<PAGE>
As filed with the Securities and Exchange Commission on September 20, 2000
Registration No. 333-39470
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
Amendment No. 2
to
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
DELCATH SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<CAPTION>
Delaware 3841 06-1245881
------------------------------- ---------------------------- ----------------
<S> <C> <C>
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
1100 Summer Street
Stamford, Connecticut 06905
(203) 323-8668
(Address, including zip code, and telephone number,
including area code, of registrant's executive offices)
----------------
M. S. KOLY
Chief Executive Officer
Delcath Systems, Inc.
1100 Summer Street
Stamford, Connecticut 06905
(203) 323-8668
(Name, address, including zip code, and telephone number,
including area code of agent for service)
----------------
Copies to:
Stephen A. Zelnick, Esq. Robert J. Mittman, Esq.
Morse, Zelnick, Rose & Lander, LLP Blank Rome Tenzer Greenblatt LLP
450 Park Avenue 405 Lexington Avenue
New York, NY 10022 New York, NY 10174
(212) 838-8040 (212) 885-5000
(212) 838-9190 (Facsimile) (212) 885-5001 (Facsimile)
----------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the Registration Statement becomes effective.
----------------
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, as amended (the "Securities Act"), check the following box. /X/
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 registration statement for the
same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act, 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 WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE SECURITIES AND EXCHANGE 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 it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION
DATED SEPTEMBER 20, 2000
[GRAPHIC OMITTED]
2,000,000 Shares of Common Stock
$6.00 per Share
Delcath Systems, Inc. is offering 2,000,000 shares of its common stock.
This is our initial public offering and there currently is no public market for
our common stock. We expect that the initial public offering price will be
$6.00 per share. The offering price may not reflect the market price of our
shares after the offering. We anticipate that our common stock will be listed
on the Nasdaq SmallCap Market under the symbol "DCTH."
-------------------------
Investing in the common stock involves risks. See "Risk Factors" beginning
on page 6.
-------------------------
================================================================================
Public Underwriting Proceeds
Offering Discounts and to
Price Commissions Company
--------------------------------------------------------------------------------
Per Share ......... $ 6.00 $ .60 $ 5.40
--------------------------------------------------------------------------------
Total ............. $12,000,000 $1,200,000 $10,800,000
================================================================================
-------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is
a criminal offense.
We have granted Whale Securities Co., L.P., the representative of the
underwriters, a 45-day option to purchase up to an additional 300,000 shares to
cover over-allotments. The underwriters are offering the shares on a firm
commitment basis. The underwriters expect to deliver the shares to purchasers
against payment on ________, 2000.
-------------------------
Whale Securities Co., L.P.
, 2000
<PAGE>
Notice to California investors: Each purchaser of our common stock in
California must be an accredited investor as that term is defined in Rule
501(a) of Regulation D promulgated under the Securities Act of 1933, or satisfy
one of the following suitability standards:
o minimum gross income of $65,000 and a net worth, exclusive of home,
home furnishings and automobiles, of $250,000; or
o minimum net worth, exclusive of home, home furnishings and
automobiles, of $500,000.
Notice to Ohio, South Carolina and Washington investors: Each purchaser of
our common stock in Ohio, South Carolina and Washington must be an accredited
investor as that term is defined in Rule 501(a) of Regulation D promulgated
under the Securities Act.
Notice for New Jersey investors: Offers and sales in this offering in New
Jersey may only be made to accredited investors as defined in Rule 501(a) of
Regulation D under the Securities Act of 1933. Under Rule 501(a) to be an
accredited investor an individual must have (a) a net worth or joint net worth
with the individual's spouse of more than $1,000,000 or (b) income of more than
$200,000 in each of the two most recent years or joint income with the
individual's spouse of more than $300,000 in each of those years and a
reasonable expectation of reaching the same income level in the current year.
Other standards apply to investors who are not individuals. There will be no
secondary sales of the securities to persons who are not accredited investors
for 90 days after the date of this offering in New Jersey by the underwriter
and selected dealers.
<PAGE>
PROSPECTUS SUMMARY
This is a summary of the information contained in this prospectus. To
understand this offering fully, you should read the entire prospectus,
especially the risk factors.
Unless the context indicates to the contrary, all per share data and
information relating to our common stock gives effect to a one-for-2.2881
reverse stock split of our common stock which will occur immediately before the
date of this prospectus.
Unless the context indicates to the contrary, the terms "Delcath," "we,"
"us," and "our" refer to Delcath Systems, Inc.
Our Business
Delcath has developed a drug-delivery system to isolate the liver from the
general circulatory system and to administer chemotherapy and other therapeutic
agents directly to the liver. Using the Delcath system, blood flowing into the
liver, after being infused with chemotherapy agents, is redirected out of the
patient's body, passed through filters which remove most of the chemotherapy
agents and then returned to the patient's general circulatory system. Isolating
the liver and cleansing the blood before its return into the patient's
circulatory system protects other parts of the body from the harmful
side-effects of chemotherapy. We believe that the use of the Delcath system in
treatment of liver cancer will allow higher dosages of chemotherapy to be
administered to the liver than can be administered with conventional
intravenous delivery.
The Delcath system is not currently approved for marketing by the United
States Food and Drug Administration, and it cannot be marketed in the United
States without FDA pre-marketing approval. With the proceeds of this offering,
we plan to conduct Phase III clinical trials under protocols which have been
approved by the FDA. The Phase III trials will seek to demonstrate the safety
and efficacy of the Delcath system in administering the chemotherapy agent,
doxorubicin, to treat cancerous tumors that have originated in the liver,
commonly known as primary liver cancer, and cancerous tumors from malignant
melanoma that have spread to the liver. We believe that the Delcath system may
provide cost savings in the treatment of liver cancer to the extent that it can
reduce treatment and hospitalization costs associated with the side-effects of
chemotherapy.
Corporate Information
We were incorporated in Delaware on August 5, 1988 under the name BGH
Medical Products. On May 7, 1990 we changed our name to Delcath Systems, Inc.
Our executive offices are located at 1100 Summer Street, Stamford, Connecticut
06905. Our telephone number at this location is (203) 323-8668. Our web site is
located at www.delcath.com. Information contained on our web site does not
constitute a part of this prospectus.
3
<PAGE>
The Offering
Common stock offered by
Delcath................. 2,000,000 shares
Common stock to be outstanding
after this offering..... 5,437,185 shares
The number of shares of common stock outstanding
after this offering includes 1,926,426 shares to be
issued immediately before the closing of this
offering upon the conversion of all our outstanding
convertible preferred stock, including 870,234
shares issued in payment of accumulated dividends
as of the date of this prospectus, assuming this
offering closes on September 30, 2000;
The number of shares of common stock outstanding
after this offering does not include:
o 559,416 shares reserved for issuance upon the
exercise of options granted under our incentive
and non-incentive stock option plans,
exercisable at a weighted average exercise price
of $3.27 per share;
o 21,852 shares reserved for issuance upon the
exercise of non-plan options exercisable at a
price of $2.29 per share;
o 21,468 shares reserved for issuance upon exercise
of outstanding warrants with exercise prices of
$8.58 and $11.74 per share;
o 300,000 shares reserved for issuance upon
exercise of options available for future grant
under our 2000 stock option plan;
o 200,000 shares reserved for issuance upon
exercise of the representative's warrants; and
o 300,000 shares reserved for issuance in this
offering to cover over-allotments, if any, by
the underwriter.
Use of proceeds.......... We intend to use the net proceeds of this offering
for research and development, introducing our
Delcath system into foreign markets and for working
capital and general corporate purposes.
Risk factors............. An investment in the common stock is speculative
and involves a high degree of risk. You should
purchase the shares only if you can afford a
complete loss of your investment. You should
consider carefully the risks listed in the "Risk
Factors" section of this prospectus before making an
investment in our shares.
Proposed Nasdaq SmallCap
Market symbol........... DCTH
4
<PAGE>
Summary Financial Data
The following summary financial data as of December 31, 1999, and for the
years ended December 31, 1998 and 1999, are derived from our audited financial
statements. The summary financial data as of June 30, 2000, and for the six
months ended June 30, 1999 and 2000 are derived from our unaudited financial
statements. This information should be read in conjunction with the financial
statements, including the notes, and "Plan of Operation" appearing elsewhere in
this prospectus.
Statement of Operations Data:
<TABLE>
<CAPTION>
Six Months Ended
Years Ended December 31, June 30,
----------------------------- -----------------------------
1998 1999 1999 2000
-------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Total costs and expenses ........... $ 2,124,443 $ 598,126 $ 206,182 $ 404,807
Operating loss ..................... (2,124,443) (598,126) (206,182) (404,807)
Net loss ........................... (2,049,980) (572,581) (200,410) (391,771)
Net loss per share ................. (2.01) (.54) (.19) (.32)
Weighted average number of shares of
common stock outstanding ......... 1,021,437 1,062,605 1,042,283 1,239,547
</TABLE>
Balance Sheet Data:
The pro forma information gives effect to:
o the payment in cash of $496,390 in accumulated preferred stock
dividends, assuming this offering closes on September 30, 2000.
o the borrowing of $230,000 of short-term indebtedness in August and
September 2000.
The as adjusted information gives effect to:
o the pro forma adjustments and sale of the 2,000,000 shares offered by
this prospectus, including the receipt of estimated net proceeds of
$10,000,000 and the repayment of $230,000 of indebtedness.
<TABLE>
<CAPTION>
As of
December 31, 1999 As of June 30, 2000
------------------- ------------------------------------------
Actual Pro Forma As Adjusted
----------- ----------- --------------
<S> <C> <C> <C> <C>
Cash and cash equivalents ......... $561,078 $417,549 $151,159 $10,212,522
Total assets ...................... 600,821 807,659 541,269 10,311,269
Total liabilities ................. 112,748 209,532 439,532 209,532
Stockholders' equity .............. 488,073 598,127 101,737 10,101,737
</TABLE>
5
<PAGE>
RISK FACTORS
The shares offered by this prospectus are speculative and involve a high
degree of risk. In addition to other information in this prospectus, you should
consider carefully the following risks before making an investment decision.
Risks related to our financial condition
We expect to incur continuing losses and our losses are expected to increase as
we begin our Phase III clinical trials.
We expect to incur significant and increasing losses while generating
minimal revenues over the next few years. Our future profitability will depend
on our ability to successfully complete Phase III clinical trials of our
Delcath system, obtain FDA pre-marketing approval for the system and
successfully market it in the United States and internationally. From our
inception on August 5, 1988 through June 30, 2000, we have incurred cumulative
losses of $11,703,733, substantially all of which were incurred in connection
with our product development efforts. For the years ended December 31, 1998 and
December 31, 1999 we incurred net losses of $2,049,980 and $572,581. If we
continue to incur losses we may exhaust our capital resources, including those
raised in this offering. In that case, unless we raise additional capital, we
may be forced to terminate or curtail operations.
If the proceeds of this offering are not sufficient to complete our Phase III
clinical trials and our efforts to raise additional financing are unsuccessful,
we will likely be required to cease operations.
Based upon our assumptions, we expect that the net proceeds of this
offering will enable us to complete our Phase III clinical trials and obtain
FDA pre-marketing approval for the use of doxorubicin with our Delcath system.
We cannot assure you that the proceeds of this offering will be sufficient for
these purposes because of unanticipated delays or expenses, increased
regulatory requirements by the FDA or other factors which we cannot foresee or
control. If we do not obtain any financing that we may require, we will not be
able to complete Phase III clinical trials and obtain FDA pre-marketing
approval for the Delcath system which could result in the cessation of our
business and the loss of your entire investment.
If we do not raise the additional capital required to commercialize the Delcath
system, our potential to generate future revenues will be significantly
limited.
The proceeds of this offering will be insufficient to fund the costs of
commercializing the Delcath system. We will require significant additional
capital to fund the costs associated with widescale marketing of the Delcath
system. We have no commitments for any additional financing. If we are unable
to obtain additional financing as needed, we will not be able to sell the
system on a commercial scale and our business will be adversely impacted.
Risks related to FDA and foreign regulatory approval
If Phase III clinical trials prove unsuccessful, we will be unable to obtain
FDA pre-marketing approval and will be unable to sell the Delcath system in the
United States.
We cannot market or sell the Delcath system in the United States without
FDA pre-marketing approval. If Phase III clinical trials are unsuccessful, we
will be unable to provide the FDA with the clinical data required to
demonstrate that the Delcath system is safe and effective and to obtain
approval to market the Delcath system in the United States. If we are unable to
market the Delcath system in the United States, it is likely that our business
will cease, resulting in the loss of your entire investment.
The FDA may reject the results of our clinical trials in whole or in part,
which could result in the FDA refusing to grant marketing approval or limiting
the circumstances under which the Delcath system may be used.
Pre-marketing approval requires a determination by the FDA that the data
developed by our clinical trials show that the use of doxorubicin in our system
is safe and effective in the treatment of primary liver cancer
6
<PAGE>
and melanoma which has spread to the liver. Separate FDA pre-marketing approval
is required for the treatment of each of these sources of liver cancer with the
Delcath system and one approval is not contingent upon the other. The FDA
requires that we demonstrate, for each of primary liver cancer and metastatic
melanoma in a statistically rigorous manner, increased patient survival times
for approval of our pre-market application. If regulatory approval is granted,
approval may require limitations on the indicated uses for which the Delcath
system may be marketed. Failure to obtain FDA pre-marketing approval to market
the Delcath system, or obtaining FDA pre-marketing approval with substantial
limitations on its indicated uses, could result in the cessation of our
business and the loss of your entire investment.
If we do not obtain FDA pre-marketing approval, we may not be able to sell the
Delcath System in foreign markets, which will limit our sales opportunities.
If we do not obtain FDA pre-marketing approval because our clinical trials
are unsuccessful, we may not be able to obtain regulatory approval to market
the Delcath system in foreign markets. If the FDA does not approve the Delcath
system, we will not be able to export the Delcath system from the United States
unless approval has been obtained from one of a number of developed
industrialized nations. We have not begun to seek foreign regulatory approval
and may not be able to obtain approval from one of those designated nations. If
we are unable to market the Delcath system internationally, our market
opportunity will be materially limited.
The conduct of Phase III clinical trials and obtaining FDA pre-marketing
approval could be delayed. Delay may cause us to exhaust our financial
resources prior to launching our product.
We may experience delays in beginning, conducting and completing the
trials, caused by many factors, including our limited experience in arranging
for clinical trials and in evaluating and submitting the data gathered from
clinical trials. Any significant delay in completing clinical trials or in the
FDA responding to our submission or a requirement by the FDA for us to conduct
additional trials will delay the commercialization of the Delcath System and
our ability to generate revenues and may result in our exhausting our financial
resources prior to launching our product.
Our dependence on contract research organizations and non-employee physicians
to conduct the Phase III clinical trials may jeopardize our successful
completion of the trials.
The contract research organizations and physicians conducting the clinical
trials are not our employees. As a result, we have limited control over their
activities and can expect that only limited amounts of their time will be
dedicated to the clinical trials. They may fail to meet their contractual
obligations or fail to meet regulatory standards in the performance of their
obligations. Failure to perform as expected, including their failure to enroll
a sufficient number of patients for our trials could result in the failure of
the trials and the failure to obtain FDA pre-marketing approval.
Third-party reimbursement may not be available to purchasers of the Delcath
system, or may be inadequate, which would hamper our sales efforts.
Our ability to commercialize the Delcath system in the United States and
in foreign markets, if regulatory approval of the system is obtained, will
depend, in part, on the extent to which third-party reimbursement for the cost
of the Delcath system will be available to purchasers. Physicians, hospitals
and other health care providers may be reluctant to purchase our products if
they do not receive substantial reimbursement for the cost of the procedures
using our products from third-party payors, including Medicare, Medicaid and
private health insurance plans.
Because the Delcath system currently is characterized by the FDA as an
experimental device, its use is not reimbursable in the United States. We will
not begin to seek to have third-party payors reimburse the use of the Delcath
system until after its use is approved by the FDA. Each third-party payor
independently determines whether and to what extent to reimburse for a medical
procedure or product. We cannot assure you that third-party payors in the
United States or abroad will cover procedures using the Delcath system.
Further,
7
<PAGE>
third-party payors may deny reimbursement if they determine that the Delcath
system was not used in accordance with established payor protocols regarding
cost effective treatment methods, or was used for forms of cancer or with drugs
not specifically approved by the FDA.
Risks related to manufacturing, commercialization and market acceptance of the
Delcath system
We obtain necessary components from sole-source suppliers. Because
manufacturers must demonstrate compliance with FDA specifications, if we change
any supplier, the successful completion of the clinical trials and/or the
commercialization of the Delcath system could be jeopardized.
Many of the components of the Delcath system are manufactured by sole
source suppliers. If any of our suppliers fail to meet our needs, or if we are
forced for any reason to seek an alternate source of supply, we may be forced
to suspend or terminate our Phase III trials. Further, if we need a new source
of supply after commercial introduction of the Delcath System, we may face long
interruptions in obtaining necessary components, which interruptions could
jeopardize our ability to supply the Delcath System to the market. Any new
supplier must demonstrate to the FDA that its components are manufactured in
accordance with manufacturing and performance specifications of the Delcath
system on file with the FDA.
We do not have any contracts with suppliers for the manufacture of components
for the Delcath system and we may encounter difficulties in obtaining adequate
supplies of components.
We do not have any contracts with suppliers for the manufacture of
components for the Delcath system. To date, we have only had components of the
Delcath system manufactured for us in small quantities for use in pre-clinical
studies and clinical trials. We will require greater quantities for the Phase
III clinical trials and significantly greater quantities to commercialize the
product. If we are unable to obtain adequate supplies of components from our
existing suppliers, or need to switch to an alternate supplier, the completion
of our clinical trials and commercialization of the Delcath system could be
delayed.
We may not be able to acquire a significant share of the market because of the
numerous cancer treatment alternatives and the strength of our competitors, and
therefore may not be able to achieve meaningful revenues or profitability.
The Delcath system competes with all forms of liver cancer treatments
which are alternatives to resection, or surgical removal, of the tumor,
including intravenous chemotherapy treatment, radiation, targeted chemotherapy
delivery through implanted infusion pumps and radio frequency waves. Many of
our competitors have substantially greater financial, technological, research
and development, marketing and personnel resources. In addition, some of our
competitors have considerable experience in conducting clinical trials and
other regulatory approval procedures. Our competitors may develop more
efficacious or more affordable products or treatment methods, or achieve
earlier product development, patent protection, in which case our chances to
achieve meaningful revenues or profitability will be substantially limited.
Risks related to this offering, our share price and corporate control
Your investment will be subject to immediate dilution of 69.0%.
Following this offering the net tangible book value of a share of common
stock will be $1.86 and you will have paid $6.00 per share. As a result, you
will experience immediate and substantial dilution of $4.14 per share, or
69.0%, between the net tangible book value per share of common stock after this
offering and the initial public offering price per share. This dilution is due
to the fact that our earlier investors paid less than the initial public
offering price when they purchased their shares of common stock and because we
have incurred losses since our inception.
Because we currently have no specific use for a substantial portion of the net
proceeds from this offering there is a greater risk that they may not be used
effectively.
Approximately $2,000,000 (20.0%) of the net proceeds from this offering
have been allocated to working capital and general corporate purposes.
Additionally, the anticipated application of the net proceeds is only an
estimate and may be adjusted from time to time as our management determines to
be appropriate. Accordingly, we will have broad discretion as to the use of the
net proceeds, including uses with which the stockholders may not agree.
8
<PAGE>
CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. These statements
relate to future events or our future financial performance, objectives,
expectations and intentions. In some cases, you can identify forward-looking
statements by terminology such as "may," "will," "should," "expects," "plans,"
anticipates," "believes," "estimates," "predicts," "potential" or "continue" or
the negative of these terms or other comparable terminology. These statements
involve known and unknown risks, unknown certainties and other factors,
including the risks outlined under "Risk Factors," that may cause our or our
industry's actual results, levels of activity, performance or achievements to
be materially different from any future results, levels of activity,
performance or achievements expressed or implied by these forward-looking
statements. You should not place undue reliance on forward-looking statements
in this prospectus which speak only as of the date they are made.
9
<PAGE>
USE OF PROCEEDS
The net proceeds to Delcath from the sale of shares being offered by this
prospectus, after deducting the underwriting discount and estimated expenses of
this offering, are estimated to be $10,000,000.
We expect to use these net proceeds approximately as follows:
<TABLE>
<CAPTION>
Approximate
Approximate Percentage
Application of Net Proceeds Dollar Amount of Net Proceeds
-------------------------------------------------------------------------- --------------- ----------------
<S> <C> <C>
Research and development:
Phase III clinical trials using the Delcath system with doxorubicin ..... $ 6,500,000 65.0%
Research and development stage clinical trials for other chemotherapy
agents ................................................................ 600,000 6.0
Reduce the cost of the Delcath filtration system ........................ 400,000 4.0
Introduce the Delcath system into foreign markets ........................ 500,000 5.0
Repayment of indebtedness ................................................ 270,000 2.7
Working capital and general corporate purposes ........................... 1,730,000 17.3
------------ -----
Total ................................................................ $ 10,000,000 100.0%
============ =====
</TABLE>
Phase III clinical trials using the Delcath system with doxorubicin. These
costs represent:
o the costs of recruiting medical centers to conduct the trials and
patients to participate in the trials;
o the costs of treating patients, including the costs of the Delcath
system and payments for unreimbursed medical expenses for patients
receiving treatment with the system; and
o the costs of approximately $950,000 for the fees and expenses of the
clinical research organization which we anticipate hiring to conduct
the trials, collect and process the data and prepare and file a
pre-market approval application and approximately $550,000 for
associated overhead, including the costs of additional personnel and
consultants.
We estimate that the average costs to treat a patient will be under
$20,000, and we expect to treat up to 274 patients.
Research and development stage clinical trials for other chemotherapy
agents. This amount represents the costs of conducting research and development
stage clinical trials for the use of other chemotherapy agents with the Delcath
system for the treatment of liver cancer. These costs represent the costs of
non-animal testing, animal testing, testing with humans, monitoring the testing
and collecting and processing data. Additional financing will be required to
conduct Phase II and III clinical trials.
Reduce the cost of the Delcath filtration system. This amount represents
the costs to design, develop and test a filter which will cost less than the
third-party filter currently used in the Delcath system and include the salaries
of an engineer and technician.
Introduce the Delcath system into foreign markets. These costs represent
the salaries of five employees to be hired, travel and promotional material to
establish alliances with leading hospitals in countries being targeted and
enlist their support in obtaining regulatory approval in their territories and
to establish strategic partnerships with domestic and/or foreign marketing
firms.
Repayment of indebtedness. Represents amounts to be used to repay $230,000
principal amount of promissory notes plus interest. These notes were issued in
August and September 2000, bear interest at an annual rate of 22% and are due
May 27, 2001. We are using the proceeds of these loans for working capital.
Working capital and general corporate purposes. These costs include
general and administrative costs, including the salaries of our executive
officers. Pending the above uses, the net proceeds of this offering will be
invested in short-term, interest-bearing, investment-grade securities.
10
<PAGE>
If the representative exercises the over-allotment option in full, we will
realize additional net proceeds of $1,566,000, which will be added to working
capital purposes.
