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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND SPECIAL REPORTS
PURSUANT TO SECTIONS 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
COMMISSION FILE NUMBER: 0-25544
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PDT, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 77-0222872
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
7408 HOLLISTER AVENUE, SANTA BARBARA, CALIFORNIA 93117
(Address of principal executive offices, including zip code)
(805) 685-9880
(Registrant's telephone number, including area code)
Securities Registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The approximate aggregate market value of voting stock held by
non-affiliates as of March 14, 1997, based upon the last sale price of the
Common Stock reported on the Nasdaq National Market was approximately
$228,223,000. For purposes of this calculation only, the registrant has
assumed that its directors and executive officers, and any person who has
filed a Schedule 13D or 13G is an affiliate.
The number of shares of Common Stock outstanding as of March 14, 1997
was 12,382,656.
ITEM 1. BUSINESS
GENERAL
PDT, Inc. (the "Company") is engaged in the development of
pharmaceutical and medical device products for use in photodynamic therapy.
Photodynamic therapy is a medical procedure which uses light-activated
(photoreactive) drugs to achieve selective photochemical destruction of
diseased cells. The Company believes that photodynamic therapy has the
potential to be a safe, cost-effective, minimally invasive primary or
adjunctive treatment for indications in a broad number of disease areas
including oncology, ophthalmology, urology, dermatology, gynecology and
cardiology. The Company is conducting Phase II/III clinical trials for three
indications in the oncology area; has initiated a Phase I/II clinical trial
in ophthalmology, is preparing to initiate additional Phase I/II clinical
trials in the urology, oncology and dermatology areas; and is conducting
preclinical studies in oncology, ophthalmology, urology, dermatology,
gynecology and cardiology. All of the Company's clinical trials are testing
its leading drug candidate: tin ethyl etiopurpurin ("SnET2"). The Company is
developing products in collaboration with its corporate partners, Pharmacia &
Upjohn, Inc. ("Pharmacia & Upjohn"), Boston Scientific Corporation ("Boston
Scientific"), Cordis Corporation, a Johnson & Johnson company ("Cordis"),
Iridex Corporation ("Iridex") and Ramus Medical Technologies ("Ramus").
In April 1996, the Company completed a secondary public offering of
1,500,000 shares of Common Stock which provided net proceeds to the Company
of approximately $65.3 million.
In July 1996, the Company's Board of Directors authorized the purchase
of up to 600,000 shares of the Company's Common Stock. During 1996, the
Company repurchased 138,500 shares at a cost of $3,948,000 under this
repurchase program. As of December 31, 1996, all shares repurchased were
retired.
BACKGROUND
Photodynamic therapy is a minimally invasive medical technology that
uses photoreactive drugs to treat or diagnose disease. The technology
involves three components: photoreactive drugs, light producing devices and
light delivery devices.
Photoreactive drugs transform light energy into chemical energy in a
manner similar to the action of chlorophyll in green plants. Certain
photoreactive drugs accumulate and are retained to a greater degree in
fast-growing (hyperproliferating) cells. Hyperproliferation is a
characteristic of cells associated with a variety of diseases such as cancer,
certain cardiovascular disorders and skin diseases such as psoriasis.
A photoreactive drug is typically administered by intravenous injection
and distributes throughout the body. After several hours, the drug starts to
clear from normal tissues but is selectively retained in hyperproliferating
tissues for up to several days. The drug is inactive until exposed to light
of a specific wavelength, which can vary depending on the drug's molecular
structure. Exposing the target cells to the appropriate light wavelength
permits selective activation of the retained drug and initiates a chemical
reaction that generates a highly reactive form of oxygen. High concentrations
of this form of oxygen lead to destruction of the cellular membrane and,
ultimately, cell death. The response of the target cells depends on, among
other factors, the drug dose, the amount of light energy delivered, the
physiology of the cell and the vasculature in the diseased areas. Neither the
drug nor the light on its own can cause the desired effect. The drug is a
catalyst which transfers energy and is not consumed in the process, thereby
reducing potential side effects. The chemical reaction stops when the light
is turned off. The result of this process is that diseased cells are
destroyed with minimal damage to surrounding normal tissues, offering the
potential for a more selective method of treating disease than chemotherapy,
radiation therapy or surgery, which can damage both normal and abnormal
tissues.
Low-power, non-thermal light can be used to activate photoreactive
drugs. As a result, there is little or no risk of thermal damage to
surrounding tissue, as would be the case if thermal lasers were used. The
light is
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typically generated electronically or by lasers which have been specifically
modified for use in photodynamic therapy. The light is often delivered from
the light source to the patient via specially modified fiber optics. These
fiber optic light delivery devices produce patterns of light for different
disease applications and can be channeled into the body for internal
applications.
Photodynamic therapy may be applied in two ways: (i) DRUG SELECTIVITY -
hyperproliferating cells such as in a cancer tumor can be selectively
destroyed by allowing the photoreactive drug to clear from non-target cells
before delivering light to the general area; and (ii) LIGHT SELECTIVITY - in
conditions such as certain eye disorders, tissues can be selectively
destroyed by precisely delivering the light to discrete areas before the drug
has cleared. This flexibility gives photodynamic therapy its potential in
many different medical applications.
While light of a specific wavelength is used to cause a photoreactive
drug to produce chemical reactions leading to cell death, light of a
different wavelength can be used to cause the same drug to fluoresce (glow).
The fluorescent property of photodynamic drugs offers the potential for their
use in diagnostic applications.
INDUSTRY
As early as 1900, scientists observed that certain compounds will
sensitize tissues to light. Since the mid-1970s, various aspects of
photodynamic therapy have been studied and established in humans.
Photodynamic therapy is currently being studied by a variety of companies,
physicians and researchers around the world for the treatment of a broad
range of cancers and non-cancer applications.
Photodynamic therapy has potential advantages over traditional treatment
methods such as chemotherapy, radiation therapy and surgery. Photodynamic
therapy offers the potential for more selective treatment of disease with
fewer side effects. The fact that photoreactive drugs are retained in
hyperproliferating tissues and are non-toxic until activated by light allows
for selective and controlled treatment. Additionally, since the activating
light offers a less invasive and less debilitating alternative to surgery,
the Company believes that photodynamic therapy may result in less trauma to
the patient. Further, the Company believes that photodynamic therapy for many
applications may be performed on an outpatient basis or in an office setting,
reducing if not eliminating the need for hospitalization. These potential
advantages may make photodynamic therapy a less costly alternative to
traditional treatment methods.
The Company believes that, despite the potential benefits of
photodynamic therapy, industry development has been hindered by various
drawbacks. First, certain formulations of photoreactive drugs are complex
mixtures derived from blood or plant sources which, in contrast to synthetic
drugs, vary in both content and concentration and may yield inconsistent
results. Second, photodynamic therapy with some drugs produces a temporary
photosensitivity (sensitivity to light) requiring patients to restrict
exposure to sunlight for up to several weeks following treatment. Third,
light wavelengths used to activate certain other photodynamic drugs require
large, expensive, difficult-to-maintain research or surgical lasers that have
been adapted to produce the low-power activating light.
The Company believes that the lack of an integrated approach to
photodynamic therapy has slowed the development of the technology in clinical
settings. The development of photodynamic therapy has historically been
pursued by companies with either drug or device technology, but not both.
Light systems and light delivery devices were supplied by outside sources;
therefore, developers were often unable to fully coordinate the three
components of drug, light producing devices and light delivery devices.
BUSINESS STRATEGY
The Company's objective is to apply its photodynamic therapy
systems--combining drug, light producing devices and light delivery devices--
as a primary therapy in targeted disease areas and as an adjunct to surgery
or other therapies. The Company believes that its systems have the potential
to offer a safe, cost-effective and
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minimally-invasive alternative therapy for numerous diseases for which
current treatments are either unsatisfactory or do not exist. Key elements of
the Company's strategy to achieve commercialization include:
INTEGRATION OF PHOTOREACTIVE DRUGS, LIGHT PRODUCING DEVICES AND LIGHT
DELIVERY DEVICES. The Company's strategy is to integrate each component of
photodynamic therapy into systems that offer predictable and consistent
results. The Company believes that by being expert in both photodynamic drugs
and devices and by integrating the development of these technologies, the
Company may create competitive advantages over companies that are developing
certain components of photodynamic therapy while outsourcing others. For
example, integration affords the Company the opportunity to pursue regulatory
approval for its drug products together with its devices through unified
clinical trials.
FOCUS ON DISEASE APPLICATIONS WITH UNMET MEDICAL NEEDS. Although the
potential applications for the Company's photodynamic therapy systems are
numerous, the Company is initially targeting high-incidence diseases or
diseases that are serious or life-threatening and for which there is no
satisfactory alternative treatment. By doing so, the Company believes it may
be able to accelerate regulatory processes where appropriate and facilitate
commercial success.
EXCLUSIVE COLLABORATIONS WITH INDUSTRY-LEADING PHARMACEUTICAL AND
MEDICAL DEVICE COMPANIES. To facilitate development, regulatory approval,
manufacturing, marketing and distribution of its products, the Company seeks
to form strategic collaborations with partners who are leaders in the
Company's targeted disease areas. To date, the Company has established
collaborative arrangements with Pharmacia & Upjohn related to SnET2, with
Boston Scientific and Cordis related to the development of medical catheters
for the delivery of light, with Iridex related to the development of diode
light devices in the field of ophthalmology and with Ramus related to the
development of the Company's and Ramus' technology for use in photodynamic
therapy in the field of cardiovascular disease. The Company seeks to obtain
from its collaborative partners exclusivity in the field of photodynamic
therapy and to retain certain manufacturing and co-development rights. See
"--Strategic Collaborations."
There can be no assurance that the Company will be successful in
pursuing its strategy or that its goals will be achieved. See "--Risk
Factors" generally for a discussion of certain risks, including those
relating to forward-looking statements.
TECHNOLOGY AND PRODUCTS
The Company is developing synthetic photoreactive drugs together with
software-controlled desktop light producing devices and fiber optic light
delivery and measurement devices for the application of photodynamic therapy
to a broad range of disease indications. The Company believes that by being
expert in both photodynamic drugs and devices, and by integrating the
development of these technologies, it can produce easy-to-use photodynamic
therapy systems which offer the potential for predictable and consistent
results.
DRUG TECHNOLOGY. The Company holds exclusive license rights under
certain U.S. patents and three foreign patents to several classes of
synthetic, photoreactive compounds, subject to certain governmental rights.
See "--Patents and Proprietary Technology." From its classes of compounds,
the Company has selected SnET2 as its leading drug candidate and has used
SnET2 in each of its clinical trials to date. The Company has granted to
Pharmacia & Upjohn an exclusive, worldwide license to use SnET2 in the field
of photodynamic therapy. See "--Strategic Collaborations" and "--Risk
Factors, Uncertainty Regarding Patents and Proprietary Technology." The
Company is developing other potential photoreactive drugs for additional
disease applications and future partnering opportunities.
The Company believes that its synthetic photoreactive drugs may provide
the following benefits:
- PREDICTABLE. The synthetic nature of the Company's photoreactive
compounds permits the Company to design drugs with a single molecular
structure. The Company believes that this characteristic may
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facilitate consistency in clinical treatment settings, as well as
predictability in manufacturing and quality control.
- MINIMAL SIDE EFFECTS. Phase I/II clinical trials with SnET2 have
demonstrated therapeutic response with minimal side effects. Treatments to
date have been well-tolerated, with SnET2 producing only a mild, transient
skin photosensitivity in some patients as compared to the relatively severe
and long-lasting photosensitivity produced by certain other photoreactive
drugs.
- VERSATILE. The Company can design drugs with specific
characteristics, such as activation by a particular wavelength of light. This
versatility provides the Company with the potential to customize its drugs
for particular uses and to take advantage of semiconductor light technology.
See "--Risk Factors" for a discussion of certain risks, including those
relating to forward-looking statements.
LIGHT PRODUCING DEVICES. Because the Company's photoreactive drugs are
synthetic, the Company has been able to design its drugs to be activated by
light produced by readily available, reliable and relatively inexpensive
light sources. The Company's light technologies include software-controlled
microchip diodes, LED arrays and non-thermal lasers. The Company's desktop
diode light was introduced into the Company's clinical trials in 1995. The
Company has also developed LED arrays for use in dermatological and other
applications of photodynamic therapy. The Company and Iridex are
collaborating on the development of light-producing devices for photodynamic
therapy in the field of ophthalmology and have introduced a portable, solid
state diode light device which is currently being used in clinical trials.
See "--Strategic Collaborations."
The Company believes that its diode and LED array devices offer
advantages over laser technology historically used in photodynamic therapy.
For example, the Company's software-controlled designs offer reliability and
built-in control and measuring features. In addition, the Company's diode
systems, which are roughly the size of a desktop computer, are smaller and
more portable than traditional laser systems. The Company believes that it
has the potential to offer light producing devices that will be more
affordable than surgical laser systems used in photodynamic therapy. See
"--Risk Factors" for a discussion of certain risks, including those relating
to forward-looking statements.
LIGHT DELIVERY AND MEASUREMENT DEVICES. The Company is developing and
manufacturing photodynamic light delivery and measurement devices including a
wide variety of fiber optic light delivery devices with specialized tips for
use in photodynamic therapy. These devices must be highly flexible and
appropriate for endoscopic use, and must be able to deliver unique patterns
of uniform, diffuse light for different disease applications. The Company's
products include microlenses that produce a tiny flashlight beam for discrete
surface lesions, the Flex-Registered Trademark- cylinder diffuser which
delivers light in a radial pattern along a flexible tip for sites such as the
esophagus and spherical diffusers which emit a diffuse ball of light for
sites such as the bladder or nasopharynx. The Company has also developed
light measurement devices for photodynamic therapy including devices that
detect wavelength and fluorescence to facilitate the measurement of light or
drug dose.
Through collaborative arrangements with Boston Scientific and Cordis,
the Company is co-developing medical catheters for use in photodynamic
therapy. The Company and Boston Scientific are collaborating in the fields of
urology, pulmonology and gastroenterology. The Company plans to introduce
certain of these catheters into its clinical studies of benign prostatic
hyperplasia ("BPH") subject to U.S. Food and Drug Administration ("FDA")
concurrence. The Company and Cordis are co-developing, and currently testing
in preclinical studies, catheters for use in photodynamic therapy of
cardiovascular conditions such as the prevention of restenosis. The Company
has secured or applied for patent protection relating to its light delivery
and measurement devices. Certain of these patents or patent applications are
subject to certain governmental rights. See "--Patents and Proprietary
Technology" and "--Risk Factors" generally for a discussion of certain risks,
including those relating to forward-looking statements.
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TARGETED DISEASES AND CLINICAL TRIALS
The Company believes that photodynamic therapy has potential in a wide
range of applications. The Company has selected, based upon regulatory,
clinical and market considerations, a number of disease applications,
discussed below, on which to focus initially. In all of its clinical trials,
the Company is using SnET2 together with light producing devices and light
delivery devices either developed on its own or in collaboration with its
partners.
All drug and device products currently under development by the Company
will require extensive preclinical and clinical testing prior to regulatory
approval for commercial use. None of the Company's products have completed
such testing for efficacy and safety in humans. There can be no assurance
that such testing for any of the Company's products under development now or
in the future, will be commenced or successfully completed within any period
of time, if at all, or that such testing, if completed, will demonstrate that
SnET2 or any other of the Company's products is safe or efficacious.
Specifically with respect to the indications discussed below, it is
uncertain that the application of the Company's products in any of such
indications will progress beyond its current state of development, receive
regulatory approval, be successfully marketed and distributed, or that the
Company will have the financial resources to pursue any such application or
indication. Any clinical data reported by the Company from time to time may
change as a result of the continuing evaluation of patients. Moreover, as a
result of changing market, clinical or regulatory conditions, or clinical
trial results, the Company's focus may shift to other indications, or it may
be determined not to further pursue one or more of the indications discussed
below. See "--Risk Factors--Unproven Safety and Efficacy; Clinical Trials";
and "--Early Stage of the Company and its Products." See "--Risk Factors"
generally for a discussion of certain other risks, including those relating
to forward-looking statements.
ONCOLOGY
Cancer is a large group of diseases characterized by uncontrolled growth
and spread of hyperproliferating cells. The Company targeted this area for
its initial products both because of the large potential market size as well
as the potential for expedited review by governmental regulatory bodies. The
Company is collaborating with Pharmacia & Upjohn on the co-development of
SnET2 in the field of oncology.
BASAL CELL CARCINOMA AND METASTATIC BREAST CANCER. The Company is
conducting clinical trials using SnET2 for the local treatment of certain
nonmelanoma cutaneous (skin) carcinomas. The skin cancer trial includes basal
cell carcinomas (skin cancers caused primarily by sun exposure), basal cell
nevus syndrome (a genetic disease which causes multiple, recurrent basal cell
carcinomas), and metastatic adenocarcinomas (cancers which originate in
glands, such as breast cancer, and in this trial have metastasized or spread
to the skin). The Company began Phase II/III clinical trials for metastatic
breast cancer involving the skin in the United States in March 1996 and
Pharmacia & Upjohn began Phase II clinical trials in Europe in January
1997. The Company also began Phase II/III clinical trials for basal cell
carcinoma in the United States and Pharmacia & Upjohn began Phase II/III
clinical trials in Australia in 1996. There can be no assurance that
successful completion of Phase II/III clinical trials will occur within any
specified period of time, if at all.
AIDS-RELATED KAPOSI'S SARCOMA. Kaposi's sarcoma ("KS") is a form of
skin cancer, usually involving multiple tumors. The most aggressive and
prevalent type of KS is the variety usually associated with AIDS. The Company
is conducting clinical trials using SnET2 for the local treatment of
AIDS-related KS. The Company began Phase II/III clinical trials for
AIDS-related KS in March 1996.
OTHER CANCERS. The Company is conducting preclinical studies for the
treatment of a variety of other cancers including prostate cancer, lung
cancer, brain tumors and head and neck cancers. The Company has an existing
oncology IND which it may utilize for those protocols, if any, it determines
to advance to a Phase I/II clinical trial. The timing of any such
advancement will depend on the progress of preclinical studies.
OPHTHALMOLOGY. The Company believes that photodynamic therapy has the
potential to treat a variety of ophthalmic disorders, including conditions
caused by neovascularization, such as age-related macular degeneration ("AMD")
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and diabetic retinopathy, as well as other ophthalmic conditions, including
glaucoma. Neovascularization is a condition in which new blood vessels grow
abnormally on the surface of the retina or other parts of the eye. These
fragile vessels can hemorrhage, causing scarring and damage to the nerve
tissue and lead to loss of vision. The Company is collaborating with
Pharmacia & Upjohn on the co-development of SnET2 in the field of
ophthalmology and is collaborating with Iridex on the co-development of light
devices in this field. The Company is conducting clinical trials for the
treatment of choroidal neovascularization including AMD. The Company began
Phase I/II clinical trials for AMD in the United States in May 1996 and is
conducting preclinical studies for the treatment of diabetic retinopathy and
glaucoma.
UROLOGY
BPH is a urological disorder characterized by a gradual enlargement of
the prostate, a gland in men which surrounds the urethra. As men age, the
prostate gland increases in size and pinches the urethra, leading to
complications in urination and other debilitating symptoms. The Company is
collaborating with Pharmacia & Upjohn on the co-development of SnET2 in the
field of urology. Additionally, the Company is conducting preclinical studies
using SnET2 for the treatment of BPH and is collaborating with Boston
Scientific on the joint development of medical catheter devices for this use.
Based on the results from these studies, the Company submitted an
Investigational New Drug application ("IND") to enter into Phase I/II
clinical trials.
DERMATOLOGY
A number of dermatologic disorders have shown potential for being
treated with photodynamic therapy. Among these are psoriasis, a chronic and
potentially debilitating skin disorder, and actinic keratosis, a precancerous
condition of the upper layer of the skin. The Company is collaborating with
Pharmacia & Upjohn on the co-development of SnET2 in the field of
dermatology. The first dermatology application targeted by the Company and
Pharmacia & Upjohn is psoriasis. The Company is continuing preclinical
studies in psoriasis and may advance to a Phase I/II clinical trial based on
the progress of the preclinical studies. Preparations include development of
LED light systems and light delivery systems for use in dermatology
applications and protocol development for anticipated clinical trials.
CARDIOLOGY
The Company is developing photodynamic therapy in the field of
cardiology. Early studies with photodynamic therapy indicate that certain
photoreactive drugs may be preferentially retained in the hyperproliferating
and lipid-rich components of arterial plaques, as they are in cancer cells.
The Company is conducting preclinical studies for the prevention of
restenosis (re-blocking of arterial vessels), and believes that photodynamic
therapy may provide a means of preventing restenosis, or even treating
diffuse atherosclerosis, without injury to the vessel. The Company is
collaborating with Cordis on the joint development of medical catheter
devices for such cardiovascular applications. In addition, the Company
believes that photodynamic therapy may provide a means of reducing intimal
hyperplasia (excessive cell growth at the anastamosis (stitch) sites)
associated with bypass grafts and is collaborating with Ramus on the
application of photodynamic therapy in the area of bypass grafts.
GYNECOLOGY
The Company believes that photodynamic therapy has potential in various
gynecological applications, including dysfunctional uterine bleeding which
accounts for a significant percent of all hysterectomies. The risks
associated with hysterectomy have prompted the development of alternatives
which allow destruction of the endometrial lining of the uterus rather than
surgical removal of the uterus. However, current techniques for such
endometrial ablation, such as the use of high-power laser or electrocautery,
are not entirely effective. The Company is therefore conducting preclinical
studies using photodynamic therapy as a method of endometrial ablation and
believes photodynamic therapy may be a non-surgical alternative to existing
techniques or hysterectomies.
