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UNITED STATES
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, 1997
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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MIRAVANT MEDICAL TECHNOLOGIES
(Exact name of Registrant as specified in its charter)
DELAWARE 77-0222872
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
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 17, 1998, based upon the last sale price of the
Common Stock reported on the Nasdaq National Market was approximately
$250,138,350. 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 17, 1998 was
14,229,302.
ITEM 1. BUSINESS
GENERAL
Miravant Medical Technologies (formerly PDT, Inc.) (the "Company") is
engaged in the integrated development of drugs and medical device products
for use in PhotoPoint-TM-, the Company's proprietary technologies for
photodynamic therapy. PhotoPoint is a medical procedure which integrates the
use of proprietary light-activated (photoselective) drugs, proprietary light
producing devices and light delivery devices to achieve selective
photochemical destruction of diseased cells. The Company believes that
PhotoPoint 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 currently conducting clinical trials in
oncology, dermatology and ophthalmology. All of the Company's clinical trials
are testing its leading drug candidate, Purlytin-TM- (SnET2, tin ethyl
etiopurpurin) ("Purlytin"). The Company is developing products in
collaboration with its corporate partners, Boston Scientific Corporation
("Boston Scientific"), Cordis Corporation, a Johnson & Johnson company
("Cordis"), Chiron Diagnostics ("Chiron"), Iridex Corporation ("Iridex"),
Medicis Pharmaceutical Corporation ("Medicis"), Pharmacia & Upjohn, Inc.
("Pharmacia & Upjohn"), and Ramus Medical Technologies ("Ramus").
In September and October 1997, the Company completed three private
equity placements totaling $70.8 million, which provided net proceeds to the
Company of $68.2 million. The transactions included the issuance of
1,416,000 shares of the Company's Common Stock as well as one detachable
Common Stock warrant for each share of Common Stock purchased. 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 December 1997, the Company's Board of Directors authorized the
repurchase of up to 750,000 shares of Common Stock. This 750,000 repurchase
authorization was in addition to and superseded the repurchase program
authorized in July 1996, which allowed for the repurchase of up to 600,000
shares of Common Stock. Under these repurchase programs, the Company purchased
301,000 shares in 1997 and 138,500 shares in 1996 at a cost of $10.0 million and
$3.9 million, respectively. As of December 31, 1997, all shares repurchased
were retired.
Effective September 15, 1997, the Company changed its name from PDT, Inc.
to Miravant Medical Technologies.
BACKGROUND
Photodynamic therapy is a minimally invasive medical technology that uses
photoselective drugs to treat or diagnose disease. The technology involves three
components: photoselective drugs, light producing devices and light delivery
devices.
Photoselective drugs transform light energy into chemical energy in a
manner similar to the action of chlorophyll in green plants. Certain
photoselective 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 photoselective 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
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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. 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 photoselective 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 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 photoselective 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 while the drug
is in circulation. This flexibility gives photodynamic therapy its potential
in many different medical applications.
While light of a specific wavelength is used to cause a photoselective
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 a more selective treatment of disease with
fewer side effects. The fact that photoselective 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 photoselective 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,
severe 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
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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 PhotoPoint, 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 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 PHOTOSELECTIVE 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 PhotoPoint systems are numerous, the
Company is initially targeting high-incidence diseases or diseases that are
serious or life-threatening or 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 Purlytin, 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, with Medicis to facilitate the
clinical development of PhotoPoint in dermatology, with Chiron related to the
early detection and treatment of lung cancer 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 operating losses, the early stage of the development of the
Company and its products, strategic collaborations and forward-looking
statements.
TECHNOLOGY AND PRODUCTS
The Company is developing synthetic photoselective drugs together with
software-controlled desktop light producing devices and fiber optic light
delivery and measurement devices for the application of PhotoPoint to a broad
range of disease indications. The Company believes that by being expert in
both PhotoPoint drugs and devices, and by integrating the development of
these technologies, it can produce easy-to-use PhotoPoint systems which
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offer the potential for predictable and consistent results. 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. See "--Targeted Diseases and Clinical Trials" and "--Risk
Factors--Early Stage of the Company and its Products" and "Unproven Safety
and Efficacy; Clinical Trials." See "--Risk Factors" generally for a
discussion of certain other risks, including those relating to
forward-looking statements.
DRUG TECHNOLOGY. The Company holds exclusive license rights under
certain U.S. and foreign patents to several classes of synthetic,
photoselective compounds, subject to certain governmental rights. See
"--Patents and Proprietary Technology." From its classes of compounds, the
Company has selected Purlytin as its leading drug candidate and has used
Purlytin in each of its clinical trials to date. The Company has granted to
Pharmacia & Upjohn an exclusive, worldwide license to use Purlytin in the
field of photodynamic therapy. See "--Strategic Collaborations" and "--Risk
Factors--Reliance on Collaborative Partners" and "--Uncertainty Regarding
Patents and Proprietary Technology." The Company is developing other
potential photoselective drugs for additional disease applications and future
partnering opportunities.
The Company believes that its synthetic photoselective drugs may provide
the following benefits:
- PREDICTABLE. The synthetic nature of the Company's photoselective
compounds permits the Company to design drugs with a single molecular
structure. The Company believes that this characteristic may facilitate
consistency in clinical treatment settings, as well as predictability in
manufacturing and quality control.
- MINIMAL SIDE EFFECTS. Treatments to date have been well-tolerated,
with the primary side effect being a mild, transient skin
photosensitivity in some patients.
- 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 photoselective 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, light emitting diode ("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 PhotoPoint. The Company and Iridex
are collaborating on the development of light-producing devices for
PhotoPoint 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 light delivery and measurement devices including a wide variety
of fiber optic light delivery devices with specialized tips for use in
PhotoPoint. 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
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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. Certain of the Company's light delivery devices were
introduced into the Company's clinical trials in 1992. The Company has also
developed light measurement devices for PhotoPoint including devices that
detect wavelength and fluorescence to facilitate the measurement of light or
drug dose.
Through collaborative arrangements with Boston Scientific in the fields
of urology, pulmonology and gastroenterology and Cordis in the field of
cardiology, the Company is co-developing medical catheters for use in
PhotoPoint. 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.
TARGETED DISEASES AND CLINICAL TRIALS
The Company believes that PhotoPoint 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
Purlytin 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
Purlytin 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 economic considerations, 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--Early Stage of the Company
and its Products" and "--Unproven Safety and Efficacy; Clinical Trials". 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
Purlytin in the field of oncology.
CUTANEOUS METASTATIC BREAST CANCER (CMBC). The Company has completed
treating patients in its Phase II/III clinical trials using Purlytin for the
local treatment of breast cancer (adenocarcinoma) which has spread to the
chest wall. The Company began Phase II/III clinical trials in the United
States in March 1996 and Pharmacia & Upjohn began Phase II clinical trials in
Europe in January 1997 and the patient accrual has since concluded. The
Company plans to file a New Drug Application ("NDA") in 1998 for this
indication as a palliative treatment of metastatic lesions which have failed
to respond to radiation therapy. There can be no assurance that the NDA will
be filed or that the U.S.
6
Food and Drug Administration ("FDA") will approve the NDA once it is filed.
The Company is continuing to treat CMBC patients under a new Phase III trial
in the United States during the NDA filing and review process.
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 Purlytin for the local treatment of
AIDS-related KS. The Company began Phase II/III clinical trials for
AIDS-related KS in March 1996 and continues to treat patients.
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 Investigational New Drug application ("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. The decision to proceed to clinical trials
depends upon a number of factors including preclinical results, FDA
communications, approval, competitive factors, economic considerations and
the Company's overall business strategy.
OPHTHALMOLOGY
The Company believes that PhotoPoint has the potential to treat a
variety of ophthalmic disorders, including conditions caused by
neovascularization, such as age-related macular degeneration ("AMD") and
corneal neovascularization, as well as other ophthalmic conditions, including
glaucoma. Neovascularization is a condition in which new blood vessels grow
abnormally under 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 Purlytin in the field of
ophthalmology and is collaborating with Iridex, through its subsidiary
company, Iris Medical Instruments, Inc., 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 has
conducted preclinical studies for the treatment of corneal neovascularization
and glaucoma.
UROLOGY
Benign prostate hyperplasia ("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 Purlytin in the field of urology. Additionally, the
Company is conducting preclinical studies using Purlytin for the treatment of
BPH and is collaborating with Boston Scientific on the joint development of
medical catheter devices for this use. Based on economic considerations, the
Company is developing local drug delivery methods to optimize this treatment
and may submit an amended IND to the FDA.
DERMATOLOGY
BASAL CELL CARCINOMA. The Company is conducting clinical trials using
Purlytin for the local treatment of certain nonmelanoma cutaneous (skin)
cancers. The skin cancer trials include basal cell carcinomas (skin cancers
caused primarily by sun exposure) and basal cell nevus syndrome (a genetic
disease which causes multiple, recurrent basal cell carcinomas). In 1996, the
Company began Phase II/III clinical trials for basal cell carcinoma in the
United States and Pharmacia & Upjohn began Phase II/III trials in Australia.
Subsequently, the responsibility for the Phase II/III basal cell carcinoma
studies was transferred from the FDA Division of Oncology to the FDA Division
of Dermatology. Because dermatological diseases are generally non
life-threatening, certain study criteria in the FDA Division of Dermatology
differ from the oncology criteria. Therefore the Company is performing
additional preclinical studies prior to the completion of the Phase II/III
clinical studies. The Company may or may not elect to further develop
PhotoPoint procedures for skin disorders based on the criteria of the FDA
Division of Dermatology and other factors, including cost and reimbursement.
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OTHER DERMATOLOGICAL DISORDERS. A number of other non-cancerous
dermatological disorders have shown potential for being treated with
PhotoPoint. Among these are psoriasis, a chronic and potentially debilitating
skin disorder, and actinic keratosis, a pre-cancerous condition of the upper
layer of the skin. The Company is collaborating with Medicis on the
co-development of PhotoPoint in the field of dermatology and, under the
provisions of the letter of intent with Medicis, the Company is responsible
for the funding and development of the dermatological clinical trials. The
Company is continuing to evaluate psoriasis as the next possible dermatology
indication and may advance to a clinical trial based on the progress of the
preclinical studies and other factors. Preparations include development of
LED or other light sources and light delivery systems for use in dermatology
applications and protocol development for anticipated clinical trials.
