As filed with the Securities and Exchange Commission on December 15, 2000
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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CONTROL DELIVERY SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
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Delaware 2834 06-1357485
(State or other (Primary Standard Industrial (I.R.S. Employer
Jurisdiction of Classification Code Number) Identification Number)
Incorporation or
Organization)
313 Pleasant Street
Watertown, Massachusetts 02472
(617) 926-5000
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
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Thomas J. Smith, Chairman
Paul Ashton, President and CEO
Control Delivery Systems, Inc.
313 Pleasant Street
Watertown, Massachusetts 02472
(617) 926-5000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
Mary E. Weber, Esq. R. W. Smith, Jr., Esq.
Ropes & Gray Piper Marbury Rudnick & Wolfe LLP
One International Place 6225 Smith Avenue
Boston, Massachusetts 02110 Baltimore, Maryland 21209
(617) 951-7000 (410) 580-3000
(617) 951-7050 (fax) (410) 580-3001 (fax)
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
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Amount of
Title of each class of Proposed maximum registration
securities to be registered aggregate offering price (1) fee
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Common Stock, $0.01 par value per
share............................. $86,250,000 $22,770
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(1) Estimated solely for the purpose of calculating the amount of the
registration fee in accordance with Rule 457(o) of the Securities Act of
1933.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said section 8(a),
may determine.
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Subject to Completion, Dated , 2001
[LOGO]
[LOGO OF CDS APPEARS HERE]
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Shares
Common Stock
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This is the initial public offering of Control Delivery Systems, Inc., and we
are offering shares of our common stock. We anticipate that the
initial public offering price will be between $ and $ per share. We
have applied to list our common stock on the Nasdaq National Market under the
symbol "CDSY."
Investing in our common stock involves risks. See "Risk Factors" beginning on
page 5.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary
is a criminal offense.
Price Underwriting Proceeds to
to Discounts and Control Delivery
Public Commissions Systems
Per share $ $ $
Total $ $ $
We have granted the underwriters the right to purchase up to
additional shares to cover over-allotments.
Deutsche Banc Alex. Brown
Banc of America Securities LLC
SG Cowen
The date of this prospectus is , 2001.
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
[Inside Front Cover: This graphic will include a depiction of our Aeon
implant.]
PROSPECTUS SUMMARY
This summary highlights information described more fully elsewhere in this
prospectus. This summary may not contain all information that you should
consider before investing in our common stock. You should read the entire
prospectus, including "Risk Factors" and the financial statements and related
notes, before making an investment decision.
Our Business
We design, develop and manufacture innovative, sustained-release drug
delivery products. Our products are designed to treat severe and chronic
diseases that have limited or no effective treatment options and represent
significant market opportunities. Using our proprietary platform technologies,
we design our products to deliver the appropriate quantity of approved drugs
directly to a target site at a controlled rate for a predetermined period of
time ranging from days to years. We believe our proprietary platform
technologies will allow us to extend the therapeutic value of a wide variety of
drugs while virtually eliminating the variability of dosing and adverse
systemic side effects characteristic of most traditional drug treatments.
We have obtained Food and Drug Administration approval for and
commercialized one product based on our patented Aeon platform technology and
are leveraging this technology to develop four additional products currently in
advanced clinical trials. Vitrasert, our Aeon product for the treatment of CMV
retinitis, a blinding eye disease afflicting late-stage AIDS patients, has been
sold since 1996 and is currently the most effective approved treatment for this
disease. We have additional Aeon products in clinical trials for the treatment
of diabetic macular edema, uveitis and age-related macular degeneration, three
leading causes of blindness that affect over one million eyes in the United
States. Two of these products have been granted fast track status by the Food
and Drug Administration, and we expect both will commence pivotal clinical
trials in early 2001. We expect that our third ophthalmic product, as well as
our Aeon product for the treatment of brain tumors, will enter multi-center
Phase II clinical trials in 2001. Our pipeline also includes products in pre-
clinical development for the treatment of severe osteoarthritis and post-
surgical pain.
We have partnered with Bausch & Lomb Incorporated for the development and
marketing of our products to treat eye diseases. Bausch & Lomb markets
Vitrasert and has committed approximately $77 million to the joint development
of our three ophthalmic product candidates, including milestone and license fee
payments to us. In addition, Bausch & Lomb has agreed to pay us royalties on
sales of our ophthalmic products. Bausch & Lomb is publicizing our Aeon
platform technology under the Envision TD brand name.
Treatment of Severe and Chronic Diseases
Severe and chronic diseases, such as blinding eye diseases, cancer, severe
osteoarthritis, multiple sclerosis and Alzheimer's disease, afflict millions of
people each year and are becoming more prevalent as the population ages.
Despite continuing advances in medical and pharmaceutical technologies, current
treatment options for many of these diseases are inadequate. Drug treatments
for these diseases, where they exist, often offer only temporary or limited
therapeutic benefits and cause harmful side effects. Some drugs are too potent
to be delivered systemically in the quantities necessary for treatment, while
others are theoretically effective but are unable to penetrate the natural
barriers that surround some areas of the body. For drug treatment to be
effective, the appropriate amount of drug must be delivered to the intended
site in the body and be maintained there for an adequate period of time. The
manner in which a drug is delivered can be as important to the ultimate
therapeutic value of the treatment as the intrinsic properties of the drug
itself.
1
Advantages of Our Proprietary Platform Technologies
Our proprietary platform technologies are designed to solve the problems
posed by traditional drug delivery methods. Our lead platform technology, the
Aeon system, consists of a drug core coated in a series of permeable polymer
layers and partially encased in an impermeable polymer layer. Our second
platform technology, the Codrug system, chemically links two or more
synergistic drugs together. Key advantages of our platform technologies
include:
. Localized Delivery. We design our products to be implanted directly at a
target site, using the natural barriers of the body to isolate and
maintain high concentrations of drug at the target site.
. Controlled Release Rate. We design our products to release drugs at a
controlled rate in order to maintain the optimal dosage level at a target
site and eliminate variability in drug concentration over time.
. Extended Delivery. We design our products to deliver drugs for extended,
predetermined periods of time ranging from days to years, eliminating the
risk of inconsistent administration.
In addition, because our products in clinical trials use drugs already
approved for other indications and are based on our commercially validated
platform technology, we believe we can develop these and future products in
less time, at a lower cost and with less risk than is typically associated with
drug discovery and development.
Our Strategy
Our objective is to revolutionize the treatment of the severe and chronic
diseases that we target and to develop products that become the standard of
care for these diseases. In order to achieve this objective, we intend to:
. Focus on severe and chronic diseases that represent significant market
opportunities,
. Rapidly commercialize our products for blinding eye diseases,
. Extend our platform technologies into additional therapeutic areas,
. Optimize distribution of our products through marketing alliances and
independent marketing, and
. Expand our manufacturing, sales and marketing capabilities.
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Control Delivery Systems, Inc. is located at 313 Pleasant St., Watertown,
Massachusetts 02472. Our telephone number is (617) 926-5000 and our web site
address is www.controldelivery.com. The information on our web site is not
incorporated as a part of this prospectus.
Aeon(TM) and Ceredur(TM) are our trademarks. Vitrasert(R) and Envision
TD(TM) are trademarks of Bausch & Lomb Incorporated. Each trademark, trade name
or service mark of any other company appearing in this prospectus belongs to
its holder.
2
The Offering
Common stock offered by Control Delivery shares
Systems.......................................
Common stock to be outstanding after this shares
offering......................................
Use of proceeds............................ For research, development and
commercialization of our
products, expansion of our
manufacturing facilities and
general corporate purposes,
including working capital
Proposed Nasdaq National Market symbol..... CDSY
The number of shares of common stock to be outstanding upon completion of
this offering is based on the number of shares of common stock outstanding as
of November 30, 2000. This number assumes the conversion into common stock of
all our preferred stock outstanding on that date. It excludes:
. 207,092 shares of common stock issuable upon exercise of stock options
outstanding as of November 30, 2000 with a weighted average exercise
price of $23.40 per share, and
. 37,402 shares of common stock issuable upon exercise of warrants
outstanding as of November 30, 2000 with a weighted average exercise
price of $53.74 per share.
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Except as otherwise indicated, all information in this prospectus assumes:
. a -for- stock split immediately prior to the date of this
prospectus,
. no exercise of the underwriters' over-allotment option,
. the conversion of all outstanding shares of our convertible preferred
stock into shares of common stock upon the closing of this offering, and
. the filing of an amended and restated certificate of incorporation
effective upon the closing of this offering.
3
Summary Financial Data
(in thousands, except per share data)
Nine Months
Ended
Year Ended December 31, September 30,
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1995 1996 1997 1998 1999 1999 2000
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Statement of Operations
Data:
Revenues:
Royalties.............. $ -- $1,076 $ 1,109 $ 638 $ 496 $ 364 $ 283
License fees and
collaborative research
and development....... 402 928 -- -- 1,889 1,148 3,283
Government research
grants................ 229 217 240 477 400 265 610
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Total revenues......... 631 2,221 1,349 1,115 2,785 1,777 4,176
----- ------ ------- ------- ------- ------- ------
Operating expenses:
Royalties.............. 7 110 492 315 496 431 308
Research and
development .......... 515 1,075 845 1,156 1,550 996 2,523
General and
administrative ....... 86 289 413 513 872 630 1,251
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Total operating
expenses.............. 608 1,474 1,750 1,984 2,918 2,057 4,082
----- ------ ------- ------- ------- ------- ------
Income (loss) from
operations ............ 23 747 (401) (869) (133) (280) 94
Interest income, net.... 7 1 7 3 39 29 307
----- ------ ------- ------- ------- ------- ------
Net income (loss)....... 30 748 (394) (866) (94) (251) 401
Accretion on redeemable
convertible preferred
stock and warrants..... -- -- -- -- -- -- 79
----- ------ ------- ------- ------- ------- ------
Net income (loss)
attributable to common
stockholders........... $ 30 $ 748 $ (394) $ (866) $ (94) $ (251) $ 322
===== ====== ======= ======= ======= ======= ======
Net income (loss) per
share:
Basic.................. $0.02 $ 0.37 $ (0.20) $ (0.42) $ (0.05) $ (0.12) $ 0.16
Diluted................ $0.02 $ 0.37 $ (0.20) $ (0.42) $ (0.05) $ (0.12) $ 0.15
Shares used in computing
net income (loss) per
share:
Basic.................. 2,000 2,000 2,000 2,050 2,066 2,065 1,953
Diluted................ 2,000 2,000 2,000 2,050 2,066 2,065 2,089
Unaudited pro forma
basic and diluted net
income (loss) per
share.................. $ (0.03) $ 0.15
Shares used in computing
unaudited pro forma net
income (loss) per
share:
Basic.................. 2,708 2,594
Diluted................ 2,708 2,731
September 30, 2000
--------------------------------------
Pro Forma
Actual Pro Forma (1) As Adjusted (2)
------- ------------- ---------------
(unaudited)
Balance Sheet Data:
Cash and cash
equivalents............ $31,028 $31,028
Working capital......... 28,320 28,320
Total assets............ 32,007 32,007
Redeemable convertible
preferred stock........ 31,258 --
Total stockholders'
(deficit) equity....... (2,087) 29,171
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(1) Gives effect to the conversion of all outstanding shares of convertible
preferred stock into common stock.
(2) As adjusted to reflect the net proceeds from the sale of shares of
common stock in this offering, at an assumed initial public offering price
of $ per share, after deducting underwriting discounts and commissions
and estimated offering expenses payable by us.
4
RISK FACTORS
An investment in our common stock involves a high degree of risk. You should
consider carefully the following information about these risks, together with
the other information contained in this prospectus, before you decide whether
to buy our common stock. If any of the following risks actually occur, our
business and prospects could suffer significantly. In any of these cases, the
market price of our common stock could decline, and you could lose all or part
of your investment in our common stock.
We may not successfully develop and commercialize our proposed products.
For our business to succeed, we must successfully research, develop and
obtain regulatory approval for our proposed drug delivery products, and then
successfully manufacture and market these products, either alone or through
collaboration with others. The development, regulatory approval and
commercialization process is long and uncertain. To date, we have completed
this process only for our Vitrasert product, which we do not expect will
generate a material portion of our future revenues. We may not be successful in
commercializing any other products. Our proposed products may:
. be ineffective or cause harmful side effects,
. fail to receive regulatory approval on a timely basis or at all,
. be difficult to manufacture on a commercial scale,
. not be accepted by physicians or patients,
. fail to receive a sufficient level of reimbursement from government or
third-party payors, or
. infringe on proprietary rights of others.
We may not successfully complete clinical trials necessary to obtain regulatory
approval to market our proposed products.
We must obtain approval from the Food and Drug Administration, or FDA, to
manufacture and market pharmaceutical products in the United States. Other
countries have similar requirements. Before we can obtain governmental
approval, we must demonstrate through pre-clinical studies and clinical trials
that each product is safe and effective for human use for each targeted
disease. Failure to successfully complete clinical trials for our products may
materially harm our prospects and future revenue.
Of our products, only Vitrasert has been approved for sale in the United
States and foreign countries. Some of our other proposed products are in
various stages of clinical testing. We plan to continue clinical trials to
assess the safety and effectiveness of these products, but we may not be
permitted to do so. We also have products in pre-clinical development. We have
not submitted investigational new drug applications or begun clinical trials
for these products. We may never successfully complete our development efforts
or file investigational new drug applications for these products due to
unfavorable results from pre-clinical testing or other reasons.
Results from pre-clinical testing and early clinical trials often do not
accurately predict results of later clinical trials. A product may show
promising results in pre-clinical testing or clinical trials, yet further
trials may ultimately fail to establish the safety and efficacy of the product.
Data obtained from pre-clinical and clinical activities are susceptible to
varying interpretations which may delay, limit or prevent regulatory approval.
We may encounter regulatory delays or rejections as a result of other factors,
including changes in regulatory policy during the development of new products.
5
One of the purposes of clinical trials is to determine appropriate dosage
levels. Drugs being utilized in our proposed ophthalmic products have known
dose-related localized side effects including cataracts and elevated
intraocular pressure. In several early clinical trials, we evaluated three
dosage levels in 37 eyes. Four patients experienced unacceptable intraocular
pressure requiring surgery, all but one of whom received the highest dosage
level. As a result, we will be evaluating the two lower drug dosages in our
subsequent trials.
Our proposed products may cause unacceptable side effects, which could
delay, limit or prevent their regulatory approval. In our clinical trials, six
implants have been removed. Three were removed because of intra-retinal
bleeding or optic nerve swelling, one was removed because of high intraocular
pressure, one was removed in connection with a cataract operation, and one was
removed because of a post-operative infection. We cannot be sure that these or
other side effects will not occur or be more serious in other patients.
If a product fails to demonstrate safety and efficacy in clinical trials,
this failure may delay development of other products and hinder our ability to
conduct related pre-clinical testing and clinical trials. As a result of these
failures, we may also be unable to partner with additional collaborators or to
obtain additional financing.
If we complete clinical trials for a product, we may fail to complete and
submit a new drug application as scheduled. If we submit a new drug application
for a product, the FDA may not clear our application in a timely manner, may
require the completion of additional clinical trials as a condition of approval
or may deny the application entirely. Failure to gain regulatory approval of a
new product after spending substantial time, effort and expense conducting and
overseeing clinical trials would have a material adverse effect on our revenues
and prospects.
Clinical trials may take longer and cost more than we expect.
Conducting clinical trials is a lengthy, time-consuming and expensive
process. We have incurred and will continue to incur substantial expense for,
and devote a significant amount of time to, pre-clinical testing and clinical
trials.
Completion of clinical trials may take several years or more. The length of
time can vary substantially with the type, complexity, novelty and intended use
of the product. Our commencement and rate of completion of clinical trials may
be delayed by many factors, including the following:
. our inability to attract clinical investigators for our trials,
. our inability to recruit patients at the expected rate,
. failure of the trials to demonstrate a product's safety or efficacy,
. our inability to follow patients adequately after treatment,
. our inability to predict unforeseen safety issues,
. our inability to manufacture sufficient quantities of materials to use
for clinical trials, and
. unforeseen governmental or regulatory delays.
Our products, if approved, may not gain market acceptance.
Physicians, patients, third-party payors, and the medical community may not
accept or utilize our products. The degree of market acceptance of any products
we develop will depend on a number of factors, including:
. demonstration of their clinical efficacy and safety,
. their cost-effectiveness,
. their potential advantages and disadvantages compared to alternative
treatment methods,
. the success of the marketing and distribution efforts of us and our
partners, and
. reimbursement policies of government and third-party payors.
6
If our products do not achieve significant market acceptance, we will be
unable to generate significant revenue and our business and financial condition
will be materially adversely affected.
Our limited operating history makes it difficult to evaluate our future
prospects.
You can only evaluate our business based on a limited operating history.