The above allocation represents our best estimate of the allocation of the
net proceeds of this offering based upon the current status of our business. We
based this estimate on assumptions, including that the Delcath system will have
obtained FDA pre-marketing approval within 24 months from the closing of this
offering. If any of these factors change, we may find it necessary to
reallocate a portion of the proceeds within the above described categories or
use portions of the proceeds for other purposes. Our estimates may prove to be
inaccurate, new programs or activities may be undertaken which will require
considerable additional expenditures or unforeseen expenses may occur.
Based upon our current plans and assumptions relating to our business
plan, we anticipate that the net proceeds of this offering will satisfy our
capital requirements for at least 12 months following the closing of this
offering. If our plans change or our assumptions prove to be inaccurate, we may
need to seek additional financing sooner than currently anticipated or curtail
our operations. We cannot assure you that the proceeds of this offering will be
sufficient to fund our clinical trials with respect to the use of the Delcath
system with doxorubicin to treat liver cancer. We also cannot assure you that
additional financing will become available if needed.
We will invest proceeds not immediately required for the purposes
described above principally in United States government securities, short-term
certificates of deposit, money market funds or other short-term
interest-bearing investments.
11
<PAGE>
DILUTION
The difference between the initial public offering price per share and the
net tangible book value per share of common stock after this offering
constitutes the dilution to investors in this offering. Net tangible book value
per share is determined by dividing total tangible assets less total
liabilities by the number of outstanding shares of common stock.
At June 30, 2000, we had a net tangible book value of $306,764 or $.22 per
share. At June 30, 2000, our net tangible book value deficit would have been
($189,626) or ($.06) per share after giving pro forma effect to:
o the conversion of all outstanding shares of our convertible preferred
stock into 1,056,192 shares of common stock;
o the payment of $1,489,170 of estimated accumulated dividends assuming
this offering closes on September 30, 2000 through the issuance of
870,234 shares of common stock and the payment of $496,390 of
estimated accumulated dividends in cash;
o the issuance of 125,000 shares to Morse, Zelnick, Rose and Lander LLP
for legal services, at the date of this prospectus.
After also giving effect to the sale of the 2,000,000 shares being offered
at an initial public offering price of $6.00 per share and after deducting
estimated underwriting discounts and expenses of this offering, our adjusted
net tangible book value at June 30, 2000 would have been $10,101,737 or $1.86
per share, representing an immediate increase in net tangible book value of
$1.92 per share to the existing stockholders and an immediate dilution of $4.14
or 69.0% per share to new investors.
The following table illustrates the above information with respect to
dilution to new investors on a per share basis:
<TABLE>
<S> <C> <C>
Initial public offering price ..................................................... $ 6.00
Pro forma net tangible book value deficit at June 30, 2000 ...................... $(.06)
Increase in pro forma net tangible book value attributable to new investors ..... 1.92
-----
Adjusted pro forma net tangible book value after offering ......................... 1.86
-------
Dilution to new investors ......................................................... $ 4.14
=======
</TABLE>
The following table sets forth, on a pro forma basis as of June 30, 2000,
with respect to our existing stockholders and new investors, a comparison of
the number of shares of common stock we issued, the percentage ownership of
those shares, the total consideration paid, the percentage of total
consideration paid and the average price per share.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
----------------------- -------------------------- Price Per
Number Percent Amount Percent Share
----------- --------- -------------- --------- ----------
<S> <C> <C> <C> <C> <C>
Existing stockholders ......... 3,437,185 63.2% $10,566,686 46.8% $ 3.07
New investors ................. 2,000,000 36.8 12,000,000 53.2 6.00
--------- ----- ----------- -----
Total ...................... 5,437,185 100.0% $22,566,686 100.0%
========= ===== =========== =====
</TABLE>
The above table assumes no exercise of the underwriter's over-allotment
option. If the representative exercises the over-allotment option in full, we
estimate that the new investors will have paid $13,800,000 for the 2,300,000
shares of common stock being offered, representing approximately 56.6% of the
total consideration for 40.1% of the total number of shares of common stock
outstanding. In addition, the above table does not give effect to the shares
issuable upon exercise of outstanding options and warrants. To the extent that
any of these options or warrants are exercised, there will be further dilution
to the new investors.
12
<PAGE>
DIVIDEND POLICY
We have never declared or paid any dividends to the holders of our common
stock and we do not expect to pay cash dividends in the foreseeable future. We
currently intend to retain all earnings for use in connection with the
expansion of our business and for general corporate purposes. Our board of
directors will have the sole discretion in determining whether to declare and
pay dividends in the future. The declaration of dividends will depend on our
profitability, financial condition, cash requirements, future prospects and
other factors deemed relevant by our board of directors. Our ability to pay
cash dividends in the future could be limited or prohibited by the terms of
financing agreements that we may enter into or by the terms of any preferred
stock that we may authorize and issue.
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 2000:
o on an actual basis;
o on a pro forma basis to reflect:
o the issuance of 1,056,192 shares upon conversion of all of our
preferred stock;
o the issuance of 870,234 shares as payment of $992,780 of
estimated accumulated dividends on our preferred stock as of the
date of this prospectus, assuming this offering closes on
September 30, 2000;
o the payment of $496,390 for the remaining accumulated dividends
on our preferred stock as of the date of this prospectus,
assuming this offering closes on September 30, 2000;
o the issuance of 125,000 shares to Morse, Zelnick, Rose and Lander
LLP for legal services, at the date of this prospectus which will
be charged to paid-in capital as an expense of this offering; and
o on an as adjusted basis to give effect to the pro forma adjustments
and to the sale of shares, at an assumed initial public offering price
of $6.00 per share, after deducting the underwriting discounts and
estimated offering expenses payable by us.
The following table excludes from the common stock outstanding 602,736
shares of common stock reserved for issuance upon exercise of outstanding
options and warrants.
<TABLE>
<CAPTION>
June 30, 2000
----------------------------------------------------
Actual Pro Forma As Adjusted
---------------- ---------------- ----------------
<S> <C> <C> <C>
Long-term debt ................................................ $ 0 $ 0 $ 0
------------- ------------- -------------
Stockholders' equity:
Class A convertible preferred stock, par value $.01; 5,000,000
shares authorized, 2,000,000 issued and outstanding
(actual); no shares issued or outstanding (pro forma and as
adjusted) .................................................. 20,000 -- --
Class B convertible preferred stock, par value $.01; 5,000,000
shares authorized, 416,675 shares issued and outstanding
(actual); no shares issued or outstanding (pro forma and as
adjusted) .................................................. 4,167 -- --
Common stock, par value $.01; 15,000,000 shares authorized,
1,385,759 shares issued and outstanding (actual); 3,437,185
and 5,437,185 shares issued and outstanding (pro forma and
as adjusted) ............................................... 13,857 34,371 54,371
Additional paid-in capital ................................... 12,263,836 13,260,270 23,240,270
Accumulated deficit .......................................... (11,703,733) (13,192,904) (13,192,904)
------------- ------------- -------------
Total stockholders' equity ................................. $ 598,127 $ 101,737 $ 10,101,737
------------- ------------- -------------
Total capitalization ...................................... $ 598,127 $ 101,737 $ 10,101,737
============= ============= =============
</TABLE>
13
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in conjunction
with Management's "Plan of Operation" included elsewhere in this prospectus.
The operating data for each of the years in the two-year period ended December
31, 1999 and for the period from inception through December 31, 1999, and the
balance sheet data at December 31, 1999, are derived from our financial
statements which have been audited by KPMG LLP, independent accountants, and
are included in this prospectus. The operating data for the six month periods
ended June 30, 1999 and 2000 and for the period from inception through June 30,
2000 and the balance sheet data as at June 30, 2000 are derived from our
unaudited financial statements. The unaudited financial statements have been
prepared on substantially the same basis as the audited financial statements
and, in the opinion of management, include all adjustments, consisting only of
normal recurring adjustments, necessary for the fair presentation of the
results of operations for these periods. Historical results are not necessarily
indicative of the results to be expected in the future, and the results of
interim periods are not necessarily indicative of results for the entire year.
Operating Data:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1998 1999
----------------- -------------
<S> <C> <C>
Costs and expenses:
Legal, consulting and
accounting ....................... $ 574,299 $ 626,366
Stock option compensation
expense (reversal) ............... 759,229 (456,185)
Compensation and related
expenses ......................... 466,644 200,128
Other operating expenses ........... 324,271 227,817
------------- ----------
Total costs and expenses ......... 2,124,443 598,126
------------- ----------
Operating loss ................... (2,124,443) (598,126)
------------- ----------
Interest income ..................... 74,463 43,470
Interest expense .................... -- (17,925)
============= ==========
Net loss ......................... $ (2,049,980) $ (572,581)
============= ==========
Net loss per share .................. $ (2.01) $ (.54)
============= ==========
Weighted average number of
shares of common stock out-
standing ........................... 1,021,437 1,062,605
=============== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Cumulative from Cumulative from
Inception Six Months Ended June 30, Inception
(August 5, 1988) to ---------------------------- (August 5, 1988) to
December 31, 1999 1999 2000 June 30, 2000
--------------------- ------------- ------------- --------------------
<S> <C> <C> <C> <C>
Costs and expenses:
Legal, consulting and
accounting ....................... $ 4,517,169 $ 389,253 $ 172,926 $ 4,690,095
Stock option compensation
expense (reversal) ............... 2,520,170 (456,185) -- 2,520,170
Compensation and related
expenses ......................... 2,488,170 123,733 104,765 2,592,935
Other operating expenses ........... 2,191,276 149,381 127,116 2,318,392
------------- ---------- ---------- -------------
Total costs and expenses ......... 11,716,785 206,182 404,807 12,121,592
------------- ---------- ---------- -------------
Operating loss ................... (11,716,785) (206,182) (404,807) (12,121,592)
------------- ---------- ---------- -------------
Interest income ..................... 537,696 23,697 13,036 550,732
Interest expense .................... (132,873) (17,925) -- (132,873)
============= ========== ========== =============
Net loss ......................... $ (11,311,962) $ (200,410) $ (391,771) $ (11,703,733)
============= ========== ========== =============
Net loss per share .................. $ (.19) $ (.32)
========== ==========
Weighted average number of
shares of common stock out-
standing ........................... 1,042,283 1,239,547
========== ==========
</TABLE>
Balance Sheet Data:
As of As of
December 31, 1999 June 30, 2000
------------------- ---------------
Cash and cash equivalents ......... $561,078 $417,549
Total assets ...................... 600,821 807,659
Total liabilities ................. 112,748 209,532
Stockholders' equity .............. 488,073 598,127
14
<PAGE>
PLAN OF OPERATION
Background
We were founded in 1988 by a team of physicians. Since our inception, we
have been a development stage company engaged primarily in developing and
testing the Delcath system for the treatment of liver cancer. A substantial
portion of our historical expenses have been in support of the development and
the clinical trials of our product. To date, we have been dependent upon
venture capital financing to fund our activities. Without an FDA pre-marketing
approved product, we have generated minimal revenues from product sales. We
have been unprofitable to date and have had losses of $2,049,980 and $572,581
for the years ended December 31, 1998 and 1999 and $391,771 for the six months
ended June 30, 2000. Cumulative losses from inception through June 30, 2000
were $11,703,733. Losses have continued through the date of this prospectus. We
expect to incur additional losses over the next three years and anticipate
these losses will increase significantly in this period due to continued
requirements for product development, clinical studies, regulatory activities,
manufacturing and establishment of a sales and marketing organization. The
amount of future net losses and time required to reach profitability are
uncertain. Our ability to generate significant revenue and become profitable
will depend on our success in commercializing our device.
We incurred non-cash compensation expense in connection with the grants of
options to purchase common stock to founders, employees, and directors because
those options had a weighted average exercise price below the fair value of the
common stock at the dates of the grants. This compensation expense from
inception on August 5, 1988, through June 30, 2000 totaled $2,520,170.
Liquidity and Capital Resources
We have financed our operations to date primarily through private
placements of our common and preferred stock. Through June 30, 2000, we raised
$9,816,686 through the sale of our class A preferred stock, class B preferred
stock and common stock. Cash used to fund operations from inception through
June 30, 2000 was $8,981,127. Our cash and cash equivalents totaled $417,549 at
June 30, 2000, a decrease of $143,529 from December 31, 1999.
Since January 1, 1998, our principal source of cash has been the following
financing transactions:
o In January 1998, we sold 43,704 shares of common stock at a price of
$11.44 per share to Johnson & Johnson Development Corporation, and
received proceeds of $500,000.
o In April 1998, we issued 10,926 shares of common stock upon exercise
of options at a price of $6.18 per share for proceeds of $67,500.
o In September 1998, we sold 4,370 shares of common stock to an
individual at a price of $13.04 per share and received proceeds of
$57,000.
o In April 1999, we issued 2,913 shares of common stock upon exercise of
warrants at a price of $8.58 per share, and received proceeds of
$24,998.
o In June 1999, we sold 59,514 shares of common stock at a price of
$13.04 per share and received proceeds of $776,192.
o In April 2000, we sold 292,426 shares of common stock at a price of
$1.72 per share, as part of a rights offering to our existing
stockholders and option holders, and received proceeds of $501,825.
o In August and September 2000, we borrowed $230,000, for which we
issued $230,000 principal amount of promissory notes, which bear
interest at an annual rate of 22% and are due on May 27, 2001. Of
these notes, $50,000 principal amount was to M.S. Koly, Chief
Executive Officer, President and a director of Delcath, and $40,000
principal amount was issued to the mother of Samuel Herschkowitz, our
Chairman of the Board and Chief Technology Officer.
Over the next 12 months, we expect to continue to incur expenses related
to the research and development of our technology, including:
o phase III clinical trials using doxorubicin with the Delcath system.
o pre-clinical and clinical trials for the use of other chemotherapy
agents with the Delcath system for the treatment of liver cancer; and
15
<PAGE>
o the development of additional products and components, in particular a
filter which will be more affordable than the third-party filter
currently used in the Delcath system.
We expect to begin doxorubicin trials during the first quarter of 2001.
These trials are expected to take 12 to 18 months to complete. The collation,
analysis and submission of the results of the trials to the FDA will take an
additional three months and we estimate that the FDA will respond to our
submission within three months;
We expect to incur significant additional operating losses over each of
the next several years and expect cumulative losses to increase significantly
as we continue to expand our research and development, clinical trials and
marketing efforts. During the next 12 months, we expect to purchase
approximately $150,000 in computer, laboratory and testing equipment, primarily
for testing of a lower cost filter. We also expect to hire approximately 12
additional employees in the areas of research and development, regulatory and
clinical management, marketing and administrative functions at an estimated
annual expense of $600,000. The number and timing of such hiring will vary
depending upon the success of the international marketing efforts and progress
of the clinical trials.
Immediately prior to the closing of this offering, all of our preferred
stock will convert into shares of common stock. As part of this conversion, the
preferred stockholders will receive an estimated 870,234 shares of common stock
and $496,390 in cash in payment of accumulated dividends, assuming the offering
closes on September 30, 2000.
We believe that existing cash and cash equivalents, together with net
proceeds of approximately $10,000,000 from this offering, will be sufficient to
finance our operations for at least twelve months from the date of this
prospectus. Our future liquidity and capital requirements, however, will depend
on numerous factors, including:
o the progress of our research and product development programs,
including clinical studies;
o the timing and costs of various United States and foreign regulatory
filings;
o the timing and effectiveness of product commercialization activities,
including marketing arrangements overseas;
o the timing and costs involved in obtaining regulatory approvals, if
ever, and complying with regulatory requirements;
o the timing and costs involved in preparing, filing, prosecuting,
defending and enforcing intellectual property rights; and
o the effect of competing technological and market developments.
If the proceeds of this offering, together with our currently available
funds, are not sufficient to satisfy our spending plans, we will be required to
revise our capital requirements or to seek additional funding through
borrowings and/or additional sales of securities. We cannot assure you that the
proceeds of this offering will be sufficient to fund our clinical trials with
respect to the use of the Delcath system with doxorubicin to treat liver
cancer. We also cannot assure you that additional financing will become
available if needed.
16
<PAGE>
BUSINESS
Overview
Delcath has developed a system, the Delcath system, to isolate the liver
from the general circulatory system and to administer chemotherapy and other
therapeutic agents directly to the liver.
The Delcath system is not currently approved for marketing by the United
States Food and Drug Administration, and it cannot be marketed in the United
States without FDA pre-marketing approval. With the proceeds of this offering,
we plan to conduct Phase III clinical trials designed to secure marketing
approval for the system in the United States and possibly in foreign markets.
Delcath was originally formed by a team of physicians on August 5, 1988 as
BGH Medical Products, Inc., a Delaware corporation. On August 22, 1988, BGH
Medical Products Inc., a Connecticut corporation, was merged into it. On May 7,
1990, the surviving Delaware corporation changed its name to Delcath Systems,
Inc.
Strategy
Our objective is to establish the use of the Delcath system as the
standard technique for delivering chemotherapy agents to the liver and to
expand the Delcath technology so that it may be used in the treatment of other
liver diseases and of cancers in other parts of the body. Our strategy includes
the following:
o Complete clinical trials to obtain FDA pre-marketing approval for use
of the Delcath system with doxorubicin to treat primary liver cancer
and malignant melanoma that has spread to the liver. Our highest
priority is completing the Phase III clinical trials, data
preparation, statistical analysis and regulatory documents associated
with an application for pre-market approval of commercial sale of the
Delcath system in the United States. FDA pre-marketing approval of our
application will permit us to market the Delcath system to administer
doxorubicin in the treatment of primary liver cancer and melanoma that
has spread to the liver.
o Obtain approval to market the Delcath system in the United States for
the treatment of other forms of liver cancer using other chemotherapy
agents and treatment of hepatitis using anti-viral drugs. In addition
to researching the use of other chemotherapeutic agents with the
Delcath system to treat cancer, we plan to research the use of other
compounds with the Delcath system to treat other diseases, such as
hepatitis. Our timing to begin these studies will depend on our
ability to establish strategic alliances with pharmaceutical
manufacturers or other strategic partners in conjunction with our
research into other therapeutic compounds or raise additional funds
for these purposes. FDA pre-marketing approval will be required to
market the Delcath system for these uses.
o Introducing the Delcath system into foreign markets. We will seek to
establish strategic relationships with domestic and foreign firms that
have recognized presence or experience in foreign markets that we
intend to target. Our strategy is to focus on markets that have a high
incidence of liver cancer and the means to provide and pay for cancer
treatments. According to the World Health Organization, many Asian and
European countries, including China, Japan, Hong Kong, the
Philippines, France, Germany, Italy and Spain have a higher incidence
of liver cancer than the United States. We intend to seek to enter
into arrangements with strategic partners who have experience with
obtaining regulatory approval or marketing medical devices in those
markets.
o Reduce the cost of the Delcath system's filtration system. The filters
we currently use to detoxify blood outside the body comprise a
significant portion of the cost of the Delcath system kit. We are
researching technologies which may enable filters to be produced at a
lower cost.
o Leverage our core double balloon catheter technology to expand our
product offerings to include systems for administering chemotherapy
agents in other parts of the body. Early studies have indicated that
the same principles employed in liver isolation may be applied to
other organs. By
17
<PAGE>
modifying the catheter, including the spacing, size and number of the
balloons, the Delcath system initially may be adapted for use in
treatment of cancers in other areas of the body, including the limbs,
kidneys, lungs, and other organs of the abdominal cavity. Future
studies may investigate the use of the Delcath system in other organs
as well.
We have not yet begun to conduct this research and do not intend to do
so until we obtain additional financing or enter strategic
relationships.
The Cancer Treatment Market
The American Cancer Society projects that about 1,200,000 Americans will
be diagnosed with cancer in 2000. According to the American Cancer Society's
"Cancer Facts and Figures -- 2000", cancer remains the second leading cause of
death in the United States. While researchers continue to develop innovative
new treatments for some forms of this disease, surgical resection,
chemotherapy, radiation and hormone therapy continue to be the most commonly
used treatments.
The financial burden of cancer is great for patients, their families and
society. The National Cancer Institute, in the American Cancer Society's "Facts
and Figures," estimates the overall costs of cancer to be $107 billion,
including $37 billion in direct medical costs, $11 billion for indirect
morbidity costs attributable to lost productivity due to illness, and $59
billion for indirect mortality costs attributable to lost productivity due to
death.
The Liver Cancer Market
Liver cancer is one of the most prevalent and lethal forms of cancer
throughout the world. There are two forms of liver cancer: primary and
metastatic. Primary liver cancer originates in the liver. Secondary, or
metastatic, liver cancer results from the spread of cancer from other places in
the body to the liver. In the liver, tumors can be surgically removed only when
they are located in one of the liver's two lobes. According to a January 3,
2000 article on liver cancer in the Houston Chronicle, an estimated 75% of
cancerous liver tumors cannot be surgically removed at the time of diagnosis. A
significant number of patients treated for primary and metastatic liver cancer
will experience a recurrence of their disease.
Metastatic liver cancer is characterized by microscopic pieces of other
forms of cancer that detach from the primary site and travel via the blood
stream and lymphatic system into the liver, where they grow into new tumors.
This growth often continues even after removal of the primary cancer or
cancerous organ. When cancer cells enter the liver and develop into tumors,
they tend to grow very quickly. In many cases, the patient dies not from the
primary cancer, but from the tumors in the liver; the liver becomes the "life
limiting organ." People cannot survive without a liver capable of performing
its critical biologic functions: facilitating the conversion of food into
energy and filtering toxic agents from the blood. The liver is one of the three
most common sites to which cancer may spread. Due to numerous factors,
including the absence of viable treatment options, metastatic liver cancer
often causes death.
According to a recent report, liver cancer is the third most common form
of cancer worldwide. The worldwide incidence of primary liver cancer is
estimated to be 1,000,000 new patients each year and there are an estimated
1,250,000 deaths worldwide caused by all forms of liver cancer. According to a
1999 article in the New England Journal of Medicine, researchers reported that
annual new diagnoses of liver cancer increased from 1.4 cases per 100,000
persons in the late 1970s to 2.4 cases per 100,000 persons in the 1990s. The
American Cancer Society has projected that in the United States there will be
approximately 15,300 new cases of primary liver cancer and 47,700 new cases of
malignant melanoma in 2000.
Liver cancer is among the most virulent forms of cancer. In the United
States, five-year survival rates are usually less than 10%, according to the
National Cancer Institute.
Primary liver cancer is particularly prevalent in Southern Europe, Asia
and developing countries, where the primary risk factors for the disease are
present. These risk factors include: hepatitis-B, hepatitis-C, relatively high
levels of alcohol consumption, aflatoxin, cigarette smoking and exposure to
industrial pollutants.
Our current product is designed to treat primary liver cancer and melanoma
which has spread to the liver.
18
<PAGE>
Liver Cancer Treatments
The prognosis for primary and secondary liver cancers is poor. Although
limited treatment options are currently available for liver cancer, they are
typically ineffective, are generally associated with significant
side-effects and can even cause death. Traditional treatment options include
surgery, chemotherapy, cryosurgery, percutaneous ethanol injection and
radiation.