CARDIOLOGY
The Company is developing PhotoPoint in the field of cardiology. Early
preclinical studies with PhotoPoint indicate that certain photoselective
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, the
renarrowing of arterial vessels following angioplasty, and believes that
PhotoPoint may provide a means of preventing restenosis, or even treating
diffuse atherosclerosis. The Company is collaborating with Cordis on the
joint development of medical catheter devices for such cardiovascular
applications. In addition, the Company believes that PhotoPoint may provide a
means of reducing intimal hyperplasia (excessive cell growth at the
anastomosis (stitch) sites) associated with bypass grafts and is
collaborating with Ramus on the application of PhotoPoint in the area of
bypass grafts.
GYNECOLOGY
The Company believes that PhotoPoint has potential in various
gynecological applications, including dysfunctional uterine bleeding which
accounts for a significant percent of all hysterectomies. The risks
associated with a 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 PhotoPoint as a method of endometrial ablation and believes
PhotoPoint may be a non-surgical alternative to existing techniques or
hysterectomies. Other possible indications include the treatment of
endometriosis and cervical dysplasia.
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 "--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 Purlytin.
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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 Purlytin in the area
of photodynamic therapy. The License Agreement provides for the
co-development of Purlytin for use in PhotoPoint in the fields of oncology,
urology and dermatology. In August 1996, the Company signed an agreement with
Pharmacia & Upjohn for the co-development of Purlytin 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 Purlytin and to fund
other current and future preclinical and clinical trials conducted by the
Company involving Purlytin. The Company is entitled to receive royalties on
the sale of Purlytin, 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 Purlytin and
to refrain from developing or selling other photodynamic therapy drugs in the
fields contained in the License Agreement 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 by the
Company in the fields contained in the License Agreement. The License
Agreement remains in force for the duration of the patents related to
Purlytin or for a period of ten years from the first commercial sale of
Purlytin on a country-by-country basis, whichever is longer. After those
periods have expired, Pharmacia & Upjohn will have an irrevocable,
royalty-free, non-exclusive license to Purlytin. 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 Purlytin 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 Purlytin 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 measure light ("light devices") for use with Purlytin in
photodynamic therapy in the fields of oncology and urology. 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 Purlytin. 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 Purlytin. Pursuant to this agreement, Pharmacia &
Upjohn agreed to (i) be the Company's exclusive supplier of such emulsion
products, (ii)
9
manufacture and supply all of the Company's worldwide requirements of certain
emulsion formulations containing Purlytin, and (iii) not develop or supply
formulations or services for use in any photodynamic therapy applications for
any other company. This agreement continues indefinitely except that it may
be terminated ten years after the first commercial sale of Purlytin. 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 "--Marketing, Sales and Distribution"
and "--Risk Factors--Limited Manufacturing and Marketing Capability and
Experience" 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 "--Marketing, Sales and Distribution" and
"--Risk Factors--Limited Manufacturing and Marketing Capability and
Experience" 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 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" and
"--Marketing, Sales and Distribution" and "--Risk Factors--Limited
Manufacturing and Marketing Capability and Experience."
RAMUS MEDICAL TECHNOLOGIES
In December 1996, the Company's wholly owned subsidiary, Miravant
Cardiovascular, Inc. ("MRVTC"), entered into a co-development agreement with
Ramus, an innovator in the development of autologous tissue stent-grafts for
vascular bypass surgeries. Generally the agreement provides MRVTC 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 MRVTC, products for use in preclinical and clinical testing with all
other preclinical and clinical costs to be paid by MRVTC. 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, MRVTC 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
10
under specified terms and conditions. Further, MRVTC 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.
MEDICIS PHARMACEUTICAL CORPORATION
In October 1997, the Company executed a letter of intent with Medicis
Pharmaceutical Corporation, the leading independent dermatology company in
the United States, to develop and commercialize certain PhotoPoint procedures
for dermatology applications. The letter agreement pursuant to which the
parties are collaborating is intended to facilitate the clinical development
of PhotoPoint in dermatology and provide the framework for a more definitive
agreement which would grant Medicis an exclusive license to distribute and
sell certain PhotoPoint products in the United States. At this time, the
Company and Medicis have not entered into any such agreement.
CHIRON DIAGNOSTICS
In November 1997, the Company executed a letter of intent with Chiron
Diagnostics, a division of Chiron Corporation and an international leader in
IN VITRO diagnostics, to collaborate on studies directed towards the early
detection and treatment of lung cancer. The alliance is designed to give the
Company a potentially more sensitive, less invasive and less costly way to
identify patients in early stages of cancer who are eligible for
participation in PhotoPoint clinical trials. In addition to assisting the
Company in these clinical trials, Chiron has agreed to work exclusively with
the Company in the field of PhotoPoint for certain oncology indications.
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 photoselective compounds (including Purlytin) 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 (iii) 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, 1997, 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 2013. 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 Purlytin, 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;
11
(ii) the Company retains the right to manufacture and sell this system for
use with the Company's own photoselective 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."
RESEARCH AND DEVELOPMENT PROGRAMS
The Company's research and development programs are devoted to the
discovery and development of drugs and devices for PhotoPoint. 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
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 PhotoPoint. 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
PhotoPoint. 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" and Item 7, "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Results of Operations" and
Note 7 of Notes to Consolidated Financial Statements.
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 Purlytin 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 Purlytin into a sterile injectable formulation and packages it in
vials for distribution by the Company. The Company expects 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
12
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,
there can be no assurance that the Company's current 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 timely
manner or in sufficient quantities to meet its needs. See "--Strategic
Collaborations" and "--Risk Factors--Reliance on Collaborative Partners" and
"--Limited Manufacturing and Marketing Capability and Experience" and
"--Dependence on Suppliers."
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
Purlytin in certain disease fields. 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 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 PhotoPoint in the field
of ophthalmology. See "--Strategic Collaborations" and "--Risk
Factors--Reliance on Collaborative Partners."
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 7 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 23 United States patents
duly issued by the U.S. Patent and Trademark Office which expire during the
time frame 2010 through 2016, a substantial number of which relate to certain
light delivery and measurement devices and methods. The Company is also the
record owner of four foreign patents expiring during the time frame from 2012
to 2014. Also in its name, the Company owns a number of United States (and
related foreign) patent applications filed and pending. In addition, the
Company has exclusive license rights under fifteen issued United States
patents, which expire during the time frame from 2006 through 2013, and two
issued foreign patents expiring in 2006, and under several pending United
States patent applications (and related foreign patent applications),
relating to certain photoselective compounds, as well as exclusive rights to
two method-of-use patents.
13
The Company obtained its photoselective compound patent rights, including
rights to Purlytin, 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.
Certain of the foregoing patents and patent applications are subject to
certain governmental rights described below.
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 including, but not limited to, patents on photoselective
compounds. 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, which relate to the Company's
business or
14
anticipated business, 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.
Certain of the Company's research, including research relating to certain
pharmaceutical compounds covered by the License Agreement with Toledo, including
Purlytin, has been or is being funded in part by Small Business Innovation
Research Administration 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 a
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 an 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
15
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.
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).
16
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 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 PhotoPoint devices, it may be necessary for the Company to
submit a PMA or a 510(k) to the FDA for its PhotoPoint 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
PhotoPoint 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.
17
INTERNATIONAL. With regard to the marketing of PhotoPoint 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 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.
18
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.
The Company believes that a primary competitive issue will be the
performance characteristics of photoselective 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 the United States and certain other 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 Purlytin and PhotoPoint light devices.
See "--Strategic Collaborations."
EMPLOYEES
As of March 17, 1998, the Company employed 177 individuals,
approximately 79 of which were engaged in research and development, 51 were
engaged in manufacturing and clinical activities and 47 in general and
19
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 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
"--Strategic Collaborations" and "--Government Regulation" and Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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, 1997, the Company had an accumulated deficit of approximately $80.9
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
20
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 Purlytin 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 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 economic considerations,
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
"--Targeted Diseases and Clinical Trials" and "--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. See "--Strategic Collaborations."
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 pursuant to which the Company
granted to Pharmacia & Upjohn an exclusive worldwide license to use,
distribute and sell Purlytin for therapeutic or diagnostic applications in
the area of photodynamic therapy. The amount of royalty revenues and other
payments, if any, ultimately received by the Company with respect to sales of
Purlytin 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 Purlytin or that Pharmacia & Upjohn
will perform its obligations as expected. See "--Strategic Collaborations."
In addition, the Company is also collaborating with Boston Scientific
and Cordis with respect to the co-development of catheters for use in
photodynamic therapy. Also, the Company is collaborating with Medicis to
facilitate the clinical development of PhotoPoint in dermatology and with
Chiron for the early detection and treatment of lung cancer. The Company has
not entered into any definitive collaborative agreement with any of these
companies. No assurance can be given that these additional collaborations
will culminate in definitive collaborative agreements or
21
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. See "--Strategic Collaborations."
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
developing or marketing products for the diseases targeted by the
collaborative programs and the Company's products. If the Company's partners
elect to terminate the development and other activities contemplated by the
collaborative relationships described above, the Company will be required to
seek other partners, or expend substantial additional resources to pursue
such activities independently. There can be no assurance that such efforts
would be successful. See "--Strategic Collaborations" and "--Limited
Manufacturing and Marketing Capabilities and Experience."
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."
PRICE PROTECTION PROVISIONS OF SECURITIES PURCHASE AGREEMENTS
Included in the provisions of the Securities Purchase Agreements related
to the Company's private equity placements in September and October 1997 are
price protections provisions that provide that, if on the first anniversary
of the closing of such purchases, the 30 day average closing bid price of the
Common Stock for the period ending on the trading day prior to the
anniversary date is less than the closing price paid by the purchasers, then
the Company shall pay each purchaser additional cash or stock, or a
combination of both, as determined by the Company at its sole option. In the
event that the price of the Common Stock is significantly below the closing
price at the anniversary date, such payment, if made in cash, would have a
material adverse impact on the liquidity and financial condition of the
Company, or would, if made in shares of Common Stock, result in dilution to
existing shareholders.
