan to file a 510(k)
application for our AeroNeb Inline nebulizer, and we expect that future
nebulizer products will also proceed through the 510(k) clearance route.
PREMARKET APPROVAL. If a device does not qualify for the 510(k) premarket
notification procedure, a company must file a premarket approval application.
The premarket approval application requires more extensive pre-filing testing
than required for a 510(k) premarket notification and usually involves a
significantly longer review process. A premarket approval application must be
supported by valid scientific evidence that typically includes extensive data,
including preclinical and clinical trial data, to demonstrate the safety and
efficacy of the device. If clinical trials are required, and the device presents
a "significant risk," an IDE application must be filed with the Food and Drug
Administration and become effective prior to initiating clinical trials. If the
device presents a "nonsignificant risk" to trial subjects, clinical trials may
begin on the basis of appropriate institutional review board approval.
A premarket approval application may be denied if applicable regulatory
criteria are not satisfied, and the Food and Drug Administration may impose
certain conditions upon the applicant, such as postmarket testing and
surveillance. The premarket approval application process can be expensive,
uncertain and lengthy, and approvals may not be granted. A number of devices for
which premarket approval has been sought have never been approved for marketing
and sale. After approval, a new application or a supplement is required if
certain modifications are made to the device, its labeling or its manufacture.
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NEW DRUG APPLICATION AND BIOLOGICS LICENSE APPLICATION. Our AeroDose
inhaler products may be regulated as drugs or biologics if approval is requested
for the inhaler with a new chemical entity or a new biologic. In this instance,
an Investigational New Drug Application (IND) will be required before Phase II
studies in patients can be conducted. Approval of a New Drug Application (NDA),
or a Biologics License Application (BLA), will be required before the product
can be marketed. In addition to reports of the preclinical and clinical trials
conducted under an effective IND application, the NDA or BLA includes
information pertaining to the preparation of the drug substance, the manufacture
of the inhaler, analytical methods, details on the manufacture of finished
products and proposed packaging and labeling. Submission of an NDA or BLA does
not assure Food and Drug Administration approval for marketing. The application
review process generally takes several years to complete. The process may take
substantially longer if, among other things, the Food and Drug Administration
has questions or concerns about the safety or efficacy of a product. In general,
the Food and Drug Administration requires at least two properly conducted,
adequate and well-controlled clinical studies demonstrating efficacy with
sufficient levels of statistical assurance.
While Pathogenesis will control the regulatory process for the AeroDose TOBI
product, we anticipate that it is likely that a New Drug Application for the use
of TOBI in combination with the AeroDose inhaler will be filed. We also may be
required to file a separate 510(k) application for the particular AeroDose
inhaler itself. The final regulatory pathway has not yet been determined.
We anticipate, although we are not yet certain, that a New Drug Application
will be required for our AeroDose albuterol, ipratroprium and budesonide
products. We plan to meet with the FDA in the first half of 2001 to discuss our
regulatory strategy and the clinical studies we plan to conduct for our AeroDose
inhaler products.
There can be no assurance that approval for any of our products will be
granted on a timely basis, or at all. Notwithstanding the submission of safety
and efficacy data, the Food and Drug Administration ultimately may decide that
the application does not satisfy all of its regulatory criteria for approval.
The Food and Drug Administration also may require additional clinical tests
(i.e., Phase IV clinical trials) following NDA or BLA approval to confirm safety
and efficacy. Upon approval, a product may only be marketed for the approved
indications.
In addition, the Food and Drug Administration may in some circumstances
impose restrictions on the use of a product that may be difficult and expensive.
Product approvals may be withdrawn if compliance with regulatory requirements is
not maintained or if problems occur after the product reaches the market. The
Food and Drug Administration also requires reporting of certain safety and other
information that becomes known to a manufacturer of an approved product.
The process for approval of products regulated as drugs and biologics
outside the United States is similar to the NDA/BLA process in the United
States. For client projects that incorporate biologics, we anticipate that a
Biologics License Application will be required in addition to, or separate from,
any 510(k) clearance we may be required to obtain for the AeroDose inhaler
itself.
EUROPEAN UNION APPROVAL. Commercialization of medical devices in the
European Union is regulated under a system which presently requires that all
medical products sold in the European Union bear the CE mark, an international
symbol of adherence to quality assurance standards and demonstrated clinical
effectiveness. Compliance with the Medical Device Directive--as certified by a
recognized European Competent Authority--permits the manufacturer to affix the
CE mark on its products. We cannot be certain that we will obtain the CE mark
approval, or that we will not have delays in obtaining the CE mark approval for
any product.
POST-APPROVAL REQUIREMENTS. Regulatory approval, if granted, may entail
limitations on the indicated uses for which a product may be marketed, and
product approvals, once granted, may be withdrawn if problems occur after
initial marketing. Manufacturers of Food and Drug Administration-regulated
products
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are subject to pervasive and continuing governmental regulation, including
recordkeeping requirements and reporting of adverse experiences associated with
product use. Compliance with these requirements is costly, and failure to comply
properly can result in withdrawal of a product approval.
GOOD MANUFACTURING PRACTICES. We will be required to adhere to applicable
regulations setting forth the Food and Drug Administration's current Good
Manufacturing Practices, which include testing, control and documentation
requirements. Other countries have similar requirements. Failure to comply with
Good Manufacturing Practices and other applicable regulatory requirements may
result in, among other things, warning letters, fines, injunctions, civil
penalties, recall or seizure of products, total or partial suspension of
production, failure of the government to review pending marketing approval
applications, withdrawal of marketing approvals and criminal prosecution.
HAZARDOUS MATERIALS. Our operations involve use of hazardous and toxic
materials and generate hazardous, toxic and other wastes. We are subject to
federal, state and local laws and regulations governing the use, storage,
handling and disposal of such materials and certain waste products. Although we
believe that our safety procedures for using, handling, storing and disposing of
such materials comply with the standards required by state and federal laws and
regulations, we cannot completely eliminate the risk of accidental contamination
or injury from these materials.
EMPLOYEES
We had 103 full-time employees as of September 30, 2000, 80 of whom were
engaged in product development and research activities. Eleven of these
employees are at our Irish facility. Our employees are not represented by a
collective bargaining agreement. All employees participate in an employee stock
option plan and receive options that generally vest over a four-year period. We
believe our relations with our employees are good.
FACILITIES
We lease two contiguous facilities, approximately 25,000 square feet and
13,000 square feet, respectively, in Sunnyvale, California. We presently use
approximately 85% of the space in these facilities and have approximately 15%
available for expansion. We have a manufacturing area in the facilities, and our
proposed manufacturing activities at AeroGen currently are not expected to
require additional space. The leases on our laboratory, manufacturing and office
spaces expire in December 2001, and we are currently assessing our future
requirements, whether our current space would be adequate and whether it would
be available to us at the end of the current lease term. AeroGen Ireland leases
a laboratory and office facility of approximately 2,500 square feet in Galway,
Ireland. The lease in this office expires at the end of this year and we expect
to renew it.
LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following persons are our executive officers, senior management and
directors and their ages as of September 30, 2000:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- -------- --------
<S> <C> <C>
Jane E. Shaw, Ph.D................ 61 Chairman, Chief Executive Officer and Director
Yehuda Ivri....................... 49 Chief Technical Officer and Director
Casper L. de Clercq............... 36 Vice President, Sales, Marketing and Business
Development
Carol A. Gamble................... 48 Vice President and General Counsel
Deborah K. Karlson................ 48 Chief Financial Officer
Michael A. Klimowicz.............. 50 Vice President, Product Development
John S. Power..................... 42 Vice President, European Operations
Thomas R. Baruch(1)............... 61 Director
Jean-Jacques Bienaime(2).......... 47 Director
Susan D. 43 Director
Desmond-Hellmann, M.D.(1).......
Phyllis I. Gardner, M.D.(2)....... 50 Director
Philip M. Young(1)(2)............. 60 Director
</TABLE>
------------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
JANE E. SHAW, PH.D. has served as Chairman of our Board of Directors and as
our Chief Executive Officer since 1998. Dr. Shaw was a founder and consultant of
The Stable Network, a consulting company that focuses on improving the
productivity and profitability of biopharmaceutical companies, from 1994 to
1998. Dr. Shaw held various scientific and management positions in ALZA
Corporation, a pharmaceutical company, from 1970 to 1994, most recently as
President and Chief Operating Officer from 1987 to 1994. Dr. Shaw received a
B.S. and Ph.D. in Physiology from Birmingham University in England. Dr. Shaw
serves as a director of McKesson HBOC, Inc., a healthcare supply management
company, Intel Corporation, a semiconductor manufacturer, Boise Cascade
Corporation, an office, wood and paper products company, and IntraBiotics
Pharmaceuticals, Inc., a biopharmaceutical company.
YEHUDA IVRI founded AeroGen in 1991 and has served as a member of our Board
of Directors since its inception. Mr. Ivri has served as our Chief Technical
Officer since 1996 and previously as Chief Scientist and Vice President.
Mr. Ivri received an M.S. in Mechanical Engineering from the Technion-Israel
Institute of Technology.
CASPER L. DE CLERCQ has served as our Vice President of Business Development
since 1998 and our Vice President of Sales, Marketing and Business Development
since 1999. Mr. de Clercq was Director of Market Development at
Heartport, Inc., a cardiovascular device company, from 1996 to 1998, and Co-
founder and Vice President of Business Development at Biointerventions, Co., a
biotechnology company, from 1994 to 1995. Mr. de Clercq held various positions
at Diagnostic Products Corporation, a medical device company, from 1987 to 1991,
and was a consultant at Bain & Company, an international strategy consulting
firm, from 1984 to 1987. Mr. de Clercq received a B.A. in Biochemistry from
Dartmouth College, an M.B.A. from Stanford University Graduate School of
Business and an M.S. in Biological Science from Stanford University.
CAROL A. GAMBLE has served as Vice President and General Counsel since
May 2000. Previously Ms. Gamble was with ALZA Corporation, a pharmaceutical
company, from 1988 to 2000, most recently as Senior Vice President and Chief
Corporate Counsel. Ms. Gamble was a partner with the law firm of Heller, Ehrman,
White & McAuliffe. Ms. Gamble received a B.S. in Education from Syracuse
University and a J.D. from the University of California, Berkeley.
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<PAGE>
DEBORAH K. KARLSON has served as our Chief Financial Officer since
February 2000 and Vice President of Finance and Administration since 1999.
Ms. Karlson was a financial consultant from 1992 until 1999, and provided
consulting services to AeroGen from 1997 to 1999. Previously, Ms. Karlson was a
manager with Deloitte & Touche LLP, an accounting firm. She received a B.A. in
Accounting and Economics and an M.B.A. in Finance and Accounting from the
Syracuse University School of Management.
MICHAEL A. KLIMOWICZ has served as our Vice President, Product Development
since 1998. Mr. Klimowicz held a number of senior management positions at Alaris
Medical Systems, a medical device company, from 1990 to 1998, most recently as
Director of Product Development. Mr. Klimowicz was the Director of Biomedical
Engineering at Psicor Inc., a medical services company, from 1987 to 1990.
Mr. Klimowicz received a B.S. in Electrical Engineering from Western Michigan
University.
JOHN S. POWER has served as our Vice President, European Operations and as
our Managing Director, AeroGen Ireland since May 2000. Mr. Power was the
Managing Director of Cerus Limited (now AeroGen Ireland), from 1998 to 2000.
Mr. Power was Engineering Manager in Mechanical Development at Nellcor Puritan
Bennett Incorporated, a medical products company, from 1993 to 1997. Mr. Power
was an engineering consultant to various companies from 1988 to 1992. Mr. Power
obtained I. Eng. Engineering Council Status from the Chesterfield College of
Technology.
THOMAS R. BARUCH has served as a director of AeroGen since 1994. He has been
a General Partner at CMEA Ventures, a venture capital firm, since 1988
(previously an affiliated fund of New Enterprise Associates). Mr. Baruch was a
special partner of New Enterprise Associates from 1990 to 1996. Mr. Baruch
received a B.S. in Engineering from Rensselaer Polytechnic Institute and a J.D.
from Capital University. Mr. Baruch serves as a director of Netro Corporation, a
telecommunications company, Symyx Technologies, a technology research company,
Physiometrix Inc., a medical products company and Aclara Biosciences, Inc., a
life science company.
JEAN-JACQUES BIENAIME has served as a director of AeroGen since 1999.
Mr. Bienaime has been President, Chief Executive Officer and a director of
SangStat, a transplant company, since 1998. Mr. Bienaime held various positions
at Rhone Poulenc Rorer Inc., a leading pharmaceutical company, from 1992 to
1998, most recently as Senior Vice President of Corporate Marketing and Business
Development. Mr. Bienaime received an M.B.A. from the Wharton School at the
University of Pennsylvania and a degree in Economics from Ecole Superieure de
Commerce de Paris in France. Mr. Bienaime serves as a director of the Fox Chase
Cancer Center in Philadelphia.
SUSAN D. DESMOND-HELLMANN, M.D. joined our Board of Directors in September
2000. Dr. Desmond-Hellmann is the Executive Vice President, Development and
Product Operations and the Chief Medical Officer of Genentech, Inc., a
biotechnology company. She has served in various executive positions with
Genentech since 1995. Prior to joining Genentech, Dr. Desmond-Hellmann was with
Bristol-Myers Squibb Pharmaceutical Research Institute from 1993 through 1994.
Dr. Desmond-Hellmann has a B.S. in Pre-Med and an M.D. from the University of
Nevada, Reno, and an M.P.H. from the University of California, Berkeley.
PHYLLIS I. GARDNER, M.D. has served as a director of AeroGen since
May 2000. Dr. Gardner is currently the Senior Associate Dean for Education and
Student Affairs and Associate Professor of Molecular Pharmacology and Medicine
at Stanford University School of Medicine and has been with the university since
1984. Dr. Gardner was Vice President of Research and Principal Scientist of ALZA
Corporation, and Head of ALZA Technology Institute, from 1996 to 1998.
Dr. Gardner was Principal Scientist and consultant to ALZA from 1994 to 1996.
Dr. Gardner received a B.S. in Biology from the University of Illinois and an
M.D. from Harvard Medical School.
PHILIP M. YOUNG has served as a director of AeroGen since 1994. Mr. Young
has been a General Partner with U.S. Venture Partners, a venture capital firm,
since 1990. Mr. Young was a Managing Director of Dillon Read & Co., a financial
services company, and Concord Partners, a venture capital firm managed by Dillon
Read, from 1986 to 1990. Mr. Young was President and CEO of Oximetrix, Inc., a
privately held manufacturer of high technology medical instruments and sterile
disposable products, from 1978 to 1986.
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<PAGE>
Mr. Young received a B.S. in Mechanical Engineering from Cornell University, an
M.S. in Engineering Physics from George Washington University and an M.B.A. from
Harvard Business School, where he was a Baker Scholar. Mr. Young serves as a
director of Vical Inc., a biotechnology company, Compugen, Ltd., a
bioinformatics company, The Immune Response Corporation, a biopharmaceutical
company, and Zoran Corporation, a digital solutions provider.
CLASSIFIED BOARD
Upon the closing of this offering, we will have authorized seven directors.
In accordance with the terms of our certificate of incorporation, the terms of
office of our Board of Directors will be divided into three classes. As a
result, a portion of our Board of Directors will be elected each year. The
division of the three classes and their respective election dates are as
follows:
- the class I directors' term will expire at the annual meeting of
stockholders to be held in 2001;
- the class II directors' term will expire at the annual meeting of
stockholders to be held in 2002; and
- the class III director's term will expire at the annual meeting of
stockholders to be held in 2003.
Our class I directors will be Phyllis I. Gardner, M.D. and Philip M. Young.
Our class II directors will be Thomas R. Baruch, Susan D. Desmond-Hellmann, M.D.
and Jane E. Shaw, Ph.D. Our class III directors will be Jean-Jacques Bienaime
and Yehuda Ivri. At each annual meeting of stockholders after the initial
classification, the successors to directors whose terms will then expire will be
elected to serve from the time of election and qualification until the third
annual meeting following election. In addition, our bylaws provide that the
authorized number of directors may be changed by an amendment to the bylaws duly
adopted by the Board of Directors or by the stockholders, or by a duly adopted
amendment to our certificate of incorporation. Any additional directorships
resulting from an increase in the number of directors will be distributed among
the three classes so that, as nearly as possible, each class will consist of
one-third of the total number of directors.
BOARD COMMITTEES
We established the audit committee of the Board of Directors in August 2000.
The audit committee reviews our internal accounting procedures and consults with
and reviews the services provided by our independent accountants. Our audit
committee currently consists of Thomas R. Baruch, Susan D. Desmond-Hellmann,
M.D. and Philip M. Young.
We established the compensation committee of the Board of Directors in
August 2000. The compensation committee administers our stock plans, reviews and
approves the compensation and benefits of all our officers and establishes and
reviews general policies relating to compensation and benefits of our employees.
Our compensation committee currently consists of Jean-Jacques Bienaime, Phyllis
I. Gardner, M.D. and Philip M. Young.
SCIENTIFIC ADVISORS
We have retained advisors to provide guidance and counsel on key scientific
and medical aspects of our business. These advisors provide us an agreed upon
minimum number of days per year. They provide input on research, development and
clinical strategy. In addition, once a year they each convene a group of
consultants and organize a two-day symposium addressing a scientific or clinical
topic of particular relevance to our product development activities. Each
advisor is paid an annual retainer and receives options to purchase common
stock.
RICHARD N. DALBY, PH.D., M.R. PHARM. S., B. PHARM., is currently our Chief
Scientific Advisor. Dr. Dalby is guiding our efforts to study and optimize the
delivery of aerosolized formulations in the lung, based on his expertise in
aerosol science, pharmaceutics and respiratory cell biology. Since 1997,
Dr. Dalby has held various positions in the Department of Pharmaceutical
Sciences at the University of Maryland,
46
<PAGE>
including the Vice Chair for Academic Affairs. Dr. Dalby received a Ph.D. from
the University of Kentucky and a B. Pharm. from the Nottingham University School
of Pharmacy.
ALAN R. LEFF, M.D., is currently our Chief Medical Advisor. Dr. Leff assists
us in identifying and assessing new opportunities. He also provides guidance for
our development programs, based on his expertise in respiratory pharmacology,
cell biology and immunology. Dr. Leff has held various positions at The
University of Chicago where he is currently Senior Director for Research and
Development for Biological Sciences. Since 1993, Dr. Leff has been the Director
of the Asthma and Allergic and Immunologic Disease Cooperative Research Center
(National Institute of Allergy and Infectious Diseases) and Professor of
Pharmacological and Physiological Sciences. From 1996 to 1997 he was
Co-Chairman, Asthma Committee, NIAID Task Force on Immunology, National
Institutes of Health. Between 1994 and 1999, Dr. Leff was editor for the
AMERICAN JOURNAL OF RESPIRATORY and CRITICAL CARE MEDICINE. Dr. Leff received an
A.B. in Biology from Oberlin College and an M.D. from the University of
Rochester School of Medicine and Dentistry.
DIRECTOR COMPENSATION
Directors currently receive no cash compensation from us for their services
as members of the Board of Directors or for attendance at committee meetings. In
August 1999, we granted Mr. Bienaime, in connection with his participation on
our Board of Directors, an option to purchase 16,666 shares of common stock at
$0.60 per share under our 1996 Stock Option Plan. In April 2000, we granted
Dr. Gardner, in connection with her participation on our Board of Directors, an
option to purchase 16,666 shares of common stock at $3.00 per share under our
1996 Stock Option Plan. In September 2000, we granted an option to purchase
16,666 shares of common stock to each of Mr. Baruch, Dr. Desmond-Hellmann, and
Mr. Young at an exercise price of $4.50 per share under our 1996 Stock Option
Plan. For each of these options, one year from the date of grant 4,166 shares
covered by the option will become exercisable, and the balance of the shares
covered by the option will vest in equal monthly installments over the
subsequent three years.
In August 2000, we adopted the 2000 Non-employee Directors' Stock Option
Plan to provide for the automatic grant of options to purchase shares of common
stock to our directors who are not our employees. Any director elected after the
closing of this offering will receive an initial option to purchase 15,000
shares of common stock. Starting at the annual stockholder meeting in 2001, all
non-employee directors will receive an annual option to purchase 5,000 shares of
common stock.
EXECUTIVE COMPENSATION
The following table sets forth summary information concerning the
compensation paid to our Chief Executive Officer and four most highly
compensated executive officers for services during the year ended December 31,
1999. All option grants were made under our 1996 Stock Option Plan.
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<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
NUMBER OF
ANNUAL SHARES OF
COMPENSATION COMMON STOCK
------------------- UNDERLYING
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS OTHER
--------------------------- -------- -------- -------------- --------
<S> <C> <C> <C> <C>
Jane E. Shaw, Ph.D. ............................. $239,989 -- -- --
Chief Executive Officer
Michael A. Klimowicz ............................ $172,523 $44,501 -- --
Vice President, Product Development
Casper L. de Clercq ............................. $160,132 -- 16,666 --
Vice President, Sales, Marketing & Business
Development
Yehuda Ivri ..................................... $151,784 -- -- $30,000(1)
Chief Technical Officer
Deborah K. Karlson(2) ........................... $126,380 -- 50,000 --
Chief Financial Officer
</TABLE>
------------------------
(1) Consists of $25,000 reimbursement for travel and lodging plus $5,000 tax
gross-up on an interest-free loan.
(2) Ms. Karlson joined AeroGen in March 1999. Her annualized salary for 1999 was
$160,000. Ms. Karlson was appointed Chief Financial Officer in
February 2000.
OPTIONS
The following table sets forth each grant of stock options during the fiscal
year ended December 31, 1999 to each of the individuals listed on the previous
table.
The exercise price of each option was equal to the fair market value of our
common stock, as determined by the Board of Directors on the date of grant. The
exercise price may be paid in cash, in shares of our common stock valued at the
fair market value on the exercise date or, after the effective date of this
offering, through a cashless exercise procedure involving a same-day sale of the
purchased shares.
The potential realizable value is calculated based on the ten-year term of
the option at the time of grant. Stock price appreciation of 5% and 10% is
assumed pursuant to rules promulgated by the SEC and does not represent our
prediction of our stock price performance. The potential realizable values at 5%
and 10% appreciation are calculated by
- multiplying the number of shares of common stock issuable upon exercise
of a given option by the assumed initial public offering price of $14.00
per share;
- assuming that the aggregate stock value derived from that calculation
compounds at the annual 5% or 10% rate shown in the table until the
expiration of the options; and
- subtracting from that result the aggregate option exercise price.
The options listed in the following table under "Number of Shares of Common
Stock Underlying Options Granted" are subject to vesting. For Mr. de Clercq, the
options vest in equal monthly installments over 48 months of service. For
Ms. Karlson, the options vest in equal monthly installments over 36 months of
service. For all the other individuals, the options vest as to 25% of the total
shares after one year and as to 1/48th of the total shares each month over the
next 36 months. Each of the options has a ten year term, subject to earlier
termination if the optionholder's service with us ends.
Percentages shown under "Percent of Total Options Granted to Employees in
1999" are based on an aggregate of 354,500 options granted to our employees
under our stock option plans during the fiscal year ended December 31, 1999.
48
<PAGE>
OPTION GRANTS IN 1999
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF ANNUAL RATES OF
SHARES OF PERCENT OF STOCK PRICE
COMMON STOCK TOTAL OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM
OPTIONS EMPLOYEES PRICE PER EXPIRATION -----------------------
NAME GRANTED IN 1999 SHARE DATE 5% 10%
---- -------------- ------------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Casper L. de Clercq........ 16,666 4.7% $0.60 08/04/09 $ 370,061 $ 595,183
Deborah K. Karlson......... 50,000 14.1% $0.60 03/18/09 $1,110,226 $1,785,620
</TABLE>
AGGREGATED OPTION EXERCISES IN THE YEAR ENDED DECEMBER 31, 1999 AND YEAR-END
OPTION VALUE
The following table sets forth the number and value of securities underlying
unexercised options that are held by each of the individuals listed on the
previous page as of December 31, 1999.