Surgery
While surgery is considered the "gold standard" treatment option to
address liver tumors, an estimated 75% of liver cancer patients are
unresectable, which means they do not qualify for surgical removal. This is
most often due to the following:
o Operative risk: limited liver function or poor patient heath threatens
survival as a result of the surgery; or
o Technical feasibility: the proximity of a cancerous tumor to a
critical organ or artery, or the size, location on the liver or number
of tumors makes surgery not feasible.
For the few patients who qualify for surgery, there are significant
complications related to the procedure. Recurrence of tumors is common and in
that event, surgery typically cannot be repeated.
We believe that delivery of drugs with the Delcath system may enable
surgical resection in some of the cases which are currently inoperable by
reducing the size and number of tumors sufficiently to make resection feasible.
Shrinking a tumor using chemotherapy and then removing the tumor is a procedure
known as adjuvant therapy. After resection, chemotherapy can be administered
through the Delcath system with the objective of destroying micrometastases in
the liver that may remain undetected, thus preventing or delaying any
recurrence of tumor growth.
Chemotherapy
The most prevalent form of liver cancer treatment is intravenous
chemotherapy. The effectiveness of this treatment, however, is limited by its
side-effects. Generally, the higher the dosage of chemotherapy administered,
the greater its ability to kill cancer cells. However, due to the toxic nature
of chemotherapy agents, the higher the dosage administered, the greater damage
chemotherapy agents cause to healthy tissues. As a result, the dosage of
chemotherapy required to kill cancer cells can be lethal to patients.
The side-effects caused by doxorubicin, the drug we are seeking to have
approved for use in the Delcath system, is representative of the side-effects
associated with many chemotherapy agents. Doxorubicin causes irreversible heart
tissue damage. Depending on dosage levels, the damage caused by doxorubicin can
be serious and lead to congestive heart failure. Doxorubicin can also cause
severe mucositis leading to ulceration of the mouth and digestive organs,
damage to a patient's immune system through destruction of bone marrow cells,
as well as acute nausea, severe vomiting, dermatological problems and hair
loss. The use of doxorubicin can be fatal even when it is administered with
careful patient monitoring.
The limited effectiveness of intravenous chemotherapy treatment and its
debilitating, often life-threatening side-effects makes the decision to undergo
chemotherapy treatment difficult. In some instances, in an attempt to shrink
tumors, a physician may prescribe a radically high-dose of chemotherapy,
despite its side-effects. In other cases, recognizing the inevitable result of
liver cancer, the physician and patient choose only to manage the patient's
discomfort from cancer with pain killers while foregoing treatment.
To address this trade-off between the efficacy of intravenous chemotherapy
treatment and its dire side-effects, physicians have experimented with
techniques to isolate the liver from the general circulatory system and to
achieve a targeted delivery of chemotherapy agents to the liver. In the 1980s, a
physician developed a procedure in which he surgically diverted the blood flow
from the liver while infusing high dosages of chemotherapy agents into the
liver. A filtration circuit reduced drug concentrations before returning the
diverted blood to the patient. The treatment, however, was not embraced by the
medical community because it is highly invasive, resulting in prolonged recovery
times, long hospital stays and excessive costs.
19
<PAGE>
Other physicians have experimented with the delivery of chemotherapy agents to
the liver by catheter, attempting to use one or more catheters to remove
chemotherapy agents before they enter the general circulatory system. We are
unaware of any system, however, which contains the patented attributes of the
Delcath design.
Cryosurgery
Cryosurgery is the destruction of cancer cells using sub-zero temperatures
in an open surgical procedure. During cryosurgery, multiple stainless steel
probes are placed into the center of the tumor and liquid nitrogen is
circulated through the end of the device, creating an iceball. Cryosurgery
involves a cycle of treatments in which the tumor is frozen, allowed to thaw
and then refrozen.
While cryosurgery is considered to be relatively effective, we believe
adoption of this procedure has been limited because:
o It is not an option for patients who cannot tolerate an open surgical
procedure;
o It involves significant complications which are similar to other open
surgical procedures, as well as liver fracture and hemorrhaging caused
by the cycle of freezing and thawing;
o It is associated with mortality rates estimated to be between one and
five percent; and
o It is expensive compared to other alternatives.
Percutaneous Ethanol Injection
Percutaneous ethanol injection, or PEI, involves the injection of alcohol
into the center of the tumor. The alcohol causes cells to dry out and cellular
proteins to disintegrate, ultimately leading to tumor cell death.
While PEI can be successful in treating some patients with primary liver
cancer, it is generally considered ineffective on large tumors as well as
metastatic tumors. Patients are required to receive multiple treatments, making
this option unattractive for many patients. Complications include pain and
alcohol introduction to bile ducts and major blood vessels. In addition, this
procedure can cause cancer cells to be deposited along the needle tract when
the needle is withdrawn.
Radiation Therapy
Radiation therapy uses high dose x-rays to kill cancer cells. Radiation
therapy is not considered an effective means of treating liver cancer and is
rarely used for this purpose. Radiation is often used as an adjunct to other
cancer treatments.
Implanted Infusion Pumps
Implanted Infusion Pumps can be used to better target the delivery of
chemotherapy agents to the tumor. Arrow International markets an implantable
pump typically used to treat colorectal cancer which has metastasized to the
liver. This pump, however, lacks a means of preventing the entry of
chemotherapy agents into the patient's general circulation after it passes
through the liver. This technique does not enable physicians to prescribe
higher doses of chemotherapy.
Other Methods of Treatment
Still other liver cancer treatments include: liver transplants,
embolization, tumor ablation through the use of radio frequency waves and the
use of biological response modulators, monoclonal antibodies and liposomes. The
effectiveness of these treatments is limited, many have dose limiting
side-effects, and none is widely used.
20
<PAGE>
The Delcath System
The Delcath system is designed to address the critical shortcomings of
conventional intravenous chemotherapy delivery. The Delcath system isolates the
liver from the general circulatory system during liver cancer treatments with
chemotherapy and then returns the blood exiting the liver to the general
circulatory system only after the chemotherapy agent has been substantially
removed by filtration outside the body. We believe that such protection from
the side-effects of chemotherapy, that is provided by the Delcath system to
other parts of the body, allows for higher chemotherapy doses to be
administered to the liver than can be administered by conventional intravenous
delivery. By filtering out a substantial portion of the chemotherapy agent
before the blood is returned to the blood stream, other organs of the body
receive less exposure than the liver to the chemotherapy agent. Therefore,
these organs are less likely to suffer from the harmful side-effects of
chemotherapy, including the cumulative harmful effect that doxorubicin has on
the heart muscle.
The Delcath system kit includes the following disposable components:
o Infusion catheter -- a thin-walled arterial infusion catheter used to
deliver chemotherapy to the liver;
o Double balloon catheter -- a multi-passageway catheter used to isolate
and divert the drug-laden blood exiting the liver;
o Extracorporeal filtration circuit -- a blood tubing circuit
incorporating the disposable components used with a blood pump to push
the isolated blood through the system's filters and guide the cleansed
blood back to the patient;
o Filters -- activated carbon blood filters used to remove most of the
chemotherapy agent from the isolated blood after it has flowed through
the liver and before it returns to the patient's general circulation;
and
o Return catheter -- a thin-walled blood sheath used to deliver the
filtered blood from the extracorporeal filtration circuit back into
one of the major veins returning blood to the right atrium of the
heart.
The double balloon catheter has one large passageway and three smaller
passageways. Each of two low-pressure balloons is inflated through one of the
three smaller passageways. Blood flows out of the liver through the large
passageway to the filtration system. A separate access port attaches to the
large passageway and is designed for sampling fluid or flushing the system. The
third smaller passageway allows blood exiting the legs and kidneys to bypass
the liver and return to the heart.
The Delcath procedure involves a series of three catheter insertions, each
of which is made through the skin. During test procedures, patients are treated
with intravenous sedation and local anesthesia at catheter insertion sites. In
some cases general anesthesia has been used. An infusion catheter is inserted
into the artery through which blood normally flows to the liver. A second
catheter -- the Delcath double balloon catheter -- is inserted through the
inferior vena cava. The balloons on the double balloon catheter are then
inflated. This procedure prevents the normal flow of blood from the liver to
the heart through the inferior vena cava because the inferior vena cava has
been blocked. A chemotherapy agent is then infused into the liver through the
infusion catheter. The infused blood is prevented from flowing to the heart,
but exits the liver through perforations on the double balloon catheter and
flows through this catheter out of the body where the infused blood is pumped
through activated charcoal filters to remove most of the chemotherapy agent.
The filtered blood is returned to the patient through the jugular vein which
leads to the superior vena cava and the heart, thus restoring the cleansed
blood to normal circulation. Infusion is administered over a period of 30
minutes. Filtration occurs during infusion and for 30 minutes afterward. The
catheters are removed and manual pressure is maintained on the catheter
puncture sites for approximately 15 minutes. The entire procedure takes
approximately two to three hours to administer.
During Phase I and II clinical trials, patients remained in the hospital
overnight for observation after undergoing treatment with the Delcath system.
Once physicians become familiar with using the Delcath system, we expect the
procedure to be performed on an outpatient basis, with the patient resuming
normal activities the day after the procedure is performed. We expect a patient
to undergo an average of four treatments, one every three weeks. A new Delcath
system kit is used for each treatment.
Integral to our research and development efforts is our program of
clinical research with prominent researchers and physicians conducted at Yale
University, M.D. Anderson Cancer Center, and the Robert Wood Johnson Medical
School/Cancer Institute of New Jersey.
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Our Phase III Clinical Trials
Phase III human clinical trials are a prerequisite for FDA pre-marketing
approval of Delcath's pre-marketing application. During these trials,
administration of doxorubicin through the Delcath system must be proven to be
safe and effective for the treatment of liver cancer. The FDA requires us to
demonstrate that delivering doxorubicin using the Delcath system results in
patient survival times that are longer than those obtained from administering
chemotherapy agents intravenously.
We have conducted Phase I and II human clinical trials at three United
States medical centers under investigational device and investigational new
drug exemptions granted by the FDA. The trials were designed to demonstrate the
system's "functionality," or its ability to administer to and extract from the
liver approved and marketed chemotherapy agents. Forty-four patients
participated in the trials. Twenty-one of these test subjects had primary liver
cancer or melanoma which had spread to the liver and were treated with
doxorubicin. The remaining 23 test subjects suffered from other forms of liver
cancer, and/or were treated with another chemotherapy agent, 5-FU. These trials
demonstrated that the Delcath system was capable of extracting approximately
70% to 85% of the chemotherapy agent administered to the liver. Therefore, the
Delcath system permits the delivery of higher dosages of chemotherapy agents to
the cancer site.
We believe the results of the clinical trials we have conducted indicate
that the Delcath system delivered:
o more chemotherapy agent to the tumor site; and
o less chemotherapy agent to the general circulation than delivered by
administration of the same dose by intravenous means.
In addition, clinicians involved in the Phase I and Phase II clinical
trials observed:
o reduction in tumor size; and
o the safety of the system at higher dosage levels of chemotherapy than
those used in conventional intravenous chemotherapy delivery.
Further, though not demonstrated in a statistically significant manner
because of the limited number of patients, clinicians observed survival times
of patients treated with the Delcath system which exceeded those that would
generally be expected in patients receiving chemotherapy treatment through
conventional intravenous means of delivery.
Based on the results of our Phase I and Phase II clinical trials, we
submitted to the FDA our application for pre-market approval of the Delcath
system as a medical device. In response to our application, the FDA classified
the Delcath system as a drug delivery system and requires us to obtain approval
of a new drug application, or a supplemental new drug application, for the
chemotherapy agent being administered by the Delcath system. These applications
must demonstrate the efficacy of a particular drug when administered through
the Delcath system. To do so, we must demonstrate, in a statistically
meaningful manner, that administering chemotherapy agents with the Delcath
system results in survival times of patients that are longer than those
obtained from administering chemotherapy agents intravenously.
With a substantial portion of the proceeds from this offering, we intend
to conduct Phase III human clinical trials designed to demonstrate that
administering doxorubicin with the Delcath system to treat primary liver cancer
and malignant melanoma that has spread to the liver results in patient survival
times that are longer than those obtained from administering chemotherapy
agents intravenously.
In December 1999, the FDA approved the protocols for conducting the Phase
III clinical trials.
We expect the Phase III clinical trials to be conducted in at least 10
medical centers and to involve approximately 274 test subjects, of which 124
will be treated for primary liver cancer and 150 will be treated for malignant
melanoma that has spread to the liver. Half of these test subjects will be
treated with doxorubicin administered using the Delcath system and half, the
control group, will be treated with chemotherapy agents delivered
intravenously. We have identified and approached a number of medical centers
that have expressed an interest in conducting the clinical trials. We expect
that within 90 days after the closing of this offering we will begin to enter
agreements with medical centers to conduct the clinical trials. As a
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result, we expect clinical trials to begin during the fourth quarter of this
year. However, our timetable is subject to uncertainty and we cannot assure you
that we can meet our planned schedule. We cannot assure you that all of the
medical centers we have identified will be available to conduct the clinical
trials when we are in a position to have them commence or that we will be ready
to commence the trials within any particular time period.
We intend to hire a contract research firm to conduct these trials.
However, we have not begun negotiations with a contract research organization
and we cannot assure you that we will be able to engage an organization on
acceptable terms and conditions in a timely manner or at all.
We believe that we will acquire sufficient data to obtain FDA
pre-marketing approval of the Delcath system within 12 to 18 months of the
commencement of the clinical trials. After acquiring sufficient data, we
believe that our collation, analysis and submission of the trial results to the
FDA will take an additional three months. Given the short life expectancy of
liver cancer patients, we believe that the FDA will review our pre-market
application expeditiously and will respond to our submission within three
months. However, we may experience delays in beginning, conducting and
completing the trials because of factors that include, but are not limited to,
delays in designing the trials to conform to the trial protocols, complying
with the requirements of investigational review boards at the sites where the
trials will be conducted, our ability to identify clinical test sites and
sponsoring physicians and the ability of the clinical test sites to identify
patients to enroll in the trials. The trials may also take longer to complete
because of difficulties we may encounter in entering into agreements with
clinical testing sites to conduct the trials and the difficulties these sites
may encounter in enrolling patients. Our ability to conduct the trials may also
be impaired by our limited experience in arranging for clinical trials and in
evaluating and submitting the data gathered from clinical trials. Further, the
FDA monitors the progress of the clinical trials and may alter, suspend or
terminate the trials based on the data that has been accumulated to that point
and its assessment of the relative risks and benefits to the patients involved
in the trials.
After acquiring sufficient data, we believe that our collation, analysis
and submission of the trial results to the FDA will take an additional three
months. Once we submit the data from the clinical trials to the FDA, we
estimate that the FDA will respond to our submission within three months.
However, the FDA may take longer than three months to evaluate our submission,
may require that additional trials be conducted or may not grant approval.
The FDA pre-marketing approval we are currently seeking is limited to
administration of doxorubicin with our Delcath system to treatment of liver
cancer patients. If we are granted this approval, we plan to subsequently seek
additional FDA pre-marketing approvals for using the Delcath system with other
chemotherapy agents for treatment of other liver cancers and with anti-viral
drugs for treatment of other diseases, such as hepatitis. In many instances,
the process of applying for and obtaining regulatory approvals involves
rigorous pre-clinical and clinical testing. The time resources and funds
required for completing necessary testing and obtaining approvals is
significant, and FDA pre-marketing approval may never be obtained for some
medical devices or drug delivery systems. If we fail to raise the additional
capital required or enter into strategic partnerships to finance this testing
or if we fail to obtain the required approvals, our potential growth and the
expansion of our business would likely be limited.
Research for Hepatitis Treatment
Another disease which attacks the liver is viral hepatitis. The incidence
of viral hepatitis in the United States and worldwide is increasing. The
long-range effects of some forms of hepatitis can include massive death of
liver cells, chronic active hepatitis, cirrhosis and hepatoma. The current
treatment for viral hepatitis is limited and includes long-term injections of
interferon alpha, which is similar to chemotherapy in its toxicity and dosage
limitations. We plan to seek a strategic partner to conduct clinical trials to
determine the feasibility of using the Delcath system to administer anti-viral
drugs, including interferon alpha, in the treatment of viral hepatitis. We have
not entered into any arrangements, understandings or agreements with potential
strategic partners.
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Sales and Marketing
We intend to focus our marketing efforts on the 34 comprehensive cancer
centers in the United States recognized by the National Cancer Institute,
beginning with the hospitals participating in the Phase III clinical trials. We
will focus these efforts on two distinct groups of medical specialists in these
comprehensive cancer centers:
o oncologists who have primary responsibility for the patient; and
o interventional radiologists who are members of the hospital staff and
work with catheter-based systems.
Upon diagnosis of cancer, a patient is usually referred to a medical
oncologist. This physician generally provides palliative treatments and refers
the patient to a surgical oncologist if surgery appears to be an option. Both
medical and surgical oncologists will be included in our target market.
Generally, oncologists do not position catheters, instead enlisting the
assistance of an interventional radiologist.
We plan to hire a marketing director at such time as we receive an
indication from the FDA that approval of the Delcath system is forthcoming and
then hire a sales manager and three sales representatives to market the system
in the United States. We have not previously sold, marketed or distributed any
products and currently do not have the personnel, resources, experience or
other capabilities to adequately market the Delcath system. Our success will
depend upon our ability to attract and retain skilled sales and marketing
personnel. Competition for sales and marketing personnel is intense, and we
cannot assure you that we will be successful in attracting or retaining such
personnel. Our inability to attract and retain skilled sales and marketing
personnel could materially adversely affect our business, financial condition
and results of operations.
In addition, we plan to utilize distributors and/or one or more corporate
marketing partners to market products outside the United States. We believe
distribution or corporate partnering arrangements will be cost effective, will
be implemented more quickly than a direct sales force established by us in such
countries and will enable us to capitalize on local marketing expertise in the
countries we target. However, any revenues we receive from the sale of the
Delcath system in foreign markets will depend upon the efforts of these parties
and may be less than we would otherwise receive if we marketed the product
through our own sales force.
Since we plan to sell the Delcath system to a large number of hospitals
and physician practices, we do not expect to be dependent upon one or a few
customers.
Market acceptance of the Delcath system will depend upon:
o the ability of our clinical trials to demonstrate a significant
reduction in the mortality rate for the kinds of cancers treated at a
cost effective price;
o our ability to educate physicians on the use of the system and its
benefits compared to other treatment alternatives; and
o our ability to convince healthcare payors that use of the Delcath
system results in reduced treatment costs of patients.
This will require substantial efforts and expenditures. We only have limited
experience in these areas and we cannot assure you that we will be successful
in achieving these goals. Moreover, the Delcath system replaces treatment
methods in which many hospitals have made a significant investment. Hospitals
may be unwilling to replace their existing technology in light of their
investment and experience with competing technologies. Many doctors and
hospitals are reluctant to use a new medical technology until its value has
been demonstrated. As a result, the Delcath system may not gain significant
market acceptance among physicians, patients and healthcare payors.
Nissho Agreement
In December 1996, we entered into an agreement with Nissho Corporation, a
large manufacturer and distributor of medical devices and pharmaceuticals based
in Osaka, Japan which grants to Nissho the
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exclusive right to distribute the Delcath system in Japan, China, Korea, Hong
Kong and Taiwan until December 31, 2004. Nissho, which has previously invested
$1,000,000 in Delcath, has advised us that it expects to commence the clinical
trials in Japan by the end of 2000. Nissho may also seek to conduct clinical
trials in the other countries in the territory.
Products covered by the agreement include the Delcath system for the
treatment of cancer in the liver and the lower extremities, as well as new
products which may be added by mutual agreement. Nissho is required to purchase
products from Delcath in connection with clinical trials and for resale in its
market at prices to be determined by mutual agreement. Nissho has agreed, in
its territory, not to engage in the business of manufacturing, distributing or
selling systems similar to the Delcath system for the liver or other organs or
body regions.
Third-Party Reimbursement
Currently, because the Delcath system is characterized by the FDA as an
experimental device, its use is not reimbursable in the United States. We will
not seek to have third-party payors, such as Medicare, Medicaid and private
health insurance plans, reimburse the use of the Delcath system until after its
use is approved by the FDA. Even if approved by the FDA, these payors may
require us, as a condition to reimbursement, to provide extensive supporting
scientific, clinical and cost effectiveness data for our Delcath system to the
American Medical Association. New products are under increased scrutiny with
respect to a determination as to whether or not they will be covered by the
various healthcare plans and with respect to the level of reimbursement which
will be applicable to respective covered products and procedures. Third-party
payors may deny reimbursement for the treatment and medical costs associated
with the Delcath system, notwithstanding FDA or other regulatory approval, if
it is determined that the Delcath system is unnecessary, inappropriate, not
cost effective, experimental or for a non-approved indication. Third-party
payors currently provide reimbursement for many of the components of the
Delcath system based on established general reimbursement codes, in connection
with their use in liver perfusion and other therapies.
We believe that the Delcath system will provide significant cost savings
to the extent that it can reduce treatment and hospitalization costs associated
with the side-effects of chemotherapy. Our planned wholesale price for the
Delcath system kit is $4,000. A patient normally undergoes four treatments with
the Delcath system, each requiring a new system kit. Each treatment with the
system costs approximately $12,000, resulting in a total treatment cost of
approximately $48,000. This compares to a total cost of conventional aggressive
chemotherapy treatment of approximately $160,000 to $180,000, which includes
the hospitalization and treatment costs associated with the side-effects of the
systemic delivery of chemotherapy agents.
Manufacturing
We plan to utilize contract manufacturers to produce the components of the
Delcath system. In order to maintain quality control, we plan to perform final
assembly and packaging in our own facility. If we undertake these operations
our facility will be required to comply with the FDA's good manufacturing
practice regulations. If we sell the Delcath system in some foreign markets,
our facility will also need ISO 9000 approval from the European Union.
The double balloon catheter will be manufactured domestically by the
Burron OEM division of B. Braun Medical, Inc. of Germany. The double balloon
catheter must be manufactured in accordance with manufacturing and performance
specifications that are on file with the FDA. Burron has demonstrated that the
components it manufactures meet these specifications. Burron's manufacturing
facility is ISO 9000 approved, which will allow the use of the catheter in
European markets. B. Braun has experience in obtaining regulatory approval for
medical products in European markets and has indicated informally, that it will
assist us in this process. We have not entered into a written agreement with
Burron to manufacture the catheter either for the Phase III clinical trials or
for commercial sale. To ensure sufficient supply of catheters to complete the
clinical trials, we intend to purchase our total trial requirements before
commencement of the trials.
Medtronic USA, Inc. manufactures the components of the blood filtration
circuit located outside of the body, including the medical tubing through which
a patient's blood flows and various connectors, as well as
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the blood filtration pump head. Medtronic is a manufacturer of components used
for extracorporeal blood circulation during cardiac surgery. The components
manufactured by Medtronic have been cleared by the FDA for other applications
and can, therefore, be sourced off the shelf. These components, however, must
comply with manufacturing and performance specifications for the Delcath system
that are on file with the FDA. Medtronic has demonstrated that the components
it manufactures meet these specifications. Medtronic's manufacturing facility
is also ISO 9000 approved and, thus, the components it manufactures may be used
in European markets.