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
22
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 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 collaborative 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
23
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" and "--Dependence upon
Suppliers."
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 photoselective compounds. Such issued U.S.
patents expire from 2006 through 2016. 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 Purlytin, provides that the licensors may elect
that the license become non-exclusive if the Company fails to satisfy certain
development and commercialization objectives. The termination or restriction
of the Company's rights under one or more of the licenses for any reason,
including without limitation its failure to satisfy commercialization
objectives or any other obligation thereunder, would likely have a material
adverse impact on the business and financial condition of the Company.
Moreover, 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
24
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
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
25
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."
YEAR 2000
The Company is in the process of assessing the impact of year 2000 on
its operations and systems, including those of its suppliers and
collaborators and other third parties. Management is in the process of
formalizing its assessment procedures and developing a plan to address
identified issues, if any. To date, the Company has performed a preliminary
evaluation of its operating systems and concluded that currently it is not
aware of any possible material impact of the year 2000. The Company is
continuing to evaluate the impact, if any, of year 2000 on its systems and
equipment and those of third parties with which the Company does business.
There can be no assurance that third parties, such as suppliers, clinical
research organizations and collaborative parties, are using systems that are
year 2000 compliant or will address any year 2000 issues in a timely fashion,
or at all. Any year 2000 compliance problems of either the Company, its
suppliers, its clinical research organizations, or its collaborative partners
could have a material adverse effect on the Company's business, operating
results and financial conditions.
The total cost of the year 2000 systems assessments and conversions is
funded through operating cash flows and the Company is expensing these costs.
The financial impact of making the required systems changes can not be known
precisely at this time, but is not expected to be material to the Company's
financial position, results of operations or cash flows.
POTENTIAL VOLATILITY OF STOCK PRICE; NO DIVIDENDS
The market prices for the Company's Common Stock and the securities of
emerging pharmaceutical and medical device companies generally have
historically been highly volatile. Future announcements concerning the
Company or its collaborators, competitors or industry, including but not
limited to the results of testing, technological innovations or new
commercial products, the achievement of or failure to achieve certain
milestones, governmental regulations, rules and orders or developments
concerning safety of the Company's products, may have a material adverse
effect on the market price of the Common Stock. In addition, the stock
market has experienced extreme price and volume fluctuations. This
volatility has significantly affected the market prices of securities of many
emerging pharmaceutical and medical device companies for reasons frequently
unrelated or disproportionate to the performance of the specific companies.
These broad market fluctuations may materially adversely affect the market
price of the Common Stock. Except for the three for two split of the Common
Stock declared for stockholders of record at July 24, 1995, 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's bank line of credit prohibits the payment of dividends on its
Common Stock.
26
CONTROL BY OFFICERS AND DIRECTORS
As of March 17, 1998, the Company's officers and directors beneficially
own approximately 25.6% of the outstanding Common Stock (approximately 29.3%
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 17, 1998, there were outstanding options to purchase
2,352,013 shares of Common Stock at a weighted average exercise price of
$20.60 per share, and warrants to purchase 2,925,239 shares of Common Stock
at a weighted average exercise price of $38.35 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.
ITEM 2. PROPERTIES
The Company has entered into three leases for approximately 73,100
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
$24,400 per month in 1998. This lease was extended during 1997 and expires in
October 2000. The facility is equipped and licensed to allow certain
laboratory testing and manufacturing. The Company manufactures and
distributes its active Purlytin drug substance from this facility.
In the second half of 1996, the Company entered into two additional
leases for approximately 54,800 square feet of office, laboratory and
manufacturing space. The current base rent for these two leases totals
approximately $53,700 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 month notice to the 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 these facilities. The Company will continue to incur additional costs
for the construction of the laboratories and office space associated with
these new facilities.
During 1997, the Company entered into a letter of intent with a local
developer to have a facility constructed to house its operations for the
foreseeable future. The Company is in the process of negotiating a
definitive agreement with respect to this new facility.
In September 1997, the Company began to sublease approximately 3,900
square feet of one of its buildings to Ramus Medical Technologies. The
sublease agreement is for three years with rent based upon the percentage of
square footage occupied. Rental income from Ramus, which is approximately
$3,800 per month, is also subject to increases based upon the consumer price
index.
ITEM 3. LEGAL PROCEEDINGS
27
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 have cooperated 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 1997.
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 MRVT. From August 30, 1995 to September 12, 1997, the Company's
Stock was traded on The Nasdaq National Market under the symbol PDTI.
Effective September 15, 1997, the Company changed its name to Miravant
Medical Technologies and its ticker symbol to MRVT. 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.
HIGH LOW
1997:
First quarter............................................... $37.25 $25.50
Second quarter.............................................. 36.75 22.75
Third quarter............................................... 60.75 34.00
Fourth quarter.............................................. 72.00 30.50
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
As of March 17, 1998, there were approximately 270 stockholders of
record of the Common Stock. Except for the three for two split of the Common
Stock declared for stockholders of record at July 24, 1995, 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.
28
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated statements of operations data set forth below
for each of the three years in the period ended December 31, 1997 and the
consolidated balance sheet data set forth below at December 31, 1996 and 1997
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, 1993 and 1994 and the consolidated balance sheet
data at December 31, 1993, 1994 and 1995 are derived from audited
consolidated financial statements not included herein. 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)
1997 1996 1995 1994 1993
----------- ----------- ---------- ---------- ----------
STATEMENT OF OPERATIONS DATA:
Revenues......................... $ 2,278 $ 3,598 $ 521 $ 130 $ 503
Costs and expenses............... 35,065 22,113 12,416 9,350 7,636
----------- ----------- ---------- ---------- ----------
Loss from operations............. (32,787) (18,515) (11,895) (9,220) (7,133)
Interest income (expense)........ 2,578 2,373 185 (259) (134)
----------- ----------- ---------- ---------- ----------
Net loss......................... $ (30,209) $ (16,142) $ (11,710) $ (9,479) $ (7,267)
----------- ----------- ---------- ---------- ----------
----------- ----------- ---------- ---------- ----------
Net loss per share (1)........... $ (2.36) $ (1.37) $ (1.19) $ (1.04) $ (0.85)
----------- ----------- ---------- ---------- ----------
----------- ----------- ---------- ---------- ----------
Shares used in computing
net loss per share (1).......... 12,791,044 11,786,429 9,861,212 9,115,926 8,508,882
----------- ----------- ---------- ---------- ----------
----------- ----------- ---------- ---------- ----------
DECEMBER 31,
-------------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
BALANCE SHEET DATA:
Cash and marketable securities... $ 83,462 $ 52,098 $ 8,886 $ 1,483 $ 4,979
Working capital.................. 80,734 51,519 6,403 (882) 2,705
Total assets..................... 93,031 59,886 11,259 3,545 7,254
Long-term obligations............ -- 21 203 778 3,164
Accumulated deficit.............. (80,854) (50,645) (34,503) (22,793) (13,314)
Total shareholders' equity....... 87,698 56,717 8,167 150 1,548
- -------------
(1) See Note 1 of Notes to Consolidated Financial Statements for information
concerning the computation of net loss per share.
29
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
PhotoPoint, the Company's proprietary technologies for photodynamic therapy.
The Company has been unprofitable since its founding and has incurred a
cumulative net loss of approximately $80.9 million as of December 31, 1997.
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, marketing,
sales, distribution 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 PhotoPoint 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 attributable to licensing agreements, contracts,
grants 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 currently conducting clinical trials in oncology,
dermatology and ophthalmology. 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.
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
30
value from period to period. As of December 31, 1997, options covering
302,500 shares with an exercise price of $34.75 per share have vested and
options covering 75,000 shares have been canceled. The remaining unvested
shares will vest in the years 1998 through 2000.
RESULTS OF OPERATIONS
The following table provides a summary of the Company's revenues for the
years ended 1997, 1996 and 1995:
- ---------------------------------------------------------------------------------
Consolidated Revenues 1997 1996 1995
- ---------------------------------------------------------------------------------
Product sales............................ $ 2,000 $ 5,000 $ 37,000
Grants and contracts..................... 146,000 577,000 445,000
Royalties................................ 234,000 73,000 39,000
License.................................. 1,896,000 2,943,000 -
- ---------------------------------------------------------------------------------
Total revenues........................... $ 2,278,000 $ 3,598,000 $ 521,000
- ---------------------------------------------------------------------------------
REVENUES. The Company's revenues increased from $521,000 in 1995 to
$3,598,000 in 1996 and decreased to $2,278,000 in 1997. The decrease in
revenues for the year ended December 31, 1997 as compared to the year ended
December 31, 1996 relates to the decrease in license income, which was
$1,896,000 in 1997 compared to $2,943,000 in 1996, associated with the
specific reimbursement of clinical costs in conjunction with the license
agreement entered into in July 1995 with Pharmacia and Upjohn, Inc.
("Pharmacia & Upjohn"). The decrease in revenues associated with the
reimbursement of clinical trial costs is the result of the timing and amount
of reimbursable costs incurred in the ongoing clinical trials. In addition,
revenues also decreased from 1997 to 1996 due to a decrease of $431,000 in
grant income. The decrease in grant income is due to a majority of the
grants being fully utilized during 1996, as well as two new grant awards
received in 1997 totaling $1.2 million that did not commence until October
1997. From 1995 through 1997, revenues from royalties have increased as a
result of royalty income earned from a license agreement entered into in 1992
with Laserscope which provides royalties from the sale of the Company's
previously designed device products. The increase in license income in 1996
as compared to 1995 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
1998 and expects to continue to receive royalties and grant income in the
future. The level of such license, grant and royalty income is likely to
fluctuate materially from period to period and in the future depending on the
amount of clinical costs incurred and/or reimbursed and the extent of
development activities under the Pharmacia & Upjohn license agreement, the
amount of grant income awarded and expended and the amount of device
products sold by Laserscope. In 1996, and continuing through 1997, the
Company decreased its custom device order activities so as to direct its
resources toward device production in support of its preclinical and clinical
trials and drug product development, which resulted in decreased device
product sales.