Amounts shown under the column "Value of Unexercised In-the-Money Options at
December 31, 1999" are based on the assumed initial public offering price of
$14.00, without taking into account any taxes that may be payable in connection
with the transaction, multiplied by the number of shares issuable upon exercise
of the option, less the exercise price payable for these shares. Our 1994 and
1996 Stock Option Plans and 2000 Equity Incentive Plan allow for the early
exercise of options granted to employees. All options exercised early are
subject to repurchase by us at the original exercise price, if the
optionholder's service with us ends prior to the date when the options would
have vested based upon the original vesting schedule.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY
SHARES UNEXERCISED OPTIONS AT OPTIONS AT
ACQUIRED DECEMBER 31, 1999 DECEMBER 31, 1999
UPON VALUE ------------------------------ ------------------------------
EXERCISE REALIZED EXERCISABLE UNEXERCISABLE(1) EXERCISABLE UNEXERCISABLE(1)
-------- -------- ----------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Michael A.
Klimowicz.......... -- -- 24,375 65,625 $326,625 $879,375
Casper L. de
Clercq............. -- -- 1,736 14,930 $ 23,262 $200,062
Deborah K. Karlson... -- -- 40,000 50,000 $538,000 $670,000
</TABLE>
------------------------------
(1) These shares can be exercised under our early exercise program. However, if
they are exercised, they will be subject to repurchase by us at the exercise
price. The repurchase right lapses over time.
EXECUTIVE SEVERANCE BENEFIT PLAN
In September 2000, the Board of Directors adopted an Executive Severance
Benefit Plan which provides severance benefits to eligible executive employees
selected by the Board of Directors. Benefits are paid only upon involuntary
termination of employment without cause, or voluntary termination of employment
for good reason, within one month prior to or within 13 months following a
change in control of the beneficial ownership of the Company. Upon execution of
a release of claims, each eligible executive would receive 12 months of salary
continuation payable in monthly installments, continued health benefits for
12 months and option vesting acceleration. The vesting of 100% of the
executive's unvested options would accelerate immediately prior to the date of
termination such that the options would vest in 12 monthly installments
beginning on the date of termination. Jane E. Shaw, Ph.D., Michael Klimowicz,
Casper L. de Clercq, Yehuda Ivri, Carol A. Gamble and Deborah K. Karlson are the
current participants in the Executive Severance Benefit Plan.
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<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of our executive officers serves as a member of the Board of Directors
or compensation committee of any entity that has one or more executive officers
serving as a member of our Board of Directors or compensation committee.
BENEFIT PLANS
Since 1994, we have established five plans under which employees, officers,
non-employee directors and consultants may purchase or receive common stock
through incentive stock options and nonstatutory stock options, restricted stock
purchase awards and stock bonuses. These plans are the 1994 Stock Option Plan,
the 1996 Stock Option Plan, the 2000 Equity Incentive Plan, the 2000 Employee
Stock Purchase Plan and the 2000 Non-employee Directors' Stock Option Plan. In
addition, we have established a defined contribution plan intended to be
tax-qualified under Sections 401(a) and 401(k) of the Internal Revenue Code, as
amended and the executive severance benefit plan described above.
2000 EQUITY INCENTIVE PLAN
The Board of Directors authorized the 2000 Equity Incentive Plan in
August 2000, and our stockholders approved the plan in November 2000.
RESERVED SHARES. We have reserved 1,000,000 shares for issuance under the
Equity Incentive Plan. On the date of each annual stockholder meeting for
ten years, starting in the year 2001, the number of shares in this reserve will
automatically increase by the least of 2,000,000 shares, 4.5% of the outstanding
common stock on a fully-diluted basis or a lesser number as determined by our
Board of Directors. If stock awards granted under the Equity Incentive Plan
expire or otherwise terminate without being exercised in full, the shares of
common stock not acquired will revert back to the plan and again become
available for issuance.
ADMINISTRATION. The Equity Incentive Plan is administered by our Board of
Directors or a committee appointed by the Board which determines recipients and
types of awards to be granted, including the exercise price, number of shares
subject to the award and the exercisability.
ELIGIBILITY. Our Board of Directors may grant incentive stock options that
qualify under Section 422 of the Internal Revenue Code, to employees, including
officers, of AeroGen or an affiliate of AeroGen. Our Board of Directors may
grant nonstatutory stock options, stock bonuses and restricted stock purchase
awards to employees, including officers, or our directors and consultants. A
restricted stock purchase award is an offer to purchase our shares at a price
either at or near the fair market value of the shares. A stock bonus, on the
other hand, is a grant of our shares at no cost to the recipient in
consideration for past services rendered. We may reacquire the shares under
either type of award at the original purchase price, which is zero in the case
of a stock bonus, if the recipient's service to us or an affiliate terminates
before the shares vest.
No incentive stock option may be granted to any person who, at the time of
the grant, owns, or is deemed to own, stock possessing more than 10% of the
total combined voting power of AeroGen or any affiliate of AeroGen, unless the
option exercise price is at least 110% of the fair market value of the stock
subject to the option on the date of grant and the term of the option does not
exceed five years from the date of grant. The aggregate fair market value,
determined at the time of grant, of the shares of common stock with respect to
which incentive stock options are exercisable for the first time by an optionee
during any calendar year under all of our plans may not exceed $100,000.
Section 162(m) of the Internal Revenue Code denies a deduction to
publicly-held corporations for compensation paid to specific employees in a
taxable year to the extent that the compensation exceeds $1,000,000. When we
become subject to Section 162(m), our Board of Directors may not grant options
under the Equity Incentive Plan to an employee covering an aggregate of more
than 1,000,000 shares in any calendar year.
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<PAGE>
OPTION TERMS. The maximum option term is ten years. The exercise prices of
options granted under the Equity Incentive Plan are determined by our Board of
Directors, provided that the exercise price for an incentive stock option cannot
be less than 100% of the fair market value of the common stock on the date of
the option grant, and the exercise price for a nonstatutory stock option cannot
be less than 85% of the fair market value of the common stock on the date of the
option grant.
Generally an option terminates three months after the optionholder's service
with us terminates. If the termination is due to the optionholder's disability,
the exercise period generally is extended to 12 months. If the termination is
due to the optionholder's death, or if the optionholder dies within three months
after his or her service terminates, in either case before the end of the option
term, the exercise period generally is extended to 18 months following death.
OTHER PROVISIONS. The optionholder may designate a beneficiary to exercise
the option following the optionholder's death. Nonstatutory stock options may be
transferable under limited circumstances. Otherwise, the option exercise rights
will pass by the optionholder's will or by the laws of descent and distribution.
Our Board of Directors determines the purchase price of other stock awards,
but the purchase price may not be less than 85% of the fair market value of
AeroGen's common stock on the grant date. However, our Board of Directors may
award stock bonuses in consideration of past services without a purchase
payment. Shares sold or awarded under the Equity Incentive Plan may, but need
not, be restricted and subject to a repurchase option in favor of AeroGen in
accordance with a vesting schedule that our Board of Directors determines. Our
Board of Directors may accelerate the vesting of the restricted stock.
Transactions not involving receipt of consideration by us, including a
merger, consolidation, reorganization, stock dividend, or stock split, may
change the nature, class and number of shares subject to the Equity Incentive
Plan and to outstanding awards. In that event, our Board of Directors will
appropriately adjust the Equity Incentive Plan as to the nature, class and the
maximum number of shares subject to the term of the Equity Incentive Plan,
including the Section 162(m) limitation. Our Board of Directors also will adjust
outstanding awards as to the nature, class, number of shares and price per share
subject to the awards.
Upon a change in control of AeroGen the surviving entity will either assume,
continue or substitute outstanding awards under the Equity Incentive Plan. If
the awards are not assumed, continued or substituted, then the vesting of the
awards will accelerate.
OPTIONS ISSUED. As of September 30, 2000, no shares or options had been
issued under the Equity Incentive Plan. The Equity Incentive Plan will not be
effective until the effective date of this offering. The Equity Incentive Plan
will terminate in 2010 unless our Board of Directors terminates it sooner. See
the description below regarding stock options previously granted under the 1996
Stock Option Plan.
1994 AND 1996 STOCK OPTION PLANS
In 1994, we adopted our 1994 Stock Option Plan. The 1994 plan will terminate
in November 2004 unless it is terminated earlier by our Board of Directors. In
1996, we adopted our 1996 Stock Option Plan. The 1996 plan will terminate in
March 2006 unless our Board of Directors terminates it sooner. In August 2000
our Board of Directors amended and restated the 1996 Stock Option Plan (Restated
1996 Plan) to provide for the same terms and conditions as the Equity Incentive
Plan described above. However, the original terms of the 1996 Plan as described
in this section will continue to apply to stock options granted under the
original 1996 Plan prior to August 2000.
OPTION TERMS. The option terms under the 1994 Plan and original 1996 Plan
are similar to the Equity Incentive Plan described above. However, an option
terminates 30 days under the original 1996 Plan and three months under the 1994
Plan after the optionholder's service with us terminates. In addition, if the
termination is due to the optionholder's disability or death, the exercise
period generally is
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<PAGE>
extended to six months under the original 1996 Plan, and twelve months under the
1994 Plan, from termination of service.
Acceptable consideration for the purchase of common stock issued under the
1994 Plan and original 1996 Plan is determined by our Board of Directors and
generally includes cash, surrender of shares of our common stock with a fair
market value equal to the exercise price, services rendered or a promissory
note.
Generally, an optionholder may not transfer a stock option other than by
will or the laws of descent or distribution unless the optionholder holds a
nonstatutory stock option that provides otherwise. However, an optionholder may
designate a beneficiary who may exercise the option following the optionholder's
death.
ELIGIBILITY. The eligibility to receive awards under the 1994 Plan and the
original 1996 Plan are the same as the 2000 Equity Incentive Plan.
The 1994 Plan and the original 1996 Plan provide for the grant of stock
awards, including:
- incentive stock options, as defined in Section 422 of the Internal
Revenue Code, that may be granted solely to employees (including
officers);
- nonstatutory stock options; and
- under the original 1996 Plan, restricted stock purchase awards and stock
bonuses that may be granted to employees (including officers),
non-employee directors and consultants.
RESTRICTED STOCK AND STOCK BONUS AWARDS. The purchase price for each
restricted stock award granted must be at least 85% of the fair market value of
the stock on the date of the award or at the time the purchase is consummated.
Rights to acquire shares under a stock bonus or restricted stock bonus agreement
may not be transferred other than by will or by the laws of descent and
distribution. Some restricted stock awards made following the completion of this
offering may be otherwise transferable if the stock purchase agreement so
provides. Restricted stock purchase awards and stock bonuses granted under the
original 1996 Plan may include a repurchase option in favor of us that varies
according to a service vesting schedule determined by our Board of Directors.
Stock bonuses may be awarded in consideration for past services without a
purchase payment.
CHANGE IN CONTROL. Upon specified changes in control, all outstanding
options under the 1994 Plan and the original 1996 Plan will be either assumed or
substituted. Under the original 1996 Plan, upon a change in control outstanding
options also may be continued, cashed out or accelerated as determined under the
change in control agreement.
AUTHORIZED SHARES. As of September 30, 2000, an aggregate of 2,766,664
shares of common stock had been authorized for issuance under the 1994 Plan and
the original 1996 Plan. As of September 30, 2000, options to purchase a total of
1,250,444 shares of our common stock were held by all participants under the
1994 Plan and the original 1996 Plan. At that date, a total of 786,712 shares of
our common stock remained available for grant under the 1994 Plan and the 1996
original Plan. Shares subject to stock options that have expired or otherwise
terminated without having been exercised in full again become available for the
grant of awards under the 1994 Plan and the original 1996 Plan.
ADMINISTRATION. The 1994 Plan and original 1996 Plan are administered in
the same manner as the Equity Incentive Plan as described above.
2000 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
The Board of Directors authorized the 2000 Non-employee Directors' Stock
Option Plan in August 2000, and our stockholders approved the plan in November
2000.
RESERVED SHARES. We authorized the issuance of 250,000 shares of our common
stock pursuant to the Non-employee Directors' Stock Option Plan. Under the
Non-employee Directors' Stock Option Plan, each new non-employee director who is
subsequently elected or appointed for the first time after this offering
52
<PAGE>
will automatically be granted an option to purchase 15,000 shares of common
stock. This is the non-employee director's initial grant.
On the date of each annual stockholder meeting, beginning in the year 2001,
each non-employee director will be granted an option to purchase 5,000 shares of
common stock. This is the non-employee director's annual grant.
Options granted under the Non-employee Directors' Stock Option Plan are
granted at 100% of the fair market value of the common stock on the date of
grant. Options granted under the Non-employee Directors' Stock Option Plan have
a ten-year term and vest as follows: initial grants vest as to 1/3rd of the
shares 12 months after the date of grant and 1/36th of the shares each month for
24 months thereafter; and annual grants vest as to 1/36th of the shares monthly
for three years. The Non-employee Directors' Stock Option Plan will terminate if
and when terminated by our Board of Directors.
CHANGE IN CONTROL. Upon certain changes in control of AeroGen, the vesting
of all outstanding options under the Non-employee Directors' Stock Option Plan
will automatically accelerate and the options will terminate if not exercised
prior to the change in control.
OPTIONS ISSUED. No options have been granted under the Non-employee
Directors' Stock Option Plan.
2000 EMPLOYEE STOCK PURCHASE PLAN
The Board of Directors authorized the Employee Stock Purchase Plan in
August 2000, and our stockholders approved the plan in November 2000.
RESERVED SHARES. We authorized the issuance of 250,000 shares of our common
stock pursuant to purchase rights granted to our U.S. employees and to employees
of our designated U.S. affiliates. On the date of each annual stockholders'
meeting, for 20 years, beginning in 2001, the number of shares in the reserve
automatically will be increased by the least of 1% of our outstanding shares on
a fully-diluted basis, 250,000 shares or such lesser number of shares as
determined by our Board of Directors.
ELIGIBILITY. The purchase plan is intended to qualify as an employee stock
purchase plan within the meaning of Section 423 of the Internal Revenue Code.
The purchase plan provides a means by which employees may purchase our common
stock through payroll deductions. We implement this purchase plan by offering
purchase rights to eligible employees. Generally, all U.S. employees of AeroGen
and any U.S. affiliate designated by our Board of Directors may participate in
the purchase plan, excluding part-time and seasonal employees. However, no
employee may participate in the purchase plan if immediately after we grant the
employee a purchase right, the employee has voting power over 5% or more of our
outstanding common stock. As of the date of this prospectus, no shares of common
stock have been purchased under the purchase plan.
ADMINISTRATION. Under the purchase plan, our Board of Directors may specify
offerings of up to 27 months. The first offering will begin on the effective
date of this initial public offering. Unless our Board of Directors otherwise
determines, our common stock is purchased for accounts of participating
employees at a price per share equal to the lower of 85% of the fair market
value of a share on the first day of this offering, or 85% of the fair market
value of a share on the purchase date.
Our Board of Directors may provide that employees who become eligible to
participate after the offering period begins nevertheless may enroll in the
offering. These employees will purchase our stock at the lower of 85% of the
fair market value of a share on the day they began participating in the purchase
plan, or 85% of the fair market value of a share on the purchase date.
Under the initial offering, employees may authorize payroll deductions of up
to 15% of their base compensation, excluding sales commissions and bonuses, for
the purchase of stock under the purchase plan, and may end their participation
in the offering at any time up to five days before a purchase date.
Participation ends automatically on termination of employment.
53
<PAGE>
OTHER PROVISIONS. Our Board of Directors may grant eligible employees
purchase rights under the purchase plan only to the extent the purchase rights,
together with any other purchase rights granted under other employee stock
purchase plans established by us or our affiliate, if any, do not permit the
employee's rights to purchase our stock to accrue at a rate that exceeds $25,000
of the fair market value of our stock for each calendar year in which the
purchase rights are outstanding. Our Board of Directors also may limit the
number of shares that an employee may purchase on any purchase date.
Upon a change of control of AeroGen, our Board of Directors may provide that
the successor corporation will assume or substitute outstanding purchase rights.
Alternatively, our Board of Directors may shorten the offering and provide that
shares will be purchased for participants immediately before the change in
control.
401(k) PLAN
We maintain a 401(k) Plan for eligible employees. An employee participant
may contribute up to 20% of his or her total annual compensation to the 401(k)
Plan, up to the legal annual limit. The annual limit for calendar year 2000 is
$10,500. Each participant is fully vested in his or her salary deferral
contributions. Participant contributions are held and invested by the 401(k)
Plan's trustee. We may make discretionary contributions as a percentage of
participant contributions, subject to established limits. To date, we have made
no discretionary contributions to the 401(k) Plan on behalf of the participants.
The 401(k) Plan is intended to qualify under Section 401(a) of the Internal
Revenue Code, so that contributions by employees or by us to the 401(k) Plan,
and income earned on the 401(k) Plan contributions, are not taxable to employees
until withdrawn from the 401(k) Plan, and so that contributions by us, if any,
will be deductible by us when made.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Our certificate of incorporation and bylaws contain provisions permitted
under Delaware law relating to the liability of directors. These provisions
eliminate a director's personal liability for monetary damages resulting from a
breach of fiduciary duty, except in circumstances involving wrongful acts,
including:
- for any breach of the director's duty of loyalty to us or our
stockholders;
- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- for any acts under Section 174 of the Delaware General Corporation Law;
or
- for any transaction from which the director derives an improper personal
benefit.
These provisions do not limit or eliminate our rights or any stockholder's
rights to seek non-monetary relief including an injunction or rescission, in the
event of a breach of a director's fiduciary duty. These provisions will not
alter a director's liability under federal securities laws. We intend to enter
into separate indemnification agreements with our directors and executive
officers that provide each of them indemnification protection in the event the
amended and restated certificate of incorporation and amended and restated
bylaws are subsequently amended. We believe that these provisions and agreements
will assist us in attracting and retaining qualified individuals to serve as
directors and officers.
EMPLOYEE CONFIDENTIALITY AGREEMENTS
At the time of commencement of employment, our employees generally sign
offer letters specifying basic terms and conditions of employment. In general,
our employees are not subject to written employment agreements. Each employee
has entered into a standard form confidential information and invention
assignment agreement that provides that the employee will not disclose any of
our confidential information received during the course of employment and that,
with some exceptions, the employee will assign to us any and all inventions
conceived or developed during the course of employment.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of our common stock as of September 30, 2000, and as adjusted to
reflect the sale of our common stock offered by this prospectus, by:
- each of the individuals listed on the "Summary Compensation Table" above;
- each of our officers and directors;
- each person, or group of affiliated persons, who is known by us to own
beneficially 5% or more of our common stock; and
- all current directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the SEC.
In computing the number of shares beneficially owned by a person and the
percentage ownership of that person, shares of common stock subject to options
held by that person that are currently exercisable or exercisable within
60 days of September 30, 2000, and not subject to repurchase as of that date,
are deemed outstanding. These shares, however, are not deemed outstanding for
the purposes of computing the percentage ownership of any other person.
Except as indicated in the notes to this table, and except pursuant to
applicable community property laws, each stockholder named in the table has sole
voting and investment power with respect to the shares shown as beneficially
owned by them. Percentage ownership is based on 15,776,702 shares of common
stock outstanding on September 30, 2000, after giving effect to the conversion
of all outstanding shares of preferred stock into common stock upon the closing
of this offering (at a rate of one share of common stock for each three shares
of preferred stock), and 19,376,702 shares of common stock outstanding after
completion of this offering. This table assumes no exercise of the underwriters'
over-allotment option.
Unless otherwise indicated, the address of each of the individuals named
below is: c/o AeroGen, Inc., 1310 Orleans Drive, Sunnyvale, CA 94089.
<TABLE>
<CAPTION>
PERCENT BENEFICIALLY
OWNED
NUMBER OF ----------------------
SHARES PRIOR TO AFTER
BENEFICIALLY THE THE
BENEFICIAL OWNER OWNED OFFERING OFFERING
---------------- ---------------- ----------- --------
<S> <C> <C> <C>
FIVE PERCENT STOCKHOLDERS:
Entities affiliated with US Venture Partners(1) ... 1,936,142 12.27% 9.99%
2180 Sand Hill Road
Suite 300
Menlo Park, California 94025
CMEA, L.P.(2) ..................................... 1,447,293 9.17% 7.47%
235 Montgomery Street, Suite 920
San Francisco, California 94104
Entities affiliated with InterWest Partners(3) .... 1,264,549 8.02% 6.53%
3000 Sand Hill Road
Building 3, Suite 255
Menlo Park, California 94025
MF Private Capital, Inc.(4) ....................... 904,762 5.73% 4.67%
45 Milk Street, Suite 600
Boston, Massachusetts 02109-5105
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
PERCENT BENEFICIALLY
OWNED
NUMBER OF ----------------------
SHARES PRIOR TO AFTER
BENEFICIALLY THE THE
BENEFICIAL OWNER OWNED OFFERING OFFERING
---------------- ---------------- ----------- --------
<S> <C> <C> <C>
Entities affiliated with Advent Partners, 848,860 5.38% 4.38%
L.P.(5) .........................................
75 State Street
30th Floor
Boston, Massachusetts 02109
DIRECTORS AND EXECUTIVE OFFICERS:
Jane E. Shaw, Ph.D.(6)............................. 465,480 2.95% 2.41%
Yehuda Ivri........................................ 1,236,666 7.84% 6.38%
Thomas R. Baruch(7)................................ 1,447,293 9.17% 7.47%
Jean-Jacques Bienaime(8)........................... 5,207 * *
Casper L. de Clercq(9)............................. 95,555 * *
Susan D. Desmond-Hellmann, M.D.(10)................ -- -- --
Carol A. Gamble(10)................................ -- -- --
Phyllis I. Gardner, M.D.(11)....................... 3,333 * *
Deborah K. Karlson(12)............................. 90,000 * *
Michael A. Klimowicz(13)........................... 90,000 * *
John S. Power(14).................................. 393,420 2.49% 2.03%
Philip M. Young(15)................................ 1,936,142 12.27% 9.99%
All directors and executive officers as a group
(11 persons)(16)................................. 5,763,096 36.30% 29.74%
</TABLE>
------------------------
* Less than 1%
(1) Includes 1,674,763 shares held by US Venture Partners IV, L.P., 203,295
shares held by Second Ventures II, L.P. and 58,084 shares held by USVP
Entrepreneur Partners II. William K. Bowes, Jr., Irwin Federman, Steven M.
Krausz and Philip M. Young share voting and dispositive power with respect
to these shares.
(2) Thomas R. Baruch has voting and investment power with respect to the shares
held by this entity.
(3) Includes 37,486 shares held by InterWest Investors VI, L.P. and 1,227,063
shares held by InterWest Partners VI, L.P. The voting and dispositive power
with respect to these shares is shared by the managing directors of
Interwest Management Partners VI, LLC (Harvey B. Cash, Alan W. Crites,
Philip T. Gianos, W. Scott Hedrick, W. Stephen Holmes, Robert R. Momsen and
Arnold L. Oronsky) and the venture member of Interwest Management Partners
VI, LLC (Gilbert H. Kliman).
(4) Richard Coles, Senior Vice President of Manulife Financial has voting and
dispositive power with respect to these shares.
(5) Includes 465,412 shares held by Noptek, L.P, 321,963 shares held by Advent
Israel, L.P., 16,100 shares held by Advent Partners, L.P., 6,410 shares
held by Advent International Investors II, L.P. and 38,975 shares held by
Advent Israel, Bermuda, L.P. In its capacity as manager of these funds,
Advent International Corporation exercises sole voting and investment power
with respect to all of the shares held by these funds. Advent International
Corporation exercises its voting and investment power through a group of
four persons: Douglas R. Brown, President and Chief Executive Officer,
Andrew I. Fillat, Senior Vice President responsible for venture investments
in North America, Dr. Jason S. Fisherman, Vice President responsible for
the investment in AeroGen, and Janet L. Hennessy, Vice President
responsible for monitoring public securities, none of whom may act
independently and a majority of whom must act in concert to exercise voting
or investment power of
56
<PAGE>
the beneficial holdings of such entity. Therefore, no individual in this
group other than Advent International Corporation is deemed to have sole
voting or investment authority.
