<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
--------------------------------------------------------------------------------
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2000
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
COMMISSION FILE NUMBER: 0-23247
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 02421
---------------------------------------------
02421 (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 July 31, 2000, the Registrant had 14,896,011 shares of Common Stock
outstanding.
<PAGE>
FOCAL, INC.
Form 10-Q for the Quarter Ended June 30, 2000
INDEX
<TABLE>
<CAPTION>
PAGE NUMBER
<S> <C>
INDEX 2
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
Condensed Balance Sheets at December 31, 1999
and June 30, 2000 3
Condensed Statements of Operations for the Three
Months and Six Months Ended June 30, 1999 and 2000 4
Condensed Statements of Cash Flows for the
Six Months Ended June 30, 1999 and 2000 5
Notes to Condensed Financial Statements 6
ITEM 2 - Management's Discussion and Analysis of Financial 8
Condition and Results of Operations
ITEM 3 - Qualitative and Quantitative Disclosures About 13
Market Risk
PART II - OTHER INFORMATION
ITEM 2 - Changes in Securities and Use of Proceeds 14
ITEM 4 - Submission of Matters to a Vote of Security Holders 14
ITEM 6 - Exhibits and Reports on Form 8-K 15
SIGNATURES 16
EXHIBIT INDEX 17
</TABLE>
2
<PAGE>
FOCAL, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
----------- -----------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 8,746,897 $ 7,852,886
Marketable securities 4,715,842 3,330,236
Inventories 1,573,934 2,175,110
Accounts receivable and prepaid expenses 557,461 827,260
----------- -----------
Total current assets 15,594,134 14,185,492
Notes receivable from related parties 271,753 284,365
Property, plant & equipment, net 2,871,034 2,465,763
Other assets 14,025 14,430
----------- -----------
Total assets $18,750,946 $16,950,050
=========== ===========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 3,343,409 $ 3,435,093
Current portion of capital lease obligations 926,041 788,012
----------- -----------
Total current liabilities 4,269,450 4,223,105
Capital lease obligations 1,333,090 990,282
Total stockholders' equity 13,148,406 11,736,663
----------- -----------
Total liabilities and stockholders' equity $18,750,946 $16,950,050
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES.
3
<PAGE>
FOCAL, INC.
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months Six months
ended June 30, ended June 30,
----------------------------- -------------------------------
1999 2000 1999 2000
unaudited unaudited
<S> <C> <C> <C> <C>
Revenues:
Collaborative R&D revenues $ 94,238 $ 17,212 $ 702,398 $ 17,212
Product revenues 679,268 397,072 1,397,100 634,438
------------ ------------ ------------ ------------
Total revenues 773,506 414,284 2,099,498 651,650
Costs and Expenses:
Cost of product revenues 950,142 289,148 1,871,378 744,940
Research & development 4,084,516 2,164,281 7,811,236 4,817,188
Sales,general & administrative 933,565 1,352,526 1,945,305 2,729,939
------------ ------------ ------------ ------------
Total costs and expenses 5,968,223 3,805,955 11,627,919 8,292,067
Insurance recovery 475,408
Interest income (net) 195,162 129,379 446,132 260,881
------------ ------------ ------------ ------------
NET LOSS $ (4,999,555) $ (3,262,292) $ (9,082,289) $ (6,904,128)
============ ============ ============ ============
Basic and diluted net loss per share ($ 0.37) ($ 0.22) ($ 0.68) ($ 0.48)
============ ============ ============ ============
Shares used in computing basic and
diluted net loss per share 13,407,029 14,777,506 13,399,300 14,505,322
============ ============ ============ ============
</TABLE>
4
<PAGE>
FOCAL, INC.
