<PAGE>
UNITED STATES
SECURITIES & EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR QUARTER ENDED SEPTEMBER 30, 1998
COMMISSION FILE NUMBER: 0-23247
FOCAL, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 94-3142791
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
4 Maguire Road, Lexington, MA 02173
---------------------------------------
(Address of principal executive offices
including zip code)
(781) 280-7800
------------------------------
(Registrant's telephone number
including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period of time that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for at least the past 90 days.
Yes X No
------ -----
As of September 30, 1998, the Registrant had 13,341,152 shares of Common Stock
outstanding.
<PAGE>
FOCAL, INC.
Form 10-Q for the Quarter Ended September 30, 1998
INDEX
<TABLE>
<CAPTION>
PAGE NUMBER
<S> <C>
INDEX 2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
Condensed Balance Sheets at December 31, 1997
and September 30, 1998 3
Condensed Statements of Operations for the Three
Months and Nine Months Ended September 30, 1997 and 1998 4
Condensed Statements of Cash Flows for the Nine
Months Ended September 30, 1997 and 1998 5
Notes to Condensed Financial Statements 6
ITEM 2 - Management's Discussion & Analysis of Financial 8
Condition and Results of Operations
PART II - OTHER INFORMATION
ITEMS 1 - 6 14
SIGNATURES 15
</TABLE>
2
<PAGE>
Focal, Inc.
Condensed Balance Sheets
<TABLE>
<CAPTION>
(Audited) (Unaudited)
December 31, September 30,
1997 1998
------------ -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $26,810,777 $ 9,545,406
Marketable securities 6,428,374 18,933,863
Inventories 566,989 1,142,473
Accounts receivable and prepaid expenses 2,733,584 1,412,741
----------- -----------
Total current assets 36,539,724 31,034,483
Notes receivable from related parties 343,480 263,577
Property, plant & equipment, net 2,710,513 2,738,576
Other assets 12,696 13,205
----------- -----------
Total assets $39,606,413 $34,049,841
----------- -----------
----------- -----------
LIABILITIES & STOCKHOLDERS' EQUITY Current liabilities:
Accounts payable & accrued liabilities $ 4,031,807 $ 3,942,850
Deferred revenue 750,000 1,500,000
Current portion of capital lease obligations 890,451 887,499
----------- -----------
Total current liabilities 5,672,258 6,330,349
Capital lease obligations 1,421,983 1,343,189
Stockholders' equity:
Common stock 128,686 133,412
Additional paid-in capital 80,777,780 84,689,083
Notes receivable from related parties (1,688,057) (1,580,151)
Deferred compensation (768,865) (540,371)
Accumulated other comprehensive income (17,358) 3,211
Accumulated deficit (45,920,014) (56,328,881)
----------- -----------
Total stockholders' equity 32,512,172 26,376,303
----------- -----------
Total liabilities and stockholders' equity $39,606,413 $34,049,841
----------- -----------
----------- -----------
</TABLE>
See accompanying notes.
3
<PAGE>
FOCAL, INC.