Since our incorporation, we have engaged primarily in research and development,
licensing technology, raising capital and recruiting scientific and management
personnel. We expect that royalties from sales of Vitrasert, our one commercial
product, will not comprise a significant portion of our future revenue. Our
limited history of operations may be inadequate to enable you to assess our
ability to successfully develop and commercialize products, achieve market
acceptance and respond to competition. We expect to encounter risks, costs and
difficulties frequently encountered by companies in an early stage of
development. Many of these risks are unknown, but they include those associated
with managing our growth, the uncertain cycle of developing commercial products
and the marketing and distribution of our products. Our failure to identify and
successfully address these risks would harm our business and prospects.
We may not achieve or maintain significant profitability.
We have incurred operating losses in each of our last three years and, as of
September 30, 2000, we had an accumulated deficit of approximately $3.3
million. We expect to continue to incur losses over at least the next several
years as we continue to incur increasing costs for research and development,
clinical trials and other purposes. Our ability to achieve consistent
profitability depends upon our ability, alone or with others, to complete
development, obtain required regulatory clearances and manufacture and market
our products. Development of drug delivery products is costly and requires
significant investment. We may be unable to generate sufficient revenue in the
future to recover the capital we invest in developing products or to generate
significant profits.
If we revise our estimates of the costs of completing research and development
activities under an agreement, we may recognize less revenue and reduce our
profitability.
Recently, we have generated significant revenues from research and
development activities under our 1999 agreement with Bausch & Lomb. We use the
retrospective percentage of completion method of accounting, which means that
we recognize revenues from nonrefundable license fees, milestone payments and
collaborative research and development based on actual costs incurred in
relation to total estimated costs to complete research and development
activities under the applicable research and development agreement at each
reporting period. Unforeseen events and circumstances may cause us to increase
our estimates of the costs associated with completing research and development
activities under the 1999 Bausch & Lomb agreement or other similar agreements.
Revisions in these cost estimates, may require us to recognize significantly
less revenues than anticipated, or in some cases, even recognize negative
revenues for a particular period. An increase in cost estimates, without
further reimbursment from a collaborative partner, would adversely affect our
revenues and profitability, and may cause a negative reaction in the investment
community, causing our stock price to fall.
We rely on Bausch & Lomb, and in the future may rely on other third parties, to
manufacture, market, distribute and sell our products. Failure of these third
parties to perform may harm our results.
Bausch & Lomb has exclusive rights to sell any products we develop to treat
conditions of the eye, including Vitrasert and our products currently in
clinical trials for the treatment of three additional blinding eye diseases. We
derived 57.2% of our total revenues in 1998 and 85.7% of our total revenues in
1999 from our agreements with Bausch & Lomb. We may enter into agreements with
other third parties to manufacture, market and sell other products we develop.
However, we may be unable to establish or maintain these third-party
relationships on a commercially reasonable basis, if at all. We do not control
the timing and other aspects of marketing of our products by
7
Bausch & Lomb, and may not control marketing efforts of other third parties,
who may have priorities that differ from ours. Our reliance on third parties
may result in unexpected delays or a failure to market and commercialize our
products successfully. If Bausch & Lomb or another third party fails to
successfully manufacture, market or sell our products on a timely basis, we may
not generate revenue or achieve or maintain profitability.
If Bausch & Lomb terminates its agreements with us, we may not have the funding
or expertise to develop, manufacture, market and sell our existing and planned
ophthalmic products.
Bausch & Lomb can terminate its agreements with us at any time without cause
and on short notice. Bausch & Lomb may change its strategic focus, pursue
alternative technologies or develop competing products. Since we do not
currently have the manufacturing or sales and marketing capabilities to fully
commercialize all of our proposed products, any breach or termination of our
agreements by Bausch & Lomb could delay or stop the commercialization of our
drug delivery products for the treatment of eye disease.
We may not successfully manage our growth.
Our success will depend upon the expansion of our operations and the
effective management of growth, which will place significant strains on our
management and on our administrative, operational and financial resources. To
manage our growth, we must expand our facilities, augment our operational,
financial and management systems and hire and train additional qualified
personnel. If we cannot manage our growth effectively, our business will be
harmed.
We may not successfully develop adequate manufacturing capabilities.
We have limited manufacturing experience and have no experience
manufacturing our products on a commercial scale. We intend to develop the
capacity to manufacture our own products at an acceptable cost from early
clinical trials through commercialization. We anticipate that the development
of commercial-scale manufacturing processes will be complex and expensive. We
may be unable to develop this manufacturing capability in a cost-effective,
timely fashion, or at all.
The manufacture of drugs for clinical trials and for commercial sale is
subject to regulation by the FDA and other regulators. The FDA, foreign
regulators or both may not approve our facilities or, once they are approved,
may not continually certify them as compliant with their manufacturing
standards. Any unforeseen problems with an approved product or any violation of
regulations could result in restrictions on the product, including its
withdrawal from the market.
We may not successfully develop marketing, sales and distribution capabilities.
We do not have any internal marketing, sales or distribution capabilities.
However, we plan to develop them for some of our products that do not treat eye
disease. The costs of developing these capabilities may exceed our estimates.
It also may take us longer than we expect to develop these capabilities. Our
marketing and sales efforts may not compete successfully against companies with
extensive and well-funded marketing and sales operations. We also may be unable
to engage qualified distributors. Even if we engage these distributors, they
may:
. fail to satisfy financial or contractual obligations to us,
. fail to adequately market our products,
. cease operations with little or no notice to us, or
. offer, design, manufacture or promote competing products.
If we fail to develop sales, marketing and distribution channels, we will be
unable to commercialize products ourselves.
8
We may experience difficulty raising needed capital in the future.
We have expended and will continue to expend substantial funds to complete
the research, development, clinical testing, manufacturing and
commercialization of our products. We believe our current level of cash and
anticipated future revenues under our existing agreements will generate
adequate capital for the next two years. However, we may require additional
funds for the research, development and testing of our products, as well as for
the development of internal manufacturing, marketing and sales capacities, if
any of these activities takes longer or costs more than we expect or if our
existing agreements are terminated. We may seek to raise additional funds
through equity or debt financings, collaborative arrangements or other sources,
any of which may dilute your ownership in us. Additional financing may not be
available on acceptable terms, if at all. If our operations require more funds
than we anticipate or our sources of financing do not produce adequate funds,
we may have to delay, reduce the scope of, or eliminate one or more of our
development programs, which would materially curtail our business and growth
and harm our prospects.
We may not retain our key personnel or be able to hire additional qualified
personnel.
Our success will depend to a significant degree upon the continued services
of key management, technical and scientific personnel, including Thomas Smith,
our Chairman, and Paul Ashton, our President and Chief Executive Officer.
Although we intend to obtain key man life insurance policies for each of Drs.
Smith and Ashton, we may be unable to obtain this insurance or it may not
adequately compensate us for the loss of their services. In addition, we must
attract and retain other highly skilled personnel. Competition for qualified
personnel is intense, and the process of hiring and integrating qualified
personnel is often lengthy. We may not recruit qualified personnel on a timely
basis, if at all. Our management and other employees may voluntarily terminate
their employment with us at any time. The loss of the services of key
personnel, or the inability to attract and retain additional qualified
personnel, could result in delays or failures in product development or
approval, loss of sales and diversion of management resources.
The manufacture, use, sale, importation and distribution of the controlled
substances some of our products deliver are subject to regulation by state,
federal and foreign law enforcement and other regulatory agencies. If we fail
to comply with these regulations, we may be subject to delay or enforcement
actions that may hinder our growth and harm our financial condition.
Some of our products currently under development contain, and our products
in the future may contain, controlled substances which are subject to state,
federal and foreign laws and regulations regarding their manufacture, use,
sale, importation and distribution. For our products containing controlled
substances, we and our suppliers, contractors, customers and distributors are
required to obtain and maintain registrations from state, federal and foreign
law enforcement and regulatory agencies. We also must comply with state,
federal and foreign laws and regulations regarding the manufacture, use, sale,
importation and distribution of controlled substances. These regulations are
extensive and include regulations governing manufacturing, labeling, packaging,
testing, dispensing, production and procurement quotas, record keeping,
reporting, handling, shipment and disposal. Failure to obtain and maintain
required registrations or comply with any applicable regulations could delay or
preclude us from developing and commercializing our products containing
controlled substances, subject us to enforcement action or both. In addition,
because of their restrictive nature, these regulations could limit
commercialization of our products containing controlled substances.
Competition in the pharmaceutical industry is intense. If we fail to compete
effectively, our financial results will suffer.
We expect to face intense competition from academic institutions, government
agencies, research institutions and biotechnology and pharmaceutical companies,
including other drug delivery companies, who are working to develop and market
other drugs, drug delivery products, vaccines and methods of preventing or
treating diseases on which we focus.
9
We are a relatively new enterprise and are engaged in the development of
novel therapeutic technologies. As a result, our resources are limited, and we
may experience technical challenges inherent in novel technologies. The capital
resources, manufacturing and marketing experience, research and development
resources and production facilities of many of our competitors are much greater
than ours. Many of them also have much more experience in pre-clinical testing
and clinical trials and in obtaining FDA and foreign approvals. In addition,
they may succeed in obtaining patents that would make it difficult or
impossible for us to compete with their products.
We expect that our proposed products, if approved, will compete with
existing therapies for our targeted diseases as well as new drugs, therapies,
drug delivery systems or technological approaches that may be developed to
treat these diseases or their underlying causes. Any of these drugs, therapies
or systems may receive government approval or gain market acceptance more
rapidly than our proposed products, may offer therapeutic or cost advantages or
may cure our targeted diseases or their underlying causes completely. As a
result, our proposed products may become noncompetitive or obsolete.
The demand for our products may change rapidly as a result of technological
innovations by our competitors.
Major technological changes can happen quickly in the biotechnology and
pharmaceutical industries, and the development by competitors of
technologically improved or different products may make our proposed products
obsolete or noncompetitive. In addition, new treatments for our targeted
diseases may reduce demand for our products. For example, sales of our product
for the treatment of CMV retinitis, a disease which affects people with late-
stage AIDS, have declined significantly because of new treatments that delay
the onset of late-stage AIDS.
Patent protection for our products is important and uncertain. If we do not
protect our intellectual property, we will be subject to increased competition.
The following factors are important to our success:
. protecting and maintaining our proprietary rights to our intellectual
property,
. protecting our proposed products with our current or new patents,
. maintaining our trade secrets,
. not infringing on the proprietary rights of others, and
. preventing others from infringing our proprietary rights.
We will be able to protect our proprietary products and processes from
unauthorized use by third parties only to the extent that our proprietary
products and processes are covered by valid and enforceable patents or are
effectively maintained as trade secrets.
We try to protect our proprietary technology by filing United States and
foreign patent applications related to the proprietary technology, inventions
and improvements that are important to the development of our business and hold
exclusive licenses of patent rights that are important to our business. Because
patents involve complex legal and factual questions, we cannot predict their
enforceability with certainty. Patents may be challenged, invalidated or
circumvented.
Our patent position, like that of other biotechnology, pharmaceutical or
medical device companies, is highly uncertain. The standards which the United
States Patent and Trademark Office and its foreign counterparts use to grant
patents are not always applied predictably or uniformly and can change. There
is no uniform worldwide policy among patent offices regarding the subject
matter and scope of claims granted or allowable in medical device or
pharmaceutical patents. Consequently, we cannot be certain as to the type and
scope of patent claims that may be issued to us in the future. Further, there
is no uniform worldwide jurisprudence regarding the scope of claims granted or
allowable in medical device or
10
pharmaceutical patents. As a result, we cannot be certain as to the type and
scope of patent claims that may be upheld or enforceable by a court of law.
Even if we are able to develop commercially significant patent positions, our
patents may not be upheld or may be substantially narrowed in litigation.
Pre-existing patents or prior art may reduce the scope or the value of, or
even invalidate, our patents or those to which we have exclusive rights and
affect our ability to market and sell our products. Others may hold conflicting
patents or have conducted research or made published discoveries of compounds
or processes that precede our discoveries and prevent us from obtaining patent
protection for our own technologies or narrow the scope of any protection
obtained. There could be a material adverse effect on our business and future
prospects if third-party patents or patent applications have priority over any
of our patents or patent applications. Any reduction in scope or invalidation
of our patents may prevent us from extending our products into new therapeutic
areas or enable other companies to develop products that compete with ours on
the basis of similar technology. As a result, any patents that we own or
license from others may not provide any or sufficient protection against
competitors. Our pending patent applications, those we may file in the future,
or those we may license from third parties, may not result in patents being
issued. If issued, they may not provide us with proprietary protection or
competitive advantages against competitors with similar technology. The laws of
some foreign countries do not protect intellectual property rights to the same
extent as do the laws of the United States.
We have exclusive licenses with the University of Kentucky Research
Foundation. The University of Kentucky Research Foundation can terminate these
licenses if we fail to perform our duties under the agreements. If we breach
these license agreements and lose the ability to employ the technology licensed
to us under these agreements, our prospects will be materially harmed. Any
disputes that arise out of these license agreements may be very costly to
litigate. Spending substantial funds litigating a dispute regarding these
license agreements may materially and adversely affect our financial condition.
We also rely on trade secrets, know-how and technology, which are not
protected by patents, to maintain our competitive position. We try to protect
this information by entering into confidentiality agreements with parties that
have access to it, such as our corporate partners, collaborators, employees,
and consultants. Any of these parties may breach the agreements and disclose
our confidential information, or our competitors might learn of the information
in some other way. If any trade secret, know-how or other technology not
protected by a patent were to be disclosed to or independently developed by a
competitor, our business and financial condition could be materially adversely
affected.
Obtaining and protecting patent and proprietary rights can be expensive. If
a competitor files a patent application claiming technology also invented by us
or our licensors, we may have to participate in an interference proceeding
before the United States Patent and Trademark Office to determine who invented
the technology. We, or our licensors, may also need to participate in
interference proceedings involving our issued patents, or patents of our
licensors, and pending applications of another entity. Our participation in an
interference proceeding would require us to spend significant amounts of time
and money. Opposition proceedings challenging the validity of our patents in
Europe may lead to the limitation or revocation of the challenged patents. An
unfavorable outcome in either of these proceedings could require us to cease
using the technology or to license rights from prevailing third parties. A
prevailing third party may only offer us a license on terms that are
unacceptable to us.
We may need to resort to litigation to enforce a patent issued to us or to
determine the scope and validity of third-party proprietary rights. We could
incur substantial costs in connection with any litigation and our management's
efforts would be diverted, regardless of the results of the litigation.
11
An unfavorable result in litigation could subject us to significant liabilities
to third parties, require us to cease manufacturing or selling the affected
products or using the affected processes, or require us to license the disputed
rights from third parties. Our business will be harmed if we cannot obtain a
license, can obtain a license only on terms we consider to be unacceptable, or
if we are unable to redesign our products or processes to avoid infringement.
Others may assert that our technology infringes their intellectual property
rights.
We do not believe that any of our proposed products infringe the patents of
any third party, but we may be subject to infringement claims in the future.
Because pending United States patent applications are not publicly disclosed
until the patent is issued, we cannot be certain that there are no pending
applications that, if issued, would restrict our ability to manufacture and
sell our proposed products. The defense of any claims of infringement made
against us by third parties could involve significant legal costs and require
our management to divert time and attention from our business, regardless of
the outcome of the litigation. If we are unsuccessful in defending against any
claims of infringement, we may be forced to obtain licenses or to pay royalties
to manufacture or sell our proposed products. We may not be able to obtain
necessary licenses on commercially reasonable terms, or at all. If we fail to
obtain necessary licenses or other rights, or if these licenses are too costly,
we may be unable to manufacture or sell our products or our expected financial
results may be adversely affected by increases in costs to license third-party
technology.
If users of our proposed products are unable to obtain adequate reimbursement
from third-party payors, or if new restrictive legislation is adopted, market
acceptance of our proposed products may be limited.
Our ability to commercialize our products successfully will depend in part
on the extent to which health care providers receive appropriate reimbursement
levels from governmental authorities, private health insurers and other
organizations for our products and related treatments. Third-party payors are
increasingly challenging the prices charged for medical products and services.
The trend toward managed health care in the United States, including the
emergence of large health maintenance organizations, and legislative proposals
to reform health care or reduce government insurance programs, may result in
lower prices for or rejection of our products.
In some foreign markets, medical care is subject to government control. In
the United States, the United States Congress and state legislatures will
likely continue to focus on health care reform, reform of the Medicare and
Medicaid system, and the cost of medical care generally. The adoption of any
legislative or regulatory proposals of this type could materially harm our
business.
We could be exposed to significant product liability claims which could be
time-consuming and costly, divert management attention and adversely affect our
ability to obtain and maintain insurance coverage.
The testing, manufacture, marketing and sale of our products involve an
inherent risk that product liability claims will be asserted against us. We are
insured against claims up to $2 million in the aggregate in connection with
clinical trials and commercial sales of our products. However, this insurance
may not fully cover the costs of claims or damages we might be required to pay.