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------------
1999 2000
---------------------------------
unaudited
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (9,082,289) $ (6,904,128)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 576,600 527,802
Amortization of deferred
compensation 158,163 161,392
Interest income accrued on notes receivable
from related parties (33,925) (18,660)
Gain on disposal of equipment, furniture and fixtures 10,667
Increase (decrease) in cash arising
from changes of operating assets and liabilities:
Accounts receivable and prepaid expenses (208,916) (269,799)
Inventories 36 (601,176)
Accounts payable and accrued liabilities 41,876 31,803
Deferred revenue (550,000) --
Other assets (308) (405)
Notes receivable from related parties 27,810 6,048
------------ ------------
Net cash used in operating activities (9,070,953) (7,056,456)
INVESTING ACTIVITIES
Sale of marketable securities 11,432,412 6,135,606
Purchase of marketable securities (2,077,345) (4,764,986)
Purchase of property and equipment (849,973) (133,198)
------------ ------------
Net cash provided by (used in) investing activities 8,505,094 1,237,422
FINANCING ACTIVITIES
Proceeds from equity financings,
net of issuance costs 5,000,000
Proceeds from exercise of stock options 166,710 151,036
Proceeds from issuance of common stock
under the employee stock purchase plan 125,868 59,882
Principal payments on notes receivable 407,749 194,942
Proceeds from lease financing 338,407 79,085
Principal payments on capital lease obligations (534,669) (559,922)
------------ ------------
Net cash provided by financing activities 504,065 4,925,023
Net decrease in cash and cash equivalents (61,794) (894,011)
Cash and cash equivalents at
beginning of the period $ 8,516,936 $ 8,746,897
------------ ------------
Cash and cash equivalents at
end of the period $ 8,455,142 $ 7,852,886
============ ============
</TABLE>
SEE ACCOMPANYING NOTES
5
<PAGE>
FOCAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
Focal, Inc. develops, manufactures and commercializes synthetic, absorbable,
liquid surgical sealants, based on its proprietary polymer technology. The
Company's family of surgical sealant products is being developed for use
inside the body to seal leaks resulting from lung, neurological,
cardiovascular and gastrointestinal surgery.
The accompanying unaudited, condensed financial statements have been prepared
by the Company in accordance with accounting principles generally accepted
in the United States 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 accounting principles generally
accepted in the United States 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 six months ended June 30,
2000 are not necessarily indicative of the results that may be expected for
the entire fiscal year ended December 31, 2000.
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, 1999.
NOTE 2. NET LOSS PER SHARE
Basic and diluted net loss per share is computed using the weighted average
number of shares of common stock outstanding during the period. The effect of
stock options and warrants are excluded in the diluted calculation, as their
effect is antidilutive.
NOTE 3. 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. Substantially all product revenues recorded during the three
months and six months ended June 30, 2000 are attributable to sales of light
sources and AdvaSeal-S neurosurgery sealant to Ethicon Inc., a Johnson &
Johnson Company, and light sources to Genzyme Surgical Products. All product
revenues recorded during the three months and six months ended June 30, 1999
are attributable to sales of surgical sealant products to Ethicon Inc.
NOTE 4. INVENTORIES
6
<PAGE>
Inventories are stated at the lower of cost (first-in, first-out method) or
market. At December 31, 1999 and June 30, 2000, inventories consisted of the
following:
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
---------- ----------
<S> <C> <C>
Raw materials $ 146,906 $ 169,837
Work in process 1,265,623 1,853,949
Finished goods 161,405 151,324
---------- ----------
1,573,934 $2,175,110
========== ==========
</TABLE>
NOTE 5. COMPREHENSIVE LOSS
The components of comprehensive loss for the three month and six months ended
June 30, 1999 and 2000 are as follows:
<TABLE>
<CAPTION>
Three months ended June 30,
1999 2000
----------- -----------
<S> <C> <C>
Net loss $(4,999,555) $(3,262,292)
Other comprehensive income:
Change in unrealized loss
on marketable securities (4,212) (6,987)
----------- -----------
Comprehensive loss $(5,003,767) $(3,269,279)
=========== ===========
<CAPTION>
Six months ended June 30,
1999 2000
----------- -----------
<S> <C> <C>
Net loss $(9,082,289) $(6,904,128)
Other comprehensive income:
Change in unrealized loss
on marketable securities (3,057) (6,649)
----------- -----------
Comprehensive loss $(9,085,346) $(6,910,777)
=========== ===========
</TABLE>
NOTE 6. EQUITY FINANCING
On April 18, 2000, the Company issued and sold to Genzyme Coporation 614,250
shares of common stock, $0.01 pare value, at a purchase price of $8.14 per
share for aggregate gross
7
<PAGE>
proceeds of $5.0 million. The shares were sold to Genzyme pursuant to the
terms of the Stock Purchase Agreement which the parties entered into in
October 1999 in connection with a North American marketing and distribution
agreement.