SELECTED CONDENSED FINANCIAL INFORMATION
(unaudited)
<TABLE>
<CAPTION>
Three months Nine months
STATEMENT OF OPERATIONS ended September 30, ended September 30,
----------------------------- ----------------------------
1997 1998 1997 1998
------------ ------------ ------------ ------------
REVENUE:
<S> <C> <C> <C> <C>
Collaborative R&D revenues $ 1,976,561 $ 1,521,226 $ 12,831,123 $ 3,560,019
Product revenues -- 866,150 -- 2,337,787
------------ ------------ ------------ ------------
Total revenues 1,976,561 2,387,376 12,831,123 5,897,806
COSTS AND EXPENSES:
Cost of product revenues -- 1,196,145 -- 2,748,508
Research & development 4,012,436 3,867,498 10,901,198 11,901,285
General & administrative 634,440 968,295 2,134,068 2,874,078
------------ ------------ ------------ ------------
Total costs and expenses 4,646,876 6,031,938 13,035,266 17,523,871
Interest income (net) 230,101 370,652 649,973 1,217,198
------------ ------------ ------------ ------------
NET INCOME (LOSS) ($ 2,440,214) ($ 3,273,910) $ 445,830 ($10,408,867)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Proforma basic and diluted net
income (loss) per share ($ 0.24) ($ 0.25) $ 0.04 ($ 0.78)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Shares used in computing net
income (loss) per share 10,344,591 13,333,059 10,236,096 13,267,971
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
4
<PAGE>
Focal, Inc
Condensed Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months ended September 30,
1997 1998
-------------------------------
<S> <C> <C>
Operating Activities
Net income (loss) 445,830 (10,408,867)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization 839,758 844,715
Amortization of deferred
compensation 201,494 228,494
Interest accrued on notes receivable (11,599) (84,415)
Increase (decrease) in cash arising
from changes of operating assets
and liabilities:
Inventories -- (575,484)
Accounts receivable and prepaid expenses (98,109) 1,320,843
Accounts payable and accrued liabilities 12,095 (88,957)
Deferred revenue 718,167 750,000
Notes receivable 164,318
------------ ------------
Net cash provided by (used in) operating activities 2,107,636 7,849,353)
Investing activities
Purchase of marketable securities (9,589,782) (24,277,676)
Sale of marketable securities 8,314,922 11,792,755
Issuance of notes receivable (71,037) --
Purchase of property and equipment (1,677,848) (872,778)
Other assets (480) (509)
------------ ------------
Net cash used in investing activities (3,024,225) (13,358,208)
Financing activities
Proceeds from equity financings,
net of issuance costs -- 3,549,500
Proceeds from exercise of
stock options 10,051 84,994
Proceeds from issuance of common stock
under the employee stock purchase plan -- 285,124
Issuance of note receivable (30,000) --
Principal payments on notes receivable -- 104,317
Proceeds from lease financing 1,407,311 739,446
Principal payments on capital lease
obligations (771,845) (821,192)
------------ ------------
Net cash provided by financing
activities 615,517 3,942,189
------------ ------------
Net decrease in cash and cash
equivalents (301,072) (17,265,371)
Cash and cash equivalents at
beginning of the period 5,465,471 26,810,777
------------ ------------
Cash and cash equivalents at
end of the period $ 5,164,399 $ 9,545,406
------------ ------------
------------ ------------
Supplemental disclosure of cash flow information:
Property acquired under capital
lease obligations $ 379,639 $ 0
------------ ------------
------------ ------------
Interest paid $ 80,921 $ 158,969
------------ ------------
------------ ------------
</TABLE>
See accompanying notes.
5
<PAGE>
Notes to Condensed Financial Statements
September 30, 1998
(Unaudited)
Note 1. Basis of Presentation
Focal, Inc. develops, manufactures and commercializes synthetic, absorbable,
liquid surgical sealants, tissue coatings and local drug delivery products,
based on its proprietary polymer technology. The Company's family of surgical
sealant products is being developed for use inside the body with or without
sutures and staples to seal air and fluid leaks resulting from lung, neuro,
cardiovascular and gastrointestinal surgery.
The accompanying unaudited, condensed financial statements have been prepared
by the Company in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, the accompanying financial
statements include all adjustments, including normal recurring accruals,
considered necessary for a fair presentation of the financial position,
results of operations, and cash flows for the periods presented.
The results of operations for the three months and nine months ended
September 30, 1998 are not necessarily indicative of the results that may be
expected for the entire fiscal year ended December 31, 1998.
These financial statements should be reviewed in conjunction with the audited
financial statements and notes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997.
Note 2. Net Income (Loss) Per Share
Proforma basic and diluted net income (loss) per share is computed using the
weighted average number of shares of common stock and convertible preferred
stock outstanding, assuming conversion of preferred stock at date of
issuance. Common equivalent shares from stock options and warrants are
excluded as their effect is antidilutive or not material. Diluted net income
per share has not been disclosed for the nine month period ending September
30, 1997 as a result of the anti dilutive effect of including common
equivalent shares.