COST OF GOODS SOLD. Cost of goods sold decreased from $67,000 in 1995 to
$5,000 in 1996 and to $1,000 in 1997. This represents negative margins of
($30,000) in 1995, a break-even margin in 1996 and a positive margin of $1,000
in 1997. The decrease in cost of goods sold from 1995 through 1997 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
$8.8 million in 1995 to $15.7 million in 1996 and to $19.1 million in 1997.
These ongoing increases in research and development expenses relate primarily to
increased costs associated with the screening and treatment of qualified
individuals for participation in the clinical trials, the preparation for the
Company's first NDA filing, currently anticipated to be filed in 1998, and the
preclinical work associated with the development of new compounds and clinical
programs. In addition, research and development expenses continue to increase
in conjunction with the Company's progression through the various stages
31
of preclinical and clinical trials and the increased costs associated with
the purchase of raw materials and supplies for the production of clinical
devices and drug product for use in these preclinical and clinical trials.
The Company anticipates future research and development expenses to increase
as the Company continues to prepare for its NDA filing and 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 $3.5 million in 1995 to $6.4 million
in 1996 and to $14.9 million in 1997. The increase in selling, general and
administrative expenses for the year ended December 31, 1997 as compared to
the year ended December 31, 1996 is primarily due to increased expenses
associated with the Company's name change awareness and product branding
program. These expenses may continue as the Company's management considers
the benefits of creating an awareness of the Company's emerging PhotoPoint
technologies and establishing name brand recognition. In addition, selling,
general and administrative costs increased from 1995 through 1997 as a result
of (i) the increase in costs associated with professional services received
from financial consultants, attorneys, and public and media relations, (ii)
payroll costs due to the addition of administrative and corporate personnel
and (iii) costs associated with 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.
LOSS IN INVESTMENT IN AFFILIATE. In connection with its investment in
Ramus Medical Technologies ("Ramus") in December 1996, the Company recorded
as expense $1.1 million for the year ended December 31, 1997. The amounts
recorded represent the full amount of the affiliate's loss for the year ended
December 31, 1997. The Company's portion of Ramus' operations for 1996 was
not significant to the results of operations for the Company for the year
ended December 31, 1996. The affiliate's losses from operations are expected
to be ongoing throughout 1998 and beyond, and the level of such losses are
expected to fluctuate depending on research and development activities and
preclinical and clinical trial progress.
INTEREST INCOME. Interest income increased from $338,000 in 1995 to
$2.4 million in 1996 and to $2.6 million in 1997. The increase in interest
income from 1996 to 1997 resulted from the investment of proceeds received
from the Company's private equity placements in September and October 1997
and the Company's secondary public offering in April 1996. The increase in
interest income from 1995 to 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 $153,000 in 1995 to
$34,000 in 1996 and $6,000 in 1997. The decrease in interest expense from
1995 through 1997 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, 1997, the Company had approximately $85.4 million of
net operating loss carryforwards for federal income tax purposes, which
expire at various dates from the years 2002 through 2012. In addition, the
Company has approximately $3.7 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 $20.9 million which expires at various dates from the years
1998 to 2002. 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.
32
LIQUIDITY AND CAPITAL RESOURCES
Since inception through December 31, 1997, the Company has accumulated a
deficit of approximately $80.9 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 Stock 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, 1997, the
Company had received proceeds from the sale of equity securities and
convertible notes of approximately $181.5 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 (7.35%
as of December 31, 1997), which expires on January 31, 1999, 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 September and October 1997, the Company completed three private
equity placements of 1,416,000 shares of Common Stock which provided net
proceeds to the Company of approximately $68.2 million. In April 1996, the
Company completed a secondary public offering of 1,500,000 shares of Common
Stock. The offering provided net proceeds to the Company of approximately
$65.3 million. These 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 corporate bonds, U.S. Government
obligations and municipal obligations.
In December 1997, the Company's Board of Directors authorized the
repurchase of up to 750,000 shares of the Company's Common Stock. The
750,000 repurchase authorization was in addition to and superseded the
repurchase program authorized in July 1996, which allowed for the repurchase
of up to 600,000 shares of Common Stock. Under the repurchase programs, the
Company purchased 301,000 shares in 1997 and 138,500 shares in 1996 at a cost
of $10.0 million and $3.9 million, respectively. As of December 31, 1997,
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
specific reimbursement of clinical costs of $1.9 million in 1997 and $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 1998.
For 1995, 1996 and 1997, the Company required cash for operations of
$7.8 million and $15.1 million, and $25.4 million, respectively. The increase
in cash used in operations from 1995 through 1997 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 and personnel and the increase in general corporate activities. For
1995, 1996 and 1997, the Company received net cash from its financing
activities of $15.8 million, $62.2 million and $59.6 million, respectively.
The 1996 and 1997 increases resulted from proceeds from the Company's
secondary public offering in April 1996 and the Company's private equity
placements in September and October 1997.
The Company invested a total of $5.8 million in property and equipment
from 1995 through 1997. 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 property and equipment in
the future as the Company continues to expand its preclinical, clinical and
research and development activities. 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.
33
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, of which there can be no assurance, the cost of
manufacturing scale-up and the cost and effectiveness of commercialization
activities and arrangements.
The Company is likely to 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. There can be no assurance that the Company's existing
collaborative arrangements will be maintained or will reduce the Company's
funding requirements, or 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
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.
34
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. 48 Chairman of the Board and Chief Executive Officer
David E. Mai 53 Director, President of Miravant Medical Technologies, President of
Miravant Pharmaceuticals, Inc., President of Miravant Systems, Inc.
and President of Miravant Cardiovascular, Inc.
John M. Philpott 37 Chief Financial Officer, Treasurer and Assistant Secretary
Charles T. Foscue 49 Director
Michael D. Farney 54 Director
Donald K. McGhan 64 Director
Raul E. Perez, M.D. 48 Director
Jonah Shacknai 41 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.
DAVID E. MAI has served as President of the Company since May 1996,
President of Miravant Cardiovascular, Inc. since September 1992, President of
Miravant Pharmaceuticals, Inc. since July 1996 and President of Miravant
Systems, Inc. since June 1997. Mr. Mai served as Vice President of Corporate
Development for the Company from March 1994 until May 1996. Mr. Mai became
associated with Miravant Medical Technologies 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 Medical Electronics. Mr. Mai 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.S. degree in Accounting and in Management Information Systems from
California State University of Northridge.
35
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
previously served 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 previously served 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.
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 is the Chairman of the
Board of Medical Device Alliance, Inc., Las Vegas, Nevada, which develops,
manufactures and markets ultrasonic surgical systems, disposables and
accessories for medical specialty markets. Mr. McGhan is also currently
Chairman Emeritus and has previously served as Chairman of the Board, Chief
Executive Officer and President of INAMED. Additionally, Mr. McGhan was
previously Founder, Chairman of the Board and Chief Executive Officer of
McGhan NuSil Corporation, which was acquired by Union Carbide Corporation in
1990. Mr. McGhan has also served as Director of Operations for Ortho
Diagnostic Systems, Inc., a 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 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 Maryland and completed his internship and residency in
obstetrics and gynecology at St. John's Mercy Medical Center.
JONAH SHACKNAI has served as a director of the Company since September
1997. Mr. Shacknai is a founder of Medicis Pharmaceutical Corporation where
he has served as Chairman of the Board and Chief Executive Officer since July
1988. Mr. Shacknai also serves as a member of the National Arthritis and
Musculoskeletal and Skin Disease Advisory Council of the National Institute
of Health, as a member of the Joint High Level Advisory Panel of the United
States-Israel Science and Technology Commission and as a director for Health
World Corporation. Previously, he was a member of the Washington D.C. law
firm of Royer, Shacknai & Mehle. Mr. Shacknai has also previously served as
Counsel to the United States House of Representatives Committee on Science
and Technology, founding director of IVAX Corporation and as a member of the
Commission on the Federal Drug Approval Process.
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.
36
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
non-employee 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, Raul E. Perez, M.D. and Jonah Shacknai.
THE COMPENSATION COMMITTEE. The Compensation Committee, composed solely
of non-employee directors, reviews and takes action regarding the 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, Raul E.
Perez, M.D. and Jonah Shacknai.
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, 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 1997, except Raul E.
Perez, M.D., Michael D. Farney and Donald K. McGhan each of whom failed to file
a timely Form 5 with respect to the annual grant of 7,500 options to non-
employee directors. In addition, Jonah Shacknai failed to file a timely Form 5
with respect to the 50,000 options which were granted to him, and subsequently
transferred to the Jonah Shacknai Special Trust, upon his appointment to the
Board of Directors in September 1997.
37
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, 1997, 1996 and 1995
(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)(1)
- ---------------------------------- ---- --------- ---------- ----------------
Gary S. Kledzik 1997 $ 200,000 $ -- 100,000
Chairman of the Board and Chief 1996 180,000 -- 5,000(2)
Executive Officer 1995 135,000 55,000(3) 200,000
David E. Mai 1997 178,000 -- 50,000
Director and President of 1996 155,000 -- 5,000(2)
Miravant 1995 118,000 -- 100,000
John M. Philpott 1997 108,000 -- 25,000
Chief Financial Officer 1996 90,000 -- 5,000(2)
1995 65,000(4) -- 22,500
(1) 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) 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.
(3) 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.
(4) Mr. Philpott's annual salary during 1995 was $85,000. However, as his
employment with the Company began in March 1995, only a portion of this
amount was earned during 1995.
The following table sets forth certain information as of December 31,
1997 and the year then ended concerning stock options granted to the named
executive officers.
- --------------------------------------------------------------------------------------------------------------
OPTION GRANTS IN LAST FISCAL YEAR
- --------------------------------------------------------------------------------------------------------------
POTENTIAL REALIZABLE
NUMBER OF % OF TOTAL VALUE AT ASSUMED
SECURITIES OPTIONS ANNUAL RATES OF
UNDERLYING GRANTED TO STOCK PRICE APPRECIATION
OPTIONS EMPLOYEES EXERCISE FOR OPTION TERM
GRANTED DURING PRICE EXPIRATION ------------------------
NAME (# OF SHARES)(1) THE YEAR ($/SHARE) DATE 5% 10%
- ------------ ------------------------------------------------------------------------------------------
Gary S. Kledzik 100,000 27.32% $ 28.00 1/01/07 $ 1,760,905 $ 4,462,479
38
David E. Mai 50,000 13.66% 28.00 1/01/07 880,452 2,231,239
John M. Philpott 25,000 6.83% 28.00 1/01/07 440,226 1,115,620
(1) 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.