(6) Includes 450,666 shares held by Dr. Shaw (of which 136,116 are subject to
repurchase at the original purchase price in the event of termination of
Dr. Shaw's service with us, which repurchase right lapses over time) and
14,814 shares held by the Carpenter Family Trust, in which Dr. Shaw has an
economic interest.
(7) All of these shares are held by CMEA L.P. Mr. Baruch, a director of
AeroGen, is a partner of CMEA Ventures. In such capacity, Mr. Baruch is
deemed to have an indirect interest in an indeterminate portion of the
shares beneficially owned by CMEA L.P. Mr. Baruch disclaims beneficial
ownership of the shares held by CMEA L.P., within the meaning of
Rule 13d-3 under the Securities Act of 1934.
(8) Includes 5,207 shares issuable upon the exercise of options exercisable
within 60 days of September 30, 2000.
(9) Includes 5,555 shares issuable upon exercise of options exercisable within
60 days of September 30, 2000 and 45,000 shares which are subject to
repurchase at the original purchase price in the event of termination of
Mr. de Clercq's service with us, which repurchase right lapses over time.
(10) No shares vest until one year after beginning of service.
(11) Includes 1,111 shares subject to repurchase at the original purchase price
in the event of termination of Dr. Gardner's service with us, which
repurchase right lapses over time.
(12) Includes 22,223 shares which are subject to repurchase at the original
purchase price in the event of termination of Ms. Karlson's service with
us, which repurchase right lapses over time.
(13) Includes 45,000 shares which are subject to repurchase at the original
purchase price in the event of termination of Mr. Klimowicz's service with
us, which repurchase right lapses over time.
(14) Includes 147,532 shares issued in conjunction with the acquisition of
Cerus Limited, subject to repurchase in the event of termination of
Mr. Power's service with us, which repurchase right lapses over time.
(15) All of these shares are held by US Venture Partners and its affiliates.
Mr. Young, a director of AeroGen, is a partner of US Venture Partners. In
such capacity, Mr. Young is deemed to have an indirect interest in an
indeterminate portion of the shares beneficially owned by US Venture
Partners and its affiliates. Mr. Young disclaims beneficial ownership of
the shares held by US Venture Partners and its affiliates, within the
meaning of Rule 13d-3 under the Securities Act of 1934.
(16) Includes shares described in the notes above as applicable to our
directors and current executive officers.
57
<PAGE>
RELATED PARTY TRANSACTIONS
The following executive officers, directors or holders of more than five
percent of our voting securities purchased securities in the amounts and as of
the dates shown below.
<TABLE>
<CAPTION>
SHARES OF CONVERTIBLE PREFERRED STOCK(6)
COMMON -----------------------------------------------------------------------
PURCHASER (1) STOCK SERIES A SERIES B SERIES C SERIES D SERIES E SERIES F
------------- ----------- ---------- ---------- ---------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
DIRECTORS AND EXECUTIVE
OFFICERS
Jane E. Shaw, Ph.D....... 450,666 -- -- -- -- -- 44,445
Casper L. de Clercq...... 90,000 -- -- -- -- -- --
Michael A. Klimowicz..... 90,000 -- -- -- -- -- --
Deborah K. Karlson....... 90,000 -- -- -- -- -- --
John S. Power(2)......... -- -- -- -- -- 1,180,262 --
ENTITIES AFFILIATED WITH
DIRECTORS
Entities affiliated with
US Venture
Partners(3)............ -- 1,282,052 1,602,565 2,666,667 257,143 -- --
CMEA..................... -- 1,282,052 1,282,052 1,333,333 -- -- 444,444
OTHER 5% STOCKHOLDERS
Entities affiliated with
Advent Partners,
L.P.(4)................ -- 1,153,848 897,438 495,300 -- -- --
Entities affiliated with
InterWest
Partners(5)............ -- -- -- 3,000,000 571,431 -- 222,222
MF Private Capital,
Inc.................... -- -- -- -- 2,714,286 -- --
Price per Share.......... $0.30-$0.60 $0.39 $0.78 $1.00 $1.75 $2.97 $2.25
Date(s) of Purchase...... 1/98-4/00 5/94-10/94 11/95-5/96 4/97-11/97 8/98 3/00 7/00
</TABLE>
------------------------
(1) See "Principal Stockholders" for more detail on shares held by these
purchasers.
(2) Consists of shares of Series E preferred stock issued to Mr. Power in
exchange for his proportionate share of voting shares of stock of Cerus
Limited in connection with the acquisition of Cerus by AeroGen, whereby
Cerus became a subsidiary of AeroGen.
(3) Affiliates of US Venture Partners include US Venture Partners IV, L.P.,
Second Ventures II, L.P., and USVP Entrepreneur Partners II, L.P.
(4) Affiliates of Advent Partners, L.P. include Noptek, L.P., Advent Israel,
L.P., Advent Partners, L.P., Advent International Investors II, L.P., and
Advent Israel, Bermuda, L.P.
(5) Affiliates of InterWest Partners include InterWest Investors VI, L.P. and
InterWest Partners VI, L.P.
(6) Upon completion of this offering, each three shares of preferred stock will
convert into one share of common stock.
REGISTRATION RIGHTS AGREEMENT. We have entered into an agreement with the
preferred stockholders identified above, excluding Mr. Power, pursuant to which
they will have registration rights with respect to their shares of common stock
following this offering. Upon the completion of this offering, all shares of our
outstanding preferred stock will be automatically converted into an equal number
of shares of common stock.
INDEMNIFICATION AGREEMENTS. We intend to enter into indemnification
agreements with our directors and officers for the indemnification of and
advancement of expenses to these persons to the full extent permitted by law. We
also intend to execute such agreements with our future directors and officers.
58
<PAGE>
TRANSACTIONS WITH OFFICERS AND DIRECTORS. Mr. Ivri, AeroGen's Founder and
Chief Technical Officer, has three notes payable to us. On May 6, 1994, we
received a promissory note for the principal amount of $69,009. The note bears
annual interest of 6.43% with principal and interest due the earlier of May 5,
2003, or 90 days after the date of termination of Mr. Ivri's service with us. On
August 15, 1996, we received a promissory note for the principal amount of
$200,000. The note bears no interest and the entire principal balance is due the
earliest of (i) August 14, 2001, (ii) 90 days after Mr. Ivri's common stock is
no longer subject to a lock-up agreement with the underwriters, or (iii) the
date Mr. Ivri's service with us terminates pursuant to Mr. Ivri's resignation or
is terminated by us for cause. On July 21, 2000, we received a promissory note
for the principal amount of $50,000. The note bears interest at the rate of
6.62%, and the principal and interest are payable on the earlier of
(i) July 21, 2005 or (ii) the date at which Mr. Ivri's service with us
terminates. These latter two notes are secured by 166,666 shares of Mr. Ivri's
common stock.
In 1998, we received a recourse note from Dr. Shaw, our Chairman and Chief
Executive Officer, in the aggregate principal amount of $140,000 in connection
with her purchase of 466,666 shares of common stock. The note bears annual
interest of 5.93%, with original principal and interest due January 28, 2002. In
October 1998, Dr. Shaw repaid $29,738 of the outstanding principal and accrued
interest on the note. Certain portions of the common stock may be repurchased by
us at the original purchase price if Dr. Shaw's service with us terminates. This
repurchase right lapses over time.
In 1998, Mr. de Clercq, our Vice President, Sales, Marketing and Business
Development, signed a note in the aggregate principal amount of $53,730 to
acquire 90,000 shares of common stock. The note bears annual interest of 4.51%,
with original principal and interest due November 19, 2002. Certain portions of
the common stock may be repurchased by us at the original purchase price if
Mr. de Clercq's service with us terminates. This repurchase right lapses over
time.
In 2000, we received a recourse note from each of Ms. Karlson, our Chief
Financial Officer, and Mr. Klimowicz, our Vice President, Product Development,
in the aggregate principal amount of $51,730 and $53,730, respectively, to
acquire 90,000 shares of common stock. The notes bear annual interest at 6.7%,
with original principal and interest due April 17, 2004. A portion of the shares
purchased by each employee may be repurchased by us at the original purchase
price if his or her service with us terminates. This repurchase right lapses
over time.
In March 1998 we granted Dr. Gardner an option to purchase 3,333 shares of
common stock at $0.30 per share under our 1996 Stock Option Plan in connection
with Dr. Gardner providing consulting services to us. After one year from the
date of grant, 2,500 shares covered by the option will vest, the remaining
shares will vest in equal monthly installments over the following three years.
We believe that all of the transactions set forth above were made in our
best interest. In particular, the loans made to our Chief Technical Officer and
certain of our other officers were made to help retain them as our employees.
All future transactions, including loans, between us and our officers,
directors, principal stockholders and their affiliates will be approved by the
Board of Directors, including a majority of the independent and disinterested
directors.
59
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following information describes our common stock and preferred stock, as
well as options and warrants to purchase our common stock, and provisions of our
certificate of incorporation and our bylaws, all as in effect upon the closing
of this offering. This description is only a summary. You should also refer to
our certificate of incorporation, bylaws and warrants which we have filed with
the SEC as exhibits to our registration statement of which this prospectus forms
a part.
Upon the closing of this offering, our authorized capital stock will consist
of 100,000,000 shares of common stock, $0.001 par value, and 5,000,000 shares of
preferred stock, $0.001 par value.
COMMON STOCK
As of September 30, 2000, there were 15,776,702 shares of common stock
outstanding that were held of record by approximately 70 stockholders, after
giving effect to the conversion of each three shares of our preferred stock into
one share of our common stock. There will be 19,376,702 shares of common stock
outstanding, assuming no exercise of the underwriters' over-allotment option and
no exercise of outstanding options, after giving effect to the sale of the
shares of common stock offered by this prospectus and the conversion of shares
of preferred stock discussed below.
The holders of common stock are entitled to one vote per share on all
matters submitted to a vote of our stockholders. Subject to preferences that may
be applicable to any preferred stock outstanding at the time, the holders of
outstanding shares of common stock are entitled to receive ratably any dividends
out of assets legally available therefor as our board of directors may from time
to time determine. Upon liquidation, dissolution or winding up of AeroGen,
holders of our common stock are entitled to share ratably in all assets
remaining after payment of liabilities and the liquidation preference of any
then outstanding shares of preferred stock. Holders of common stock have no
preemptive or conversion rights or other subscription rights. There are no
redemption or sinking fund provisions applicable to the common stock. All
outstanding shares of common stock are fully paid and nonassessable.
PREFERRED STOCK
Prior to this offering, there were 39,010,653 shares of convertible
preferred stock outstanding. All outstanding shares of convertible preferred
stock will be converted into 13,003,514 shares of common stock upon the closing
of this offering.
Our certificate of incorporation provides that our Board of Directors will
have the authority, without further action by the stockholders, to issue up to
5,000,000 shares of preferred stock in one or more series. Our Board of
Directors will be able to fix the rights, preferences, privileges and
restrictions of the preferred stock, including dividend rights, conversion
rights, voting rights, terms of redemption, liquidation preferences, sinking
fund terms and the number of shares constituting any series or the designation
of this series. The issuance of preferred stock could adversely affect the
voting power of holders of common stock, and the likelihood that holders of
preferred stock will receive dividend payments and payments upon liquidation may
have the effect of delaying, deferring or preventing a change in control of
AeroGen, which could depress the market price of our common stock. We have no
present plan to issue any shares of preferred stock.
WARRANTS
As of September 30, 2000, we have outstanding warrants to purchase:
- 10,683 shares of common stock at an exercise price of $2.34 per share;
- 65,000 shares of Series C preferred stock, at an exercise price of $1.00
per share, which shares are convertible into 21,666 shares of common
stock.
60
<PAGE>
The warrants to purchase common stock were issued to Venture Lending &
Leasing, Inc. and will expire no later than June 30, 2002. The warrants to
purchase Series C preferred stock were issued to Venture Lending & Leasing, Inc.
and Venture Lending & Leasing II, Inc. and will expire no later than
October 14, 2004.
REGISTRATION RIGHTS OF STOCKHOLDERS
Upon completion of this offering, under the Fourth Amended and Restated
Information and Registration Rights Agreement dated July 7, 2000 the holders of
12,428,551 shares of common stock and warrants to purchase 21,666 shares of
common stock, or their transferees, will be entitled to rights to register these
shares under the Securities Act. If we propose to register any of our securities
under the Securities Act, either for our own account or for the account of other
security holders, the holders of these shares will be entitled to notice of the
registration and will be entitled to include, at our expense, their shares of
common stock. In addition, the holders of 11,787,525 of these shares may require
us, at our expense and on not more than three occasions at any time beginning
approximately six months from the date of the closing of this offering, to
file a registration statement under the Securities Act with respect to their
shares of common stock, and we will be required to use our best efforts to
effect the registration. Further, the holders may require us at our expense to
register their shares on Form S-3 when this form becomes available to us. These
rights shall terminate on the earlier of five years after the effective date of
this offering, or when a holder is able to sell all its shares pursuant to
Rule 144 under the Securities Act in any 90-day period.
ANTI-TAKEOVER PROVISIONS OF DELAWARE LAW AND CHARTER PROVISIONS
We are subject to Section 203 of the Delaware General Corporation Law. In
general, the statute prohibits a publicly held Delaware corporation from
engaging in any business combination with any interested stockholder for a
period of three years following the date that the stockholder became an
interested stockholder unless:
- prior to the date, our board of directors approved either the business
combination or the transaction that resulted in the stockholder becoming
an interested stockholder;
- upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of our voting stock of the corporation outstanding at the time
the transaction commenced, excluding those shares owned by persons who
are directors and also officers, and employee stock plans in which
employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer; or
- on or subsequent to the date, the business combination is approved by the
board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at
least two-thirds of the outstanding voting stock that is not owned by the
interested stockholder.
Section 203 defines "business combination" to include:
- any merger or consolidation involving the corporation and the interested
stockholder;
- any sale, transfer, pledge or other disposition involving the interested
stockholder of 10% or more of the assets of the corporation;
- subject to exceptions, any transaction that results in the issuance or
transfer by the corporation of any stock of the corporation to the
interested stockholder; or
- the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
61
<PAGE>
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 the entity or person.
Our bylaws provide that candidates for director may be nominated only by the
Board of Directors or by a stockholder who gives written notice to us no later
than 90 days prior nor earlier than 120 days prior to the first anniversary of
the last annual meeting of stockholders. The Board of Directors may consist of
one or more members to be determined from time to time by the Board of
Directors. The Board of Directors currently consists of seven members divided
into three different classes. As a result, only one class of directors will be
elected at each annual meeting of our stockholders, with the other classes
continuing for the remainder of their respective terms. Between stockholder
meetings, the Board of Directors may appoint new directors to fill vacancies or
newly created directorships.
Our certificate of incorporation requires that upon completion of this
offering, any action required or permitted to be taken by our stockholders must
be effected at a duly called annual or special meeting of stockholders and may
not be effected by a consent in writing. Our certificate of incorporation also
provides that the authorized number of directors may be changed only by
resolution of the Board of Directors. Delaware law and these charter provisions
may have the effect of deterring hostile takeovers or delaying changes in
control of our management, which could depress the market price of our common
stock.
SECTION 2115
We currently are subject to Section 2115 of the California Corporations
Code. Section 2115 provides that, regardless of a company's legal domicile,
provisions of California corporate law relating to shareholder rights, election
and removal of directors and distributions to shareholders will apply to that
company if the company meets the requirements of Section 2115. We will not be
subject to Section 2115 if:
- we are qualified for trading as a national market security on The Nasdaq
National Market, and we have at least 800 stockholders of record as of
the record date of our most recent annual meeting, or
- during any income year less than 50% of our outstanding voting securities
are held of record by persons having addresses in California.
Our certificate of incorporation includes a provision requiring cumulative
voting for directors whenever Section 2115 of the California Corporations Code
applies to us. Under cumulative voting, a minority stockholder holding a
sufficient percentage of a class of shares may be able to ensure the election of
one or more directors. We expect that, following this offering, Section 2115
will not apply to us.
TRANSFER AGENT
The transfer agent and registrar for our common stock is ChaseMellon
Shareholder Services, L.L.C.
62
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common
stock. The market price of our common stock after this offering could decline as
a result of the sale of a large number of shares of our common stock in the
market, or the perception that such sales could occur. Furthermore, since no
shares will be available for sale shortly after this offering because of
contractual and legal restrictions on resale as described below, sales of
substantial amounts of our common stock in the public market after these
restrictions lapse could adversely affect the prevailing market price and our
ability to raise equity capital in the future.
Upon completion of this offering, we will have outstanding an aggregate of
19,376,702 shares of common stock, assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding options. Of these shares,
all of the shares sold in this offering will be freely tradable without
restriction or further registration under the Securities Act, unless these
shares are purchased by affiliates. The remaining 15,776,702 shares of common
stock held by existing stockholders are restricted securities. Restricted
securities may be sold in the public market only if registered or if they
qualify for an exemption from registration described below under Rules 144,
144(k) or 701 promulgated under the Securities Act.
As a result of the contractual restrictions described below and the
provisions of Rules 144, 144(k) and 701, the restricted shares will be available
for sale in the public market as follows:
- 30,916 shares will be eligible for immediate sale on the date the
registration statement of which this prospectus is a part is declared
effective;
- 11,562 shares will be eligible for sale 90 days from the date the
registration statement of which this prospectus is a part is declared
effective;
- 5,699,940 shares will be eligible for sale upon the expiration of the
lock-up agreements, described below, 180 days after the date this
offering is declared effective; and
- 188,072 shares will be eligible for sale upon the exercise of vested
options or warrants 180 days after the date this offering is declared
effective.
- 9,895,109 shares will be eligible for sale at various times more than
180 days after the date this offering is declared effective.
LOCK-UP AGREEMENTS. All of our officers and directors, and all
stockholders, option holders and warrant holders except the holders of 42,478
shares of our common stock have agreed not to transfer or dispose of, directly
or indirectly, any shares of our common stock or any securities convertible into
or exercisable or exchangeable for shares of our common stock, for a period of
180 days after the date the registration statement of which this prospectus is a
part is declared effective. Transfers or dispositions can be made sooner with
the prior written consent of Chase Securities Inc.
RULE 144. In general, under Rule 144 as currently in effect, beginning
90 days after the date the registration statement of which this prospectus is a
part is declared effective, a person or persons whose shares are aggregated, who
has beneficially owned restricted securities for at least one year, including
the holding period of any prior owner except an affiliate, would be entitled to
sell within any three-month period a number of shares that does not exceed the
greater of:
- 1% of the number of shares of our common stock then outstanding, which
will equal approximately 193,766 shares immediately after this offering;
or
- the average weekly trading volume of our common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to the sale.
Sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of current public information about
us.
63
<PAGE>
RULE 144(k). Under Rule 144(k), a person who is not deemed to have been one
of our affiliates at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner except an affiliate, is entitled
to sell these shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. A total of
5,177,554 shares of our common stock will qualify as "144(k) shares" within
180 days after the date the registration statement of which this prospectus is a
part, is declared effective.
RULE 701. In general, under Rule 701 of the Securities Act as currently in
effect, any of our employees, consultants or advisors, other than affiliates,
who purchase or receive shares from us in connection with a compensatory stock
purchase plan or option plan or other written agreement will be eligible to
resell their shares beginning 90 days after the effective date of the
registration statement of which this prospectus is a part, subject only to the
manner of sale provisions of Rule 144, and by affiliates under Rule 144 without
compliance with its holding period requirements.
REGISTRATION RIGHTS. Upon completion of this offering, the holders of
12,428,523 shares of our common stock, or their transferees, will be entitled to
rights with respect to the registration of their shares under the Securities
Act. Registration of their shares under the Securities Act would result in the
shares becoming freely tradable without restriction under the Securities Act,
except for shares purchased by affiliates, immediately upon the effectiveness of
such registration.
STOCK OPTIONS. Immediately after this offering, we intend to file a
registration statement under the Securities Act covering the shares of common
stock reserved for issuance under our 2000 Equity Incentive Plan, 1996 Stock
Option Plan, 1994 Stock Option Plan, 2000 Non-employee Directors' Stock Option
Plan, and 2000 Employee Stock Purchase Plan. The registration statement is
expected to be filed and become effective as soon as practicable after the
closing of this offering. Accordingly, shares registered under the registration
statements will, subject to Rule 144 volume limitations applicable to
affiliates, be available for sale in the open market beginning 180 days after
the effective date of the registration statement of which this prospectus is a
part.
64
<PAGE>
UNDERWRITING
Chase Securities Inc., CIBC World Markets Corp. and SG Cowen Securities
Corporation are the representatives of the underwriters. Subject to the terms
and conditions of the underwriting agreement, the underwriters named below,
through their representatives, have severally agreed to purchase from us the
following respective numbers of shares of common stock:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- -----------
<S> <C>
Chase Securities Inc........................................
CIBC World Markets Corp.....................................
SG Cowen Securities Corporation.............................
---------
Total....................................................... 3,600,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the underwriters
are subject to certain conditions precedent, including the absence of any
material adverse change in our business and the receipt of certain certificates,
opinions and letters from us and our counsel. The underwriters are committed to
purchase all of the shares of common stock offered by us if they purchase any
shares.
The following table shows the per share and total underwriting discounts and
commissions we will pay to the underwriters. Such amounts are shown assuming
both no exercise and full exercise of the underwriters' over-allotment option to
purchase additional shares.
UNDERWRITING DISCOUNTS AND COMMISSIONS
<TABLE>
<CAPTION>
WITHOUT WITH
OVER-ALLOTMENT OVER-ALLOTMENT
EXERCISE EXERCISE
-------------- --------------
<S> <C> <C>
Per Share................................... $ 0.98 $ 0.98
Total....................................... $3,528,000 $4,057,200
</TABLE>
We estimate that the total expenses of this offering, excluding underwriting
discounts and commissions, will be approximately $1.5 million.
The underwriters propose to offer the shares of common stock directly to the
public at the initial public offering price set forth on the cover page of this
prospectus and to certain dealers at that price less a concession not in excess
of $ per share. The underwriters may allow and such dealers may re- allow a
concession not in excess of $ per share to certain other dealers. After the
initial public offering of the shares, the offering price and other selling
terms may be changed by the underwriters. The representatives have advised us
that the underwriters do not intend to confirm discretionary sales in excess of
5% of the shares of common stock offered in this offering.
We have granted to the underwriters a 30-day option to purchase up to
540,000 additional shares of common stock at the initial public offering price,
less the underwriting discount set forth on the cover page of this prospectus.
To the extent that the underwriters exercise this option, each of the
underwriters will have a firm commitment to purchase approximately the same
percentage thereof which the number of shares of common stock to be purchased by
it shown in the above table bears to the total number of shares of common stock
offered hereby. We will be obligated, pursuant to this option, to sell shares to
the
65
<PAGE>
underwriters to the extent the option is exercised. The underwriters may
exercise this option only to cover over-allotments made in connection with the
sale of shares of common stock offered by us.
This offering of the shares is made for delivery when, as and if accepted by
the underwriters and subject to prior sale and to withdrawal, cancellation or
modification of this offering without notice. The underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act, and to contribute to payments
the underwriters may be required to make in respect of these liabilities.
All of our executive officers and directors and all of our stockholders
except the holders of 42,478 shares of our common stock, have agreed or will
agree prior to completion of this offering that they will not, without the prior
written consent of Chase Securities Inc., offer, sell or otherwise dispose of
any shares of capital stock, options or warrants to acquire shares of capital
stock or securities exchangeable for or convertible into shares of capital stock
owned by them for a period of 180 days following the date of this prospectus. We
have agreed that we will not, without the prior written consent of Chase
Securities Inc., offer, sell or otherwise dispose of any shares of capital
stock, options or warrants to acquire shares of capital stock or securities
exchangeable for or convertible into shares of capital stock for a period of
180 days following the date of this prospectus, except that we may issue shares
upon the exercise of options and warrants granted prior to the date hereof. We
also may grant additional options or other awards under our stock option plans.
Without the prior written consent of Chase Securities Inc., any additional
options granted shall not be exercisable during this 180-day period.