Note 3. Exercise of Overallotment Option from Initial Public Offering
In January 1998, the underwriters for the Company's initial public offering
exercised the overallotment option on 375,000 shares of common stock granted
to them in
6
<PAGE>
connection with the offering. The Company received net proceeds of $3.5 million
from the issuance of these shares.
Note 4. Revenue Recognition for Product Sales
Revenues from product sales are recorded in full as product shipments are
made, as there are no contractual right of return or stock rotation
privileges. All product revenues recorded during the three month and nine
month periods ended September 30, 1998 were attributable to sales of surgical
sealant products to Ethicon Inc., a division of Johnson & Johnson.
Note 5. Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market. At December 31, 1997 and September 30, 1998, inventories consisted of
the following:
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
----------- -----------
<S> <C> <C>
Raw materials $ 566,989 $ 260,122
Work in process -- 837,369
Finished goods -- 44,982
---------- ----------
$ 566,989 $1,142,473
---------- ----------
---------- ----------
</TABLE>
Note 6. Adoption of Newly Issued Accounting Standards
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income." Statement No. 130 was adopted effective January 1, 1998 and there was
no material effect on the Company's financial statements. Statement No. 130
establishes standards for the reporting and display of comprehensive income and
its components. Statement No. 130 requires unrealized gains and losses on the
Company's marketable securities, which prior to adoption were reported
separately in stockholders' equity, to be included in other comprehensive
income.
The components of comprehensive income for the three and nine month periods
ended September 30, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
Three months ended September 30,
1997 1998
--------------------------------
<S> <C> <C>
Net loss $(2,440,214) $(3,273,910)
Other comprehensive income:
Change in unrealized gain (loss)
on marketable securities 23,362 23,976
------ ------
Comprehensive loss $(2,416,852) $(3,249,934)
----------- -----------
----------- -----------
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Nine months ended September 30,
1997 1998
-------------------------------
<S> <C> <C>
Net income (loss) $ 445,830 $(10,408,867)
Other comprehensive income:
Change in unrealized gain (loss)
on marketable securities 31,945 20,569
------ ------
Comprehensive income (loss) $ 477,775 $(10,388,298)
------------ ------------
------------ ------------
</TABLE>
Management's Discussion & Analysis of Financial Condition and Results of
Operations:
The following discussion should be read in conjunction with the accompanying
unaudited, condensed financial statements and the related footnotes thereto,
appearing elsewhere in this report. This Management's Discussion and Analysis
contains certain forward looking statements regarding future events with
respect to the Company. Actual events and/or future results of operations may
differ materially as a result of the factors described herein and in the
Company's Report on Form 10-K for the year ended December 31, 1997, including
the factors described under "Business - Product and Product Development
Programs," "-Strategic Alliances," "-Patents and Proprietary Rights,"
"-Government Regulation," "-Competition and Technological Change," "-Third
Party Reimbursement" and "Factors Affecting Operating Results." These factors
and other statements set forth in the Report on Form 10-K should be read in
conjunction with this Management's Discussion and Analysis.
Overview
The Company was founded in 1991, and is focused on the development, manufacture
and commercialization of synthetic, absorbable, liquid surgical sealants, tissue
coatings and local drug delivery products, based on the Company's proprietary
polymer technology. Since inception, the Company has funded its operations
primarily through the private placement of equity securities and most recently,
in December 1997, through an initial public offering of common stock. In
addition, the Company has entered into strategic alliances with corporate
partners and has recorded revenues totaling $25.0 million through September 30,
1998, in conjunction with these alliances. The Company has incurred net losses
in each year since its inception, including net losses of approximately $3.3
million for the three months ended September 30, 1998. At September 30, 1998,
the Company had an accumulated deficit of $56.3 million. The Company's operating
losses have resulted primarily from
8
<PAGE>
expenses incurred in connection with the Company's research and development
activities, including preclinical and clinical trials, development of
manufacturing processes and general and administrative expenses. The Company
expects to incur net losses at least through the first half of 2000 and may
incur net losses in subsequent periods although the amount of future net losses
and time required by the Company to reach profitability are highly uncertain.