Product liability claims or other claims related to our products, regardless of
their outcome, could require us to spend significant time and money in
litigation, divert management time and attention and require us to pay
significant damages. Any successful product liability claim may prevent us from
obtaining adequate product liability insurance in the future on commercially
desirable or reasonable terms. Product liability coverage may cease to be
available in sufficient amounts or at an acceptable cost. An inability to
obtain sufficient insurance coverage at an acceptable cost or otherwise to
protect against potential product liability claims could prevent or inhibit the
commercialization of our products. A product liability claim could also
significantly harm our reputation and delay or prevent market acceptance of our
products.
12
The market price of our common stock after this offering may fluctuate widely
and rapidly.
There is currently no public market for our common stock, and an active
trading market may not develop or be sustained after this offering. We and the
underwriters' representatives will negotiate an initial public offering price
that may not be indicative of the market price for our common stock after this
offering. As a result, the market price of our stock could fall below the
initial public offering price.
The market price of our common stock could fluctuate significantly as a
result of many factors including:
. the receipt and timing of FDA approval of our products, if granted,
. the receipt of payments from collaborative development partners,
. our financial performance,
. failure to meet analysts' or investors' expectations,
. economic and stock market conditions,
. changes in evaluation and recommendation by securities analysts following
our stock,
. earnings and other announcements by, and changes in market evaluations
of, other companies in our industry,
. changes in business or regulatory conditions,
. announcements or implementation by us or our competitors of technological
innovations or new products,
. the trading volume of our common stock, or
. other factors unrelated to our company or industry.
The securities of many technology and pharmaceutical companies have
experienced extreme price and trading volume fluctuations in recent years,
often unrelated or disproportionate to the companies' operating performances.
Following periods of volatility in the market price of a company's securities,
stockholders often have instituted securities class action litigation against
that company. If we become involved in a class action suit, it could divert the
attention of management, and, if adversely determined, could have a material,
negative impact on our financial condition.
Substantial sales of our common stock after the offering could cause our stock
price to fall.
Our sale or the resale by our stockholders of shares of our common stock
after this offering could cause the market price of our common stock to
decline. After this offering, we will have shares of common stock
outstanding. Of these shares, the shares sold in this offering
will be freely transferable without restriction.
As of November 30, 2000, options to purchase 207,092 shares of our common
stock were outstanding. Many of these options are subject to vesting that
generally occurs over a period of up to five years following the date of grant.
We intend to file a registration statement following this offering to permit
the sale of shares of our common stock to cover these shares. In
addition, as of November 30, 2000, warrants to purchase 37,402 shares of our
common stock were outstanding and exercisable. The shares received upon
exercise of these warrants may become freely tradable at various points over
the next years, depending upon the method of exercise.
Substantially all of our stockholders will have signed lock-up agreements
before the commencement of this offering. Under these lock-up agreements, these
stockholders have agreed, subject to certain limited exceptions, not to sell
any shares owned by them as of the effective date
13
of this prospectus for a period of 180 days thereafter, unless they first
obtain the written consent of the managing underwriter. At the end of 180 days,
unless earlier waived by the managing underwriter, lock-up restrictions
covering approximately shares of our common stock will end.
The holders of 641,642 shares of common stock issuable upon conversion of
preferred stock will have the right in certain circumstances to require us to
register their shares for resale to the public. Please read our discussion of
registration rights under "Description of Capital Stock."
You will experience immediate and substantial dilution.
If you purchase common stock in this offering, you will pay more for your
shares than the amounts paid by existing stockholders for their shares. As a
result, you will experience immediate and substantial dilution of approximately
$ per share, representing the difference between our net tangible book
value per share after giving effect to this offering and the initial public
offering price. For more information, see "Dilution."
Other companies may have difficulty acquiring us, even if doing so would
benefit our stockholders, due to provisions of our certificate of incorporation
and by-laws and Delaware law.
Provisions in our certificate of incorporation, in our by-laws and under
Delaware law could make it difficult for other companies to acquire us, even if
doing so would benefit our stockholders. Our certificate of incorporation and
by-laws contain the following provisions, among others, which may inhibit an
acquisition of our company by a third party:
. a board of directors that is staggered in three classes,
. advance notification procedures for matters to be brought before
stockholder meetings,
. a limitation on who may call stockholder meetings,
. a prohibition on stockholder action by written consent, and
. an authorization of 20,000,000 shares of undesignated preferred stock
that we may issue with special rights, preferences and privileges and
that we could use, for example, to implement a rights plan or poison
pill.
We are also subject to provisions of Delaware law that prohibit us from
engaging in any business combination with any "interested stockholder," meaning
generally a stockholder who beneficially owns more than 15% of our stock, for a
period of three years from the date this person became an interested
stockholder, unless various conditions are met, such as approval of the
transaction by our board of directors. These provisions could have the effect
of delaying or preventing a change in control. For a more complete discussion
of these provisions of Delaware law, please see "Description of Capital Stock--
Anti-Takeover Provisions--Delaware Law."
Our affiliates can control matters requiring stockholder approval because they
own a large percentage of our common stock, and they may vote this common stock
in a way with which you do not agree.
After this offering, our affiliates will own approximately % of the
outstanding shares of our stock. As a result, if these persons act together,
they will have the ability to exercise substantial control over our affairs and
corporate actions requiring stockholder approval, including the election of
directors, a sale of substantially all our assets, a merger with another entity
or an amendment to our certificate of incorporation. If they act together,
these stockholders could use their ownership position to delay, deter or
prevent a change in control. Also, their aggregate ownership could adversely
affect the price that investors might be willing to pay in the future for
shares of our common stock.
14
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this prospectus constitute forward-
looking statements. These statements involve known and unknown risks,
uncertainties and other factors that may cause our or our industry's actual
results, performance or achievements to be materially different than any
expressed or implied by these statements. In some cases, you can identify these
statements by terminology such as "may," "will," "should," "expects," "plans,"
"anticipates," "believes," "estimates," "predicts," "potential," "continue" or
the negative of these terms or other comparable terminology.
Although we believe that the expectations reflected in these statements are
reasonable, we cannot guarantee future results, performance or achievements.
Except as otherwise required by federal securities laws, we are under no duty
to update any of the statements after the date of this prospectus to conform
these statements to actual results.
15
USE OF PROCEEDS
We estimate that we will receive net proceeds from this offering of
approximately $ , at an assumed initial public offering price of
$ per share, net of estimated underwriting discounts and commissions and
estimated offering expenses payable by us. If the underwriters exercise their
over-allotment option in full, we estimate our net proceeds will be $
million.
We expect to use these proceeds for research, development and
commercialization of our products, expansion of our manufacturing facilities,
and general corporate purposes, including working capital. As of the date of
this prospectus, we cannot specify with certainty all of the particular uses
for the remaining net proceeds we will have upon completion of the offering.
Accordingly, our management will have broad discretion in the application of
the net proceeds.
Pending these uses, we intend to invest the net proceeds in interest-
bearing, investment-grade instruments, certificates of deposit, or direct or
guaranteed obligations of the United States.
DIVIDEND POLICY
We have never declared or paid dividends on our capital stock and do not
anticipate declaring or paying any dividends in the foreseeable future. We
currently intend to retain any future earnings for the expansion of our
business.
16
CAPITALIZATION
The following table sets forth the following information as of September 30,
2000:
. our actual capitalization,
. our pro forma capitalization after giving effect to the filing of an
amendment to our certificate of incorporation immediately prior to the
closing of this offering to authorize 100,000,000 shares of common stock,
eliminate all existing series of preferred stock and authorize 20,000,000
shares of undesignated preferred stock, and the conversion of all
outstanding convertible preferred stock into common stock, and
. our pro forma as adjusted capitalization, reflecting the sale of
shares of common stock in this offering at an assumed initial public
offering price of $ per share, after deducting the underwriting
discounts and commissions and estimated offering expenses.
As of September 30, 2000
(1)
-----------------------------
Pro Pro Forma
Actual Forma As Adjusted
------- ------- -----------
(in thousands)
Series A redeemable convertible preferred stock,
$0.01 par value; 650,000 shares authorized,
641,642 shares issued and outstanding, actual;
no shares authorized, issued and outstanding,
pro forma and pro forma as adjusted ........... $31,258 $ -- $
======= ======= =====
Stockholders' equity (deficit):
Undesignated preferred stock, $0.01 par value;
1,350,000 shares authorized, no shares issued
and outstanding, actual; 20,000,000 shares
authorized, no shares issued and outstanding,
pro forma and pro forma as adjusted.......... -- --
Common stock, $0.01 par value; 3,000,000
shares authorized, 1,847,500 shares issued
and outstanding, actual; 100,000,000 shares
authorized, 2,489,142 shares issued and
outstanding pro forma; 100,000,000 shares
authorized, shares issued and
outstanding, pro forma as adjusted........... 18 25
Additional paid-in capital.................... 1,561 32,812
Deferred compensation......................... (405) (405)
Accumulated deficit........................... (3,261) (3,261)
------- ------- -----
Total stockholders' (deficit) equity........ (2,087) 29,171
------- ------- -----
Total capitalization...................... $29,171 $29,171 $
======= ======= =====
- --------
(1) Excludes 213,600 shares subject to outstanding options with a weighted
average exercise price of $10.56 per share and 37,402 shares of common
stock issuable upon the exercise of outstanding warrants with a weighted
average exercise price of $53.74 per share, in each case as of September
30, 2000.
17
DILUTION
Our pro forma net tangible book value as of was $ , or $ per
share, assuming conversion of all outstanding shares of convertible preferred
stock into shares of our common stock on the closing of this offering. Pro
forma net tangible book value per share represents the amount of our total
tangible assets, reduced by the amount of our total liabilities, and then
divided by the total number of shares of common stock outstanding after giving
effect to the automatic conversion of all shares of outstanding preferred stock
upon closing of this offering. Dilution in pro forma net tangible book value
per share represents the difference between the amount paid per share by
purchasers of shares of common stock in this offering and the pro forma net
tangible book value per share of common stock immediately after the completion
of this offering. After giving effect to the sale of the shares of
common stock offered by us at an assumed initial public offering price of
$ per share, and after deducting the underwriting discounts and
commissions and estimated offering expenses payable, our pro forma net tangible
book value at would have been $ million or $ per share of common
stock. This represents an immediate increase in pro forma net tangible book
value of $ per share to existing stockholders and an immediate dilution of
$ per share to new investors purchasing shares at the initial public
offering price. The following table illustrates this dilution on a per share
basis:
Assumed public offering price..................................... $
----
Pro forma net tangible book value as of .................... $
Increase attributable to new investors..........................
----
Pro forma net tangible book value after the offering..............
----
Dilution to new investors......................................... $
====
The following table summarizes, as of , the differences between the
existing stockholders and new investors with respect to the number of shares of
common stock purchased from us, the total consideration paid to us and the
average price paid per share:
Shares Total
Purchased Consideration Average
-------------- -------------- Price
Number Percent Amount Percent Per Share
------ ------- ------ ------- ---------
Existing stockholders................... % $ % $
New investors...........................
--- --- ----- ---
Totals.............................. % $ %
=== === ===== ===
The preceding tables assume no issuance of shares of common stock under our
stock plans after . As of , shares were subject to outstanding
options at a weighted average exercise price of $ per share. This table
also assumes no exercise of the warrants outstanding as of for shares
of common stock at a weighted average exercise price of $ per share. If all
of these options and warrants were exercised, then the total dilution per share
to new investors would be $ .
18
SELECTED FINANCIAL DATA
(in thousands, except per share data)
You should read the selected historical financial data set forth below in
conjunction with our financial statements and related notes and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this prospectus. The statement of operations data for the
years ended December 31, 1997, 1998 and 1999, and the balance sheet data at
December 31, 1998 and 1999 are derived from financial statements included
elsewhere in the prospectus that have been audited by PricewaterhouseCoopers
LLP, independent accountants. The balance sheet data as of December 31, 1997
are derived from our audited financial statements that are not included in this
prospectus. The statement of operations data for the nine months ended
September 30, 1999 and 2000 and the balance sheet data as of September 30, 2000
have been derived from our unaudited financial statements included elsewhere in
this prospectus. These unaudited interim financial statements include all
adjustments, consisting only of normal recurring adjustments, which we consider
necessary for a fair presentation of the information. The statement of
operations data for the years ended December 31, 1995 and 1996 and the balance
sheet data at December 31, 1995 and 1996 are derived from our unaudited
financial statements that are not included in this prospectus and which
include, in our opinion, all adjustments necessary for a fair presentation of
such data. Historical results are not necessarily indicative of results to be
expected for any future period.
Nine Months
Ended
Year Ended December 31, September 30,
------------------------------------ --------------
1995 1996 1997 1998 1999 1999 2000
------ ------ ------ ------ ------ ------ ------
Statement of Operations
Data:
Revenues:
Royalties.................. $ -- $1,076 $1,109 $ 638 $ 496 $ 364 $ 283
License fees and
collaborative research and
development............... 402 928 -- -- 1,889 1,148 3,283
Government research
grants.................... 229 217 240 477 400 265 610
------ ------ ------ ------ ------ ------ ------
Total revenues ........... 631 2,221 1,349 1,115 2,785 1,777 4,176
------ ------ ------ ------ ------ ------ ------
Operating expenses:
Royalties.................. 7 110 492 315 496 431 308
Research and development... 515 1,075 845 1,156 1,550 996 2,523
General and
administrative............ 86 289 413 513 872 630 1,251
------ ------ ------ ------ ------ ------ ------
Total operating expenses.. 608 1,474 1,750 1,984 2,918 2,057 4,082
------ ------ ------ ------ ------ ------ ------
Income (loss) from
operations................. 23 747 (401) (869) (133) (280) 94
Interest income, net........ 7 1 7 3 39 29 307
------ ------ ------ ------ ------ ------ ------
Net income (loss)........... 30 748 (394) (866) (94) (251) 401
Accretion on redeemable
convertible preferred stock
and warrants............... -- -- -- -- -- -- 79
------ ------ ------ ------ ------ ------ ------
Net income (loss)
attributable to common
stockholders............... $ 30 $ 748 $ (394) $ (866) $ (94) $ (251) $ 322
====== ====== ====== ====== ====== ====== ======
Net income (loss) per share:
Basic...................... $ 0.02 $ 0.37 $(0.20) $(0.42) $(0.05) $(0.12) $ 0.16
Diluted.................... $ 0.02 $ 0.37 $(0.20) $(0.42) $(0.05) $(0.12) $ 0.15
Shares used in computing net
income (loss) per share:
Basic...................... 2,000 2,000 2,000 2,050 2,066 2,065 1,953
Diluted ................... 2,000 2,000 2,000 2,050 2,066 2,065 2,089
Unaudited pro forma basic
and diluted net income
(loss) per share........... $(0.03) $ 0.15
Shares used in computing
unaudited pro forma net
income (loss) per share:
Basic...................... 2,708 2,594
Diluted ................... 2,708 2,731
19
SELECTED FINANCIAL DATA -- (Continued)
(in thousands)
December 31,
------------------------------------------- September 30,
1995 1996 1997 1998 1999 2000
------- ------- ------- ------- ------- -------------
Balance Sheet Data:
Cash and cash
equivalents............ $ 101 $ 176 $ 124 $ 129 $ 1,144 $ 31,028
Working capital......... (749) (2) (535) (485) (522) 28,320
Total assets............ 148 568 375 286 1,525 32,007
Redeemable convertible
preferred stock........ -- -- -- -- -- 31,258
Total stockholders'
deficit................ (956) (207) (597) (449) (253) (2,087)
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial
condition and results of operations in conjunction with "Selected Financial
Data" and our financial statements and related notes appearing elsewhere in
this prospectus.
Overview
We design, develop and manufacture innovative sustained-release drug
delivery products. Since our founding in 1991, we have been primarily engaged
in the research and development of products using our proprietary platform
technologies. To date, we have developed one commercial product, Vitrasert,
which has been sold since 1996. We have four additional products in advanced
clinical trials. Our revenues have consisted primarily of royalties, license
fees and payments for research and development under our two collaborative
licensing and development agreements. We have also earned revenue from
government research grants.
We have licensed a number of key patents relating to aspects of our platform
technologies from the University of Kentucky Research Foundation, or the UKRF.
Under these agreements, we must pay royalties to the UKRF.
In December 1992, we entered into a licensing and development agreement with
Chiron Vision Corporation for the development and commercialization of
Vitrasert. Under this agreement, we earned a total of approximately $2.3
million in collaborative research and development revenue from 1993 to 1996.
Chiron began selling Vitrasert in 1996 following Food and Drug Administration
approval, and paid us royalties on those sales. When Bausch & Lomb Incorporated
acquired Chiron Vision Corporation in 1997, Bausch & Lomb assumed this
agreement on the same terms. Bausch & Lomb continues to market and sell
Vitrasert and pay us royalties on those sales. Improvements in the treatment of
AIDS/HIV have significantly decreased the incidence of CMV retinitis, and, as a
result, our royalty revenue from sales of Vitrasert has declined each year
since 1997. The royalties we pay to the UKRF on these sales have declined
proportionately.