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STRATEGIC COLLABORATIONS
The Company pursues a strategy of establishing license agreements and
collaborative arrangements for the purpose of securing exclusive access to
drug and device technologies and providing market access for products. The
Company intends to continue to pursue this strategy where appropriate in
order to enhance in-house research programs, facilitate clinical testing and
gain access to distribution channels and additional technology. Strategic
collaborations are not, however, without risks. See "--Risk
Factors--Reliance on Collaborative Partners" and "--Limited Manufacturing and
Marketing Capabilities and Experience." To date, the Company has entered
into the following collaborative arrangements:
PHARMACIA & UPJOHN
The Company has entered into a series of agreements with certain
subsidiaries of Pharmacia & Upjohn (collectively "Pharmacia & Upjohn")
relating to the development and commercialization of SnET2.
SNET2 LICENSE AGREEMENT. Under a July 1995 development and license
agreement (the "License Agreement"), the Company granted to Pharmacia &
Upjohn an exclusive, worldwide license to use, distribute and sell SnET2 in
the area of photodynamic therapy. The License Agreement provides for the
co-development of SnET2 for use in photodynamic therapy in the fields of
oncology, urology and dermatology. In August 1996, the Company signed an
agreement with Pharmacia & Upjohn for the co-development of SnET2 in the
field of ophthalmology with similar terms and conditions as the License
Agreement.
Under the License Agreement, Pharmacia & Upjohn is responsible for
conducting certain aspects of clinical trials involving SnET2 and to fund
other current and future preclinical and clinical trials conducted by the
Company involving SnET2. The Company is entitled to receive royalties on the
sale of SnET2, payments for certain contemplated indications upon the
achievement of certain milestones and reimbursement for certain expenses.
Pharmacia & Upjohn has also agreed to promote, market and sell SnET2 and to
refrain from developing or selling other photodynamic therapy drugs in the
fields of oncology, urology, dermatology and ophthalmology during the
agreement term. Pharmacia & Upjohn also has a right of first negotiation with
respect to the marketing rights to any new photodynamic therapy drug
developed in the fields of oncology, urology, dermatology and ophthalmology
by the Company. The License Agreement remains in force for the duration of
the patents related to SnET2 or for a period of ten years from the first
commercial sale of SnET2 on a country-by-country basis, whichever is longer.
After those periods have expired, Pharmacia & Upjohn will have an
irrevocable, royalty-free, nonexclusive license to SnET2. See "--Risk
Factors, Uncertainty Regarding Patents and Proprietary Technology" and
Note 7 of Notes to Consolidated Financial Statements.
STOCK PURCHASE AGREEMENT. Concurrent with the License Agreement,
Pharmacia & Upjohn entered into a Stock Purchase Agreement (the "Stock
Purchase Agreement"), pursuant to which Pharmacia & Upjohn purchased 600,000
shares of Common Stock from the Company for $12 million, and agreed to
certain restrictions with respect to the acquisition and sale of shares of
the Common Stock, subject to certain exceptions.
DRUG SUPPLY AGREEMENT. The Company and Pharmacia & Upjohn have also
entered into a Drug Supply Agreement pursuant to which the Company agreed to
manufacture (or have manufactured) and supply to Pharmacia & Upjohn upon
specified payment terms Pharmacia & Upjohn's requirements of SnET2 in
finished pharmaceutical form for clinical and commercial purposes in the area
of photodynamic therapy. The Drug Supply Agreement was amended in 1996 to
include similar terms and conditions for the field of ophthalmology. The Drug
Supply Agreement remains in force for the term of the License Agreement,
subject to termination under certain limited circumstances. Upon termination,
the Company has agreed to continue to provide SnET2 to Pharmacia & Upjohn on
terms to be negotiated by the parties. See Note 7 of Notes to Consolidated
Financial Statements.
DEVICE SUPPLY AGREEMENT. The Company and Pharmacia & Upjohn also entered
into a Device Supply Agreement pursuant to which the Company appointed
Pharmacia & Upjohn as a non-exclusive worldwide distributor of certain
instruments developed, manufactured or licensed by the Company that produce,
deliver or
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measure light ("light devices") for use with SnET2 in photodynamic therapy in
the fields of oncology, urology and dermatology. The Device Supply Agreement
provides for the sale by the Company to Pharmacia & Upjohn of such light
devices at specified rates and the Company is responsible for the development
and regulatory approval of the light devices. During the term of the Device
Supply Agreement, Pharmacia & Upjohn is prohibited from developing ,
manufacturing or purchasing from third parties such light devices or
distributing or selling them for use with any photodynamic drug other than
SnET2. If, however, the Company determines not to or is unable to
manufacture or supply a particular light device, Pharmacia & Upjohn is
entitled to manufacture such device. The Device Supply Agreement was amended
in 1996 to include similar terms and conditions for the field of
ophthalmology. The Device Supply Agreement remains in force during the term
of the License Agreement, subject to earlier termination under certain
limited circumstances. See Note 7 of Notes to Consolidated Financial
Statements.
FORMULATION AGREEMENT. In August 1994, the Company entered into a
supply contract with Pharmacia & Upjohn to develop an emulsion formulation
suitable for intravenous administration of SnET2. Pursuant to this agreement,
Pharmacia & Upjohn agreed to (i) be the Company's exclusive supplier of such
emulsion products, (ii) manufacture and supply all of the Company's worldwide
requirements of certain emulsion formulations containing SnET2, and (iii)
not develop or supply formulations or services for use in any photodynamic
applications for any other company. This agreement continues indefinitely
except that it may be terminated ten years after the first commercial sale of
SnET2. See "--Manufacturing" and Note 7 of Notes to Consolidated Financial
Statements.
BOSTON SCIENTIFIC CORPORATION
In December 1993, the Company executed a strategic development letter
agreement with Boston Scientific, a leading developer, manufacturer and
marketer of catheter-based medical technology, for the joint development of
catheter-based light delivery devices for photodynamic therapy in the fields
of urology, pulmonology and gastroenterology. The letter agreement pursuant
to which the parties are collaborating is intended to provide the framework
for a more definitive agreement, relating to, among other things, the
distribution, manufacturing and licensing of developed products, and
continues until the parties enter into such an agreement. At this time,
however, the Company and Boston Scientific have not entered into any such
agreement. See "--Manufacturing" and Note 7 of Notes to Consolidated
Financial Statements.
CORDIS CORPORATION
In December 1993, the Company executed a strategic development letter
agreement with Cordis, a Johnson & Johnson company and a leader in coronary
catheter devices, for the joint development of catheter-based light delivery
devices for photodynamic therapy in the cardiovascular field.
The letter agreement pursuant to which the parties are collaborating is
intended to provide the framework for a more definitive agreement, relating
to, among other things, the distribution, manufacturing and licensing of
developed products, and continues until the parties enter into a definitive
agreement. At this time, the Company and Cordis have not entered into any
such agreement. See "--Manufacturing" and Note 7 of Notes to Consolidated
Financial Statements.
IRIDEX CORPORATION
In May 1996, the Company entered into a co-development and distribution
agreement with Iridex, a leading provider of semiconductor-based laser
systems to treat eye diseases. The agreement generally provides (i) the
Company with the exclusive right to co-develop with Iridex light-producing
devices for use in photodynamic therapy in the field of ophthalmology, (ii)
that the Company will conduct clinical trials and make regulatory
submissions with respect to all co-developed devices and Iridex will
manufacture all devices for such trials, with costs shared as set forth in
the agreement, and (iii) that Iridex will have an exclusive, worldwide
license to make, distribute and sell all co-developed devices, on which it
will pay royalties to the Company. The agreement
9
remains in effect, subject to earlier termination in certain circumstances,
until ten years after the date of the first FDA approval of any co-developed
device for commercial sale, subject to certain renewal rights. See
"--Manufacturing."
RAMUS MEDICAL TECHNOLOGIES
In December 1996,the Company's wholly owned subsidiary, PDT
Cardiovascular, Inc. ("PDTC"), entered into a co-development agreement with
Ramus, an innovator in the development of autologous tissue stent-grafts for
coronary bypass surgeries. Generally the agreement provides PDTC with the
exclusive rights to co-develop its photodynamic therapy technology with
Ramus' proprietary technology in the development of autologous vascular
grafts for coronary arteries and other vessels. Ramus shall provide, at no
cost to PDTC, products for use in preclinical and clinical testing with all
other preclinical and clinical costs to be paid by PDTC. The agreement
remains in effect until the later of (i) ten years after the date of the
first FDA approval of any co-developed device for commercial sale, or (ii)
the life of any patent issued thereon, subject to certain renewal rights.
In conjunction with the co-development agreement, PDTC purchased, for $2
million, shares of Ramus' Series A Preferred Stock and obtained an option to
acquire the remaining shares of Ramus at some time in the future under
specified terms and conditions. Further, PDTC is provided first refusal
rights and pre-emptive rights for any issuance of new securities, whether
debt or equity, made by Ramus and requires that Ramus maintain certain
financial and other covenants.
THE UNIVERSITY OF TOLEDO, THE MEDICAL COLLEGE OF OHIO AND ST. VINCENT MEDICAL
CENTER
In July 1989, the Company entered into a License Agreement with the
University of Toledo, the Medical College of Ohio and St. Vincent Medical
Center, of Toledo, Ohio (collectively, "Toledo"). This agreement provides the
Company with, among other items, exclusive, worldwide rights, subject to
certain governmental rights as described below: (i) to make, use, sell,
license or sublicense certain photoreactive compounds (including SnET2)
covered by certain Toledo patents and patent applications, or not covered by
such patents or patent applications but owned or licensed to Toledo (and
which Toledo has the right to sublicense); (ii) to make, use, sell, license
or sublicense certain of such compounds for which the Company has provided
Toledo with financial support; and (ii) to make, use or sell any invention
claimed in certain Toledo patents or applications and any composition,
method or device related to compounds conceived or developed by Toledo under
research funded by the Company. The agreement further provides that the
Company pay Toledo royalties on the sales of such compounds. As of December
31, 1996, no royalties had been paid or accrued since no drug or related
product had been sold. Under the agreement, the Company is required to
satisfy certain development and commercialization objectives. This agreement
terminates upon the expiration or non-renewal of the last patent which may
issue under this agreement, currently 2016. By its terms, however, the
license extends upon issuance of any new Toledo patents. The Company does not
have contractual indemnification rights against Toledo under the agreement.
Certain research relating to the compounds covered by the License Agreement,
including SnET2, has been or is being funded in part by certain governmental
grants under which the United States Government has or will have certain
rights in the technology developed, including the right under certain
circumstances to a non-exclusive license or to require the Company to grant
an exclusive license to a third party. See "--Patents and Proprietary
Technology" and "--Risk Factors--Uncertainty Regarding Patents and Proprietary
Technology."
LASERSCOPE
In April 1992, the Company entered into a seven-year License and
Distribution Agreement with Laserscope of San Jose, California, a leader in
the surgical laser industry. Pursuant to this agreement, as amended, among
other terms: (i) the Company granted to Laserscope rights to manufacture and
sell a dye laser module developed by the Company; (ii) the Company retains
the right to manufacture and sell this system for use with the Company's own
photoreactive drugs; and (iii) Laserscope agreed to pay to the Company a
license fee and royalties on Laserscope's sales. This dye laser module had
been developed by the Company prior to the development of the Company's diode
light systems. See Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
10
RESEARCH AND DEVELOPMENT PROGRAMS
The Company's research and development programs are devoted to the
discovery and development of drugs and devices for photodynamic therapy.
These research activities are conducted in-house in the Company's
pharmaceutical and engineering laboratories or elsewhere in collaboration
with medical or other research institutions or with other companies. The
Company has expended, and expects to continue to spend, substantial funds on
its research and development programs. See Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
The Company's pharmaceutical research program is focused on the ongoing
evaluation of its proprietary compounds for different disease applications.
Among its outside or extramural research, the Company is conducting
preclinical animal studies at various academic and medical research
institutions in the United States, Europe and Australia. The Company is also
active in the research and development of devices for photodynamic therapy.
These programs include development of fiber optic light delivery devices and
measurement devices for accuracy in dosimetry and fluorescence detection
systems for diagnostic application of photodynamic therapy. Device research
and development is presently conducted either in-house or in collaboration
with partners.
The Company has pursued and been awarded various government grants and
contracts, such as grants sponsored by the National Institutes of Health and
the Small Business Innovative Research Administration, which complement the
Company's research efforts and facilitate new development. See "--Patents
and Proprietary Technology." See Note 7 of Notes to Consolidated Financial
Statements.
The Company's expenditures for research and development (which include
clinical trial expenses) totaled approximately $15.7 million, $8.8 million
and $7.0 million in 1996, 1995 and 1994 , respectively.
MANUFACTURING
The Company's strategy is generally to retain manufacturing rights and,
where appropriate, to partner with leading pharmaceutical and medical device
companies for certain elements of its manufacturing processes. The Company is
licensed by the State of California to manufacture bulk drug substance at its
Santa Barbara, California facility for clinical trial use and currently
manufactures the active SnET2 drug substance, light producing devices and
light delivery devices, and conducts other production and testing activities,
at this location. However, the Company has limited capabilities and
experience in the manufacture of drug, light producing and light delivery
products and utilizes outside suppliers, contracted or otherwise, for certain
materials and services related to its manufacturing activities. Although most
of the Company's materials and components are available from various sources
it is dependent on certain suppliers for key materials or services used in
the Company's drug and light producing and light delivery device development
and production operations. One such supplier is Pharmacia & Upjohn, which
processes SnET2 into a sterile injectable formulation and packages it in
vials for distribution by the Company. The Company and Pharmacia & Upjohn
expect to continue to develop new formulations which may or may not have
similar dependencies on suppliers.
Although the Company believes it can continue to produce its drug and
device products in quantities sufficient to support its clinical trial
requirements for the foreseeable future, the Company has limited capabilities
and experience in large-scale drug and device manufacturing. The Company has
and may elect in the future to utilize contract suppliers and manufacturers
for the production of certain drug and device components or product lines.
Moreover, if definitive collaborative arrangements with Boston Scientific and
Cordis are consummated, it is anticipated that such companies will
manufacture the medical catheters and the Company will manufacture the fiber
optic sub-assemblies. Under the terms of the co-development agreement with
Iridex, all manufacturing for light producing devices for use in photodynamic
therapy in the field of ophthalmology is the responsibility of Iridex. There
can be no assurance that such collaborative arrangements will be available to
the Company on acceptable terms, if at all. Additionally, although the
Company anticipates continuous and good relationships with its current
suppliers, there can be no assurance that such suppliers will continue to be
available to the Company on acceptable terms, if at all, or that the Company
will be able to produce materials or components in-house in a
11
timely manner or in sufficient quantities to meet its needs. See "--Risk
Factors--Limited Manufacturing and Marketing Capability and Experience" and
"--Strategic Collaboration."
In February 1997, the Company received registration to ISO 9001 and EN
46001 signifying compliance to the International Standards Organization
quality systems requirements for design, manufacture and distribution of
medical devices. This registration should enable the Company to more easily
attain international device marketing approvals.
MARKETING, SALES AND DISTRIBUTION
The Company's strategy is to partner with leading pharmaceutical and
medical device companies for the marketing, sales and distribution of its
products. The Company has granted to Pharmacia & Upjohn the exclusive,
worldwide license to market and sell the Company's leading drug candidate
SnET2. Under the terms of the Company's co-development arrangements with
Boston Scientific and Cordis, these companies have the option of negotiating
to enter into long-term relationships with the Company, under which they will
do have a license to market and sell the co-developed medical catheters --
Boston Scientific in the fields of urology, pulmonology and gastroenterology
and Cordis in the field of cardiology on a worldwide basis. At this time, the
Company and Boston Scientific and Cordis have not entered into any such
agreements. Also, the Company has granted to Iridex, the worldwide license to
market and sell all co-developed light producing devices for use in
photodynamic therapy in the field of ophthalmology. See "--Strategic
Collaborations."
Where appropriate, the Company intends to seek additional arrangements
with collaborative partners, selected for experience in disease applications
or markets, to act as the marketing and sales arm for the Company and to
establish distribution channels for the Company's drugs and devices. However,
there can be no assurance that such collaborative arrangements can be
negotiated or will be successful. See "--Risk Factors--Reliance on
Collaborative Partners."
The Company may also distribute its products directly or through
independent distributors. The Company currently has limited capabilities and
experience in marketing, sales and distribution of its products. See "--Risk
Factors--Limited Manufacturing and Marketing Capability and Experience" and
Note 1 of Notes to Consolidated Financial Statements.
PATENTS AND PROPRIETARY TECHNOLOGY
The Company pursues a policy of seeking patent protection for its
technology both in the United States and in selected countries abroad. The
Company plans to prosecute, assert and defend its patent rights when
appropriate. The Company also relies upon trade secrets, know-how, continuing
technological innovations and licensing opportunities to develop and maintain
its competitive position.
The Company is currently the record owner of eighteen United States
patents duly issued by the U.S. Patent and Trademark Office which expire 2010
through 2014, a majority of which relate to certain light delivery and
measurement devices. Also in its name, the Company has a number of United
States (and related foreign) patent applications filed and pending relating
to certain light delivery and measurement devices. In addition, the Company
has exclusive rights under fourteen issued United States patents, which
expire from 2006 through 2016, and three issued foreign patent expiring in
2006, and under several pending United States patent applications (and
related foreign patent applications), relating to certain photoreactive
compounds. Additionally, issued in its name the Company has one foreign
method patent which expires in 2013. Certain of the foregoing patents and
patent applications are subject to certain governmental rights described
below.
The Company currently does not have any drug patents issued in its own
name. The Company obtained its photoreactive compound patent rights,
including rights to SnET2, through an exclusive License Agreement with
Toledo. This agreement is the basis for the Company's core drug technology.
See "--Strategic Collaborations" for a description of the Toledo agreement.
12
The patent position of pharmaceutical and medical device firms generally
is highly uncertain and involves complex legal and factual questions. There
can be no assurance that patent applications owned by or licensed to the
Company will result in issued patents, that any issued patents will provide
the Company with significant proprietary protection or competitive advantages
or will not be infringed upon or designed around by others, will not be
challenged by others and held to be invalid or unenforceable or that the
patents of others will not have a material adverse effect on the Company.
See "--Risk Factors--Uncertainty Regarding Patents and Proprietary
Technology."
The Company is aware that its competitors and other companies,
institutions and individuals have been issued patents relating to
photodynamic therapy. In addition, the Company's competitors and other
companies, institutions and individuals may have filed patent applications or
been issued patents relating to other potentially competitive products of
which the Company is not aware. Further, the Company's competitors and other
companies, institutions and individuals may in the future file applications
for, or be granted licenses or otherwise obtain proprietary rights to,
patents relating to other potentially competitive products. There can be no
assurance that these existing or future patents or patent applications will
not conflict with the Company's or its licensors' patents or patent
applications. Such conflicts could result in a rejection of the Company's or
its licensors' patent applications or the invalidation of their patents,
which could have a material adverse effect on the Company's competitive
position. In the event of such conflicts, or in the event the Company
believes that such competitive products may infringe the patents owned by or
licensed to the Company, the Company may pursue patent infringement
litigation or interference proceedings against, or may be required to defend
against litigation involving, holders of such conflicting patents or
competing products. Such proceedings may materially adversely affect the
Company's competitive position, and there can be no assurance that the
Company will be successful in any such proceeding. Litigation and other
proceedings relating to patent matters, whether initiated by the Company or a
third party, can be expensive and time consuming, regardless of whether the
outcome is favorable to the Company, and can result in the diversion of
substantial financial, managerial and other resources from the Company's
other activities. An adverse outcome could subject the Company to significant
liabilities to third parties or require the Company to cease any related
research and development activities or product sales. The Company does not
have contractual indemnification rights against the licensors of the various
drug patents. In addition, if patents that contain dominating or conflicting
claims have been or are subsequently issued to others and such claims are
ultimately determined to be valid, the Company may be required to obtain
licenses under patents or other proprietary rights of others. No assurance
can be given that any licenses required under any such patents or proprietary
rights would be made available on terms acceptable to the Company, if at all.
If the Company does not obtain such licenses, it could encounter delays or
could find that the development, manufacture or sale of products requiring
such licenses is foreclosed.
The Company also relies upon unpatented trade secrets, and no assurance
can be given that others will not independently develop substantially
equivalent proprietary information and techniques, or otherwise gain access
to the Company's trade secrets or disclose such technology, or that the
Company can meaningfully protect its rights to its unpatented trade secrets
and know-how.
It is the Company's policy to require its employees, consultants, outside
scientific collaborators and sponsored researchers and other advisors to
execute confidentiality agreements upon the commencement of employment or
consulting relationships with the Company. These agreements provide that all
confidential information developed or made known to the individual during the
course of the individual's relationship with the Company is to be kept
confidential and not disclosed to third parties except in specific limited
circumstances. The Company also requires signed confidentiality or material
transfer agreements from any company that is to receive confidential data or
proprietary compounds. In the case of employees and consultants, the
agreements generally provide that all inventions conceived by the individual
while rendering services to the Company shall be assigned to the Company as
the exclusive property of the Company. There can be no assurance, however,
that these agreements will provide meaningful protection or adequate remedies
for the Company's trade secrets or other proprietary information in the event
of unauthorized use or disclosure of such information.
13
Certain of the Company's research, including research relating to certain
drug compounds covered by the License Agreement with Toledo, including SnET2,
has been or is being funded in part by Small Business Innovation Research or
National Institutes of Health grants. See "--Research and Development
Programs." As a result of such funding, the United States Government has or
will have certain rights in the inventions developed with the funding. These
rights include a non-exclusive, paid-up, worldwide license under such
inventions for any governmental purpose. In addition, the government has the
right to require the Company to grant an exclusive license under any of such
inventions to a third party if the government determines that (i) adequate
steps have not been taken to commercialize such inventions, (ii) such action
is necessary to meet public health or safety needs or (iii) such action is
necessary to meet requirements for public use under federal regulations.