The activated charcoal filters used in the Delcath system are manufactured
by Asahi Medical Products of Japan. These filters have been cleared by the FDA
for other applications and can be sourced off the shelf. Asahi has demonstrated
that the filters it supplies fall within the performance parameters and meet
the specifications on file with the FDA. We have not entered into a written
agreement with Asahi to supply the filters either for the Phase III clinical
trials or for commercial sale.
Competition
The healthcare industry is characterized by extensive research efforts,
rapid technological progress and intense competition from numerous
organizations, including biotechnology firms and academic institutions.
Competition in the cancer treatment industry, and specifically the markets for
systems and devices to improve the outcome of chemotherapy treatment for
cancer, is intense. We believe that the primary competitive factors for
products addressing cancer include safety, efficacy, ease of use, reliability
and price. We also believe that physician relationships, especially
relationships with leaders in the interventional radiology and oncology
communities, are important competitive factors.
Delcath competes with all forms of liver cancer treatments which are
alternatives to resection including radiation, implanted infusion pumps, liver
transplants, embolization, cryosurgery, radiowave ablation and the use of
biological response modulators, monoclonal antibodies and liposomes.
Many large pharmaceutical companies and research institutions are
developing systems and devices to improve the outcome of chemotherapy treatment
for cancer. Arrow International currently markets an implantable infusion pump,
which has been successful in facilitating regional drug delivery. However,
Arrow's pump lacks a means of preventing the entry of these agents into the
patient's general circulation after they pass through the liver. Other
companies, including Merck & Co., Inc., are developing various chemotherapy
agents with reduced toxicity, while other companies are developing products to
reduce the toxicity and side-effects of chemotherapy treatment. In addition,
gene therapy, vaccines and other minimally invasive procedures are currently
being developed as alternatives to chemotherapy.
Technological developments are expected to continue at a rapid pace in
both industry and academia which could result in a short product life cycle for
our Delcath system.
Government Regulation
United States Food and Drug Administration
General. The manufacture and sale of medical devices and drugs are subject
to extensive governmental regulation in the United States and in other
countries. The Delcath system is regulated in the United States as a drug
delivery system by the FDA under the Federal Food, Drug, and Cosmetic Act. As
such, it requires approval by the FDA of a pre-marketing application and a new
drug application prior to commercial distribution.
Doxorubicin, the drug that we are initially seeking to have approved for
delivery by the Delcath system, is a widely used chemotherapy agent which has
been approved by the FDA since 1974. Like all approved drugs, the approved
labeling includes indications for use, method of action, dosing, side-effects
and contraindications. Because the Delcath system delivers doxorubicin through
a mode of administration and at
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dose levels which differ from those currently approved, we must obtain approval
for revised labeling of a doxorubicin product permitting for its use with the
Delcath system. This will require the filing of a supplemental or an original
new drug application for the administration of doxorubicin through the Delcath
system.
Under the Federal, Food, Drug, and Cosmetic Act, the FDA regulates the
pre-clinical and clinical testing, design, manufacture, labeling, distribution,
sales, marketing, post-marketing reporting, advertising and promotion of
medical devices and drugs in the United States. Noncompliance with applicable
requirements could result in different sanctions such as:
o the refusal of the government to grant approvals;
o suspension or withdrawal of clearances or approvals;
o total or partial suspension of production, distribution, sales and
marketing;
o fines;
o injunctions;
o civil penalties;
o recall or seizure of products; and
o criminal prosecution of a company and its officers and employees.
Our contract manufacturers also are subject to numerous federal, state and
local laws relating to such matters as safe working conditions, manufacturing
practices, environmental protection, fire hazard control and disposal of
hazardous or potentially hazardous substances.
Medical Devices. The Delcath system is a Class III medical device. It is
subject to the most stringent controls applied by the FDA to reasonably assure
safety and effectiveness. An application for pre-market approval must be
supported by data, typically including the results of animal and laboratory
testing and human clinical trials. The conducting of Phase III trials is
subject to regulations and to continuing oversight by Institutional Review
Boards and the FDA. These regulations include required reporting of adverse
effects from use of the device during the trials. Before commencing clinical
trials, we obtained an investigational device exemption providing for the
initiation of clinical trials. We also obtained approval of our investigational
plan, including the proposed protocols and informed consent statement that
patients signed before undergoing treatment with the Delcath system, by the
institutional review boards at the sites where the trials were conducted. Under
the Federal Food, Drug, and Cosmetic Act, clinical studies for "significant
risk" Class III devices require obtaining such approval by institutional review
boards and the filing with the FDA of an investigational device exemption at
least 30 days before initiation of the studies.
Given the short life expectancy of liver cancer patients, we believe the
FDA will review our pre-market application expeditiously and respond to our
submission of the Delcath system for commercial sale within three months.
However, approval of the Delcath system may take longer if the FDA requests
substantial additional information or clarification, or if any major amendments
to the application are filed. In addition, the FDA may refer this matter to an
advisory committee of experts to obtain views about the Delcath system. This
process is referred to as "panel review", and could delay the approval of the
Delcath system. The FDA will usually inspect the applicant's manufacturing
facility to ensure compliance with quality systems regulations prior to
approval of an application. The FDA also may conduct bioresearch monitoring
inspections of the clinical trial sites and the applicant to ensure data
integrity, and that the studies were conducted in compliance with the
applicable FDA regulations, including good clinical practice regulations.
If the FDA's evaluations of the application, clinical study sites and
manufacturing facilities are favorable, the FDA will issue either an approval
letter, or an "approvable letter" containing a number of conditions that must
be met in order to secure approval of an application. If and when those
conditions have been fulfilled to the satisfaction of the FDA, the agency will
issue an order approving the application, authorizing commercial
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marketing of the device under specified conditions of use. If the FDA's
evaluation of the application, the clinical study sites or the manufacturing
facilities are not favorable, the FDA will deny approval of the application or
issue a "not approvable letter." The FDA may also determine that additional
pre-clinical testing or human clinical trials are necessary.
The FDA's regulations require agency approval of an application supplement
for changes to a device if they affect the safety and effectiveness of the
device, including new indications for use; labeling changes; the use of a
different facility or establishment to manufacture, process, or package the
device; changes in vendors supplying components for the device; changes in
manufacturing methods or quality control systems; and changes in performance or
design specifications. Changes in manufacturing procedures or processes may be
implemented and the device distributed 30 days after the FDA is provided with
notice of these changes unless the FDA advises the pre-market approval
application holder within 30 days of receipt of the notice that the notice is
inadequate or that preapproval of an application supplement is required.
Approved medical devices remain subject to extensive regulation.
Advertising and promotional activities are subject to regulation by the FDA
and, in some instances, by the Federal Trade Commission. Other applicable
requirements include the FDA's medical device reporting regulations, which
require that we provide information to the FDA on deaths or serious injuries
alleged to have been associated with the use of marketed devices, as well as
product malfunctions that would likely cause or contribute to a death or
serious injury if the malfunction were to recur. If safety or efficacy problems
occur after the product reaches the market, the FDA may take steps to prevent
or limit further marketing of the product. Additionally, the FDA actively
enforces regulations prohibiting marketing or promotion of devices or drugs for
indications or uses that have not been cleared or approved by the FDA. Further,
the Food, Drug, and Cosmetic Act authorizes the FDA to impose post-market
surveillance requirements with respect to a Class III device which is
reasonably likely to have a serious adverse health consequence or which is
intended to be implanted in the human body for more than one year or to be a
life sustaining or life supporting device used outside a device user facility.
The Food, Drug, and Cosmetic Act regulates a device manufacturer's quality
control and manufacturing procedures by requiring the manufacturer to
demonstrate and maintain compliance with quality systems including good
manufacturing practice requirements as specified in the FDA quality systems
regulations. These regulations require, among other things, that:
o there are in place design controls, including initial design and
design changes;
o the manufacturing process be regulated, controlled, and documented by
the use of written procedures; and
o the ability to produce devices which meet the manufacturer's
specifications be validated by extensive and detailed testing of every
aspect of the process. The FDA monitors compliance with quality
systems regulations, including good manufacturing practice
requirements, by conducting periodic inspections of manufacturing
facilities. If violations of the applicable regulations are found
during FDA inspections, the FDA will notify the manufacturer of such
violations and the FDA, administratively or through court enforcement
action, can prohibit further manufacturing, distribution, sales and
marketing of the device until the violations are cured. If violations
are not cured within a reasonable length of time after the FDA
provides notification of such violations, the FDA is authorized to
withdraw approval of the pre-market approval application.
Investigational devices that require FDA pre-marketing approval in the
United States but have not received such approval, may be exported to countries
belonging to the European Union, European Economic Area, and to some other
specified countries, provided that the device is intended for investigational
use in accordance with the laws of the importing country; has been manufactured
in accordance with the FDA's good manufacturing practices or ISO standards; is
labeled on the outside of the shipping carton "for export only," is not sold or
offered for sale in the United States; and complies with the specifications of
the foreign purchaser. The export of an investigational device for
investigational use to any other country requires prior authorization from the
FDA. An investigational device may be exported for commercial use only as
described below, under "Foreign Regulation."
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Drugs. We, or a manufacturer of a chemotherapy agent, must obtain FDA
pre-marketing approval of a supplemental or original new drug application for a
chemotherapy product providing for its use with the Delcath system before the
system may be marketed in the United States to deliver that agent to the liver
or any other site. We have budgeted the coverage of the filing costs associated
with obtaining such approval which, after it has been obtained, would not have
a negative effect on the manufacturers of doxorubicin. Rather, they will have
the opportunity to expand the use of the drug as a result of changing their
label to include the Delcath labeling.
Clinical trials to support the relabeling of doxorubicin to provide for
its use with the Delcath system must be conducted in accordance with the FDA's
investigational new drug regulations. Phase III clinical trial protocols have
been approved by the FDA under the Company's investigational new drug
application. FDA regulations also require that prior to initiating the trials
the sponsor of the trials obtain investigational review board approval from
each investigational site that will conduct the trials. We have identified ten
medical centers that have expressed an interest in conducting the trials. The
investigational review boards at two of these medical centers have given their
approval to have the clinical trials conducted at their institutions. We are
seeking the approval of investigational review boards at additional medical
centers by assembling and providing them with information with respect to the
trials.
The FDA requires that, in order to obtain approval to relabel doxorubicin
for delivery using the Delcath system, we demonstrate that delivering
doxorubicin using the system results in patient survival times that are longer
than those obtained from administering chemotherapy agents intravenously.
The approved Phase III trial protocols are designed to obtain approval of
both a new drug application, or a supplemental new drug application, and a
pre-marketing approval application providing for the use of doxorubicin with
the Delcath system. The trial protocols were approved by both the FDA division
that approves new drugs and the division that reviews applications to market
new devices. All of the data generated in the trials will be submitted to both
of these FDA divisions.
If we successfully complete the clinical trials, we believe the
manufacturer of doxorubicin will submit to the FDA a new drug application or
supplemental new drug application and pre-market approval to deliver
doxorubicin to the liver through the Delcath system. Under the Food, Drug, and
Cosmetic Act, the Delcath system cannot be marketed until the new drug
application, or supplemental new drug application, and the pre-marketing
approval application approvals are obtained, and then only in conformity with
conditions of use set forth in the approved labeling.
Foreign Regulation. In order for us to market our products in Asia,
Europe, Latin America and other foreign jurisdictions, we must obtain required
regulatory approvals or clearances and otherwise comply with extensive
regulations regarding safety and manufacturing processes and quality. These
regulations, including the requirements for approvals or clearances to market,
may differ from the FDA regulatory scheme. In addition, there may be foreign
regulatory barriers other than pre-market approval or clearance.
In April 1996, FDA legislation was enacted that permits that a medical
device which requires FDA pre-marketing approval but which has not received
such approval to be exported to any country for commercial use, provided that
the device:
o complies with the laws of that country;
o has valid marketing authorization or the equivalent from the
appropriate authority in any of a list of industrialized countries
including Australia, Canada, Israel, Japan, New Zealand, Switzerland,
South Africa and countries in the European Economic Union; and
o meets other regulatory requirements regarding labeling, compliance
with the FDA's good manufacturing practices or ISO manufacturing
standards and notification to the FDA.
We must obtain a CE mark in order for us to market and sell the Delcath
system in the European Union, except for limited use as a clinical trial
device. Supplemental device approvals also might be required to market and sell
the Delcath system.
29
<PAGE>
Patents, Trade Secrets and Proprietary Rights
Our success depends in large part on our ability to obtain patents,
maintain trade secret protection and operate without infringing on the
proprietary rights of third parties. Because of the length of time and expense
associated with bringing new products through development and regulatory
approval to the marketplace, the health care industry has traditionally placed
considerable importance on obtaining patent and trade secret protection for
significant new technologies, products and processes. We hold the following six
United States patents, as well as three corresponding foreign patents in
Canada, Europe and Japan:
<TABLE>
<CAPTION>
Summary Description of Patents Patent No.
------------------------------------------------------------ ----------------
<S> <C>
Isolated perfusion method for cancer treatment U.S. #5,069,662
Isolated perfusion device -- catheter for use in isolated
perfusion in cancer treatment U.S. #5,411,479
Device and method for isolated pelvic perfusion U.S. #5,817,046
Catheter design to allow blood flow from renal veins and
limbs to bypass occluded segment of IVC U.S. #5,893,841
Balloon inside catheter to restrict blood flow or prevent
catheter from moving U.S. #5,897,533
Catheter with slideable balloon to adjust isolated segment U.S. #5,919,163
</TABLE>
We plan to vigorously enforce our intellectual property rights. In
addition, we will conduct searches and other activity relating to the
protection of existing patents and filing of new applications.
Litigation may be necessary to enforce any patents issued or assigned to
us or to determine the scope and validity of third party proprietary rights.
Litigation would be costly and divert our attention from our business. If
others file patent applications with respect to inventions for which we already
have issued patents or have patent applications pending, we may be forced to
participate in interference proceedings declared by the United States Patent
and Trademark Office to determine priority of invention, which would also be
costly and divert our attention from our business. If a third party violates
our intellectual property rights, we may be unable to enforce our rights
because of our limited resources.
In addition to patent protection, we rely on unpatented trade secrets and
proprietary technological expertise. We rely, in part, on confidentiality
agreements with our marketing partners, employees, advisors, vendors and
consultants to protect our trade secrets and proprietary technological
expertise. These agreements may not provide meaningful protection of our
proprietary technologies or other intellectual property if unauthorized use or
disclosure occurs.
Product Liability
Clinical trials, manufacturing, marketing and product sales may expose us
to liability claims from the use of the Delcath system. Though participants in
clinical trials are generally required to execute consents and waivers of
liability they may still be able to assert product liability claims against us.
Claims for damages, whether or not successful, could cause delays in the
clinical trials and result in the loss of physician endorsement. We do not
currently carry product liability insurance and we may not be able to acquire
product liability insurance at sufficient coverage levels or at an acceptable
cost. If we are unable to obtain sufficient insurance coverage at an acceptable
cost, we may not be able to commercialize the Delcath system. A successful
product liability claim or recall would have a material adverse effect on our
business, financial condition and results of operations.
Employees
As of April 30, 2000, we had four employees, three of whom were
compensated and full-time. We intend to recruit additional personnel in
connection with the research, development, manufacturing and marketing of
30
<PAGE>
our products. None of our employees is represented by a union, and we believe
relationships with our employees are good. Our success will depend, in large
part, upon our ability to attract and retain qualified employees. We face
competition in this regard from other companies, research institutions and
other organizations.
In addition to our full time employees, we engage the services of medical
and scientific consultants.
Facilities
We occupy approximately 3,300 square feet of office space in Stamford,
Connecticut, pursuant to an informal arrangement with the landlord. According
to this agreement we prepaid our rent, which is approximately $7,500 a month,
through December 2000. We have occupied these facilities since 1992. We believe
that we will require additional space in 2001, and are beginning site selection
for rental property in the same building or nearby and believe that
satisfactory space is available at commercially reasonable rates.
Legal Proceedings
We are not involved in any legal proceedings and we are not aware of any
such proceedings being contemplated.
31
<PAGE>
MANAGEMENT
Executive Officers, Directors and Key Employees
Our executive officers and directors and their respective ages are as
follows:
<TABLE>
<CAPTION>
Name Age Positions
------------------------------------- ----- --------------------------------------------------
<S> <C> <C>
Samuel Herschkowitz, M.D. ........... 50 Chairman of the Board and Chief Technical Officer
M. S. Koly .......................... 64 Chief Executive Officer, President, Treasurer and
Director
Joseph P. Milana, CPA ............... 37 Chief Financial Officer
Jonathan A. Foltz, CFA .............. 38 Director of Operations
William I. Bergman .................. 68 Director
Frank G. Mancuso, Jr. ............... 41 Director
James V. Sorrentino, Ph.D. .......... 63 Director
</TABLE>
Samuel Herschkowitz, M.D. has been Chairman of the Board of Delcath since
1998 and Delcath's Chief Technical Officer since 1991. In 1987, he co-founded
Venkol Ventures L.P. and Venkol Ventures, Ltd., two affiliated venture capital
funds specializing in medical technology investments, which are no longer
active. Dr. Herschkowitz is board certified in psychiatry and neurology. He is
an assistant professor at New York University Medical Center, and has held
academic positions at Beth Israel Hospital, Mount Sinai Medical School and
Downstate Medical Center. Dr. Herschkowitz graduated from Syracuse University
and received his medical degree from Downstate Medical Center College of
Medicine.
M. S. Koly has been Chief Executive Officer and Treasurer of Delcath since
1998 and has served as a Director since 1988. From 1987 until June 1998, Mr.
Koly managed Venkol Ventures, L.P. and Venkol Ventures, Ltd., firms he
co-founded with Dr. Herschkowitz. From 1983 to 1987, Mr. Koly was president of
Madison Consulting Corporation, a firm he founded. From 1978 to 1983, Mr. Koly
was president of Becton-Dickinson Respiratory Systems. Prior to that time, he
held various senior management positions at Abbott Laboratories, Stuart
Pharmaceuticals and National Patent Development Corp. He received a B.A. from
American University and an M.B.A. in marketing and finance from Northwestern
University.
Joseph P. Milana, CPA, has been the Controller of Delcath since 1995. From
1984 to 1995, Mr. Milana was with KPMG LLP, most recently as a senior tax
manager. He received a B.B.A. in accounting and an M.S. in taxation from Pace
University, and received a CPA designation from the state of New York. Mr.
Milana currently devotes one day a week to Delcath matters and will become a
full-time employee once Delcath becomes a public company.
Jonathan A. Foltz, CFA, has been our Director Of Operations since 1992.
Mr. Foltz was senior associate of Venkol Ventures from 1989 to 1992. During
1988 to 1989, he provided investment and acquisition research, consulting to
corporations and brokerage firms including First Montauk Securities, Inc.,
Gilford Securities Inc., Texas American Energy Corporation and Computer
Memories Inc. He was the research director of Nicholas, Lawrence and Co., a
regional stock brokerage firm, reorganizing and managing their equity research
department. Mr. Foltz earned a B.S. in finance and computer science from Lehigh
University, an M.B.A. from the University of Connecticut and is a chartered
financial analyst.
William I. Bergman has been a director of Delcath since 1996. A retired
executive, Mr. Bergman was with Richardson-Vicks from 1956 through 1990 most
recently as Vice President-controller of North American Operations, vice
president-marketing of colds care business and Canadian operations, president
and general manager of Vicks health care division, assistant general manager of
Vicks International, and executive vice president of Richardson-Vicks Inc.
Following the acquisition of Vicks by The Procter & Gamble Company in 1986, he
became the president of Richardson-Vicks, U.S.A. and vice president of The
Procter & Gamble Company prior to retirement in 1990. He is also a director of
ZymeTx, Inc. a biotech company involved in the development of viral
diagnostics. His education includes a B.S. from Drexel University and the
advanced management program at Harvard University.
32
<PAGE>
Frank G. Mancuso, Jr., has been a director of Delcath since 1998. Mr.
Mancuso has been President of FGM Entertainment since 1985. In the past five
years, he has produced numerous movies and television series within his own
companies and for Paramount Pictures and MGM/United Artists. He has a B.A. from
Upsala College.
James V. Sorrentino, Ph.D., has been a director of Delcath since 1996.
Since 1992, Dr. Sorrentino has been President of Healthcare Products
Development, Inc., a clinical research organization that designs, organizes and
manages clinical trials for the pharmaceutical and biological industry. From
1974 to 1992, he held several research positions with Richardson-Vicks Inc.,
including director of over-the-counter products, Vice President & director of
research and development. After Richardson-Vicks Inc. was acquired by The
Procter & Gamble Company, he served as director of worldwide clinical
development, non-prescription drug products of The Procter & Gamble Company. He
received an A.B. in Biology, an M.S. in bacteriology, and a Ph.D. in
virology/immunology from the Catholic University of America.
Our success will depend largely on the continuing efforts of Samuel
Herschkowitz, our Chief Technical Officer and M.S. Koly, our Chief Executive
Officer. Our business may be adversely affected if the services of either
officer become unavailable to us.
We have agreed, for a period of three years from the date of this
prospectus, if so requested by the representative of the underwriters, to
nominate and use our best efforts to elect a designee of the underwriter as a
director of Delcath or, at the representative's option, as a non-voting advisor
to our board of directors. The representative has not yet exercised its right
to designate a person.
Classified Board of Directors
Our board of directors is divided into three classes of directors serving
staggered three-year terms. As a result, approximately one-third of the board
of directors will be elected each year. These provisions, together with the
provision of our amended and restated certificate of incorporation and by-laws,
allow the board of directors to fill vacancies on or increase the size of the
board of directors, and may deter a stockholder from removing incumbent
directors and filling such vacancies with its own nominees in order to gain
control of the board. The staggering of the election of our directors may have
the effect of delaying, deferring or discouraging a change of control.
Each of our directors has been elected to serve until his successor has
been elected and duly qualified. The directorship terms of Dr. Herschkowitz and
Mr. Koly will expire at the annual meeting of stockholders in 2003; the
directorship term of Mr. Mancuso will expire at the annual meeting of
stockholders in 2001; and the directorship terms of Dr. Sorrentino and Mr.
Bergman will expire at the annual meeting of stockholders in 2002.
Committees of the Board
We have established an audit committee and a stock option and compensation
committee.
The audit committee approves the selection of our independent accountants
and meets and interacts with the independent accountants to discuss questions
in regard to the financial reporting. In addition, the audit committee reviews
the scope and results of the audit with the independent accountants, reviews
with management and the independent accountants our annual operating results,
considers the adequacy of our internal accounting procedures and considers and
reports to the board of directors with respect to other auditing and accounting
matters, fees to be paid to our independent auditors and the performance of our
independent auditors. After this offering, the audit committee will consist of
Messrs. Bergman and Mancuso and Dr. Sorrentino.
The stock option and compensation committee reviews and recommends to the
board of directors the salaries, benefits and stock option grants of all
employees, consultants, directors and other individuals compensated by us. The
stock option and compensation committee also administers our stock option and
other employee benefits plans. The compensation committee currently consists of
Mr. Koly, Dr. Sorrentino and Mr. Bergman. Mr. Bergman currently chairs the
compensation committee.