In June 1999, we entered into a licensing and development agreement with
Bausch & Lomb to develop and market products for the treatment of other eye
diseases. Under this agreement, Bausch & Lomb has paid us $2.5 million in
license fees, is funding the joint development of our three proposed products
for the treatment of blinding eye disease and has agreed to make additional
payments to us if we achieve milestones with respect to the development of
these products. Bausch & Lomb has an exclusive license to market and sell our
products for the treatment of eye disease and has agreed to pay us royalties on
sales of these products.
We have also received government research grants that fund the cost of
research and development relating to aspects of our proposed products. The
government reimburses us for actual expenditures made for research authorized
under these grants.
Revenue Recognition Policy
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements," or
SAB 101, which clarifies the Securities and Exchange Commission's views
regarding recognition of revenue. We adopted SAB 101 retroactively to 1993.
21
We recognize nonrefundable license fees, milestone payments and
collaborative research and development payments under licensing and development
agreements as revenue on a retrospective percentage of completion basis. The
cost of the total effort to complete the expected research and development
activities under an agreement is estimated from the commencement date. At each
reporting period, we determine the cost of the effort that has been incurred to
date and divide this amount by the amount of total expected research and
development costs under an agreement. Revenue is recognized for license fees,
milestone payments and collaborative research and development payments by
multiplying the resulting percentage completion by the total license, milestone
and research and development revenues we expect to receive under that
agreement, then subtracting revenue previously recognized. The remainder is
spread over the remaining performance period in a similar manner. Total
revenues we expect to receive under the agreement include amounts due from the
collaborative partner at the time a contingency has been removed and the
collaborative partner becomes obligated to make a payment related to
achievement of a milestone. Payments received in advance of being earned are
recorded as deferred revenue.
We evaluate all collaborative agreements on a monthly basis to determine the
appropriate revenue recognition for that period. The evaluation includes all of
the potential revenue components from each specific collaborative agreement.
In contrast to our recognition of a portion of license fees and milestone
payments over the remainder of the underlying contract, we recognize the
corresponding royalty due to the UKRF as expense in full upon receipt of the
payment from our development partners. Consequently, we will generally
recognize the royalty expense for license fees and milestone payments in
earlier periods than we recognize the corresponding revenue. We expect that
revenues from license fees and milestone payments will cause our total revenues
and net income or loss to fluctuate in the future depending upon whether and
when we earn these payments.
Royalty revenue is recognized based on actual sales of licensed products in
licensed territories as reported by licensees and is generally recognized in
the period the sales occur. If a portion of the royalty revenue relates to
sponsored research and development, it is deferred and amortized consistent
with retrospective percentage of completion for that contract.
Government research grants are nonrefundable and are recognized as revenue
when the related expense is incurred. Revenue recorded under government
research grants is recorded consistent with guidelines issued by the governing
body issuing the grant.
Results of Operations
Nine months ended September 30, 2000 and 1999
Revenues. Total revenues increased $2.4 million, or 135.0%, to $4.2 million
for the nine months ended September 30, 2000, from $1.8 million for the nine
months ended September 30, 1999.
Royalties revenue decreased $80,961, or 22.2%, to $283,041 for the nine
months ended September 30, 2000, from $364,002 for the nine months ended
September 30, 1999. This decrease was due to a decrease in Vitrasert royalties
paid to us. Vitrasert royalties decreased due to improvements in the treatment
of AIDS/HIV, which caused a corresponding decline in the incidence of CMV
retinitis.
License fees and collaborative research and development revenue increased
$2.1 million, or 185.9%, to $3.3 million for the nine months ended September
30, 2000, from $1.1 million for the nine months ended September 30, 1999. The
increase was due to increased research and development activities we conducted
under our 1999 agreement with Bausch & Lomb and additional license fee payments
we received.
22
Government research grants revenue increased $345,066, or 130.2%, to
$610,000 for the nine months ended September 30, 2000, from $264,934 for the
nine months ended September 30, 1999. This increase was caused by an increase
in our research and development activities associated with and funded by these
grants.
Royalties. Royalties expense decreased $122,689, or 28.5%, to $307,911 for
the nine months ended September 30, 2000, from $430,600 for the nine months
ended September 30, 1999. The decrease was attributable to lower Vitrasert
sales and decreased license fees that we received from Bausch & Lomb, both of
which decreased our royalty payments to the University of Kentucky Research
Foundation.
Research and Development. Research and development expense increased
$1.5 million, or 153.2%, to $2.5 million for the nine months ended September
30, 2000, from $996,377 for the nine months ended September 30, 1999. The
increase was due to our conducting an increased number of pre-clinical and
clinical trials and our hiring of additional research and development
personnel, both in connection with our 1999 agreement with Bausch & Lomb. We
believe that our research and development expense will continue to increase as
we fund late-stage clinical trials, expand our development efforts on other
products and further develop our manufacturing capabilities.
General and Administrative. General and administrative expense increased
$621,479, or 98.6%, to $1.3 million for the nine months ended September 30,
2000, from $630,096 for the nine months ended September 30, 1999. The increase
was due to our hiring of additional administrative staff to manage and support
the growth of our business, increased costs of outside professional services
associated with our intellectual property and increased stock-based
compensation. We believe that general and administrative expense will increase
in the future as we hire additional personnel and incur increased costs of
outside professional services as a public company.
Interest Income, net. Interest income, net of interest expense, increased
$278,427, or 969.2%, to $307,155 for the nine months ended September 30, 2000,
from $28,728 for the nine months ended September 30, 1999. The increase was due
to increased interest earned from our higher average outstanding balances of
cash and cash equivalents following our sale of Series A convertible preferred
stock in August 2000. The increase was partially offset by interest expense on
a note payable related to a repurchase of our common stock.
Years ended December 31, 1999 and 1998
Revenues. Total revenues increased $1.7 million, or 149.9%, to $2.8 million
for the year ended December 31, 1999, from $1.1 million for the year ended
December 31, 1998.
Royalties revenue decreased $141,627, or 22.2%, to $496,378 for the for the
year ended December 31, 1999, from $638,005 for the year ended December 31,
1998. This decrease was due to a decrease in Vitrasert royalties paid to us.
Vitrasert royalties decreased due to the decline in the incidence of CMV
retinitis.
License fees and collaborative research and development revenue increased to
$1.9 million for the year ended December 31, 1999, from $0 for the year ended
December 31, 1998. The increase was due to the initiation of collaborative
research and development activities and an initial license fee under our 1999
agreement with Bausch & Lomb.
Government research grants revenue decreased $77,090, or 16.2%, to $399,512
for the year ended December 31, 1999, from $476,602 for the year ended December
31, 1998. The decrease was due to a decrease in our research and development
activities associated with and funded by government grants.
23
Royalties. Royalties expense increased $180,979, or 57.4%, to $496,164 for
the year ended December 1999, from $315,185 for the year ended December 31,
1998. The increase in royalties expense was attributable to payment of
royalties by us to the University of Kentucky Research Foundation for license
fees we received under our 1999 agreement with Bausch & Lomb. This increase was
partially offset by reduced royalty payments we made to the University of
Kentucky Research Foundation as a result of lower Vitrasert sales.
Research and Development. Research and development expense increased
$393,798, or 34.1%, to $1.5 million for the year ended December 31, 1999, from
$1.2 million for the year ended December 31, 1998. The increase was due to our
conducting an increased number of pre-clinical and clinical trials and our
hiring of additional research and development personnel, both in connection
with our 1999 agreement with Bausch & Lomb.
General and Administrative. General and administrative expense increased
$358,676, or 69.8%, to $872,223 for the year ended December 31, 1999, from
$513,547 for the year ended December 31, 1998. The increase was due to our
hiring of additional administrative staff and an increase in the costs of
outside professional services to manage and support the growth of our business.
Interest Income. Interest income increased $35,253 to $38,648 for the year
ended December 31, 1999, from $3,395 for the year ended December 31, 1998. The
increase was due to higher cash balances as a result of payments we received
under our 1999 agreement with Bausch & Lomb.
Years ended December 31, 1998 and 1997
Revenues. Total revenues decreased $234,401, or 17.4%, to $1.1 million in
the year ended December 31, 1998, from $1.3 million for the year ended December
31, 1997.
Royalties revenue decreased $470,737, or 42.5%, to $638,005 for the year
ended December 31, 1998, from $1.1 million for the year ended December 31,
1997. The decrease was due to a decrease in Vitrasert royalties paid to us.
Vitrasert royalties decreased due to the decline in the incidence of CMV
retinitis.
Government research grants revenue increased $236,336, or 98.4%, to $476,602
for the year ended December 31, 1998, from $240,266 for the year ended December
31, 1997. This increase was attributable to an increase in our research and
development activities associated with and funded by government grants.
Royalties. Royalties expense decreased $176,655, or 35.9%, to $315,185 for
the year ended December 31, 1998, from $491,840 for the year ended December 31,
1997. The decrease was caused by a decline in Vitrasert sales which decreased
our royalty payments to the University of Kentucky Research Foundation.
Research and Development. Research and development expense increased
$310,784, or 36.8%, to $1.2 million for the year ended December 31, 1998, from
$844,777 for the year ended December 31, 1997. This increase was due to
increased research and development we conducted under government grants and our
hiring of additional research and development staff.
General and Administrative. General and administrative expense increased
$100,295, or 24.3%, to $513,547 for the year ended December 31, 1998, from
$413,252 for the year ended
24
December 31, 1997. The increase was due to our hiring of additional
administrative staff and an increase in the costs of outside professional
services to manage and support the growth of our business.
Interest Income. Interest income decreased $3,191, or 48.5%, to $3,395 for
the year ended December 31, 1998, from $6,586 for the year ended December 31,
1997. The decrease was due to lower average cash balances.
Liquidity and Capital Resources
We have historically financed our operations through royalties and other
payments received from collaborative licensing and development agreements,
funding under government research grants and sales of common and preferred
stock.
We had a working capital deficit of $535,294 at December 31, 1997, $484,552
at December 31, 1998 and $522,231 at December 31, 1999. The decrease in the
working capital deficit between 1997 and 1998 was due primarily to the receipt
of cash from sales of our common stock. The increase in the working capital
deficit between 1998 and 1999 was due to an increase in deferred revenue under
our 1999 agreement with Bausch & Lomb.
At September 30, 2000 we had cash and cash equivalents of $31.0 million,
primarily from the sale in August 2000 of our Series A convertible preferred
stock for gross proceeds of approximately $34.5 million. We also repurchased
279,335 shares of our common stock for approximately $3.5 million in 2000.
We had cash and cash equivalents of $123,881 at December 31, 1997, $129,319
at December 31, 1998 and $1.1 million at December 31, 1999. The increase of
approximately $5,000 in cash and cash equivalents at December 31, 1998 from
December 31, 1997 was primarily due to the sale of our common stock, which was
partially offset by operating expenses. The increase of approximately $1.0
million in cash and cash equivalents at December 31, 1999 from December 31,
1998 was due to the receipt of a license fee under our 1999 agreement with
Bausch & Lomb and the sale of our common stock, partially offset by the payment
of deferred payroll compensation and acquisition of capital equipment.
We anticipate that we will increase our use of cash in the future as we
continue to research, develop and manufacture our products. We believe that our
existing cash and investment securities and anticipated cash flow from existing
collaborations together with the net proceeds of this offering will be
sufficient to support our current operating plan for at least the next two
years. Our future capital requirements will depend on many factors, including:
. the number, rate and progress of our research programs and pre-clinical
and clinical trials,
. the achievement of the milestones under the Bausch & Lomb agreement and
any future collaborations,
. the results of clinical trials,
. our ability to maintain and establish and maintain strategic alliances,
including our collaboration with Bausch & Lomb,
25
. the success of Bausch & Lomb and future marketing partners in
commercializing our products, and
. costs incurred in enforcing and defending our patent claims and other
intellectual property rights.
If we require additional capital, it may not be available on favorable
terms, if at all. If adequate funds are not available on acceptable terms, we
may be required to significantly reduce or refocus our operations or to obtain
funds through arrangements that may require us to relinquish rights to our
products, technologies or potential markets, which could have a material
adverse effect on our business. To the extent that we raise additional capital
through the sale of equity or convertible debt securities, our existing
stockholders could be diluted.
Disclosure Amount Market Risk
Our exposure to market risk is principally confined to our cash and cash
equivalents, which consist of money market accounts. We do not use derivative
instruments to hedge interest rate exposure. Due to the nature of our
investments, we believe we are not subject to material market risk.
26
BUSINESS
Overview
We design, develop and manufacture innovative, sustained-release drug
delivery products. Our products are designed to treat severe and chronic
diseases that have limited or no effective treatment options and represent
significant market opportunities. Using our proprietary platform technologies,
we design our products to deliver the appropriate quantity of approved drugs
directly to a target site at a controlled rate for a predetermined period of
time ranging from days to years. We believe our proprietary platform
technologies will allow us to extend the therapeutic value of a wide variety of
drugs while virtually eliminating the variability of dosing and adverse
systemic side effects characteristic of most traditional drug treatments.
We have obtained Food and Drug Administration approval for and
commercialized one product based on our patented Aeon platform technology and
are leveraging this technology to develop four additional products currently in
advanced clinical trials. Vitrasert, our Aeon product for the treatment of CMV
retinitis, a blinding eye disease afflicting late-stage AIDS patients, has been
sold since 1996 and is currently the most effective approved treatment for this
disease. We have additional Aeon products in clinical trials for the treatment
of diabetic macular edema, uveitis and age-related macular degeneration, three
leading causes of blindness that affect over one million eyes in the United
States. Two of these products have been granted fast track status by the Food
and Drug Administration, and we expect both will commence pivotal clinical
trials in early 2001. We expect that our third ophthalmic product, as well as
our Aeon product for the treatment of brain tumors, will enter multi-center
Phase II clinical trials in 2001. Our pipeline also includes products in pre-
clinical development for the treatment of severe osteoarthritis and post-
surgical pain.
Industry Background
Severe and chronic diseases, such as blinding eye diseases, cancer, severe
osteoarthritis, multiple sclerosis and Alzheimer's disease, afflict millions of
people each year and are becoming more prevalent as the population ages.
Despite continuing advances in medical and pharmaceutical technologies, current
treatment options for many of these diseases are inadequate. Drug treatments
for these diseases, where they exist, often offer only temporary or limited
therapeutic benefits and cause adverse side effects.
The therapeutic value of a drug depends on its distribution throughout the
body, reaction with the targeted site, reaction with other tissues and organs
in the body, and elimination from the body. For a drug to be effective, the
appropriate amount of drug must be delivered to the intended site in the body
and maintained there for an adequate period of time without affecting other
tissues and organs. Accordingly, the manner in which a drug is delivered can be
as important to the ultimate therapeutic value of the treatment as the
intrinsic properties of the drug itself.
Drugs are typically administered systemically by oral dosing or injection
and then disperse throughout the body. In many cases, this administration
method does not deliver drugs to the intended site at an adequate concentration
for a sufficient period of time, fails to achieve the maximum potential
therapeutic benefit and results in adverse side effects.
Because drugs delivered systemically disperse throughout the body, they
often must be administered at high dosage levels in order to achieve sufficient
concentrations at the intended site. Some areas of the body, such as the eyes,
joints, brain and nervous system, have natural barriers that impede the
movement of drugs to those areas, requiring the administration of even higher
systemic doses. These high dosage levels can cause harmful side effects when
the drug interacts with other tissues and organs.
27
Most systemic delivery methods also result in variability in drug
concentration over the course of each dose. The high drug concentration
immediately after dosing can cause toxicity and harmful side effects. As time
elapses after dosing, the drug concentration can rapidly diminish to levels too
low to provide any therapeutic benefit. In many cases, the optimal
concentration of drug is present at the target site for only a small period of
time.
Timely and repeated administration of drugs by the patient is often
necessary to maintain therapeutic drug levels over an extended period of time.
However, patients often fail to take drugs as prescribed and, as a result, do
not receive the potential therapeutic benefit. The risk of patient
noncompliance increases if multiple drugs are required, the dosing regimen is
complicated or the patient is elderly or cognitively impaired.
Due to the drawbacks of traditional drug delivery, the development of novel
methods to deliver drugs to patients in a more precise, controlled fashion over
sustained periods of time has become a multibillion dollar industry. Recently
developed drug delivery methods include oral controlled-release products,
transdermal controlled-release patches and injectable-depot formulations. These
methods seek to improve the consistency of the dosage over time and extend the
duration of delivery. However, most of these methods cannot provide linear,
controlled dosage or deliver drugs for a sufficiently long duration. This
reduces their effectiveness for diseases that are chronic or require precise
dosing. In addition, most of these methods still deliver drugs systemically
and, as a result, can still cause adverse systemic side effects.