The Company is dependent upon corporate partners for funding of a significant
portion of research and development expenses. If the Company does not continue
to receive funding from its current corporate partners, or is unable to
otherwise obtain third party funding, net losses will continue to increase. The
Company's ability to achieve and sustain profitability will be dependent upon
obtaining regulatory approval for and successfully commercializing its FocalSeal
surgical sealants, and developing the manufacturing capacity and sales and
marketing capability for its products. There can be no assurance that Focal will
obtain the required regulatory approvals, or successfully develop, manufacture,
commercialize and market products or that the Company will ever achieve
profitability. In addition, if the Company achieves profitability, there can be
no assurance that such profitability would be sustained.
The Company introduced its first commercial product, FocalSeal-L for lung
surgery indications, in Europe in March 1998 through its strategic marketing and
distribution alliance with Ethicon Inc., a division of Johnson & Johnson. The
Company anticipates that revenues derived from European sales of the Company's
FocalSeal surgical sealants will account for a substantial majority of the
Company's near term product revenues. The Company has obtained a CE mark to
market FocalSeal surgical sealant for lung surgery indications in the member
countries of the European Union.
Results of Operations
Three months ended September 30, 1998, compared to three months ended September
30, 1997
Revenues for the three months ended September 30, 1998, increased to $2.4
million from $2.0 million for the three months ended September 30, 1997.
Included in the 1998 quarter were product revenues of $866,000 and collaborative
revenues of $1,521,000 compared with $2.0 million of collaborative revenues
during the same period in 1997. The quarterly funding under the alliance with
Ethicon relating to the Pulmonary and Neurological sealants has decreased from
$1.25 million per quarter in 1997 to $750,000 per quarter in 1998 pursuant to
the provisions of the Company's agreement with Ethicon. The cessation of a local
drug delivery collaboration with Novartis contributed to a decline in
collaborative revenues in the third quarter of 1998 compared with the same
period in 1997. Offsetting this decline was the expansion of the collaboration
with Ethicon relating to a Cardiovascular sealant product. This collaboration
contributed $750,000 during the third quarter of 1998.
Cost of product revenues for the quarter ended September 30, 1998 of
$1,196,000 were recorded relating to the commercial sales of the Company's
FocalSeal-L product.
9
<PAGE>
Gross margins remained negative due to the startup phase of the Company's
manufacturing operations and the resulting lack of economies of scale.
Additionally, costs related to a packaging related recall further burdened
the cost of product revenues line for the quarter ending September 30, 1998.
The cause for this recall has been fully identified and the Company resumed
shipment of product within 4-5 weeks of initiating the recall. There was no
cost of product revenues for the corresponding period in 1997 because the
Company had no product revenues.
Research and development expenses decreased to $3,867,000 for the quarter ended
September 30, 1998, from $4,012,000 for the quarter ended September 30, 1997.
This decrease resulted from the timing of various clinical study activities and
from delays in hiring additional research and development personnel to support
the development of FocalSeal for cardiovascular applications, as the Company
awaited a final agreement with Ethicon.
General and administrative expenses increased to $968,000 for the quarter ending
September 30, 1998, from $634,000 for the quarter ended September 30, 1997.
General and administrative expenses during these periods consisted primarily of
personnel costs, which increased due to the hiring of additional personnel in
administration, human resources, and finance. In addition, certain costs related
to the transition of the Company to a publicly traded entity such as investor
relations, legal costs, and insurance have increased.