ITEM 2.
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. For this purpose, any
statements contained herein that are not statements of historical fact may
be deemed to be forward-looking statements. Without limiting the foregoing,
the words "believes," "anticipates," "plans," "expects," "intends,"
"should," "would," "will," "could," or "may," and similar expressions are
intended to identify forward-looking statements. There are a number of
important factors that could cause the Company's actual results to differ
materially from those indicated in such forward-looking statements,
including those factors set forth under the captions "Business -Patents and
Proprietary Rights," "-Government Regulation," "-Sales and Marketing,"
"-Manufacturing," "-Competition and Technological Change," "-Third Party
Reimbursement" and "Factors Affecting Operating Results" in the Company's
Annual Report on Form 10-K for the year ended December 31, 1999, of which
the captioned discussion is expressly incorporated herein by reference.
OVERVIEW
Focal, Inc. was founded in 1991, and is focused on the development,
manufacture and commercialization of synthetic, absorbable surgical sealants
based on the Company's proprietary polymer technology. Since inception, Focal
has funded its operations primarily through the private placement of equity
securities and through an initial public offering of common stock. In
addition, Focal has entered into strategic alliances with corporate partners
and has recorded revenues totaling $28.7 million through June 30, 2000, in
connection with these alliances.
Focal has incurred net losses in each year since its inception, including net
losses of approximately $16.8 million during 1999. At June 30, 2000, Focal
had an accumulated deficit of $83.1 million. Focal's operating losses have
resulted primarily from expenses incurred in connection with its research and
development activities, including preclinical and clinical trials,
development of manufacturing processes and general and administrative
expenses.
Focal expects to incur net losses at least through 2004 and may incur net
losses in subsequent periods although the amount of future net losses and the
time required by Focal to reach profitability are highly uncertain. The
Company's ability to achieve and sustain profitability will be dependent upon
successfully commercializing its FOCALSEAL-TM- surgical sealants in North
8
<PAGE>
America. The Company has exclusive marketing and distribution partners for
the majority of its products throughout the world, including Genzyme Surgical
Products, a division of Genzyme Corporation, in North America and Ethicon,
Inc., a Johnson & Johnson company, in Europe and other international markets.
The Company's ability to achieve and sustain profitability is dependent in
large part on the ability of its marketing partners to effectively market and
distribute the Company's sealant products. There can be no assurance that
Focal will successfully develop, manufacture, commercialize and market
products or that Focal will ever achieve profitability.
Focal introduced its first commercial product, FOCALSEAL-L surgical sealant
for lung surgery indications, in Europe in 1998 through its strategic
marketing alliance with Ethicon. Focal launched its FOCALSEAL-L surgical
sealant in North America through its marketing partner, Genzyme Surgical
Products, in July 2000. Focal anticipates that revenues derived from the
sales of FOCALSEAL-L surgical sealant for lung surgery will account for all
of the Company's near term product revenues.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
Revenues for the three months ended June 30, 2000 (the "2000 Quarterly
Period") decreased to $414,000 from $774,000 for the three months ended June
30, 1999 (the "1999 Quarterly Period"). Product revenues decreased to
$397,000 for the 2000 Quarterly Period from product revenues of $679,000 in
the 1999 Quarterly Period. The decrease in product revenues was primarily due
to Ethicon selling product from previously purchased inventory. Focal
anticipates that Ethicon will continue to sell previously purchased
FocalSeal-L inventory at least through the third quarter of 2000.