The CDS Advantage
We design our innovative sustained-release drug delivery products to provide
extended, controlled, localized delivery of approved pharmacological agents for
the treatment of severe and chronic diseases. Key advantages of our proprietary
platform technologies include:
. Localized Delivery. We design our products to be implanted directly at a
target site. By using the natural barriers of the body to isolate and
maintain appropriate concentrations of drug at the target site, we
believe our products will maximize the therapeutic effect of a drug,
while minimizing unwanted systemic side effects.
. Controlled Release Rate. We design our products to release drugs at a
linear or other controlled rate. We believe this will allow our products
to maintain the optimal drug concentration at a target site and eliminate
variability in dosing over time. By controlling the quantity of drug
delivered over the duration of treatment, we believe our products will
significantly improve the therapeutic benefits of treatment.
. Extended Delivery. We design our products to deliver drugs to target
sites for predetermined periods of time ranging from days to years. We
believe this uninterrupted, sustained delivery will reduce the need for
repeat applications, eliminate the risk of patient noncompliance and
provide more effective treatments.
. Reduced Development Risk. Our products in clinical trials use our
commercially validated platform technology to deliver drugs already
approved for other indications. As a result, we believe we can develop
these and future products in less time, at a lower cost and with less
risk than is typically associated with drug discovery and development.
. Cost-effective Therapy. We believe that by delivering the appropriate
amount of drug for an extended period of time, our products will reduce
the need for costly repeat treatments, hospitalizations and chronic care.
In addition, we believe that by virtually eliminating systemic side
effects, our products will further reduce the cost of treating the
diseases we target.
28
Our Strategy
Our proprietary platform technologies employ novel therapeutic approaches
designed to treat severe and chronic diseases that have limited or no effective
treatment options. Our objective is to revolutionize the treatment of the
severe and chronic diseases that we target and to develop products that become
the standard of care for these diseases. In order to achieve this objective, we
intend to:
. Focus on Severe and Chronic Diseases that Represent Significant Market
Opportunities. We focus our product development on severe and chronic
diseases that we believe would be treatable with drugs already approved
for other applications if those drugs could be delivered safely and
effectively to the disease site. These diseases represent significant
market opportunities because they have limited or no currently effective
treatments and affect large numbers of people. We are currently
developing products to treat blinding eye diseases, brain tumors and
severe osteoarthritis. In the future, we plan to target such diseases as
Alzheimer's disease, multiple sclerosis, post-surgical pain and prostate
cancer.
. Rapidly Commercialize Our Products for Blinding Eye Diseases. We plan to
aggressively pursue the development of our products for blinding eye
diseases. We believe that the FDA approval and the commercial acceptance
of Vitrasert, our product for the treatment of CMV retinitis, validated
our Aeon platform technology for the treatment of eye disease. We are
using the same technology to develop products for the treatment of three
leading causes of blindness. The FDA has granted fast track status to two
of these products, which we expect to enter pivotal trials in early 2001.
We expect the third product to enter Phase II trials in 2001. We have
selected Bausch & Lomb to market our products for the treatment of
blinding eye diseases, and it is publicizing our platform technology
under the Envision TD brand name.
. Extend Our Technology Platforms into Additional Therapeutic Areas. We
believe that we can easily adapt our existing platform technologies to
treat additional diseases by modifying the design of the product or
varying the drug delivered. For example, we are modifying our Aeon
implant designed to treat eye disease to develop a product to treat
severe osteoarthritis. By using drugs already approved for other
indications in our adaptable platform technologies, we believe we will be
able to develop products more rapidly and with lower risk than
conventional drug discovery and development.
. Optimize Product Distribution. In order to optimize the distribution of
our products, we expect to either enter into joint marketing or license
arrangements with established, industry-leading marketing partners or
independently commercialize our products using a targeted sales force.
Our commercialization strategy for each product will depend upon many
factors, including the market size, the expected cost and duration of the
regulatory approval process and the projected costs and complexity of
marketing the product. We have selected Bausch & Lomb to market our
products for blinding eye diseases. We expect to retain our rights to the
underlying technology in any licensing arrangements.
. Expand Internal Capabilities. To date, we have primarily been a research
and development company. We intend to broaden our strengths to gain
increased control over product development and greater flexibility in our
commercialization strategy by hiring additional personnel to oversee our
clincial trials, developing our commercial manufacturing capacity and
adding sales and marketing capabilities.
Our Proprietary Platform Technologies
Our two proprietary platform technologies are the Aeon system and the Codrug
system. Our one commercial product and all of our products currently in
clinical trials are based on our Aeon technology. Applications of our Codrug
technology are in pre-clinical trials.
29
Aeon Platform Technology
The Aeon system consists of a drug core coated in a series of permeable
polymer layers and partially encased in an impermeable polymer layer. Once the
product is implanted in the body, drug crosses the permeable layers into the
target site at a controlled rate for a predetermined period of time ranging
from days to years. We believe our Aeon technology can be used to deliver
almost any drug that is stable at body temperature for the expected duration of
delivery. By changing the implant design, we can control both the rate and
duration of release to meet different therapeutic needs. We are currently using
our Aeon platform technology to develop products for the treatment of blinding
eye diseases, severe osteoarthritis and brain tumors. We are currently testing
two implants with two different dosages of the same drug for the treatment of
three eye diseases. Results of clinical trials may indicate that the same
implant is appropriate for all three diseases, allowing us to use one product
for these three diseases.
Blinding Eye Diseases
Our first commercial product, Vitrasert, demonstrated the feasibility and
effectiveness of our Aeon platform technology by providing sustained, localized
treatment of CMV retinitis. We are now extending our Aeon technology to treat
diabetic macular edema, uveitis and age-related macular degeneration, three
leading causes of blindness.
CMV Retinitis. Cytomegalovirus, or CMV, retinitis, a blinding eye disease,
is a viral infection of the eye that frequently occurs in individuals with
AIDS. Although common in the early 1990s, improvements in the treatment of
AIDS/HIV have significantly decreased the incidence of CMV retinitis. Our
Vitrasert implant for CMV retinitis has been sold since 1996 and provides
sustained treatment of the disease for six to eight months. Our implant gained
greater than a 20% market share in its first year of commercialization and has
been used in over 10,000 eyes since 1996. Studies show that Vitrasert is the
most effective approved treatment for CMV retinitis.
Diabetic Macular Edema. Diabetic macular edema, a form of diabetic
retinopathy, is a blinding eye disease that affects the macula, the most
sensitive part of the retina. It develops as retinal blood vessels
progressively deteriorate and leak fluid, which causes swelling of the retina.
Diabetic macular edema is a major cause of vision loss in diabetics. According
to a leading study, 26% of the diabetics followed for 14 years developed
diabetic macular edema. We estimate that at least 300,000 diabetics in the
United States and over 1.3 million diabetics worldwide have diabetic macular
edema. We are not aware of any approved drug treatment for this disease. The
only current treatments are laser therapy which burns the retina, either in
specific sites or in a grid, and vitrectomy, a major eye surgery which involves
the removal of the vitreous gel from the cavity of the eye and the surgical
dissection of the scar tissue membranes off the surface of the retina. Both
treatments only slow the progression of the disease, at best temporarily
reverse vision loss in some patients.
We are developing a three-year Aeon implant to treat diabetic macular edema.
In our preliminary clinical trials, eight eyes of eight patients were treated
with an Aeon implant. Four of these patients had been functionally blind before
treatment. All treated eyes showed reversal of the disease. In the five eyes
that were treated for more than nine months, the average visual acuity improved
dramatically. This is the first study of which we are aware that demonstrated a
long-term improvement in the visual acuity of patients with diabetic macular
edema.
30
Based on the results of our preliminary clinical trials, the FDA has granted
fast track status to our Aeon implant for diabetic macular edema, and we expect
to start pivotal clinical trials in early 2001. We will conduct two trials with
a total of approximately 475 patients who will receive either a control
treatment or an Aeon implant. We will compare the visual acuity of eyes with
implants to eyes without implants and the efficacies of two doses.
Uveitis. Uveitis is an autoimmune condition characterized by inflammation of
the inside of the eye that can cause sudden or gradual vision loss. We estimate
that over 175,000 eyes in the United States suffer from severe uveitis.
Treatments include steroidal eye drops, ocular injections of steroids, oral
systemic steroidal and non-steroidal anti-inflammatory medication and
chemotherapy. These treatments, if successful, generally only slow the
progression of uveitis. In addition, systemic treatment and chemotherapy often
cause severe side effects.
We are developing a three-year Aeon implant to treat severe uveitis. In our
Phase I/II clinical trials, nine eyes of six patients were treated with an Aeon
implant. These patients had severe, intractable uveitis with significant vision
loss and had previously received systemic therapy with steroids or
chemotherapy. In these trials, our Aeon implant completely controlled the
uveitis in the treated eyes and permitted the withdrawal of systemic therapy,
leading to a virtual elimination of adverse systemic side effects. In the seven
eyes of five patients that were monitored for more than one year, the average
visual acuity of the treated eyes improved significantly.
Based on the results of our preliminary clinical trials, the FDA has granted
fast track status to our Aeon implant for uveitis, and we expect to start
pivotal clinical trials in early 2001. We plan to implant approximately 450
patients in the United States and Europe with an Aeon system with one of two
doses. At the end of six months, we will measure the recurrence of the disease
and will compare the efficacies of the two doses. The FDA designated our Aeon
implant for the treatment of uveitis as an orphan drug. Orphan drug designation
entitles the sponsor to receive benefits for developing a product to treat a
rare disease, including exclusive marketing rights for seven years and tax
incentives for clinical research. The FDA gives this designation to new drugs
designed to treat diseases that affect fewer than 200,000 people.
Age-related Macular Degeneration. Age-related macular degeneration, or ARMD,
is the leading cause of severe visual impairment and blindness in Americans
over 60 and affects more than five million people in the United States. ARMD
has two forms, dry and wet. With dry ARMD, the cells in the central retina die
slowly resulting in gradual central vision loss. Wet ARMD occurs when blood
vessels grow abnormally beneath the most sensitive part of the retina, the
macula. This abnormal new blood vessel growth is called choroidal
neovascularization. The abnormal blood vessels leak, bleed and form scar tissue
under the macula, resulting in sudden and severe loss of central vision.
Approximately 10% to 15% of ARMD patients have wet ARMD, but it is responsible
for 85% to 90% of all vision loss resulting from ARMD. Forms of therapy for wet
ARMD include laser and photodynamic therapy. Only 10% to 15% of patients with
wet ARMD can be treated with laser therapy. Laser therapy generally causes an
immediate and substantial loss of vision, followed by a stabilization in vision
at the reduced level. Approximately 30% of patients with wet ARMD can be
treated with photodynamic therapy. The most favorable expected outcome of
photodynamic therapy is vision stabilization. However, photodynamic therapy
achieves this result in only approximately 15% of patients treated and must be
performed three to four times per year.
We are developing a three-year Aeon implant to treat wet ARMD. In our Phase
I/II clinical trials, we treated 20 eyes of 20 patients suffering from various
forms of choroidal neovascularization, including three with wet ARMD, and
followed these patients for more than a year on average. Five of the implants
were removed due to various complications. The average visual acuity of the
patients in the trial stabilized during the follow-up period. We expect to
start a Phase II clinical trial in 2001 comparing the Aeon implant to
photodynamic therapy in approximately 90 patients with wet ARMD.
31
Other Diseases
We believe our Aeon platform technology can be adapted to treat other parts
of the body which, like the eye, are difficult to treat.
Severe Osteoarthritis. Osteoarthritis is a disease that attacks cartilage.
Surfaces of joint cartilage and underlying bone compress and become irregular,
leading to pain, inflammation, bone spurs and limited movement. Osteoarthritis
is one of the most common disabilities in the United States, affecting
approximately 30 million Americans. As osteoarthritis progresses, serious joint
damage and chronic pain can result. The goal of treatment is to reduce joint
pain and inflammation while improving and maintaining joint function. Current
treatments for osteoarthritis are weight reduction, physical therapy and oral
anti-inflammatory and anti-pain medications. However, there is no evidence that
drug treatment changes the course of the disease. The effectiveness of these
treatments decreases as the disease progresses. In severe osteoarthritis, joint
replacement surgery is common, but sometimes is forestalled with injections of
steroids into the affected joint. Nevertheless, there were nearly 500,000 joint
replacement surgeries in the United States during 1999, which we believe were
mainly due to osteoarthritis.
We are developing a three-year Aeon implant designed to treat severe
osteoarthritis and to delay and possibly eliminate the need for joint
replacement surgery. We are currently completing pre-clinical animal studies of
this implant.
Brain Tumors. Each year, over 20,000 people in the United States develop
primary brain tumors. Patients with brain tumors are generally treated with
surgery, radiation therapy and chemotherapy. Surgery usually cannot completely
remove tumor cells in the brain. Radiation and chemotherapy generally cause
significant systemic side effects and cannot be safely given at levels
sufficient to eradicate all malignant brain cells. As a result, in most cases,
these treatments cannot prevent brain tumors from recurring.
We have developed an Aeon implant, called Ceredur, that is designed to
increase the life expectancy of patients with primary brain tumors. Similar to
our other Aeon implants, our Ceredur implant releases a drug at a controlled
rate for a predetermined period of time. Ceredur is refillable from outside the
body and can deliver semi-stable drugs, such as proteins and peptides, as well
as stable drugs. During therapy, the physician can change the release rate by
changing the concentration of drug used. Since Ceredur is refillable, it can
potentially deliver drugs indefinitely.
We have treated 13 patients in a Phase II clinical trial with Ceredur
implants. These patients had recurrent glioblastoma, a serious form of brain
cancer with an average life expectancy for patients of eight weeks when left
untreated. We observed no significant safety issues in the Phase II trial, and
the patients avoided systemic chemotherapy and the related side effects. The
Radiation Therapy Oncology Group, a clinical trials group funded by the
National Institutes of Health, has agreed to conduct and fund a multi-center
Phase II clinical trial using the Ceredur implant to treat brain tumors.
Future Disease Targets
We are currently evaluating the feasibility of using Aeon products to treat
various forms of cancer, Alzheimer's disease and multiple sclerosis.
Codrug Platform Technology
Our proprietary Codrug platform technology allows the simultaneous release
of synergistic drugs from the same product at the same, controlled rate over a
predetermined period of time. Using this technology, we link two or more drugs
together with a chemical bond, called a covalent bond, creating a new, inactive
compound. This compound can then be delivered to the target site by virtually
any delivery method. Once delivered, the compound dissolves slowly, hydrolyzes
and
32
separates into the original drugs. We believe that most drugs can be covalently
bonded with our Codrug technology, and we have synthesized a Codrug library of
over 450 drug combinations. We are currently evaluating Codrug products for the
treatment of post-surgical pain and prostate cancer.
Strategic Collaborations
We have partnered with two leading eye care companies to develop and
commercialize our initial products. In both of these agreements, we retained
our rights to the underlying technologies.
Chiron Vision Corporation
Our first collaboration was with Chiron Vision Corporation, a subsidiary of
Chiron Corporation. Under a 1992 licensing and development agreement, Chiron
financed the development of Vitrasert, and we granted Chiron a worldwide,
exclusive license to make and sell products based on the Aeon technology used
in Vitrasert for the treatment of conditions of the eye. Chiron commenced
commercial sales of Vitrasert following FDA approval in 1996. Bausch & Lomb
acquired Chiron Vision Corporation in 1997 and assumed this agreement. Bausch &
Lomb pays us royalties on net sales of Vitrasert under this agreement. Bausch &
Lomb may terminate this agreement at any time on 180 days' written notice.
Bausch & Lomb Incorporated
In 1999, we expanded our relationship with Bausch & Lomb by entering into a
licensing and development agreement for additional products for the treatment
of eye diseases. We granted Bausch & Lomb a worldwide, exclusive license for
the life of the relevant patents to use our technologies for the treatment,
prevention or diagnosis of any disease, disorder or condition of the eye in
humans or in animals.
Under our licensing and development agreement, Bausch & Lomb has agreed to
fund the development of our products for the treatment of diabetic macular
edema, uveitis and age-related macular degeneration. Bausch & Lomb has
committed to fund budgeted research and development performed by them and by
us, and to make license fee and milestone payments to us. This commitment
currently totals approximately $77 million. Under the agreement, we will
manufacture products for clinical trials and serve as a secondary manufacturing
source for commercial products.
A joint steering committee is responsible for managing and overseeing the
development process under the licensing and development agreement. The
agreement contains a research and development plan, a budget that governs the
amounts to be spent and reimbursed to us, and a marketing plan that sets forth
product-specific sales minimums for defined markets to be met by Bausch & Lomb.
The steering committee meets periodically to discuss and revise the budget and
the research and development and marketing plans.
Bausch & Lomb has agreed to pay us royalties on net sales of licensed
products. If Bausch & Lomb fails to achieve the product-specific sales minimums
for a defined market set forth in the marketing plan, Bausch & Lomb must pay us
the royalties due under those predetermined sales minimums or the license
becomes non-exclusive for the applicable product in the applicable market.