33
<PAGE>
Director Compensation
Directors who are employees of Delcath do not currently receive any
compensation for serving on the board of directors. Following this offering
non-employee directors will receive $750 for each meeting of the board of
directors attended in person or participated in telephonically. Currently,
non-employee directors do not receive any compensation. A new compensation rate
for these directors will be established in our next shareholders meeting. In
addition, each non-employee director received a one-time grant in January 1999
of options to purchase 43,704 shares of common stock at a price of $3.89 per
share, all of which are vested. Each non-employee director received a separate
one-time grant in December 1999 of options to purchase 28,408 shares of common
stock at a price of $2.29 per share, half of which are vested, the remainder to
vest in December 2000.
Scientific Advisors and Consultants
We seek to expand the breadth of expertise and experience available to us
through the use of consultants and advisors. We coordinate these advisors,
including nine M.D.s and Ph.D.s to organize, conduct, and monitor clinical and
pre-clinical testing, regulatory filings and responses, product development and
manufacturing, and publication and presentation of the results of our research.
These individuals bring a broad range of competencies to our operations. The
scientific advisors are independent professionals who meet on an individual
basis with management when so requested. We seek as scientific advisors
recognized experts in relevant sciences or clinical medicine to advise us about
present and long-term scientific planning, research and development.
There is no fixed term of service for the scientific advisors. Current
members may resign or be removed at any time, and additional members may be
appointed. Members do not serve on an exclusive basis with Delcath, are not
under contract, other than with respect to confidentiality obligations, and are
not obligated to present corporate opportunities to us. To our knowledge, none
of the members is working on the development of competitive products.
Inventions or products developed by a scientific advisor who is not otherwise
affiliated with us will not become our property.
Scientific advisors who are not affiliated with us are paid a per diem fee
for their services. All members receive reimbursement for expenses incurred in
traveling to and attending meetings on behalf of Delcath.
Our scientific advisors and collaborators include the following doctors in
the fields of surgical oncology and interventional radiology:
<TABLE>
<CAPTION>
Relationship to
Name Title Specialty Delcath
------------------------ ------------------------- ------------------------ --------------------------
<S> <C> <C> <C>
Morton G. Glickman, Associate Dean, Yale Cardiovascular and Founder and
M.D. University School of Interventional stockholder
Medicine Radiology
William N. Hait, M.D., Director, The Cancer Medical Consultant and Founder and
Ph.D. Institute of New Jersey Scientific Advisor stockholder
T.S. Ravikumar, M.D. Chairman, Department Surgical Oncology Principal Investigator of
of Surgery, Montefiore the Delcath system
Medical Center
</TABLE>
Morton G. Glickman, M.D. was educated at Cornell University (B.A.) and
Washington University (M.D.). He also received an honorary M.A. from Yale. He
was a resident at the University of California. He served as the chief of neuro
and vascular radiology at San Francisco General Hospital from 1969 to 1973, and
has held numerous academic and professional appointments at Yale University
School of Medicine, currently serving as associate dean and vice chairman of
diagnostic radiology and surgery. Dr. Glickman is a founder of Delcath.
William N. Hait, M.D., Ph.D. was educated at the University of
Pennsylvania (B.A.) and The Medical College of Pennsylvania (M.D., Ph.D.). He
was a resident in internal medicine and held numerous academic and professional
appointments at Yale University School of Medicine, including chief of medical
oncology. Dr. Hait is currently director of The Cancer Institute of New Jersey.
Dr. Hait is a founder of Delcath.
34
<PAGE>
T.S. Ravikumar, M.D. was educated in India at Madras University and Madras
Medical College. He was the associate director of The Cancer Institute of New
Jersey from 1993 through 1998. He also served as a resident in general surgery
at Maimonides Medical Center at S.U.N.Y. -- Downstate and was a fellow in
surgical oncology at the University of Minnesota. Dr. Ravikumar won a National
Reserve Service Award in surgical oncology, and served as a fellow at Brigham
and Women's Hospital and the Dana Farber Cancer Institute from 1982 through
1984. He has had a number of academic appointments, including at Harvard
Medical School, Yale University School of Medicine, and hospital appointments,
including at Yale Comprehensive Cancer Center and Robert Wood Johnson
University Hospital.
In addition, Delcath uses the services of the following medical and
scientific consultants for technical expertise:
<TABLE>
<CAPTION>
Name Title Specialty
------------------------- --------------------------------- --------------------------------
<S> <C> <C>
Anil R. Diwan, Ph.D. Principal, Applied Biotech Filtration Consultant
Concepts
Harvey J. Ellis, C.C.P. Chief of Cardiac Perfusion, Perfusion Consultant
Bridgeport Hospital
Durmus Koch President, Bipore, Inc. Manufacturing
James H. Muchmore, M.D. Associate Professor of Surgery, Oncology and Perfusion
Tulane University School of Consultant
Medicine
Gabriela Nicolau, Ph.D. Director, Pharmacokinetics and Metabolism and Pharmacokinetics
Drug Metabolism, Innapharma
John Quiring, Ph.D. Principal, QST Consulting Biostatistician
</TABLE>
Executive Compensation
The following table sets forth all compensation earned by our Chief
Executive Officer for the years ended December 31, 1998 and 1999. No other
executive officer of Delcath earned more than $100,000 during the year ended
December 31, 1999.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
-------------
Shares of
Common Stock
Annual Compensation Underlying
------------------------------ -------------
Name Year Salary Bonus Options
------------------------------------------- ------ ----------- ------- -------------
<S> <C> <C> <C> <C>
M.S. Koly, Chief Executive
Officer, President and Treasurer ......... 1999 $101,250 $0 177,002
1998 60,000 0 --
</TABLE>
35
<PAGE>
The following tables show information with respect to incentive and
non-qualified stock options granted during the fiscal year ended December 31,
1999 to the executives and the aggregate value at June 30, 2000 of those
options. The per share exercise price of all options was equal to the estimated
fair market value of a share of common stock on the date of grant. No options
granted to any named executives have been exercised.
Option/SAR Grants in Fiscal Year Ending December 31, 1999
<TABLE>
<CAPTION>
Number of
Shares of Common Percent of Total Exercise
Stock Underlying Options Granted to Price
Name Option Employees in 1999 ($/Sh) Expiration Date
----------- ------------------ -------------------- --------- ----------------
<S> <C> <C> <C> <C>
M.S. Koly 77,094 22.5% 3.89 January 2004
M.S. Koly 32,166 9.4% 3.89 January 2004
M.S. Koly 67,742 19.7% 2.29 December 2004
</TABLE>
Aggregated Fiscal Year End Option Values
<TABLE>
<CAPTION>
Number of Shares of
Common Stock Underlying Value of Unexercised
Unexercised Options at In-the-Money
June 30, 2000 Options at June 30, 2000
------------------------------- ------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- --------------- ------------- --------------
<S> <C> <C> <C> <C>
M.S. Koly 51,396 25,698 $108,445 $ 54,223
M.S. Koly 32,166 0 $ 67,870 0
M.S. Koly 33,871 33,871 $125,661 $125,661
</TABLE>
Employment Agreements
Delcath has entered into employment agreements with M.S. Koly and Sam
Herschkowitz. Under the agreements, each officer will serve for a three-year
term, beginning on the closing of this offering, with an automatic one-year
renewal, unless either party provides notice of termination. Mr. Koly will
receive a base salary of $175,000 per year and Dr. Herschkowitz will receive a
base salary of $120,000 per year. Mr. Koly is required to devote his full
business time to our business and affairs, and Dr. Herschkowitz is required to
devote a substantial part of his business time to our business and affairs. In
addition to his responsibilities at Delcath, Dr. Herschkowitz lectures and
instructs students as an assistant professor at New York University on one day
per week basis and conducts a clinical medical practice prior to 8:30 a.m. in
the morning and after 6:00 p.m. in the evening. The remainder of his normal
business time is generally devoted to Delcath.
Key-man Life Insurance
We have obtained "key-man" life insurance on each of the lives of Mr. Koly
and Dr. Herschkowitz in the amount of $2,000,000.
Stock Option Plans
On October 15, 1992, our board of directors and stockholders adopted our
1992 incentive stock option plan and our 1992 non-incentive stock option plan.
On June 15, 2000, the board of directors adopted our 2000 stock option plan.
Our 2000 stock option plan will be submitted for stockholder approval at our
next annual meeting. We have reserved 299,375 shares of common stock for
issuance upon exercise of options granted from time to time under the 1992
incentive stock option plan, 260,041 shares of common stock for issuance upon
exercise of options granted from time to time under the 1992 non-incentive
stock option plan and 300,000 shares of common stock for issuance from time to
time under the 2000 stock option plan. The stock option plans are intended to
assist us in securing and retaining key employees, directors and consultants by
allowing them to participate in our ownership and growth through the grant of
incentive and non-qualified options.
36
<PAGE>
Under the 1992 incentive stock option plan we may grant incentive stock
options only to key employees and employee directors. Under the 1992
non-incentive stock option plan, we may grant non-qualified options to our
employees, officers, directors, consultants, agents and independent
contractors. Under the 2000 stock option plan, we may grant incentive or
non-qualified options to our officers, employees, directors, consultants,
agents and independent contractors. The stock option plans are administered by
a committee, currently the stock option and compensation committee, appointed
by our board of directors.
Subject to the provisions of each of the stock option plans, the committee
will determine who shall receive options, the number of shares of common stock
that may be purchased under the options, the time and manner of exercise of
options and exercise prices. The term of options granted under each of the
stock option plans may not exceed ten years, or five years for an incentive
stock option granted to an optionee owning more than 10% of our voting stock.
The exercise price for incentive stock options shall be equal to or greater
than 100% of the fair market value of the shares of the common stock at the
time granted; provided that incentive stock options granted to an optionee
owning more than 10% of our voting stock shall be exercisable at a price equal
to or greater than 110% of the fair market value of the common stock on the
date of the grant. The exercise price for non-qualified options will be set by
the committee, in its discretion, but in no event shall the exercise price be
less than the fair market value of the shares of common stock on the date of
grant. Shares of common stock received upon exercise of options granted under
each of the plans will be subject to restrictions on sale or transfer.
As of the date of this prospectus, we have granted incentive stock options
to purchase 299,375 shares of common stock under our 1992 incentive stock
option plan at a weighted average price of $3.18 and non-incentive stock
options to purchase 260,041 shares of common stock under our 1992 non-incentive
stock option plan at a weighted average price of $3.37. All of these options
have been granted to our officers and directors and terminate on the fifth
anniversary of their vesting date. We will not grant any additional options
under these plans. As of the date of this prospectus, we have not granted any
options under our 2000 stock option plan. For a period of one year following
the effective date of this offering, we will not grant options to our
employees, promoters or affiliates which, when added to options previously
granted, will exceed 15% of our then outstanding shares of common stock.
Each of our stock option plans includes a provision that an optionholder,
upon exercise of an option, must execute a stockholder's agreement containing
provisions to be determined by Delcath at the time of such exercise.
Limitation on Liability and Indemnification Matters
As authorized by the Delaware General Corporation Law, our certificate of
incorporation provides that none of our directors shall be personally liable to
us or our stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability for:
o any breach of the director's duty of loyalty to Delcath or its
stockholders;
o acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
o unlawful payments of dividends or unlawful stock redemptions or
repurchases; or
o any transaction from which the director derived an improper personal
benefit.
This provision limits our rights and the rights of our stockholders to recover
monetary damages against a director for breach of the fiduciary duty of care
except in the situations described above. This provision does not limit our
rights or the rights of any stockholder to seek injunctive relief or rescission
if a director breaches his duty of care. In addition, our certificate of
incorporation provides that if the Delaware General Corporation Law is amended
to further limit the liability of a director, then the liability of the
directors shall be eliminated or limited to the fullest extent permitted by
such amendment. These provisions will not alter the liability of directors
under federal securities laws.
37
<PAGE>
Our certificate of incorporation further provides for the indemnification
of any and all persons who serve as our director, officer, employee or agent to
the fullest extent permitted under the Delaware General Corporation Law.
We maintain a policy of insurance under which our directors and officers
are insured, subject to the limits of the policy, against certain losses
arising from claims made against our directors and officers by reason of any
acts or omissions covered under this policy in their capacities as directors or
officers, including liabilities under the Securities Act.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our directors, officers and controlling persons under
the above provisions, or otherwise, we have been advised that in the opinion of
the SEC, indemnification is against public policy as expressed in the
Securities Act, and is unenforceable.
38
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table presents information known to us, as of the date of
this prospectus and as adjusted to reflect the sale by us of 2,000,000 shares
common stock offered under this prospectus, relating to the beneficial
ownership of common stock by:
o each person who is known by us to be the beneficial holder of more
than 5% of our common stock;
o each of our directors; and
o our directors and executive officers as a group.
We believe that all persons named in the table have sole voting and
investment power with respect to all shares beneficially owned by them, except
as noted.
A person is deemed to be the beneficial owner of securities that can be
acquired by that person within 60 days from the date of this prospectus upon
the exercise of options, warrants or convertible securities. Each beneficial
owner's percentage ownership is determined by assuming that options, warrants
or other convertible securities that are held by that person, but not those
held by any other person, and which are exercisable within 60 days of the date
of this prospectus, have been exercised and converted. The table also assumes
o a base of 3,437,185 shares outstanding before this offering; and
o a base of 5,437,185 shares outstanding immediately after this
offering, before any consideration is given to outstanding options or
warrants.
The number of shares beneficially owned by each individual includes shares
to be issued in partial payment of accrued dividends.
The address for each listed director and officer is c/o Delcath Systems,
Inc., 1100 Summer Street, Stamford, Connecticut 06905.
<TABLE>
<CAPTION>
Percentage of Shares
Number of Beneficially Owned
Shares ----------------------------
Beneficially Before
Name of Beneficial Owner Owned Offering After Offering
----------------------------------- -------------- ---------- ---------------
<S> <C> <C> <C>
M.S. Koly ......................... 1,917,331 53.9% 34.5%
Venkol Trust ...................... 1,777,429 51.7 32.7
Samuel Herschkowitz, M.D. ......... 335,172 9.5 6.1
Frank G. Mancuso, Jr. ............. 127,378 3.6 2.3
James V. Sorrentino, Ph.D ......... 72,767 2.1 1.3
William I. Bergman ................ 66,649 1.9 1.2
All directors and executive
officers as a group (six
persons) ......................... 2,271,960 59.5% 39.1%
</TABLE>
M.S. Koly's beneficially owned shares include;
o 7,609 shares of the 15,218 shares held by Venkol Inc. as nominee for
M.S. Koly;
o 14,859 shares held by M. Ted Koly, M.S. Koly's minor son;
o 117,434 shares issuable upon exercise of options; and
o 1,773,933 shares and 3,496 shares issuable upon exercise of warrants
held by Venkol Trust.
Mr. Koly is the trustee of Venkol Trust and is deemed the beneficial owner
of its shares. His beneficially owned shares exclude 59,596 shares issuable
upon exercise of options which become exercisable on December 7, 2000.
Samuel Herschkowitz's beneficially owned shares include;
o 7,609 shares of the 15,218 shares held by Venkol Inc. as nominee for
Dr. Herschkowitz;
o 229,010 shares held by Venkol Trust as to which Dr. Herschkowitz has a
beneficial remainder interest; and
39
<PAGE>
o 83,694 shares which are issuable upon exercise of options.
His beneficially owned shares exclude 23,382 shares issuable upon exercise
of options which become exercisable on December 7, 2000.
Frank G. Mancuso's beneficially owned shares include;
o 18,327 shares held by Venkol Trust as to which Mr. Mancuso has a
beneficial remainder interest;
o 57,908 shares issuable upon exercise of options; and
o 1,804 shares issuable upon exercise of warrants.
His beneficially owned shares exclude 14,204 shares issuable upon exercise
of options which become exercisable on December 7, 2000.
James V. Sorrentino's and William I. Bergman's beneficially owned shares
include 57,908 shares issuable upon exercise of options. Their beneficially
owned shares exclude 14,204 shares issuable upon exercise of options which
become exercisable on December 7, 2000.
The number of shares beneficially owned by all directors and executive
officers as a group include 1,773,933 shares and 3,496 shares issuable upon
exercise of warrants held by Venkol Trust.
Upon the closing of this offering, our officers, directors and principal
stockholders will beneficially own approximately 39.1% of our outstanding
common stock, and 37.1% if the representative's over-allotment option is
exercised in full. Consequently, these persons, as a group, will be able to
control the outcome of all matters submitted for stockholder action, including
the election of members to our board of directors and the approval of
significant change-in-control transactions. Therefore, they will effectively
control our management and affairs. This may have the effect of delaying or
preventing a change in control.
40
<PAGE>
CERTAIN TRANSACTIONS
From September 1997 through January 1998, we sold 111,446 shares of common
stock to 11 investors for an aggregate consideration to us of $1,275,000. One
of the investors was Johnson & Johnson Development Corporation, which invested
$500,000. As part of that offering, Venkol Ventures, L.P. and Venkol Ventures,
Ltd. purchased an aggregate of 26,223 shares of common stock for approximately
$300,000 and Mr. Mancuso, a director of Delcath, purchased 8,741 shares of
common stock for $100,000.
In November 1998, Venkol Ventures, L.P. and Venkol Ventures, Ltd.
distributed their shares in Delcath to their limited partners or their
designees. The majority of shares were transferred to the Venkol Trust, which
is managed by M.S. Koly, our Chief Executive Officer and a director. The shares
transferred to the trust include all of our shares of Preferred A stock,
117,650 shares of our Preferred B stock and 45,694 common shares.
All of our preferred stockholders have agreed to convert their preferred
stock into 1,056,192 shares of common stock. The preferred stockholders have
also agreed to accept 870,234 shares of common stock as payment of $992,780 of
estimated accumulated dividends, and a cash dividend of $496,390 in payment of
the balance of the accrued dividend, assuming this offering closes on September
30, 2000. Venkol Trust holds all 2,000,000 shares of our class A preferred
stock and will receive 874,087 shares of common stock on conversion of those
shares, 776,177 shares of common stock in partial payment of accumulated
dividends and a cash dividend of $221,997 in payment of the balance of the
accrued dividend, assuming this offering closes on September 30, 2000. Frank
Mancuso, Jr. and Venkol Trust own 19,608 and 117,650 shares of our class B
shares of preferred stock and will receive 8,570 and 51,418 shares of common
stock, upon conversion of those shares, 4,426 shares and 26,557 shares of
common stock in payment of $25,825 and $154,952 of accumulated dividends and
cash dividends of approximately $12,912 and $77,476, in payment of the balance
of the accrued dividends, assuming this offering closes on September 30, 2000.
In June 1999, we sold an aggregate of 59,514 shares of common stock and
three-year warrants to purchase an aggregate of 6,609 shares of common stock at
$11.74 per share for aggregate proceeds of $776,192. Mr. Mancuso made a $75,000
investment for which he received 5,750 shares of common stock and warrants to
purchase 639 shares of common stock.
In April 2000, we issued 292,426 shares of common stock to existing
security holders and their designees for proceeds of $501,825 in a rights
offering. Each of M.S. Koly, Samuel Herschkowitz, our Chairman and Chief
Technical Officer, and James Sorrentino, a director of Delcath, purchased
14,859 shares for $25,500, and William Bergman, a director of Delcath,
purchased 8,741 shares for $15,000.
In August and September 2000, Delcath borrowed an aggregate of $230,000
for which it issued promissory notes due on May 27, 2001. The promissory notes
bear interest at an annual rate of 22%. Of these loans, $205,000 was borrowed
from existing stockholders or relatives of existing stockholders of Delcath.
M.S. Koly, Chief Executive Officer, President and a director of Delcath, and
Mary Herschkowitz, the mother of Samuel Herschkowitz, M.D., Chairman and Chief
Technical Officer of Delcath, provided $50,000 and $40,000 of the loans.
We believe that each of the transactions with our officers, directors and
principal stockholders and their affiliates were on terms no less favorable
than could have been obtained from unaffiliated third parties. All future
transactions, including loans between us and our officers, directors and
stockholders beneficially owning 5% or more of our outstanding voting
securities, or their affiliates, will be on terms no less favorable to us than
could be obtained in arm's length transactions from unaffiliated third parties.
Further, all transactions and loans and any foregiveness of indebtedness owed
by any of our officers, directors and stockholders beneficially owning 5% or
more of our outstanding voting securities, or their affiliates, to us, must be
approved by a majority of our independent directors who do not have an interest
in the transactions and who have access, at our expense, to either our legal
counsel or independent legal counsel.
41
<PAGE>
DESCRIPTION OF SECURITIES
Upon the closing of this offering, the authorized capital stock of Delcath
will consist of 15,000,000 shares of common stock, $.01 par value per share,
and 10,000,000 shares of preferred stock, $.01 par value per share, whose
rights and designation have not yet been established. There will be no
preferred stock outstanding immediately after the closing of this offering. The
description in the sections below of Delcath's certificate of incorporation and
by-laws refers to Delcath's Amended and Restated Certificate of Incorporation
and Amended and Restated By-Laws, respectively, as they will be in effect upon
the closing of this offering.
Common Stock
Immediately prior to the closing of this offering, there will be 3,437,185
shares of common stock outstanding. After giving effect to the issuance of the
2,000,000 shares of common stock offered by this prospectus, assuming the
underwriters do not exercise their overallotment option, there will be
5,437,185 shares of common stock outstanding upon the closing of this offering.
As of the date of this prospectus, we have approximately 70 stockholders of
record, assuming the conversion of all of our preferred stock into common
stock. There is currently no public market for our common stock.
Holders of common stock are entitled to one vote for each share on all
matters submitted to a stockholder vote. Holders of common stock do not have
cumulative voting rights. Therefore, holders of a majority of the shares of
common stock voting for the election of directors can elect all of the
directors. Holders of common stock are entitled to share in all dividends that
the board of directors, in its discretion, declares from legally available
funds. In any liquidation, dissolution or winding up of Delcath, each
outstanding share entitles its holder to participate pro rata in all assets
that remain after payment of liabilities and after providing for each class of
stock, if any, having preference over the common stock.
Holders of common stock have no conversion, preemptive or other
subscription rights, and there are no redemption provisions applicable to the
common stock. The rights of the holders of common stock are subject to any
rights that may be fixed for holders of preferred stock, when and if any
preferred stock is issued. All outstanding shares of common stock are, and the
shares underlying all options and warrants will be, duly authorized, validly
issued, fully paid and non-assessable upon our issuance of these shares.
Preferred Stock
Under Delcath's certificate of incorporation, Delcath's board of directors
is authorized, subject to limitations prescribed by law, without further
stockholder approval, from time to time to issue up to an aggregate of
10,000,000 shares of preferred stock. The preferred stock may be issued in one
or more series. Each series may have different rights, preferences and
designations and qualifications, limitations and restrictions that may be
established by Delcath's board of directors without approval from the
stockholders. These rights, designations and preferences include:
o number of shares to be issued;
o dividend rights;
o right to convert the preferred stock into a different type of
security;
o voting rights attributable to the preferred stock;
o right to set aside assets for payments relating to the preferred
stock; and
o prices to be paid upon redemption of the preferred stock or a
bankruptcy type event.
If Delcath's board of directors decides to issue any preferred stock, it
could have the effect of delaying or preventing a third-party from taking
control of Delcath. This is because the terms of the preferred stock could be
designed to make it prohibitively expensive for any unwanted third party to
make a bid for the shares of Delcath. In addition, the issuance of preferred
stock with voting or conversion rights could adversely affect the voting power
or other rights of the holders of our common stock. We have no present plans to
issue any new shares of preferred stock.