The representatives of the underwriters participating in this offering may
over-allot or effect transactions which stabilize, maintain or otherwise affect
the market price of the common shares at levels above those which might
otherwise prevail in the open market, including by entering stabilizing bids,
effecting syndicate covering transactions or imposing penalty bids. A
stabilizing bid means the placing of any bid or effecting of any purchase, for
the purpose of pegging, fixing or maintaining the price of the shares of common
stock. A syndicate covering transaction means the placing of any bid on behalf
of the underwriting syndicate or the effecting of any purchase to reduce a short
position created in connection with the offering. A penalty bid means an
arrangement that permits the underwriters to reclaim a selling concession from a
syndicate member in connection with the offering when common shares sold by the
syndicate member are purchased in syndicate covering transactions. Such
transactions may be effected on the Nasdaq National Market, in the
over-the-counter market, or otherwise. Such stabilizing, if commenced, may be
discontinued at any time.
In connection with this offering, the underwriters may make short sales of
our common stock and may purchase our shares on the open market to cover
positions created by short sales. Short sales involve the sale by the
underwriters of a greater number of shares than they are required to purchase in
this offering. "Covered" short sales are sales made in an amount not greater
than the underwriters' over-allotment option to purchase additional shares in
this offering. The underwriters may close out any covered short position by
either exercising their over-allotment option or purchasing shares in the open
market. In determining the source of shares to close out the covered short
position, the underwriters will consider, among other things, the price of
shares available for purchase in the open market as compared to the price at
which they may purchase shares through the over-allotment option. "Naked" short
sales are sales in excess of the over-allotment option. The underwriters must
close out any naked short position by purchasing shares in the open market. A
naked short position is more likely to be created if the underwriters are
concerned that there may be downward pressure on the price of the shares in the
open market after pricing that could adversely affect investors who purchase in
this offering. Similar to other purchase transactions, the underwriters'
purchases to cover the syndicate short sales may have the effect of raising or
maintaining the market price of our common stock or preventing or retarding a
decline in the
66
<PAGE>
market price of our common stock. As a result, the price of our common stock may
be higher than the price that might otherwise exist in the open market.
Prior to this offering, there has been no public market for our common
stock. The initial public offering price for the shares of common stock was
determined by negotiations among us and the representatives. Among the factors
considered in determining the initial public offering price were prevailing
market and economic conditions, our revenues and earnings, market valuations of
other companies engaged in activities similar to our business operations, our
management and other factors deemed relevant.
In addition, at our request, the underwriters have reserved up to 180,000
shares of common stock for sale at the initial public offering price to our
directors, business associates and related persons. The number of shares
available for sale to the general public will be reduced if such persons
purchase the reserved shares. Any reserved shares which are not so purchased
will be offered by the underwriters to the general public on the same basis as
the other shares offered by this prospectus.
In connection with this offering, certain underwriters and selling group
members, if any, who are qualified market makers on the Nasdaq National Market
may engage in passive market making transactions in our shares of common stock
on the Nasdaq National Market in accordance with Rule 103 of Regulation M under
the Securities Exchange Act of 1934, as amended. In general, a passive market
maker must display its bid at a price not in excess of the highest independent
bid of such security; if all independent bids are lowered below the passive
market maker's bid, however, the passive market maker must then lower its bid
when certain purchase limits are exceeded.
67
<PAGE>
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us
by Cooley Godward LLP, Palo Alto, California. Cooley Godward LLP has been
granted an option to purchase 16,666 shares of our common stock. Stroock &
Stroock & Lavan LLP, New York, New York, is acting as counsel for the
underwriters in connection with certain legal matters relating to the shares of
common stock offered by this prospectus.
EXPERTS
The consolidated financial statements of AeroGen, Inc. as of December 31,
1998 and 1999 and for each of the three years ended December 31, 1999 and for
the period from November 18, 1991 (date of inception) to December 31, 1999,
included in this prospectus, have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The financial statements of Cerus Limited as of December 31, 1998 and 1999
and for each of the two years ended December 31, 1999 and for the period from
December 16, 1997 (date of inception) to December 31, 1999, included in this
prospectus, have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 (including
exhibits, schedules and amendments) under the Securities Act with respect to the
shares of common stock to be sold in this offering. This prospectus does not
contain all the information set forth in the registration statement. For further
information with respect to us and the shares of common stock to be sold in this
offering, reference is made to the registration statement. Statements contained
in this prospectus as to the contents of any contract, agreement or other
document referred to are not necessarily complete. Whenever we make reference in
this prospectus to any contract or other document of ours, the reference may not
be complete, and you should refer to the exhibits that are a part of the
registration statement for a copy of the contract or document.
You may read and copy all or any portion of the registration statement or
any other information we file at the SEC's public reference room at 450 Fifth
Street, N.W., Washington, D.C. 20549. You can request copies of these documents,
upon payment of a duplicating fee, by writing to the SEC. Please call the SEC at
1-800-SEC-0330 for further information on the operation of the public reference
rooms. Our SEC filings, including the registration statement, are also available
to you on the SEC's web site (http://www.sec.gov).
As a result of this offering, we will become subject to the information and
reporting requirements of the Securities Exchange Act, and, in accordance with
those requirements, will file periodic reports, proxy statements and other
information with the SEC.
68
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
AEROGEN, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
Report of Independent Accountants......................... F-2
Consolidated Balance Sheets............................... F-3
Consolidated Statements of Operations..................... F-4
Consolidated Statements of Stockholders' Deficit.......... F-5
Consolidated Statements of Cash Flows..................... F-8
Notes to Consolidated Financial Statements................ F-9
CERUS LIMITED
(A COMPANY IN THE DEVELOPMENT STAGE)
Report of Independent Accountants......................... F-29
Balance Sheets............................................ F-30
Statements of Operations.................................. F-31
Statements of Stockholders' Equity........................ F-32
Statements of Cash Flows.................................. F-33
Notes to Financial Statements............................. F-34
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
Unaudited Pro Forma Combined Condensed Statements of
Operations.............................................. F-42
Notes to the Unaudited Pro Forma Combined Condensed
Statements of Operations................................ F-44
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of AeroGen, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' deficit and of cash
flows present fairly, in all material respects, the financial position of
AeroGen, Inc. (a company in the development stage) and its subsidiary at
December 31, 1998 and 1999, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999 and for
the cumulative period from November 18, 1991 (date of inception) through
December 31, 1999, in conformity with accounting principles generally accepted
in the United States of America. 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 of these statements in accordance with auditing standards generally
accepted in the United States of America, which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
/s/ PRICEWATERHOUSECOOPERS LLP
San Jose, California
February 25, 2000,
except for Note 11 as to which
the date is July 21, 2000
and Note 12 as to which
the date is November 2, 2000
F-2
<PAGE>
AEROGEN, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
EQUITY AT
DECEMBER 31, SEPTEMBER 30,
--------------------------- SEPTEMBER 30, 2000
1998 1999 2000 (SEE NOTE 9)
------------ ------------ ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 17,499,487 $ 1,821,945 $ 14,312,223
Available-for-sale securities.......................... -- 5,986,918 5,267,582
Accounts receivable.................................... -- 319,051 1,994,439
Prepaid expenses and other current assets.............. 118,072 390,748 1,055,308
------------ ------------ ------------
Total current assets................................. 17,617,559 8,518,662 22,629,552
Property and equipment, net.............................. 865,671 1,009,846 1,827,693
Goodwill and other intangible assets, net................ -- -- 1,907,357
Other assets............................................. 125,000 145,093 205,093
------------ ------------ ------------
Total assets......................................... $ 18,608,230 $ 9,673,601 $ 26,569,695
============ ============ ============
LIABILITIES, CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable....................................... $ 344,372 $ 455,700 $ 1,215,302
Accrued liabilities.................................... 171,801 301,056 1,440,043
Notes payable, current portion......................... 276,518 354,470 143,037
------------ ------------ ------------
Total current liabilities............................ 792,691 1,111,226 2,798,382
Notes payable, less current portion...................... 379,509 -- --
Other long-term liabilities.............................. 100,000 100,000 271,895
------------ ------------ ------------
Total liabilities.................................... 1,272,200 1,211,226 3,070,277
------------ ------------ ------------
Commitments (Note 5)
Convertible preferred stock, par value: $0.001:
Authorized: 27,994,352 shares;
Issued and outstanding: 27,864,352 shares at
December 31, 1998 and 1999, 39,010,653 shares at
September 30, 2000 (unaudited) and none pro forma
(unaudited)
(Liquidation preference: $32,245,302 at December 31,
1998 and 1999, $58,601,307 at September 30, 2000
(unaudited))......................................... 31,476,099 31,476,099 58,541,015 $ --
------------ ------------ ------------ ------------
Stockholders' equity (deficit):
Common stock, par value: $0.001:
Authorized: 40,000,000 shares;
Issued and outstanding: 2,182,586, 2,309,594 and
2,773,188 shares at December 31, 1998, 1999 and
September 30, 2000 (unaudited), respectively; and
15,776,702 shares pro forma (unaudited)............ 2,183 2,310 2,773 15,777
Additional paid-in capital............................. 251,932 954,524 7,378,796 65,906,807
Notes receivable from stockholders..................... (492,795) (510,318) (682,570) (682,570)
Deferred stock-based compensation, net................. -- (558,360) (6,174,092) (6,174,092)
Accumulated other comprehensive income (loss).......... -- (32,576) 10,802 10,802
Deficit accumulated during the development stage....... (13,901,389) (22,869,304) (35,577,306) (35,577,306)
------------ ------------ ------------ ------------
Total stockholders' equity (deficit)................. (14,140,069) (23,013,724) (35,041,597) $ 23,499,418
------------ ------------ ------------ ============
Total liabilities, convertible preferred stock and
stockholders' equity (deficit)................... $ 18,608,230 $ 9,673,601 $ 26,569,695
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
AEROGEN, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
CUMULATIVE CUMULATIVE
PERIOD FROM PERIOD FROM
NOVEMBER 18, NOVEMBER 18,
1991 (DATE OF NINE MONTHS ENDED 1991 (DATE OF
YEARS ENDED DECEMBER 31, INCEPTION) TO SEPTEMBER 30, INCEPTION) TO
--------------------------------------- DECEMBER 31, -------------------------- SEPTEMBER 30,
1997 1998 1999 1999 1999 2000 2000
----------- ----------- ----------- ------------- ----------- ------------ -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Research and development
revenues................. $ 327,780 $ 85,450 $ 468,220 $ 1,597,762 $ 31,250 $ 5,139,795 $ 6,737,557
----------- ----------- ----------- ------------ ----------- ------------ ------------
Operating expenses:
Research and
development(1)......... 3,961,130 4,392,901 7,909,503 19,051,521 5,387,854 12,035,534 31,087,055
General and
administrative(2)...... 1,509,204 1,599,912 2,076,507 6,577,958 1,573,573 2,820,785 9,398,743
Purchased in-process
research and
development............ -- -- -- -- -- 3,500,000 3,500,000
----------- ----------- ----------- ------------ ----------- ------------ ------------
Total operating
expenses............. 5,470,334 5,992,813 9,986,010 25,629,479 6,961,427 18,356,319 43,985,798
----------- ----------- ----------- ------------ ----------- ------------ ------------
Loss from operations....... (5,142,554) (5,907,363) (9,517,790) (24,031,717) (6,930,177) (13,216,524) (37,248,241)
Interest income............ 116,544 466,926 626,003 1,420,312 503,188 540,634 1,960,946
Interest expense........... (29,239) (121,946) (76,128) (257,899) (59,511) (32,112) (290,011)
----------- ----------- ----------- ------------ ----------- ------------ ------------
Net loss................... (5,055,249) (5,562,383) (8,967,915) (22,869,304) (6,486,500) (12,708,002) (35,577,306)
Dividend related to
beneficial conversion
feature of preferred
stock.................... -- -- -- -- -- (16,516,574) (16,516,574)
----------- ----------- ----------- ------------ ----------- ------------ ------------
Net loss available to
common stockholders...... $(5,055,249) $(5,562,383) $(8,967,915) $(22,869,304) $(6,486,500) $(29,224,576) $(52,093,880)
=========== =========== =========== ============ =========== ============ ============
Net loss per common share,
basic and diluted........ $ (3.40) $ (3.47) $ (4.95) $ (3.68) $ (13.26)
=========== =========== =========== =========== ============
Shares used in computing
net loss per common
share, basic and
diluted.................. 1,487,409 1,603,191 1,811,105 1,762,411 2,204,640
=========== =========== =========== =========== ============
Pro forma net loss per
common share, basic and
diluted (unaudited)...... $ (0.81) $ (0.98)
=========== ============
Shares used in computing
pro forma net loss per
common share, basic and
diluted (unaudited)...... 11,099,222 12,947,068
=========== ============
</TABLE>
------------------------------
(1) Including deferred stock-based compensation expense of $72,191 in 1999,
$72,191 and $462,883 (unaudited) for the cumulative periods from
November 18, 1991 (date of inception) to December 31, 1999 and
September 30, 2000, respectively, and $28,430 (unaudited) and $390,692
(unaudited) for the nine months ended September 30, 1999 and September 30,
2000, respectively.
(2) Including deferred stock-based compensation expense of $37,664 in 1999,
$37,664 and $133,695 (unaudited) for the cumulative periods from
November 18, 1991 (date of inception) to December 31, 1999 and
September 30, 2000, respectively, and $25,107 (unaudited) and $96,031
(unaudited) for the nine months ended September 30, 1999 and September 30,
2000, respectively.
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
AEROGEN, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE PERIOD FROM NOVEMBER 18, 1991 (DATE OF INCEPTION) TO SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
NOTES
COMMON STOCK ADDITIONAL RECEIVABLE DEFERRED
-------------------- PAID-IN FROM STOCK-BASED
SHARES AMOUNT CAPITAL STOCKHOLDERS COMPENSATION
--------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Issuance of common stock to founder at $0.0015 per
share for cash in November 1991.................. 1,333,333 $ 2,000 $ -- $ -- $ --
Note receivable from stockholder................... -- -- -- (69,009) --
Issuance of common stock at $0.12 per share for
cash and note receivable in July 1994............ 333,330 40,000 -- (35,000) --
Accretion to redemption value of redeemable
convertible preferred stock...................... -- -- -- -- --
Net loss........................................... -- -- -- -- --
--------- -------- ------------ --------- -----------
Balances, December 31, 1994........................ 1,666,663 42,000 -- (104,009) --
Issuance of common stock pursuant to exercise of
stock options at $0.12 per share for cash in
April............................................ 3,333 400 -- -- --
Repurchase of common stock at $0.12 per share in
connection with cancellation of note receivable
from stockholders in May......................... (263,898) (31,668) -- 31,668 --
Repayment of note receivable from stockholder in
November......................................... -- -- -- 3,332 --
Accrued interest on notes receivable from
stockholders..................................... -- -- -- (7,120) --
Accretion to redemption value of redeemable
convertible preferred stock...................... -- -- -- -- --
Net loss........................................... -- -- -- -- --
--------- -------- ------------ --------- -----------
Balances, December 31, 1995........................ 1,406,098 10,732 -- (76,129) --
Issuance of common stock at $0.24 per share for
services rendered in May......................... 6,416 1,540 -- -- --
Notes receivable from stockholders................. -- (200,000) --
Issuance of common stock pursuant to exercise of
stock options at $0.12 and $0.24 per share for
cash in August and September..................... 6,666 1,400 -- -- --
Accrued interest on notes receivable from
stockholders..................................... -- -- -- (4,709) --
Accretion to redemption value of redeemable
convertible preferred stock...................... -- -- -- -- --
Net loss........................................... -- -- -- -- --
--------- -------- ------------ --------- -----------
Balances, December 31, 1996........................ 1,419,180 13,672 -- (280,838) --
<CAPTION>
DEFICIT
ACCUMULATED ACCUMULATED
OTHER DURING THE TOTAL
COMPREHENSIVE DEVELOPMENT STOCKHOLDERS'
INCOME (LOSS) STAGE DEFICIT
------------- ------------ ----------------
<S> <C> <C> <C>
Issuance of common stock to founder at $0.0015 per
share for cash in November 1991.................. $ -- $ -- $ 2,000
Note receivable from stockholder................... -- -- (69,009)
Issuance of common stock at $0.12 per share for
cash and note receivable in July 1994............ -- -- 5,000
Accretion to redemption value of redeemable
convertible preferred stock...................... -- (68,621) (68,621)
Net loss........................................... -- (355,581) (355,581)
-------- ------------ ------------
Balances, December 31, 1994........................ -- (424,202) (486,211)
Issuance of common stock pursuant to exercise of
stock options at $0.12 per share for cash in
April............................................ -- -- 400
Repurchase of common stock at $0.12 per share in
connection with cancellation of note receivable
from stockholders in May......................... -- -- --
Repayment of note receivable from stockholder in
November......................................... -- -- 3,332
Accrued interest on notes receivable from
stockholders..................................... -- -- (7,120)
Accretion to redemption value of redeemable
convertible preferred stock...................... -- (208,506) (208,506)
Net loss........................................... -- (754,076) (754,076)
-------- ------------ ------------
Balances, December 31, 1995........................ -- (1,386,784) (1,452,181)
Issuance of common stock at $0.24 per share for
services rendered in May......................... -- -- 1,540
Notes receivable from stockholders................. -- -- (200,000)
Issuance of common stock pursuant to exercise of
stock options at $0.12 and $0.24 per share for
cash in August and September..................... -- -- 1,400
Accrued interest on notes receivable from
stockholders..................................... -- -- (4,709)
Accretion to redemption value of redeemable
convertible preferred stock...................... -- (515,687) (515,687)
Net loss........................................... -- (2,174,108) (2,174,108)
-------- ------------ ------------
Balances, December 31, 1996........................ -- (4,076,579) (4,343,745)
</TABLE>
F-5
<PAGE>
AEROGEN, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT (CONTINUED)
FOR THE PERIOD FROM NOVEMBER 18, 1991 (DATE OF INCEPTION) TO SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
NOTES
COMMON STOCK ADDITIONAL RECEIVABLE DEFERRED
-------------------- PAID-IN FROM STOCK-BASED
SHARES AMOUNT CAPITAL STOCKHOLDERS COMPENSATION
--------- -------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Issuance of common stock at $0.24 per share for note
receivable in January............................. 283,333 68,000 -- (68,000) --
Issuance of common stock at $0.24 per share for
services rendered in May.......................... 3,333 800 -- -- --
Issuance of common stock pursuant to exercise of
stock options at $0.12 and $0.24 per share for
cash throughout the year.......................... 81,763 16,457 -- -- --
Accrued interest on notes receivable from
stockholders...................................... -- -- -- (7,976) --
Accretion to redemption value of redeemable
convertible preferred stock....................... -- -- -- -- --
Net loss............................................ -- -- -- -- --
--------- -------- ---------- --------- -----------
Balances, December 31, 1997......................... 1,787,609 98,929 -- (356,814) --
Accretion to redemption value of redeemable
convertible preferred stock....................... -- -- -- -- --
Reincorporation into a Delaware corporation......... -- (97,141) 97,141 -- --
Removal of redemption provision for Series A, B and
C in conjunction with issuance of Series D........ -- -- -- -- --
Issuance of common stock at $0.30 per share for a
note receivable in January........................ 466,666 467 139,533 (140,000) --
Repurchase of common stock at $0.24 per share in
connection with cancellation of note receivable in
January........................................... (208,833) (209) (49,911) 71,590 --
Issuance of common stock at $0.60 per share for a
note receivable in December....................... 90,000 90 53,910 (53,730) --
Issuance of common stock pursuant to exercise of
stock options for cash............................ 47,144 47 11,259 -- --
Accrued interest on notes receivable from
stockholders...................................... -- -- -- (13,841) --
Net loss............................................ -- -- -- -- --
--------- -------- ---------- --------- -----------
Balances, December 31, 1998......................... 2,182,586 2,183 251,932 (492,795) --
<CAPTION>
DEFICIT
ACCUMULATED ACCUMULATED
OTHER DURING THE TOTAL
COMPREHENSIVE DEVELOPMENT STOCKHOLDERS'
INCOME (LOSS) STAGE DEFICIT
------------- ------------ ----------------
<S> <C> <C> <C>
Issuance of common stock at $0.24 per share for note
receivable in January............................. -- -- --
Issuance of common stock at $0.24 per share for
services rendered in May.......................... -- -- 800
Issuance of common stock pursuant to exercise of
stock options at $0.12 and $0.24 per share for
cash throughout the year.......................... -- -- 16,457
Accrued interest on notes receivable from
stockholders...................................... -- -- (7,976)
Accretion to redemption value of redeemable
convertible preferred stock....................... -- (895,541) (895,541)
Net loss............................................ -- (5,055,249) (5,055,249)
-------- ------------ ------------
Balances, December 31, 1997......................... -- (10,027,369) (10,285,254)
Accretion to redemption value of redeemable
convertible preferred stock....................... -- (953,587) (953,587)
Reincorporation into a Delaware corporation......... -- -- --
Removal of redemption provision for Series A, B and
C in conjunction with issuance of Series D........ -- 2,641,950 2,641,950
Issuance of common stock at $0.30 per share for a
note receivable in January........................ -- -- --
Repurchase of common stock at $0.24 per share in
connection with cancellation of note receivable in
January........................................... -- -- 21,470
Issuance of common stock at $0.60 per share for a
note receivable in December....................... -- -- 270
Issuance of common stock pursuant to exercise of
stock options for cash............................ -- -- 11,306
Accrued interest on notes receivable from
stockholders...................................... -- -- (13,841)
Net loss............................................ -- (5,562,383) (5,562,383)
-------- ------------ ------------
Balances, December 31, 1998......................... -- (13,901,389) (14,140,069)
</TABLE>
F-6
<PAGE>
AEROGEN, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT (CONTINUED)
FOR THE PERIOD FROM NOVEMBER 18, 1991 (DATE OF INCEPTION) TO SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
NOTES
COMMON STOCK ADDITIONAL RECEIVABLE DEFERRED
------------------ PAID-IN FROM STOCK-BASED
SHARES AMOUNT CAPITAL STOCKHOLDERS COMPENSATION
--------- ------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Issuance of common stock pursuant to exercise of
stock options at $0.12-$0.60 per share for cash
throughout the year.............................. 127,008 127 34,377 -- --
Accrued interest on notes receivable from
stockholders..................................... -- -- -- (17,523) --
Unrealized loss on available-for-sale securities... -- -- -- -- --
Deferred stock compensation........................ -- -- 668,215 -- (668,215)
Amortization of deferred stock compensation........ -- -- -- -- 109,855
Net loss........................................... -- -- -- -- --
--------- ------ ------------ --------- -----------
Balances, December 31, 1999........................ 2,309,594 2,310 954,524 (510,318) (558,360)
Issuance of common stock pursuant to exercise of
stock options at $0.24-$4.50 per share for cash
and notes receivable from stockholders throughout
the period (unaudited)........................... 468,073 468 324,500 (105,460) --
Repurchase of common stock at $0.60 per share in
August (unaudited)............................... (4,479) (5) (2,683) -- --
Note receivable from stockholder (unaudited)....... -- -- -- (50,000) --
Accrued interest on notes receivable from
stockholders (unaudited)......................... -- -- -- (16,792) --
Changes in unrealized loss on available-for-sale
securities (unaudited)........................... -- -- -- -- --
Foreign currency translation (unaudited)........... -- -- -- -- --
Deferred stock compensation (unaudited)............ -- -- 6,102,455 -- (6,102,455)
Amortization of deferred stock compensation
(unaudited)...................................... -- -- -- -- 486,723
Beneficial conversion feature related to issuance
of Series E and Series F preferred stock
(unaudited)...................................... -- -- 16,516,574 -- --
Deemed dividend related to beneficial conversion
feature of preferred stock (unaudited)........... -- -- (16,516,574) -- --
Net loss (unaudited)............................... -- -- -- -- --
--------- ------ ------------ --------- -----------
Balances, September 30, 2000 (unaudited)........... 2,773,188 $2,773 $ 7,378,796 $(682,570) $(6,174,092)
========= ====== ============ ========= ===========
<CAPTION>
DEFICIT
ACCUMULATED ACCUMULATED
OTHER DURING THE TOTAL
COMPREHENSIVE DEVELOPMENT STOCKHOLDERS'
INCOME (LOSS) STAGE DEFICIT
------------- ------------ ----------------
<S> <C> <C> <C>
Issuance of common stock pursuant to exercise of
stock options at $0.12-$0.60 per share for cash
throughout the year.............................. -- -- 34,504
Accrued interest on notes receivable from
stockholders..................................... -- -- (17,523)