Federal law requires that any exclusive licensor of an invention that was
partially funded by federal grants (which is the case with the subject matter
of certain patents issued in the Company's name or licensed from Toledo)
agree that it will not grant exclusive rights to use or sell the invention in
the United States unless the grantee agrees that any products embodying the
invention will be manufactured substantially in the United States, although
such requirement is subject to a discretionary waiver by the government. It
is not expected that the government will exercise any such rights or that
such exercise would have material impact on the Company.
GOVERNMENT REGULATION
The research, development, manufacture, marketing and distribution of the
Company's products are subject to regulation for safety and efficacy by
numerous governmental authorities in the United States and other countries.
In the United States, pharmaceutical products and medical devices are
regulated by the FDA through the Food, Drug and Cosmetic Act ("FDC Act").
The FDC Act and various other federal and state statutes control and
otherwise affect the development, approval, manufacture, testing, storage,
records and distribution of drugs and medical devices. The Company is subject
to regulatory requirements governing both drugs and devices.
DRUG PRODUCTS. The FDA generally requires the following steps before a
new drug product may be marketed in the United States: (i) preclinical
studies (laboratory and animal tests); (ii) the submission to the FDA of an
application for an IND exemption, which must become effective before human
clinical trials may commence; (iii) adequate and well-conducted clinical
trials to establish safety and efficacy of the drug for its intended use;
(iv) the submission to the FDA of a New Drug Application ("NDA"); and (v)
review and approval of the NDA by the FDA before any commercial sale or
shipment of the drug. In addition to obtaining FDA approval for each new drug
product, each drug manufacturing establishment must be registered with the
FDA. Manufacturing establishments, both domestic and foreign, are subject to
inspections by or under the authority of the FDA and by other federal, state
or local agencies and must comply with the FDA's current Good Manufacturing
Practices ("GMP") regulations. The FDA will not approve an NDA until a
preapproval inspection of the manufacturing facilities confirms that the drug
is produced in accordance with current drug GMPs. In addition, drug
manufacturing establishments in California must also be licensed by the State
of California and must comply with manufacturing, environmental and other
regulations promulgated and enforced by the California Department of Health
Services.
Preclinical studies include laboratory evaluation of product chemistry,
conducted under Good Laboratory Practice ("GLP") regulations, and animal
studies to assess the potential safety and efficacy of the drug and its
formulation. The results of the preclinical tests are submitted to the FDA as
part of the IND. Unless the FDA objects to the IND, the IND becomes effective
30 days following its receipt by the FDA.
Clinical trials involve the administration of the investigational drug to
human subjects under FDA regulations and other guidance commonly known as
good clinical practice ("GCP") requirements and the supervision of a
qualified physician. Clinical trials are conducted in accordance with
protocols that detail the objectives of the study, the parameters to be used
to monitor safety and the efficacy criteria to be evaluated. Each protocol is
submitted to the FDA as a part of the IND. Each clinical study must be
conducted under the auspices of an independent Institutional Review Board
("IRB"). The IRB considers, among other things, ethical factors, the safety
of human subjects and the possible liability of the testing institution.
14
Clinical trials are typically conducted in three sequential phases,
although the phases may overlap. Phase I represents the initial introduction
of the drug to a small group of humans to test for safety (adverse effects),
dosage tolerance, absorption, distribution, metabolism, excretion and
clinical pharmacology and, if possible, to gain early evidence of
effectiveness. Phase II involves studies in a limited sample of the intended
patient population to assess the efficacy of the drug for a specific
indication, to determine dose tolerance and optimal dose range and to
identify possible adverse effects and safety risks. Once a compound is found
to have some efficacy and to have an acceptable safety profile in Phase II
evaluations, Phase III clinical trials are initiated for definitive clinical
safety and efficacy studies in a broader sample of the patient population at
multiple study sites. The results of the preclinical and clinical testing are
submitted to the FDA in the form of an NDA for marketing approval.
Completing clinical trials and obtaining FDA approval for a new drug
product is likely to take several years and require expenditure of
substantial resources. If an NDA application is submitted, there can be no
assurance that the FDA will approve the NDA in a timely manner, if at all.
Even if initial FDA approval is obtained, further studies will be required to
gain approval for the use of a product as a treatment for clinical
indications other than those for which the product was initially approved.
Also, the FDA requires post-market surveillance programs to monitor and
report the drug's side effects. For certain drugs, the FDA may also,
concurrent with marketing approval, seek agreement from the sponsor to
conduct post-marketing ("Phase IV") studies to obtain further information
about the drug's risks, benefits, and optimal use. Results of such monitoring
and of Phase IV post-marketing studies may affect the further marketing of
the product.
Where appropriate, the Company may seek to obtain accelerated review
and/or approval of products and to use expanded access programs that may
provide broader accessibility and, if approved by the FDA, payment for an
investigational drug product. These activities may include, but may not be
limited to, pursuing programs such as treatment IND or parallel track IND
classifications which allow expanded availability of an investigational
treatment to patients not in the ongoing clinical trials, and seeking
physician or cross-referenced INDs which allow individual physicians to use
an investigational drug before marketing approval and for an indication not
covered by the ongoing clinical trials. However, there can be no assurance
that the Company will seek such avenues in all possible cases or in any
individual case. Further, there can be no assurance that the Company will be
able to obtain access to such avenues in a timely manner, if at all. If the
Company is able to obtain access to any such avenue, there can be no
assurance that an avenue will be successful or result in accelerated review
or approval, or broader accessibility to, any of the Company's products.
MEDICAL DEVICE PRODUCTS. The Company's medical device products are
subject to government regulation in the United States and foreign countries.
In the United States, the Company is subject to the rules and regulations
established by the FDA requiring that the Company's medical device products
are safe and efficacious and are designed, tested, developed, manufactured
and distributed in accordance with FDA regulations.
Under the FDC Act, medical devices are classified into one of three
classes (i.e., class I, II, or III) on the basis of the controls necessary to
reasonably ensure their safety and effectiveness. Safety and effectiveness
can reasonably be assured for class I devices through general controls (e.g.,
labeling, premarket notification and adherence to GMPs) and for class II
devices through the use of general and special controls (e.g., performance
standards, postmarket surveillance, patient registries, and FDA guidelines).
Generally, class III devices are those which must receive premarket approval
by the FDA to ensure their safety and effectiveness (e.g., life-sustaining,
life-supporting and implantable devices, or new devices which have been found
not to be substantially equivalent to legally marketed devices).
Before a new device can be introduced to the market, the manufacturer
generally must obtain FDA clearance through either a 510(k) premarket
notification or a premarket approval application ("PMA"). A PMA requires the
completion of extensive clinical trials comparable to those required of new
drugs and typically requires several years before FDA approval, if any, is
obtained. A 510(k) clearance will be granted if the submitted data establish
that the proposed device is "substantially equivalent" to a legally marketed
class I or class II medical device, or to a class III medical device for
which the FDA has not called for PMAs. Currently, devices indicated
15
for use in photodynamic therapy, such as the Company's devices, regardless of
classification, must be evaluated in conjunction with an IND as a combination
drug-device product.
COMBINATION DRUG-DEVICE PRODUCTS. Medical products containing a
combination of drugs, devices or biological products may be regulated as
"combination products." A combination product is generally defined as a
product comprised of components from two or more regulatory categories
(drug/device, device/biologic, drug/biologic, etc.) and in which the various
components are required to achieve the intended effect and are labeled
accordingly. Each component of a combination product is subject to the rules
and regulations established by the FDA for that component category, whether
drug, biologic or device. Primary responsibility for the regulation of a
combination product depends on the FDA's determination of the "primary mode
of action" of the combination product, whether drug, biologic or device.
In order to facilitate premarket review of combination products, the FDA
designates one of its centers to have primary jurisdiction for the premarket
review and regulation of both components, in most cases eliminating the need
to receive approvals from more than one center. The determination whether a
product is a combination product or two separate products is made by the FDA
on a case-by-case basis. Market approval authority for combination
photodynamic therapy drug/device products is vested in the FDA Center for
Drug Evaluation and Research (the "CDER") which is required to consult with
the FDA Center for Devices and Radiological Health. As the lead agency, the
CDER administers and enforces the premarket requirements for both the drug
and device components of the combination product. The FDA has reserved the
decision on whether to require separate submissions for each component until
the product is ready for premarket approval. Although to date photodynamic
therapy products have been categorized by the FDA as combination drug-device
products, there can be no assurance that the Company's products currently
under investigation or any future drug/device products will continue to be
categorized for regulatory purposes as combination products, that they will
not require separate drug and device submissions, or that they will not
require separate approval by both centers.
In the event that separate applications for approval are required in the
future for photodynamic therapy devices, it may be necessary for the Company
to submit a PMA or a 510(k) to the FDA for its photodynamic devices.
Submission of a PMA would include the same clinical studies submitted under
the IND to show the safety and efficacy of the device for its intended use in
the combination product. A 510(k) notification would include information and
data to show that the Company's device is substantially equivalent to
previously marketed devices. There can be no assurance as to the exact form
of the premarket approval submission required by the FDA or post-marketing
controls for the Company's photodynamic therapy devices.
POST-APPROVAL COMPLIANCE. Once a product is approved for marketing, the
Company must continue to comply with various FDA, and in some cases Federal
Trade Commission, requirements for design, safety, advertising, labeling,
record keeping and reporting of adverse experiences associated with the use
of a product. The FDA actively enforces regulations prohibiting marketing of
products for non-approved uses. Failure to comply with applicable regulatory
requirements can result in, among other things, fines, injunctions, civil
penalties, failure of the government to grant premarket clearance, premarket
approval or export certificates for devices or drugs, delays or suspensions
or withdrawals of approvals, seizures or recalls of products, operating
restrictions and criminal prosecutions. Changes in existing requirements or
adoption of new requirements could have a material adverse effect on the
Company's business, financial condition and results of operations.
INTERNATIONAL. With regard to the marketing of photodynamic therapy
drugs and devices outside the United States, the Company is subject to
foreign regulatory requirements governing testing, development, marketing,
licensing, pricing and/or distribution of drugs and devices in other
countries. These regulations vary from country to country. Beginning in 1995,
a new regulatory system to approve drug market registration applications was
implemented in the European Union ("EU"). The system provides for new
centralized, decentralized and national (member state by member state)
registration procedures through which a company may obtain drug marketing
registrations. The centralized procedure allows for expedited review and
approval of biotechnology and high technology/innovative product marketing
applications by a central Committee for Proprietary Medicinal Products that
is binding on all member states in the EU. The decentralized procedure allows
16
a company to petition individual EU member states to review and recognize a
market application previously approved in one member state by the national
route. There can be no assurance that the Company's drug products will
qualify for the centralized review procedure or that the Company will be able
to obtain a national market application that will be accepted by other EU
member states. The Company's devices must also meet the new Medical Device
Directive effective in Europe in 1998. The Directive requires that the
Company's manufacturing quality assurance systems and compliance with
technical essential requirements be certified with a CE Mark authorized by a
registered notified body of an EU member state prior to free sale in the EU.
Registration and approval of a photodynamic therapy product in other
countries, such as Japan, may include additional procedures and requirements,
nonclinical and clinical studies, and may require the assistance of native
corporate partners.
The time and expense required to gain approval for a product in another
country may be more or less than that required for U.S. approval. There can
be no assurance as to degree or extent of approval requirements or regulation
of the Company's products in any country, or the effect of such requirements
or regulations on the Company's ability to sell its products outside of the
United States.
OTHER LAWS; FUTURE LEGISLATION OR REGULATIONS. In addition to the
regulations for drug or device approvals, the Company is subject to
regulation under state, federal or other law, including regulations for
worker occupational safety, laboratory practices, environmental protection
and hazardous substance control. The Company continues to make capital and
operational expenditures for protection of the environment in amounts which
are not material. However, there can be no assurance that future expenditures
will not have a material adverse effect on the Company. The Company may also
be subject to other present and possible future local, state, federal and
foreign regulation. There can be no assurance that any such regulations will
not adversely affect the Company's business.
Heightened public awareness and concerns regarding the growth in overall
health care expenditures in the United States, combined with the continuing
efforts of governmental authorities to contain or reduce costs of health
care, may result in the enactment of national health care reform or other
legislation or regulations that impose limits on the number and type of
medical procedures which may be performed or which have the effect of
restricting a physician's ability to select specific products for use in
certain procedures. Such new legislation or regulations may materially
adversely affect the demand for the Company's products. In the United States,
there have been, and the Company expects that there will continue to be, a
number of federal and state legislative proposals and regulations to
implement greater governmental control in the health care industry. For
example, the Clinton Administration and certain members of Congress have
proposed health care reform legislation that may impose pricing or
profitability limitations or other restrictions on companies in the health
care industry. The announcement of such proposals may materially adversely
affect the Company's ability to raise capital or to form collaborations, and
the enactment of any such reforms could have a material adverse effect on the
Company. In certain foreign markets, the pricing and profitability of health
care products are subject to governmental influence or control. In addition,
legislation or regulations that impose restrictions on the price that may be
charged for health care products or medical devices may adversely affect the
Company's results of operations. From time to time, legislation or regulatory
proposals are considered that could alter the review and approval process
relating to pharmaceutical or medical device products. The Company is unable
to predict the likelihood of adverse effects which might arise from future
legislative or administrative action, either in the United States or abroad.
COMPETITION
The pharmaceutical and medical device industries are characterized by
extensive worldwide research and development efforts and rapid technological
change. Competition from other domestic and foreign pharmaceutical or medical
device companies and research and academic institutions in the areas of
product development, product and technology acquisition, manufacturing and
marketing is intense and is expected to increase. These competitors may
succeed in obtaining approval from the FDA or other regulatory agencies for
their products more rapidly than the Company. Competitors have also developed
or are in the process of developing technologies that are, or in the future
may be, the basis for competitive products.
17
The Company believes that a primary competitive issue will be the
performance characteristics of photoreactive drugs, including product
efficacy and safety, as well as availability, price and patent position,
among other issues. As the photodynamic therapy industry evolves, the Company
believes that new and more sophisticated devices will be required and that
the ability of any group to develop advanced devices will be of primary
importance to market position. The Company believes that, after approval,
competition will be based on product reliability, clinical utility,
availability, price and patent position.
The Company is aware of various competitors involved in the photodynamic
therapy drug arena. The Company understands that these companies are
conducting preclinical and/or clinical testing in various countries and for a
variety of disease indications. One such company is QLT PhotoTherapeutics
("QLT"). The Company understands that QLT's drug Photofrin-Registered
Trademark- has received marketing approval in certain countries for various
specific disease indications. In addition, the Company is aware of
competitors active in the commercialization of photodynamic therapy devices.
Many of the Company's competitors have substantially greater financial,
technical and human resources than the Company and substantially greater
experience in developing products, conducting preclinical or clinical
testing, obtaining regulatory approvals and manufacturing and marketing.
Further, the Company's competitive position could be materially adversely
affected by the establishment of patent protection by its competitors. There
can be no assurance that the Company's competitors will not succeed in
developing technologies and products that are more effective or affordable
than those being developed by the Company or that would render the Company's
technology and products less competitive or obsolete. See "--Risk
Factors--Competition and Technological Uncertainty."
LIABILITY OR RECALL
The use of the Company's products in clinical trials and the sale of such
products may expose the Company to liability claims. These claims could be
made directly by patients or consumers, or by companies, institutions or
others using or selling such products. In addition, the Company is subject to
the inherent risk that a governmental authority or third party may require
the recall of one or more of the Company's products. The Company has not
obtained liability insurance that would cover a claim relating to the use or
recall of its products. In the absence of such insurance, claims made against
the Company or a product recall could have a material adverse effect on the
Company. In addition, there can be no assurance that, if the Company seeks
insurance coverage in the future, such coverage will be available at a
reasonable cost and in amounts sufficient to protect the Company against
claims that could have a material adverse effect on the financial condition
and prospects of the Company. Further, liability claims relating to the use
of the Company's products or a product recall could negatively effect the
Company's ability to obtain or maintain regulatory approval for its products.
The Company has agreed to indemnify certain of its collaborative partners
against certain potential liabilities relating to the manufacture and sale of
SnET2 and photodynamic therapy light devices. See "--Strategic
Collaborations."
EMPLOYEES
As of March 14, 1997, the Company employed 134 individuals, approximately
58 of which were engaged in research and development, 39 were engaged in
manufacturing and clinical activities and 37 in general and administrative
activities. The Company believes that its relationship with its employees is
good and none of the employees are represented by a labor union.
RISK FACTORS
The Company does not provide forecasts of potential future operational or
financial performance. While management of the Company is optimistic about
the Company's long-term prospects, the following issues and uncertainties,
among others, should be considered in evaluating its outlook. This Annual
Report on Form 10-K contains forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995, which involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievement of the Company, or industry results, to
differ materially from any future results, performance or achievements
expressed or implied by such forward-looking statements. Actual results
could
18
differ materially from those contemplated by such statements. The factors
listed below represent certain important factors the Company believes could
cause such results to differ. These factors are not intended to represent a
complete list of the general or specific risks that may affect the Company.
It should be recognized that other risks may be significant, presently or in
the future, and the risks set forth below may affect the Company to a greater
extent than indicated.
EARLY STAGE OF THE COMPANY AND ITS PRODUCTS
The Company and its products are in an early stage of development. No
revenues have been generated from sales of the Company's drugs and only
limited revenues have been generated from sales of the Company's devices. The
Company does not expect to achieve significant levels of revenues for at
least several years. The Company's revenues to date have consisted, and for
the foreseeable future are expected to consist, principally of grants awarded
and payments for its devices which are purchased by others engaged in
preclinical and clinical testing and research of photodynamic therapy drugs
or by companies that distribute the devices and payments under research and
development agreements, license fees, royalties, clinical reimbursements,
milestone payments and interest income. To achieve profitable operations on a
continuing basis, the Company, alone or with collaborative partners, must
successfully research, develop, test, obtain regulatory approval,
manufacture, introduce, market and distribute its products. The time frame
necessary to achieve these goals for any individual product is long and
uncertain. Most of the products currently under development by the Company
will require significant additional research and development, preclinical and
clinical testing and regulatory approval prior to commercialization. There
can be no assurance that the Company's research or product development
efforts or those of its collaborative partners will be successfully
completed, that the drugs or devices currently under development will be
successfully transformed into marketable products, that required regulatory
approvals can be obtained, that products can be manufactured at an acceptable
cost and with appropriate quality, that any approved products can be
successfully marketed, or that any products that may be marketed will be
favorably accepted. The likelihood of the Company's success must be
considered in light of these and other problems, expenses, difficulties,
complications and delays frequently encountered in connection with the
formation of a new business and the development and commercialization of new
products, particularly pharmaceutical and medical device products. See Item
7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and "--Government Regulation."
HISTORY OF LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY
The Company has generated little revenue to date, has experienced
operating losses since its inception in 1989 and has not yet achieved
profitability. As of December 31, 1996, the Company had an accumulated
deficit of approximately $50.6 million. These losses have resulted primarily
from the Company's research and development programs, the funding of
preclinical and clinical testing and regulatory activities and the general
and administrative expenses associated with these activities. The Company
anticipates incurring substantial and increasing losses over at least the
next several years. The extent of losses and the time required to reach
profitability are highly uncertain. To achieve sustained profitable
operations, the Company, alone or with collaborative partners, must
successfully research, develop, test, obtain regulatory approval,
manufacture, introduce, market and distribute its products. There can be no
assurance that the Company will be able to achieve profitability or that
profitability, if achieved, can be sustained on an ongoing basis. Moreover,
if profitability is achieved, the level of that profitability cannot be
accurately predicted. See Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
UNPROVEN SAFETY AND EFFICACY; CLINICAL TRIALS
All drug and device products currently under development by the Company
will require extensive preclinical and clinical testing prior to regulatory
approval for commercial use. None of the Company's products have completed
testing for efficacy or safety in humans. There can be no assurance that such
testing will demonstrate that SnET2 or any other of the Company's products is
safe or efficacious or that testing for any of the Company's compounds
currently under development will be commenced or completed successfully
within any
19
specified time period, if at all. Further, there can be no assurance that
clinical data reported by the Company will not change as a result of the
continuing evaluation of patients. Data obtained from preclinical and
clinical trials are subject to varying interpretations which can delay, limit
or prevent approval by the FDA or other regulatory authorities. There can be
no assurance that the Company will not encounter problems in research and
development, preclinical testing or clinical trials that will cause the
Company to delay, suspend or cancel clinical trials. Many potential
pharmaceutical and medical device products that achieve promising results in
preclinical tests and clinical trials fail to demonstrate sufficient safety
or efficacy to warrant approval by the FDA or other regulatory authorities,
and there can be no assurance that any of the Company's potential products
will obtain the required approvals or, if approved, will obtain sufficient
market acceptance to become commercially successful. Moreover, as a result of
changing market, clinical or regulatory conditions, or clinical trial
results, the Company's focus may shift to other indications, or it may be
determined not to further pursue one or more of the indications currently
being pursued. See "--Government Regulation."
To date, the Company has very limited experience in conducting clinical
trials. The Company will either need to rely on third parties, including its
collaborative partners, to design and conduct any required clinical trials or
expend resources to hire additional personnel to administer such clinical
trials. There can be no assurance that the Company will be able to find
appropriate third parties to design and conduct clinical trials or that it
will have the resources to hire personnel to administer clinical trials
in-house.