42
<PAGE>
There are currently 2,000,000 shares of Class A preferred stock and
416,675 shares of Class B preferred stock outstanding which will all be
converted into shares of common stock immediately prior to the closing of this
offering. The holders of the Class A preferred stock and Class B preferred
stock are entitled to receive dividends on a cumulative basis at a rate of 11%
and 8%, per share per year, as and when declared by the Board of Directors.
Upon the conversion of the currently outstanding shares of Class A preferred
stock and Class B preferred stock, the holders of these shares will receive an
additional 870,234 shares of common stock and payment in cash of $496,390 as
accumulated dividends as of the date of this prospectus, assuming this offering
closes on September 30, 2000. The holders of the Class A preferred stock have a
liquidation preference over the holders of the Class B preferred stock and the
common stockholders and the holders of the Class B preferred stock have a
liquidation preference over the common stockholders. In addition to special
voting rights to elect directors to the Board of Directors, each Class A
preferred stockholder is entitled to ten times the number of votes per share of
common stock into which the Class A preferred stock is convertible and each
Class B preferred stockholder is entitled to the number of votes per share of
common stock into which the Class B preferred stock is convertible.
Upon the closing of this offering and the payment of all accrued
dividends, all of the shares of the Class A preferred stock and the Class B
preferred stock will automatically convert into shares of common stock.
Options and Warrants
We have reserved 21,852 shares of common stock for issuance upon exercise
of non-plan options. These options are exercisable at any time on or prior to
February 4, 2002 at a price of $2.29 per share. We have also reserved for
issuance 21,468 shares of common stock for issuance upon outstanding warrants
to purchase common stock at $8.58 and $11.74 per share which expire,
respectively, on January 16, 2001 and March 2, 2002. Also, the representative
of the underwriters will receive five-year warrants to purchase 200,000 shares.
The exercise of any of these options and warrants will dilute the percentage
ownership of our other stockholders.
Anti-Takeover Effects of Delaware Law and Delcath's Amended and Restated
Certificate of Incorporation and By-Laws
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law. That section provides, with exceptions, that a Delaware
corporation may not engage in any of a broad range of business combinations
with a person or his affiliate or associate who is an owner of 15% or more of
the outstanding voting stock of the corporation for a period of three years
from the date that this person became an interested stockholder.
Our board of directors is divided into three classes of directors serving
staggered three-year terms. As a result, approximately one-third of the board
of directors will be elected each year. These provisions, when coupled with the
provisions of our amended and restated certificate of incorporation authorizing
the board of directors to fill vacant directorships or increase the size of the
board of directors, may deter a stockholder from removing incumbent directors
and simultaneously gaining control of the board of directors by filling the
vacancies created by that removal with its own nominees.
Transfer Agent and Warrant Agent
The transfer agent for our common stock and warrants is American Stock
Transfer & Trust Company, 40 Wall Street, New York, New York 10005.
43
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
After the closing of this offering, we will have 5,437,185 shares of
common stock issued and outstanding of which the 2,000,000 shares offered by
this prospectus will be freely tradable without restriction or further
registration under the Securities Act, except for any shares purchased by any
affiliate of us. An affiliate of us is generally a person who has a controlling
position with regard to us. Any shares purchased by our affiliates will be
subject to the resale limitations of Rule 144 promulgated under the Securities
Act.
All of the approximately 3,437,185 remaining shares of common stock that
will be outstanding, are restricted securities as that term is defined under
Rule 144.
Approximately 2,010,574 of these shares are immediately eligible for sale
and the remaining 1,426,611 shares will become eligible, at various times,
beginning 90 days following the date of this prospectus, in each case, subject
to the contracted provisions below.
The holders of all of our common stock, including each of our officers,
directors and principal stockholders, have agreed not to sell or dispose of any
of the shares of common stock held by them, including in accordance with Rule
144, for a period of twelve months following the date of this prospectus
without the prior written consent of the representative of the underwriters.
For the second year following the closing, our officers, directors and
principal shareholders have agreed that, without the representative's written
consent, they will not sell any shares of common stock during any three-month
period in excess of the amount they would be allowed to sell if they were
deemed an affiliate of ours and the shares were deemed restricted as defined
under Rule 144 of the Securities Act. This volume is the greater of:
o 1% of the then outstanding common stock; and
o the average weekly trading volume of the common stock during the four
calendar weeks preceding a sale.
In general, under Rule 144, as currently in effect, beginning 90 days
after the date of this prospectus, a person or group of persons whose shares
are aggregated, who has beneficially owned restricted shares for at least one
year, including the holding period of any prior owner except an affiliate of
us, would be entitled to sell, within any three month period, a number of
shares that does not exceed the greater of:
o 1% of the then outstanding common stock; or
o The average weekly trading volume of our common stock during the four
calendar weeks preceding the sale, provided, that, public information
about us as required by Rule 144 is available and the seller complies
with manner of sale provisions and notice requirements.
The volume limitations described above, but not the one-year holding
period, also apply to sales of our non-restricted securities by affiliates of
us.
A person who is not an affiliate, has not been an affiliate within three
months before the sale and has beneficially owned the restricted securities for
at least two years, is entitled to sell the restricted shares under Rule 144
without regard to any of the limitations described above.
Before this offering, there was no public market for our common stock. We
cannot predict the effect, if any, that sales of, or the availability for sale
of, our common stock will have on the market price of our common stock
prevailing from time to time. Nevertheless, the possibility that substantial
amounts of common stock in the public market, including shares issuable upon
the exercise of outstanding warrants or options, could adversely affect the
prevailing market price of our common stock and could impair our ability to
raise capital in the future through the sale of securities.
44
<PAGE>
UNDERWRITING
Whale Securities Co., L.P. is acting as representative of the several
underwriters named below. The underwriters have agreed, jointly and severally,
subject to the terms and conditions contained in the underwriting agreement
relating to this offering, to purchase the 2,000,000 shares of common stock
offered by us. The number of shares of common stock that each underwriter has
agreed to purchase appears opposite its name below:
Number of
Underwriter Shares
------------------------------------ ---------
Whale Securities Co., L.P. .........
Total .......................... 2,000,000
=========
The underwriting agreement provides that the obligations of the
underwriters are subject to the delivery of an opinion of our counsel and to
various other conditions. The underwriters are committed to purchase and pay
for all of the shares offered by this prospectus if any of those shares are
purchased.
The representative has advised us that the underwriters propose to offer
our shares to the public at the public offering price indicated on the cover
page of this prospectus. The underwriters may allow selected dealers who are
members of the National Association of Securities Dealers, Inc., known as the
NASD, concessions, not in excess of $.___ per share, of which not in excess of
$.___ per share may be reallowed to other dealers who are members of the NASD.
We have granted to the representative an option, exercisable not later
than 45 days after the date of this prospectus, to purchase up to 300,000
shares at the public offering price indicated on the cover page of this
prospectus, less the underwriting discounts and commissions. The representative
may exercise this option only to cover over-allotments, if any, made in
connection with the sale of the common shares offered by this prospectus. If
the representative exercises its over-allotment in full, the total price to the
public would be $13,800,000, the total underwriting discounts and commissions
would be $1,380,000 and the total proceeds to us, before payment of the
expenses of this offering, would be $12,420,000.
We have agreed to pay to the representative a non-accountable expense
allowance equal to 3% of the gross proceeds from the sale of the shares offered
by us, including any securities sold pursuant to the representative's
over-allotment option, of which $50,000 has been paid as of the date of this
prospectus. We have also agreed to pay all expenses in connection with
qualifying the shares offered under the laws of the states as the
representative may designate, including expenses of counsel retained for this
purpose by the underwriters. We estimate our expenses of this offering to be
$2,000,000, including the underwriters' discounts and commission, or $2,234,000
if the representative's over-allotment option is completely exercised.
At the closing of this offering, we will sell to the representative and
its designees, for an aggregate of $100, representative's warrants to purchase
up to 200,000 shares. The representative's warrants are exercisable at any
time, in whole or in part, during the five-year period commencing on the date
of this prospectus at an exercise price of $9.90 per share, 165% of the public
offering price per share. During the first year following the date of this
prospectus, the representative's warrants may not be sold, transferred, pledged
or hypothecated, except that the representative's warrants may be assigned or
transferred only to officers and partners of the representative, or the
underwriters and members of the selling group. During the exercise period, the
holders of the representative's warrants will have the opportunity to profit
from a rise in the market price of the shares, which will dilute the interests
of our stockholders. We expect that the representative's warrants will be
exercised when we would, in all likelihood be able to obtain any needed capital
on terms more favorable to us than those provided in the representative's
warrants. Any profit realized
45
<PAGE>
by the representative on the sale of the representative's warrants or the
underlying shares of common stock may be deemed additional underwriting
compensation. The representative's warrants contain a cashless exercise
provision. We have agreed that, upon the request of the holders of the majority
of the representative's warrants, we will, at our own expense, on one occasion
during the exercise period register the representative's warrants and the
shares underlying the representative's warrants under the Securities Act. We
have also agreed to include the representative's warrants and all underlying
shares in any appropriate registration statement which is filed by us under the
Securities Act during the seven years following the date of this prospectus.
We have agreed, for a period of three years from the date of this
prospectus, if so requested by the representative, to nominate and use our best
efforts to elect a designee of the representative as a director of Delcath or,
at the representative's option, as a non-voting advisor to our board of
directors. Our officers, directors and current stockholders have agreed to vote
their shares in favor of the representative's designee. The representative has
not yet exercised its right to designate a person.
The holders of all of our outstanding shares of common stock, options and
warrants have agreed not to sell or dispose in another manner any of those
securities in the public markets for a period of twelve months from the date of
this prospectus without the representative's prior written consent. For the
second year following the closing, our officers, directors and principal
stockholders have agreed that without the representative's written consent they
will not sell any shares of common stock during any three-month period in
excess of the amount they would be allowed to sell if they were deemed an
affiliate of ours and the shares were deemed restricted as defined under Rule
144 of the Securities Act. This amount is the greater of:
o 1% of the then outstanding common stock; and
o the average weekly trading volume of the common stock during the four
calendar weeks preceding the sale.
We have agreed to indemnify the underwriters against civil liabilities,
including liabilities under the Securities Act.
The representative has informed us that it does not expect sales of the
securities offered to discretionary accounts to exceed 1% of the shares offered
by this prospectus.
Before this offering, there has been no public market for our common
stock. Accordingly, the initial public offering price of the common stock has
been determined by negotiation between us and the representative and may not
necessarily be related to our asset value, net worth or other established
criteria of value. Factors considered in determining this price include our
financial condition and prospects, an assessment of our management, market
prices of similar securities of comparable publicly-traded companies, financial
and operating information of companies engaged in activities similar to our
business and the general condition of the securities market. Additionally, the
initial public offering price of our common stock may not be indicative of the
prices that may prevail in the public market.
In connection with this offering, the underwriters may engage in passive
market making transactions in the shares on Nasdaq in accordance with Rule 103
of Regulation M promulgated under the Exchange Act.
In connection with this offering, the underwriters may engage in
transactions that stabilize, maintain or affect in another manner the price of
our common stock. These transactions may include stabilization transactions
permitted by Rule 104 of Regulation M, under which persons may bid for or
purchase shares to stabilize the market price. Specifically, the underwriters
may over-allot in connection with this offering, creating a short position in
our common stock for its own account. In addition, to cover over-allotments or
to stabilize the price of our common stock, the underwriters may bid for, and
purchase, shares in the open market. The underwriters may also reclaim selling
concessions allowed to a dealer for distributing the common stock in this
offering, if the underwriters repurchased previously distributed shares in
transactions to cover short positions, in stabilization transactions or in
another manner. Any of these activities may stabilize or maintain the market
price of our common stock above independent market levels. The underwriters are
not required to engage in these activities, and may end any of these activities
at any time.
46
<PAGE>
LEGAL MATTERS
The validity of the common stock and warrants offered hereby will be
passed upon for Delcath by Morse, Zelnick, Rose & Lander, LLP, New York, New
York. Morse, Zelnick, Rose & Lander, LLP owns an aggregate 125,000 shares of
our common stock. Blank Rome Tenzer Greenblatt LLP, New York, New York, has
served as counsel to the underwriters in connection with this offering.
EXPERTS
The financial statements of Delcath Systems, Inc. as of December 31, 1999
and for each of the years in the two year period ended December 31, 1999 and
for the period from August 5, 1988 (inception) to December 31, 1999 included in
this prospectus have been so included in reliance on the report of KPMG LLP,
independent certified public accountants, given on the authority of such firm
as experts in auditing and accounting.
AVAILABLE INFORMATION
Delcath has filed with the Securities and Exchange Commission, a
registration statement on Form SB-2, including exhibits and schedules thereto,
under the Securities Act with respect to the shares to be sold in this
offering. This prospectus which constitutes a part of the registration
statement, does not contain all the information set forth in the registration
statement and the exhibits filed with it, portions of which have been omitted
as permitted by the rules and regulations of the SEC. For further information
with respect to Delcath and the shares to be sold in this offering, reference
is made to the registration statement and to the exhibits filed with it.
Statements contained in this prospectus as to the contents of any contract,
agreement or other document referred to, are not necessarily complete. In each
instance we refer you to the copy of the contracts, agreements and or other
documents filed as exhibits to the registration statement, and these statements
are deemed qualified in their entirety by reference to the contract or
document.
You may inspect, without charge, all or any portion of the registration
statement or any reports, statements or other information Delcath files at the
SEC's public reference room at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the regional offices of the SEC located at
Seven World Trade Center, 13th Floor, Suite 1300, New York, New York 10048 and
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of these documents may also be obtained from the SEC's Public Reference
Room at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 upon payment
of the prescribed fees. You may obtain information on the operation of the
Public Reference Room by calling the SEC at 1-800-SEC-0330.
In addition, registration statements and other filings made with the SEC
through its electronic data gathering, analysis and retrieval systems are
publicly available through the SEC's site located at www.sec.gov. The
registration statement, including all exhibits and schedules and amendments,
has been filed with the commission through the Electronic Data Gathering,
Analysis and Retrieval system.
On the date of this prospectus, we will become subject to the reporting
requirements of the Exchange Act and in accordance with these requirements,
will file reports, proxy statements and other information with the SEC. We
intend to furnish our stockholders with annual reports containing audited
financial statements and other periodic reports as we deem appropriate or as
may be required by law.
47
<PAGE>
Index to Financial Statements
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Independent Auditor's Report .................................................. F-2
Balance Sheets as of December 31, 1999 and June 30, 2000 (unaudited) .......... F-3
Statements of Operations for each of the years in the two-year period ended
December 31, 1999, and cumulative from inception
(August 5, 1988) to December 31, 1999, and for the six-month periods
ended June 30, 1999 and 2000 (unaudited) and cumulative
from inception (August 5, 1988) to June 30, 2000 (unaudited) ................. F-4
Statements of Stockholders' Equity for each of the years in the two-year
period ended December 31, 1999 and cumulative from
inception (August 5, 1988) to June 30, 2000 (unaudited) ...................... F-5
Statements of Cash Flows for each of the years in the two-year period
ended December 31, 1999, and cumulative from
inception (August 5, 1988) to December 31, 1999, and the six-month
periods ended June 30, 1999 and 2000 (unaudited) and
cumulative from inception (August 5, 1988) to June 30, 2000
(unaudited) .................................................................. F-6
Notes to Financial Statements ................................................. F-7
</TABLE>
F-1
<PAGE>
Independent Auditors' Report
(When the reverse stock split as described in Note 2 of the accompanying
financial statements has been consummated, we will be in a position to render
the following opinion.)
/s/ KPMG LLP
---------------------
KPMG LLP
The Board of Directors
Delcath Systems, Inc.:
We have audited the accompanying balance sheet of Delcath Systems, Inc. (a
development stage enterprise) as of December 31, 1999 and the related
statements of operations, stockholders' equity, and cash flows for each of the
years in the two-year period ended December 31, 1999 and for the period from
August 5, 1988 (inception) to December 31, 1999. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Delcath Systems, Inc. (a
development stage enterprise) as of December 31, 1999 and the results of its
operations and its cash flows for each of the years in the two-year period
ended December 31, 1999 and for the period August 5, 1988 (inception) to
December 31, 1999, in conformity with generally accepted accounting principles.