The following table sets forth information as to the stock options held by
the named executive officers at the end of 1997 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
1997.
- -----------------------------------------------------------------------------------
1997 YEAR-END OPTION VALUES
- -----------------------------------------------------------------------------------
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1997 DECEMBER 31, 1997(1)
----------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------ ----------- ------------- ----------- -------------
Gary S. Kledzik 615,000 103,750 $16,910,250 $ 1,282,500
David E. Mai 225,000 103,750 6,874,875 945,000
John M. Philpott 15,625 34,375 276,863 552,488
(1) Based on the difference between the closing price of the Common Stock as
reported on the NASDAQ National Market as of December 31, 1997 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, December 31 of each
year. 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 $300,000. As of
December 31, 1997, 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 $0.88 per share. Additionally, from two of the Company's employee stock
option plans, Dr. Kledzik has received options to purchase 331,250 shares at
exercise prices ranging from $6.00 to $56.00 per share with a weighted average
exercise price of $30.59 per share. See Note 1 to Summary Compensation Table.
Options for 899,466 shares have vested, of which 284,466 have been exercised.
Options outstanding at December 31, 1997 vest ratably over four years from the
date of grant. Vesting of all of the stock options under the Employment
Agreement is contingent upon Dr. Kledzik's continued employment with Miravant,
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
39
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
created or enhanced during Dr. Kledzik's employment to and providing for the
protection of confidential information.
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 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 Mr. Mai notifies the Company in
writing at least 30 days in advance of, 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
$225,000. As of December 31, 1997, 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 two of the
Company's employee stock option plans, Mr. Mai has received options to
purchase 181,250 shares at exercise prices ranging from $6.00 to $56.00 per
share with a weighted average exercise price of $29.01 per share. See Note 1
to Summary Compensation Table. Options for 225,000 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.
The Company and Mr. Philpott are parties to an employment agreement
effective March 20, 1995, as amended (the "Employment Agreement"), pursuant
to which Mr. Philpott serves as Chief Financial Officer and Controller of 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 Mr. Philpott notifies the Company in writing at least 30 days
in advance of, or the Company notifies Mr. Philpott in writing 30 days before
or after, March 20 of each year. Under the terms of the Employment
Agreement, Mr. Philpott is entitled to an annual salary as determined by the
Company from time to time. The current annual salary is $140,000. As of
December 31, 1997, in connection with the Employment Agreement, Mr. Philpott
has received options to purchase a total of 15,000 shares of Common Stock at
exercise prices ranging from $8.00 to $10.67 per share with a weighted
average price of $9.34 per share. Additionally, from two of the Company's
employee stock option plans, Mr. Philpott has received options to purchase
37,500 shares at exercise prices ranging from $28.00 to $56.00 per share with
a weighted average exercise price of $31.22 per share. See Note 1 to Summary
Compensation Table. Options for 15,625 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. Philpott'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. Philpott's option or by the Company for cause, then the Company shall
pay Mr. Philpott 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 Miravant Medical Technologies 1996 Stock Compensation Plan, as
amended and restated effective March 3, 1997 (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
40
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. 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 stock options under the Plan. During the year ended
December 31, 1997, the following non-employee directors were each awarded
automatic grants of stock options to purchase 7,500 shares under the Plan:
Charles T. Foscue, Michael D. Farney, Donald K. McGhan and Raul E. Perez. In
addition, Jonah Shacknai, upon his appointment to the Board of Directors in
September 1997, received 50,000 stock options under the Plan which were
granted at an option price equal to the fair market value of the Common
Stock on the grant date and vest ratably each quarter over a three year
period. 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
1997 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, Miravant Cardiovascular, Inc. See Item 1,
"Business" and Item 13, "--Certain Relationships and Related Transactions."
In February 1998, the Company agreed to guaranty a term loan in the
amount of $7,600,000 from a bank to Michael D. Farney, a director of the
Company. The loan is due and payable on July 31, 1999, or sooner upon an
event of default (as defined in the loan agreement), bears interest at the
bank's reference rate, minus .5% per annum payable quarterly, and is secured
by all of Mr. Farney's shares of the Company's Common Stock. In connection
with the guaranty, the Company granted the bank a security interest in an
account maintained at the bank and agreed, upon an event of default, to
purchase the loan from the bank for a price generally equal to the then
outstanding principal, plus accrued interest, fees and costs. In the event
the Company purchases the loan, Mr. Farney granted the Company the option to
acquire all of his shares of Common Stock at a price equal to 50% of the
20-day average closing price, net of loan repayment. He also agreed to
certain restrictions on the sale of such shares. Under the loan agreement
and the guaranty, Mr. Farney and the Company are subject to the maintenance
of specified financial and other covenants. See Note 11 of Notes to
Consolidated Financial Statements.
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 17, 1998 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
- ------------------------------------------------------------------------------------
Gary S. Kledzik, Ph.D. (3) 1,469,125 10.3%
41
Donald K. McGhan (3)(5) 1,323,920 9.3
Daniel R. Doiron, Ph.D. (4) 1,296,336 9.1
Paul F. Glenn (6) 827,160 5.8
Pharmacia & Upjohn, Inc. (7) 725,001 5.1
Michael D. Farney 480,000 3.4
David E. Mai 238,125 1.7
Raul E. Perez, M.D. 45,000 *
Charles T. Foscue 61,913 *
John M. Philpott 26,250 *
Jonah Shacknai (8) -- *
All directors and executive officers as a
group (8 persons) (8) 3,644,333 25.6
- ---------------
* 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.
(2) Includes the following shares of Common Stock issuable upon exercise of
options and/or warrants exercisable within 60 days of March 17, 1998:
Dr. Kledzik--615,625 shares; Mr. McGhan--34,500 shares; Dr.
Doiron--25,000 shares; Mr. Glenn--0 shares; Mr. Farney--45,000 shares;
Mr. Mai--200,815 shares; Dr. Perez--45,000 shares; Mr. Foscue--33,917
shares; Mr. Philpott--21,250 shares; and directors and executive officers
as a group--996,107 shares.
(3) 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) According to the Schedule 13D filings, Mr. Doiron's address is 3090
Calzada Ridge Road, Santa Ynez, California 93460.
(5) Includes 539,420 shares of Common Stock held by McGhan Management, a
Nevada Limited Partnership, 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) 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.
(8) Excludes 6,250 shares underlying options exercisable within 60 days
of March 17, 1998 as to which Mr. Shacknai disclaims beneficial
ownership. Such shares are held in a trust administered by an
independent trustee for the benefit of Mr. Shacknai's children.
42
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 five percent 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, 1997, the Company
paid $3.3 million and recorded as expense $2.9 million in connection with the
Formulation Agreement. The Formulation Agreement also 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, 1997, the Company paid HAI $222,000
associated with the private equity placements and paid HAI $293,000 and
recorded as expense $178,000 in connection with ongoing consulting services.
See Note 7 of Notes to Consolidated Financial Statements.
In December 1997, the Compensation Committee of the Board of Directors
recommended and subsequently approved an option loan program for the
Company's named executive officers. The loans, which accrue interest at the
applicable federal rates and are payable in five years, were awarded
specifically for the purpose of exercising options and paying the related
option exercise price and payroll taxes and are secured by the underlying
shares exercised. The amounts awarded under this program were $500,000 each
for both Gary S. Kledzik and David E. Mai and $150,000 for John M. Philpott.
As of March 17, 1998, these amounts had been fully utilized by each of the
officers.
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, 1997, and 1996 44
Consolidated Statements of Operations for the
years ended December 31, 1997, 1996 and 1995 45
Consolidated Statements of Shareholders'
Equity for the years ended December 31,
1997, 1996, and 1995 46
Consolidated Statements of Cash Flows for the
years ended December 31, 1997, 1996 and 1995 47
Notes to Consolidated Financial Statements 48
43
(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
44
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.
Miravant Medical Technologies
/s/ Gary S. Kledzik, Ph.D.
---------------------------------------
Gary S. Kledzik, Ph.D., Chief Executive
Officer and Chairman of the Board
Dated: March 31, 1998
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, 1998
- -------------------------- and Chief Executive Officer,
Gary S. Kledzik, Ph.D. (Principal Executive Officer)
/s/ David E. Mai Director and President March 31, 1998
- --------------------------
David E. Mai
/s/ John M. Philpott Chief Financial Officer and Controller March 31, 1998
- -------------------------- (Principal Financial Officer and
John M. Philpott Principal Accounting Officer)
/s/ Michael D. Farney Director March 31, 1998
- --------------------------
Michael D. Farney
/s/ Donald K. McGhan Director March 31, 1998
- --------------------------
Donald K. McGhan
/s/ Raul E. Perez, M.D. Director March 31, 1998
- --------------------------
Raul E. Perez, M.D.