RELIANCE ON COLLABORATIVE PARTNERS
The Company has entered into collaborative relationships with certain
corporations and academic institutions in connection with the research and
development, preclinical and clinical testing, licensing, manufacturing and
distribution of its products. In July 1995, the Company entered into a
collaborative agreement with Pharmacia & Upjohn, Inc. pursuant to which the
Company granted to Pharmacia & Upjohn an exclusive worldwide license to use,
distribute and sell SnET2 for therapeutic or diagnostic applications in the
area of photodynamic therapy. See "--Strategic Collaborations." The amount
of royalty revenues and other payments, if any, ultimately received by the
Company with respect to sales of SnET2 is dependent, in part, on the amount
and timing of resources Pharmacia & Upjohn commits to research and
development, clinical testing and regulatory and marketing activities, which
are entirely within the control of Pharmacia & Upjohn. The resources
committed by Pharmacia & Upjohn in these areas will depend on Pharmacia &
Upjohn's own competitive, marketing and strategic considerations, including
the relative advantages of alternative products or therapies developed and
marketed by Pharmacia & Upjohn or competitors. There can be no assurance that
Pharmacia & Upjohn will pursue the development and commercialization of SnET2
or that Pharmacia & Upjohn will perform its obligations as expected. In
addition, the Company is collaborating with Boston Scientific and Cordis with
respect to the development of catheters for use in photodynamic therapy. The
Company has not entered into any definitive collaborative agreement with
either of these companies. No assurance can be given that these additional
collaborations will culminate in definitive collaborative agreements or
marketable products or will otherwise be successful. Also, there can be no
assurance that Iridex and Ramus will continue to pursue the development of
devices for use in photodynamic therapy in the fields of ophthalmology and
cardiology, respectively or that such development will result in marketable
products .
In addition, the Company is currently at various stages of discussions
with other companies regarding the establishment of various collaborations.
The Company's current and future collaborations are important to the Company
because they allow the Company greater access to funds, to research,
development or testing resources and to manufacturing, sales or distribution
resources than it would otherwise have, and the Company intends to continue
to rely on such collaborative arrangements. However, there can be no
assurance that the Company will be able to negotiate acceptable collaborative
arrangements in the future or that such future or existing collaborative
arrangements will be successful or result in products that are marketed or
sold. In addition, there can be no assurance that such collaborative
relationships will not limit or restrict the Company in any way. Further,
there can be no assurance that the Company's collaborative partners will not
develop or pursue alternative technologies either on their own or in
collaboration with others, including the Company's competitors, as a means of
20
developing or marketing products for the diseases targeted by the
collaborative programs and the Company's products. See "--Strategic
Collaborations."
ADDITIONAL FINANCING REQUIREMENTS AND UNCERTAINTY OF CAPITAL FUNDING
The Company has incurred negative cash flows from operations since its
inception and has expended substantial funds in connection with its research
and development programs and preclinical and clinical testing. The Company
may require substantial funding to continue or undertake its research and
development activities, preclinical and clinical testing and manufacturing,
marketing, sales, distribution and administrative activities. There can be no
assurance that the Company's existing capital resources, together with the
proceeds from future offerings and future cash flows, will be sufficient to
fund the Company's future operations. See Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
COMPETITION AND TECHNOLOGICAL UNCERTAINTY
Many of the Company's competitors have substantially greater financial,
technical and human resources than the Company and substantially greater
experience in developing products, conducting preclinical or clinical
testing, obtaining regulatory approvals and manufacturing and marketing.
Further, the Company's competitive position could be materially adversely
affected by the establishment of patent protection by its competitors. There
can be no assurance that the Company's existing competitors or other
companies will not succeed in developing technologies and products that are
more effective or affordable than those being developed by the Company or
that would render the Company's technology and products less competitive or
obsolete. See "--Patents and Proprietary Technology" and "--Competition."
The Company's products are subject to the risks of failure inherent in
the development and testing of products based on innovative technologies.
These risks include the possibilities that this technology or any or all of
the Company's products may be found to be ineffective or to have
unanticipated limitations or otherwise fail.
GOVERNMENT REGULATION
The production and marketing of the Company's products and its ongoing
research and development, preclinical testing and clinical trial activities
are subject to extensive regulation and review by numerous governmental
authorities in the United States, including the FDA, and in other countries.
All drugs and most medical devices developed by the Company must undergo
rigorous preclinical and clinical testing and an extensive regulatory
approval process administered by the FDA under the FDC Act, and comparable
foreign authorities before they can be marketed. These processes involve
substantial cost and can take many years. The Company has limited experience
in, and limited resources available to commit to, regulatory activities.
Failure to comply with the applicable regulatory requirements can, among
other things, result in non-approval, suspensions of regulatory approvals,
fines, product seizures and recalls, operating restrictions, injunctions and
criminal prosecution.
The time required for completing such testing and obtaining such
approvals is uncertain and approval itself may not be obtained. In addition,
delays or rejections may be encountered due to, among other reasons,
regulatory review of each submitted new drug, device or combination
drug/device application or product license application, as well as changes in
regulatory policy during the period of product development. Similar delays
may also be encountered in foreign countries. To date, no pharmaceutical
product candidate being developed by the Company has been submitted for
approval or has been approved by the FDA or any other regulatory authority
for marketing, and there can be no assurance that, even after investing
substantial time and expense, regulatory approval will be obtained for any
products developed by the Company. Moreover, if regulatory approval of a
product is granted, such approval may entail limitations on the indicated
uses for which the product may be marketed. Further, even if such regulatory
approval is obtained, a marketed product, its manufacturer and the facilities
in which the product is manufactured are subject to continual review and
periodic inspections. Later
21
discovery of previously unknown problems with a product, manufacturer or
facility may result in restrictions on such product or manufacturer,
including withdrawal of the product from the market and litigation. Although
to date photodynamic therapy products have been categorized by the FDA as
combination drug-device products, there can be no assurance that the
Company's products currently under investigation or any future drug/device
products will continue to be categorized for regulatory purposes as
combination products, that they will not require separate drug and device
submissions, or that they will not require separate approval by regulatory
authorities. See "--Government Regulation."
REIMBURSEMENT
The Company's ability to commercialize its products successfully may
depend in part on the extent to which reimbursement for such products and
related treatment will be available from corporate partners, government
health administration authorities, private health insurers, managed care
entities and other organizations. Such payors are increasingly challenging
the price of medical products and services and establishing protocols and
formularies which effectively limit physicians' ability to select products
and procedures. Uncertainty exists as to the reimbursement status of health
care products (especially innovative technologies), and there can be no
assurance that adequate reimbursement coverage will be available to enable
the Company to achieve market acceptance of its products or to maintain price
levels sufficient for realization of an appropriate return on its products.
LIMITED MANUFACTURING AND MARKETING CAPABILITY AND EXPERIENCE
To be successful, the Company's products must be manufactured in
commercial quantities under current GMP prescribed by the FDA and at
acceptable costs. Although the Company intends to manufacture drugs and
devices, the Company has not yet manufactured any products in commercial
quantities under GMP and has no experience in such commercial manufacturing.
The Company will need to expand its manufacturing capabilities and/or depend
on its collaborators, licensees or contract manufacturers for the commercial
manufacture of its products. In the event the Company determines to expand
its manufacturing capabilities, it will require the expenditure of
substantial funds, the hiring and retention of significant additional
personnel and compliance with extensive regulations applicable to such
expansion. There can be no assurance that the Company will be able to expand
such capabilities successfully or that it will be able to manufacture
products in commercial quantities for sale at competitive prices. Further,
there can be no assurance that the Company will be able to enter into
manufacturing arrangements with collaborators, licensees, or contract
manufacturers on acceptable terms or at all. If the Company is not able to
expand its manufacturing capabilities or enter into additional commercial
manufacturing agreements, it could be materially and adversely affected. See
"--Strategic Collaborations" and "--Manufacturing."
The Company has limited experience in marketing, distributing and
selling pharmaceutical products, and will need to develop a sales force or
rely on its collaborators or licensees or make arrangements with others to
provide for the marketing, distribution and sale of its products. There can
be no assurance that the Company's marketing, distribution and sales
capabilities or current or future arrangements with third parties to perform
such activities will be adequate for the successful commercialization of its
products. See "--Strategic Collaborations" and "--Marketing, Sales and
Distribution."
UNCERTAINTY REGARDING PATENTS AND PROPRIETARY TECHNOLOGY
The Company's success will depend, in part, on its and its licensors'
ability to obtain, assert and defend its patents, protect trade secrets and
operate without infringing the proprietary rights of others. The Company has
filed applications for or has been issued U.S. and foreign patents a majority
of which relate to its light delivery and measurement devices, and the
Company has an exclusive license under patent applications or patents of
others relating to certain photoreactive compounds. Such issued U.S. patents
expire from 2006 through 2014. Certain of the foregoing patents and patent
applications are subject to certain governmental rights. The exclusive
license to the Company under various drug patents, including patents relating
to its leading drug candidate SnET2, provides
22
that the licensors may elect that the license become non-exclusive if the
Company fails to satisfy certain development and commercialization
objectives. Although the Company believes it should be able to achieve such
objectives, there can be no assurance that the Company will be successful.
The patent position of pharmaceutical and medical device firms generally is
highly uncertain and involves complex legal and factual questions. There can
be no assurance that the patent applications owned by or licensed to the
Company will result in issued patents, that any issued patents will provide
the Company with proprietary protection or competitive advantages, will not
be infringed upon or designed around by others, will not be challenged by
others and held to be invalid or unenforceable or that the patents of others
will not have a material adverse effect on the Company. See "--Strategic
Collaborations."
The Company is aware that its competitors and other companies,
institutions and individuals have been issued patents relating to
photodynamic therapy. In addition, the Company's competitors and other
companies, institutions and individuals may have filed patent applications or
been issued patents relating to other potentially competitive products of
which the Company is not aware. Further, the Company's competitors and other
companies, institutions and individuals may in the future file applications
for, or be granted or license or otherwise obtain proprietary rights to,
patents relating to other potentially competitive products. There can be no
assurance that these existing or future patents or patent applications will
not conflict with the Company's or its licensors' patents or patent
applications. Such conflicts could result in a rejection of the Company's or
its licensors' patent applications or the invalidation of their patents,
which could have a material adverse effect on the Company's competitive
position. In the event of such conflicts, or in the event the Company
believes that such competitive products may infringe the patents owned by or
licensed to the Company, the Company may pursue patent infringement
litigation or interference proceedings against, or may be required to defend
against litigation involving, holders of such conflicting patents or
competing products. Such proceedings may materially adversely affect the
Company's competitive position, and there can be no assurance that the
Company will be successful in any such proceeding. Litigation and other
proceedings relating to patent matters, whether initiated by the Company or a
third party, can be expensive and time consuming, regardless of whether the
outcome is favorable to the Company, and can result in the diversion of
substantial financial, managerial and other resources from the Company's
other activities. An adverse outcome could subject the Company to significant
liabilities to third parties or require the Company to cease any related
research and development activities or product sales. The Company does not
have contractual indemnification rights against the licensors of the various
drug patents. In addition, if patents that contain dominating or conflicting
claims have been or are subsequently issued to others and such claims are
ultimately determined to be valid, the Company may be required to obtain
licenses under patents or other proprietary rights of others. No assurance
can be given that any licenses required under any such patents or proprietary
rights would be made available on terms acceptable to the Company, if at all.
If the Company does not obtain such licenses, it could encounter delays or
could find that the development, manufacture or sale of products requiring
such licenses is foreclosed.
The Company also seeks to protect its proprietary technology and
processes in part by confidentiality agreements with its collaborative
partners, employees and consultants. There can be no assurance that these
agreements will not be breached, that the Company will have adequate remedies
for any breach, or that the Company's trade secrets will not otherwise become
known or be independently discovered by competitors. Certain of the research
activities relating to the development of certain of the patents owned by or
licensed to the Company were funded, in part, by agencies of the United
States government. When the United States government participates in research
activities, it retains certain rights that include the right to use the
resulting patents for government purposes under a royalty-free license. See
"--Research and Development Programs" and "--Patents and Proprietary
Technology."
DEPENDENCE UPON KEY PERSONNEL AND CONSULTANTS
The Company's ability to successfully develop its products, manage
growth and maintain a competitive position will depend in large part on its
ability to attract and retain highly qualified scientific, management and
other personnel and to develop and maintain relationships with leading
research institutions and consultants. The Company is highly dependent upon
principal members of its management, key employees, scientific staff and
23
consultants which the Company may retain from time to time. Competition for
such personnel and relationships is intense, and there can be no assurance
that the Company will be able to continue to attract and retain such
personnel. The Company's consultants may be affiliated or employed by others,
and some have consulting or other advisory arrangements with other entities
that may conflict or compete with their obligations to the Company.
Inventions or processes discovered by such persons will not necessarily
become the property of the Company and may remain the property of such
persons or others. See Item 10, "Directors and Executive Officers."
DEPENDENCE UPON SUPPLIERS
The Company currently depends upon outside suppliers, contracted or
otherwise, for certain raw materials and components for its products. There
can be no assurance that such raw materials or components will continue to be
available to the Company's standards or on acceptable terms, if at all, or
that alternative suppliers will be available to the Company on acceptable
terms, if at all. Further, there can be no assurance that the Company will be
able to produce needed materials or components in-house in a timely manner or
in sufficient quantities to meet the needs of the Company, if at all.
Although most of the Company's raw materials and components are available
from various sources, the Company is currently dependent on single,
contracted sources for certain key materials or services used by the Company
in its drug development, light producing and light delivery device
development and production operations. Although the Company has entered into
agreements with these suppliers, there can be no assurance that these
arrangements will be successful or that the Company will not encounter delays
or other problems which may materially adversely affect its business. See
"--Strategic Collaborations" and "--Manufacturing."
ENVIRONMENTAL MATTERS
The Company is subject to federal, state, county and local laws and
regulations relating to the protection of the environment. In the course of
its business, the Company is involved in the handling, storage and disposal
of materials that are classified as hazardous. The Company's safety
procedures for handling, storage and disposal of such materials are designed
to comply with the standards prescribed by applicable laws and regulations.
However, there can be no assurance that the Company will not be involved in
contamination or injury from these materials. In the event of such an
occurrence, the Company could be held liable for any damages that result, and
any such liability could materially and adversely affect the Company.
Further, there can be no assurance that the cost of complying with these laws
and regulations will not increase materially in the future. See "--Government
Regulation."
CONTROL BY OFFICERS AND DIRECTORS
As of March 14, 1997, the Company's officers and directors beneficially
own approximately 32.8% of the outstanding Common Stock (approximately 44.7%
is beneficially owned if all options granted to such officers and directors
become vested and are exercised). These shareholders will be able to elect a
substantial number of the Company's directors and will have the ability to
influence significantly the Company and the direction of its business and
affairs. Such concentration of ownership may have the effect of delaying or
preventing a change in control of the Company, which could adversely affect
the market price for the Common Stock. See Item 12, "Security Ownership of
Certain Beneficial Owners and Management."
OUTSTANDING OPTIONS AND WARRANTS
As of March 14, 1997, there were outstanding options to purchase
2,421,088 shares of Common Stock at a weighted average exercise price of
$14.16 per share, and warrants to purchase 1,634,471 shares of Common Stock
at a weighted average exercise price of $10.53 per share. The exercise of
these options and warrants would result in significant book value and
earnings dilution to existing shareholders. See Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--General" and Notes 3 and 4 of Notes to Consolidated Financial
Statements.
24
ITEM 2. PROPERTIES
The Company has entered into three leases for approximately 65,500
square feet of office and laboratory space in Santa Barbara, California. The
first lease for approximately 18,300 square feet of space was entered into in
1992 at a base rent of approximately $16,000 per month. The rent is adjusted
annually based on increases in the consumer price index, and the rent is
$18,100 per month in 1997. This lease expires in October 1997, subject to the
Company's option to extend the lease for a three year term upon six months
notice to lessor. The facility is equipped and licensed to allow certain
laboratory testing and manufacturing. The Company manufactures and
distributes its active SnET2 drug substance from this facility.
In the second half of 1996, the Company entered into two additional
leases for approximately 47,200 square feet of office, laboratory and
manufacturing space. The current base rent for these two leases totals
approximately $45,700 per month. Each lease provides for rent to be adjusted
annually based on increases in the consumer price index. These leases expire
in August 1999, subject to the Company's option to extend them for a three
year term upon six months notice to lessor. Each leased property is located
in a business park and is subject to a master lease. The Company
manufactures its light producing and light delivery devices and performs
research and development of drugs, light delivery and light producing devices
from this facility. The Company will continue to incur additional costs for
the construction of the laboratories and office space associated with these
new facilities.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently party to any material litigation or
proceeding and is not aware of any material litigation or proceeding
threatened against it.
During 1996, the Company and two of its executive officers responded to
subpoenas from the Securities and Exchange Commission (the "SEC") to provide
certain information and documents and to testify in the matter of "TRADING IN
THE SECURITIES OF THE UPJOHN COMPANY" (HO 3129). Although the breadth and
nature of this investigation is not known, neither the SEC nor its staff has
given any indication that it intends to make any allegations or bring any
claims against the Company or any of its directors or officers, and, after
completion of its own internal inquiries, the Company continues to believe
that neither it nor any of its officers or directors has engaged in any
inappropriate activity. The Company and management are cooperating fully
with the investigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of 1996.
25
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDERS MATTERS
The Company's Common Stock is traded on The Nasdaq National Market under
the symbol PDTI. From April 11, 1995 through August 29, 1995, the Common
Stock was traded on The Nasdaq SmallCap Market. At the close of business on
August 29, 1995, the Common Stock ceased trading on The Nasdaq SmallCap
Market and on August 30, 1995 commenced trading on The Nasdaq National
Market. The following table sets forth high and low sales prices per share
of Common Stock as reported on The Nasdaq National Market based on published
financial sources, for the period commencing on August 30, 1995, and the high
and low bid prices of the Common Stock on The Nasdaq SmallCap Market for the
period from April 11, 1995 to August 29, 1995. The Nasdaq SmallCap Market
prices reflect inter-dealer prices, without mark-up, mark-down or commission
and may not reflect actual transactions.
HIGH LOW
-------- --------
1996
First quarter . . . . . . . . . . . . . . . . . . $ 62.00 $ 47.00
Second quarter. . . . . . . . . . . . . . . . . . 60.75 33.00
Third quarter . . . . . . . . . . . . . . . . . . 39.00 26.75
Fourth quarter. . . . . . . . . . . . . . . . . . 33.50 22.38
1995
Second quarter (from April 11). . . . . . . . . . $ 25.33 $ 10.67
Third quarter (through August 29) . . . . . . . . 38.67 21.17
Third quarter (from August 30). . . . . . . . . . 43.00 33.00
Fourth quarter. . . . . . . . . . . . . . . . . . 74.25 32.50
As of March 14, 1997, there were approximately 232 stockholders of
record of the Common Stock. The Company has never paid dividends, cash or
otherwise, on its capital stock and does not anticipate paying any such
dividends in the foreseeable future. The Company currently intends to retain
future earnings, if any, to finance the growth and development of its
business. Any future determination to pay dividends will be at the
discretion of the Board of Directors and will be dependent upon the Company's
financial condition, results of operations, capital requirements and such
other factors as the Board of Directors deems relevant. The Company's bank
credit line prohibits the payment of dividends on the Common Stock.
26
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated statement of operations data set forth below
for each of the three years in the period ended December 31, 1996 and the
consolidated balance sheet data set forth below at December 31, 1995 and 1996
are derived from the consolidated financial statements of the Company which
have been audited by Ernst & Young LLP, independent auditors, and which are
included elsewhere herein. The consolidated statement of operations data for
the years ended December 31, 1992 and 1993 and the consolidated balance sheet
data at December 31, 1992, 1993 and 1994 are derived from audited
consolidated financial statements not included herei n. The data set forth
below should be read in conjunction with Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the
Consolidated Financial Statements and related notes listed under Item 14,
"Exhibits, Financial Statement Schedules, and Reports on Form 8-K."
Year Ended December 31,
-------------------------------------------------------------------
(in thousands, except share and per share data)
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
STATEMENT OF OPERATIONS DATA:
Revenues ........................ $ 3,598 $ 521 $ 130 $ 503 $ 2,444
Costs and expenses............... 22,113 12,416 9,350 7,636 4,780
----------- ----------- ----------- ----------- -----------
Loss from operations............. (18,515) (11,895) (9,220) (7,133) (2,336)
Interest income (expense)........ 2,373 185 (259) (134) 5
----------- ----------- ----------- ----------- -----------
Net loss......................... $ (16,142) $ (11,710) $ (9,479) $ (7,267) $ (2,331)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Net loss per share (1) .......... $ (1.37) $ (1.19) $ (1.04) $ (0.85) $ (0.29)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Shares used in computing net
loss per share (1) .............. 11,786,429 9,861,212 9,115,926 8,508,882 8,117,216
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
December 31,
-------------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
BALANCE SHEET DATA:
Cash and marketable securities... $ 52,098 $ 8,886 $ 1,483 $ 4,979 $ 2,783
Working capital.................. 51,519 6,403 (882) 2,705 2,548
Total assets..................... 59,886 11,259 3,545 7,254 4,473
Long-term obligations ........... 21 203 778 3,164 91
Accumulated deficit.............. (50,645) (34,503) (22,793) (13,314) (6,047)
Total shareholders' equity....... 56,717 8,167 150 1,548 3,374
(1) See Note 1 of Notes to Consolidated Financial Statements for information
concerning the computation of net loss per share.
27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes thereto.
GENERAL
Since its inception, the Company has been principally engaged in the
research and development of drugs and medical device products for use in
photodynamic therapy. The Company has been unprofitable since its founding
and has incurred a cumulative net loss of approximately $50.6 million as of
December 31, 1996. The Company expects to continue to incur substantial and
increasing operating losses for the next several years due to continued and
increased spending on research and development programs, the funding of
preclinical and clinical testing and regulatory activities and the costs of
manufacturing and administrative activities.
The Company's revenues primarily reflect income earned from licensing
agreements, contracts, grants, and device product sales. Device product sales
represent limited sales of photodynamic therapy devices (e.g. light
producing devices and light delivery and measurement devices), sold both
domestically and internationally, to researchers and an OEM distributor. To
date, the Company has received no revenue from the sale of drug products, and
the Company is not permitted to engage in commercial sales of drugs or
devices until such time, if ever, as the Company receives requisite
regulatory approvals. As a result, the Company does not expect to record
significant product sales until such approvals are received.