Unrealized loss on available-for-sale securities... (32,576) -- (32,576)
Deferred stock compensation........................ -- -- --
Amortization of deferred stock compensation........ -- -- 109,855
Net loss........................................... -- (8,967,915) (8,967,915)
-------- ------------ ------------
Balances, December 31, 1999........................ (32,576) (22,869,304) (23,013,724)
Issuance of common stock pursuant to exercise of
stock options at $0.24-$4.50 per share for cash
and notes receivable from stockholders throughout
the period (unaudited)........................... -- -- 219,508
Repurchase of common stock at $0.60 per share in
August (unaudited)............................... -- -- (2,688)
Note receivable from stockholder (unaudited)....... -- -- (50,000)
Accrued interest on notes receivable from
stockholders (unaudited)......................... -- -- (16,792)
Changes in unrealized loss on available-for-sale
securities (unaudited)........................... 32,576 -- 32,576
Foreign currency translation (unaudited)........... 10,802 -- 10,802
Deferred stock compensation (unaudited)............ -- -- --
Amortization of deferred stock compensation
(unaudited)...................................... -- -- 486,723
Beneficial conversion feature related to issuance
of Series E and Series F preferred stock
(unaudited)...................................... -- -- 16,516,574
Deemed dividend related to beneficial conversion
feature of preferred stock (unaudited)........... -- -- (16,516,574)
Net loss (unaudited)............................... -- (12,708,002) (12,708,002)
-------- ------------ ------------
Balances, September 30, 2000 (unaudited)........... $ 10,802 $(35,577,306) $(35,041,597)
======== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
AEROGEN, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
CUMULATIVE
PERIOD FROM
NOVEMBER 18,
1991 (DATE OF NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, INCEPTION) TO SEPTEMBER 30,
---------------------------------------- DECEMBER 31, --------------------------
1997 1998 1999 1999 1999 2000
----------- ----------- ------------ ------------------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss......................... $(5,055,249) $(5,562,383) $ (8,967,915) $(22,869,304) $(6,486,500) $(12,708,002)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and
amortization................. 217,696 344,082 494,311 1,211,352 361,551 629,841
Loss on disposal of property
and equipment................ 4,858 -- -- 4,858 -- --
Common stock issued for
services received............ 800 -- -- 2,340 -- --
Purchased in-process research
and development.............. -- -- -- -- -- 3,500,000
Accrued interest on notes
receivable from
stockholders................. (7,976) (13,841) (17,523) (320,178) (12,429) (16,792)
Amortization of deferred
stock-based compensation..... -- -- 109,855 109,855 53,537 486,723
Changes in operating assets and
liabilities:
Accounts receivable.......... (127,488) 127,488 (319,051) (319,051) -- (1,570,350)
Prepaid expenses and other
current assets............. (123,658) 30,457 (272,676) (390,748) (284,551) (664,560)
Accounts payable............. 100,311 132,290 111,328 455,700 33,783 697,449
Accrued liabilities.......... 208,346 (148,178) 129,255 301,056 128,462 1,095,091
Other........................ (18,348) 4,500 (20,093) (45,093) (20,093) (9,105)
----------- ----------- ------------ ------------ ----------- ------------
Net cash used in operating
activities............... (4,800,708) (5,085,585) (8,752,509) (21,859,213) (6,226,240) (8,559,705)
----------- ----------- ------------ ------------ ----------- ------------
Cash flows from investing
activities:
Acquisition of property and
equipment...................... (764,371) (410,855) (638,486) (2,183,768) (539,434) (1,289,716)
Purchases of available-for-sale
securities..................... -- -- (28,565,057) (28,565,057) (8,003,790) (6,091,494)
Proceeds from maturities of
available-for-sale
securities..................... -- -- 22,545,563 22,545,563 -- 6,843,406
Cash acquired, net............... -- -- -- -- -- 392,174
----------- ----------- ------------ ------------ ----------- ------------
Net cash used in investing
activities............... (764,371) (410,855) (6,657,980) (8,203,262) (8,543,224) (145,630)
----------- ----------- ------------ ------------ ----------- ------------
Cash flows from financing
activities:
Proceeds from issuance of common
stock.......................... 16,457 11,576 34,504 71,337 22,860 219,508
Repurchase of common stock....... -- -- -- -- -- (2,688)
Proceeds from issuance of
convertible preferred stock,
net............................ 9,180,558 17,345,599 -- 31,476,107 -- 21,252,356
Proceeds from issuance of note
payable........................ 976,587 -- -- 1,113,324 -- --
Principal payments under capital
lease obligations.............. -- -- -- (42,296) -- --
Repayment of note payable........ (138,235) (286,341) (301,557) (758,854) (227,326) (211,433)
Issuance of note receivable from
stockholder.................... - - - - - (50,000)
Repayment of note receivable from
stockholder.................... -- 21,470 -- 24,802 -- --
----------- ----------- ------------ ------------ ----------- ------------
Net cash provided by (used
in) financing
activities............... 10,035,367 17,092,304 (267,053) 31,884,420 (204,466) 21,207,743
----------- ----------- ------------ ------------ ----------- ------------
Effect of exchange rate changes on
cash............................. -- -- -- -- -- (12,130)
Net increase (decrease) in cash and
cash equivalents................. 4,470,288 11,595,864 (15,677,542) 1,821,945 (14,973,970) 12,490,278
Cash and cash equivalents,
beginning of period.............. 1,433,335 5,903,623 17,499,487 -- 17,499,487 1,821,945
----------- ----------- ------------ ------------ ----------- ------------
Cash and cash equivalents, end of
period........................... $ 5,903,623 $17,499,487 $ 1,821,945 $ 1,821,945 $ 2,525,557 $ 14,312,223
=========== =========== ============ ============ =========== ============
Supplemental disclosure of noncash
investing and financing
activities:
Acquisition of property and
equipment under capital
lease.......................... $ -- $ -- $ -- $ 39,958 $ -- $ --
Exchange of stockholder note
receivable for common stock.... $ 68,000 $ 193,730 $ -- $ 261,730 $ -- $ 105,460
Repurchase of common stock in
connection with cancellation of
note receivable from
stockholder.................... $ -- $ 50,120 $ -- $ 81,788 $ -- $ --
Convertible preferred stock
issued for acquisition......... $ -- $ -- $ -- $ -- $ -- $ 5,812,560
Accretion to redemption value of
redeemable convertible
preferred stock................ $ 895,541 $ 953,587 $ -- $ 2,641,950 $ -- $ --
Removal of redemption provision
for convertible preferred
stock.......................... $ -- $ 2,641,950 $ -- $ 2,641,950 $ -- $ --
Deferred stock-based
compensation................... $ -- $ -- $ 668,215 $ 668,215 $ 161,666 $ 6,102,455
Supplemental disclosure of cash
flow information:
Cash paid during period for
interest....................... $ 28,417 $ 121,946 $ 76,128 $ 257,899 $ 59,511 $ 27,830
<CAPTION>
CUMULATIVE
PERIOD FROM
NOVEMBER 18,
1991 (DATE OF
INCEPTION) TO
SEPTEMBER 30,
2000
-------------------
(UNAUDITED)
<S> <C>
Cash flows from operating
activities:
Net loss......................... $(35,577,306)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and
amortization................. 1,841,193
Loss on disposal of property
and equipment................ 4,858
Common stock issued for
services received............ 2,340
Purchased in-process research
and development.............. 3,500,000
Accrued interest on notes
receivable from
stockholders................. (336,970)
Amortization of deferred
stock-based compensation..... 596,578
Changes in operating assets and
liabilities:
Accounts receivable.......... (1,889,401)
Prepaid expenses and other
current assets............. (1,055,308)
Accounts payable............. 1,153,149
Accrued liabilities.......... 1,396,147
Other........................ (54,198)
------------
Net cash used in operating
activities............... (30,418,918)
------------
Cash flows from investing
activities:
Acquisition of property and
equipment...................... (3,473,484)
Purchases of available-for-sale
securities..................... (34,656,551)
Proceeds from maturities of
available-for-sale
securities..................... 29,388,969
Cash acquired, net............... 392,174
------------
Net cash used in investing
activities............... (8,348,892)
------------
Cash flows from financing
activities:
Proceeds from issuance of common
stock.......................... 290,845
Repurchase of common stock....... (2,688)
Proceeds from issuance of
convertible preferred stock,
net............................ 52,728,463
Proceeds from issuance of note
payable........................ 1,113,324
Principal payments under capital
lease obligations.............. (42,296)
Repayment of note payable........ (970,287)
Issuance of note receivable from
stockholder.................... (50,000)
Repayment of note receivable from
stockholder.................... 24,802
------------
Net cash provided by (used
in) financing
activities............... 53,092,163
------------
Effect of exchange rate changes on
cash............................. (12,130)
Net increase (decrease) in cash and
cash equivalents................. 14,312,223
Cash and cash equivalents,
beginning of period.............. --
------------
Cash and cash equivalents, end of
period........................... $ 14,312,223
============
Supplemental disclosure of noncash
investing and financing
activities:
Acquisition of property and
equipment under capital
lease.......................... $ 39,958
Exchange of stockholder note
receivable for common stock.... $ 367,190
Repurchase of common stock in
connection with cancellation of
note receivable from
stockholder.................... $ 81,788
Convertible preferred stock
issued for acquisition......... $ 5,812,560
Accretion to redemption value of
redeemable convertible
preferred stock................ $ 2,641,950
Removal of redemption provision
for convertible preferred
stock.......................... $ 2,641,950
Deferred stock-based
compensation................... $ 6,770,670
Supplemental disclosure of cash
flow information:
Cash paid during period for
interest....................... $ 285,729
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE>
AEROGEN, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--FORMATION AND BUSINESS OF THE COMPANY:
AeroGen, Inc., formerly Fluid Propulsion Technologies, Inc. (the "Company")
was incorporated on November 18, 1991 to develop industrial, consumer, and
medical products using a liquid aerosol generator. The Company is in the
development stage and since inception has devoted substantially all of its
efforts to developing its products, including engaging in research and
development activities with partners, raising capital, and recruiting personnel.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF CONSOLIDATION
In May 2000, the Company acquired a subsidiary in Ireland, AeroGen
(Ireland) Limited (see note 11). The consolidated financial statements include
the accounts of the Company and its subsidiary. All intercompany balances and
transactions have been eliminated.
UNAUDITED INTERIM RESULTS
The accompanying consolidated balance sheet as of September 30, 2000, the
consolidated statements of operations and of cash flows for the nine months
ended September 30, 1999 and 2000 and for the cumulative period from
November 8, 1991 (date of inception) to September 30, 2000, and the statement of
stockholders' deficit for the nine months ended September 30, 2000 are
unaudited. The unaudited interim consolidated financial statements have been
prepared on the same basis as the annual financial statements and, in the
opinion of management, reflect all adjustments, which include only normal
recurring adjustments, necessary to present fairly the Company's consolidated
financial position and results of operations and cash flows for the nine months
ended September 30, 1999, and 2000. The financial data and other information
disclosed in these notes to financial statements related to the nine month
periods are unaudited. The results for the nine months ended September 30, 2000
are not necessarily indicative of the results to be expected for the year ending
December 31, 2000.
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
disclosures 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.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents. Cash and cash
equivalents include money market and deposit accounts.
AVAILABLE-FOR-SALE SECURITIES
All investments are classified as available-for-sale and therefore are
carried at fair market value. Unrealized gains and losses on such securities are
reported as a separate component of stockholders' deficit. Realized gains and
losses on sales of all such securities are reported in earnings and computed
using the specific identification cost method.
F-9
<PAGE>
AEROGEN, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
DEPRECIATION AND AMORTIZATION
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is provided using the straight-line method over the
estimated useful lives of the assets, generally three to five years.
Amortization of leasehold improvements and leased assets is provided on a
straight-line basis over the life of the related asset or the lease term, if
shorter. Upon sale or retirement of assets, the cost and related accumulated
depreciation and amortization are removed from the balance sheet and the
resulting gain or loss is reflected in operations.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets primarily consist of goodwill and
acquired workforce related to the acquisition of Cerus Limited and are amortized
on a straight-line basis to operations over six and two years, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company accounts for long-lived assets under Statement of Financial
Accounting Standards No. 121 ("SFAS No. 121"), "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which requires
the Company to review for impairment of long-lived assets, whenever events or
changes in circumstances indicate that the carrying amount of an asset might not
be recoverable. When such an event occurs, management determines whether there
has been an impairment by comparing the anticipated undiscounted future net cash
flows to the related asset's carrying value. If an asset is considered impaired,
the asset is written down to fair value, which is determined based either on
discounted cash flows or appraised value, depending on the nature of the asset.
CONCENTRATION OF CREDIT RISK AND OTHER RISKS AND UNCERTAINTIES
The Company maintains its cash and cash equivalents in accounts with two
major financial institutions in the United States. Deposits in these
institutions may exceed the amount of insurance provided on such deposits. The
Company has not experienced any losses on its deposits of cash and cash
equivalents.
Carrying amounts of certain of the Company's financial instruments,
including cash and cash equivalents, available-for-sale securities, accounts
receivable, accounts payable and accrued liabilities approximate fair value due
to their relatively short maturities. Based upon borrowing rates currently
available to the Company for loans with similar terms, the carrying value of
notes payable approximates fair value.
Products developed by the Company may require the approval of the Food and
Drug Administration ("FDA") and/or other international regulatory agencies prior
to commercial sales. The Company cannot be assured that its products will
receive the necessary approvals. If the Company is denied approval or if
approval is delayed, this may have a material adverse impact on the Company.
The Company is subject to risks common to companies in the pharmaceutical
industry including, but not limited to, new technological innovations,
dependence on key personnel, protection of proprietary technology, compliance
with government regulations, uncertainty of market acceptance of products,
product liability and the need to obtain additional financing.
F-10
<PAGE>
AEROGEN, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Three customers accounted for 36%, 27% and 15% of the research and
development revenues during the year ended December 31, 1997, respectively.
One customer accounted for 100% of the research and development revenues
during the year ended December 31, 1998.
One customer accounted for 100% of accounts receivable at December 31, 1999
and three customers accounted for 75%, 11% and 11% of research and development
revenues during the year ended December 31, 1999, respectively.
RESEARCH AND DEVELOPMENT REVENUE RECOGNITION
Research and development revenues which are earned under agreements with
third parties for contract research and development activities are recorded as
the related expenses are incurred, up to contractual limits. Charges to these
third parties are based upon negotiated rates for full time equivalent employees
of the Company and such rates are intended to approximate the Company's
anticipated costs. Payments received that are related to future performance are
recorded as deferred revenue and recognized as revenues as they are earned. All
revenues recognized to date are not refundable if the relevant research effort
is not successful.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations as incurred.
Certain research and development projects are funded under agreements with third
parties, and the costs related to these activities are included in research and
development expense. The charges to third parties are based upon negotiated
rates for full-time-equivalent employees of the Company, and such rates are
intended to approximate the Company's anticipated costs.
FOREIGN CURRENCY TRANSLATION
The Company's international subsidiary uses its local currency as its
functional currency. Assets and liabilities are translated at exchange rates in
effect at the balance sheet date and income and expense accounts at average
exchange rates during the period. Resulting translation adjustments are recorded
directly to a separate component of stockholders' deficit.
INCOME TAXES
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." Under
this method, deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts expected
to be realized.
SEGMENTS
The Company follows Statement of Financial Accounting Standards No. 131, or
SFAS 131, "Disclosure About Segments of an Enterprise and Related Information."
The Company operates in one segment, using one measurement of profitability to
manage its business. As of December 31, 1998 and
F-11
<PAGE>
AEROGEN, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
1999, all long-lived assets are maintained in the United States. All revenue was
generated in the United States during the years ended December 31, 1997, 1998
and 1999 and for the cumulative period from November 18, 1991 (date of
inception) to December 31, 1999.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company uses the intrinsic value method of Accounting Principles Board
Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees," in
accounting for its employee stock options, and presents disclosure of pro forma
information required under Statement of Financial Accounting Standards No. 123
("SFAS No. 123"), "Accounting for Stock-Based Compensation."
The Company accounts for equity instruments issued to non-employees in
accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force
Issue No. 96-18, "Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services"
which require that such equity instruments are recorded at their fair value on
the measurement date, which is typically the date of grant. The measurement of
stock-based compensation is subject to periodic adjustment as the underlying
equity instruments vest.
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) generally represents all changes in
stockholders' deficit except those resulting from investments or contributions
by stockholders. The Company's unrealized losses on available-for-sale
securities represent the only component of comprehensive income (loss) that is
excluded from the Company's net loss for the years ended December 31, 1997, 1998
and 1999 and for the cumulative period from November 18, 1991 (date of
inception) to December 31, 1999. As it is not significant individually or in the
aggregate, no separate statements of comprehensive loss have been presented.
NET LOSS PER COMMON SHARE
Basic net loss per share is computed by dividing net loss available to
common stockholders by the weighted average number of vested common shares
outstanding for the period. Diluted net loss per share is computed giving effect
to all potential dilutive common shares, including options, warrants and
convertible preferred stock. Options, warrants and convertible preferred stock
were not included in the diluted net loss per share calculations because the
effect would be antidilutive.
F-12
<PAGE>
AEROGEN, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
A reconciliation of the numerator and denominator used in the calculation of
basic and diluted net loss per common share follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------- --------------------------
1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net loss per common share,
basic and diluted:
Net loss..................... $(5,055,249) $(5,562,383) $(8,967,915) $(6,486,500) $(12,708,002)
Dividend related to
beneficial conversion
feature of preferred
stock...................... -- -- -- -- (16,516,574)
----------- ----------- ----------- ----------- ------------
Net loss available to common
stockholders................. $(5,055,249) $(5,562,383) $(8,967,915) $(6,486,500) $(29,224,576)
=========== =========== =========== =========== ============
Weighted average common shares
outstanding.................. 1,752,686 2,075,482 2,242,840 2,221,855 2,578,673
Less weighted average shares
subject to repurchase........ (265,277) (472,291) (431,735) (459,444) (374,033)
----------- ----------- ----------- ----------- ------------
Weighted average shares used in
computing basic and diluted
net loss per common share.... 1,487,409 1,603,191 1,811,105 1,762,411 2,204,640
=========== =========== =========== =========== ============
</TABLE>
The following outstanding options, common stock subject to repurchase,
convertible preferred stock and warrants were excluded from the computation of
diluted net loss per share as they had an antidilutive effect:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------- -------------------------
1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Options to purchase common
stock....................... 277,458 610,166 708,047 636,752 1,250,444
Common stock subject to
repurchase.................. 291,666 556,666 306,804 362,221 441,263
Convertible preferred stock... 17,578,638 27,864,352 27,864,352 27,864,352 39,010,653
Warrants...................... -- -- 75,683 75,683 75,683
</TABLE>
RECENT ACCOUNTING PRONOUNCEMENTS
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 ("FIN No. 44") "Accounting for Certain Transactions
Involving Stock Compensation," an interpretation of the Accounting Principles
Board Opinion No. 25 ("APB No. 25"). This interpretation clarifies the
definition of employee for purposes of applying APB No. 25, "Accounting for
Stock Issued to Employees," the criteria for determining whether a plan
qualifies as a noncompensatory plan, the accounting consequence of
F-13
<PAGE>
AEROGEN, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
various modifications to the terms of a previously fixed stock option or award,
and the accounting for an exchange of stock compensation awards in a business
combination. FIN No. 44 is effective July 1, 2000, but certain conclusions cover
specific events that occur after either December 15, 1998, or January 12, 2000.
The adoption of FIN No. 44 did not have a material impact on the Company's
financial statements.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB No. 101"), "Revenue Recognition in
Financial Statements," which provides guidance on the recognition, presentation,
and disclosure of revenue in financial statements filed with the SEC. SAB
No. 101 outlines the basic criteria that must be met to recognize revenue and
provides guidance for disclosures related to revenue recognition policies. The
Company has complied with the guidance in SAB No. 101 for all periods presented.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 establishes new
standards of accounting and reporting for derivative instruments and hedging
activities. SFAS No. 133 requires that all derivatives be recognized at fair
value in the statement of financial position, and that the corresponding gains
or losses be reported either in the statement of operations or as a component of
comprehensive income, depending on the type of relationship that exists. As
amended SFAS No. 133 will be effective for fiscal years beginning after
June 15, 2000. The Company does not currently hold derivative instruments or
engage in hedging activities and does not believe that the implementation of
SFAS No. 133 will have any significant impact on its financial position or
results of operations.
NOTE 3--BALANCE SHEET COMPONENTS:
Available-for-sale securities at December 31, 1999 are summarized as
follows:
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED FAIR MARKET
COST BASIS LOSS VALUE
---------- ---------- -----------
<S> <C> <C> <C>
Government notes........................ $3,011,243 $(22,803) $2,988,440
Corporate paper......................... 3,008,251 (9,773) 2,998,478
---------- -------- ----------
$6,019,494 $(32,576) $5,986,918
========== ======== ==========
</TABLE>
All available-for-sale securities mature within one year. At December 31,
1998, the Company held no available-for-sale securities.
F-14
<PAGE>
AEROGEN, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--BALANCE SHEET COMPONENTS: (CONTINUED)
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1999
---------- -----------
<S> <C> <C>
Laboratory, computer and office equipment............ $ 867,459 $ 1,360,065
Furniture............................................ 295,341 363,074
Leasehold improvements............................... 418,149 496,296
---------- -----------
1,580,949 2,219,435
Less: accumulated depreciation and amortization...... (715,278) (1,209,589)
---------- -----------
$ 865,671 $ 1,009,846
========== ===========
</TABLE>
Included in property and equipment at December 31, 1998 and 1999 is
equipment acquired under capital leases totaling $39,958, and related
accumulated amortization of $39,958.
Accrued liabilities consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Payroll and related expense............................. $150,662 $183,548
Other accrued liabilities............................... 21,139 117,508
-------- --------
$171,801 $301,056
======== ========
</TABLE>
NOTE 4--NOTES PAYABLE:
The Company maintained term loan facilities to finance property and
equipment acquisitions. The initial facility, which expired on October 31, 1996,
provided for borrowings up to $250,000, and was collateralized by the specific
property and equipment totaling $137,000. A payment on this term loan of $1,367
was due January 1, 1996. Thereafter, payments comprised 35 monthly installments
of $4,485 with a final lump sum payment of $20,511 on February 1, 1999. A
subsequent term loan facility, which expired in June 30, 1999, was obtained to
provide for borrowings up to $2,000,000 and is secured by the assets financed
under the facility. As of the expiration date, the Company had borrowed $976,587
under this facility. The loan bears interest at 14.4% per annum and is repayable
in thirty-six equal monthly payments of $29,591, which represent both principal
and interest, and a final lump sum payment of $146,488 due on November 1, 2000.
In conjunction with these term loan facilities, warrants to purchase 10,683
shares of common stock at $2.34 per share and warrants to purchase 65,000 shares
of Series C convertible preferred stock at $1.00 per share were issued (see
Note 7).
F-15
<PAGE>
AEROGEN, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--COMMITMENTS:
The Company rents its office facilities under operating leases which expires
on December 31, 2001. At December 31, 1999, future minimum facility lease
payments are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
<S> <C>
2000........................................................ $ 715,219
2001........................................................ 740,678
----------
$1,455,897
==========
</TABLE>
Under the terms of the lease agreement, the Company is obligated to return
the facility to shell condition at the end of the lease and to provide the
lessor with a letter of credit in the amount of $90,000. The estimated cost of
this demolition work ($100,000) is included in other long-term liabilities, and
the letter of credit is secured by a term deposit of $90,000 which is included
in other assets.