May 5, 2000
New York, New York
F-2
<PAGE>
DELCATH SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
Balance Sheets
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
Assets ---------------- ----------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents ....................................... $ 561,078 417,549
Interest receivable ............................................. 3,326 975
Prepaid rent .................................................... -- 43,689
Prepaid insurance ............................................... 4,167 23,333
Deferred IPO costs .............................................. -- 291,363
------------- -------
Total current assets .......................................... 568,571 776,909
Furniture and fixtures, net ...................................... 8,250 6,750
Due from affiliate ............................................... 24,000 24,000
------------- -------
Total assets .................................................. $ 600,821 807,659
============= =======
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses ........................... $ 112,748 209,532
------------- -------
Total current liabilities ..................................... 112,748 209,532
------------- -------
Commitments and contingencies (note 4)
Stockholders' equity (note 2):
Class A preferred stock, $.01 par value: 5,000,000 shares
authorized; 2,000,000 shares issued and outstanding (liqui-
dation preference of $2,216,637 at December 31, 1999) ......... 20,000 20,000
Class B preferred stock, $.01 par value: 5,000,000 shares
authorized; 416,675 shares issued and outstanding (liquida-
tion preference of $1,625,033 at December 31, 1999) ........... 4,167 4,167
Common stock, $.01 par value: 15,000,000 shares authorized;
1,093,333 and 1,385,759 shares issued and outstanding ......... 10,933 13,857
Additional paid-in capital ...................................... 11,764,935 12,263,836
Deficit accumulated during development stage .................... (11,311,962) (11,703,733)
------------- -----------
Total stockholders' equity .................................... 488,073 598,127
------------- -----------
Total liabilities and stockholders' equity .................... $ 600,821 807,659
============= ===========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
DELCATH SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
Statements of Operations
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------
1998 1999
----------------- -------------
<S> <C> <C>
Costs and expenses:
Legal, consulting and
accounting fees .......... $ 574,299 626,366
Stock option
compensation expense
(reversal) ............... 759,229 (456,185)
Compensation and related
expenses ................. 466,644 200,128
Other operating expenses ... 324,271 227,817
------------- --------
Total costs and
expenses ................ 2,124,443 598,126
------------- --------
Operating income (loss) (2,124,443) (598,126)
Interest income ............ 74,463 43,470
Interest expense ........... -- (17,925)
------------- --------
Net income (loss) ........ $ (2,049,980) (572,581)
============= ========
Common share data:
Basic and diluted income
(loss) per share ......... $ (2.01) (0.54)
============= ========
Weighted average number
of shares of common
stock outstanding ........ 1,021,437 1,062,605
<CAPTION>
Cumulative Cumulative
from inception Six months ended from inception
(August 5, 1988) June 30, (August 5, 1988)
to ---------------------------- to
December 31, 1999 1999 2000 June 30, 2000
------------------- ------------- ------------- -----------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Costs and expenses:
Legal, consulting and
accounting fees .......... 4,517,169 389,253 172,926 4,690,095
Stock option
compensation expense
(reversal) ............... 2,520,170 (456,185) -- 2,520,170
Compensation and related
expenses ................. 2,488,170 123,733 104,765 2,592,935
Other operating expenses ... 2,191,276 149,381 127,116 2,318,392
--------- -------- ------- ---------
Total costs and
expenses ................ 11,716,785 206,182 404,807 12,121,592
---------- -------- ------- ----------
Operating income (loss) (11,716,785) (206,182) (404,807) (12,121,592)
Interest income ............ 537,696 23,697 13,036 550,732
Interest expense ........... (132,873) (17,925) -- (132,873)
----------- -------- -------- -----------
Net income (loss) ........ (11,311,962) (200,410) (391,771) (11,703,733)
=========== ======== ======== ===========
Common share data:
Basic and diluted income
(loss) per share ......... (0.19) (0.32)
======== ========
Weighted average number
of shares of common
stock outstanding ........ 1,042,283 1,239,547
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
DELCATH SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
Statements of Stockholders' Equity
Six months ended June 30, 2000 (unaudited) and years ended December 31, 1999
and 1998 and
cumulative from inception (August 5, 1988) to December 31, 1999 and June 30,
2000 (unaudited)
<TABLE>
<CAPTION>
Common stock $.01 par value
-----------------------------------------------------
Issued In treasury
------------------------- --------------------------
No. of No. of
shares Amount shares Amount
------------- ---------- ------------- -----------
<S> <C> <C> <C> <C>
Shares issued in connection with the formation of
the Company as of August 22, 1988 .................. 786,678 $ 7,867 -- --
Sale of preferred stock, August 22, 1988 ............ -- -- -- --
Shares returned as of March 9, 1990 ................. -- -- (524,451) (5,245)
Sale of stock, October 2, 1990 ...................... -- -- 21,852 219
Sale of stock, January 23, 1991 ..................... -- -- 58,924 589
Sale of stock, August 30, 1991 ...................... -- -- 1,714 17
Sale of stock, December 31, 1992 .................... -- -- 131,113 1,311
Sale of stock, July 15, 1994 ........................ -- -- 130,763 1,308
Sale of stock, December 19, 1996 .................... -- -- 50,046 500
Shares issued in connection with conversion of
short-term borrowings as of December 22, 1996 ...... 74,086 741 124,619 1,246
Sale of stock, December 31, 1997 .................... 67,742 677 -- --
Exercise of stock options ........................... 17,482 175 4,370 44
Shares issued as compensation ....................... 2,970 30 1,050 11
Amortization of compensatory stock options
granted ............................................ -- -- -- --
Forfeiture of stock options ......................... -- -- -- --
Shares issued in connection with exercise of
warrants ........................................... 27,318 273 -- --
Deficit accumulated from inception to December
31, 1997 ........................................... -- -- -- --
------- ------- -------- ------
Balance at December 31, 1997 ........................ 976,276 9,763 -- --
Sale of stock, January 16, 1998 ..................... 43,704 437 -- --
Sale of stock, September 24, 1998 ................... 4,370 44 -- --
Shares returned, April 17, 1998 ..................... (4,370) (44) -- --
Amortization of compensatory stock options
granted ............................................ -- -- -- --
Forfeiture of stock options ......................... -- -- -- --
Exercise of stock options ........................... 10,926 109 -- --
Net loss for year ended December 31, 1998 ........... -- -- -- --
------- ------- -------- ------
Balance at December 31, 1998 ........................ 1,030,906 10,309 -- --
Sale of stock, June 30, 1999 ........................ 59,514 595 -- --
Amortization of compensatory stock options
granted ............................................ -- -- -- --
Forfeiture of stock options ......................... -- -- -- --
Shares issued in connection with exercise of
warrants ........................................... 2,913 29 -- --
Net loss for year ended December 31, 1999 ........... -- -- -- --
--------- ------- -------- ------
Balance at December 31, 1999 ........................ 1,093,333 10,933 -- --
Sale of stock, April 14, 2000 ....................... 292,426 2,924 -- --
Net loss for six months ended June 30, 2000
(unaudited) ........................................ -- -- -- --
--------- ------- -------- ------
Balance at June 30, 2000 ............................ 1,385,759 $13,857 -- --
========= ======= ======== ======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Class A Class B
Common stock $.01 par value preferred stock preferred stock
--------------------------- ------------------------ --------------------
Outstanding $.01 par value $.01 par value
-------------------------- ------------------------ --------------------
No. of No. of No. of
shares Amount shares Amount shares Amount
------------- ----------- ------------ ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Shares issued in connection with the formation of
the Company as of August 22, 1988 .................. 786,678 $ 7,867 -- -- -- --
Sale of preferred stock, August 22, 1988 ............ -- -- 2,000,000 20,000 -- --
Shares returned as of March 9, 1990 ................. (524,451) (5,245) -- -- -- --
Sale of stock, October 2, 1990 ...................... 21,852 219 -- -- -- --
Sale of stock, January 23, 1991 ..................... 58,924 589 -- -- 416,675 4,167
Sale of stock, August 30, 1991 ...................... 1,714 17 -- -- -- --
Sale of stock, December 31, 1992 .................... 131,113 1,311 -- -- -- --
Sale of stock, July 15, 1994 ........................ 130,763 1,308 -- -- -- --
Sale of stock, December 19, 1996 .................... 50,046 500 -- -- -- --
Shares issued in connection with conversion of
short-term borrowings as of December 22, 1996 ...... 198,705 1,987 -- -- -- --
Sale of stock, December 31, 1997 .................... 67,742 677 -- -- -- --
Exercise of stock options ........................... 21,852 219 -- -- -- --
Shares issued as compensation ....................... 4,020 41 -- -- -- --
Amortization of compensatory stock options
granted ............................................ -- -- -- -- -- --
Forfeiture of stock options ......................... -- -- -- -- -- --
Shares issued in connection with exercise of
warrants ........................................... 27,318 273 -- -- -- --
Deficit accumulated from inception to December
31, 1997 ........................................... -- -- -- -- -- --
-------- -------- --------- ------ ------- -----
Balance at December 31, 1997 ........................ 976,276 9,763 2,000,000 20,000 416,675 4,167
Sale of stock, January 16, 1998 ..................... 43,704 437 -- -- -- --
Sale of stock, September 24, 1998 ................... 4,370 44 -- -- -- --
Shares returned, April 17, 1998 ..................... (4,370) (44) -- -- -- --
Amortization of compensatory stock options
granted ............................................ -- -- -- -- -- --
Forfeiture of stock options ......................... -- -- -- -- -- --
Exercise of stock options ........................... 10,926 109 -- -- -- --
Net loss for year ended December 31, 1998 ........... -- -- -- -- -- --
-------- -------- --------- ------ ------- -----
Balance at December 31, 1998 ........................ 1,030,906 10,309 2,000,000 20,000 416,675 4,167
Sale of stock, June 30, 1999 ........................ 59,514 595 -- -- -- --
Amortization of compensatory stock options
granted ............................................ -- -- -- -- -- --
Forfeiture of stock options ......................... -- -- -- -- -- --
Shares issued in connection with exercise of
warrants ........................................... 2,913 29 -- -- -- --
Net loss for year ended December 31, 1999 ........... -- -- -- -- -- --
--------- -------- --------- ------ ------- -----
Balance at December 31, 1999 ........................ 1,093,333 10,933 2,000,000 20,000 416,675 4,167
Sale of stock, April 14, 2000 ....................... 292,426 2,924 -- -- -- --
Net loss for six months ended June 30, 2000
(unaudited) ........................................ -- -- -- -- -- --
--------- -------- --------- ------ ------- -----
Balance at June 30, 2000 ............................ 1,385,759 $ 13,857 2,000,000 $20,000 416,675 $4,167
========= ======== ========= ======= ======= ======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Deficit
accumulated
Additional during
paid-in development
capital stage Total
-------------- ----------------- ---------------
<S> <C> <C> <C>
Shares issued in connection with the formation of
the Company as of August 22, 1988 .................. $ (6,867) $ -- $ 1,000
Sale of preferred stock, August 22, 1988 ............ 480,000 -- 500,000
Shares returned as of March 9, 1990 ................. 5,245 -- --
Sale of stock, October 2, 1990 ...................... 24,781 -- 25,000
Sale of stock, January 23, 1991 ..................... 1,401,566 -- 1,406,322
Sale of stock, August 30, 1991 ...................... 9,984 -- 10,001
Sale of stock, December 31, 1992 .................... 1,013,693 -- 1,015,004
Sale of stock, July 15, 1994 ........................ 1,120,692 -- 1,122,000
Sale of stock, December 19, 1996 .................... 999,500 -- 1,000,000
Shares issued in connection with conversion of
short-term borrowings as of December 22, 1996 ...... 1,702,977 -- 1,704,964
Sale of stock, December 31, 1997 .................... 774,323 -- 775,000
Exercise of stock options ........................... 30,781 -- 31,000
Shares issued as compensation ....................... 34,444 -- 34,485
Amortization of compensatory stock options
granted ............................................ 2,496,347 -- 2,496,347
Forfeiture of stock options ......................... (279,220) -- (279,220)
Shares issued in connection with exercise of
warrants ........................................... 234,125 -- 234,398
Deficit accumulated from inception to December
31, 1997 ........................................... -- (8,689,401) (8,689,401)
----------- ------------- -------------
Balance at December 31, 1997 ........................ 10,042,371 (8,689,401) 1,386,900
Sale of stock, January 16, 1998 ..................... 499,563 -- 500,000
Sale of stock, September 24, 1998 ................... 56,956 -- 57,000
Shares returned, April 17, 1998 ..................... (4,956) -- (5,000)
Amortization of compensatory stock options
granted ............................................ 1,166,418 -- 1,166,418
Forfeiture of stock options ......................... (407,189) -- (407,189)
Exercise of stock options ........................... 67,391 -- 67,500
Net loss for year ended December 31, 1998 ........... -- (2,049,980) (2,049,980)
----------- ------------- -------------
Balance at December 31, 1998 ........................ 11,420,554 (10,739,381) 715,649
Sale of stock, June 30, 1999 ........................ 775,597 -- 776,192
Amortization of compensatory stock options
granted ............................................ 98,186 -- 98,186
Forfeiture of stock options ......................... (554,371) -- (554,371)
Shares issued in connection with exercise of
warrants ........................................... 24,969 -- 24,998
Net loss for year ended December 31, 1999 ........... -- (572,581) (572,581)
----------- ------------- -------------
Balance at December 31, 1999 ........................ 11,764,935 (11,311,962) 488,073
Sale of stock, April 14, 2000 ....................... 498,901 -- 501,825
Net loss for six months ended June 30, 2000
(unaudited) ........................................ -- (391,771) (391,771)
----------- ------------- -------------
Balance at June 30, 2000 ............................ $12,263,836 $ (11,703,733) $ 598,127
=========== ============= =============
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
DELCATH SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
Statement of Cash Flows
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------
1998 1999
----------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ............................ $ (2,049,980) (572,581)
Adjustments to reconcile net income
(loss) to net cash used in operating
activities:
Stock option compensation expense
(reversal) ................................. 759,229 (456,185)
Stock compensation expense .................. -- --
Depreciation expense ........................ 3,000 3,000
Amortization of organization costs .......... -- --
(Increase) decrease in prepaid
expenses ................................... 7,966 867
(Increase) decrease in interest
receivable ................................. 32,932 1,797
Due from affiliate .......................... -- --
(Decrease) increase in accounts
payable and accrued expenses ............... (174,369) (69,323)
------------- --------
Net cash used in operating
activities ............................... (1,421,222) (1,092,425)
------------- ----------
Cash flows from investing activities:
Purchase of furniture and fixtures ........... -- --
Purchase of short-term investments ........... -- --
Proceeds from maturities of short-term
investments ................................. -- --
Organization costs ........................... -- --
------------- ----------
Net cash provided by (used in)
investing activities ..................... -- --
------------- ----------
Cash flows from financing activities:
Net proceeds from sale of stock and
exercise of stock options and warrants 624,500 801,190
Deposits ..................................... (304,991) --
Deferred IPO costs ........................... -- --
Proceeds from short-term borrowings .......... -- --
------------- ----------
Net cash provided by financing
activities ............................... 319,509 801,190
------------- ----------
Increase (decrease) in cash and cash
equivalents .............................. (1,101,713) (291,235)
Cash and cash equivalents at beginning of
period ....................................... 1,954,026 852,313
------------- ----------
Cash and cash equivalents at end of period $ 852,313 561,078
============= ==========
Supplemental cash flow activities:
Conversion of debt to common stock ........... $ -- --
============= ==========
Cash paid for interest ....................... $ -- 17,925
============= ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Cumulative Cumulative
from inception Six months ended from inception
(August 5, 1988) ---------------------------- (August 5, 1988)
to June 30, June 30, to
December 31, 1999 1999 2000 June 30, 2000
------------------- ------------- ------------- -----------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ............................ (11,311,962) (200,410) (391,771) (11,703,733)
Adjustments to reconcile net income
(loss) to net cash used in operating
activities:
Stock option compensation expense
(reversal) ................................. 2,520,171 (456,185) -- 2,520,171
Stock compensation expense .................. 34,485 -- -- 34,485
Depreciation expense ........................ 6,750 1,500 1,500 8,250
Amortization of organization costs .......... 42,165 -- -- 42,165
(Increase) decrease in prepaid
expenses ................................... (4,167) (11,633) (62,855) (67,022)
(Increase) decrease in interest
receivable ................................. (3,326) 3,900 2,351 (975)
Due from affiliate .......................... (24,000) -- -- (24,000)
(Decrease) increase in accounts
payable and accrued expenses ............... 112,748 61,580 96,784 209,532
----------- -------- -------- -----------
Net cash used in operating
activities ............................... (8,627,136) (601,248) (353,991) (8,981,127)
----------- -------- -------- -----------
Cash flows from investing activities:
Purchase of furniture and fixtures ........... (15,000) -- -- (15,000)
Purchase of short-term investments ........... (1,030,000) -- -- (1,030,000)
Proceeds from maturities of short-term
investments ................................. 1,030,000 -- -- 1,030,000
Organization costs ........................... (42,165) -- -- (42,165)
----------- -------- -------- -----------
Net cash provided by (used in)
investing activities ..................... (57,165) -- -- (57,165)
----------- -------- -------- -----------
Cash flows from financing activities:
Net proceeds from sale of stock and
exercise of stock options and warrants 7,540,415 801,190 501,825 8,042,240
Deposits ..................................... -- -- -- --
Deferred IPO costs ........................... -- -- (291,363) (291,363)
Proceeds from short-term borrowings .......... 1,704,964 -- -- 1,704,964
----------- -------- -------- -----------
Net cash provided by financing
activities ............................... 9,245,379 801,190 210,462 9,455,841
----------- -------- -------- -----------
Increase (decrease) in cash and cash
equivalents .............................. 561,078 199,942 (143,529) 417,549
Cash and cash equivalents at beginning of
period ....................................... -- 852,313 561,078 --
----------- -------- -------- -----------
Cash and cash equivalents at end of period 561,078 1,052,255 417,549 417,549
=========== ========= ======== ===========
Supplemental cash flow activities:
Conversion of debt to common stock ........... 1,704,964 -- -- 1,704,964
=========== ========= ======== ===========
Cash paid for interest ....................... 114,948 -- -- 114,948
=========== ========= ======== ===========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
DELCATH SYSTEMS, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 1999 and 1998
(1) Description of Business and Summary of Significant Accounting Policies
(a) Description of Business
Delcath Systems, Inc. (the "Company") is a development stage company which
was founded in 1988 for the purpose of developing and marketing a proprietary
drug delivery system capable of introducing, and removing, high dose
chemotherapy agents to a diseased organ system while greatly inhibiting their
entry into the general circulation system. It is hoped that the procedure will
result in a meaningful treatment for cancer. In November 1989, the Company was
granted an IDE (Investigational Device Exemption) and an IND status
(Investigational New Drug) for its product by the FDA (Food and Drug
Administration).
(b) Basis of Financial Statement Presentation
The accounting and financial reporting policies of the Company conform to
generally accepted accounting principles. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make assumptions and estimates that impact the amounts reported
in those statements. Such assumptions and estimates are subject to change in
the future as additional information becomes available or as circumstances are
modified. Actual results could differ from these estimates.
(c) Furniture and Fixtures
Furniture and fixtures are recorded at cost and are being depreciated over
the estimated useful lives of the assets.
(d) Income Taxes
The Company accounts for income taxes following the asset and liability
method in accordance with Statement of Financial Accounting Standards (SFAS)
No. 109, "Accounting for Income Taxes." Under such method, deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. The Company's income tax
returns are prepared on the cash basis of accounting. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years that the asset is expected to be recovered or the liability
settled.
(e) Stock Option Plan
The Company has historically accounted for its employee stock option plans
in accordance with the provisions of Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. As such, compensation expense is recorded on the date of grant
only if the current fair market value of the underlying stock exceeds the
exercise price. Fair market values of the Company's common stock at the dates
options were granted were based on third party sales of stock at or around the
dates options were granted, or in the absence of such transactions, based on a
determination by the board of directors based on current available information.
In 1996, the Company adopted Statement of Financial Accounting Standards (SFAS)
No. 123, "Accounting for Stock-Based Compensation," which permits entities to
recognize as expense over the vesting period the fair value of all stock-based
awards on the date of grant. Alternatively, SFAS No. 123 also allows entities
to continue to apply the provisions of APB Opinion No. 25 and provide pro forma
net income and pro forma earnings per share disclosures for employee stock
option grants made in 1995 and future years as if the fair-value-based method
defined in SFAS No. 123 had been applied. The Company has elected to continue
to apply the provisions of APB Opinion No. 25 and provide the pro forma
disclosure provisions of SFAS No. 123 (see note 2(e)).
F-7
<PAGE>
DELCATH SYSTEMS, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 1999 and 1998 -- (Continued)
(1) Description of Business and Summary of Significant Accounting Policies --
(Continued)
(f) Earnings Per Share
Basic earnings per share is computed using the weighted average number of
shares of common stock outstanding during the period. Diluted earnings per
share reflect the dilutive effect of common stock equivalents using the
treasury stock method.
(g) Statements of Cash Flows
For purposes of the statements of cash flows, the Company considers highly
liquid debt instruments with original maturities of three months or less to be
cash equivalents. At December 31, 1999 cash equivalents included commercial
paper of $557,000.
(h) Interim Financial Information
The financial statements and notes related thereto as of June 30, 2000 and
for the six months ended June 30, 1999 and 2000 are unaudited, but in the
opinion of management, include all normal recurring adjustments necessary for a
fair presentation of financial position and results of operations. The
operating results for the interim periods are not necessarily indicative of a
full year's operations.
(2) Stockholders' Equity
The common stock and per share data for all periods gives effect to a
reverse stock split of 1 for 2.2881 shares which is to occur immediately before
the date of the Company's initial public offering described in note 5.
(a) Stock Issuances
BGH Medical Products, Inc. (name later changed to Delcath Systems, Inc.),
a Delaware corporation (BGH - Delaware), was formed on August 5, 1988. As of
August 22, 1988, BGH Medical Products, Inc., a Connecticut corporation (BGH -
Conn.), was merged into BGH -Delaware, the surviving corporation. As of the
merger date, the authorized capital stock of BGH - Conn. consisted of 5,000
shares of common stock, par value $.01 per share, of which 1,000 shares were
issued and outstanding. Upon the merger, each BGH - Conn. common share
outstanding was exchanged into 786.678 shares of BGH - Delaware common stock.
As a result of the conversion, BGH - Delaware issued 786,678 shares of common
stock at $.01 par value. The aggregate amount of the par value of all shares of
common stock issued as a result of the exchange, $7,867, was credited as the
common stock capital of BGH - Delaware, and the difference in respect to the
capital account deficiency was charged to additional paid-in capital.
On August 22, 1988, BGH - Delaware then sold in a private placement
2,000,000 shares of class A preferred stock, with a par value of $.01, to two
affiliated venture capital funds for an aggregate amount of $500,000 in cash.
On March 8, 1990, 524,451 shares of common stock were returned to the
Company as treasury stock due to relevant technology milestones not being fully
achieved within the specified time period, in accordance with provisions of a
stockholders' agreement.
Effective May 7, 1990, the Company changed its name to Delcath Systems,
Inc.
On October 2, 1990, the Company sold 21,852 shares of common stock held in
its treasury, at $.01 par value, for an aggregate amount of $25,000.
On January 23, 1991, the Company offered in a private placement shares of
common stock and/or class B preferred stock at $5.83 and $2.55 per share,
respectively, for an aggregate maximum amount of
F-8
<PAGE>
DELCATH SYSTEMS, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 1999 and 1998 -- (Continued)
(2) Stockholders' Equity -- (Continued)
$2,000,000. Under the terms of the private placement, 58,924 shares of common
stock held in its treasury and 416,675 shares of class B preferred stock were
sold, yielding net proceeds to the Company of $1,406,322. The common stock and
class B preferred stock sold each has a par value of $.01, resulting in an
increase in additional paid-in capital of $1,401,566. The two affiliated
venture capital funds that owned the class A preferred stock purchased 117,650
of the class B preferred stock sold in the private placement.
On August 30, 1991, the Company sold an additional 1,714 shares of common
stock held in its treasury at $5.83 per share, yielding proceeds to the Company
of $10,001. The shares have a par value of $.01, resulting in an additional
paid-in capital amount of $9,984.
In a December 1992 private placement, the Company sold 131,113 shares of
common stock held in our treasury at $8.01 per share for a total placement of
$1,050,000 ($1,015,004 after expenses). The shares issued have a par value of
$.01, resulting in an additional paid-in capital amount of $1,048,689
($1,013,693 after expenses). The two affiliated venture capital funds that
owned the class A preferred stock purchased 34,963 of the shares of common
stock in its treasury which were sold.
Effective January 1, 1994, the Company issued 2,185 shares of common stock
held in its treasury at $1.14 per share for a total price of $2,500 upon the
exercise of stock options by an employee of the Company.
During the first quarter of 1994, the Company increased its authorized
number of shares of common stock from 5,000,000 to 15,000,000.
On July 15, 1994, the Company sold through a private placement offering,
units at a price of $51,000 per unit. Each unit consisted of 5,944 common
shares and 594 warrants, each of which entitled the holder to purchase one
share of common stock for $8.58. In connection therewith, the Company sold
twenty-two (22) units (130,763 common shares and 13,076 warrants expiring
August 30, 1997) for total proceeds of $1,122,000. The two affiliated venture
capital funds that owned the class A preferred stock purchased six (6) of the
units sold. During August 1997, the holders of warrants exercised 11,293
warrants to purchase 11,293 shares of common stock at $8.58 each for total
proceeds of $96,900. The remaining warrants expired unexercised.
Effective January 1, 1995, the Company issued 2,185 shares of common stock
held in its treasury at $1.14 per share for a total price of $2,500 upon the
exercise of stock options by an employee of the Company.
Effective January 1, 1996, the Company issued 1,049 shares of common
stock, valued at $8.58 per share for a total of $9,000, as compensation for
consulting services.
On December 19, 1996, the Company sold through a private transaction
50,046 shares of common stock for total proceeds of $1,000,000. In connection
with the offering, the purchaser obtained sole distribution rights for the
Company's products for a limited period of time in Japan, Korea, China, Taiwan,
and Hong Kong. No value was attributed to the distribution rights. In addition,
the purchaser will be required to buy certain products from the Company.
On April 26, 1996, the Company entered into short-term borrowing
agreements with 26 investors under which it borrowed $1,704,964 bearing
interest at 10.25% per annum. Under the terms of the agreements, on December
22, 1996, the short-term borrowings were converted into 198,705 shares of
common stock, based on a conversion price of $8.58 per share, and 99,350
warrants, expiring April 25, 1999, entitling the holders to purchase 99,350
additional shares of common stock at $8.58 per share. The two affiliated
venture capital funds discussed above provided $250,000 of the short-term loan,
converting that debt into 29,136 shares and 14,568
F-9
<PAGE>
DELCATH SYSTEMS, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 1999 and 1998 -- (Continued)
(2) Stockholders' Equity -- (Continued)
warrants. From April 26, 1996 through December 22, 1996, interest of $114,948
accrued on the borrowings. Such interest was paid in January 1997. During
September 1997, the holders of warrants exercised 1,457 warrants to purchase
1,457 shares of common stock at $8.58 each for total proceeds of $12,499.
During December 1997, the two affiliated venture capital funds exercised their
14,568 warrants to purchase 14,568 common shares at $8.58 each for total
proceeds of $124,999. During April 1999, the holders of warrants exercised
2,913 warrants to purchase 2,913 common shares at $8.58 each for total proceeds
of $24,998. The remaining warrants expired unexercised.
In 1997, the Company issued 2,970 shares of common stock, valued at $8.58
per share based on a 1996 agreement, for a total cost of $25,485, as
compensation for consulting services.
From September 1997, through December 31, 1997, the Company issued 67,742
shares of common stock. During January 1998, the Company received an additional
$500,000 and issued another 43,704 shares. In April 1998, under the terms of
the restricted stock sales agreements, the Company issued to the purchasers of
the 111,446 shares of common stock 14,859 three year warrants entitling the
holders to purchase 14,859 shares of common stock at $8.58 per share.
In December 1997, the holder of non-incentive stock options exercised
17,482 options to purchase 17,482 shares of common stock at $1.49 each for
total proceeds of $26,000.
At the end of December 1997, the holders of 35,545 shares of common stock
agreed to sell those shares to the two affiliated venture capital funds
discussed above at $8.58 per share. The venture capital funds deposited
$304,991 with the Company pending transfer of the shares. At the time of
transfer, the Company paid the funds to the sellers.
In April 1998, a venture capital firm exercised 10,926 non-incentive stock
options to purchase 10,926 restricted common shares at $6.18 each for total
proceeds of $67,500.
In April 1998, in connection with the settlement of a dispute with a
former director, the Company cancelled 4,370 shares of common stock previously
held by the former director in return for $1.14 per share, the price originally
paid by the former director.
In September 1998, the Company sold 4,370 shares of common stock to an
individual for $13.04 per share, yielding proceeds to the Company of $57,000.
In June 1999, the Company sold 59,514 shares of common stock to individual
investors for $13.04 per share and warrants entitling the holders to purchase
6,609 common shares at $11.74 per share (which warrants expire April 30, 2002),
yielding proceeds to the Company of $776,192.
In April 2000, the Company sold 292,426 shares at $1.72 per share to
existing stockholders in a rights offering yielding proceeds to the Company of
$501,825.
The two affiliated venture capital firms discussed above were liquidated
in 1998 and the shares of the Company then owned by the funds were distributed
to the individual investors of the funds, or their nominee, if so directed.
(b) Voting Rights
Each holder of common stock is entitled to one vote. Each share of class A
preferred stock and each share of class B preferred stock is convertible into
shares of common stock on a one for .4370 basis, subject to antidilution
adjustments. In addition to special voting rights to elect directors to the
Board of Directors,
F-10
<PAGE>
DELCATH SYSTEMS, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 1999 and 1998 -- (Continued)
(2) Stockholders' Equity -- (Continued)
each class A preferred stockholder is entitled to ten times the number of votes
per share of common stock into which the class A preferred stock is convertible
and each class B preferred stockholder is entitled to the number of votes per
share of Common Stock into which the class B preferred stock is convertible.