Until the Company commercializes its product(s), the Company expects
revenues to continue to be attributed to grants, contracts, licensing
agreements and device product sales for research use. The Company anticipates
that future revenues and results of operations may continue to fluctuate
significantly depending on, among other factors, the timing and outcome of
applications for regulatory approvals, the Company's ability to successfully
manufacture, market and distribute its drug products and device products
and/or the establishment of collaborative arrangements for the manufacturing,
marketing and distribution of some of its products. The Company anticipates
its operating activities will result in substantial net losses for several
more years.
The Company is conducting Phase II/III clinical trials for three
indications in the oncology area; has initiated a Phase I/II clinical trial
in ophthalmology, is preparing to initiate additional Phase I/II clinical
trials in the urology, oncology and dermatology areas; and is conducting
preclinical studies in oncology, ophthalmology, urology, dermatology,
gynecology and cardiology. See Item 1, "Business--Targeted Diseases and
Clinical Trials" and "--Risk Factors."
The Company has awarded, and may award in the future, stock options that
vest upon the achievement of certain milestones. Under Accounting Principals
Board Opinion No. 25, such options are accounted for as variable stock
options. As such, until the milestone is achieved (but only after it is
determined to be probable), deferred compensation is recorded in an amount
equal to the difference between the fair market value of the Common Stock on
the date of determination less the option exercise price and is adjusted from
period to period to reflect changes in the market value of the Common Stock.
Deferred compensation, as it relates to a particular milestone, is amortized
over the period between when achievement of the milestone becomes probable
and when the milestone is estimated to be achieved. Amortization of deferred
compensation could result in significant additional compensation expense
being recorded in future periods based on the market value of the Common
Stock from period to period.
28
Effective June 21, 1996, the Compensation Committee of the Board of
Directors adjusted the future vesting periods of the variable stock options
covering 400,000 shares of Common Stock. These variable stock options were
adjusted to change the vesting periods to specific dates as opposed to the
original vesting periods which were based upon the achievement of milestones;
no change was made to the exercise prices of these variable stock options.
This change in the vesting periods provides for the options to be accounted
for as non-variable options and therefore alleviates the impact of deferred
compensation fluctuating in future periods based on changes in the per share
market value from period to period. As of December 31, 1996, options
covering 227,500 shares with an exercise price of $34.75 per share, have
vested. The remaining unvested shares will vest in the years 1997 through
2000.
RESULTS OF OPERATIONS
The following table provides a summary of the Company's revenues for the
years ended 1996, 1995 and 1994:
- --------------------------------------------------------------------
Consolidated Revenues 1996 1995 1994
- --------------------------------------------------------------------
Product sales............ $ 5,000 $ 37,000 $ 28,000
Grants and contracts..... 577,000 445,000 95,000
Royalties................ 73,000 39,000 7,000
License.................. 2,943,000 -- --
- --------------------------------------------------------------------
- --------------------------------------------------------------------
Total revenue............ $ 3,598,000 $ 521,000 $ 130,000
- --------------------------------------------------------------------
- --------------------------------------------------------------------
REVENUES. The Company's revenues increased from $130,000 in 1994 to
$521,000 in 1995 and increased to $3,598,000 in 1996. The increase for the
year ended December 31, 1996 relates to the increase in license income which
was $2,943,000 in 1996 compared to no license income for 1995. The increase
in license income is due to the commencement in 1996 of the billing for the
reimbursement of clinical costs in conjunction with the license agreement
entered into in July 1995 with Pharmacia & Upjohn. The Company anticipates
recording license income for the reimbursement of clinical costs throughout
1997 and beyond. Although the level of such income may fluctuate in the
future depending on the amount of clinical costs incurred. See Item 1,
"Business--Strategic Collaborations." In 1994 and continuing through 1996,
the Company decreased its custom device order activities so as to direct its
resources toward device production in support of its clinical trials and drug
product development, which resulted in decreased device product sales. The
increase in revenues of $391,000 from 1994 to 1995, related directly to
$290,000 in increased grant income. Grant income increased to $550,000 for
1996. Revenues from grants may be an ongoing source of revenue in the future
depending on grant awards received by the Company.
COST OF GOODS SOLD. Cost of goods sold decreased from $81,000 in 1994
to $67,000 in 1995 and to $5,000 in 1996. This represents negative margins of
($53,000) and ($30,000) in 1994 and 1995, respectively, and break-even
margins in 1996. The decrease in cost of goods sold from 1994 through 1996 is
due to the reduction in unit volume based on the Company's decrease in custom
device order activity due to its decision to allocate its manufacturing
resources to supporting its preclinical and clinical programs. The Company
expects gross margins to be insignificant until the Company commences
commercial sales of its products.
RESEARCH AND DEVELOPMENT. Research and development expenses increased
from $7.0 million in 1994 to $8.8 million in 1995 and to $15.7 million in
1996. These ongoing increases in research and development expenses reflect
increased research staffing, facilities and preclinical and clinical testing
of the Company's drug and device development programs. The increase in
research and development expense from 1994 through 1996 was primarily due to
significant increases in (i) costs associated with the development of drug
formulation, (ii) costs associated with the purchase of raw materials and
supplies for the production of clinical devices and drug product for use in
clinical trials, (iii) payroll costs due to the growth of research and
development personnel and (iv) compensation expense associated with
non-variable and variable stock options which vest upon achievement of
milestones related to research and development. The Company anticipates
future research and development expenses to
29
increase as the Company expands its research and development programs which
include the increased hiring of personnel and continued expansion of
preclinical and clinical testing.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses increased from $2.3 million in 1994 to $3.5 million
in 1995 and to $6.4 million in 1996. The increase from 1994 through 1996
relates primarily to (i) the increase in costs associated with professional
services received from financial and investor consultants, attorneys, and
public and media relations, (ii) payroll costs due to the addition of
administrative and corporate personnel and (iii) costs associated with
non-variable and variable stock option compensation expense. The Company
expects future selling, general and administrative expenses to continue to
grow as a result of the increased support required for research and
development activities, continuing corporate development and professional
services, compensation expense associated with stock options and financial
consultants and general corporate matters as well as the other factors
described above.
INTEREST INCOME. Interest income increased from $74,000 in 1994 to
$338,000 in 1995 and to $2.4 million in 1996. The increase in interest income
during 1995 and 1996 resulted from the investment of proceeds received from
the Company's initial public offering in April 1995, Pharmacia & Upjohn's $12
million investment in the Common Stock in July 1995 and the Company's
secondary public offering in April 1996.
INTEREST EXPENSE. Interest expense decreased from $333,000 in 1994 to
$153,000 in 1995 and to $34,000 in 1996. The decrease in interest expense
from 1994 through 1996 resulted primarily from the conversion of the
Company's convertible notes to Common Stock (approximately 79% were converted
in December 1994, 18% were converted during 1995 and the remaining 3% were
converted during 1996) and the payoff of the Company's $1.0 million line of
credit in 1995.
As of December 31, 1996, the Company had approximately $49.5 million of
net operating loss carryforwards for federal income tax purposes, which
expire at various dates from the years 2002 through 2011. In addition, the
Company has approximately $2.3 million of research and development and
alternative minimum tax credit carryforwards available for federal and state
tax purposes. The Company also has a state net operating loss tax
carryforward of $12.9 million which expires at various dates from the years
1997 to 2001. Under Section 382 of the Internal Revenue Code, utilization of
the net operating loss carryforwards may be limited based on changes in the
percentage ownership of the Company. The Company's ability to utilize the net
operating loss carryforwards, without limitation, is uncertain.
The Company does not believe that inflation has had a material impact on
its results of operations.
LIQUIDITY AND CAPITAL RESOURCES
Since inception through December 31, 1996, the Company has accumulated a
deficit of approximately $50.6 million and expects to continue to incur
substantial and increasing operating losses for the next several years. The
Company has financed its operations primarily through private placements of
common and preferred stock, private placements of convertible notes and short
term notes, its initial public offering, Pharmacia & Upjohn's purchase of
Common Stock and a secondary public offering. As of December 31, 1996, the
Company had received proceeds from the sale of equity securities and
convertible notes of approximately $110.7 million. In addition, the Company
has financed a portion of its leasehold improvements and certain equipment
through capital lease obligations, a leasehold improvement loan and a bank
line of credit. The Company has available a $1.0 million bank line of credit
which has a variable rate of interest based on the bank's lending rate (7.8%
as of December 31, 1996), which expires on January 31, 1998, and is
collateralized by the Company's cash balances. The credit agreement subjects
the Company to certain customary restrictions, including a prohibition on the
payment of dividends. The Company presently has no outstanding borrowings
under the line of credit.
In April 1996, the Company completed a secondary public offering of
1,500,000 shares of Common Stock at $48 per share. The offering provided net
proceeds to the Company of approximately $65.3 million. These
30
proceeds are anticipated to be used to fund preclinical and clinical testing,
research and development and the balance for general corporate activities.
Pending such uses, the Company has invested the net proceeds in short-term,
interest-bearing obligations which primarily consist of marketable securities
with domestic corporate issuers collateralized by U.S. Government securities.
In July 1996, the Company's Board of Directors authorized the purchase
of up to 600,000 shares of the Company's Common Stock. During 1996, the
Company repurchased 138,500 shares at a cost of $3.9 million under this
repurchase program. As of December 31, 1996, all shares repurchased were
retired.
In connection with the licensing agreement with Pharmacia & Upjohn
entered into in July 1995, the Company has recorded as license income for the
reimbursement of clinical costs of $2.9 million in 1996. No license income
associated with the reimbursement of clinical costs was recorded in 1995.
The Company anticipates recording license income for the reimbursement of
clinical costs throughout 1997 and beyond.
For 1994, 1995 and 1996, the Company required cash for operations of
$7.8 million, $7.8 million and $15.1 million, respectively. The increase in
cash used in operations from 1994 through 1996 was primarily due to an
increase in operating activities associated with the continued expansion of
preclinical and clinical testing, the increase in research and development
programs, personnel and the increase in general corporate activities. For
1994, 1995 and 1996, the Company received net cash from its financing
activities of $4.7 million, $15.8 million and $62.2 million, respectively.
The 1995 and 1996 increases resulted from proceeds from the sale of Common
Stock in the Company's initial public offering in April 1995, Pharmacia &
Upjohn's investment in the Common Stock of the Company in July 1995 and the
Company's secondary public offering in April 1996. During 1994, the Company
received funding from a private placement of securities and a convertible
debenture offering.
The Company invested a total of $2.2 million in property and equipment
from 1994 through 1996. During 1996, the Company entered into two new lease
agreements for additional facilities. The addition of these new facilities
increased the Company's equipment costs due to the expansion of its
laboratories and office space and the purchase of equipment for this new
space. The Company expects to continue to purchase significant property and
equipment during 1997 as the Company expands its preclinical, clinical and
research and development activities and continues its laboratory and office
construction in its new facilities. Since inception, the Company has entered
into capital lease agreements for approximately $184,000 of equipment,
consisting primarily of laboratory equipment. The Company expects to continue
to lease equipment from time to time as needed, when and if financing
resources become available at acceptable terms to the Company.
The Company's capital requirements will depend on numerous factors,
including the progress and magnitude of the Company's research and
development programs, preclinical testing and clinical trials, the time
involved in obtaining regulatory approvals, the cost involved in filing and
maintaining patent claims, technological advances, competitor and market
conditions, the ability of the Company to establish and maintain
collaborative arrangements, the cost of manufacturing scale-up and the cost
and effectiveness of commercialization activities and arrangements.
The Company may require substantial funding to continue its research and
development activities, preclinical and clinical testing and manufacturing,
marketing, sales, distribution and administrative activities. The Company
has raised funds in the past through the public or private sale of
securities, and may contemplate raising funds in the future through public or
private financings, collaborative arrangements or from other sources. The
success of such efforts will depend in large part upon continuing
developments in the Company's preclinical and clinical testing. The Company
continues to explore and, as appropriate, enter into discussions with other
companies regarding the potential for equity investment, collaborative
arrangements, license agreements or development or other funding programs
with the Company in exchange for manufacturing, marketing, distribution or
other rights to products developed by the Company. However, there can be no
assurance that discussions with other companies will result in any
investments, collaborative arrangements, agreements or funding or that the
necessary additional financing through debt or equity financing will be
available to the Company on acceptable terms, if at all. Further, there can
be no assurance that any arrangements resulting from these discussions will
31
successfully reduce the Company's funding requirements. If additional funding
is not available to the Company when needed, the Company will be required to
scale back its research and development programs, preclinical and clinical
testing and administrative activities and the Company's business and
financial results and condition would be materially adversely affected. See
Item 1, "Business--Risk Factors--Additional Financial Requirements and
Uncertainty of Capital Funding."
Except for the historical information herein, the matters discussed in
this report are deemed forward-looking statements under federal securities
laws that involve risks and uncertainties. Actual results may differ
materially from those in the forward-looking statements depending on a number
of factors including, among other things, the risks, uncertainties and other
factors detailed in Item 1, "Business--Risk Factors."
ITEM 8. FINANCIAL STATEMENT AND SUPPLEMENTARY DATA
The Report of Independent Accountants and the Consolidated Financial
Statements and Notes to the Consolidated Financial Statements of the Company
that are filed as part of this Report are listed under Item 14, "Exhibits,
Financial Statement Schedules, and Reports on Form 8-K" and are set forth on
pages 43 through 57 immediately following the signature page of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND DISCLOSURE
None.
32
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to the
directors and executive officers of the Company.
NAME AGE POSITION
- --------------------------- ---- ---------------------------------------------------------------------
Gary S. Kledzik, Ph.D...... 47 Chairman of the Board and Chief Executive Officer
Daniel R. Doiron, Ph.D..... 46 Director, Vice President of Technology and President of
PDT Systems, Inc.
David E. Mai .............. 52 Director, President of PDT, Inc., President of PDT
Pharmaceuticals, Inc. and President of PDT Cardiovascular, Inc.
John M. Philpott........... 36 Chief Financial Officer, Controller, Treasurer and Assistant Secretary
Charles T. Foscue.......... 48 Director
Michael D. Farney.......... 53 Director
Donald K. McGhan........... 63 Director
Raul E. Perez, M.D. ....... 47 Director
GARY S. KLEDZIK, PH.D. is a founder of the Company and has served as a
director since its inception in June 1989. He served as President of the
Company from June of 1989 to May of 1996. He has been Chairman of the Board
of Directors since July 1991 and Chief Executive Officer since September
1992. Dr. Kledzik held the office of President of PDT Pharmaceuticals, Inc.
since its formation until July 1996. Prior to joining the Company, Dr.
Kledzik was Vice President of the Glenn Foundation for Medical Research. His
previous experience includes serving as General and Research Manager for an
Ortho Diagnostic Systems, Inc. division of Johnson & Johnson, Vice President
of Immulok, Inc. a cancer and infectious disease biotechnology company which
he co-founded and which was acquired by Johnson & Johnson in 1983, Laboratory
Director for Endocrine Sciences in Los Angeles and Adjunct Research Scientist
at the University of California at Los Angeles. Dr. Kledzik holds a B.S. in
Biology and a Ph.D. in Physiology from Michigan State University.
DANIEL R. DOIRON, PH.D. is a founder of the Company and has served as
Vice President of Technology or Chief Scientist and a director of the
Company, and as President of the PDT Systems, Inc. subsidiary, since the
Company's inception in June 1989. Dr. Doiron was the principal officer of
Laserguide, Inc., the custom laser, fiber optic and accessory firm which he
founded in January 1984 and which was acquired by the Company in August 1989.
Dr. Doiron's prior experience includes positions as Research Associate at
the Institute of Physics and Imaging Science at the University of Southern
California, Director of Photophysics Laboratory at Children's Hospital of Los
Angeles and Assistant Professor of Research at the USC School of Medicine.
He holds B.S. and M.S. degrees in Nuclear Engineering and a Ph.D. degree in
Chemical Engineering from the University of California at Santa Barbara.
DAVID E. MAI has served as President of the Company since May 1996,
President of PDT Cardiovascular, Inc. since September 1992 and President of
PDT Pharmaceuticals, Inc. since July 1996. Mr. Mai served as Vice President
of Corporate Development for the Company from March 1994 until May 1996. Mr.
Mai became associated with PDT, Inc. in July 1990 as a consultant assisting
with technology and business development. He joined the Company in 1991,
serving as New Product Program Manager from February 1991 to July 1992 and as
Clinical Research Manager from July 1992 to September 1992. Prior to joining
the Company, Mr. Mai was Director of the Intravascular Ultrasound Division of
Diasonics Corporation from 1988 to 1989. Previously, Mr. Mai served as
Director of Strategic Marketing for Boston Scientific Corporation's Advanced
Technologies Division, Vice President of Stanco Medical and Sales Engineer
with Hewlett-Packard
33
Medical Electronics. Mr. Mai's early career in the hospital/clinical field
included positions as Manager of Cardiology Department and Clinical and
Research Associate in Cardiology at Fresno Community Hospital. Mr. Mai
received his cardiopulmonary training in the U.S. Navy and holds a B.S.
degree in Biology from the University of Hawaii.
JOHN M. PHILPOTT has served as Chief Financial Officer since December
1995. Since March 1995, Mr. Philpott has served as Controller for the
Company. Prior to joining the Company, Mr. Philpott was a Senior Manager
with Ernst & Young LLP, which he joined in 1986. Mr. Philpott was an
Assistant Controller with Corporate Events, Inc. from June 1985 until August
1986. Mr. Philpott is a Certified Public Accountant in the State of
California. He holds a B.A. degree in Accounting and in Management
Information Systems from California State University of Northridge.
MICHAEL D. FARNEY is a founder of the Company and has served as a
director since its inception in June 1989. He served as Chief Financial
Officer of the Company from inception until December 1995. Mr. Farney also
serves as a director, Chief Executive Officer, Chief Financial Officer,
Secretary and Treasurer of INAMED Corporation, Las Vegas, Nevada ("INAMED"),
which develops, manufactures and markets medical devices. He also serves as
Chief Financial Officer, Secretary and Treasurer of INAMED's wholly-owned
subsidiaries, including, BioEnterics Corporation, BioDermis Corporation,
Flowmatrix Corporation, McGhan Medical Corporation and Medisyn Technologies
Corporation. He has held his present position with INAMED since April 1987.
CHARLES T. FOSCUE has served as a director of the Company since July
1996. Mr. Foscue is a founder, Chairman, President and Chief Executive
Officer of HAI Financial, Inc. ("HAI") and has held those positions since the
inception of HAI in 1979 (previously known as Harmet Associates, Inc.). HAI
serves as a corporate financial consultant in the areas of mergers and
acquisitions, public and private financings, strategic planning and financial
analysis. HAI and Mr. Foscue have been advisors to the Company since 1991
and have been involved in the Company's private and public financings from
1991 to the present. Prior to founding HAI, Mr. Foscue was Vice President of
Marketing for Tri-Chem, Inc. Mr. Foscue holds a B.A. degree in Economics
from the University of North Carolina and an M.B.A. degree from Harvard
University, Graduate School of Business.
DONALD K. MCGHAN is a founder of the Company and has served as a
director since its inception in June 1989. He served as Chairman of the
Board prior to Dr. Kledzik's appointment in 1991. Mr. McGhan concurrently
serves as Chairman of the Board and President of INAMED. Previously, Mr.
McGhan was Founder, Chairman of the Board and Chief Executive Officer of
McGhan NuSil Corporation, acquired by Union Carbide Corporation in 1990. Mr.
McGhan has also served as Director of Operations for an Ortho Diagnostic
Systems, Inc. subsidiary of Johnson & Johnson and as a Founder, President
and Chairman of the Board of Immulok, Inc., which was acquired by Johnson &
Johnson in 1983.
RAUL E. PEREZ, M.D. has served as a director of the Company since
September 1992. Dr. Perez is a board certified obstetrician/gynecologist.
He has been in practice for thirteen years and currently practices at St.
John's Mercy Medical Center in St. Louis, Missouri, where he is also a member
of the Quality Assurance Committee. Dr. Perez is also a fellow of the
Academy of Obstetricians and Gynecologists. Dr. Perez completed his medical
education at the University of Baltimore and completed his internship and
residency in obstetrics and gynecology at St. John's Mercy Medical Center.
All directors hold office until the next annual meeting of shareholders
or until their successors have been elected and qualified. The officers of
the Company are appointed by, and serve at the discretion of, the Board of
Directors, subject to existing employment agreements with such officers.
34
BOARD COMMITTEES
The Board has standing Audit and Compensation Committees. The Board does
not have a standing nominating committee or a committee performing similar
functions. Both the Audit Committee and the Compensation Committee function
independently of the Company's management. The current members of each of
the Board's committees are listed below.
THE AUDIT COMMITTEE. The Audit Committee, composed solely of outside
directors, meets periodically with the Company's independent accountants and
management to discuss, recommend and review accounting principles, financial
and accounting controls, the scope of the annual audit and other matters;
advises the Board on matters related to accounting and auditing; and reviews
management's selection of independent accountants. The current members of the
Audit Committee are Charles T. Foscue, Michael D. Farney, Donald K. McGhan
and Raul E. Perez, M.D.
THE COMPENSATION COMMITTEE. The Compensation Committee, composed solely
of non-employee directors, reviews and takes action regarding terms of
compensation, employment contracts and pension matters that concern officers
and key employees of the Company. The current members of the Compensation
Committee are Charles T. Foscue, Michael D. Farney, Donald K. McGhan and
Raul E. Perez, M.D.