Interest income, net of interest expense, increased to $371,000 for the quarter
ended September 30, 1998, from $230,000 for the quarter ended September 30,
1997, as a result of higher average cash balances, including the net proceeds
from the Company's initial public offering in December 1997.
The Company recorded a net loss of $(3,274,000) for the quarter ended September
30, 1998. During the same period in 1997, the Company recorded a net loss of
$(2,440,000). The increase in net loss is primarily attributed to decreasing
collaborative revenues, negative gross margins on product sales and increased
general and administrative expenses from the third quarter of 1997 to the same
period in 1998. The Company expects that it will incur net operating losses
through at least the first half of 2000.
Nine months ended September 30, 1998, compared to nine months ended September
30, 1997
For the nine month periods ended September 30, 1998 and 1997, revenues decreased
from $12.8 million to $5.9 million. The decline in revenues was due primarily to
the inclusion in revenue for the 1997 period of a one-time payment of $7.0
million in connection with the strategic alliance for surgical sealant products
entered into with Ethicon in January 1997 and the contractual reduction in
quarterly funding relating to the same collaboration. Included in revenues for
the nine months ended September
10
<PAGE>
30, 1998 were $2.3 million of product revenues in connection with commercial
introduction of the FocalSeal-L product in Europe by Ethicon.
Cost of product revenues for the nine months ended September 30, 1998 of
$2,749,000 were recorded relating to the commercial release of the Company's
FocalSeal-L product. Gross margins remained negative due to the startup phase
of the Company's manufacturing operations and the resulting lack of economies
of scale. There was no cost of product revenues for the corresponding period
in 1997 because the Company had no product revenues.
Research and development expenses for the nine months ended September 30, 1998
increased to $11,901,000 from $10,901,000 for the corresponding period in 1997.
This increase resulted from the hiring of additional research and development
personnel, increased clinical trial expenses related to the Company's
FocalSeal-L surgical sealant for lung surgery, and increased pre-clinical and
clinical activities related to the Company's FocalSeal-S surgical sealant for
neurosurgery.
General and administrative expenses increased to $2,874,000 for the nine months
ended September 30, 1998, from $2,134,000 for the nine months ended September
30, 1997. General and administrative expenses during these periods consisted
primarily of personnel costs, which increased due to the hiring of additional
personnel in administration, human resources, and finance. In addition, certain
costs related to the transition of the Company to a publicly traded entity have
increased such as investor relations, legal costs, and insurance.
Interest income, net of interest expense, increased to $1,217,000 for the nine
months ended September 30, 1998, from $650,000 for the nine months ended
September 30, 1997, as a result of higher average cash balances, including the
proceeds from the Company's initial public offering of common stock.
The Company has recorded a net loss of $(10,409,000) for the nine months ended
September 30, 1998 compared with net income of $446,000 for the same period in
1997. This net income was primarily the result of receipt of a one-time payment
of $7.0 million and quarterly funding of research and development expenses by
Ethicon. The Company expects that it will incur net operating losses through at
least the first half of 2000.
Liquidity and Capital Resources
Since its inception, the Company has financed operations primarily from the sale
of preferred stock in private placements as well as the Company's December 1997
initial public offering. Through September 30, 1998, the Company has raised
approximately $87.0 million from equity financings and has received $6.6 million
in equipment lease
11
<PAGE>
financing. In addition, the Company has received funding from Ethicon and other
corporate partners totaling approximately $25.0 million through September 30,
1998. At September 30, 1998, the Company had cash, cash equivalents and
marketable securities of $28.5 million.
Cash used by operations totaled $7.8 million for the nine months ended September
30, 1998 compared with cash provided by operations of $2.1 million for the same
period in 1997. The change in cash from operations was due to the net income
generated in the nine months ended September 30, 1997 as a result of the $7.0
million one-time payment from Ethicon. Cash provided by (used in) operations is
equal to the net income or loss incurred for each period, plus non-cash charges
such as depreciation and amortization of property and equipment plus any changes
in working capital.