(c) Liquidation Preference
In the event of any liquidation, dissolution or winding up of the Company,
after provision for payment of debts and other liabilities, the holders of the
class A preferred stock shall be entitled to receive, prior to any distribution
of any of the assets or surplus funds of the Company to the holders of class B
preferred stock and common stock, an amount equal to the sum of (a) 150% of the
issue price (as adjusted for any combinations, consolidations, stock
distributions or stock dividends with respect to such shares) plus (b) a sum
equal to that amount of interest that would have accrued if a sum equal to 150%
of the issue price had been invested at a compounded annual interest rate of
10% at the original issue date. After the satisfaction of the class A preferred
stockholders, the holders of class B preferred stock will be entitled to a
liquidation sum, in preference to the common stockholders, of $3.90 per share.
Common stockholders will be entitled to share ratably with the class A and
class B preferred stockholders (on an as-converted basis) in the remaining
assets of the Company.
(d) Dividends
The holders of class A and class B preferred stock are entitled to receive
dividends on a cumulative basis at the rate of 11% and 8%, respectively, per
share per annum as and when declared by the Board of Directors, before any
dividend or distribution is declared, set apart for, or paid upon the common
stock of the Company. As of December 31, 1999, class A preferred stock and
class B preferred stock had dividends in arrears of $624,740 ($.31 per share)
and $759,429 ($1.82 per share), respectively. Dividends declared but unpaid, at
the option of the holder, are payable in cash or may be converted into common
stock subject to antidilution adjustments. The class A dividends may be
converted at the rate of $.57 per share, while the class B dividends may be
converted at the rate of $5.83 per share.
The Company has entered into agreements with the preferred shareholders
providing that if the Company completes a public offering of its common stock
prior to September 30, 2001, the Board will, immediately prior to the offering,
declare as payable all dividends in arrears. In such event, the preferred
shareholders have agreed to accept one-third of such dividends in cash and then
immediately convert all of their outstanding preferred stock into common stock
as well as convert the balance of their declared but unpaid preferred stock
dividends into common stock at the applicable conversion price.
(e) Stock Option Plans
The Company established an Incentive Stock Option Plan and a Non-Incentive
Stock Option Plan under which stock options may be granted. Additionally, the
Company has entered into separate contracts apart from the Incentive Stock
Option Plan and the Non-Incentive Stock Option Plan under which options to
purchase common shares have been granted. A stock option granted allows the
holder of the option to purchase a share of the Company's common stock in the
future at a stated price. The Plans are administered by the Board of Directors
which determines the individuals to whom the options shall be granted as well
as the terms and conditions of each option grant, the option price and the
duration of each option.
The Company's Incentive and Non-Incentive Stock Plans were approved and
became effective on November 1, 1992. The Incentive Stock Options vest as
determined by the Company and expire over varying terms, but not more than five
years from the date of grant.
F-11
<PAGE>
DELCATH SYSTEMS, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 1999 and 1998 -- (Continued)
(2) Stockholders' Equity -- (Continued)
Stock option activity for the period January 1, 1998 through December 31,
1999 is as follows:
<TABLE>
<CAPTION>
Non-Incentive and
Grants Incentive Option Plans Other Option
----------------------- ------------------------- -------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------------ ---------- ------------ -------------
<S> <C> <C> <C> <C>
Outstanding at
December 31, 1997 255,020 $ 6.11 21,852 $ 2.29
Granted during 1998 21,852 6.18 -- --
Forfeited during 1998 (52,445) 6.18 -- --
Expired during 1998 (119,750) 6.18 -- --
Exercised during 1998 (10,926) 6.18 -- --
-------- ------
Outstanding at
December 31, 1998 93,751 5.97 21,852 2.29
Granted during 1999 559,416 3.27 21,852 2.29
Canceled during 1999 (43,704) 5.97 -- --
Forfeited during 1999 (50,047) 5.97 -- --
Expired during 1999 -- -- (21,852) 2.29
-------- -------
Outstanding at
December 31, 1999 559,416 $ 3.27 21,852 $ 2.29
======== =======
</TABLE>
The following summarizes information about shares subject to option at
December 31, 1999:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
---------------------------------------------------------------------- -------------------------------
Weighted
Weighted average Weighted
Number Range of average remaining Number average
outstanding exercise prices exercise price life in years exercisable exercise price
------------- ----------------- ---------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
240,374 $2.29 $2.29 3.76 131,113 $ 2.29
340,894 3.89 3.89 4.00 340,894 3.89
------- ----- ----- ---- ------- ------
581,268 $2.29 - $3.89 $3.23 3.90 472,007 $ 3.46
======= =======
</TABLE>
The Company applies APB 25 and related interpretations in accounting for
its plans. As such, compensation cost is measured at the date of grant as the
excess, if any, of the fair market value of the underlying stock over the
exercise price. Such cost is then recognized over the period the recipient is
required to perform services to earn such compensation. If a stock option is
not exercised because an employee fails to fulfill an obligation, the estimate
of compensation expense recorded in previous periods is adjusted by decreasing
compensation expense in the period of forfeiture. In 1998 and 1999, former
employees of the Company resigned and forfeited all of their non vested
options. As a result, the expense previously accrued for such option grants was
reversed. Accordingly, stock option compensation expense/(reversal) associated
with the Incentive and Non-Incentive Stock Plans for the years ended December
31, 1998 and 1999 was $759,229 and ($456,185), respectively, net of forfeitures
of $407,189 and $554,371, respectively. Had compensation cost for the Company's
stock option grants been determined based on the fair value at the grant dates
consistent with the methodology of SFAS 123, the Company's net loss for the
years ended December 31, 1998 and 1999 would have been increased to the pro
forma amounts indicated as follows:
F-12
<PAGE>
DELCATH SYSTEMS, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 1999 and 1998 -- (Continued)
(2) Stockholders' Equity -- (Continued)
1998 1999
----------------- -------------
Net loss:
As reported $ (2,049,980) (572,581)
Pro forma (2,132,139) (944,303)
The per share weighted average fair value of stock options granted during
1999 and 1998 was $.73, estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions used for
the grants for both years: no dividend yield, risk free interest rate of 5.5%,
expected lives of five years and no volatility.
(3) Income Taxes
As of December 31, 1999, the Company had net operating loss carryforwards
for federal income tax purposes of approximately $8,542,000 which are available
to offset future federal taxable income, if any, through 2019. The net
operating loss carryforwards resulted in a deferred tax asset of approximately
$2,904,000 at December 31, 1999. Management does not expect the Company to be
taxable in the near future and has established a 100% valuation allowance
against the deferred tax asset created by the net operating loss carryforwards.
(4) Prepaid Rent and Due From Affiliate
The Company occupies office space pursuant to an informal arrangement with
the landlord according to which the Company prepaid its rent for the period
through December 31, 2000. In addition, the landlord is holding a $24,000
deposit provided by the Company.
(5) Initial Public Offering
In March 2000, the Company engaged an investment banker for the purpose of
issuing its stock in an initial public offering. In connection therewith, the
Company anticipates declaring and paying the preferred stock dividends as
described in note 2(d); converting all the outstanding preferred stock to
common stock as described in note 2(d) and effecting a reverse split of the
common shares of 1 for 2.2881 shares.
F-13
<PAGE>
The Delcath System Procedure
Isolating the Liver For Chemotherapy Treatment
[Diagram of interior cross section of a human torso showing the liver, heart
and major arteries and veins. The Delcah system is shown with the Delcath
catheters fully inserted in place. Arrows with numbers keyed to text at the
bottom trace the flow of chemotherapy through the liver as directed by the
Delcath system.]
1. An infusion catheter is inserted into the artery through which blood
normally flows to the liver.
2. A second catheter -- the Delcath double balloon catheter -- is inserted
through the inferior vena cava. Blood normally flows from the liver into the
inferior vena cava to the heart which circulates the blood throughout the body.
3. The balloons on the double balloon catheter are then inflated using the
caudal and cephalad extensions. The balloons prevent the normal flow of blood
from the liver to the heart because the inferior vena cava is blocked. Once the
balloons are inflated, the activated charcoal filters are opened and the priming
line, which is used during catheter positioning, is clamped.
4. A chemotherapeutic agent is infused into the liver through the infusion
catheter.
5. The blood in the liver, which is now infused with a chemotherapeutic
agent, cannot flow to the heart. Blood exits the liver through perforations on
the double balloon catheter and flows into this catheter out of the body. During
the procedure, samples of the isolated blood can be obtained through the
sampling extension.
6. Once out of the body, the infused blood is circulated through activated
charcoal filters to remove most of the chemotherapeutic agent.
7. The filtered blood is returned to the patient through the jugular vein
which leads to the superior vena cava and the heart. The heart restores the
cleansed blood to normal circulation.
<PAGE>
This diagram illustrates normal
blood flow.
Blood normally travels from the
hepatic (liver) veins into the inferior vena cava and towards the heart.
This diagram illustrates the blood flow
using the Delcath system.
During drug delivery, the Delcath double balloon catheter isolates the hepatic
blood for 60 minutes. The two balloons obstruct the normal flow and divert the
hepatic blood through openings in the catheter. This blood travels through the
catheter to the filtration system outside the patient's body.
<PAGE>
CT scans showing the results of
treatment using the Delcath system
on a single patient.
[CT scan of liver of patient before treatment, with the tumors marked in red]
Pre-Treatment. Two large metastatic tumors in the liver.
[CT scan of same patient after treatment showing the reduction of tumors]
Post-Treatment. Significant reduction in size of tumors.
The above CT scans show the results of treatment using the Delcath System on a
single patient, as reported in "Percutaneous hepatic vein isolation and
high-dose hepatic arterial infusion chemotherapy for unresectable liver
tumors," by Dr. T.S. Ravikumar and associates in the Journal of Clinical
Oncology, December 1994. The scans should not be viewed as evidence that the
Delcath system will generally shrink tumors in patients, but are presented
because they highlight the reason Delcath is sponsoring Phase III clinical
trials designed to demonstrate whether results seen in some Phase I/II patients
will be repeated in a statistically relevant number of new patients.
<PAGE>
================================================================================
We have not authorized any dealer, salesperson or any other person to
give any information or to represent anything not contained in this prospectus.
You must not rely on any unauthorized information. This prospectus does not
constitute an offer to sell or buy any shares in any jurisdiction where it is
unlawful.
-----------------------------------
TABLE OF CONTENTS
Page
---------
Prospectus Summary ....................... 3
Risk Factors ............................. 6
Cautionary Statement Regarding
Forward-Looking Statements ............ 9
Use of Proceeds .......................... 10
Dilution ................................. 12
Dividend Policy .......................... 13
Capitalization ........................... 13
Selected Financial Data .................. 14
Plan of Operation ........................ 15
Business ................................. 17
Management ............................... 32
Principal Stockholders ................... 39
Certain Transactions ..................... 41
Description of Securities ................ 42
Shares Eligible for Future Sale .......... 44
Underwriting ............................. 45
Legal Matters ............................ 47
Experts .................................. 47
Available Information .................... 47
Index to Financial Statements ............ F-1
-----------------------------------
Until ________, 2000 (25 days after the date of this prospectus), all
dealers effecting transactions in the registered securities, whether or not
participating in this offering, may be required to deliver a prospectus. This
is in addition to the dealers' obligation to deliver a prospectus when acting
as underwriters and with respect to their unsold allotments or subscriptions.
================================================================================
================================================================================
2,000,000 Shares
[GRAPHIC OMITTED]
Common Stock
----------------------------------------
PROSPECTUS
----------------------------------------
Whale Securities Co., L.P.
, 2000
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 24. Indemnification of Directors and Officers
Section 145 of the General Corporation Law of the State of Delaware
provides for the indemnification of officers and directors under certain
circumstances against expenses incurred in successfully defending against a
claim and authorizes a Delaware corporation to indemnify its officers and
directors under certain circumstances against expenses and liabilities incurred
in legal proceedings involving such persons because of their being or having
been an officer or director.
Section 102(b) of the Delaware General corporation Law permits a
corporation, by so providing in its certificate of incorporation, to eliminate
or limit a director's liability to the corporation and its stockholders for
monetary damages arising out of certain alleged breaches of their fiduciary
duty. Section 102(b)(7) provides that no such limitation of liability may
affect a director's liability with respect to any of the following:
o breaches of the director's duty of loyalty to the corporation or its
stockholders;
o acts or omissions not made in good faith or which involve intentional
misconduct of knowing violations of law;
o liability for dividends paid or stock repurchased or redeemed in
violation of the Delaware General Corporation law; or
o any transaction from which the director derived an improper personal
benefit. Section 102(b)(7) does not authorize any limitation on the
ability of the company or its stockholders to obtain injunctive
relief, specific performance or other equitable relief against
directors.
Article Seventh of the Registrant's Certificate of Incorporation provides
that the personal liability of the directors of the Registrant be eliminated to
the fullest extent permitted under Section 102(b) of the Delaware General
Corporation law.
Article Eighth of the Registrant's Certificate of Incorporation and the
Registrant's By-laws provides that all persons whom the Registrant is empowered
to indemnify pursuant to the provisions of Section 145 of the Delaware General
Corporation law (or any similar provision or provisions of applicable law at
the time in effect), shall be indemnified by the Registrant to the full extent
permitted thereby. The foregoing right of indemnification shall not be deemed
to be exclusive of any other rights to which those seeking indemnification may
be entitled under any by-law, agreement, vote of stockholders or disinterested
directors, or otherwise.
Insofar as indemnification for liabilities under the Securities Act of
1933, as amended (the "Securities Act") may be permitted to directors, officers
or persons controlling the Registrant pursuant to the foregoing provisions, the
Registrant has been informed that in the opinion of the Commission, such
indemnification is against public policy as expressed in the Securities Act and
is therefor unenforceable.
Reference is made to the Underwriting Agreement, the proposed form of
which is filed as Exhibit 1.1, pursuant to which the underwriters agree to
indemnify the directors and certain officers of the Registrant and certain
other persons against certain civil liabilities.
Item 25. Other Expenses of Issuance and Distribution
The following table sets forth the expenses (other than the underwriting
discounts and commissions and the representative's non-accountable expense
allowance) expected to be incurred in connection with the issuance and
distribution of the securities being registered. All of such expenses are
estimates, other than the filing fees payable to the Securities and Exchange
Commission and the National Association of Securities Dealers, Inc.
II-1
<PAGE>
<TABLE>
<S> <C>
Filing Fee - Securities and Exchange Commission ....................... $ 4,165.92
Filing Fee - National Association of Securities Dealers, Inc. ......... $ 2,078.00
Fees and Expenses of Accountants ...................................... $ 75,000.00
Fees and Expenses of Counsel .......................................... $ 225,000.00*
Printing and Engraving Expenses ....................................... $ 50,000.00
Blue Sky Fees and Expenses ............................................ $ 75,000.00
Transfer Agent Fees ................................................... $ 5,000.00
Miscellaneous Expenses ................................................ $ 3,756.08
------------
Total: .............................................................. $ 440,000.00
============
</TABLE>
-------------------
* In addition, counsel will receive 125,000 common shares at the consummation
of this offering.
Item 26. Recent Sales of Unregistered Securities
Since January 1997, the Registrant has issued securities without
registration under the Securities Act in the following transactions:
1. From September 1997 through January 1998, the Registrant issued an aggregate
of 114,446 shares of common stock to eleven investors, including Venkol
Ventures LP, Venkol Ventures Ltd. and a director of the Registrant for
aggregate proceeds of $1,275,000. In April 1998, the eleven investors also
received three-year warrants to purchase 14,859 shares of common stock at $8.58
per share.
2. In December 1997, the Registrant issued an aggregate of 17,482 shares of
common stock to an employee upon the exercise of non-incentive stock options
for aggregate proceeds of $26,000.
3. In December 1997, the Registrant issued an aggregate of 2,970 shares of
common stock valued at $25,485 to a consultant as compensation for consulting
services.
4. In April 1998, the Registrant issued an aggregate of 10,926 shares of common
stock to a venture capital firm upon the exercise of non-incentive stock
options for aggregate proceeds of $67,500.
5. In September 1998, the Registrant issued an aggregate of 4,370 shares of
common stock to an investor for aggregate proceeds of $57,000.
6. In April 1999, the Registrant issued an aggregate of 2,913 shares of common
stock to a venture capital firm upon the exercise of warrants for aggregate
proceeds of $24,998.
7. In June 1999, the Registrant issued an aggregate of 59,514 shares of common
stock and warrants entitling the holders thereof to purchase an aggregate of
6,609 shares of common stock to twelve investors, at $11.74 per share,
including a director of the Registrant, for aggregate proceeds of $776,192.
8. In April 2000, the Registrant issued an aggregate of 292,426 shares of
common stock to 14 security holders and their designees for aggregate proceeds
of $501,825
The sales and issuances of the common stock, options and warrants in each
transaction described above were deemed to be exempt from registration under
the Securities Act in reliance upon Section 4(2) of the Securities Act as
transactions not involving a public offering. The issuance of common stock and
warrants described in item 6 were exempt from registration under Section 4(6)
of the Securities Act. In addition, the issuance of common stock and warrants
described in items 7 and 8 were exempt from registration under Regulation D
Rules 506 and 504, respectively. The Registrant made a determination that each
of the purchasers was a sophisticated investor who had access to the same type
of information typically available in a registration statement. The purchasers
in such private offerings represented their intention to acquire the securities
for investment only and not with a view to the distribution thereof.
Appropriate legends were affixed to the stock certificates and warrants issued
in each transaction. All purchasers had adequate access, through their
employment or other relationships, to sufficient information about the
Registrant to make an informed investment decision. None of the securities was
sold through an underwriter and, accordingly, there were no underwriting
discounts or commissions involved.
II-2
<PAGE>
Item 27. Exhibits
<TABLE>
<CAPTION>
Exhibit
No. Description
-------- ------------------------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement*
3.1 Revised form of Amended and Restated Certificate of Incorporation of the Registrant*
3.2 Revised form of By-Laws of the Registrant*
4.1 Specimen Stock Certificate*
4.2 Form of Representative's Warrant Agreement*
5.1 Opinion of Morse, Zelnick, Rose & Lander, LLP*
10.1 1992 Incentive Stock Option Plan*
10.2 1992 Non-Incentive Stock Option Plan*
10.3 2000 Stock Option Plan*
10.4 Employment Agreement between the Registrant and M.S Koly, as amended*
10.5 Employment Agreement between the Registrant and Samuel Herschkowitz, M.D., as amended*
10.6 Distributorship Agreement with Nissho Corporation*
10.7 Form of Lock-up Agreement
10.8 Form of Promissory Note
23.1 Consent of KPMG LLP
23.2 Consent of Morse, Zelnick, Rose & Lander, LLP (included in Exhibit 5.1).*
23.3 Consents from the following scientific advisors and consultants: Morton G. Glickman, William N.
Hait, M.D., Ph.D., T.S. Ravikumar, M.D., Anil R. Diwan, Ph.D., Harvey J. Ellis, C.C.P., Durmus
Koch, James H. Muchmore, M.D., Gabriela Nicolau, Ph.D., and John Quiring, Ph.D.*
24 Power of Attorney (included in signature page).*
27.1 Financial Data Schedule
</TABLE>
-------------------
* previously filed
Item 28. Undertakings.
The undersigned Registrant hereby undertakes to:
(1) file, during any period in which it offers or sells securities, a post
effective amendment to this Registration Statement to:
o include any prospectus required by Section 10(a)(3) of the Securities
Act;
o reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information set forth
in the Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more than
a 20 percent change in the maximum aggregate offering price set forth
in the "Calculation of Registration Fee" table in the effective
Registration Statement; and
o include any additional or changed material information on the plan of
distribution;
(2) for determining liability under the Securities Act, treat each
post-effective amendment as 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.
(3) file a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Commission such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable.
The undersigned Registrant hereby undertakes (1) 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
II-3
<PAGE>
the underwriters to permit prompt delivery to each purchaser; (2) that for the
purpose of determining any liability under the Securities Act, treat 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 as part of this Registration Statement as of the time
the Securities and Exchange Commission declares it effective; and (3) that for
the purpose of determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement
herein, and treat the offering of the securities at that time as the initial
bona fide offering of those securities.
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, the Registrant certifies that it has reasonable grounds to believe
that it meets all of the requirements for filing on Form SB-2 and authorized
this Registration Statement to be signed on its behalf by the undersigned, in
the City of New York, State of New York on September 19, 2000.
DELCATH SYSTEMS, INC.
By: /s/ M. S. Koly
------------------------------------
M. S. Koly, President
ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints M. S. Koly and Stephen A. Zelnick, or any one of them,
his true and lawful attorney-in-fact and agent, with full power of substitution
and resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all pre- or post-effective amendments to this
Registration Statement, and to file the same with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite or necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any one of them, or
their or his substitutes, may lawfully do or cause to be done by virtue hereof.
<PAGE>
In accordance with the requirements of the Securities Act of 1933, as
amended, this Registration Statement has been signed below by the following
persons in the capacities indicated on September 19, 2000.
<TABLE>
<CAPTION>
Signature Title
------------------------- -----------------------------------------------
<S> <C>
M. S. Koly*
-------------------------
M. S. Koly President, Chief Executive Officer and Director
Joseph P. Milana*
-------------------------
Joseph P. Milana Chief Financial Officer
Samuel Herschkowitz*
-------------------------
Samuel Herschkowitz Director
William I. Bergman*
-------------------------
William I. Bergman Director
Frank G. Mancuso, Jr.*
-------------------------
Frank G. Mancuso, Jr. Director
James V. Sorrentino*
-------------------------
James V. Sorrentino Director
*By: /s/ M.S. Koly
---------------------------
M.S. Koly, attorney-in-fact
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
-------- ------------------------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement*
3.1 Revised form of Amended and Restated Certificate of Incorporation of the Registrant*
3.2 Revised form of By-Laws of the Registrant*
4.1 Specimen Stock Certificate*
4.2 Form of Representative's Warrant Agreement*
5.1 Opinion of Morse, Zelnick, Rose & Lander, LLP*
10.1 1992 Incentive Stock Option Plan*
10.2 1992 Non-Incentive Stock Option Plan*
10.3 2000 Stock Option Plan*
10.4 Employment Agreement between the Registrant and M.S Koly, as amended*
10.5 Employment Agreement between the Registrant and Samuel Herschkowitz, M.D., as amended*
10.6 Distributorship Agreement with Nissho Corporation*
10.7 Form of Lock-up Agreement
10.8 Form of Promissory Note
23.1 Consent of KPMG LLP
23.2 Consent of Morse, Zelnick, Rose & Lander, LLP (included in Exhibit 5.1).*
23.3 Consents from the following scientific advisors and consultants: Morton G. Glickman, William N.
Hait, M.D., Ph.D., T.S. Ravikumar, M.D., Anil R. Diwan, Ph.D., Harvey J. Ellis, C.C.P., Durmus
Koch, James H. Muchmore, M.D., Gabriela Nicolau, Ph.D., and John Quiring, Ph.D.*
24. Power of Attorney (included in signature page).*
27.1 Financial Data Schedule
</TABLE>
-------------------
* previously filed