COMPLIANCE WITH SECTION 16 OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 ("Exchange Act")
requires the Company's directors, executive officers, and persons who own
more than ten percent of a registered class of the Company's equity
securities, to file reports of ownership and changes in ownership on Forms 3,
4 and 5 with the SEC and any national securities exchange on which the
Company's securities are listed. Directors, executive officers, and greater
than ten percent shareholders are required by SEC regulation to furnish the
Company with copies of all Forms 3, 4 and 5 they file.
Based solely on the Company's review of the copies of such forms it has
received, or written representations from certain reporting persons that no
Forms 5 were required for these persons, the Company believes that all its
directors, executive officers, and greater than ten percent shareholders
complied with all filing requirements applicable to them with respect to
transactions during 1996, except Gerald W. Yankie failed to file a timely
Form 4 with respect to the transfer of 2,500 shares to a family trust, which
also failed to file a timely Form 3 with respect to the same transfer.
35
ITEM 11. EXECUTIVE COMPENSATION
The following table summarizes all compensation paid to the Company's
Chief Executive Officer and to the Company's other most highly compensated
executive officers other than the Chief Executive Officer, whose total annual
salary exceeded $100,000 for services rendered in all capacities to the
Company during the fiscal years ended December 31, 1996, 1995 and 1994
(collectively, the "named executive officers").
- ---------------------------------------------------------------------------------------------------------
SUMMARY COMPENSATION TABLE
- ---------------------------------------------------------------------------------------------------------
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------- -------------
SECURITIES
UNDERLYING
OPTIONS
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS (# OF SHARES)
- -------------------------------------------------------- ---- --------- ------- -------------
Gary S. Kledzik........................................ 1996 $ 180,000 $ -- 5,000(1)
Chairman of the Board and Chief Executive Officer 1995 135,000 55,000(2) 200,000
1994 125,000 -- 7,500
Daniel R. Doiron....................................... 1996 144,000 5,000(1)
Director and Vice President of Technology 1995 122,000 -- 100,000
1994 110,500 -- 7,500
David E.Mai............................................ 1996 154,797 -- 5,000(1)
Director and President of PDT, Inc. 1995 118,000 -- 100,000
1994 104,000 -- 7,500
(1) Represents options for 2,500 shares which were originally granted on
February 1, 1996 at an exercise price of $56.00, the closing price of
the Company's Common Stock on the Nasdaq National Market on the date of
grant, and, subsequently, were re-priced on December 31, 1996 to
$28.00, the closing price of the Common Stock on the Nasdaq National
Market on such date. The net result of this transaction was that a
total of 2,500 options granted to each named executive officer in 1996
was held by each such officer at December 31, 1996. The options vest
equally over a period of four years and expire upon the earlier of
(i) six months after termination of employment (or upon termination
if terminated for cause), or (ii) ten years from the date of grant.
(2) Dr. Kledzik was awarded a bonus of $55,000, with after tax net proceeds
of $33,000. The bonus was awarded with the explicit intent for the net
proceeds to be used to pay off Dr. Kledzik's outstanding note payable to
the Company of $33,000 which includes outstanding interest.
The following table sets forth certain information as of December 31,
1996 and the year then ended concerning stock options granted to the named
executive officers.
- -------------------------------------------------------------------------------------------------------------------
OPTION GRANTS IN LAST FISCAL YEAR
- -------------------------------------------------------------------------------------------------------------------
POTENTIAL REALIZABLE
NUMBER OF % OF TOTAL VALUE AT ASSUMED
SECURITIES OPTIONS ANNUAL RATES OF
UNDERLYING GRANTED TO STOCK PRICE APPRECIATION
OPTIONS EMPLOYEES EXERCISE FOR OPTION TERM
GRANTED DURING PRICE EXPIRATION --------------------------
NAME (# OF SHARES) THE YEAR ($/SHARE)(*) DATE 5% 10%
- ------------------------ ------------- -------- ------------ ---------- ---------- ----------
Gary S. Kledzik......... 5,000 (*) 1.54% $ 28.00 2/01/06 $ 246,091 $ 516,248
Daniel R. Doiron....... 5,000 (*) 1.54% 28.00 2/01/06 246,091 516,248
David E. Mai............. 5,000 (*) 1.54% 28.00 2/01/06 246,091 516,248
* See Note 1 to Summary Compensation Table above.
36
The following table sets forth information as to the stock options held
by the named executive officers at the end of 1996 and the value of the
options at that date based on the difference between the market price of the
stock and the exercise prices of the options. There were no exercises of
stock options during 1996.
- -------------------------------------------------------------------------------------------------------------
1996 YEAR-END OPTION VALUES
- -------------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1996 DECEMBER 31, 1996 (1)
---------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------------------- ------------ --------------- ------------ -------------
Gary S. Kledzik.......................... 559,688 59,062 $10,780,886 $ 136,864
Daniel R. Doiron........................ 164,688 84,062 3,590,636 136,864
David E. Mai............................. 194,688 84,062 4,413,011 136,864
(1) Based on the difference between the closing price of the Common Stock
as reported on the Nasdaq National Market as of December 31, 1996 and
the exercise price of such options.
EMPLOYMENT AGREEMENTS
The Company and Dr. Kledzik are parties to an employment agreement
effective December 31, 1989, as amended (the "Employment Agreement"),
pursuant to which Dr. Kledzik serves as Chief Executive Officer for the
Company and its subsidiaries. The Employment Agreement provides for an
initial employment term of one (1) year, renewed for successive one-year
terms, unless Dr. Kledzik notifies the Company in writing at least 30 days in
advance of or the Company notifies Dr. Kledzik in writing 30 days before or
after the anniversary of the effective date. Under the terms of the
Employment Agreement, Dr. Kledzik is entitled to an annual salary as
determined by the Compensation Committee of the Board of Directors from time
to time. The current annual salary is $200,000. As of December 31, 1996, in
connection with the Employment Agreement, Dr. Kledzik has received options to
purchase a total of 674,466 shares of Common Stock at exercise prices ranging
from $0.03 to $2.00 per share with a weighted average price of $0.89 per
share. Additionally, from one of the Company's employee stock option plans,
Dr. Kledzik has received options to purchase 231,250 shares at exercise
prices ranging from $6.00 to $56.00 per share with a weighted average
exercise price of $31.71 per share. See Note 1 to Summary Compensation
Table. Options for 844,154 shares have vested, of which 284,466 have been
exercised. Options outstanding at December 31, 1996 vest ratably over four
years from the date of grant except for options covering 50,000 shares
originally granted as milestone options for which the vesting was fixed to be
vested as of December 31, 1997. Vesting of all of the stock options under the
Employment Agreement is contingent upon Dr. Kledzik's continued employment
with PDT, and all of the underlying Common Stock is covered by a repurchase
option in favor of the Company which expires four years after the grants of
the respective stock options. The Employment Agreement provides that Dr.
Kledzik shall perform his duties at 'the Company's designated facility in
Santa Barbara, California. If the Employment Agreement is terminated other
than at Dr. Kledzik's option or by the Company for cause, then the Company
shall pay Dr. Kledzik severance compensation in an amount equal to the
product of his monthly base salary multiplied by the greater of: (i) the
number of months remaining under the term of the Employment Agreement; or
(ii) six. If the Company terminates Dr. Kledzik's employment for cause or
Dr. Kledzik terminates his employment, he is not entitled to severance pay.
"Cause" is defined in the Employment Agreement to be personal dishonesty,
incompetence, willful misconduct, breach of fiduciary duty involving personal
profit, intentional failure to perform stated duties, willful violation of
any law, rule or regulation (other than minor traffic violations) or material
breach of any provision of the Employment Agreement or any other agreement
between Dr. Kledzik and the Company. In addition, in connection with the
execution of the Employment Agreement, Dr. Kledzik executed and delivered the
Company's standard form Intellectual Property and Confidentiality Agreement
providing for the assignment to the Company of inventions and intellectual
property
37
created or enhanced during Dr. Kledzik's employment to and providing
for the protection of confidential information.
PDT Systems, Inc. and Dr. Doiron are parties to an employment agreement
effective August 1, 1992, as amended (the "Employment Agreement") pursuant to
which Dr. Doiron serves as President of PDT Systems, Inc. and Chief Scientist
of PDT, Inc. The Employment Agreement provides for an initial employment
term of one (1) year, renewed for successive one-year terms, unless Dr.
Doiron notifies PDT Systems, Inc. in writing at least 30 days in advance or
PDT Systems, Inc. notifies Dr. Doiron in writing 30 days before or after the
anniversary of the effective date. Under the terms of the Employment
Agreement, Dr. Doiron is entitled to an annual salary as determined by the
Company from time to time. The current annual salary is $158,000. As of
December 31, 1996, in connection with the Employment Agreement, Dr. Doiron
has received options to purchase a total of 329,466 shares of Common Stock at
exercise prices ranging from $0.03 to $2.00 per share with a weighted average
price of $0.61 per share. Additionally, from one of the Company's employee
stock option plans, Mr. Doiron has received options to purchase 131,250
shares at exercise prices ranging from $6.00 to $56.00 per share with a
weighted average exercise price of $29.39 per share. See Note 1 to Summary
Compensation Table. Options for 374,154 shares have vested, of which 209,466
have been exercised. The options generally vest ratably over four years from
the date of grant. The remaining terms and conditions of Dr. Doiron's
Employment Agreement are substantially identical to that between PDT, Inc.
and Dr. Kledzik.
The Company and Mr. Mai are parties to an employment agreement effective
February 1, 1991, as amended (the "Employment Agreement") pursuant to which
Mr. Mai serves as President of PDT, Inc., PDT Cardiovascular, Inc. and PDT,
Pharmaceuticals, Inc. The Employment Agreement provides for an initial
employment term of one (1) year, renewed for successive one-year terms,
unless Mr. Mai notifies the Company in writing at least 30 days in advance,
or the Company notifies Mr. Mai in writing 30 days before or after, January
1st of each year. Under the terms of the Employment Agreement, Mr. Mai is
entitled to an annual salary as determined by the Company from time to time.
The current annual salary is $178,200. As of December 31, 1996, in connection
with the Employment Agreement, Mr. Mai has received options to purchase a
total of 150,000 shares of Common Stock at exercise prices ranging from $0.67
to $2.00 per share with a weighted average price of $1.42 per share.
Additionally, from one of the Company's employee stock option plans, Mr. Mai
has received options to purchase 131,250 shares at exercise prices ranging
from $6.00 to $56.00 per share with a weighted average exercise price of
$29.39 per share. See Note 1 to Summary Compensation Table. Options for
194,688 shares have vested, of which none have been exercised. The options
generally vest ratably over four years from the date of grant. The remaining
terms and conditions of Mr. Mai's Employment Agreement are substantially
identical to those in Dr. Kledzik's agreement except that if the Employment
Agreement is terminated other than at Mr. Mai's option or by the Company for
cause, then the Company shall pay Mr. Mai severance compensation in an amount
equal to one week's salary for each six month employment period, beginning
six months after the effective date of the Employment Agreement.
COMPENSATION OF DIRECTORS
Employees of the Company do not receive any additional compensation for
serving the Company as members of the Board of Directors or any of its
Committees. Directors who are not employees of the Company do not receive
fees for Board Meetings attended but do receive an annual stock option grant
under the PDT, Inc. 1996 Stock Compensation Plan, as amended and restated
effective March 3, 1997 subject to stockholder approval at the 1997 Annual
Meeting of Stockholders (the "Plan"). The Plan provides for an automatic
grant of non-qualified stock options to purchase 7,500 shares of Common Stock
to non-employee directors on the first day of the fourth quarter of each year
that a non-employee director serves on the Board of Directors. Each stock
option vests upon the grant date. The options are granted at an option price
equal to the fair market value of the Company's Common Stock on the grant
date. Each stock option is subject to a repurchase option in favor of the
Company for some or all of the underlying shares, and such repurchase option
lapses at a rate of 20% per year over five years subsequent to the grant
date. The options terminate 90 days from the date on which a director is no
longer a member of the Board of Directors for any reason other than death,
ten years from the date of grant, or six months from the director's death.
Non-employee directors are also eligible for discretionary awards of
38
stock options under the Plan. During the year ended December 31, 1996, the
following non-employee directors were awarded stock options under the
Non-Employee Directors' Stock Option Plan which will be terminated and
superseded by the Plan subject to stockholder approval of the Plan at the
1997 Annual Meeting. Charles T. Foscue, Michael D. Farney, Donald K. McGhan
and Raul E. Perez were each awarded a stock option to purchase 7,500 shares.
In addition, the Company also reimburses directors for out-of-pocket expenses
incurred in connection with attending Board and Committee Meetings.
COMPENSATION COMMITTEE INTERLOCKS
The members of the Company's Compensation and Audit Committees for
fiscal 1996 were Michael D. Farney, Donald K. McGhan, Raul E. Perez, M.D. and
Charles T. Foscue. Mr. Farney was the Chief Financial Officer for the
Company prior to the appointment of John M. Philpott in 1995, and Mr. McGhan
was Chairman of the Board prior to Dr. Kledzik's appointment in 1991. Mr.
Foscue is a founder, Chairman, President and Chief Executive Officer of HAI.
HAI and Mr. Foscue have been advisors to the Company since 1991 and have been
involved in the Company's private and public financings from 1991 to the
present. Additionally, HAI and Mr. Foscue acted as advisors to Ramus in
connection with the sale of Ramus' stock to the Company's subsidiary, PDTC.
See Item 1, "Business" and Item 13, "Certain Relationships and Related
Transaction."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of the Common Stock as of March 14, 1997 by (i) each
person known by the Company to own beneficially five percent or more of the
outstanding shares of its Common Stock, (ii) each of the named executive
officers, (iii) each director of the Company and (iv) all directors and
executive officers of the Company as a group.
NUMBER OF SHARES PERCENTAGE
BENEFICIALLY OF OUTSTANDING
NAME OWNED (1)(2) STOCK
- -------------------------------------- ------------ --------------
Daniel R. Doiron, Ph.D. (3)(4) 1,641,336 13.1%
Gary S. Kledzik, Ph.D. (3) 1,388,813 10.7
Donald K. McGhan (3)(5) 1,316,420 10.6
Paul F. Glenn (6) 827,160 6.7
Pharmacia & Upjohn, Inc. (7) 787,502 6.3
Michael D. Farney 472,500 3.8
David E. Mai 195,313 1.6
Raul E. Perez, M.D. 37,500 *
Charles T. Foscue 36,390 *
All directors and executive officers
as a group (8 persons) 5,103,897 38.0
- -------------
* Less than one percent.
(1) Each person has sole voting and investment power over the Common Stock
shown as beneficially owned, subject to community property laws where
applicable and the information contained in the footnotes below.
39
(2) Includes the following shares of Common Stock issuable upon exercise
of options and/or warrants exercisable within 60 days of March 14, 1997:
Dr. Doiron--165,313 shares; Dr. Kledzik--560,313 shares;
Mr. McGhan--27,000 shares; Mr. Glenn--0 shares; Mr. Farney--37,500 shares;
Mr. Mai--195,313 shares; Dr. Perez--37,500 shares; Mr. Foscue 7,500
shares; and directors and officers as a group--1,046,064 shares.
(3) Dr. Doiron's and Dr. Kledzik's address is 7408 Hollister Avenue, Santa
Barbara, California 93117; Mr. McGhan's address is 3800 Howard Hughes
Parkway, Las Vegas, Nevada 89109.
(4) Includes 50,000 shares held in a Charitable Remainder Trust of which
Dr. Doiron is a trustee. Does not include 18,738 shares of Common Stock
held in trusts for Dr. Doiron's minor children as to which he disclaims
beneficial ownership.
(5) Includes 539,420 shares of Common Stock held by McGhan Management, a
Nevada Limited Par tnership, of which Mr. McGhan is the General Partner
and all other Limited Partners are members of his immediate family. Does
not include 10,500 shares held by a member of Mr. McGhan's immediate
family as to which he disclaims beneficial ownership.
(6) According to the Schedule 13G filings, Mr. Glenn's address is
P.O. Box 50310, Santa Barbara, California 93105.
(7) Includes warrants to purchase 62,501 shares of Common Stock. Pharmacia
& Upjohn is a Delaware corporation formed by the merger in November 1995
of Pharmacia AB of Sweden and The Upjohn Company of the United States,
according to a press release issued by Pharmacia & Upjohn on November 2,
1995. Each of Pharmacia AB and Pharmacia S.p.A., an Italian corporation
and wholly-owned subsidiary of Pharmacia AB, has filed a Schedule 13D
with the Securities and Exchange Commission dated July 7, 1995. According
to the Schedule 13D filings, the principal business address of
Pharmacia AB is S-171 97 Stockholm Sweden, and the principal business
address of Pharmacia S.p.A. is via Robert Hoch 1.2, 75017 Milan, Italy.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In July 1995, the Company entered into the License Agreement, the Drug
Supply Agreement and the Device Supply Agreement with Pharmacia & Upjohn, the
beneficial owners of more than 5% of the Company's Common Stock. Concurrent
with entering into the License Agreement, Pharmacia & Upjohn entered into the
Stock Purchase Agreement pursuant to which Pharmacia & Upjohn purchased
600,000 shares of Common Stock from the Company for $12 million. In August
1994, the Company entered into a Formulation Agreement with Pharmacia &
Upjohn. For the year ended December 31, 1996, the Company paid $2.6 million
and recorded as expense $2.5 million in connection with the Formulation
Agreement. The Formulation Agreement requires the Company to pay an
additional $400,000 if certain milestones are achieved as well as paying for
the costs related to the development program being performed. See Item 1,
"Business--Strategic Collaborations" and Note 7 of Notes to Consolidated
Financial Statements.
Mr. Foscue, a director of the Company, is a founder, Chairman, President
and Chief Executive Officer of HAI which provides corporate financial
consulting services in the areas of mergers and acquisitions, public and
private financings, strategic planning and financial analysis. Both HAI and
Mr. Foscue have been advisors to the Company since 1991 and have been
involved in the Company's private and public financings from 1991 to the
present. For the year ended December 31, 1996, the Company paid HAI
$1,115,000 associated with the Company's secondary offering and paid HAI
$105,000 and recorded as expense $224,000 in connection with ongoing
consulting services. See Note 9 of Notes to Consolidated Financial
Statements. Additionally, Mr. Foscue and HAI acted as an advisor to Ramus
and HAI is entitled to be paid fees by Ramus' selling shareholders upon the
exercise of PDTC's option to
40
purchase the remaining shares of Ramus. Ramus paid HAI $140,000 in 1996 as a
fee associated with PDTC's purchase of $2 million of Ramus stock. See Item
1, "Business--Strategic Collaborations" and Note 7 of Notes to Consolidated
Financial Statements.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a)(1) INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SELECTED PAGE(S)
QUARTERLY FINANCIAL DATA:
Report of Independent Auditors 43
Consolidated Balance Sheets as of
December 31, 1996, and 1995 44
Consolidated Statements of Operations for the
years ended December 31, 1996, 1995 and 1994 45
Consolidated Statements of Shareholders'
Equity for the years ended December 31,
1996, 1995, and 1994 46
Consolidated Statements of Cash Flows for the
years ended December 31, 1996, 1995 and 1994 47
Notes to Consolidated Financial Statements 48
(a)(2) INDEX TO CONSOLIDATED FINANCIAL STATEMENT SCHEDULES:
All schedules are omitted because the required information is not
present or is not present in amounts sufficient to require submission of the
schedule or because the information required is given in the consolidated
financial statements or notes thereto.
(a)(3) INDEX TO EXHIBITS:
See Index to Exhibits on pages 58 to 59.
(b) REPORTS ON FORM 8-K:
None
41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
PDT, Inc.
/s/ Gary S. Kledzik, Ph.D.
------------------------------------------
Gary S. Kledzik, Ph.D., Chief Executive
Officer and Chairman of the Board
Dated: March 31, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Gary S. Kledzik, Ph.D. Chairman of the Board, Director, March 31, 1997
- -------------------------- and Chief Executive Officer,
Gary S. Kledzik, Ph.D. (Principal Executive Officer)
/s/ David E. Mai Director and President March 31, 1997
- --------------------------
David E. Mai
/s/ John M. Philpott Chief Financial Officer and March 31, 1997
- -------------------------- Controller (Principal Financial
John M. Philpott Officer and Principal Accounting
Officer)
/s/ Daniel R. Doiron, Ph.D. Director and Vice President March 31, 1997
- -------------------------- of Technology
Daniel R. Doiron, Ph.D.
/s/ Michael D. Farney Director March 31, 1997
- --------------------------
Michael D. Farney
/s/ Donald K. McGhan Director March 31, 1997
- --------------------------
Donald K. McGhan
/s/ Raul E. Perez, M.D. Director March 31, 1997
- --------------------------
Raul E. Perez, M.D.
/s/ Charles T. Foscue Director March 31, 1997
- --------------------------
Charles T. Foscue
42
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
PDT, Inc.