Bausch & Lomb may terminate the agreement at any time on 90 days' written
notice, subject to wind-down provisions, including payment of all milestone and
budgeted research and development payments due and payable to us within that
90-day period.
33
Bausch & Lomb has begun publicizing our Aeon platform technology under the
Envision TD brand name and has publicly identified our proposed ophthalmic
products as its highest development priority. As of November 30, 2000, Bausch &
Lomb owned approximately 23.5% of our outstanding common stock.
Sales and Marketing
We have partnered with Bausch & Lomb to market our products for the
treatment of blinding eye diseases. Bausch & Lomb currently markets and sells
Vitrasert and has agreed to market and sell the other ophthalmic products we
are developing. We derived 57.2% of our total revenues in 1998 and 85.7% of our
total revenues in 1999 from our agreements with Bausch & Lomb. We derived 82.2%
of our total revenues in 1997, 57.2% of our total revenues in 1998 and 17.8% of
our total revenues in 1999 from sales of Vitrasert.
In the future, we expect to independently commercialize some of our proposed
non-ophthalmic products using a targeted sales force that we plan to develop.
In appropriate cases, we plan to enter into joint marketing or license
arrangements with established, industry-leading marketing partners for non-
ophthalmic products. Because our products in clinical trials use a proven
technology platform to deliver drugs that have already been approved for other
indications, we believe the development cycle for these products will be
shorter than traditional drug discovery and development. We believe this will
allow us to enter into marketing alliances at a later stage of clinical
development, when the product development risk is diminished, and retain
greater economic participation. When determining our commercialization strategy
for a product, we will consider the market size, the expected cost and duration
of the regulatory approval process, the projected costs and complexity of
marketing the product, competition and other factors. We expect to retain our
rights to the underlying technology in any licensing arrangements.
Reimbursement
The cost of the Vitrasert and the associated surgical fee are covered by
Medicaid and Medicare, most major health maintenance organizations and most
health insurance carriers. We believe that the Medicare reimbursement code for
the Vitrasert implantation procedure will cover the implantation procedure for
our other ophthalmic Aeon products once they are approved by the FDA. Based on
our experience with Vitrasert, we believe that we will be able to obtain
Medicare reimbursement codes for additional Aeon products. We believe our
success in obtaining coverage for Vitrasert and the success of our Vitrasert
pricing strategy will facilitate third-party payor reimbursement of our other
proposed Aeon products.
Manufacturing
We have a manufacturing facility located at our corporate headquarters in
Watertown, Massachusetts. We believe that manufacturing our products is a
complex process involving our proprietary know-how. All of the supplies we use
to manufacture our products in clinical trials are readily available from a
variety of sources and we are not dependent on any one supplier. We manufacture
implants for all of our ophthalmic clinical trials, and are developing the
production capacity to support initial commercialization of our Aeon products
for diabetic macular edema, uveitis and age-related macular degeneration. We
intend to further expand our manufacturing capabilities so that we can support
full commercialization of our products. We believe that we can achieve
significant economies of scale by producing several different products based on
the same technology platforms.
34
Patents, Licenses and Intellectual Property
Intellectual Property Strategy
Our commercial success will depend, in part, on our ability to obtain patent
protection in the United States and elsewhere for our products or our
processes. We therefore seek, whenever possible, to obtain protection for these
products and processes. We also seek to expand our product and process
portfolio through collaborations, funded research and licensing technology from
others.
Patents and Patent Applications
We have filed and continue to file patent applications with respect to
multiple aspects of our technologies, products and processes. As of November
30, 2000, we had, or had exclusive rights to, seven United States patents and
15 European patents. In addition, as of that date, we had, or had exclusive
rights to, three patent applications pending in the United States and 34 patent
applications pending in foreign countries. Our patents expire at various dates
starting in 2012. We believe that our patent applications include novel
technologies of potential commercial significance. However, due to the extended
period of time for review of patent applications in the medical device and
pharmaceutical field, we cannot be certain as to when decisions regarding our
patent applications will be made. Moreover, we do not know if any patents will
be granted to us or, if issued to us, will be sufficiently broad to provide a
competitive advantage. Any patent granted to us may be challenged or
circumvented by a competitor.
The University of Kentucky Research Foundation holds five United States
patents and related foreign patents on aspects of our Aeon and Codrug platform
technologies. We have exclusive licenses for these patents and related know-how
and are obligated to pay the University of Kentucky Research Foundation
royalties based on sublicensing of these patents and sales of products
utilizing these patents.
The enactment of the legislation implementing the General Agreement on
Tariffs and Trade resulted in changes to United States patent laws that became
effective on June 8, 1995. Most notably, the term of patent protection for
patent applications filed after June 8, 1995 is no longer a period of 17 years
from the date of grant. The new term of United States patents for applications
filed after June 8, 1995 commences on the date of issuance and terminates 20
years from the earliest effective filing date of the application in the United
States. Because the time from filing to issuance of medical device and
pharmaceutical patent applications is often more than three years, the 20-year
term from the effective date of filing may result in a substantially shortened
term of patent protection which may adversely impact our patent position.
However, legislation signed into law on November 29, 1999 and effective for
patent applications filed on or after May 29, 2000 allows the opportunity to
recover or adjust patent terms under limited circumstances. The opportunity for
recovery or adjustment of patent terms will not be available for most of our
patents and patent applications since the filing dates of these patents and
patent applications precede the effective date of the legislation. If the
patent term is shorter in the United States, our business could be adversely
affected to the extent that the duration and level of the royalties we are
entitled to receive from licenses of our strategic patents are based on the
existence of a valid patent.
35
Other Proprietary Rights
Some elements of our drug delivery devices, processes or methods of
manufacturing involve unpatented proprietary technology, processes, know-how or
data. With respect to proprietary technology, know-how and data which are not
patentable or potentially patentable or processes other than production
processes for which patents are difficult to enforce, we have chosen or may
chose to protect our interests by relying on trade secret protection and
confidentiality agreements with our employees, consultants and contractors. To
maintain the confidentiality of trade secrets and proprietary information, we
maintain a policy of requiring employees, scientific advisors, consultants and
collaborators to execute confidentiality and invention assignment agreements
upon commencement of a relationship with us. These agreements are designed both
to enable us to protect our proprietary information by controlling the
disclosure and use of technology to which we have rights, and to provide for
our ownership of proprietary technology that we develop. However, we cannot
assure you that these agreements will provide meaningful protection for our
trade secrets in the event of unauthorized use or disclosure of such
information.
Competition
The pharmaceutical and drug delivery industries are highly competitive. Our
one commercial product, Vitrasert, primarily competes with treatments involving
the systemic delivery of ganciclovir, a Hoffman-La Roche Inc. product, and
other drugs. We must obtain regulatory approval to market our proposed products
in order to compete. We expect that our proposed products, if approved, will
compete with existing therapies for our targeted diseases as well as new drugs,
therapies, drug delivery systems or technological approaches that may be
developed to treat these diseases or their underlying causes. Any of these
drugs, therapies or systems may receive government approval or gain market
acceptance more rapidly than our proposed products, may offer therapeutic or
cost advantages or may cure our targeted diseases or their underlying causes
completely. As a result, our proposed products may become noncompetitive or
obsolete.
We believe that pharmaceutical, drug delivery and biotechnology companies,
research organizations, governmental entities, universities, hospitals and
other nonprofit organizations and individual scientists are seeking to develop
therapies for our targeted diseases. For many of our targeted diseases,
competitors have already commercialized, or are in advanced stages of
development of, alternative therapies. For example, Eli Lilly and Company is in
advanced trials for its PKC beta inhibitor for the treatment of diabetic
macular edema. Novartis AG and QLT Inc. are currently marketing their
Visudyne(TM) photodynamic therapy for the treatment of age-related macular
degeneration. Novartis also markets a cyclosporine product for the treatment of
uveitis. Guilford Pharmaceuticals Inc. has developed its Gliadel(R) wafer
implant for the treatment of brain tumors. Various cyclooxygenase 2, or COX-2,
inhibitors, such as VIOXX(R) marketed by Merck & Co., Inc. and Celebrex(R)
marketed by Pfizer Inc., are used for the treatment of osteoarthritis.
Many competitors and potential competitors have greater research and
development, financial, regulatory, manufacturing, marketing, and sales
experience and resources than we do and represent significant potential
competition to us. We believe our ability to protect our intellectual property
from challenges by others and to enforce our patent rights against potential
infringement will be important to our competitive position.
36
Government Regulation
The FDA and comparable regulatory agencies in state and local jurisdictions
and in foreign countries impose substantial requirements upon the clinical
development, manufacture and marketing of pharmaceutical products. These
agencies and other federal, state and local entities regulate research and
development activities and the testing, manufacture, quality control, safety,
effectiveness, labeling, storage, record keeping, approval, advertising and
promotion of our drug delivery products.
The process required by the FDA under the new drug provisions of the Federal
Food, Drug and Cosmetics Act before our products may be marketed in the United
States generally involves the following:
. pre-clinical laboratory and animal tests,
. submission to the FDA of an investigational new drug application, or IND,
which must become effective before clinical trials may begin,
. adequate and well-controlled human clinical trials to establish the
safety and efficacy of the proposed pharmaceutical in our intended use,
. submission to the FDA of a new drug application, and
. FDA review and approval of the new drug application.
The testing and approval process requires substantial time, effort, and
financial resources and we cannot be certain that any approval will be granted
on a timely basis, if at all.
Pre-clinical tests include laboratory evaluation of the product, its
chemistry, formulation and stability, as well as animal studies to assess the
potential safety and efficacy of the product. The results of the pre-clinical
tests, together with manufacturing information and analytical data, are
submitted to the FDA as part of an IND, which must become effective before we
may begin human clinical trials. The IND automatically becomes effective 30
days after receipt by the FDA, unless the FDA, within the 30-day time period,
raises concerns or questions about the conduct of the trials as outlined in the
IND and imposes a clinical hold. In such a case, the IND sponsor and the FDA
must resolve any outstanding concerns before clinical trials can begin. There
is no certainty that pre-clinical trials will result in the submission of an
IND or that submission of an IND will result in FDA authorization to commence
clinical trials.
Clinical trials involve the administration of the investigational product to
human subjects under the supervision of a qualified principal investigator.
Clinical trials are conducted in accordance with protocols that detail the
objectives of the study, the parameters to be used to monitor safety and the
efficacy criteria to be evaluated. Each protocol must be submitted to the FDA
as part of the IND. Further, each clinical study must be conducted under the
auspices of an independent institutional review board at the institution where
the study will be conducted. The institutional review board will consider,
among other things, ethical factors, the safety of human subjects and the
possible liability of the institution.
Human clinical trials are typically conducted in three sequential phases
which may overlap:
. PHASE I: The drug is initially introduced into healthy human subjects or
patients and tested for safety, dosage tolerance, absorption, metabolism,
distribution and excretion.
. PHASE II: Studies are conducted in a limited patient population to
identify possible adverse effects and safety risks, to determine the
efficacy of the product for specific targeted diseases and to determine
dosage tolerance and optimal dosage.
37
. PHASE III: Phase III trials are undertaken to further evaluate dosage and
clinical efficacy and to further test for safety in an expanded patient
population, often at geographically dispersed clinical study sites. Phase
III or IIb/III trials are often referred to as pivotal trials, as the
data from these trials are used for the final approval of a product.
In the case of products for life-threatening diseases such as cancer, or
severe conditions such as blinding eye disease, the initial human testing is
often conducted in patients with disease rather than in healthy volunteers.
Since these patients already have the targeted disease or condition, these
studies may provide initial evidence of efficacy traditionally obtained in
Phase II trials and so these trials are frequently referred to as Phase I/II
trials. If a product uses a combination of drugs, the FDA requires that
clinical trials demonstrate that the combination is safe and that each drug
contributes to efficacy. We cannot be certain that we will successfully
complete Phase I, Phase II or Phase III testing of our product candidates
within any specific time period, if at all. Furthermore, we, the FDA, the
institutional review board or the sponsor may suspend clinical trials at any
time on various grounds, including a finding that the subjects or patients are
being exposed to an unacceptable health risk.
The results of product development, pre-clinical studies and clinical
studies are submitted to the FDA as part of a new drug application for approval
of the marketing and commercial shipment of the product. The FDA may deny a new
drug application if the applicable regulatory criteria are not satisfied or may
require additional clinical data. Even if the additional data is submitted, the
FDA may ultimately decide that the new drug application does not satisfy the
criteria for approval. Once issued, the FDA may withdraw product approval if
compliance with regulatory standards for production and distribution is not
maintained or if safety problems occur after the product reaches the market. In
addition, the FDA requires surveillance programs to monitor approved products
which have been commercialized, and the agency has the power to require changes
in labeling or to prevent further marketing of a product based on the results
of these post-marketing programs.
The FDA has a fast track program intended to facilitate the development and
expedite the review of drugs that, based on a preliminary evaluation of
clinical data, demonstrate the potential to address unmet medical needs for
treatment of serious or life-threatening diseases. If the FDA grants fast track
status to a product, a company can submit portions of the new drug application
to the FDA for review before the entire application is complete. In addition,
the FDA undertakes to complete its review process within six months of the
filing of the complete new drug application. Vitrasert received fast track
status prior to its approval in 1996, and two more of our products received
fast track status in 2000. We may seek to have some of our other product
candidates designated as fast track products, with the goal of reducing the
development and review time. We cannot guarantee that the FDA will grant any of
our future requests for fast track designation, that any fast track designation
will affect the time of review, or that the FDA will approve the new drug
application submitted for any of our product candidates, whether or not the FDA
grants a fast track designation. Additionally, the FDA approval of a fast track
product can include restrictions on the product's use or distribution such as
permitting use only for specified medical procedures or limiting distribution
to physicians or facilities with special training or expertise. The FDA may
grant conditional approval of a product with fast track status and require
additional clinical studies following approval.
Satisfaction of FDA requirements or similar requirements of state, local and
foreign regulatory agencies typically takes several years and the actual time
required may vary substantially, based upon the type, complexity and novelty of
the pharmaceutical product. Government regulation may delay or prevent
marketing of potential products for a considerable period of time and impose
costly procedures upon our activities. Success in pre-clinical or early stage
clinical trials does not assure success in later stage clinical trials. Data
from pre-clinical and clinical activities is not always conclusive and may be
susceptible to varying interpretations which could delay, limit or prevent
38
regulatory approval. Even if a product receives regulatory approval, the
approval may be significantly limited to specific indications. Further, even
after the FDA approves a product, later discovery of previously unknown
problems with a product may result in restrictions on the product or even
complete withdrawal of the product from the market.
Any products we manufacture or distribute under FDA clearances or approvals
are subject to pervasive and continuing regulation by the FDA, including
record-keeping requirements and reporting of adverse experiences with the
products. Drug manufacturers and their subcontractors are required to register
with the FDA and state agencies, and are subject to periodic unannounced
inspections by the FDA and state agencies for compliance with good
manufacturing practices, which impose procedural and documentation requirements
upon us and our third party manufacturers.
We are also subject to numerous other federal, state and local laws relating
to such matters as safe working conditions, manufacturing practices,
environmental protection, fire hazard control, and disposal of hazardous or
potentially hazardous substances. We may incur significant costs to comply with
such laws and regulations now or in the future. In addition, we cannot predict
what adverse governmental regulations may arise from future United States or
foreign governmental action.
We also are subject to foreign regulatory requirements governing human
clinical trials and marketing approval for pharmaceutical products which we
sell outside the United States. The requirements governing the conduct of
clinical trials, product licensing, pricing and reimbursement vary widely from
country to country. Whether or not we obtain FDA approval, we must obtain
approval of a product by the comparable regulatory authorities of foreign
countries before manufacturing or marketing the product in those countries. The
approval process varies from country to country and the time required for these
approvals may differ substantially from that required for FDA approval. We
cannot assure you that clinical trials conducted in one country will be
accepted by other countries or that approval in one country will result in
approval in any other country. For clinical trials conducted outside the United
States, the clinical stages generally are comparable to the phases of clinical
development established by the FDA.
Employees
As of November 30, 2000, we had 33 full-time employees, including 24 in
research and development and nine in general and administrative roles. Of the
33 employees, 14 hold Ph.D., M.D. or masters degrees. None of our employees is
represented by a collective bargaining unit, and we have never experienced a
work stoppage. We consider our relations with our employees to be good.
Facilities
We occupy an 18,000 square foot facility in Watertown, Massachusetts,
located approximately eight miles from downtown Boston. The facility is
composed of 10,000 square feet of laboratory space, including a Class 100,000
clean room, a synthetic chemistry laboratory, analytical laboratory, pre-
production laboratory and a pharmaceutical development laboratory. The
remaining 8,000 square feet is dedicated to general office space. Our current
lease for the facility runs through November 2003, with a four-year extension
at our option.
39
MANAGEMENT
Executive Officers and Directors
The following table sets forth information regarding our executive officers
and directors as of November 30, 2000.