Rent expense for 1997, 1998, 1999 and for the period from November 18, 1991
(date of inception) to December 31, 1999 was approximately $269,000, $488,800,
$564,800 and $1,451,500, respectively.
NOTE 6--CONVERTIBLE PREFERRED STOCK:
In connection with the Series D preferred stock financing, completed in
August 1998, the Company amended its Certificate of Incorporation to remove the
redemption provisions associated with the Series A, Series B and Series C
convertible preferred stock. Accordingly, the cumulative accretion charges to
the deficit accumulated during the development stage were reversed. Prior to
August 1998 the carrying value of redeemable convertible preferred stock was
increased by periodic accretions so that the carrying value would equal the
redemption amount of the preferred stock at their redemption dates. These
increases were effected through charges against the deficit accumulated during
the development stage. As of December 31, 1997, the convertible preferred stock
comprises:
<TABLE>
<CAPTION>
NUMBER NUMBER OF
OF SHARES LIQUIDATION
SHARES ISSUED AND CARRYING PREFERENCE DIVIDENDS
AUTHORIZED OUTSTANDING VALUE PER SHARE PER SHARE
---------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Series A............. 3,846,156 3,846,156 $ 1,461,181 $0.39 $0.0312
Series B............. 4,487,182 4,487,182 3,488,769 $0.78 $0.0624
Series C............. 9,375,300 9,245,300 9,180,558 $1.00 $0.08
---------- ---------- -----------
17,708,638 17,578,638 $14,130,508
========== ========== ===========
</TABLE>
F-16
<PAGE>
AEROGEN, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--CONVERTIBLE PREFERRED STOCK: (CONTINUED)
As of December 31, 1998 and 1999, the convertible preferred stock comprises:
<TABLE>
<CAPTION>
NUMBER NUMBER OF
OF SHARES LIQUIDATION
SHARES ISSUED AND CARRYING PREFERENCE DIVIDENDS
AUTHORIZED OUTSTANDING VALUE PER SHARE PER SHARE
---------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Series A............. 3,846,156 3,846,156 $ 1,461,181 $0.39 $0.0312
Series B............. 4,487,182 4,487,182 3,488,769 $0.78 $0.0624
Series C............. 9,375,300 9,245,300 9,180,558 $1.00 $0.08
Series D............. 10,285,714 10,285,714 17,345,591 $1.75 $0.14
---------- ---------- -----------
27,994,352 27,864,352 $31,476,099
========== ========== ===========
</TABLE>
As of September 30, 2000, the convertible preferred stock comprises
(unaudited):
<TABLE>
<CAPTION>
NUMBER NUMBER OF
OF SHARES LIQUIDATION
SHARES ISSUED AND CARRYING PREFERENCE DIVIDENDS
AUTHORIZED OUTSTANDING VALUE PER SHARE PER SHARE
---------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Series A............. 3,846,156 3,846,156 $ 1,461,181 $0.39 $0.0312
Series B............. 4,487,182 4,487,182 3,488,769 $0.78 $0.0624
Series C............. 9,375,300 9,245,300 9,180,558 $1.00 $0.08
Series D............. 10,285,714 10,285,714 17,345,591 $1.75 $0.14
Series E............. 3,648,078 3,648,078 10,750,265 $2.60 $0.208
Series F............. 7,498,223 7,498,223 16,314,651 $2.25 $0.18
---------- ---------- -----------
39,140,653 39,010,653 $58,541,015
========== ========== ===========
</TABLE>
The rights, preferences and privileges of the convertible preferred stock
are as follows:
DIVIDENDS
The holders of convertible preferred stock are entitled to receive dividends
at the annual rate stated above per share if and when declared by the board of
directors. Such dividends, which are noncumulative and in preference to any
common stock dividends, are payable whenever funds are legally available. As of
September 30, 2000, no dividends have been declared.
In May 2000, the Company issued 961,539 shares of Series E convertible
preferred stock at $2.60 per share for gross cash proceeds of $2,500,001. In
July 2000, the Company issued 7,498,223 shares of Series F convertible preferred
stock at $2.25 per share for gross proceeds of $16,871,002. The issuances
resulted in a beneficial conversion feature of $201,923 and $16,314,651,
respectively, calculated in accordance with Emerging Issues Task Force No. 98-5
("EITF No. 98-5"), "Accounting for Convertible Securities with Beneficial
Conversion Features." The beneficial conversion features are reflected as
preferred stock dividends in the Statement of Operations for the nine months
ended September 30, 2000.
LIQUIDATION
In the event of any liquidation, dissolution or winding up of the Company,
whether voluntary or not, the holders of convertible preferred stock are
entitled to receive, prior and in preference to any
F-17
<PAGE>
AEROGEN, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--CONVERTIBLE PREFERRED STOCK: (CONTINUED)
distribution of any of the assets of the Company to the holders of common stock,
an amount per share, as stated above, for each outstanding share of convertible
preferred stock, plus any declared and unpaid dividends. If the funds available
for distribution are insufficient to cover the liquidation preference, then the
entire assets and funds of the Company legally available for distribution are to
be distributed ratably among the holders of convertible preferred stock. A
liquidation includes any recapitalization or any consolidation or corporate
reorganization in which the stockholders of the Company immediately prior to
such event own less than 50% of the Company's voting power immediately after
such event.
After payment of the full liquidation preference of the preferred
stockholders, any remaining assets of the Company legally available are to be
distributed ratably to the holders of common stock and convertible preferred
stock on an as-if converted basis.
REDEMPTION
The convertible preferred stock is not redeemable by the Company.
CONVERSION
Each share of convertible preferred stock, at the option of the holder, is
convertible into a number of fully paid shares of common stock as determined by
dividing the respective convertible preferred stock issue price by the
conversion price in effect at the time. The conversion price of Series A,
Series B, Series C, Series D, Series E and Series F convertible preferred stock
is $1.17, $2.34, $3.00, $5.25, $7.80 and $6.75, respectively, and is subject to
adjustment in accordance with antidilution provisions contained in the Company's
Certificate of Incorporation. Conversion is automatic immediately upon the
closing of the Company's initial public offering in which the public offering
price equals or exceeds $10.50 per share (adjusted to reflect subsequent stock
dividends, stock splits or recapitalization) and the aggregate proceeds raised
exceed $15,000,000. At September 30, 2000, 13,025,180 shares of the Company's
common stock have been reserved for conversion.
VOTING RIGHTS
The holder of each share of convertible preferred stock is entitled to one
vote for each share of common stock into which each share of convertible
preferred stock could be converted.
NOTE 7--STOCKHOLDERS' DEFICIT:
REINCORPORATION
In August 1998, the Company was reincorporated in Delaware, at which time
the Company's outstanding California corporation preferred and common stock was
exchanged on a one-for-one share basis for Delaware corporation preferred and
common stock. The related change in par value was recorded as an adjustment to
additional paid-in capital and common stock.
COMMON STOCK
Each share of common stock has the right to one vote. The holders of common
stock are also entitled to receive dividends whenever funds are legally
available and when declared by the Board of Directors, subject to the prior
rights of holders of all classes of stock outstanding having priority rights as
to dividends. No dividends have been declared or paid as of September 30, 2000.
F-18
<PAGE>
AEROGEN, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--STOCKHOLDERS' DEFICIT: (CONTINUED)
The Company issued shares of its common stock to certain employees under
stock purchase agreements, some of which contain repurchase provisions in the
event of termination of service with the Company. The shares are generally
released from repurchase provisions ratably over four years. Included in common
stock as of December 31, 1999 and September 30, 2000, are 306,804 and 202,428
(unaudited) shares subject to repurchase, respectively.
STOCK OPTION PLANS
The Company has reserved shares of common stock for issuance under the 1994
and 1996 Stock Incentive Plans (the "Plans"). Under the Plans the Board of
Directors may issue incentive stock options to employees and nonstatutory stock
options to employees, consultants or nonemployee directors of the Company, and
stock purchase rights to employees, nonemployee directors, or consultants. The
Board of Directors has the authority to determine to whom options will be
granted, the number of shares, the term and exercise price (which cannot be less
than fair market value at date of grant for incentive stock options or 85% of
fair market value for nonstatutory stock options). Historically, fair market
value has been determined by the Board of Directors. If an employee owns stock
representing more than 10% of the outstanding shares, the price of each share
shall be at least 110% of fair market value, as determined by the Board of
Directors. All options are immediately exercisable and generally vest over four
years, and expire ten years from date of grant. Unvested option exercises are
subject to repurchase upon termination of the holder's status as an employee or
consultant. At December 31, 1999 and September 30, 2000, none and 238,835
(unaudited) shares of common stock were subject to the Company's repurchase
rights, respectively.
F-19
<PAGE>
AEROGEN, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--STOCKHOLDERS' DEFICIT: (CONTINUED)
Activity under the Plans is as follows:
<TABLE>
<CAPTION>
SHARES WEIGHTED
AVAILABLE NUMBER OF AVERAGE
FOR SHARES EXERCISE AGGREGATE EXERCISE
GRANT OUTSTANDING PRICE PRICE PRICE
---------- ----------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Shares reserved at Plan
inception....................... 166,666
Options granted................. (101,663) 101,663 $0.12 $ 12,200 $0.12
Options exercised............... -- (3,333) $0.12 (400) $0.12
Options canceled................ 53,332 (53,332) $0.12 (6,400) $0.12
---------- ---------- ----------
Balances, December 31, 1995....... 118,335 44,998 $0.12 5,400 $0.12
Reservation of shares........... 333,333 -- -- -- --
Options granted................. (282,659) 282,659 $0.24 67,838 $0.24
Options exercised............... -- (6,666) $0.12-$0.24 (1,400) $0.21
Options canceled................ 21,666 (21,666) $0.24 (5,200) $0.24
---------- ---------- ----------
Balances, December 31, 1996....... 190,675 299,325 $0.12-$0.24 66,638 $0.22
Options granted................. (135,795) 135,795 $0.24-$3.75 43,479 $0.32
Options exercised............... -- (81,763) $0.12-$0.24 (16,457) $0.20
Options canceled................ 75,899 (75,899) $0.12-$0.24 (17,382) $0.23
---------- ---------- ----------
Balances, December 31, 1997....... 130,779 277,458 $0.12-$3.75 76,278 $0.27
Reservation of shares........... 566,666 -- -- -- --
Options granted................. (396,491) 396,491 $0.30-$0.60 176,736 $0.45
Options exercised............... -- (47,144) $0.30-$0.60 (11,306) $0.24
Options canceled................ 16,639 (16,639) $0.24-$0.30 (4,233) $0.25
---------- ---------- ----------
Balances, December 31, 1998....... 317,593 610,166 $0.12-$3.75 237,475 $0.39
Reservation of shares........... 133,333 -- -- -- --
Options granted................. (439,215) 439,215 $0.60 263,529 $0.60
Options exercised............... -- (127,008) $0.12-$0.60 (34,504) $0.27
Options canceled................ 214,326 (214,326) $0.12-$0.60 (78,043) $0.36
---------- ---------- ----------
Balances, December 31, 1999....... 226,037 708,047 $0.24-$3.75 388,457 $0.55
Reservation of shares
(unaudited)................... 2,816,666 -- -- -- --
Options granted (unaudited)..... (1,096,632) 1,096,632 $0.60-$6.75 3,567,232 $3.25
Options exercised (unaudited)... -- (468,073) $0.24-$4.50 (324,968) $0.69
Options canceled (unaudited).... 86,162 (86,162) $0.24-$3.75 (129,985) $1.51
Shares repurchased
(unaudited)................... 4,479 -- $0.60 -- $0.60
---------- ---------- ----------
Balances, September 30, 2000
(unaudited)..................... 2,036,712 1,250,444 $0.24-$6.75 $3,500,736 $2.80
========== ========== ==========
</TABLE>
F-20
<PAGE>
AEROGEN, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--STOCKHOLDERS' DEFICIT: (CONTINUED)
The options outstanding and currently vested by exercise price at
December 31, 1999 are as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------------------------
WEIGHTED
AVERAGE
REMAINING NUMBER
NUMBER CONTRACTUAL OF
EXERCISE OF OPTIONS LIFE IN OPTIONS
PRICE OUTSTANDING YEARS VESTED
-------- ----------- ------------ ----------
<S> <C> <C> <C>
$0.24 30,999 6.71 26,749
$0.30 98,769 8.13 57,939
$0.54 23,998 8.55 8,971
$0.60 552,481 8.74 80,095
$3.75 1,800 7.65 1,800
--------- -------
708,047 175,554
========= =======
</TABLE>
The options outstanding and currently vested by exercise price at
September 30, 2000 (unaudited) are as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------------------------
WEIGHTED
AVERAGE
REMAINING NUMBER
NUMBER CONTRACTUAL OF
EXERCISE OF OPTIONS LIFE IN OPTIONS
PRICE OUTSTANDING YEARS VESTED
-------- ----------- ------------ ----------
<S> <C> <C> <C>
$0.24 15,487 5.71 15,215
$0.30 4,065 7.52 2,083
$0.60 225,171 8.87 35,658
$3.00 805,730 9.59 3,602
$3.75 36,665 9.81 347
$4.50 131,661 9.92 145
$6.75 31,665 10.00 --
--------- ------
1,250,444 57,050
========= ======
</TABLE>
F-21
<PAGE>
AEROGEN, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--STOCKHOLDERS' DEFICIT: (CONTINUED)
STOCK-BASED COMPENSATION
The Company has adopted the disclosure only provisions of SFAS No. 123. The
Company calculated the fair value of each option on the date of grant using the
minimum value method as prescribed by SFAS No. 123 with the following
assumptions:
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER ENDED
31, SEPTEMBER 30,
-------------------------------------- -----------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Risk-free interest rate.......... 5.82% 5.20% 5.71% 6.02% 5.92%
Expected life (in years)......... 5 5 5 5 5
Dividend yield................... -- -- -- -- --
</TABLE>
The weighted average grant date fair value of options granted during the
years ended December 31, 1997, 1998 and 1999 was $0.33, $0.45 and $0.60,
respectively.
As the determination of fair value of all options granted after such time as
the Company becomes a public entity will include an expected volatility factor
in addition to the factors described in the preceding table, the following
results may not be representative of future periods.
Had compensation costs been determined based upon the fair value at the
grant date, consistent with the methodology prescribed under SFAS No. 123, the
Company's pro forma net loss and pro forma basic and diluted net loss per share
under SFAS No. 123 would have been as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------- --------------------------
1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net loss available to common
stockholders--as reported.... $(5,055,249) $(5,562,383) $(8,967,915) $(6,486,500) $(29,224,576)
=========== =========== =========== =========== ============
Net loss available to common
stockholders--pro forma...... $(5,061,341) $(5,571,770) $(8,986,409) $(6,515,932) $(29,843,186)
=========== =========== =========== =========== ============
Net loss per share, basic and
diluted--as reported......... $ (3.40) $ (3.47) $ (4.95) $ (3.68) $ (13.26)
=========== =========== =========== =========== ============
Net loss per share, basic and
diluted--pro forma........... $ (3.40) $ (3.48) $ (4.96) $ (3.70) $ (13.54)
=========== =========== =========== =========== ============
</TABLE>
DEFERRED STOCK-BASED COMPENSATION
During 1999 and 2000, the Company issued options to certain employees under
the Plans with exercise prices below what is now considered to be the deemed
fair market value of the Company's common stock at the date of grant. In
accordance with the requirements of APB 25, the Company has recorded deferred
stock-based compensation for the difference between the exercise price of the
stock options and the deemed fair market value of the Company's stock at the
date of grant. This deferred stock-
F-22
<PAGE>
AEROGEN, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--STOCKHOLDERS' DEFICIT: (CONTINUED)
based compensation is amortized to expense on a straight line basis, over the
period during which the Company's right to repurchase the stock lapses or the
options become vested, generally four years. At December 31, 1999 and
September 30, 2000, the Company had recorded deferred compensation related to
these options in the amounts of $331,638 and $5,453,480 (unaudited), net of
cancellations, respectively, of which $8,827 and $299,664 (unaudited) had been
amortized to expense during 1999 and the nine months ended September 30, 2000,
respectively.
Stock-based compensation expense related to stock options granted to
non-employees is recognized, on a straight line basis, as the stock options are
earned. The Company believes that the fair value of the stock options is more
reliably measurable than the fair value of the services received. The fair value
of the stock options granted is calculated at each reporting date using the
Black-Scholes option pricing model as prescribed by SFAS No. 123 using the
following assumptions:
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------------------------- -----------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Risk-free interest rate.......... 5.79% 4.93% 6.05% 5.90% 6.09%
Expected life (in years)......... 10 10 10 10 10
Dividend yield................... -- -- -- -- --
Expected volatility.............. 70% 70% 70% 70% 70%
</TABLE>
The stock-based compensation expense will fluctuate as the deemed fair
market value of the common stock fluctuates. In connection with the grant of
stock options to non-employees, the Company recorded deferred stock-based
compensation of none, none and $336,577 for the years ended December 31, 1997,
1998 and 1999, respectively, and $648,975 (unaudited) for the nine months ended
September 30, 2000, of which none, none and $101,028 has been amortized to
expense in 1997, 1998 and 1999, respectively, and $187,059 (unaudited) has been
amortized to expense in the nine months ended September 30, 2000.
WARRANTS
In connection with the financing arrangements entered into by the Company in
July 1995 and October 1997, the Company issued warrants to purchase 10,683
shares of common stock and warrants to purchase 65,000 shares of Series C
convertible preferred stock at exercise prices of $2.34 and $1.00, respectively.
The warrants expire on June 30, 2002 and October 14, 2004, respectively. The
fair value of these warrants, determined using the Black-Scholes option pricing
model, was not material.
NOTES RECEIVABLE
In May 1994, the Company loaned $69,009 to a stockholder/employee. The note
bears interest at 6.43% per annum and is due May 2003. At December 31, 1999 and
September 30, 2000, $96,373 and $101,703 (unaudited) of principal and interest
was outstanding on this note, respectively. In August 1996, the Company loaned
an additional $200,000 to this individual. The note is non-interest bearing, is
due 2001 and is secured by 166,666 shares of common stock. In July 2000, the
Company loaned this individual an additional $50,000. This loan bears interest
at 6.62% per annum, is due in July 2005 and is secured by
F-23
<PAGE>
AEROGEN, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--STOCKHOLDERS' DEFICIT: (CONTINUED)
the same 166,666 shares of common stock. At September 30, 2000, no payments have
been made on the notes.
In January 1998 and December 1998 the Company received full recourse notes
receivable from officers of the Company in exchange for common stock. The notes
bear interest at 5.93% and 4.51%, and are due in January 2002 and
December 2002, respectively. At December 31, 1999, $156,454 and $55,993 of
principal and interest are outstanding on these notes, respectively. At
September 30, 2000, $164,414 and $58,145 of principal and interest are
outstanding on these notes, respectively. The loans are secured by 466,666 and
90,000 shares of common stock, respectively.
In April 2000, the Company received full recourse notes receivable from two
officers of the Company in exchange for common stock. Each note bears interest
at 6.71% and is due in April 2004. Each loan is secured by 90,000 shares of
common stock. At September 30, 2000, $108,311 of principal and interest are
outstanding on these notes.
NOTE 8--INCOME TAXES:
At December 31, 1999, the Company has approximately $21.8 million and
$13.9 million in Federal and California net operating loss carryforwards,
respectively, which expire through the year 2014. United States Federal income
tax regulations may restrict the utilization of the operating loss and tax
credit carryforwards in the case of an "ownership change" of the Company.
The tax effects of temporary differences and carryforwards that give rise to
significant portions of the net deferred tax assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1999
---------- ----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................... $5,264,000 $8,700,000
Research and development tax credit
carryforwards.................................... 212,000 407,000
Depreciation and amortization...................... 166,000 296,000
Other.............................................. 46,000 48,000
Less: valuation allowance.......................... (5,688,000) (9,451,000)
---------- ----------
$ -- $ --
========== ==========
</TABLE>
The Company has established a valuation allowance against its deferred tax
assets due to the uncertainty surrounding the realization of such assets.
NOTE 9-- UNAUDITED PRO FORMA NET LOSS PER COMMON SHARE AND PRO FORMA
STOCKHOLDERS' EQUITY:
Pro forma basic and diluted net loss per share have been computed to give
effect to common equivalent shares from convertible preferred stock that will
convert to common stock upon the closing of the Company's initial public
offering (using the as-if-converted method) for the year ended December 31,
F-24
<PAGE>
AEROGEN, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9-- UNAUDITED PRO FORMA NET LOSS PER COMMON SHARE AND PRO FORMA
STOCKHOLDERS' EQUITY: (CONTINUED)
1999 and the nine months ended September 30, 2000. A reconciliation of the
numerator and denominator used in the calculation of pro forma basic and diluted
net loss per common share follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------- -------------
(UNAUDITED)
<S> <C> <C>
Pro forma net loss per common share, basic and
diluted:
Net loss.................................... $ (8,967,915) $(12,708,002)
============ ============
Weighted average shares used in computing net
loss per common share, basic and diluted.... 1,811,105 2,204,640
Adjustments to reflect the effect of the
assumed conversion of the preferred stock
from the date of issuance................... 9,288,117 10,742,428
------------ ------------
Weighted average shares used in computing pro
forma net loss per common share, basic and
diluted..................................... 11,099,222 12,947,068
============ ============
Pro forma net loss per common share, basic and
diluted..................................... $ (0.81) $ (0.98)
============ ============
</TABLE>
If an initial public offering is consummated, all of the convertible
preferred stock outstanding, as of the closing date, will be converted into an
aggregate of approximately 13,003,514 shares of common stock based on the shares
of convertible preferred stock outstanding at September 30, 2000. Unaudited pro
forma stockholders' equity at September 30, 2000, as adjusted for the conversion
of convertible preferred stock, is disclosed on the consolidated balance sheet.
NOTE 10--EMPLOYEE BENEFIT PLAN:
In August 1996, the Company adopted a plan (the "Plan") which is qualified
under section 401(k) of the Internal Revenue Code of 1986. Eligible employees
may make voluntary contributions to the Plan of up to 20% of their annual
compensation, not to exceed the statutory amount, and the Company may make
matching contributions. To date, the Company has not made any matching
contributions to the Plan.
NOTE 11--ACQUISITION:
In May 2000, the Company acquired all the voting stock of Cerus Limited
("Cerus"), now AeroGen (Ireland) Limited, in exchange for 1,725,000 shares of
Series E convertible preferred stock valued at $3.37 per share and transaction
costs of approximately $150,000. Cerus is a development stage company engaged in
the development of pulmonary inhalation products utilizing the Company's core
aerosol generator technology, under a license agreement with the Company.
The acquisition of Cerus has been accounted for using the purchase method of
accounting and, accordingly the results of operations of Cerus have been
included in the Company's financial statements
F-25
<PAGE>
AEROGEN, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--ACQUISITION: (CONTINUED)
subsequent to May 25, 2000. The purchase price was allocated to the assets
acquired and the liabilities assumed based on their estimated fair values at the
date of acquisition as determined by management. The excess of the purchase
price over the fair value of the net identifiable assets was allocated to
goodwill. The purchase price was allocated as follows:
<TABLE>
<S> <C>
Cash and cash equivalents................................... $ 542,174
Grants receivable........................................... 105,038
Property and equipment, net................................. 34,772
Other assets................................................ 50,895
Assumed liabilities......................................... (287,908)
Acquired workforce.......................................... 100,000
Acquired in-process research and development................ 3,500,000
Goodwill.................................................... 1,917,589
----------
Total purchase price........................................ $5,962,560
==========
</TABLE>
The amortization of acquired workforce and goodwill is being computed over
two and six years, respectively, on the straight-line basis. The acquired
in-process research and development represents the value of new medical and
other technologies that were in various stages of development where no
alternative future use was identified. Management is primarily responsible for
the valuation of the acquired in-process research and development. The fair
value of the in-process research and development was based on the discounted
cash flow method. As Cerus was a development stage company, there were no
historical pricing and margin assumptions to utilize and therefore estimates
used were based on the expectations of management. Management does not expect
material net cash in-flows until at least 2005. The present value of these cash
flows was calculated with an overall discount rate of 40%. At the date of
acquisition, the Company determined the technological feasibility of Cerus's
products was not established and, accordingly, wrote off the corresponding
amounts to acquired in-process research and development. Approximately
$0.5 million in research and development has been spent up to the date of the
acquisition in an effort to develop the technologies to produce commercially
viable products. At the date of acquisition, the only identifiable intangible
assets acquired were the technologies under development and the acquired
workforce. Currently the Company knows of no developments which would lead it to
change its original assessment of the expected timing and commercial viability
of these projects.