/s/ Charles T. Foscue Director March 31, 1998
- --------------------------
Charles T. Foscue
/s/ Jonah Shacknai Director March 31, 1998
- --------------------------
Jonah Shacknai
45
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Miravant Medical Technologies
We have audited the accompanying consolidated balance sheets of Miravant
Medical Technologies as of December 31, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Miravant
Medical Technologies at December 31, 1997 and 1996 and the consolidated
results of its operations and its cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ ERNST & YOUNG LLP
---------------------
ERNST & YOUNG LLP
Woodland Hills, California
February 12, 1998
46
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
1997 1996
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $55,666,000 $31,498,000
Investments in short-term marketable securities 27,796,000 20,600,000
Accounts receivable 1,833,000 2,179,000
Prepaid expenses and other current assets 772,000 390,000
----------- -----------
Total current assets 86,067,000 54,667,000
Property, plant & equipment:
Vehicles 28,000 28,000
Furniture and fixtures 1,578,000 943,000
Equipment 3,752,000 2,444,000
Leasehold improvements 3,071,000 1,072,000
Capital lease equipment 184,000 184,000
----------- -----------
8,613,000 4,671,000
Accumulated depreciation and amortization 2,886,000 1,806,000
----------- -----------
5,727,000 2,865,000
Investment in affiliate 895,000 2,000,000
Patents and other assets 342,000 354,000
----------- -----------
Total assets $93,031,000 $59,886,000
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,290,000 $ 2,716,000
Accrued payroll and expenses 1,022,000 352,000
Current portion of long term obligations -- 42,000
Current portion of capital lease obligations 21,000 38,000
----------- -----------
Total current liabilities 5,333,000 3,148,000
Capital lease obligations, less current portion -- 21,000
Shareholders' equity:
Common stock, 50,000,000 shares authorized;
13,952,847 and 12,337,876 shares issued
and outstanding at December 31, 1997 and
December 31, 1996, respectively 170,451,000 108,974,000
Deferred compensation (1,899,000) (1,612,000)
Accumulated deficit (80,854,000) (50,645,000)
----------- -----------
Total shareholders' equity 87,698,000 56,717,000
----------- -----------
Total liabilities and shareholders' equity $93,031,000 $59,886,000
----------- -----------
----------- -----------
See accompanying notes.
47
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
1997 1996 1995
------------ ----------- ------------
Revenues:
Product sales $ 2,000 $ 5,000 $ 37,000
Grants, licensing and
royalty revenue 2,276,000 3,593,000 484,000
------------ ----------- ------------
2,278,000 3,598,000 521,000
Cost and expenses:
Cost of goods sold 1,000 5,000 67,000
Research and development 19,053,000 15,715,000 8,802,000
Selling, general and administrative 14,906,000 6,393,000 3,547,000
Loss in investment in affiliate 1,105,000 -- --
------------ ----------- ------------
Total costs and expenses 35,065,000 22,113,000 12,416,000
Loss from operations (32,787,000) (18,515,000) (11,895,000)
Interest income (expense):
Interest income 2,584,000 2,407,000 338,000
Interest expense (6,000) (34,000) (153,000)
------------ ----------- ------------
Total interest income 2,578,000 2,373,000 185,000
------------ ----------- ------------
Net loss $(30,209,000) $(16,142,000) $(11,710,000)
------------ ----------- ------------
------------ ----------- ------------
Net loss per share - basic and diluted $ (2.36) $ (1.37) $ (1.19)
------------ ----------- ------------
------------ ----------- ------------
Shares used in computing net loss per
share 12,791,044 11,786,429 9,861,212
------------ ----------- ------------
------------ ----------- ------------
See accompanying notes.
49
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, 1995 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 -- -- 563,456 1,010,000 -- -- -- 1,010,000
and warrants
Conversion of notes
payable (net of
approximately $5,000 of -- -- 11,562 87,000 -- -- -- 87,000
debt issuance costs)
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
Issuance of stock at $50.00
per share (net of
approximately $2,627,000
of offering costs) -- -- 1,416,000 68,173,000 -- -- -- 68,173,000
Exercise of stock options
and warrants -- -- 499,971 1,536,000 -- -- -- 1,536,000
Repurchase of stock -- -- (301,000) (10,041,000) -- -- -- (10,041,000)
Deferred compensation
related to warrants granted,
net of cancellations -- -- -- 1,809,000 -- (1,809,000) -- --
Amortization of deferred
compensation -- -- -- -- -- 1,522,000 -- 1,522,000
Net loss -- -- -- -- -- -- (30,209,000) (30,209,000)
------- --------- ---------- ------------ --------- ------------ ------------ -----------
------- --------- ---------- ------------ --------- ------------ ------------ -----------
Balance at December 31, 1997 -- $ -- 13,952,847 $170,451,000 $ -- $(1,899,000) $(80,854,000) $87,698,000
------- --------- ---------- ------------ --------- ------------ ------------ -----------
------- --------- ---------- ------------ --------- ------------ ------------ -----------
See accompanying notes.
50
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
1997 1996 1995
------------- -------------- -------------
OPERATING ACTIVITIES:
Net loss............................................ $(30,209,000) $ (16,142,000) $(11,710,000)
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation and amortization................... 1,099,000 615,000 602,000
Amortization of deferred compensation........... 1,522,000 2,276,000 2,286,000
Changes in operating assets and liabilities:
Accounts receivable.......................... 346,000 (2,168,000) --
Prepaid expenses and other assets............ (372,000) 44,000 (236,000)
Accounts payable and accrued payroll and
expenses..................................... 2,244,000 269,000 1,257,000
------------- -------------- -------------
Net cash used in operating activities.............. (25,370,000) (15,106,000) (7,801,000)
INVESTING ACTIVITIES:
Purchases of marketable securities.................. (44,696,000) (130,200,000) --
Sales of marketable securities...................... 37,500,000 109,600,000 --
Investment in affiliate............................. 1,105,000 (2,000,000) --
Assets used in clinical trials...................... -- -- (528,000)
Purchases of property, plant and equipment.......... (3,942,000) (1,855,000) (10,000)
Purchases of patents................................ (17,000) (51,000) (64,000)
------------- -------------- -------------
Net cash used in investing activities............... (10,050,000) (24,506,000) (602,000)
FINANCING ACTIVITIES:
Proceeds from issuance of Common Stock, less
issuance costs.................................. 69,709,000 66,271,000 16,866,000
Purchases of Common Stock.......................... (10,041,000) (3,948,000) --
Proceeds from notes payable........................ -- -- 1,230,000
Payments of notes payable.......................... -- -- (1,230,000)
Payments of capital lease obligations.............. (38,000) (43,000) (38,000)
Payments of long term obligations.................. (42,000) (56,000) (47,000)
Proceeds from line of credit....................... -- -- 3,682,000
Payments of line of credit......................... -- -- (4,682,000)
Repayment of officer note receivable............... -- -- 25,000
------------- -------------- -------------
Net cash provided by financing activities.......... 59,588,000 62,224,000 15,806,000
------------- -------------- -------------
Net increase in cash and cash equivalents.......... 24,168,000 22,612,000 7,403,000
Cash and cash equivalents at beginning of period... 31,498,000 8,886,000 1,483,000
------------- -------------- -------------
Cash and cash equivalents at end of period......... $ 55,666,000 $ 31,498,000 $ 8,886,000
------------- -------------- -------------
------------- -------------- -------------
SUPPLEMENTAL DISCLOSURES:
State taxes paid................................... $ 104,000 $ 14,000 $ 8,000
------------- -------------- -------------
------------- -------------- -------------
Interest paid...................................... $ 7,000 $ 34,000 $ 213,000
------------- -------------- -------------
------------- -------------- -------------
See accompanying notes.
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Miravant Medical Technologies (the "Company") is engaged in the
research and development of drugs and medical device products for use in
PhotoPoint, the Company's proprietary technologies for photodynamic therapy.
Effective September 15, 1997, the Company changed its name from PDT, Inc. to
Miravant Medical Technologies. 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, 1997, the Company had an accumulated deficit of
$80.9 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
Miravant Medical Technologies and its wholly owned subsidiaries, Miravant
Systems, Inc., Miravant Pharmaceuticals, Inc., and Miravant Cardiovascular,
Inc. All significant intercompany balances and transactions have been
eliminated in consolidation. Certain reclassifications of prior year amounts
have been made for purposes of presentation.
INVESTMENTS IN AFFILIATES
Investments in affiliates, owned more than 20 % but not in excess of
50 % 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 of 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. For the year ended
December 31, 1997, the Company recorded expense of $1,105,000 which
represents the full amount of Ramus' loss for 1997. The Company's portion of
Ramus' operations for 1996 was not significant to the results of operations
for the Company for the year ended December 31, 1996.
MARKETABLE SECURITIES
Marketable securities consist of short-term, interest-bearing
corporate bonds, U.S. Government obligations and municipal obligations in the
amount of $8.3 million, $8.5 million and $11.0 million, respectively, as of
December 31, 1997. The Company has established guidelines relative to
concentration, maturities and credit ratings that maintain safety and
liquidity.
52
In accordance with Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Securities," the
Company determines the appropriate classification of debt and equity
securities at the time of purchase and re-evaluates such designation as of
each balance sheet date. As of December 31, 1997, all marketable securities
were classified as "available-for-sale" securities. Available-for-sale
securities are carried at fair value with unrealized gains and losses
reported as a separate component of shareholders' equity. As of December 31,
1997 and 1996, net unrealized gains and losses were not material to the
consolidated financial statements. 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.
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.
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.
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 $67,000 and $48,000 at December 31, 1997
and 1996, 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.
LONG-LIVED ASSETS
53
The Company accounts for long-lived assets in accordance with
Statement of Financial Accounting Standards No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
("SFAS N0. 121"). The Company reviews for the impairment of long-lived
assets and certain identifiable intangibles whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Under SFAS No. 121, an impairment loss would be recognized when
the fair value of a long-lived asset, which would generally approximate
estimated future cash flows expected to result from the use of the asset and
its eventual disposition discounted at the Company's implicit borrowing rate,
is less than its carrying amount. No such impairment losses have been
identified by the Company.
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 certain preclinical and clinical costs.
ADVERTISING
Costs incurred for producing and communicating advertising are
generally expensed when incurred. In September 1997, the Company commenced a
name change awareness and product branding program pursuant to which
advertising costs were incurred. Advertising expense was $5.5 million for
the year ended December 31, 1997 and was not material for the years ended
December 31, 1996 and 1995. The amounts incurred in 1997 were primarily
associated with the name change awareness and product branding program.
NET LOSS PER SHARE
The Company has adopted Statement of Financial Accounting Standards
No. 128 ("SFAS No. 128"), "Earnings per Share," which supersedes APB Opinion
No. 15 and which is effective for all periods ending after December 31, 1997.
SFAS No. 128 replaced the presentation of primary and fully diluted earnings
per share with basic and diluted earnings per share. Unlike primary earnings
per share, basic earnings per share excludes any dilutive effects of options,
warrants and convertible securities. Diluted earnings per share is very
similar to the previously reported fully diluted earnings per share and
reflects the potential dilution that would occur if securities or other
contracts to issue common stock were exercised or converted to common stock.