Name Age Position
- ---- --- -----------------------------------------------------
Paul Ashton, Ph.D. ..... 40 President, Chief Executive Officer and Director
Thomas J. Smith, M.D. .. 49 Chairman of the Board of Directors
Kathleen T. Karloff..... 45 Vice President of Operations
Michael D. Mays......... 34 Vice President, Chief Financial Officer and Treasurer
Robert W. Shimizu,
Ph.D. ................. 46 Vice President of Business Development
Kenneth A. Walters,
Ph.D................... 51 Senior Vice President of Research and Development
Alan L. Crane........... 37 Director
James L. Currie......... 63 Director
Stephen C. McCluski..... 48 Director
Paul Ashton, Ph.D. is one of our founders. He has served as a director since
our inception in 1991 and as President and Chief Executive Officer since 1996.
Since 1998, Dr. Ashton has been a Professor of Ophthalmology at the University
of Kentucky. From 1996 to 2000, he served on the faculty of Tufts University.
Dr. Ashton received a B.Sc. in Chemistry from Durham University, England and a
Ph.D. in Pharmaceutical Science from the University of Wales.
Thomas J. Smith, M.D. is one of our founders. He has served as a director
since our inception in 1991, as President from 1991 to 1992, as Medical
Director since 1992 and as Chairman of the Board of Directors from 1992 to the
present. Dr. Smith, a board-certified ophthalmologist, was a principal in the
Chandler-Simmons practice in Boston, Massachusetts from 1991 to 1996. Since
1997, Dr. Smith has been a Professor of Ophthalmology at the University of
Kentucky. From 1991 to 1996, he served on the faculty of Harvard University.
Dr. Smith received an M.D. from the University of Toronto.
Kathleen T. Karloff has served as our Vice President of Operations since
June 2000. From March 1998 through May 2000, Ms. Karloff worked for MacroChem
Corporation, a drug delivery development company, as Director of Chemistry,
Manufacturing and Controls. From 1984 to 1998, Ms. Karloff worked for Boston
Scientific Corporation, a medical device company, in various positions, most
recently as Director of Manufacturing. Ms. Karloff received her B.S. in
Microbiology from Montana State University.
Michael D. Mays has served as our Vice President, Chief Financial Officer
and Treasurer since 1999. From 1995 to 1999, Mr. Mays worked for WSI, Inc., an
environmental technology company, as Corporate Controller, and most recently as
Vice President, Mergers and Acquisitions. From 1989 to 1995, Mr. Mays worked
for KPMG-Peat Marwick. Mr. Mays received an honors degree in business
administration from the University of Windsor, Ontario, Canada and is a
Certified Management Accountant.
Robert W. Shimizu, Ph.D. has served as our Vice President of Business
Development since September 2000 and as Vice President of Development since
1997. From 1989 to 1997, Dr. Shimizu worked at Chiron Vision Corporation, a
subsidiary of Chiron Corporation, a biotechnology company, in a variety of
management roles, most recently serving as Senior Director of Strategic
Planning. Dr. Shimizu received a B.A. in Bacteriology from the University of
California at Davis and an M.S. and a Ph.D. in Biology from New Mexico State
University.
40
Kenneth A. Walters, Ph.D. has served as our Senior Vice President of
Research and Development since November 2000. From 1992 to 2000, Dr. Walters
was a Director of An-eX Ltd., a contract research organization based in Wales.
Dr. Walters obtained a Ph.D. in Pharmacology and Toxicology from the University
of Strathclyde, Scotland.
Alan L. Crane has served as a director since 1999. Mr. Crane is Senior Vice
President of Corporate Development at Millennium Pharmaceuticals, Inc., a
biopharmaceutical company, where he has worked since 1997. Mr. Crane joined
Millennium through its merger with ChemGenics Pharmaceuticals Inc., a
biotechnology company. From 1995 to 1997, Mr. Crane served as Vice President of
Business Development of ChemGenics. From 1994 to 1995, Mr. Crane served as the
Vice President, Business Development at Organogenesis Inc., a tissue
engineering company.
James L. Currie has served as a director since August 2000. Mr. Currie is a
Managing Director of Essex Woodlands Health Ventures, which he co-founded in
1985. He also serves as a director of Avax Technologies, Inc., a
biopharmaceutical company.
Stephen C. McCluski has served as one of our directors since November 2000.
Since 1995, Mr. McCluski has served as Senior Vice President and Chief
Financial Officer of Bausch & Lomb Incorporated, one of our affiliates, where
he has worked since 1988. Prior to joining Bausch & Lomb, Mr. McCluski worked
at PricewaterhouseCoopers LLP. He currently serves as a director of Charles
River Laboratories, Inc., a provider of animal research models.
Executive Officers
Each executive officer serves at the discretion of the board of directors
and holds office until his successor is elected and qualified or until his
earlier resignation or removal. There are no family relationships among any of
our directors or executive officers.
Board Composition
Our board of directors currently consists of five directors. Each of the
directors serves on the board of directors pursuant to the terms of an
agreement that will terminate upon the closing of this offering. Following this
offering, the board of directors will be divided into three classes, each of
whose members will serve for a three-year term. Dr. Ashton will serve in the
class whose term expires in 2001, Dr. Smith and Mr. Currie will serve in the
class whose term expires in 2002 and Messrs. McCluski and Crane will serve in
the class whose term expires in 2003. At each annual meeting of stockholders, a
class of directors will be elected for a three-year term to succeed the
directors of the same class whose terms are then expiring.
Board Committees
Our board of directors has established an audit committee and a compensation
committee. The audit committee, consisting of Messrs. Crane, Currie and
McCluski, reviews our internal accounting procedures and consults with and
reviews the services provided by our independent accountants. The compensation
committee, consisting of Messrs. Crane and Currie, reviews and determines the
compensation and benefits of all of our officers, establishes and reviews
general policies relating to the compensation and benefits of all of our
employees, and, upon the closing of this offering, will administer our 1997
Stock Option Plan.
41
Compensation Committee Interlocks and Insider Participation
Prior to establishing the compensation committee, the board of directors as
a whole performed the functions delegated to the compensation committee. No
member of our current compensation committee has ever served as one of our
officers or employees. None of our executive officers serves as a member of the
board of directors or compensation committee of any entity that has one or more
executive officers serving on our board of directors or compensation committee.
Director Compensation
Our directors currently do not receive any cash compensation from us for
their services as members of the board of directors. We reimburse our directors
for out-of-pocket expenses in connection with attendance at board and committee
meetings. All of our directors, including non-employee directors, are eligible
to participate in our stock incentive plans.
In November 1999, we granted options to purchase 17,500 shares of common
stock to Mr. Crane for his services as a director. Options to purchase 7,500
shares vested immediately upon grant, and the remainder vest ratably each year
over the ensuing five-year period.
Executive Compensation
The following table sets forth a summary of the compensation paid during the
fiscal year ended December 31, 1999 to our Chief Executive Officer and to all
of our other executive officers whose salary and bonus exceeded $100,000. We
refer to these persons as the named executive officers.
Summary Compensation Table
Annual Long-term
Compensation Compensation
--------------- ------------
Securities
Underlying All Other
Name and Principal Position Year Salary Bonus Options Compensation (1)
- --------------------------- ---- -------- ------ ------------ ----------------
Paul Ashton, Ph.D. ................... 1999 $200,000 -- 10,000 $6,000
President and Chief Executive Officer
Thomas J. Smith, M.D. ................ 1999 175,000 -- -- 6,000
Chairman of the Board of Directors
Robert W. Shimizu, Ph.D. ............. 1999 121,654 $8,192 5,000 3,828
Vice President of Business
Development
- --------
(1) Consists of contributions to our 408(k) plan made on behalf of the named
executive officers to match the deferral contributions made by each to the
plan.
Stock Option Grants
The following table contains summary information regarding stock option
grants made during the year ended December 31, 1999 by us to the named
executive officers. We granted these options at an exercise price equal to the
fair value of the common stock on the date of grant as determined by our board
of directors. The options granted to Drs. Ashton and Shimizu vest ratably over
three years on the yearly anniversary of the date of grant.
We calculated the potential realizable value of options in the table
assuming our initial public offering price appreciates at the indicated rate
for the entire term of the option and that the option holder exercises his
option on the last day of its term at the appreciated price. All options listed
have a term of 10 years. We assumed stock price appreciation of 5% and 10%
pursuant to the rules of the Securities and Exchange Commission. We cannot
assure you that our actual stock price will appreciate over the ten-year option
term at the assumed 5% and 10% levels, or at any other rate.
42
Option Grants In Last Fiscal Year
Potential Realizable
Value at Assumed
Rates of Stock
Price Appreciation
for Option Term
---------------------
% of
Total
Options
Number of Granted
Securities to
Underlying Employees Exercise
Options in Fiscal Price Expiration
Name Granted Year Per Share Date 5% 10%
- ---- ---------- --------- --------- ---------- ---------- ----------
Paul Ashton, Ph.D. ..... 10,000 14.4% $8.00 8/26/09
Thomas J. Smith, M.D. .. -- -- -- --
Robert W. Shimizu,
Ph.D. ................. 5,000 7.2 8.00 8/26/09
Year-End Option Values
The following table provides information about the number and value of
unexercised options to purchase common stock held on December 31, 1999 by the
named executive officers. There was no public market for our common stock on
December 31, 1999. Accordingly, we have calculated the values of the
unexercised options on the basis of our initial public offering price of
$ per share, less the applicable exercise price, multiplied by the number
of shares acquired upon exercise. None of the named executive officers
exercised any stock options in 1999.
Fiscal Year End Option Values
Number of Securities
Underlying Unexercised Value of Unexercised
Options at Fiscal Year In-The-Money Options at
End Fiscal Year End
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
Paul Ashton, Ph.D. ..... 7,500 17,500
Thomas J. Smith, M.D. .. 7,500 7,500
Robert W. Shimizu,
Ph.D. ................. 20,000 25,000
Indemnification of Directors and Executive Officers and Limitation on Liability
Our amended and restated certificate of incorporation to be filed upon
completion of this offering provides that our directors will not be liable to
us or our stockholders for monetary damages for any breach of fiduciary duty,
except to the extent otherwise required by the Delaware General Corporation
Law. This provision will not prevent our stockholders from obtaining injunctive
or other relief against our directors nor does it shield our directors from
liability under federal or state securities laws.
Our certificate of incorporation also requires us to indemnify our directors
and officers to the fullest extent permitted by the Delaware General
Corporation Law, subject to a few very limited exceptions where indemnification
is not permitted by applicable law. Our certificate of incorporation also
requires us to advance expenses, as incurred, to our directors and officers in
connection with any legal proceeding to the fullest extent permitted by the
Delaware General Corporation Law. These rights are not exclusive.
43
Stock Plans
1997 Stock Option Plan
Our board of directors and shareholders adopted our 1997 Stock Option Plan
in July 1997. We have reserved 300,000 shares of common stock for issuance
under the plan. The plan terminates in July 2007, unless terminated earlier by
our board of directors.
Effective upon the closing of this offering the compensation committee of
our board of directors will administer the plan. The compensation committee has
authority to interpret the plan, grant awards and make all other determinations
necessary to administer the plan.
The plan provides for the grant of both incentive stock options, commonly
called ISOs, that qualify under Section 422 of the Internal Revenue Code, and
nonqualified stock options, commonly called NQSOs. ISOs may be granted only to
our employees or employees of a parent or subsidiary. NQSOs may be granted to
our employees, directors and consultants. Generally, the exercise price of ISOs
must be at least equal to the fair market value of our common stock on the date
of grant. Any grant of an ISO to a holder of 10% or more of our outstanding
shares of common stock must have an exercise price of at least 110% of the fair
market value of our common stock on the date of grant. The exercise price of
NQSOs must be at least equal to 85% of the fair market value of our common
stock on the date of grant. Options granted under the plan have a maximum term
of 10 years. Options granted under the plan may not be transferred other than
by will or by the laws of descent and distribution. They generally also must be
exercised during the lifetime of the optionee and only by the optionee.
The plan also provides for the grant of stock appreciation rights, commonly
called SARs. Each SAR entitles the holder to receive upon exercise the increase
in the value of one share of our common stock from the date of grant to the
date of exercise.
Options or SARs granted under the plan generally expire three months after
the termination of the optionee's service, except in the case of death or
disability, in which case the options or SARs generally may be exercised up to
12 months following the date of death. If we are dissolved or liquidated or
experience a "change in control," all options and SARs granted under the plan
will become exercisable, then terminate, unless the successor corporation, if
any, assumes or substitutes for outstanding awards.
408(k) Plan
In 1997, we adopted a Salary Reduction Simplified Employee Pension Plan
under Section 408(k) of the Internal Revenue Code for all employees who earn at
least $3,000 in gross salary per year. A participant may contribute up to a
maximum of $6,000 of his or her salary annually, subject to some limitations.
The Company matches employee contributions at a rate of 3% of the employee's
annual salary, up to a maximum of $6,000 per employee. For the year ended
December 31, 1999, we contributed approximately $30,000 to the plan in matching
contributions.
401(k) Plan
We are in the process of implementing a 401(k) defined contribution plan
covering substantially all full-time employees.
44
RELATED PARTY TRANSACTIONS
Bausch & Lomb, from which we receive substantially all of our revenues, owns
600,000 shares of our common stock. In addition, Stephen McCluski, a member of
our board of directors, is the Chief Financial Officer of Bausch & Lomb. Under
a license agreement we entered into on December 3, 1992, originally with Chiron
Vision Corporation, Bausch & Lomb has exclusive rights to market and sell our
Vitrasert product and pays us royalties on these sales. Under a license
agreement entered into on June 9, 1999, Bausch & Lomb has the exclusive right
to market and sell any products we develop for the treatment of eye disease,
including our Aeon products under development for the treatment of diabetic
macular edema, uveitis and age-related macular degeneration.
Effective January 1, 2001, we amended the June 9, 1999 license agreement to
provide that we will manufacture Aeon products for Phase III clinical trials
and expand our commercial manufacturing capacity in exchange for $5.4 million,
payable over the next two years.
In June 1999, we entered into a Stock Option and Purchase Agreement with
Bausch & Lomb under which Bausch & Lomb had an option to purchase shares of
preferred stock. Bausch & Lomb never exercised its option to purchase these
shares. In June 2000, we terminated this agreement.
Under a bridge financing agreement, on the following dates, we issued the
indicated number of shares of our common stock to Bausch & Lomb, at the fair
market value on the date of issue, for aggregate consideration of $1,250,000:
Date of Issuance Number of Shares
---------------- ----------------
April 15, 1998.............................................. 40,800
June 10, 1998............................................... 25,100
September 10, 1998.......................................... 20,360
December 10, 1998........................................... 15,570
February 10, 1999........................................... 17,505
On June 9, 2000 we redeemed 119,335 shares of our common stock held by
Bausch & Lomb in exchange for aggregate consideration valued at $1,250,000,
consisting of cash and waivers of license fees otherwise due to us.
Vincent Manopoli is a former director and officer who held in excess of 5%
of our outstanding shares until June 15, 2000. On January 10, 1999, we redeemed
6,500 shares of our common stock held by Mr. Manopoli for $65,000. On June 15,
2000, we redeemed 153,500 shares of our common stock held by Mr. Manopoli in
exchange for $150,000 and a note in the amount of $2,065,005. We have satisfied
our obligations under this note. Mr. Manopoli no longer holds in excess of 5%
of our outstanding stock.
Under agreements with the University of Kentucky Research Foundation, or the
UKRF, Drs. Ashton and Smith receive a portion of the royalties received by the
UKRF from us for technology we have licensed from the UKRF. These royalties
pertain to technology developed by Drs. Ashton and Smith while they were
performing research at the University of Kentucky. During fiscal 1999, these
royalties totaled $75,376 for Dr. Ashton and $25,376 for Dr. Smith. During
fiscal 1998, these royalties totaled $46,537 for Dr. Ashton and $46,537 for Dr.
Smith. During fiscal 1997, these royalties totaled $45,306 for Dr. Ashton and
$45,306 for Dr. Smith.
45
PRINCIPAL STOCKHOLDERS
The following table sets forth information known to us with respect to the
beneficial ownership of our common stock as of November 30, 2000 by the
following persons:
. each stockholder known by us to own beneficially more than 5% of our
common stock,
. each of our directors,
. each of the named executive officers, and
. all directors and executive officers as a group.
This table lists applicable percentage ownership based on 2,552,300 shares
of common stock outstanding as of November 30, 2000, and also lists applicable
percentage ownership based on shares of common stock outstanding after
completion of this offering. Percentage ownership assumes conversion of all
shares of preferred stock outstanding as of November 30, 2000 into shares of
common stock, which will occur upon the closing of this offering.
We have determined beneficial ownership in the table in accordance with the
rules of the Securities and Exchange Commission. In computing the number of
shares beneficially owned by a person and the percentage ownership of that
person, we have deemed shares of common stock subject to options or warrants
held by that person that are currently exercisable or will become exercisable
within 60 days of November 30, 2000 to be outstanding, but we have not deemed
these shares to be outstanding for computing the percentage ownership of any
other person. To our knowledge, except as set forth in the footnotes below,
each stockholder identified in the table possesses sole voting and investment
power with respect to all shares of common stock shown as beneficially owned by
that stockholder.