The unaudited pro forma financial information, had the acquisition of Cerus
occurred at the beginning of each period presented, giving effect to an
acquisition adjustment for the elimination of acquired in-process research and
development is as follows:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED SEPTEMBER 30,
1999 2000
------------- -------------------
<S> <C> <C>
Revenue................................................. $ 756,575 $ 5,250,369
Net loss available to common stockholders............... (9,745,715) (26,078,456)
Net loss per common share, basic and diluted............ $ (5.38) $ (11.83)
</TABLE>
The unaudited pro forma financial information is presented for illustrative
purposes only and is not necessarily indicative of the operating results that
would have occurred had the transaction been completed at the beginning of the
earliest period presented, nor is it necessarily indicative of future operating
results.
F-26
<PAGE>
AEROGEN, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--STOCK SPLIT
In September 2000, the Board of Directors approved a three-for-one reverse
stock split of the common stock which was approved by the stockholders in
November 2000. All common stock data and stock option plan information in these
consolidated financial statements has been restated to reflect the reverse
split. In addition, the conversion prices of the Company's preferred stock have
also been adjusted to reflect the effect of the reverse split.
NOTE 13--SUBSEQUENT EVENTS (UNAUDITED):
RESEARCH AND DEVELOPMENT AGREEMENTS
In March 2000, the Company entered into an agreement with PathoGenesis
Corporation ("PathoGenesis"). Under the terms of the agreement the Company and
PathoGenesis agreed to collaborate on the development and registration of a
product which will combine PathoGenesis' drug TOBI (tobramycin solution for
inhalation) with the Company's AeroDose inhaler. The Company will be reimbursed
for costs incurred in developing the product in accordance with an agreed upon
workplan, will manufacture inhalers on a cost plus a fixed profit margin, and
will receive royalties on future product sales. In connection with the
agreement, the Company issued 961,539 shares of Series E convertible preferred
stock at $2.60 per share for total gross proceeds of $2.5 million.
In May 2000, the Company entered into an agreement with Becton, Dickinson
and Company ("Becton Dickinson") under which Becton Dickinson will develop and
supply a patent-adjustable container for use in the Company's AeroDose insulin
product. Under the terms of the agreement, the Company issued 961,539 shares of
Series E convertible preferred stock at $2.60 per share for total gross proceeds
of $2.5 million and will be obligated to pay Becton Dickinson royalties on
future product sales and a portion of any payments the Company receives from any
future marketing partner. As a result of this issuance a beneficial conversion
feature charge of $201,923 was recorded in the nine months ended September 30,
2000.
INITIAL PUBLIC OFFERING
In August 2000, the Company's Board of Directors authorized management to
file a registration statement with the Securities and Exchange Commission to
permit the Company to sell its common stock to the public. Upon completion of
the Company's initial public offering, all of the outstanding convertible
preferred stock will be converted into shares of common stock.
2000 EQUITY INCENTIVE PLAN
In August 2000, the Board of Directors adopted the 2000 Equity Incentive
Plan (the "2000 Plan"). The 2000 Plan, which will terminate no later than 2010,
provides for the granting of incentive stock options, nonstatutory stock options
and restricted stock purchase rights and stock bonuses to employees, and
consultants.
A total of 1,000,000 shares of common stock have been authorized for
issuance under the 2000 Plan. At the date of the stockholders' meeting in 2001,
and annually thereafter, the authorized shares will automatically be increased
by a number of shares equal to the least of:
- 4.5% of the then outstanding shares of common stock on a fully-diluted
basis;
- 2,000,000 shares; or
- a lesser number of shares determined by the Board of Directors.
F-27
<PAGE>
AEROGEN, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13--SUBSEQUENT EVENTS (UNAUDITED): (CONTINUED)
2000 EMPLOYEE STOCK PURCHASE PLAN
In August 2000, the Board of Directors adopted the 2000 Employee Stock
Purchase Plan (the "Purchase Plan") authorizing the issuance of 250,000 shares
of common stock pursuant to purchase rights granted to in the United States
employees. The stockholders approved the Purchase Plan in November 2000.
At the date of the stockholders' meeting in 2001, and annually thereafter,
for a period of 20 years, the share reserve will automatically be increased by a
number of shares equal to the least of:
- 1.0% of the then outstanding shares of common stock on a fully diluted
basis;
- 250,000 shares; or
- a lesser number of shares determined by the Board of Directors.
The Purchase Plan is intended to qualify as an employee stock purchase plan
within the meaning of Section 423 of the Internal Revenue Code of 1986, as
amended. As of the date hereof, no shares of common stock have been purchased
under the Purchase Plan.
The Purchase Plan permits eligible employees to purchase common stock at a
discount through payroll deductions during defined offering periods. The price
at which stock is purchased under the purchase plan is equal to 85% of the fair
market value of the common stock on the first day of the offering period or 85%
of the fair market value on the subsequent designated purchase dates, whichever
is lower. The initial offering period will commence on the effective date of the
offering.
2000 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
In August 2000, the Board of Directors adopted the 2000 Non-Employee
Directors' Stock Option Plan ("2000 Non-Employee Plan") under which 250,000
shares of common stock were reserved for issuance. The stockholders approved the
2000 Non-Employee Plan in November 2000. Under the terms of the 2000
Non-Employee Plan, each new non-employee director elected on, or after, the
effectiveness of an initial public offering of the Company's common stock, will
be granted an option to purchase 15,000 shares of common stock which vest over a
4 year period. Thereafter, on an annual basis, on the date of the annual
stockholder meeting, each director will be granted an option to purchase 5,000
shares of common stock which vest over a three year period. The exercise price
of an option will not be less than the fair market value of the common stock on
the date of grant and the term will not exceed 10 years.
EXECUTIVE SEVERANCE BENEFIT PLAN
In September 2000, the Board of Directors adopted the Executive Severance
Benefit Plan ("Severance Plan"). Under the terms of the Severance Plan the
Company's officers will be provided with severance benefits upon the involuntary
termination of their employment without cause, or voluntary termination for good
reason, within one month prior to or 13 months following a change in control.
Benefits under the plan include salary continuation, health benefits and option
acceleration.
F-28
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Cerus Limited.
In our opinion, the accompanying balance sheets and the related statements
of operations, of shareholders' equity and cash flows present fairly, in all
material respects, the financial position of Cerus Limited (a company in the
development stage) at December 31, 1998 and 1999, and the results of its
operations and its cash flows for each of the two years in the period ended
December 31, 1999 and for the cumulative period from December 16, 1997 (date of
inception) through December 31, 1999, in conformity with accounting principles
generally accepted in the United States. 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 of these statements in accordance with auditing standards generally
accepted in the United States, which 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, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers
Chartered Accountants and Registered Auditors
Limerick
Ireland
August 23, 2000
F-29
<PAGE>
CERUS LIMITED
(A COMPANY IN THE DEVELOPMENT STAGE)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1998 1999
-------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 89,035 $ 756,032
Accounts receivable....................................... 33,506 60,955
Other current assets...................................... -- 139,788
-------- ----------
Total current assets.................................... 122,541 956,775
Office equipment, and furniture & fittings, net........... 4,258 40,818
-------- ----------
Total assets............................................ $126,799 $ 997,593
======== ==========
LIABILITIES REDEEMABLE SHARES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 11,792 $ 52,113
Taxes payable............................................. 22,141 36,610
Related party payable..................................... 29,541 8,241
-------- ----------
Total current liabilities............................... 63,474 96,964
-------- ----------
Commitments (Note 4)
Redeemable shares:
"B" ordinary shares par value: $1.41
Authorised: 500,000 shares
Issued and outstanding: No shares in 1998 and 154,000
shares in 1999.......................................... -- 216,308
-------- ----------
Shareholders' equity:
"A" ordinary shares par value: $0.014
Authorised: 10,000,000 shares
Issued and outstanding: 200 shares in 1998 and 95,000
shares in 1999.......................................... 3 1,352
Additional paid-in capital................................ -- 1,027,849
Earnings (deficit) accumulated during the development
stage................................................... 63,322 (344,880)
-------- ----------
Total shareholders' equity.............................. 63,325 684,321
-------- ----------
Total liabilities, redeemable shares and shareholders'
equity.............................................. $126,799 $ 997,593
======== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE>
CERUS LIMITED
(A COMPANY IN THE DEVELOPMENT STAGE)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
CUMULATIVE PERIOD
FROM
YEARS ENDED DECEMBER 16, 1997
DECEMBER 31, (DATE OF INCEPTION)
-------------------- TO DECEMBER 31,
1998 1999 1999
-------- --------- -------------------
<S> <C> <C> <C>
Research and development revenues................... $167,169 $ 180,815 $ 347,984
Grant income........................................ -- 107,540 107,540
-------- --------- ---------
167,169 288,355 455,524
-------- --------- ---------
Operating expenses:
Research and development.......................... 80,962 206,307 287,269
Administrative(1)................................. 4,343 354,814 359,157
-------- --------- ---------
Total operating expenses........................ 85,305 561,121 646,426
-------- --------- ---------
Income (loss) from operations....................... 81,864 (272,766) (190,902)
Interest and other income........................... 3,709 1,372 5,081
Interest and other expense.......................... (110) (183) (293)
Foreign currency exchange loss...................... -- (108,874) (108,874)
-------- --------- ---------
Net income (loss) before taxation................... 85,463 (380,451) (294,988)
Taxation............................................ (22,141) (27,751) (49,892)
-------- --------- ---------
Net income (loss)................................... $ 63,322 $(408,202) $(344,880)
======== ========= =========
</TABLE>
------------------------
(1) Including stock-based compensation expense of $177,925 in 1999.
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE>
CERUS LIMITED
(A COMPANY IN THE DEVELOPMENT STAGE)
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM DECEMBER 16, 1997 (DATE OF INCEPTION) TO DECEMBER 31, 1999
<TABLE>
<CAPTION>
EARNINGS
(DEFICIT)
ACCUMULATED
ORDINARY SHARES ADDITIONAL DURING THE
------------------- PAID-IN DEVELOPMENT
SHARES AMOUNTS CAPITAL STAGE TOTAL
-------- -------- ---------- ---------------- ---------
<S> <C> <C> <C> <C> <C>
Issuance of Class "A" ordinary
shares for cash at $0.0142 per
share in January................ 200 $ 3 $ -- $ -- $ 3
Net income........................ -- -- -- 63,322 63,322
------ ------ ---------- --------- ---------
Balances, December 31, 1998....... 200 3 -- 63,322 63,325
Issuance of Class "A" ordinary
shares for cash at $0.0142,
$7.117 and $42.702 per share in
August, net of issuance costs of
$39,345......................... 94,800 1,349 849,924 -- 851,273
Compensation expense associated
with issuance of Class "A"
ordinary shares................. -- -- 177,925 -- 177,925
Net loss.......................... -- -- -- (408,202) (408,202)
------ ------ ---------- --------- ---------
Balances, December 31, 1999....... 95,000 $1,352 $1,027,849 $(344,880) $ 684,321
====== ====== ========== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-32
<PAGE>
CERUS LIMITED
(A COMPANY IN THE DEVELOPMENT STAGE)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
CUMULATIVE PERIOD
YEARS ENDED FROM
DECEMBER 31, DECEMBER 16, 1997
-------------------- (DATE OF INCEPTION) TO
1998 1999 DECEMBER 31, 1999
-------- --------- ----------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................. $ 63,322 ($408,202) ($344,880)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation.................................... 752 16,532 17,284
Stock-based compensation -- 177,925 177,925
Changes in operating assets and liabilities:
Accounts receivable........................... (33,506) (27,449) (60,955)
Prepaid expenses and other current assets..... -- (139,788) (139,788)
Accounts payable.............................. 11,792 40,321 52,113
Taxes and related party payables.............. 51,682 (6,831) 44,851
-------- --------- ---------
Net cash provided by (used in) operating
activities...................................... 94,042 (347,492) (253,450)
-------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of office equipment and furniture and
fittings........................................ (5,010) (53,092) (58,102)
-------- --------- ---------
Net cash used in investing activities............. (5,010) (53,092) (58,102)
-------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Class `A' ordinary
shares, net..................................... 3 851,273 851,276
Proceeds from issuance of Class `B' ordinary
shares, net..................................... -- 216,308 216,308
-------- --------- ---------
Net cash provided by financing activities......... 3 1,067,581 1,067,584
-------- --------- ---------
Net increase in cash and cash equivalents......... 89,035 666,997 756,032
Cash and cash equivalents, beginning of period.... -- 89,035 --
-------- --------- ---------
Cash and cash equivalents, end of period.......... $ 89,035 $ 756,032 $ 756,032
======== ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during period for interest.............. $ 110 $ 183 $ 293
======== ========= =========
Cash paid during period for taxes................. $ -- $ 10,837 $ 10,837
======== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-33
<PAGE>
CERUS LIMITED
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
1. FORMATION AND BUSINESS OF THE COMPANY
Cerus Limited (the "company") was incorporated in the Republic of Ireland on
December 16, 1997 to develop pulmonary medical products. The company, which
operates in the Republic of Ireland, is in the development stage and since
inception has devoted substantially all of its efforts to developing its
products, raising capital and recruiting personnel.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FOREIGN CURRENCY TRANSLATION
The financial accounts of the company were originally denominated in Irish
punts (IRL) and have now been translated in United States Dollars ($). Operating
results have been translated at the average exchange rate for the relevant
period. Monetary assets and liabilities have been translated at the exchange
rates in effect at the balance sheet dates. Non-monetary assets and liabilities
have been translated at the exchange rates in effect at the date of the
transaction. Differences arising on translation are included in the statements
of operations for the relevant period.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures 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.
CASH AND CASH EQUIVALENTS
The company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents. Cash and cash
equivalents include money market and deposit accounts.
DEPRECIATION
Office equipment, and furniture and fittings are stated at cost less
accumulated depreciation. Depreciation is provided using the straight line
method over the estimated useful lives of the assets, generally three to five
years. Upon sale or retirement of assets, the cost and related accumulated
depreciation are removed from the balance sheet and the resulting gain or loss
is reflected in operations.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Carrying amounts of certain of the company's financial instruments,
including cash and cash equivalents, accounts receivable, accounts payable, and
other liabilities approximate fair value due to their short maturities.
F-34
<PAGE>
CERUS LIMITED
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATION OF CREDIT RISK AND OTHER RISKS AND UNCERTAINTIES
The company maintains its cash and cash equivalents in accounts with a major
financial institution in the Republic of Ireland. The company has not
experienced any losses on its deposits of cash and cash equivalents.
Products developed by the company may require the approval of the Food and
Drug Administration (FDA) and/or other international regulatory agencies prior
to commercialised sales. The company cannot be assured that its products will
receive the necessary approvals. If the company was denied approval or if
approval was delayed, it may have a material adverse impact on the company. To
date the company has not made any product sales.
In 1998, two customers individually accounted for 44% and 51%, respectively
of the company's total revenue. In 1999, one customer accounted for 90% of the
company's total revenue.
At December 31, 1998, two customers accounted for 45% and 50% of accounts
receivable, respectively. At December 31, 1999, one customer accounted for 100%
of accounts receivable.
RESEARCH AND DEVELOPMENT REVENUE RECOGNITION
Research and development revenues which are earned under agreements with
third parties for contract research and development activities are recorded as
the related expenses are incurred, up to contractual limits. Charges to third
parties are based upon negotiated rates for full-time-equivalent employees of
the company, and such rates are intended to approximate the company's
anticipated costs. Payments received that are related to future performance are
recorded as deferred revenue and recognized as revenues as they are earned. All
revenues recognized to date are not refundable if the relevant research effort
is not successful.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations as incurred.
Certain research and development projects are funded under agreements with third
parties, and the costs related to these activities are included in research and
development expense. The charges to third parties are based upon negotiated
rates for full-time-equivalent employees of the company, and such rates are
intended to approximate the company's anticipated costs.
INCOME TAXES
The company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes". Under
this method, deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts expected
to be realised.
F-35
<PAGE>
CERUS LIMITED
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 ("FIN No. 44") "Accounting for Certain Transactions
Involving Stock Compensation," an interpretation of the Accounting Principles
Board Opinion No. 25 ("APB No. 25"). The Interpretation clarifies the definition
of employee for purposes of applying APB No. 25, "Accounting for Stock Issued to
Employees," the criteria for determining whether a plan qualifies as a
noncompensatory plan, the accounting consequence of various modifications to the
terms of a previously fixed share option or award, and the accounting for an
exchange of share compensation awards in a business combination. FIN No. 44 is
effective July 1, 2000, but certain conclusions cover specific events that occur
after either December 15, 1998, or January 12, 2000. The adoption of FIN No. 44
did not and will not have a material impact on the company's financial
statements.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 ("SAB No. 101"), "Revenue Recognition in Financial
Statements," which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements filed with the SEC. SAB 101
outlines the basic criteria that must be met to recognise revenue and provides
guidance for disclosures related to revenue recognition policies. The Company
has complied with the guidance in SAB No. 101 for all periods presented.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 establishes new
standards of accounting and reporting for derivative instruments and hedging
activities. SFAS No. 133 requires that all derivatives be recognised at fair
value in the statement of financial position, and that corresponding gains or
losses be reported either in the statement of operations or as a component of
comprehensive income, depending on the type of hedging relationship that exists.
As amended SFAS No. 133 will be effective for fiscal quarters beginning after
June 15, 2000. The Company does not currently hold derivative instruments or
engage in hedging activities and does not believe that the implementation of
SFAS No. 133 will have any significant impact on its financial position or
results of operations.
3. OFFICE EQUIPMENT, AND FURNITURE AND FITTINGS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1999
------------- -------------
<S> <C> <C>
Office equipment............................... $ -- $42,643
Furniture and fittings......................... 5,010 15,459
------ -------
5,010 58,102
Less accumulated depreciation.................. (752) (17,284)
------ -------
$4,258 $40,818
====== =======
</TABLE>
F-36
<PAGE>
CERUS LIMITED
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. COMMITMENTS
The company rents its office facilities under a lease which expires on
December 31, 2000. At December 31, 1999 future minimum rent payments are $15,800
in 2000.
Rental expense for 1998, 1999 and cumulatively from December 16, 1997 (date
of inception) to December 31, 1999 was $1,428, $7,011 and $8,439, respectively.
The company acquired an option to acquire land for a three year period from
April 1999 for a reservation fee of approximately $9,400 per annum. The option
expense in 1999 amounted to $6,507. At December 31, 1999 future payments are
approximately as follows:
<TABLE>
<S> <C>
2000........................................................ $ 9,400
2001........................................................ 9,400
2002........................................................ 2,890
-------
$21,690
=======
</TABLE>
5. REDEEMABLE SHARES
In April 1999 the company established an Irish Revenue approved Business
Expansion Scheme under which it raised $216,308. The Business Expansion Scheme
is a tax based scheme which grants investors tax breaks on the amounts invested.
The investment is generally for a five year period. Under the Business Expansion
Scheme the company issued 154,000 B ordinary shares of IRL1 each at par (or
$1.14 when translated at the historic exchange rate). The maximum amount which
the B ordinary shareholders will receive from the company in respect of their
shares either by way of redemption, dividend or a liquidation is IRL1.20 per
share (or $1.53 when translated as of December 31, 1999).
REDEMPTION
A Put/Call Option agreement has been entered into between the company and
the Business Expansion Scheme investors. This agreement provides an option to
the company to require the investors to sell their shares to the company (the
"Call Option") and an option to the investors to require the company to purchase
their shares (the "Put Option") within a three to four month period after a five
year period has elapsed from the date of issue of these shares. The share price
is to be determined by independent appraisal but is capped at a maximum value of
IRL1.20 per share. These B ordinary shares shall rank PARI PASSU (based on a
ratio of 100:1) with the A ordinary shares except that they shall not carry
voting rights.
DIVIDENDS
The B ordinary shares are entitled (based on a ratio 100:1 with A ordinary
shares) to receive such a portion (if any) of the profits of the company which
are proposed to be distributed by way of dividend in respect of any financial
year of the company whether by way of interim dividend declared by the directors
or by way of dividend declared by the company in a general meeting, up to a
maximum of IRL1.20 per share. The maximum aggregate amount paid by way of
dividend on B ordinary shares shall never exceed the aggregate sum of IRL1.20
per share.
F-37
<PAGE>
CERUS LIMITED
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. REDEEMABLE SHARES (CONTINUED)
LIQUIDATION
On a winding up, the B ordinary shares shall each rank PARI PASSU (based on
a ratio of 100:1) with A ordinary shares, as to entitlement to the return of
amounts paid up or credited as paid up on each share including any premium and
shall further rank PARI PASSU (with the A ordinary shares) as their entitlement
to participate further in the profits and assets of the company, up to a maximum
aggregate amount of IRL1.20 for each share less the aggregate amount (if any) of
all dividends previously paid or declared in respect of B ordinary shares. The
maximum aggregate amount paid on winding up of the company to B ordinary shares,
when aggregated with the aggregate amount of all dividends paid on the B
ordinary shares, shall never exceed the aggregate of IRL1.20 per share inclusive
of amounts paid up or credited as paid up thereon including any premium.
6. SHAREHOLDERS' EQUITY
The A ordinary shares of IRL0.01 each (or $0.014 when translated at the
historic exchange rate) have full voting rights. The A ordinary shares shall be
entitled equally to B ordinary shares (based on a ratio of 1:100) to receive
such proportion (if any) of the profit of the company which is proposed to be
distributed by way of dividend in respect of any financial year of the company
whether by way of interim dividend declared by the directors or by way of
dividend declared by the company at a general meeting until such time as the
holders of the A and B ordinary shares shall have received an amount of IRL1.20
per share. Thereafter, the A ordinary shares shall entitle the holders thereof
to receive payment of any further dividend which may be declared to the
exclusion of any entitlement thereto on the part of the holders of B ordinary
shares.
During 1999 the company issued A ordinary shares to a member of the Board of
Directors at a price below the fair market value at the date of issuance. In
accordance with the requirements of Accounting Principles Board Opinion No. 25
("APB 25"), "Accounting for Stock Issued to Employees," the company has recorded
stock-based compensation for the difference between the issuance price of the A
ordinary shares and the fair market value at the date of issuance. This
stock-based compensation was immediately expensed to administrative expenses as
the shares were immediately vested.
7. INCOME TAXES
The company is subject to Irish Corporation Tax on certain research and
development revenues. The provision for income taxes consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Current income taxes...................................... $22,141 $27,751
Deferred taxes............................................ -- --
------- -------
Provision for income taxes................................ $22,141 $27,751
======= =======
</TABLE>
F-38
<PAGE>
CERUS LIMITED
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES (CONTINUED)
The tax effects of temporary differences and carryforwards that give rise to
significant portions of the deferred tax assets at December 31, 1999 and 1998
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Deferred tax asset:
Deferred research and development expenditures......... $ -- $ 25,000
Pension and other deferred expenses.................... 13,000
-------- --------
Total deferred tax asset............................... -- 38,000
Valuation allowance.................................... -- (38,000)
-------- --------
$ -- $ --
======== ========
</TABLE>
A full valuation allowance is provided for the deferred tax assets as the
company determines that it is more likely than not that the deferred tax assets
will not be utilized. The deferred research and development expenditures can be
carried forward for three years.
8. RELATED PARTY TRANSACTIONS
Related party payables relate specifically to transactions with directors in
their capacity as directors of the company. At December 31, 1998 and 1999, the
company had payables of $29,541 and $8,241 respectively for these transactions.
Costs incurred by the company in respect of services rendered to the company by
directors in their capacity as directors for 1998, 1999 and cumulatively from
December 16, 1997 (date of inception) were approximately $30,000, $80,000 and
$110,000 respectively.