Common stock equivalent shares from stock options and warrants have been
excluded from this computation as their effect is antidilutive. All
previously stated earnings per share amounts have been restated to conform to
the new SFAS No. 128 requirements.
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.
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 130 ("SFAS No.
130"), "Reporting Comprehensive Income," and Statement of Financial
Accounting Standards No. 131 ("SFAS No. 131"), "Disclosures about Segments of
an Enterprise and Related Information," were issued in June 1997. SFAS No.
130 and SFAS No. 131 are effective for
54
fiscal years beginning subsequent to December 15, 1997, and, therefore, will
be adopted by the Company for the 1998 fiscal year. The Company does not
expect the adoption of SFAS No. 130 or SFAS No. 131 to result in any material
changes in its disclosure and these statements will have no impact on the
Company's consolidated results of operations, financial position or cash
flows.
2. CREDIT ARRANGEMENTS
The Company has a $1,000,000 line of credit agreement with a bank,
with a variable rate of interest based on the bank's lending rate (7.35% as
of December 31, 1997). The Company did not utilize the line of credit during
1997 or 1996. The line of credit expires on January 31, 1998 and has been
subsequently renewed through January 31, 1999 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 tenant
improvement allowance has been fully paid as of December 31, 1997 and had an
outstanding balance of $42,000 at December 31, 1996.
3. SHAREHOLDERS' EQUITY
In September and October 1997, the Company completed three private
equity placements totaling $70.8 million, which provided net proceeds of
$68.2 million. The placements included the issuance of 1,416,000 shares of
Common Stock as well as one detachable Common Stock warrant for each share of
Common Stock purchased. With respect to the warrants issued in connection
with these placements, 50% are exercisable at $55 per share and 50% are
exercisable at $60 per share. Both the Common Stock and warrants to purchase
Common Stock are subject to a Lock-Up Agreement which prohibits any offer or
sale for a one-year period after the closing of the purchase. The Lock-Up
Agreement is subject to earlier termination in certain limited circumstances,
and the prohibition on sales is subject to certain limited exceptions.
Additionally, the Securities Purchase Agreements provide that if on the first
anniversary of the closing of the purchase, the 30 day average closing bid
price of the Common Stock for the period ending on the trading day prior to
the anniversary date is less than the closing price paid by the purchasers,
then the Company shall pay each purchaser additional cash or stock, or a
combination of both, as determined by the Company at its sole option.
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 December 1997, the Company's Board of Directors authorized the
repurchase of up to 750,000 shares of the Company's Common Stock. This
750,000 repurchase authorization was in addition to and superseded the
repurchase program authorized in July 1996, which allowed the Company to
repurchase up to 600,000 shares. Under these repurchase programs, the
Company repurchased 301,000 shares in 1997 and 138,500 shares in 1996 at a
cost of $10.0 million and $3.9 million, respectively. As of December 31,
1997, 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 "Prior
Plans"), the Miravant Medical Technologies 1996 Stock Compensation Plan (the
"1996 Plan") and the Non-Employee Directors Stock Option Plan (the
"Directors' Plan"). As disclosed in Note 1, the Company applies APB Opinion
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.
55
The Prior Plans provided 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 Prior Plans were superseded with the adoption
of the 1996 Plan except to the extent of options outstanding in the Prior
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, 1997,
milestone options covering 302,500 shares have vested, options covering
75,000 shares have been canceled and the remaining unvested shares will vest
in the years 1998 through 2000. The remaining outstanding shares granted
under the Prior 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 which has not yet been
implemented. Also included in the 1996 Plan is a Non-Employee Directors'
Stock Option award program which provides for an automatic fully vested
annual grant on the first day of the fourth quarter of each year to each
non-employee director of a non-qualified stock option for the purchase of
7,500 shares of Common Stock at fair market value. Officers, key employees,
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 Prior Plans and the Directors' Plan, except to the extent of
options outstanding under those 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 4,000,000 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.
Effective March 1997, the Directors' Plan was superseded by the
adoption of the 1996 Plan except to the extent of options outstanding under
the Directors' Plan. The Directors' Plan provided 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. The Company recorded $17,000 of deferred compensation expense related
to these options for the year ended December 31, 1997. For the year ended
December 31, 1996, the Company recorded deferred compensation expense of
$767,000 and
56
a reduction in deferred compensation of $3,652,000 for 1996 with respect to
variable milestone options. As of December 31, 1997, options covering
302,500 shares with an exercise price of $34.75 per share have vested and
options covering 75,000 shares have been canceled. The remaining unvested
shares will vest in the years 1998 through 2000.
Additionally, during the years ended December 31, 1996 and 1995,
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 and is adjusted for options which
have been canceled. This resulted in compensation expense of $39,000,
$378,000 and $348,000 for the years ended December 31, 1997, 1996 and 1995,
respectively.
OTHER STOCK OPTIONS
In connection with employment agreements, the Company has with its
executives and certain key employees, non-qualified 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, 1995............ $ 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)
Canceled .............................. 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)
Canceled .............................. 6.00 - 56.00 49.83 (114,918)
-------------------------------------------------------------------------------------------
Outstanding at December 31, 1996.......... 0.33 - 52.25 12.76 2,258,430
Granted................................ 28.00 - 55.50 35.05 446,000
Exercised.............................. 0.33 - 29.00 5.06 (262,002)
Canceled .............................. 6.00 - 46.75 25.52 (200,645)
-------------------------------------------------------------------------------------------
Outstanding at December 31, 1997.......... $ 0.33 - 55.50 $ 16.80 2,241,783
-------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------
Options Outstanding by Price Range at
December 31, 1997...................... $ 0.33 - 2.00 $ 1.35 839,250
4.00 - 10.67 6.56 396,828
24.38 - 34.75 31.16 770,205
38.00 - 55.50 42.15 235,500
Exercisable at:
December 31, 1995......................... $ 0.33 - 40.25 $ 2.72 1,647,754
December 31, 1996......................... 0.33 - 40.25 8.39 1,629,469
57
December 31, 1997......................... 0.33 - 55.50 11.55 1,629,942
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 $56,000, $1.1 million and $1.6
million for the years ended December 31, 1997, 1996 and 1995, 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 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:
58
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------
Net Loss
As Reported............................ $ (30,209,000) $ (16,142,000) $ (11,710,000)
Pro forma.............................. $ (34,332,000) $ (22,940,000) $ (13,365,000)
Loss per share
As Reported............................ $ ( 2.36) $ ( 1.37) $ (1.19)
Pro forma.............................. $ ( 2.68) $ ( 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:
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------
Expected dividend yield............... 0% 0% 0%
Expected stock price volatility..... 50% 50% 50%
Risk-free interest rate................... 5.71% - 5.81% 6.01% - 6.41% 5.23% - 5.58%
Expected life of options............... 2 - 4 years 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, 1997, 1996 and 1995 was 6.6 years, 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 1999.
Warrants to purchase 136,783, 13,190 and 7,751 shares of Common Stock were
exercised during 1997, 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 1999. Warrants to purchase 125,000 shares of Common Stock
were exercised during 1997. No warrants were exercised in 1996 and 1995.
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 1999. As of December 31, 1997, 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
59
agreements, issued warrants to purchase 55,000 shares of Common Stock at
$34.75 per share to different consultants. These warrants vest equally over
the term of the agreement, generally between one and three years. Also,
during 1997, the Company, in connection with consulting agreements, issued
warrants to purchase 128,000 shares of Common Stock to various consultants at
prices ranging from $28.00 to $31.00 per share. These warrants vest equally
over the term of the agreement, generally between two and three years. The
consulting 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, 1997, no
warrants have been exercised. The Company recorded deferred compensation
associated with the value of these warrants of $1,927,000 in 1997 and
$3,215,000 in 1995. The Company recorded compensation expense of $1,466,000,
$1,129,000 and $693,000 for the years ended December 31, 1997, 1996 and 1995,
respectively.
In September and October of 1997, the Company, in connection with
three private equity placement agreements, issued warrants to purchase
1,416,000 shares of Common Stock with 50% of the warrants exercisable at $55
per share and 50% exercisable at $60 per share. In addition, in connection
with these private equity placements, the Company also issued warrants to
purchase 250,000 shares of Common Stock, under exactly the same terms as
described above, to various selling agents. The warrants are exercisable
beginning one year after the closing of the purchase and expire in December
2001. As of December 31, 1997, no warrants have been exercised.
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. During 1997, warrants to purchase 23,435 shares of
Common Stock were exercised.
5. EMPLOYEE BENEFIT PLANS
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.
On December 9, 1996, the Board of Directors approved the Miravant
Medical Technologies 401(k) - Employee Stock Ownership Plan (the "ESOP")
which provides substantially all employees with the opportunity for long term
benefits. The ESOP was implemented by management on July 1, 1997 and
operates on a calendar year basis. In conjunction with the ESOP, the Company
registered with the Securities and Exchange Commission 300,000 shares of the
Company's Common Stock for purchase by the ESOP. The ESOP provides for
eligible employees to allocate pre-tax deductions from payroll which are used
to purchase the Company's Common Stock on a bi-weekly basis. The ESOP also
provides for a discretionary contribution made by the Company based on the
amounts contributed by the participants. The amount to be contributed by the
Company is determined by the Board of Directors prior to the start of each
plan year. Company contributions, which the Board of Directors determined to
be 50% for the 1997 plan year,
60
are made on a quarterly basis and vest equally over a five year period.
Total Company matching contributions for 1997 were not material.