Collaborative research and development revenues decreased to $17,000 in the
2000 Quarterly Period from $94,000 of collaborative research and development
revenues in the 1999 Quarterly Period. The decrease in collaborative research
and development revenues was primarily related to revenue from Ethicon-funded
sealant projects in the 1999 Quarterly Period which were not in place in the
2000 Quarterly Period but offset by the initiation of a local drug delivery
project with Genzyme in the 2000 Quarterly Period.
Cost of product revenues for the 2000 Quarterly period of $289,000 were
recorded relating to the commercial sales of the Company's FOCALSEAL-L
surgical sealant and light sources versus cost of product revenues for the
1999 Quarterly Period of $950,000. The decrease in cost of product revenue is
primarily attributable to the negative gross margins resulting from the
startup phase of the Company's manufacturing operations and the resulting
lack of economies of scale. Additionally, costs related to fixed overhead,
and inefficiencies surrounding sterile fill and finish processes further
burdened cost of product revenues for the 2000 Quarterly Period.
Research and development expenses decreased to $2,164,000 for the 2000
Quarterly Period, from $4,085,000 for the 1999 Quarterly Period. This
decrease was primarily due to the transition from research and development to
commercialization. In addition, research and
9
<PAGE>
development expenses decreased in the 2000 Quarterly Period due to a slower
than anticipated patient enrollment in the Company's current U.S.
neurosurgical clinical trial. During the 1999 Quarterly Period, the Company
was engaged in a European clinical trial of FocalSeal-S surgical sealant
for neuro-surgery indications.
Sales, General and administrative expenses increased to $1,353,000 for the
2000 Quarterly Period, compared with $934,000 for the 1999 Quarterly Period.
This increase is due to the sales and marketing expenses relating to the U.S.
product launch of FocalSeal-L Surgical Sealant, which commenced in June. We
expect selling, general, and administrative expenses to increase as we
continue to expand our North American operations, increase our direct sales
force, and engage in activities to further commercialize our FocalSeal
surgical sealant products.
Interest income, net of interest expense, decreased to $129,000 for the 2000
Quarterly Period, from $195,000 for the 1999 Quarterly Period, as a result of
lower average cash balances available for investment. We expect interest
income to decrease during the remainder of 2000 due to lower average cash
balances for investment.
The Company recorded a net loss of $(3,262,000) for the 2000 Quarterly Period
compared to a net loss of $(4,999,555) in the 1999 Quarterly Period. The
decrease in net loss is primarily due to Focal's cost cutting efforts. The
Company expects that it will incur net operating losses through at least
2004.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
For the six month period ended June 30, 2000 (the "2000 Six Month Period")
revenues decreased to $651,000 from $2,100,000 for the six month period ended
June 30, 1999 (the "1999 Six Month Period"). This decrease was primarily due
to Ethicon, Inc., a Johnson & Johnson company and Focal's distributor outside
of North America, selling product from previously purchased inventory, as
well as the absence of revenue from certain collaborative research and
development programs that were in place in the 1999 Six Month Period but not
the 2000 Six Month Period.
Cost of product revenues for the 2000 Six Month Period of $745,000 were
recorded relating to the commercial sales of the Company's FocalSeal-L
surgical sealant product and light sources, versus cost of product revenues
of $1,871,000 for the 1999 Six Month Period. The decrease in cost of product
revenue is primarily attributable to the negative gross margins in the 2000
Six Month Period resulting from the company's manufacturing operations and
the resulting lack of economies of scale. Additionally, costs related to
inventory costing and inefficiencies surrounding sterile fill and finish
processes further burdened cost of product revenues for the 2000 Six Month
Period.