Other costs incurred by the company in respect of services rendered to the
company by directors and companies connected to directors for 1998, 1999 and
cumulatively from December 16, 1997 (date of inception) were approximately nil,
$29,376 and $29,376 respectively.
At December 31, 1998 and 1999, the company had payables of nil and $3,093
respectively relating to these services which are included in accounts payable.
9. SUBSEQUENT EVENTS
Effective May 25, 2000 all of the company's outstanding A ordinary shares
were acquired by AeroGen, Inc. ("AeroGen") in exchange for 1,725,000 shares of
AeroGen's Series E convertible preferred shares. This acquisition was recorded
by AeroGen as a purchase.
F-39
<PAGE>
AEROGEN, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
OVERVIEW
In May 2000, the Company acquired all the voting stock of Cerus Limited
("Cerus"), now AeroGen (Ireland) Limited, in exchange for 1,725,000 shares of
Series E convertible preferred stock valued at $3.37 per share and transaction
costs of approximately $150,000. Cerus is a development stage company engaged in
the development of pulmonary inhalation products utilizing the Company's core
aerosol generator technology, under a license agreement with the Company.
The acquisition of Cerus has been accounted for using the purchase method of
accounting and, accordingly the results of operations of Cerus have been
included in the Company's financial statements subsequent to May 25, 2000. The
purchase price was allocated to the assets acquired and the liabilities assumed
based on their estimated fair values at the date of acquisition as determined by
management. The excess of the purchase price over the fair value of the net
identifiable assets was allocated to goodwill. The purchase price was allocated
as follows:
<TABLE>
<S> <C>
Cash and cash equivalents................................... $ 542,174
Grants receivable........................................... 105,038
Property and equipment, net................................. 34,772
Other assets................................................ 50,895
Assumed liabilities......................................... (287,908)
Acquired workforce.......................................... 100,000
Acquired in-process research and development................ 3,500,000
Goodwill.................................................... 1,917,589
----------
Total purchase price........................................ $5,962,560
==========
</TABLE>
The amortization of acquired workforce and goodwill is being computed over
two and six years, respectively, on the straight-line basis. The acquired
in-process research and development represents the value of new medical and
other technologies that were in various stages of development where no
alternative future use was identified. Management is primarily responsible for
the valuation of the acquired in-process research and development. The fair
value of the in-process research and development was based on the discounted
cash flow method. As Cerus was a development stage company, there were no
historical pricing and margin assumptions to utilize and therefore estimates
used were based on the expectations of management. Management does not expect
material net cash in-flows until at least 2005. The present value of these cash
flows was calculated with an overall discount rate of 40%. At the date of
acquisition, the Company determined the technological feasibility of Cerus's
products was not established, and accordingly, wrote off the corresponding
amounts to acquired in-process research and development. Approximately
$0.5 million in research and development had been spent up to the date of the
acquisition in an effort to develop the technology to produce commercially
viable products. At the date of acquisition, the only identifiable intangible
assets acquired were the technologies under development and the acquired
workforce. Currently the Company knows of no developments which would lead it to
change its original assessment of the expected timing and commercial viability
of these projects.
The following unaudited pro forma combined condensed statements of
operations are derived from the historical consolidated financial statements of
the Company and Cerus Limited. The unaudited pro forma combined condensed
statements of operations present the combined results of operations of AeroGen,
Inc. and Cerus Limited for the year ended December 31, 1999, and the nine months
ended
F-40
<PAGE>
AEROGEN, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
September 30, 2000. The unaudited pro forma combined condensed statement of
operations gives effect to the acquisition of Cerus Limited as if it had
occurred as of January 1, 1999.
The following unaudited pro forma combined condensed statement of operations
is presented for illustrative purposes only and is not necessarily indicative of
the operating results that would have occurred if the transaction had been
consummated at the date indicated, nor is it necessarily indicative of future
operating results of the combined businesses. The unaudited pro forma combined
condensed statement of operations should be read in conjunction with the
historical consolidated financial statements and related notes of AeroGen, Inc.
and Cerus Limited included elsewhere herein.
F-41
<PAGE>
AEROGEN, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
HISTORICAL CERUS -----------------------------
AEROGEN, INC. LIMITED ADJUSTMENTS COMBINED
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Research and development revenues........... $ 468,220 $ 180,815 $ -- $ 649,035
Grant income................................ -- 107,540 -- 107,540
----------- --------- --------- ------------
468,220 288,355 -- 756,575
----------- --------- --------- ------------
Operating expenses:
Research and development.................. 7,909,503 206,307 -- 8,115,810
General and administrative................ 2,076,507 354,814 369,598(A) 2,800,919
----------- --------- --------- ------------
Total operating expenses................ 9,986,010 561,121 369,598 10,916,729
----------- --------- --------- ------------
Loss from operations........................ (9,517,790) (272,766) (369,598) (10,160,154)
Other income (expenses), net................ 549,875 (135,436) -- 414,439
----------- --------- --------- ------------
Net loss.................................... $(8,967,915) $(408,202) $(369,598) $ (9,745,715)
=========== ========= ========= ============
Net loss per common share, basic and
diluted................................... $ (4.95) $ (5.38)
=========== ============
Shares used in computing net loss per common
share, basic and diluted.................. 1,811,105 1,811,105
=========== ============
</TABLE>
See notes to unaudited pro forma combined financial information.
F-42
<PAGE>
AEROGEN, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
PRO FORMA
-----------------------------
AEROGEN, INC. CERUS LIMITED ADJUSTMENTS COMBINED
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Research and development revenues....... $ 5,124,866 $ -- $ -- $ 5,124,866
Grant income............................ 14,929 110,574 -- 125,503
------------ --------- ----------- ------------
5,139,795 110,574 -- 5,250,369
------------ --------- ----------- ------------
Operating expenses:
Research and development.............. 12,035,534 236,738 -- 12,272,272
General and administrative............ 2,820,785 74,798 153,999(A) 3,049,582
Purchased in-process research and
development......................... 3,500,000 -- (3,500,000)(B) --
------------ --------- ----------- ------------
Total operating expenses............ 18,356,319 311,536 (3,346,001) 15,321,854
------------ --------- ----------- ------------
Loss from operations.................... (13,216,524) (200,962) 3,346,001 (10,071,485)
Other income (expenses), net............ (16,008,052) 1,081 -- (16,006,971)
------------ --------- ----------- ------------
Net loss available to common
stockholders.......................... $(29,224,576) $(199,881) $ 3,346,001 $(26,078,456)
============ ========= =========== ============
Net loss per common share, basic and
diluted............................... $ (13.26) $ (11.83)
============ ============
Shares used in computing net loss per
common share, basic and diluted....... 2,204,640 2,204,640
============ ============
</TABLE>
See notes to unaudited pro forma combined financial information.
F-43
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
NOTE 1 -- BASIS OF PRESENTATION
The unaudited pro forma statements of operations give effect to the
acquisition as if it had occurred on January 1, 1999 and presents the unaudited
statement of operations of the Company for the nine months ended September 30,
2000 with the unaudited statement of operations of Cerus Limited for the five
months ended May 25, 2000 and the audited statement of operations of the Company
for the year ended December 31, 1999 combined with the audited statement of
operations of Cerus Limited for the year ended December 31, 1999. The
acquisition of Cerus Limited has been accounted for using the purchase method of
accounting and, accordingly, the results of operations of Cerus Limited have
been included in the Company's financial statements subsequent to May 25, 2000.
The unaudited pro forma combined information is presented for illustrative
purposes only and is not necessarily indicative of the operating results or
financial position that would have occurred if the transactions had been
consummated at the dates indicated, nor is it necessarily indicative of the
future operating results or the financial position of the combined companies.
NOTE 2 -- PRO FORMA ADJUSTMENTS
The following adjustments have been made to arrive at the pro forma combined
financial information:
(A) Additional amortization of goodwill and acquired workforce over their
estimated useful lives as follows:
<TABLE>
<CAPTION>
PRO FORMA EXPENSE
-----------------------------
NINE MONTHS
YEAR ENDED ENDED
AMORTIZATION DECEMBER 31, SEPTEMBER 30,
AMOUNT PERIOD 1999 2000
---------- ------------ ------------- -------------
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Goodwill............................. $1,917,589 6 years $319,598 $133,166
Acquired workforce................... 100,000 2 years 50,000 20,833
---------- -------- --------
Total................................ $2,017,589 $369,598 $153,999
========== ======== ========
</TABLE>
(B) To eliminate the write-off of the value assigned to in-process research and
development as it is a non-recurring expense. The income approach was used
to value acquired in-process research and development, which includes an
analysis of the completion costs, cash flows, other required assets and
risks associated with achieving such cash flow. At the time of acquisition,
the Company determined the technological feasibility of Cerus Limited's
product had not been established and, accordingly, wrote-off the amount to
acquired in-process research and development.
F-44
<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
3,600,000 SHARES
[AEROGEN LOGO]
COMMON STOCK
----------------
PROSPECTUS
---------------------
CHASE H&Q
CIBC WORLD MARKETS
SG COWEN
--------------
, 2000
---------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO
BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE
PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF
THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS
PROSPECTUS OR OF ANY SALE OF OUR COMMON STOCK.
NO ACTION IS BEING TAKEN IN ANY JURISDICTION OUTSIDE THE UNITED STATES TO
PERMIT A PUBLIC OFFERING OF THE COMMON STOCK OR POSSESSION OR DISTRIBUTION OF
THIS PROSPECTUS IN THAT JURISDICTION. PERSONS WHO COME INTO POSSESSION OF THIS
PROSPECTUS IN JURISDICTIONS OUTSIDE THE UNITED STATES ARE REQUIRED TO INFORM
THEMSELVES ABOUT AND TO OBSERVE ANY RESTRICTIONS AS TO THIS OFFERING AND THE
DISTRIBUTION OF THIS PROSPECTUS APPLICABLE TO THAT JURISDICTION.
UNTIL , 2000 (THE 25TH DAY AFTER THE COMMENCEMENT OF THIS
OFFERING), ALL DEALERS THAT BUY, SELL OR TRADE IN OUR COMMON STOCK, WHETHER OR
NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all costs and expenses, other than the
underwriting discounts and commissions, payable by the company in connection
with the sale of common stock being registered hereby. All of the amounts shown
are estimates except the SEC registration fee and the NASDAQ National Market
listing fee.
<TABLE>
<CAPTION>
AMOUNT
TO BE
PAID
----------
<S> <C>
SEC registration fee........................................ $ 16,395
NASD filing fee............................................. 6,250
NASDAQ listing fee.......................................... 95,000
Accounting fees and expenses................................ 450,000
Legal fees and expenses..................................... 500,000
Printing and engraving expenses............................. 350,000
Transfer Agent and registrar fees........................... 11,500
Miscellaneous............................................... 70,855
----------
Total..................................................... $1,500,000
==========
</TABLE>
------------------------
* To be completed by amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
As permitted by Delaware law, our amended and restated certificate of
incorporation provides that no director of ours will be personally liable to us
or our stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability for any breach of duty of loyalty to us or to our
stockholders;
- for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
- for unlawful payment of dividends or unlawful stock repurchases or
redemptions under Section 174 of the Delaware General Corporation Law; or
- for any transaction from which the director derived an improper personal
benefit.
Our amended and restated certificate of incorporation further provides that
we must indemnify our directors and executive officers and may indemnify our
other officers and employees and agents to the fullest extent permitted by
Delaware law. We believe that indemnification under our amended and restated
certificate of incorporation covers negligence and gross negligence on the part
of indemnified parties.
We intend to enter into indemnification agreements with each of our
directors and officers. These agreements, among other things, will require us to
indemnify each director and officer for certain expenses including attorneys'
fees, judgments, fines and settlement amounts incurred by any such person in any
action or proceeding, including any action by or in the right of AeroGen,
arising out of the person's services as our director or officer, any subsidiary
of ours or any other company or enterprise to which the person provides services
at our request.
II-1
<PAGE>
The underwriting agreement (Exhibit 1.1) will provide for indemnification by
the underwriters of AeroGen, our directors, our officers who sign the
registration statement, and our controlling persons for some liabilities,
including liabilities arising under the Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since July 1997, we have sold and issued the following unregistered
securities:
(1) From July 1997 through October 30, 2000, AeroGen has granted stock options
to purchase 1,986,136 shares of common stock to employees, consultants and
directors pursuant to its 1994 Stock Option Plan and 1996 Stock Option
Plan. Of these options, 321,079 have been canceled without being exercised,
656,391 have been exercised, 7,187 have been repurchased, and 1,246,502
shares remain outstanding.
(2) From April 1997 through November 1997, AeroGen issued 9,245,300 shares of
Series C preferred stock to 17 investors, including 14 institutional
investors and three individuals at a purchase price of $1.00 per share for
an aggregate purchase price of $9,245,300. Shares of Series C preferred
stock are convertible into shares of common stock at the rate of one share
of common stock for each three shares of Series C preferred stock owned.
(3) In October 1997, AeroGen issued warrants to purchase up to 130,000 shares
of Series C preferred stock at an exercise price of $1.00 per share to two
equipment leasing companies, Venture Lending & Leasing, Inc. and Venture
Lending & Leasing II, Inc. Shares of Series C preferred stock are
convertible into shares of common stock at the rate of one share of common
stock for each three shares of Series C preferred stock owned.
(4) In January 1998, AeroGen issued 466,666 shares of common stock to Jane E.
Shaw at $0.30 per share, for a purchase price of $140,000.
(5) In August 1998, AeroGen issued 10,285,714 shares of Series D preferred
stock to 20 investors including 15 institutional investors, three
individuals and two trusts at a purchase price $1.75 per share for an
aggregate purchase price of $17,999,999. Shares of Series D preferred stock
are convertible into shares of common stock at the rate of one share of
common stock for each three shares of Series D preferred stock owned.
(6) In November 1998, AeroGen issued 90,000 shares of common stock to
Casper L. de Clercq at $0.60 per share, for a purchase price of $54,000.
(7) From March 2000 through May 2000, AeroGen issued 1,923,078 shares of
Series E preferred stock to two purchasers, PathoGenesis Corporation and
Becton, Dickinson and Company, at a purchase price of $2.60 per share for
an aggregate purchase price of $5,000,002. Shares of Series E preferred
stock are convertible into shares of common stock at the rate of one share
of common stock for each three shares of Series E preferred stock owned.
(8) In April 2000, AeroGen issued 180,000 shares of common stock to two
purchasers, Michael A. Klimowicz and Deborah K. Karlson, at prices of $0.30
and $0.60 per share, for an aggregate purchase price of $106,000.
(9) In May 2000, AeroGen issued 1,725,000 shares of Series E preferred stock in
exchange for all voting shares of stock of Cerus Limited, held by 20
individuals, in connection with the acquisition of Cerus by AeroGen,
whereby Cerus became a subsidiary of AeroGen. Shares of Series E preferred
stock are convertible into shares of common stock at the rate of one share
of common stock for each three shares of Series E preferred stock owned.
(10) In July 2000, AeroGen issued 7,498,223 shares of Series F preferred stock
to 30 investors including 20 institutional investors, six individuals and
four trusts at a purchase price of $2.25 per share for an
II-2
<PAGE>
aggregate purchase price of $16,871,001. Shares of Series F Preferred
Stock are convertible into shares of common stock at the rate of one share
of common stock for each three shares of Series F Preferred Stock owned.
The sales and issuances of securities described in paragraph (1) above were
deemed to be exempt from registration under the Securities Act by virtue of
Rule 701 of the Securities Act in that they were offered and sold either
pursuant to a written compensatory benefit plan or pursuant to a written
contract relating to compensation, as provided by Rule 701. The sales and
issuances of securities described in paragraphs (2), (5), (7) and (10) above
were deemed to be exempt from registration under the Securities Act in reliance
upon Regulation D. The sales and issuances of securities described in
paragraphs (3), (4), (6) and (8) above were deemed to be exempt from
registration under the Securities Act in reliance upon Rule 4(2). The issuance
of securities described in paragraph (9) above was deemed to be exempt from
registration under the Securities Act in reliance upon Regulation S.
Appropriate legends are affixed to the stock certificates issued in the
aforementioned transactions. Similar legends were imposed in connection with any
subsequent sales of any such securities. All recipients either received adequate
information about AeroGen or had access, through employment or other
relationships, to such information.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------ ------------------------------------------------------------
<C> <S>
1.1+ Form of Underwriting Agreement
3.1+ Amended and Restated Certificate of Incorporation of AeroGen
3.2+ Amended and Restated Certificate of Incorporation of AeroGen
to be effective upon the closing of the offering
3.3+ Bylaws of AeroGen
3.4+ Amended and Restated Bylaws of the AeroGen to be effective
upon the closing of the offering
4.1+ Specimen Common Stock Certificate
4.2+ Fourth Amended & Restated Information and Registration
Rights Agreement dated July 7, 2000 between AeroGen and
holders of AeroGen Series A, Series B, Series C, Series D,
Series E, and Series F preferred stock and holders of
warrants to purchase AeroGen common stock or Series C
preferred stock
4.3+ Warrant, dated June 20, 1995, to purchase common stock of
AeroGen issued to Venture Lending & Leasing, Inc.
4.4+ Warrant, dated October 14, 1997, to purchase Series C
preferred stock of AeroGen issued to Venture Lending &
Leasing II, Inc.
4.5+ Warrant, dated October 14, 1997, to purchase Series C
preferred stock of AeroGen issued to Venture Lending &
Leasing, Inc.
4.6+ Stock Purchase Agreement between AeroGen and PathoGenesis
Corporation, dated March 13, 2000
4.7++ Stock Purchase Agreement between AeroGen and Becton,
Dickinson and Company, dated May 10, 2000
5.1 Opinion of Cooley Godward LLP
10.1+ Form of Indemnity Agreement
10.2+ 1994 Stock Option Plan
10.3+ 1996 Stock Option Plan
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------ ------------------------------------------------------------
<C> <S>
10.4+ 2000 Equity Incentive Plan
10.5+ 2000 Non-Employee Directors' Stock Option Plan
10.6+ 2000 Employee Stock Purchase Plan
10.7+ Sublease between AeroGen and MicroBar dated April 3, 1997
10.8+ Sublease between AeroGen and MicroBar dated August 9, 1999
10.9++ Development & Supply Agreement between AeroGen and
PathoGenesis Corporation dated March 13, 2000
10.10++ Development Agreement between Becton, Dickinson and Company
and AeroGen, dated May 10, 2000
10.11+ Settlement Agreement between Bespak plc and AeroGen and
Tenax Corporation, dated March 4, 1999
10.12+ Agreement for the Acquisition By Way of Exchange of the
Entire Issued "A" Share Capital of Cerus Limited, dated May
25, 2000
10.13+ Amended and Restated 1996 Stock Option Plan
10.14+ AeroGen, Inc. Executive Severance Benefit Plan
21.1+ Subsidiaries of AeroGen
23.1 Consent of PricewaterhouseCoopers LLP, independent
accountants
23.2 Consent of PricewaterhouseCoopers, independent accountants
23.3 Consent of Cooley Godward LLP. Reference is made to Exhibit
5.1
23.4+ Consent of IMS HEALTH
23.5+ Consent of Front Line Strategic Management Consulting, Inc.
24.1+ Power of Attorney. Reference is made to Page II-6
27.1+ Financial Data Schedule
</TABLE>
------------------------
++ Confidential treatment requested as to specific portions, which portions
are omitted and filed separately with the Securities and Exchange
Commission.
+ Previously filed.
(b) Financial Statement Schedules
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
ITEM 17. UNDERTAKINGS.
The registrant hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification by the registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the registrant pursuant to the provisions referenced in Item 14 of
this Registration Statement or otherwise, the registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer, or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered hereunder, the registrant will, unless in the opinion of its counsel
the matter
II-4
<PAGE>
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
Prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act, each
post-effective amendment that contains a form of Prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Sunnyvale,
State of California, on the 8th day of November, 2000.
<TABLE>
<S> <C> <C>
AEROGEN, INC.
By: *
-----------------------------------------
Jane E. Shaw, Ph.D.
Chairman and Chief Executive Officer
(Principal Executive Officer)
</TABLE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* Chairman and Chief Executive November 8, 2000
------------------------------- Officer and Director
Jane E. Shaw, Ph.D. (Principal Executive
Officer)
* Chief Financial Officer November 8, 2000
------------------------------- (Principal Financial and
Deborah K. Karlson Accounting Officer)
* Chief Technical Officer and November 8, 2000
------------------------------- Director
Yehuda Ivri
* Director November 8, 2000
-------------------------------
Thomas R. Baruch
* Director November 8, 2000
-------------------------------
Jean-Jacques Bienaime
* Director November 8, 2000
-------------------------------
Phyllis I. Gardner, M.D.
* Director November 8, 2000
-------------------------------
Susan D. Desmond-Hellmann
* Director November 8, 2000
-------------------------------
Philip M. Young
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ CAROL GAMBLE
----------------------------------
Carol Gamble
Attorney-in-fact
</TABLE>
II-6
<PAGE>
AEROGEN, INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
----------------------- -----------
<C> <S>
1.1+ Form of Underwriting Agreement
3.1+ Amended and Restated Certificate of Incorporation of AeroGen
3.2+ Amended and Restated Certificate of Incorporation of AeroGen
to be effective upon the closing of the offering
3.3+ Bylaws of AeroGen
3.4+ Amended and Restated Bylaws of AeroGen to be effective upon
the closing of the offering
4.1+ Specimen Common Stock Certificate
4.2+ Fourth Amended & Restated Information and Registration
Rights Agreement dated July 7, 2000 between AeroGen and
holders of AeroGen Series A, Series B, Series C, Series D,
Series E, and Series F preferred stock and holders of
warrants to purchase AeroGen common stock or Series C
preferred stock
4.3+ Warrant, dated June 20, 1995, to purchase common stock of
AeroGen issued to Venture Lending & Leasing, Inc.
4.4+ Warrant, dated October 14, 1997, to purchase Series C
preferred stock of AeroGen issued to Venture Lending &
Leasing II, Inc.
4.5+ Warrant, dated October 14, 1997, to purchase Series C
preferred stock of AeroGen issued to Venture Lending &
Leasing, Inc.
4.6+ Stock Purchase Agreement between AeroGen and PathoGenesis
Corporation, dated March 13, 2000
4.7++ Stock Purchase Agreement between AeroGen and Becton,
Dickinson and Company, dated May 10, 2000
5.1 Opinion of Cooley Godward LLP
10.1+ Form of Indemnity Agreement
10.2+ 1994 Stock Option Plan
10.3+ 1996 Stock Option Plan
10.4+ 2000 Equity Incentive Plan
10.5+ 2000 Non-Employee Directors' Stock Option Plan
10.6+ 2000 Employee Stock Purchase Plan
10.7+ Sublease between AeroGen and MicroBar dated April 3, 1997
10.8+ Sublease between AeroGen and MicroBar dated August 9, 1999
10.9++ Development & Supply Agreement between AeroGen and
PathoGenesis Corporation dated March 13, 2000
10.10++ Development Agreement between Becton, Dickinson and Company
and AeroGen, dated May 10, 2000
10.11+ Settlement Agreement between Bespak plc and AeroGen and
Tenax Corporation, dated March 4, 1999
10.12+ Agreement for the Acquisition By Way of Exchange of the
Entire Issued "A" Share Capital of Cerus Limited, dated May
25, 2000
10.13+ Amended and Restated 1996 Stock Option Plan
10.14+ AeroGen, Inc. Executive Severance Benefit Plan
21.1+ Subsidiaries of AeroGen
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
----------------------- -----------
<C> <S>
23.1 Consent of PricewaterhouseCoopers LLP, independent
accountants
23.2 Consent of PricewaterhouseCoopers, independent accountants
23.3 Consent of Cooley Godward LLP. Reference is made to Exhibit
5.1
23.4+ Consent of IMS HEALTH
23.5+ Consent of Front Line Strategic Management Consulting, Inc.
24.1+ Power of Attorney. Reference is made to Page II-6
27.1+ Financial Data Schedule
</TABLE>
------------------------
++ Confidential treatment requested as to specific portions, which portions
are omitted and filed separately with the Securities and Exchange
Commission.
+ Previously filed.