Capital expenditures from inception through September 30, 1998 totaled $7.3
million, representing laboratory equipment, office furniture and equipment,
computers and certain leasehold improvements. The majority of these purchases
have been financed through either direct financing leases or sale and leaseback
arrangements. Capital expenditures for the nine months ended September 30, 1998
totaled $873,000. As of September 30, 1998, the Company did not have any
material commitments for future capital expenditures. During 1999 and 2000, the
Company anticipates capital expenditures of approximately $2.5 million for
manufacturing facilities and approximately $1.2 million for related equipment.
The Company has commitments from lenders in the form of lease lines totaling
$1.5 million to provide for its expected capital needs during 1998, and expects
to secure additional lease lines to provide for its needs in 1999 and 2000.
Based on a review of its existing information systems, the Company does not
anticipate that it will incur significant costs in connection with bringing its
information systems into compliance with Year 2000 requirements. In addition,
the Company does not anticipate that it will be necessary for it to incur other
significant Year 2000 related expenditures. The Company is currently evaluating
fully integrated enterprise resource planning systems and expects to install
such a system during 1999. A key requirement of such a system will be full year
2000 compliance. There can be no reliance however, that Focal will be able to
solve all potential Year 2000 issues. Focal's reliance on its key suppliers, and
therefore on the proper functioning of their information systems and software,
is increasing, and there can be no assurance that another company's failure to
address Year 2000 issues could not have an adverse effect on Focal. Focal has
initiated formal communications with each of its significant suppliers to
determine the extent to which Focal is vulnerable to those third parties'
failure to remediate their own Year 2000 issues. Based upon those parties'
responses or failure to respond, the Company is prepared to develop contingency
plans to address such risks.
The Company believes that its existing capital resources, interest income and
future payments due under strategic alliances, will be sufficient to satisfy its
current and
12
<PAGE>
projected funding requirements for at least 18 months. Under the Company's
surgical sealant collaborative agreement with Ethicon, the Company will receive
fixed quarterly research and development funding of $750,000 per quarter through
1998, for the Pulmonary and Neurosurgery products. In addition, with the
expansion of the agreement with Ethicon negotiated in July 1998, the Company
will receive approximately $2.6 million during the second half of 1998 and the
first half of 1999 for research and development activities associated with its
Cardiovascular sealant product. The Company may receive additional payments
under these agreements for research and development activities and upon
achievement of specified development milestones; however, as such payments are
dependent upon the achievement of such milestones, there can be no assurance as
to the receipt or timing of any such payments. Under certain agreements with
universities and consultants, the Company is obligated to make payments for
sponsored research and consulting services. The Company's research funding
commitments under these agreements totaled approximately $177,000 at September
30, 1998. Payments under these agreements are typically made on a quarterly or
monthly basis.
There can be no assurance that the Company's capital resources will be
sufficient to enable the Company to conduct its research and development
programs as planned. The Company's future capital requirements will depend on
many factors, including continued progress in its research and development
programs, progress with preclinical testing and clinical trials, the time and
costs involved in obtaining regulatory approvals, if any, the costs involved in
filing and prosecuting patent applications and enforcing patent claims,
competing technological and market developments, the establishment of additional
strategic alliances, the cost of manufacturing facilities and of
commercialization activities and arrangements, and the cost of product
in-licensing and any possible acquisitions. There can be no assurance that the
Company's cash, cash equivalents and marketable securities and interest income
earned thereon, together with funding that may be received under the Company's
strategic alliances, will be adequate to satisfy its capital and operating
requirements.
The Company intends to seek additional funding through strategic alliances, and
may seek additional funding through public or private sales of the Company's
securities, including equity securities. In addition, the Company has obtained
equipment lease financing and other forms of debt financing and may continue to
pursue opportunities to obtain additional lease or debt financing in the future.