We have audited the accompanying consolidated balance sheets of PDT, Inc. as
of December 31, 1996 and 1995, and the related consolidated statements of
operations, shareholders' equity, and cash flows for each of the three years
in the period ended December 31, 1996. 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 misstatements. 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 consolidated financial position of PDT, Inc. at
December 31, 1996 and 1995 and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
1996, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Woodland Hills, California
February 5, 1997
43
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
1996 1995
-------------- ------------
ASSETS
Current assets:
Cash and cash equivalents............................................................ $ 31,498,000 $ 8,886,000
Investments in short term marketable securities...................................... 20,600,000 --
Accounts receivable.................................................................. 2,179,000 11,000
Inventory-finished goods............................................................. -- 10,000
Prepaid expenses and other current assets............................................ 390,000 385,000
-------------- ------------
Total current assets.................................................................. 54,667,000 9,292,000
Property, plant & equipment:
Vehicles......................... ................................................... 28,000 --
Furniture and fixtures............................................................... 943,000 336,000
Equipment............................................................................ 2,444,000 1,630,000
Leasehold improvements............................................................... 1,072,000 666,000
Capital lease equipment.............................................................. 184,000 184,000
-------------- ------------
4,671,000 2,816,000
Accumulated depreciation and amortization............................................ 1,806,000 1,210,000
-------------- ------------
2,865,000 1,606,000
Investment in affiliate............................................................... 2,000,000 --
Patents and other assets.............................................................. 354,000 361,000
-------------- ------------
Total assets.......................................................................... $ 59,886,000 $ 11,259,000
-------------- ------------
-------------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................................................... $ 2,716,000 $ 2,468,000
Accrued payroll and expenses......................................................... 352,000 331,000
Current portion of long term obligations............................................. 42,000 51,000
Current portion of capital lease obligations......................................... 38,000 39,000
-------------- ------------
Total current liabilities............................................................. 3,148,000 2,889,000
Long term obligations, less current portion........................................... -- 47,000
Capital lease obligations, less current portion....................................... 21,000 63,000
Convertible notes payable............................................................. -- 93,000
Shareholders' equity:
Common stock, 50,000,000 shares authorized; 12,337,876 and
10,401,358 shares issued and outstanding at December 31, 1996 and
December 31, 1995, respectively..................................................... 108,974,000 50,188,000
Deferred compensation................................................................ (1,612,000) (7,518,000)
Accumulated deficit.................................................................. (50,645,000) (34,503,000)
-------------- ------------
Total shareholders' equity............................................................ 56,717,000 8,167,000
-------------- ------------
Total liabilities and shareholders' equity........................................... $ 59,886,000 $ 11,259,000
-------------- ------------
-------------- ------------
SEE ACCOMPANYING NOTES.
44
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
1996 1995 1994
------------ ------------ -----------
Revenues:
Product sales......................... $ 5,000 $ 37,000 $ 28,000
Grants, licensing and royalty revenue. 3,593,000 484,000 102,000
------------ ------------ -----------
3,598,000 521,000 130,000
Cost and expenses:
Cost of goods sold.................... 5,000 67,000 81,000
Research and development.............. 15,715,000 8,802,000 6,963,000
Selling, general and administrative... 6,393,000 3,547,000 2,306,000
------------ ------------ -----------
Total costs and expenses............... 22,113,000 12,416,000 9,350,000
Loss from operations................... (18,515,000) (11,895,000) (9,220,000)
Interest income (expense):
Interest income....................... 2,407,000 338,000 74,000
Interest expense...................... (34,000) (153,000) (333,000)
------------ ------------ -----------
Total interest income (expense)........ 2,373,000 185,000 (259,000)
------------ ------------ -----------
Net loss............................... $(16,142,000) $(11,710,000) $(9,479,000)
------------ ------------ -----------
------------ ------------ -----------
Net loss per share..................... $ (1.37) $ (1.19) $ (1.04)
------------ ------------ -----------
------------ ------------ -----------
Shares used in computing net
loss per share........................ 11,786,429 9,861,212 9,115,926
------------ ------------ -----------
------------ ------------ -----------
SEE ACCOMPANYING NOTES.
45
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
NOTE
RECEIVABLE
PREFERRED STOCK COMMON STOCK FROM DEFERRED ACCUMULATED
SHARES AMOUNT SHARES AMOUNT OFFICER COMPENSATION DEFICIT TOTAL
-------- --------- ---------- ------------ ---------- ------------ ------------- ------------
Balance at January 1, 1994. . . . . 375,000 $ 500,000 7,882,642 $15,854,000 $(25,000) $(1,467,000) $(13,314,000) $ 1,548,000
Issuance of stock and warrants at
$8.00 per share (net of
approximately $56,000 of
offering costs). . . . . . . . . - - 574,587 4,541,000 - - - 4,541,000
Exercise of stock options . . . . - - 1,088 4,000 - - - 4,000
Conversion of notes payable to
stock and warrants (net of
approximately $63,000 of debt
issuance costs) . . . . . . . . - - 294,624 2,490,000 - - - 2,490,000
Deferred compensation related to
stock options granted. . . . . . - - - 220,000 - (220,000) -
Amortization of deferred
compensation . . . . . . . . . . - - - - - 1,046,000 - 1,046,000
Net loss. . . . . . . . . . . . . - - - - - - (9,479,000) (9,479,000)
-------- --------- ---------- ------------ ---------- ----------- ------------ ------------
Balance at December 31, 1994. . . . 375,000 500,000 8,752,941 23,109,000 (25,000) (641,000) (22,793,000) 150,000
Issuance of stock at $10.67
per share (net of approximately
$1,105,000 of offering costs). . - - 525,000 4,496,000 - - - 4,496,000
Issuance of stock at $20.00
per share. . . . . . . . . . . . - - 600,000 12,000,000 - - - 12,000,000
Conversion of Preferred stock to
Common stock . . . . . . . . . . (375,000) (500,000) 375,000 500,000 - - - -
Exercise of stock options and
warrants . . . . . . . . . . . . - - 84,169 404,000 - - - 404,000
Conversion of notes payable
(net of approximately $7,000 of
debt issuance costs) . . . . . . - - 68,748 543,000 - - - 543,000
Repurchase of stock . . . . . . . - - (4,500) (27,000) - - - (27,000)
Repayment of note receivable from
officer. . . . . . . . . . . . . - - - - 25,000 - - 25,000
Deferred compensation related to
stock options and warrants
granted. . . . . . . . . . . . . - - - 9,163,000 - (9,163,000) - -
Amortization of deferred
compensation . . . . . . . . . . - - - - - 2,286,000 - 2,286,000
Net loss. . . . . . . . . . . . . - - - - - - (11,710,000) (11,710,000)
-------- --------- ---------- ------------ ---------- ----------- ------------ ------------
Balance at December 31, 1995. . . . - - 10,401,358 50,188,000 - (7,518,000) (34,503,000) 8,167,000
Issuance of stock at $48.00
per share (net of approximately
$6,733,000 of offering costs). . - - 1,500,000 65,267,000 - - - 65,267,000
Exercise of stock options and
warrants . . . . . . . . . . . . - - 563,456 1,010,000 - - - 1,010,000
Conversion of notes payable
(net of approximately $5,000 of
debt issuance costs) . . . . . . - - 11,562 87,000 - - - 87,000
Repurchase of stock . . . . . . . - - (138,500) (3,948,000) - - - (3,948,000)
Deferred compensation related to
stock options and warrants
granted. . . . . . . . . . . . . - - - (3,630,000) - 3,630,000 - -
Amortization of deferred
compensation . . . . . . . . . . - - - - - 2,276,000 - 2,276,000
Net loss. . . . . . . . . . . . . - - - - - - (16,142,000) (16,142,000)
-------- --------- ---------- ------------ ---------- ----------- ------------ ------------
-------- --------- ---------- ------------ ---------- ----------- ------------ ------------
Balance at December 31, 1996. . . . - $ - 12,337,876 $108,974,000 $ - $(1,612,000) $(50,645,000) $ 56,717,000
-------- --------- ---------- ------------ ---------- ----------- ------------ ------------
-------- --------- ---------- ------------ ---------- ----------- ------------ ------------
SEE ACCOMPANYING NOTES.
46
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
1996 1995 1994
------------- ------------ -----------
OPERATING ACTIVITIES:
Net loss ................................................. $ (16,142,000) $(11,710,000)) $(9,479,000)
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation and amortization........................... 615,000 602,000 553,000
Amortization of deferred compensation................... 2,276,000 2,286,000 1,046,000
Changes in operating assets and liabilities:
Accounts receivable................................... (2,168,000) -- 38,000
Inventories........................................... 10,000 14,000 101,000
Prepaid expenses and other assets..................... 34,000 (250,000) (77,000)
Accounts payable and accrued payroll and
expenses............................................. 269,000 1,257,000 (18,000)
------------- ------------ -----------
Net cash used in operating activities..................... (15,106,000) (7,801,000) (7,836,000)
INVESTING ACTIVITIES:
Purchases of marketable securities........................ (130,200,000) -- --
Sales of marketable securities............................ 109,600,000 -- --
Investment in affiliate................................... (2,000,000) -- --
Assets used in clinical trials............................ -- (528,000) --
Purchases of property, plant, and equipment............... (1,855,000) (10,000) (305,000)
Purchases of patents...................................... (51,000) (64,000) (50,000)
------------- ------------ -----------
Net cash used in investing activities..................... (24,506,000) (602,000) (355,000)
FINANCING ACTIVITIES:
Proceeds from issuance of Common Stock, less
issuance costs........................................... 66,271,000 16,866,000 4,678,000
Purchase of Common Stock.................................. (3,948,000) -- --
Proceeds from notes payable............................... -- 1,230,000 --
Payments of notes payable................................. -- (1,230,000) --
Payments of capital lease obligations..................... (43,000) (38,000) (28,000)
Proceeds from long term obligations....................... -- -- 26,000
Payments of long term obligations......................... (56,000) (47,000) (43,000)
Proceeds from line of credit.............................. -- 3,682,000 10,040,000
Payments of line of credit................................ -- (4,682,000) (9,978,000)
Repayment of officer note receivable...................... -- 25,000 --
------------- ------------ -----------
Net cash provided by financing activities................. 62,224,000 15,806,000 4,695,000
------------- ------------ -----------
Net increase (decrease) in cash and cash equivalents...... 22,612,000 7,403,000 (3,496,000)
Cash and cash equivalents at beginning of period.......... 8,886,000 1,483,000 4,979,000
------------- ------------ -----------
Cash and cash equivalents at end of period................ $ 31,498,000 $ 8,886,000 $ 1,483,000
------------- ------------ -----------
------------- ------------ -----------
SUPPLEMENTAL DISCLOSURES:
State taxes paid.......................................... $ 14,000 $ 8,000 $ 16,000
------------- ------------ -----------
------------- ------------ -----------
Interest paid............................................. $ 34,000 $ 213,000 $ 347,000
------------- ------------ -----------
------------- ------------ -----------
SEE ACCOMPANYING NOTES.
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
PDT, Inc. (the Company) is engaged in the development of drugs and
devices used in photodynamic therapy. The Company is located in Santa
Barbara, California. The Company has had limited sales of devices and its
customers are medical device companies, researchers, hospitals and
universities located throughout the world.
As of December 31, 1996, the Company had an accumulated deficit of $50.6
million and anticipates it will continue to incur losses for some time. The
Company is continuing its efforts in research and development and the
clinical trials of its products. These efforts, and obtaining requisite
regulatory approval, prior to commercialization, will require substantial
expenditures. While management of the Company believes that it has sufficient
resources to fund the required expenditures for the next few years and that
additional funding will be available when required, there is no assurance
that this will be the case.
The preparation of financial statements in conformity with Generally
Accepted Accounting Principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
the accompanying notes. Actual results may differ from those estimates and
such differences may be material to the financial statements.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of PDT, Inc.
and its wholly owned subsidiaries, PDT Systems, Inc., PDT Pharmaceuticals,
Inc., and PDT Cardiovascular, Inc. All significant intercompany balances and
transactions have been eliminated in consolidation.
INVESTMENTS IN AFFILIATES
Investments in affiliates, owned more than 20 percent but not in excess
of 50 percent where the Company is not deemed to be able to exercise
controlling influence, are recorded on the equity method. In December 1996,
the Company purchased a 33% equity interest in Ramus Medical Technologies
("Ramus") of Carpinteria, California for $2,000,000. The investment
agreement contains an option to acquire the remaining shares or Ramus at some
time in the future under specified terms and conditions. In addition, the
Company is provided first refusal rights and preemptive rights for any
issuance of new securities, whether debt or equity, made by Ramus. The
Company's portion of Ramus' operations for 1996 is not significant to the
results of operations for the Company for the year ended December 31, 1996.
MARKETABLE SECURITIES
Marketable securities are classified as available-for-sale and are
carried at market value. Unrealized gains and losses are reported in
shareholders' equity. Realized gains and losses on investment transactions
are recognized when realized based on settlement dates and recorded as
interest income. Interest and dividends on securities are recognized when
earned. As of December 31, 1996, the market value approximates the cost of
the marketable securities and therefore there are no unrecognized gains or
losses reflected as a component of shareholders' equity. As of December 31,
1996, marketable securities consisted primarily of short-term interest
bearing obligations with domestic corporate issuers and collateralized by
U.S. Government securities.
48
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"),
"Accounting for Stock-Based Compensation", encourages, but does not require
companies to record compensation cost for stock-based employee compensation
plans at fair value. The Company has chosen to continue to account for
stock-based compensation using the intrinsic value method prescribed by
Accounting Principles Board Opinion No. 25 ("APB Opinion No. 25"). The
Company has awarded stock options that vest upon the achievement of certain
milestones. Under APB Opinion No. 25, such options are accounted for as
variable stock options. As such, until the milestone is achieved (but only
after it is determined to be probable), deferred compensation is recorded in
an amount equal to the difference between the fair market value of the Common
Stock on the date of determination less the option exercise price and is
adjusted from period to period to reflect changes in the market value of the
Common Stock. Deferred compensation, as it relates to a particular milestone,
is amortized over the period between when achievement of the milestone
becomes probable and when the milestone is estimated to be achieved.
Amortization of deferred compensation could result in significant
compensation expense being recorded in future periods based on the market
value of the Common Stock from period to period.
INVENTORIES
Inventories are stated at lower of cost (first-in, first-out) or market.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development costs are expensed as incurred. The acquisition
of technology rights for research and development projects and the value of
equipment for specific research and development projects are also included in
research and development expenses.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment is stated at cost with depreciation provided over the
estimated useful lives of the respective assets on the straight-line basis
and on the double-declining method. Leasehold improvements are stated at cost
with amortization provided on the straight-line basis. The estimated useful
lives of the assets are as follows:
Furniture and fixtures 5 years
Equipment 3 - 5 years
Leasehold improvements 5 years or the remaining life of the
lease term, whichever is shorter
PATENTS AND OTHER ASSETS
Costs of acquiring patents are capitalized and amortized on the
straight-line basis over the estimated useful life of the patents, seventeen
years. Accumulated amortization was $48,000 and $30,000 at December 31, 1996
and 1995, respectively. The costs of servicing the Company's patents are
expensed as incurred. Also included in this caption are deposits and other
miscellaneous non-current assets.
REVENUE RECOGNITION
The Company recognizes revenues from product sales at the time of
shipment to the customer. Grant, royalty and licensing income is recognized
based on the terms of the related agreements and includes the reimbursement
of clinical costs.
49
NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of
shares of common stock outstanding. Common equivalent shares from stock
options and warrants are excluded from the computation as their effect is
antidilutive, except that, pursuant to Securities and Exchange Commission
Staff Accounting Bulletins and Staff policy, common and common equivalent
shares issued during the twelve-month period prior to the initial public
offering at prices substantially below the public offering price are presumed
to have been issued in contemplation of the public offering and have been
included in the calculation as if they were outstanding for all periods
presented (using the treasury stock method). The net loss per share also
gives effect to the automatic conversion of all outstanding shares of
convertible preferred stock into common stock upon the closing of the
Company's initial public offering using the if-converted method.
On May 23, 1995 and July 14, 1995, the Company's Board of Directors and
shareholders, respectively, approved a three-for-two split of the Company's
Common Stock for shareholders of record on July 24, 1995. All outstanding
options, rights and convertible securities that include provisions for
adjustments in the number of shares held thereby, and the exercise or
conversion price thereof, as a result of the stock split have been adjusted.
Share data included in the consolidated financial statements and notes
reflects the effect of the stock split for all periods presented.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
2. CREDIT ARRANGEMENTS
On July 30, 1992, the Company entered into a $1,000,000 line of credit
agreement with a bank, with a variable rate of interest based on the bank's
lending rate (7.8% as of December 31, 1996). The weighted average interest
rates for the year ended December 31, 1995 was 8.25%. The Company did not
utilize the line of credit during 1996. The line of credit expires on January
31, 1997 and has been subsequently renewed through January 31, 1998 with
similar terms and conditions. The line of credit is collateralized by the
Company's cash balances. The credit agreement subjects the Company to certain
customary restrictions including a prohibition on the payment of dividends.
In conjunction with the Company's building lease agreement, the Company
received two tenant improvement allowances totaling $215,000. The tenant
improvement allowances must be repaid over the term of the lease and have
fixed interest rates of 10% and 8.5%, respectively. The total outstanding
balance of the tenant improvement allowances was $42,000 and $98,000 at
December 31, 1996 and 1995, respectively.
3. SHAREHOLDERS' EQUITY
In April 1996, the Company completed a secondary public offering in
which it sold 1,500,000 shares of Common Stock at $48 per share. The
offering provided net proceeds to the Company of approximately $65.3 million.
In July 1996, the Company's Board of Directors authorized the purchase
of up to 600,000 shares of the Company's Common Stock. During 1996, the
Company repurchased 138,500 shares at a cost of $3,948,000 under this
repurchase program. As of December 31, 1996, all shares repurchased were
retired.
STOCK OPTION PLANS
The Company has five stock-based compensation plans which are described
below - the 1989 Plan, the 1992 Plan, the 1994 Plan, ( the "Existing Plans")
the PDT, Inc. 1996 Stock Compensation Plan (the "1996 Plan") and the
Non-Employee Directors Stock Option Plan. As disclosed in Note 1, the
Company applies APB Opinion
50
No. 25 and related interpretations in accounting for its plans. The Company
records deferred compensation for the excess of the fair value of Common
Stock over the exercise price of stock options. With respect to variable
stock options granted, deferred compensation is recorded when the likelihood
of the achievement of the specified milestone is considered probable.
The Existing Plans provide for the grant of both incentive stock options
and non-statutory stock options. Stock options were granted under these plans
to certain employees and corporate officers. The purchase price of
incentive stock options must equal or exceed the fair market value of the
Common Stock at the grant date and the purchase price of non-statutory stock
options may be less than fair market value of the Common Stock at grant date.
Effective July 21, 1996, the Existing Plans were superseded with the adoption
of the 1996 Plan except to the extent of options outstanding in the Existing
Plans. The Company has allocated 300,000 shares, 750,000 shares and 600,000
shares for the 1989 Plan, the 1992 Plan and the 1994 Plan, respectively.
Included in the outstanding options under the 1992 Plan are options for the
purchase of 427,500 shares at $34.75 per share which originally were variable
options that vested upon the achievement of certain milestones.
Subsequently, these variable options were adjusted to change the vesting
period to a specific date as discussed further. As of December 31, 1996,
milestone options covering 227,500 shares have vested and the remaining
unvested shares will vest in the years 1997 through 2000. The remaining
outstanding shares granted under the Existing Plans vest in equal annual
installments over four years beginning one year from the grant date and
expire ten years from the original grant date.
The 1996 Plan provides for awards which include incentive stock options,
non-qualified stock options, restricted shares, stock appreciation rights,
performance shares, stock payments and dividend equivalent rights. Included
in the 1996 Plan is a stock purchase program for which the commencement has
been deferred pending further evaluation. Officers, key employees, employee
directors and independent contractors or agents of the Company may be
eligible to participate in the 1996 Plan, except that incentive stock options
may only be granted to employees of the Company. The 1996 Plan supersedes and
replaces the Existing Plans except to the extent of options outstanding in
the Existing Plans. The purchase price for awards granted from the 1996 Plan
may not be less than the fair market value at the date of grant. The maximum
amount of shares that could be awarded under the 1996 Plan over its term is
3,500,000 shares. Awards granted under the 1996 Plan expire on the date
determined by the Plan Administrators as evidenced by the award agreement but
shall not expire later than ten years from the date the award is granted
except for grants of restricted shares which expire at the end of a specified
period if the specified service or performance conditions have not been met.
In 1992, the Company established the Non-Employee Directors' Stock
Option Plan under which grants of non-qualified stock options are made to the
Company's non-employee directors. The plan provides for an automatic annual
grant of an option for the purchase of 7,500 shares at fair market value on
the first day of the fourth quarter of each year to be made to each
non-employee director. The options vest on the grant date and expire ten
years from the date of grant or within 90 days of termination of the
individual's directorship.
As of December 31, 1995, the Company had nonvested variable stock
options with an exercise price of $34.75 per share covering 427,500 shares of
Common Stock of which deferred compensation has been recorded for 347,500
shares. The Company recorded deferred compensation of $8,074,000 with
respect to variable stock options, the vesting of which (due to the
likelihood of achievement of specified milestones) was considered to be
probable. Of this amount, $1,247,000 and $687,000 was amortized in the years
ended December 31, 1995 and 1994, respectively, with the remaining amount to
be amortized over future periods. Effective June 21, 1996, the Compensation
Committee of the Board of Directors adjusted the future vesting periods of
the variable stock options granted in 1995 under the 1992 Plan covering
400,000 shares of Common Stock. The remaining options covering 27,500 shares
were not adjusted due to milestones being attained. These variable stock
options were adjusted to change the vesting periods to specific dates as
opposed to the original vesting periods which were based upon the achievement
of milestones; no change was made to the exercise prices of these variable
stock options. This change in the vesting periods provides for the options to
be accounted for as non-variable options and therefore alleviates the impact
of deferred compensation and the related expense fluctuating in future
periods based on the changes in the per share market value from period to
period. For the year ended December 31, 1996,
51
the Company recorded deferred compensation expense of $767,000 and a
reduction in deferred compensation of $3,652,000 for 1996 with respect to
variable milestone options. As of December 31, 1996, options covering
227,500 shares with an exercise price of $34.75 per share have vested. The
remaining unvested shares will vest in the years 1997 through 2000.
Additionally, during the years ended December 31, 1996, 1995 and 1994,
the Company recorded deferred compensation with respect to certain of the
Common Stock options which had been granted at less than the estimated fair
value. Deferred compensation recorded is amortized ratably over the period
that the options vest to the option holder. This resulted in compensation
expense of $378,000, $348,000 and $359,000 for the years ended December 31,
1996, 1995 and 1994, respectively.