6. PROVISION FOR INCOME TAXES
Deferred income taxes reflect the net tax effects of net operating
loss carryforwards, credits and temporary differences between the financial
statements and tax basis of assets and liabilities. Significant components
of the Company's deferred tax assets and liabilities as of December 31 are as
follows:
1997 1996
------------------------- -------------------------
CURRENT NON-CURRENT CURRENT NON-CURRENT
----------------------------------------------------------
Deferred tax assets:
Uniform capitalization ........................... $ -- $ -- $ 2,000 $ --
Other accruals and reserves....................... 110,000 -- 91,000 --
Capitalized research and development.............. -- 2,293,000 -- 1,461,000
Net operating losses and tax credits.............. -- 33,951,000 -- 20,346,000
----------------------------------------------------------
Total deferred tax assets........................... 110,000 36,244,000 93,000 21,807,000
Deferred tax liabilities:
Amortization and depreciation expense............. -- 468,000 -- 413,000
Federal benefit for state income taxes............ 8,000 1,633,000 7,000 1,169,000
----------------------------------------------------------
Total deferred tax liabilities...................... 8,000 2,101,000 7,000 1,582,000
----------------------------------------------------------
Net deferred tax assets............................. 102,000 34,143,000 86,000 20,225,000
Less valuation reserve.............................. 102,000 34,143,000 86,000 20,225,000
----------------------------------------------------------
$ -- $ -- $ -- $ --
----------------------------------------------------------
----------------------------------------------------------
The Company has net operating loss carryforwards for federal tax
purposes of $85.4 million which expire in the years 2002 to 2012. Research
and alternative minimum tax credit carryforwards aggregating $3.7 million
which are available for federal and state tax purposes. These credits expire
in the years 2002 to 2012. The Company also has a state net operating loss
carryforward of $20.9 million which expires in the years 1998 to 2002. Under
Section 382 of the Internal Revenue Code, the utilization of the Company's
tax attributes may be limited based on changes in the percentage of ownership
in the Company.
Included in the valuation allowance balance is $5.7 million related
to the exercise of stock options which are not reflected as an expense for
financial reporting purposes. Accordingly, any future reduction in the
valuation allowance relating to this amount will be credited directly to
equity and not reflected as an income tax benefit in the statement of
operations.
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 $881,000,
$1,575,000 and $465,000 for the years ended December 31, 1997, 1996 and 1995,
respectively. The Company has also entered into licensing and OEM agreements
to develop, manufacture and market drugs and devices for photodynamic therapy
and
61
other related uses. The agreements provide for the Company to receive or
pay royalties at various rates. The Company has recorded royalty revenues of
$234,000, $73,000 and $39,000 for the years ended December 31, 1997, 1996 and
1995, 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. No reimbursement revenues have been received or recorded for
1997.
In 1994, the Company entered into a development and commercial
supply agreement with Pharmacia & Upjohn to receive formulation and packaging
services for one of the Company's drugs at specified prices. For the years
ended December 31, 1997, 1996 and 1995, respectively, the Company paid
$3,262,000, $2,596,000 and $830,000 and recorded as expense $2,872,000,
$2,505,000 and $1,685,000 primarily for drug formulation development cost.
The agreement also 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 for the Company's leading
proprietary photoselective 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 Pharmacia & Upjohn 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. 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. For the years ended December 31, 1997 and 1996, the
Company recorded license revenues of $1.9 million and $2.9 million,
respectively, related to the billing for the reimbursement of clinical costs
related to the Pharmacia & Upjohn license agreement of which $1.7 million and
$2.0 million, respectively, are included in accounts receivable. No license
revenues related to the agreement were recorded in 1995 as the billing for
the reimbursement of clinical costs did not commence until 1996.
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, 1997, 1996 and 1995, the Company has recorded
income from grants of $146,000, $550,000 and $385,000, respectively.
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. See additional discussion of
commitments at Note 11 of the Notes to Consolidated Financial Statements.
8. LEASES
The Company leases three buildings for a total monthly rental of
$78,100. One of the leases was renewed in October 1997 and expires in October
2000. Each of the other two leases expire August 1999 and may be renewed for
three years thereafter. The leases provide for annual rental increases based
upon a consumer price index. In September 1997, the Company began to
sublease a portion of one of its buildings to Ramus, an affiliate. The
sublease agreement is for three years with rent based upon the percentage of
square footage occupied. Sublease rental income from Ramus,
62
which is approximately $3,800 per month, is netted against the Company's rent
expense which is included in general and administrative expenses.
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 $128,000 and $91,000 at December 31, 1997 and 1996,
respectively. In connection with the leases, noncash fixed asset acquisitions
were $75,000 for the year ended December 31, 1995. There were no non-cash
fixed asset acquisitions made in 1997 and 1996.
Future minimum lease payments as of December 31, 1997 are as follows:
OPERATING LEASE CAPITAL LEASES
--------------- --------------
1998..................................... $ 960,000 $ 21,000
1999..................................... 489,000 --
2000..................................... 23,000 --
2001..................................... -- --
2002..................................... -- --
--------------- -------------
Total minimum lease payments............. $ 1,472,000 21,000
---------------
Less amounts representing interest....... 1,000
-------------
Present value of lease payments.......... $ 20,000
-------------
-------------
Rent expense, net of sublease income, was $866,000, $504,000 and
$216,000 for the years ended December 31, 1997, 1996 and 1995, 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, $1,115,000 in
connection with the Company's secondary offering in 1996 and $222,000 in
connection with the Company's private equity placements in 1997. The Company
recorded as expense $178,000, $224,000 and $53,000 for the years ended
December 31, 1997, 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, $57,000 in
connection with the Company's secondary offering in 1996 and $57,000 in
connection with the Company's private equity placements in 1997. In
connection with general legal services provided by the law firm, the Company
recorded as expense $155,000, $116,000 and $191,000 for the years ended
December 31, 1997, 1996 and 1995, respectively.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following is information concerning the fair value of each class
of financial instrument at December 31, 1997:
CASH, CASH EQUIVALENTS, ACCOUNTS RECEIVABLE AND MARKETABLE SECURITIES
63
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.
11. SUBSEQUENT EVENT
In February 1998, the Company agreed to guaranty a term loan in the
amount of $7,600,000 from a bank to a director of the Company. The loan is
due and payable by July 31, 1999, or sooner upon an event of default (as
defined in the loan agreement) bears interest at the bank's reference rate,
minus .5% per annum payable quarterly, and is secured by all of the
director's shares of the Company's Common Stock. In connection with the
guaranty, the Company granted the bank a security interest in an account
maintained at the bank and agreed, upon an event of default, to purchase the
loan from the bank for a price generally equal to the then outstanding
principal, plus accrued interest, fees and costs. In the event the Company
purchases the loan, the director granted the Company the option to acquire
all of his shares of Common Stock at a price equal to 50% of the 20-day
average closing price, net of the loan repayment. The director also agreed to
certain restrictions on the sale of such shares. Under the loan agreement and
the guaranty, the director and the Company are subject to the maintenance of
specified financial and other covenants.
64
INDEX TO EXHIBITS
-----------------
Incorporating
Exhibit Reference
Number Description (if applicable)
------- ----------- ---------------
3.1 Certificate of Amendment of the Restated Certificate of Incorporation of the Registrant filed
with the Delaware Secretary of State on September 12, 1997. [F][3.1]
3.2 Certificate of Amendment of the Restated Certificate of Incorporation of the Registrant filed [C][3.11]
with the Delaware Secretary of State on July 24, 1995.
3.3 Restated Certificate of Incorporation of the Registrant filed with the Delaware Secretary of [B][3.1]
State on December 14, 1994.
3.4 Certificate of Amendment of the Certificate of Incorporation of the Registrant filed with the [A][3.2]
Delaware Secretary of State on March 17, 1994.
3.5 Certificate of Amendment of the Certificate of Incorporation of the Registrant filed with the [A][3.3]
Delaware Secretary of State on October 7, 1992.
3.6 Certificate of Amendment of the Certificate of Incorporation of the Registrant filed with the [A][3.4]
Delaware Secretary of State on November 21, 1991.
3.7 Certificate of Amendment of the Certificate of Incorporation of the Registrant filed with the [A][3.5]
Delaware Secretary of State on September 27, 1991.
3.8 Certificate of Amendment of the Certificate of Incorporation of the Registrant filed with the [A][3.6]
Delaware Secretary of State on December 20, 1989.
3.9 Certificate of Amendment of the Certificate of Incorporation of the Registrant filed with the [A][3.7]
Delaware Secretary of State on August 11, 1989.
3.10 Certificate of Amendment of the Certificate of Incorporation of the Registrant filed with the [A][3.8]
Delaware Secretary of State on July 13, 1989.
3.11 Certificate of Incorporation of the Registrant filed with the Delaware Secretary of State on June [A][3.9]
16, 1989.
3.12 Amended and Restated Bylaws of the Registrant. [F][3.12]
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 Investment Agreement. [A][4.8]
4.8 Form of $55 Common Stock Purchase Warrant. [E][4.1]
4.9 Form of $60 Common Stock Purchase Warrant. [E][4.2]
10.1 Amendment No. 5 to Employment Agreement dated as of January 1, 1997 between the Registrant and
Gary S. Kledzik.* [G][10.1]
10.2 Amendment No. 10 to Employment Agreement dated as of January 1, 1997 between the Registrant and
David E. Mai.* [G][10.2]
10.3 Amendment No. 3 to Employment Agreement dated as of January 1, 1997 between the Registrant and
Daniel R. Doiron.* [G][10.3]
10.4 Amendment No. 2 to Employment Agreement dated as of January 1, 1997 between the Registrant and
John M. Philpott.* [G][10.4]
10.5 Amended and Restated 1996 Stock Compensation Plan.* [H]
10.6 PDT, Inc. 401(k)-Employee Stock Ownership Plan.* [I][10.2]
10.7 Form of Non-employee Director Option Agreement.* [F][10.1]
10.8 Form of Securities Purchase Agreement. [E][10.1]
10.9 Form of Lock-Up Agreement. [E][10.2]
10.10 Form of Registration Rights Agreement. [E][10.3]
11.1 Statement regarding computation of net loss per share.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Independent Auditors.
27.1 Financial Data Schedule.
65
[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 September 30, 1996 (File No. 0-25544).
[E] Incorporated by reference from the exhibit referred to in brackets contained in the Registrant's Registration Statement on
Form S-3 (File No. 333-39905).
[F] Incorporated by reference from the exhibit referred to in brackets contained in the Registrant's Form 10-Q for the quarter
ended September 30, 1997 (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 March 31, 1997 (File No. 0-25544).
[H] Incorporated by reference from the Registrant's 1996 Definitive Proxy Statement filed April 24, 1997.
[I] Incorporated by reference from the exhibit referred to in brackets contained in the Registrant's Form 10-Q for the quarter
ended June 30, 1997 (File No. 0-25544).
* Management contract or compensatory plan or arrangement.
66