There can be no assurance, however, that additional equity or debt financing
will be available on reasonable terms, if at all. Any additional equity
financing would be dilutive to the Company's stockholders. If adequate funds are
not available, the Company may be required to curtail significantly one or more
of its research and development programs and/or obtain funds through
arrangements with corporate partners or others that may require the Company to
relinquish rights to certain of its technologies or product candidates.
13
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. None
Item 2. Changes in Securities and use of Proceeds.
There have been no material changes in the use of proceeds from the
sale of securities under the Company's Registration Statement on
Form S-1 (333-38379), which was declared effective on December 11, 1997,
from that set forth in the Company's report on Form 10-K for the year
ended December 31, 1997.
Item 3. Defaults upon Senior Securities. None
Item 4. Submission of Matters to a Vote of Security Holders. None
Item 5. Other Matters.
Any proposal submitted pursuant to Rule 14a-8 under the Securities
Exchange Act of 1934, as amended, that a stockholder wishes to be considered
for inclusion in the Company's proxy materials for its 1999 Annual Meeting of
Stockholders must be received by the Secretary of the company at the
principal offices of the Company no later than December 27, 1998.
In addition, the Company's bylaws require that the Company be
given advance notice of stockholder nominations for election to the
Company's Board of Directors and of other matters of which stockholders
which to present at an annual meeting of stockholders (other than
matters included in the Company's proxy statement in accordance with
Rule 14a-8). The required notice must comply with the Company's bylaws
and be received not less than 120 days prior to the annual meeting. The
persons designed in the Company's proxy statement shall be granted
discretionary authority with respect to any shareholder proposals of
which the Company does not receive timely notice.
Written notice of shareholder proposals submitted outside the
processes of Rule 14a-8 for consideration at the 1999 Annual Meeting of
Stockholders must be received by the company on or before March 12,
1999, in order to be considered timely for purposes of Rule 14a-4. The
persons designated in the Company's proxy statement shall be granted
discretionary authority with respect to any shareholder proposals of
which the Company does not receive timely notice.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this 10-Q report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 6, 1998 FOCAL, INC.
By: /s/ W. Bradford Smith
----------------------------
W. Bradford Smith,
Vice President and Chief
Financial Officer
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998 DEC-31-1997 DEC-31-1998
<PERIOD-START> JUL-01-1997 JUL-01-1998 JAN-01-1997 JAN-01-1998
<PERIOD-END> SEP-30-1997 SEP-30-1998 SEP-30-1997 SEP-30-1998
<CASH> 0 9,545,406 0 0
<SECURITIES> 0 18,933,863 0 0
<RECEIVABLES> 0 1,412,741 0 0
<ALLOWANCES> 0 0 0 0
<INVENTORY> 0 1,412,473 0 0
<CURRENT-ASSETS> 0 31,034,483 0 0
<PP&E> 0 7,310,876 0 0
<DEPRECIATION> 0 4,572,300 0 0
<TOTAL-ASSETS> 0 34,049,841 0 0
<CURRENT-LIABILITIES> 0 6,330,349 0 0
<BONDS> 0 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 0 133,412 0 0
<OTHER-SE> 0 26,242,891 0 0
<TOTAL-LIABILITY-AND-EQUITY> 0 34,049,841 0 0
<SALES> 0 0 0 0
<TOTAL-REVENUES> 1,976,561 2,387,376 12,831,123 5,897,806
<CGS> 0 0 0 0
<TOTAL-COSTS> 0 1,196,945 0 2,748,508
<OTHER-EXPENSES> 4,646,876 4,835,793 13,035,266 14,775,363
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 38,881 51,496 80,921 158,969
<INCOME-PRETAX> (2,440,214) (3,273,910) 445,830 (10,408,867)
<INCOME-TAX> 0 0 0 0
<INCOME-CONTINUING> (2,440,214) (3,273,910) 445,830 (10,408,867)
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> (2,440,214) (3,273,910) 445,830 (10,408,867)
<EPS-PRIMARY> (.24) (.25) .04 (.78)
<EPS-DILUTED> (.24) (.25) .04 (.78)
</TABLE>