Research and development expenses for the 2000 Six Month Period decreased to
$4,817,000 from $7,811,000 for the 1999 Six Month Period. This decrease
resulted from lower clinical trial costs and controlling costs in the 2000
Six Month Period, compared with the 1999 Six Month Period.
Sales, General and administrative expenses increased to $2,730,000 in the
2000 Six Month Period compared with $1,945,000 for the 1999 Six Month Period.
This increase is due to increased
10
<PAGE>
commercialization expenses relating to the Company's products and, in
particular, expenses relating to the U.S. product launch of FocalSeal-L,
which commenced in June. As a result of surgical sealant product approvals in
Canada, Europe and the U.S., Focal anticipates increased marketing and sales
headcount and expenses to continue throughout the remainder of the year.
Insurance recovery income of $475,000 for the 2000 Six Month Period relates
to payment for damage to inventory stored offsite.
Interest income, net of interest expense, decreased to $261,000 for the 2000
Six Month Period, from $446,000 for the 1999 Six Month Period, as a result of
lower average cash balances available for investment.
The Company recorded a net loss of $(6,904,000) for the 2000 Six Month Period
compared to a net loss of $(9,082,000) for the 1999 Six Month Period. The
decrease in net loss is primarily due to the transition of Focal from
primarily being engaged in research and development to a greater focus on
sales and marketing. Also, the Company has reduced expenses related to a
slower than anticipated patient enrollment in its current U.S. neuro surgical
clinical trail in the 2000 Six Month Period when compared to the 1999 Six
Month Period. The Company expects that it will incur net operating losses
through at least 2002.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations primarily from
the sale of capital stock in private placements as well as the Company's 1997
initial public offering. In addition, Focal has received $10.0 million in
equity investments from Genzyme Surgical Products, in connection with the
agreement described below. Through June 30, 2000, the Company has raised
approximately $93.5 million from equity financings and has received $7.1
million in equipment lease financing. In addition, the Company has received
collaborative funding, exclusive of equity investments, from Ethicon and
other corporate partners totaling approximately $28.5 million through June
30, 2000. At June 30, 2000, the Company had cash, cash equivalents and
marketable securities of $11,183,122.
Cash used in operations totaled $7.1 million for the six months ended June
30, 2000, as compared to cash used in operations of $9.1 million for the same
period in 1999. The decrease in cash used in operations was due to lower net
losses incurred in 2000, compared to 1999, as well as lower investments in
working capital. Cash used in operations is equal to the net 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 June 30, 2000 totaled $8.5
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. As of June 30, 2000, the Company did not have any
material commitments for future capital expenditures.
In October 1999, in connection with entering into a Marketing and
Distribution Agreement with Genzyme Surgical Products, Focal and Genzyme
Surgical Products entered into a Stock
11
<PAGE>
Purchase Agreement, with up to $20.0 million in purchases of the Company's
common stock committed by Genzyme Surgical over an eighteen month period.
The first $5.0 million purchase was made by Genzyme Surgical in November
1999, with Genzyme purchasing approximately 810,000 shares at a 25% premium
to the ten day average trading price of the Company's common stock prior to
the investment. The second investment, $5.0 million, was made by Genzyme on
April 14, 2000, with Genzyme purchasing approximately 614,000 shares at a
25% premium to the twenty day average closing price of the Company's common
stock prior to the investment. At Focal's option, up to two additional $5.0
million investments will be made by Genzyme Surgical Products. The final
two investments of $5.0 million each may be called by Focal in October 2000
and April 2001, respectively. These final two investments will be priced
based upon the twenty day trading average of the Company's common stock.
The Company believes that its existing capital resources will be sufficient
to satisfy its current and projected funding requirements for at least 16
months. 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 the sale of up to an additional $10.0
million of the Company's common stock to Genzyme Corporation, subject to the
satisfaction of specified closing conditions. 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.