OTHER STOCK OPTIONS
In connection with employment agreements the Company has with its
executives and certain key employees, nonqualified stock options have been
granted to purchase shares of Common Stock. The options generally become
exercisable in equal installments over four years beginning one year from the
grant date and expire ten years from the original grant date.
On December 15, 1989, the Company granted to an outside investor an
option to purchase 375,000 shares of Common Stock at $1.33 per share. The
option was exercised in January 1996.
Prior to the Company's initial public offering, 79,769 options were
issued to various selling agents of the Company and 16,500 options were
granted in connection with consulting agreements.
The following table summarizes all stock option activity:
WEIGHTED
AVERAGE
EXERCISE PRICE EXERCISE STOCK
PER SHARE PRICE OPTIONS
- --------------------------------------------------------------------------------------
Outstanding at January 1, 1994..... $ 0.33 - 8.00 $2.24 1,878,634
Granted........................... 4.00 - 6.00 7.02 281,342
Exercised......................... 4.00 4.00 (1,088)
Cancelled......................... 6.00 6.00 (3,000)
- --------------------------------------------------------------------------------------
Outstanding at December 31, 1994... 0.33 - 8.00 2.83 2,155,888
Granted........................... 10.67 - 40.25 32.54 513,500
Exercised......................... 0.67 - 8.00 2.63 (62,331)
Cancelled......................... 0.67 - 8.00 6.24 (43,687)
- --------------------------------------------------------------------------------------
Outstanding at December 31, 1995... 0.33 - 40.25 8.74 2,563,370
Granted........................... 24.375 - 56.00 36.58 355,040
Exercised......................... 0.33 - 8.00 1.58 (545,062)
Cancelled......................... 6.00 - 56.00 49.83 (114,918)
- --------------------------------------------------------------------------------------
Outstanding at December 31, 1996 $ 0.33 - 52.25 $12.76 2,258,430
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
Exercisable at:
December 31, 1994.................. $ 0.33 - 8.00 $1.94 1,281,267
December 31, 1995.................. 0.33 - 40.25 2.72 1,647,754
December 31, 1996.................. 0.33 - 40.25 8.39 1,629,469
In accordance with APB Opinion No. 25 and in connection with accounting
for the Company's stock-based compensation plans, the Company recorded total
stock compensation expense of $1.1 million, $1.6 million and $1.0 million for
the years ended December 31, 1996, 1995 and 1994, respectively, with respect
to the variable stock options and options granted at less than fair value
described previously. If the Company had elected to recognize compensation
expense based on the fair value of the options granted at grant date for its
stock-based
52
compensation plans consistent with the method of SFAS No. 123, the Company's
net income and loss per share would have been reduced to the pro forma
amounts indicated below:
1996 1995
----------------------------------------------------------------------------
Net Loss
As Reported......................... $ (16,172,000) $ (11,710,000)
Pro forma........................... $ (22,940,000) $ (13,365,000)
Loss per share
As Reported......................... $ ( 1.37) $ (1.19)
Pro forma........................... $ ( 1.95) $ (1.36)
----------------------------------------------------------------------------
The fair value of each option grant was estimated using the Black-Scholes
option pricing model using the Multiple Option approach whereby a separate
fair value is computed for each vesting increment of an option. The following
assumptions were used:
1996 1995
----------------------------------------------------------------------------
Expected dividend yield.............. 0% 0%
Expected stock price volatility...... 50% 50%
Risk-free interest rate.............. 6.01% - 6.41% 5.23% - 5.58%
Expected life of options............. 2 - 4 years 2 - 4 years
The above assumptions are highly subjective, in particular the expected
stock price volatility of the underlying stock. Because changes in these
subjective input assumptions can materially affect the fair value estimate,
in management's opinion, the existing models do not provide a reliable single
measure of the fair value of its stock options.
Additionally, the weighted average remaining contractual life of options
outstanding at December 31, 1996 and 1995 was 6.9 years and 6.8 years,
respectively.
WARRANTS
In connection with a private placement offering which commenced in 1993
and continued through 1994, the Company issued one detachable Common Stock
warrant for every two shares of Common Stock purchased. Each half warrant was
allocated $0.67 of the overall $8.00 per share purchase price. In 1994 and
1993, the Company issued detachable stock warrants in connection with the
private placement offering of 287,294 and 242,247, respectively. Each
detachable stock warrant provides for the purchase of one share of Common
Stock at $8.00 per share with the warrants expiring in February 1998.
Warrants to purchase 13,190 and 7,751 shares of Common Stock were exercised
during 1996 and 1995, respectively.
During 1994 and 1993, the Company issued warrants to private placement
selling agents and a corporate partner to purchase 7,216 shares and 148,449
shares of Common Stock, respectively. Each warrant provides for the purchase
of one share of Common Stock at $8.00 per share with the warrants expiring
February 1998. As of December 31, 1996, no warrants have been exercised.
In January 1995, the Company, in connection with a loan received from a
principal of its designated selling agent, issued warrants to purchase 15,000
shares of the Company's Common Stock at $10.67 per share. The warrants expire
February 1998. As of December 31, 1996, no warrants have been exercised.
In April 1995, the Company, in connection with consulting agreements,
issued warrants to purchase 750,000 shares of Common Stock at $10.67 per
share to various consultants. These warrants vest equally over the term of
the agreement, generally three years. Additionally, in November 1995, the
Company, in connection with consulting agreements, issued warrants to
purchase 55,000 shares of Common Stock to different consultants. These
warrants vest equally over the term of the agreement, generally between one
and three years. The consulting
53
agreements can be terminated by the Company at any time with only those
warrants vested as of the date of termination exercisable. The warrants
expire five years after the date of issuance. As of December 31, 1996, no
warrants have been exercised. In 1995, the Company recorded deferred
compensation associated with the value of these warrants of $3,215,000. The
Company recorded compensation expense of $1,129,000 and $693,000 for the
years ended December 31, 1996 and 1995, respectively.
4. CONVERTIBLE NOTES PAYABLE
During 1993, the Company issued $3,000,000 in convertible notes payable.
The notes earn interest at 10% per year which is payable quarterly (beginning
September 30, 1993) and the principal balance is due three years from the
date of issuance. The principal balance is due to be paid on the due date or
can be converted into shares of Common Stock at a price of $8.00 per share.
In December 1994, the holders of $2,357,000 in principal amount of
convertible notes exchanged their notes for shares of Common Stock at $8.00
per share for 294,624 shares of Common Stock. The conversion also provided
the noteholders with one warrant for every two shares of Common Stock
converted for total warrants covering 147,312 shares of Common Stock. The
warrants provide for the purchase of one share of Common Stock at $8.00 per
share and expire February 1998. During 1995, warrants to purchase 14,062
shares of Common Stock were exercised and noteholders converted an additional
$550,000 in principal amount of notes for 68,748 shares of Common Stock at
$8.00 per share. During 1996, holders of the remaining $93,000 in principal
amount of convertible notes exchanged their notes for 11,562 shares of Common
Stock at $8.00 per share and warrants to purchase 5,204 shares of Common
Stock were exercised.
5. RETIREMENT SAVINGS PLAN
The Company has available a retirement savings plan for all eligible
employees who have completed three months and 500 hours of service and who
are at least 21 years of age. The plan has received Internal Revenue Service
approval under Section 401(a) of the Internal Revenue Code. Participating
employees are 100% vested upon entering the plan and no matching contribution
is made by the Company.
6. PROVISION FOR INCOME TAXES
The deferred income tax assets and liabilities consist of differences
between the financial statements and tax basis of assets and liabilities, and
is measured at the current enacted tax rates. The temporary differences
related to the following as of December 31:
1996 1995
----------------------------------------------
Current Non-current Current Non-current
----------------------------------------------
Deferred tax assets:
Uniform capitalization..... $ 2,000 $ -- $ 3,000 $ --
Other accruals and
reserves.................. 91,000 -- 81,000 --
Capitalized research and
development............... -- 1,461,000 -- --
Net operating losses and
tax credits............... -- 20,346,000 -- 12,484,000
----------------------------------------------
Total deferred tax assets... 93,000 21,807,000 84,000 12,484,000
Deferred tax liabilities:
Amortization and
depreciation expense...... -- 413,000 16,000 --
Federal benefit for
state income taxes........ 7,000 1,169,000 -- 636,000
----------------------------------------------
Total deferred tax
liabilities................ 7,000 1,582,000 16,000 636,000
----------------------------------------------
Net deferred tax assets..... 86,000 20,225,000 68,000 11,848,000
Less valuation reserve...... 86,000 20,225,000 68,000 11,848,000
----------------------------------------------
$ -- $ -- $ -- $ --
----------------------------------------------
----------------------------------------------
54
The Company has net operating loss carryforwards for federal tax purposes
of $49.5 million which expire in the years 2002 to 2011. Research and
alternative minimum tax credit carryforwards aggregating $2.3 million which
are available for federal and state tax purposes. These credits expire in the
years 2002 to 2011. The Company also has a state net operating loss
carryforward of $12.9 million which expires in the years 1997 to 2001. Under
Section 382 of the Internal Revenue Code, the utilization of the net
operating loss carryforwards may be limited based on changes in the
percentage of ownership in the Company.
7. COMMITMENTS AND CONTINGENCIES
The Company has entered into agreements with various parties to perform
research and development and conduct clinical trials on behalf of the
Company. For the research and development agreements, the Company has the
right to use and license, patent and commercialize any products resulting
from these agreements. In connection with these clinical trial agreements,
the Company has recorded as research and development costs of $1,575,279,
$465,000, and $402,000 for the years ended December 31, 1996, 1995 and 1994,
respectively. As of December 31, 1996, the Company has future obligations of
$148,750 of which $58,750 is due in 1997. The Company has also entered into
licensing and OEM agreements to develop, manufacture and market drugs and
devices for photodynamic therapy and other related uses. The agreements
provide for the Company to receive or pay royalties at various rates. The
Company has recorded royalty revenues of $73,000, $39,000 and $7,000 for the
years ended December 31, 1996, 1995 and 1994 , respectively.
In 1993, the Company entered into two separate strategic development
letter agreements each of which provide for the co-development of medical
catheters for use in certain photodynamic therapy applications and the option
to negotiate a long-term license to market these devices. Reimbursements for
preclinical funding of $27,000 and $60,000 were received in 1996 and 1995,
respectively, and no reimbursements were received in 1994.
In 1994, the Company entered into a development and commercial supply
agreement with a related party to receive formulation and packaging services
for one of the Company's drugs at specified prices. For the years ended
December 31, 1996 and 1995, respectively, the Company paid $2,596,000 and
$830,000 and recorded as expense $2,505,000 and $1,685,000 primarily for drug
development cost. For the year ended December 31, 1994, the Company paid and
recorded as expense $600,000. The agreement requires the Company to pay an
additional $400,000 if certain milestones are achieved.
In July 1995, the Company entered into an exclusive development and
licensing agreement with Pharmacia & Upjohn, a related party, for the
Company's leading proprietary photoreactive drug. Under this agreement, the
Company is entitled to receive funding for certain preclinical development
and clinical trial costs, payments upon the achievement of certain milestones
and royalties upon the commercial sale of drug products. In September 1995,
the Company signed two supply contracts with the same related party which
support the license agreement. The first agreement specifies the terms under
which the Company will supply drug product for the ongoing clinical
development and through to the commercial marketplace. Under the second
agreement, the Company will manufacture and supply medical light devices for
use with the drug product. For the year ended December 31, 1996, the Company
recorded license revenues of $2.9 million related to the commencement of the
billing for the reimbursement of clinical costs related to the Pharmacia &
Upjohn license agreement of which $2.0 million is included in accounts
receivable. In July 1996, the Company amended the license agreement to
include an additional disease field and in December 1996, entered into an
additional supply contract for devices under the new field. Terms of the
amendment to the license agreement and the new supply contract are similar to
existing agreements.
Certain of the Company's research has been or is being funded in part by
Small Business Innovation Research or National Institutes of Health grants.
As a result of such funding, the United States Government has or will have
certain rights in the technology developed which includes a non-exclusive,
worldwide license under such inventions of any governmental purpose and the
right to require the Company to grant an exclusive license under any of such
intentions to a third party based on certain criteria. For the years ended
December 31, 1996, 1995 and 1994, the Company has recorded income from grants
of $550,000, $385,000 and $95,000, respectively.
55
The Company is involved in certain claims and inquiries that are routine
to its business. Legal proceedings tend to be unpredictable and costly.
Based on currently available information, management believes that the
resolution of pending claims, regulatory inquiries, and legal proceedings
will not have a material adverse effect on the Company's operating results,
financial position or liquidity position.
8. LEASES
The Company leases three buildings for a total monthly rental of
$63,800. One of the leases expires in October 1997 and may be renewed for
three years thereafter. Each of the other two leases expire August 1999 and
may also be renewed for three years thereafter. The leases provide for annual
rental increases based upon a Consumer Price Index.
Beginning in 1993, the Company entered into capital lease agreements for
various research equipment. The leases are from one to five years and require
equal monthly payments of principal and interest, with interest ranging from
10% to 14%. Amortization expense related to this capitalized leased equipment
is included as depreciation expense. Accumulated amortization was $91,000 and
$54,000 at December 31, 1996 and 1995, respectively. In connection with the
leases, noncash fixed asset acquisitions were $75,000 and $47,000 for the
years ended December 31, 1995 and 1994, respectively. There were no noncash
fixed asset acquisitions made in 1996.
Future minimum lease payments as of December 31, 1996 are as follows:
Operating Lease Capital Leases
--------------- --------------
1997................................ $ 768,000 $ 46,000
1998................................ 581,000 18,000
1999................................ 386,000 --
2000................................ 1,000 --
2001................................ -- --
------------- ------------
Total minimum lease payments........ $ 1,736,000 64,000
-------------
Less amounts representing interest.. (5,000)
------------
Present value of lease payments..... $ 59,000
------------
------------
Rent expense was $504,000, $216,000 and $207,000 for the years ended
December 31, 1996, 1995 and 1994, respectively.
9. RELATED PARTY TRANSACTIONS
A director of the Company is a founder, Chairman, President and Chief
Executive Officer of a company which provides corporate financial consulting
services in the areas of mergers and acquisitions, public and private
financings, strategic planning and financial analysis. Both the consulting
company and the director have been advisors to the Company since 1991 and
have been involved in the Company's private and public financings from 1991
to the present. The consulting company was paid $45,800 in connection with
the Company's initial public offering in 1995 and $1,115,000 in connection
with the Company's secondary offering in 1996. The Company recorded as
expense $224,000 and $53,000 for the years ended December 31, 1996 and 1995,
respectively, in connection with ongoing consulting services provided by the
company.
In July, 1996, a partner in a law firm used by the Company for outside
legal counsel, was elected by the Board of Directors to serve as Secretary of
the Company. The Company paid $131,000 in connection with legal services for
the Company's initial public offering in 1995 and $57,000 in connection with
the Company's secondary offering in 1996. In connection with general legal
services provided by the law firm, the Company recorded as expense $116,000,
$191,000 and $18,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.
56
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following is information concerning the fair value of each class of
financial instrument at December 31, 1996:
CASH, CASH EQUIVALENTS, ACCOUNTS RECEIVABLE AND MARKETABLE SECURITIES
The carrying amounts of cash, cash equivalents, accounts receivable and
marketable equity securities approximate their fair values. Fair values of
cash equivalents and marketable securities are based on quoted market prices.
LONG TERM OBLIGATIONS
The carrying amount of long term obligations approximate their fair
values due to the short remaining term of maturity of these obligations.
57
INDEX TO EXHIBITS
Incorporating
Exhibit Reference
Number Description (if applicable)
- ------- ----------- ---------------
3.1 Certificate of Amendment of the Restated Certificate of [C][3.11]
Incorporation of the Registrant filed with the Delaware
Secretary of State on July 24, 1995.
3.2 Restated Certificate of Incorporation of the Registrant [B][3.1]
filed with the Delaware Secretary of State on December
14, 1994.
3.3 Certificate of Amendment of the Certificate of [A][3.2]
Incorporation of the Registrant filed with the Delaware
Secretary of State on March 17, 1994.
3.4 Certificate of Amendment of the Certificate of [A][3.3]
Incorporation of the Registrant filed with the Delaware
Secretary of State on October 7, 1992.
3.5 Certificate of Amendment of the Certificate of [A][3.4]
Incorporation of the Registrant filed with the Delaware
Secretary of State on November 21, 1991.
3.6 Certificate of Amendment of the Certificate of [A][3.5]
Incorporation of the Registrant filed with the Delaware
Secretary of State on September 27, 1991.
3.7 Certificate of Amendment of the Certificate of [A][3.6]
Incorporation of the Registrant filed with the Delaware
Secretary of State on December 20, 1989.
3.8 Certificate of Amendment of the Certificate of [A][3.7]
Incorporation of the Registrant filed with the Delaware
Secretary of State on August 11, 1989.
3.9 Certificate of Amendment of the Certificate of [A][3.8]
Incorporation of the Registrant filed with the Delaware
Secretary of State on July 13, 1989.
3.10 Certificate of Incorporation of the Registrant filed with [A][3.9]
the Delaware Secretary of State on June 16, 1989.
3.11 Amended and Restated Bylaws of the Registrant. [G][3.11]
4.1 Specimen Certificate of Common Stock. [B][4.1]
4.2 Form of Convertible Promissory Note. [A][4.3]
4.3 Form of Indenture. [A][4.4}
4.4 Special Registration Rights Undertaking. [A][4.5]
4.5 Undertaking Agreement dated August 31, 1994. [A][4.6]
4.6 Letter Agreement dated March 10, 1994. [A][4.7]
4.7 Form of $10,000,000 Common Stock and Warrants Offering [A][4.8]
Investment Agreement.
10.1@ Amendment dated as of March 20, 1996 to Development and [D][10.1]
License Agreement, Product Supply Agreement and Device
Supply Agreement between Registrant and Pharmacia, S.p.A.
10.2@ Development and Distribution Agreement between Registrant [F][10.1]
and Iridex Corporation.
10.3# Commercial Lease Agreement between Registrant and Santa [F][10.2]
Barbara Business Park, a California Limited Partnership.
10.4 PDT, Inc. Stock Compensation Plan.* [E]
10.5@ Ophthalmology Amendment to Development and License [G][10.2]
Agreement between Registrant and Pharmacia & Upjohn
S.p.A. and Pharmacia & Upjohn AB.
10.6 Forms of Loan Program including Loan Program Agreement, [G][10.3]
Loan Program Summary Description and Employee Loan
Promissory Note.
10.7 Form of Amendment No. 3 to 1989 Stock Option Agreement.* [G][10.4]
10.8 Form of Incentive Stock Option Agreement.*
10.9 Form of Non-Qualified Stock Option Agreement.*
10.10 Form of Restricted Share Agreement.*
10.11 Form of Stock Rights Agreement.*
10.12 Amendment No. 4 to Employment Agreement dated as of May 17,
1996 between the Registrant and Gary S. Kledzik.*
58
Incorporating
Exhibit Reference
Number Description (if applicable)
- ------- ----------- ---------------
10.13 Amendment No. 8 to Employment Agreement dated as of
May 17, 1996 between the Registrant and David E. Mai.*
10.14 Amendment No. 9 to Employment Agreement dated as of
July 17, 1996 between the Registrant and David E. Mai.*
10.15 Amendment No. 1 to Employment Agreement dated as of
December 25, 1995 between the Registrant and John M.
Philpott.*
10.16+ Investment Agreement dated December 27, 1996 between PDT
Cardiovascular, Inc. and Ramus Medical Technologies.
10.17 Co-Development Agreement dated December 27, 1996 between
PDT Cardiovascular, Inc. and Ramus Medical Technologies.
10.18+ Series A Preferred Stock Registration Rights Agreement
dated December 27, 1996 between PDT Cardiovascular, Inc.
and Ramus Medical Technologies.
10.19+ Option to Purchase Ramus Medical Technologies dated
December 27, 1996.
10.20+ Amendment dated as of December 16, 1996 to Product
Supply Agreement between Registrant and Pharmacia &
Upjohn S.p.A. and Pharmacia & Upjohn AB.
10.21+ SnET2 Device Supply Agreement for Ophthalmology dated as
of December 20, 1996 between Registrant and Pharmacia &
Upjohn AB.
11.1 Statement regarding computation of net loss per share.
27.1 Financial Data Schedule.
__________________________
[A] Incorporated by reference from the exhibit referred to in
brackets contained in the Registrant's Registration
Statement on Form S-1 (File No. 33-87138).
[B] Incorporated by reference from the exhibit referred to in
brackets contained in Amendment No. 2 to the Registrant's
Registration Statement on Form S-1 (File No. 33-87138).
[C] Incorporated by reference from the exhibit referred to in
brackets contained in the Registrant's Form 10-Q for the
quarter ended June 30, 1995, as amended on Form 10-Q/A
dated December 6, 1995 (File No. 0-25544).
[D] Incorporated by reference from the exhibit referred to in
brackets contained in the Registrant's Form 10-Q for the
quarter ended March 31, 1996 (File No. 0-25544).
[E] Incorporated by reference from the Registrant's 1996
Definitive Proxy Statement filed June 18, 1996
[F] Incorporated by reference from the exhibit referred to in
brackets contained in the Registrant's Form 10-Q for the
quarter ended June 30, 1996 (File No. 0-25544).
[G] Incorporated by reference from the exhibit referred to in
brackets contained in the Registrant's Form 10-Q for the
quarter ended September 30, 1996 (File No. 0-25544).
@ Filed subject to confidential treatment application
granted by the Commission. Confidential portions of this
Exhibit have been omitted (by redacting-out such material).
# The material has been filed separately on paper pursuant
to a request granted by the Commission for a continuing
hardship exemption from filing electronically.
+ Filed subject to confidential treatment. Confidential
portions of this exhibit have been omitted (by
redacting-out such material).
* Management contract or compensatory plan or arrangement.
59