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 $215,000 at June 30, 2000. 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, the success of the sales and
distribution efforts of its marketing partners, 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 will be
adequate to satisfy its capital and operating requirements.
12
<PAGE>
ITEM 3.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The Company maintains an investment portfolio in accordance with its
Investment Policy. The primary objectives of the Company's Investment Policy
are to preserve principal, maintain proper liquidity to meet operating needs
and maximize yields. The Company's Investment Policy specifies credit quality
standards for the Company's investments and limits the amount of credit
exposure to any single issue, issuer or type of investment.
The Company's investments consist of securities of various types and
maturities. The Company accounts for its investments in accordance with
Statement of Accounting Standards No. 115, "Accounting for certain
investments in Debt and Equity Securities" (SFAS 115). All of the Company's
cash equivalents and marketable securities are treated as available-for-sale
under SFAS 115.
The securities held in the company's investment portfolio are subject to
interest rate risk. Changes in interest rates affect the fair market value of
the available-for-sale securities. After a review of the Company's marketable
securities as of June 30, 2000, the Company has determined that in the event
of a hypothetical ten percent increase in interest rates, the resulting
decrease in fair market value of the Company's marketable investment
securities would be insignificant to the financial statements as a whole.
13
<PAGE>
PART II. OTHER INFORMATION
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,
1999.
On April 14, 2000, Focal sold 614,250 shares of its Common Stock, $.01 par
value per share, to Genzyme Corporation, for aggregate proceeds of
$4,999,995. No person acted as an underwriter with respect to this
transaction. Focal relied on Section 4(2) of the Securities Act of 1933, as
amended (the "Securities Act"), for the exemption from the registration
requirements of the Securities Act, since no registration of the shares to be
offered was made prior to issuance and sale.
Item 4. Submission of Matters to a Vote of Security Holders.
On May 24, 2000, Focal held its annual meeting of stockholders. The following
sets forth items submitted to a vote of the stockholders of Focal and the
votes cast in respect to such items.
1. Election of Donald A. Grilli and Robert Langer, Ph.D. as Class III
directors of Focal:
Donald A. Grilli: 11,266,137 for
501,524 vote withheld
Robert Langer, Ph.D.: 11,236,804 for
530,857 vote withheld
2. To approve an amendment to Focal's 1999 Stock Incentive Plan increasing
from 875,000 to 1,525,000 the number of shares of Focal's Common Stock
reserved for issuance under the plan:
9,461,153 for 2,292,274 against 14,234 abstain 0 unvoted
3. Ratification of the appointment of Ernst and Young LLP as independent
auditors of Focal for the fiscal year ending December 31, 2000:
$11,682,135 for 78,661 against 6,865 abstain 0 unvoted
14
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
The exhibits listed in the Exhibit Index are included
in this report.
(b) Reports on Form 8-K
None.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 14, 2000 FOCAL, INC.
By: /s/ Robert J. DePasqua
----------------------
Robert J. DePasqua
President and C.E.O.
(Principal Executive
Officer)
By: /s/ Harry R. Trout III
-----------------------
Harry R. Trout III
Chief Financial Officer
(Principal Financial
and Accounting Officer)
16
<PAGE>
EXHIBIT INDEX
The following exhibits are filed as part of this Quarterly Report on form
10-Q:
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
10.1 Preferred Shares Rights Agreement dated as of
December 17,1997, as amended by Amendment
No. 1 to Rights Agreement, dated March 31,
2000, by and between the Company and Norwest
Bank Minnesota, N.A., as Rights Agent
27 Financial Data Schedule
99.1 Pages 12 through 24 of the Company's Annual
Report on form 10-K for the year ended
December 31, 1999, as filed with the
Securities and Exchange Commission (which
pages are deemed filed hereunder except to
the extent that portions are not expressly
incorporated by reference).
</TABLE>
17