The address for each listed director and officer is c/o Control Delivery
Systems, Inc., 313 Pleasant Street, Watertown, Massachusetts 02472. The address
for Bausch & Lomb Incorporated is One Bausch & Lomb Place, Rochester, NY 14604.
The address for Essex Woodlands Health Ventures is 190 South LaSalle Street,
Suite 2800, Chicago, IL 60603.
Percentage of Shares
Outstanding
------------------------
Number of Shares Before After
Name of Beneficial Owner Beneficially Owned Offering Offering
- ------------------------ ------------------ ---------- ----------
Bausch & Lomb Incorporated...... 600,000 23.5%
Paul Ashton (1)................. 574,583 22.4
Thomas J. Smith (2)............. 557,250 21.8
Essex Woodlands Health Ventures
(3)............................ 186,081 7.3
Robert W. Shimizu (4) .......... 31,667 1.2
Alan L. Crane (5)............... 10,000 *
James L. Currie (6)............. 186,081 7.3
Stephen C. McCluski (7)......... 600,000 23.5
All directors and officers as a
group
(9 persons)(1)(2)(4)(5)(6)(7)... 1,965,831 76.0%
- --------
* Less than 1% of the outstanding shares of common stock.
(1) Includes 27,720 shares held by the Paul Ashton Family Irrevocable Trust,
19,055 shares held by the Paul Ashton Children's Irrevocable Trust and
14,583 shares issuable upon the exercise of options that are or will become
exercisable within 60 days of November 30, 2000. In addition to these
shares, Dr. Ashton serves as trustee for the Thomas J. and Ellen Doble-
Smith Family Irrevocable Trust. Because the beneficiaries of these trusts
are family members of Dr. Smith, we have included them as owned by Dr.
Smith and not by Dr. Ashton.
46
(2) Includes 93,555 shares held by Thomas J. and Ellen Doble-Smith Family
Irrevocable Trust, 4,200 shares held by the Thomas J. and Ellen Doble-Smith
Trusts for Minors and 6,250 shares issuable upon the exercise of options
that are or will become exercisable within 60 days of November 30, 2000. In
addition to these shares, Dr. Smith serves as trustee for the Paul Ashton
Family Irrevocable Trust and for the Paul Ashton Children's Irrevocable
Trust. Because the beneficiaries of these trusts are family members of Dr.
Ashton, we have included them as owned by Dr. Ashton and not by Dr. Smith.
(3) Includes 148,865 shares held by Essex Woodlands Health Ventures Fund V, LP
and 37,216 shares held by Essex Woodlands Health Ventures Fund IV, LP.
(4) Includes 11,667 shares issuable upon the exercise of options that are or
will become exercisable within 60 days of November 30, 2000.
(5) Includes 2,400 shares held by three family members of Mr. Crane, and 2,000
shares issuable upon the exercise of options that are or will become
exercisable within 60 days of November 30, 2000.
(6) Includes 186,081 shares held by entities affiliated with Essex Woodlands
Health Ventures, with which Mr. Currie is affiliated. Mr. Currie disclaims
beneficial ownership of those shares except to the extent of his pecuniary
interest therein.
(7) Includes 600,000 shares held by Bausch & Lomb Incorporated, of which Mr.
McCluski is an executive officer. Mr. McCluski disclaims beneficial
ownership of these shares.
47
DESCRIPTION OF CAPITAL STOCK
General
Upon the completion of this offering, we will be authorized to issue
100,000,000 shares of common stock, $0.01 par value per share, and 20,000,000
shares of undesignated preferred stock, $0.01 par value per share. The
following description of our capital stock does not purport to be complete and
is subject to, and qualified in its entirety by, our certificate of
incorporation and by-laws, which we have included as exhibits to the
registration statement of which this prospectus forms a part.
Preferred Stock
As of November 30, 2000, there were 641,642 shares of Series A convertible
preferred stock outstanding. Upon the closing of this offering, all outstanding
shares of Series A convertible preferred stock will convert into shares of
common stock. The board of directors will have the authority, without further
action by the stockholders, to issue up to 20,000,000 shares of preferred stock
in one or more series and to designate the rights, preferences, privileges and
restrictions of each series. The issuance of preferred stock could have the
effect of restricting dividends on the common stock, diluting the voting power
of the common stock, impairing the liquidation rights of the common stock or
delaying or preventing a change in control without further action by the
stockholders. We have no present plans to issue any shares of preferred stock
after the completion of this offering.
Common Stock
As of November 30, 2000, there were 1,910,658 shares of common stock
outstanding, held of record by 35 stockholders. In addition, as of November 30,
2000, there were 207,092 shares of common stock subject to outstanding options.
Upon completion of this offering, there will be shares of common stock
outstanding, assuming no exercise of outstanding stock options and conversion
of all outstanding shares of preferred stock into common stock.
Each share of common stock entitles its holder to one vote on all matters to
be voted upon by stockholders. Subject to preferences that may apply to any
outstanding preferred stock, holders of common stock will receive ratably any
dividends that the board of directors may declare out of funds legally
available for that purpose. In the event of our liquidation, dissolution or
winding up, the holders of common stock are entitled to share ratably in all
assets remaining after payment of liabilities and any liquidation preference of
preferred stock that may be outstanding. The common stock has no preemptive
rights, conversion rights or other subscription rights or redemption or sinking
fund provisions. All outstanding shares of common stock are fully paid and non-
assessable, and the shares of common stock that we will issue upon completion
of this offering will be fully paid and non-assessable.
Warrants
In August 2000, we issued warrants to purchase 37,402 shares of common stock
at a weighted average exercise price of $53.74 per share which are exercisable
until one year from the closing of this offering or April 7, 2002, whichever is
earlier.
Registration Rights
We have granted registration rights to holders of almost all of our capital
stock. Beginning 180 days after this offering, holders of 30% of the stock
entitled to registration rights, other than
48
Drs. Smith and Ashton, may require that we register shares of common stock with
an aggregate value of at least $10.0 million. We are not obligated to effect
more than two required registrations in total or more than one in any 12-month
period. In addition, holders of registration rights may require us to register
their shares any time we propose a registered offering, subject to our right to
decrease the number of shares included if market conditions prevent the
registration of all shares. Twelve months after this offering, holders of
registration rights may request that we register their shares on Form S-3,
provided that each proposed registration exceeds $2.5 million. Holders of
registration rights may not require us to register shares on Form S-3 more than
twice in any 12-month period or more than once in any six-month period.
If our board of directors determines that a registration would be materially
detrimental to us, we may suspend these rights for up to 180 days, but we may
not do so more than once in any one-year period. Registration rights are
transferable, provided the transferee agrees to be bound by the terms of our
registration rights agreement and is an affiliate of an existing holder of
registration rights or acquires at least 10% of the shares entitled to
registration rights initially held by the transferor. We must bear all expenses
associated with the filing of registration statements on behalf of holders of
registration rights except for underwriting discounts and selling commissions.
Anti-Takeover Provisions
Delaware Law
We are subject to Section 203 of the Delaware General Corporation Law, which
regulates acquisitions of some Delaware corporations. In general, Section 203
prohibits a publicly held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years
following the date the person becomes an interested stockholder, unless:
. the corporation's board of directors approved the business combination or
the transaction in which the person became an interested stockholder
prior to the time the person attained this status,
. upon consummation of the transaction that resulted in the person becoming
an interested stockholder, the person owned at least 85% of the voting
stock of the corporation outstanding at the time the transaction
commenced, excluding shares owned by persons who are directors and also
officers, or
. at or subsequent to the time the person became an interested stockholder,
the corporation's board of directors approved the business combination
and the stockholders other than the interested stockholder authorized the
transaction at an annual or special meeting of stockholders by the
affirmative vote of at least 66 2/3% of the outstanding voting stock not
owned by the interested stockholder.
A "business combination" generally includes a merger, asset or stock sale or
other transaction with or caused by the interested stockholder. In general, an
"interested stockholder" is a person who, together with the person's affiliates
and associates, owns, or within three years prior to the determination of
interested stockholder status did own, 15% or more of a corporation's voting
stock.
This statute could prohibit or delay mergers or other takeover or change-in-
control attempts with respect to us and, accordingly, may discourage attempts
to acquire us.
Certificate of Incorporation and By-law Provisions
Board of Directors. Our amended and restated certificate of incorporation
will divide our board of directors into three classes with staggered three-year
terms. In addition, our certificate of incorporation provides that directors
may be removed only for cause by the affirmative vote of the
49
holders of 75% of our shares of capital stock entitled to vote. Under our
certificate of incorporation, any vacancy on our board of directors, including
a vacancy resulting from an enlargement of our board of directors, may only be
filled by vote of a majority of our directors then in office. The
classification of our board of directors and the limitations on the removal of
directors and filling of vacancies could make it more difficult for a third
party to acquire, or discourage a third party from acquiring, control of us.
Stockholder Meetings. Under our by-laws to be effective upon the closing of
this offering, special meetings of the stockholders may be called only by the
board of directors, the chairman of the board or the chief executive officer.
Our by-laws will also provide that stockholders wishing to propose business to
be brought before a meeting of stockholders will be required to comply with
various advance notice requirements. Finally, our certificate of incorporation
and by-laws will provide that any action required or permitted to be taken by
our stockholders at an annual or special meeting may be taken only if properly
brought before the meeting, and may not be taken by written consent in lieu of
a meeting. These provisions could have the effect of delaying until the next
stockholders' meeting stockholder actions which are favored by the holders of a
majority of our outstanding voting securities. These provisions may also
discourage a third party from making a tender offer for our common stock,
because even if it acquired a majority of our outstanding voting securities,
the third party would be able to take action as a stockholder (such as electing
new directors or approving a merger) only at a duly called stockholders'
meeting, and not by written consent.
Undesignated Preferred Stock. The authorization of undesignated preferred
stock makes it possible for our board of directors to issue preferred stock
with voting or other rights or preferences that could impede the success of any
attempt to acquire us. These and other provisions may have the effect of
deterring hostile takeovers or delaying changes in control of us.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is American Stock
Transfer and Trust Company. The transfer agent's address is 40 Wall Street, New
York, NY 10005.
50
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock.
Future sales of substantial amounts of our common stock in the public market
could adversely affect prevailing market prices. Sales of substantial amounts
of our common stock in the public market after any restrictions on sale lapse
could adversely affect the prevailing market price of the common stock and
impair our ability to raise equity capital in the future.
Upon completion of the offering, we will have outstanding shares of
common stock, outstanding options to purchase shares of common stock and
outstanding warrants to purchase shares of common stock, assuming no
additional option or warrant grants or exercises after . Of the
shares sold in the offering, shares will be subject to the lock-up
agreements described below assuming that we sell all shares reserved under our
directed share program to the entities or persons for whom these shares have
been reserved. We expect that the remaining shares sold in the offering,
plus any shares issued upon exercise of the underwriters' over-allotment
option, will be freely tradable without restriction under the Securities Act,
unless purchased by our "affiliates" as that term is defined in Rule 144 under
the Securities Act. In general, affiliates include officers, directors and 10%
or greater stockholders.
The remaining shares outstanding and shares subject to outstanding
options and warrants are "restricted securities" within the meaning of Rule
144. Restricted securities may be sold in the public market only if the sale is
registered or if it qualifies for an exemption from registration, or if the
securities can be sold under Rules 144, 144(k) or 701 promulgated under the
Securities Act, which are summarized below. Sales of restricted securities in
the public market, or the availability of these shares for sale, could
adversely affect the market price of the common stock.
Lock-Up Agreements
We, our directors, officers, and various other stockholders and employees,
who together hold substantially all of our securities, have entered into lock-
up agreements in connection with this offering. These lock-up agreements
generally provide that these holders will not offer, sell, contract to sell,
grant any option to purchase or otherwise dispose of our common stock or any
securities exercisable for or convertible into our common stock owned by them
for a period of 180 days after the date of this prospectus without the prior
written consent of Deutsche Bank Securities Inc. Notwithstanding possible
earlier eligibility for sale under the provisions of Rules 144, 144(k) and 701,
shares subject to lock-up agreements may not be sold until these agreements
expire or are waived. Assuming that Deutsche Bank Securities Inc. does not
release any securityholders from the lock-up agreements, the following shares
will be eligible for sale in the public market at the following times:
. Beginning on the effective date of the registration statement of which
this prospectus forms a part, of the shares sold in this
offering will be immediately available for sale in the public market.
. Beginning days after the effective date, an additional shares
will be eligible for sale pursuant to Rule 144, Rule 144(k) and Rule
701.
51
Rule 144
In general, under Rule 144 as currently in effect, after the expiration of
the lock-up agreements, a person who has beneficially owned restricted
securities for at least one year would be entitled to sell within any three-
month period a number of shares that does not exceed the greater of:
. 1% of the number of shares of common stock then outstanding, which will
equal approximately shares immediately after this offering, and
. the average weekly trading volume of our common stock during the four
calendar weeks preceding the sale.
Sales under Rule 144 are also subject to requirements with respect to manner
of sale, notice and the availability of current public information about us.
Rule 144(k)
Under Rule 144(k), a person who is not deemed to have been our affiliate at
any time during the three months preceding a sale, and who has beneficially
owned the shares proposed to be sold for at least two years, may sell these
shares without complying with the manner of sale, public information, volume
limitation or notice requirements of Rule 144.
Rule 701
Rule 701, as currently in effect, permits our employees, officers, directors
or consultants who purchased shares pursuant to a written compensatory plan or
contract to resell these shares in reliance upon Rule 144, but without
compliance with certain restrictions. Rule 701 provides that affiliates may
sell their Rule 701 shares under Rule 144 ninety days after effectiveness
without complying with the holding period requirement and that non-affiliates
may sell these shares in reliance on Rule 144 ninety days after effectiveness
without complying with the holding period, public information, volume
limitation or notice requirements of Rule 144.
Employee Plans
We intend to file a registration statement under the Securities Act after
the effective date of this offering to register shares to be issued pursuant to
our 1997 Stock Option Plan. As a result, any options or rights exercised under
our 1997 Stock Option Plan will also be freely tradable in the public market.
However, shares held by affiliates will still be subject to the volume
limitation, manner of sale, notice and public information requirements of Rule
144, unless otherwise resellable under Rule 701. As of , we had
granted options to purchase shares of common stock to employees that
had not been exercised, of which options to purchase shares were
exercisable. See "Management--Employee Benefits Plans" and "Description of
Capital Stock--Registration Rights."
52
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement, the
underwriters named below, through their representatives Deutsche Bank
Securities Inc., Banc of America Securities LLC and SG Cowen Securities
Corporation, have severally agreed to purchase from us the following respective
number of shares of common stock at the public offering price less the
underwriting discounts and commissions set forth on the cover page of this
prospectus:
Number
Underwriters of Shares
- ------------ ---------
Deutsche Bank Securities Inc. ........................................
Banc of America Securities LLC........................................
SG Cowen Securities Corporation.......................................
------
Total...............................................................
======
The underwriting agreement provides that the obligations of the several
underwriters to purchase the shares of common stock we are offering are subject
to conditions precedent and that the underwriters will purchase all of the
shares of common stock offered by this prospectus, other than those covered by
the over-allotment option described below, if they purchase any of these
shares.
The representatives of the underwriters have advised us that the
underwriters propose to offer the shares of common stock to the public at the
public offering price shown on the cover of this prospectus and to dealers at a
price that represents a concession not in excess of $ per share under the
public offering price. The underwriters may allow, and these dealers may re-
allow, a concession of not more than $ per share to other dealers. After
the initial public offering, representatives of the underwriters may change the
offering price and other selling terms.
We have granted to the underwriters an option, exercisable not later than 30
days after the date of this prospectus, to purchase up to additional
shares of common stock at the public offering price less the underwriting
discounts and commissions shown on the cover page of this prospectus. The
underwriters may exercise this option only to cover over-allotments made in
connection with the sale of the common stock offered by this prospectus. To the
extent that the underwriters exercise this option, each of the underwriters
will become obligated, subject to conditions, to purchase approximately the
same percentage of these additional shares of common stock as the number of
shares of common stock to be purchased by it in the above table bears to the
total number of shares of common stock offered by this prospectus. We will be
obligated, pursuant to the option, to sell these additional shares of common
stock to the underwriters to the extent the option is exercised. If any
additional shares of common stock are purchased, the underwriters will offer
the additional shares on the same terms as those on which the shares are being
offered.
The underwriting discounts and commissions per share are equal to the public
offering price per share of common stock less the amount paid by the
underwriters to us per share of common stock. The underwriting discounts and
commissions are % of the initial public offering price. We have agreed to pay
the underwriters the following discounts and commissions, assuming either no
exercise or full exercise by the underwriters of the underwriters' over-
allotment option:
Total Fees
-------------------------------------------
Without Exercise of With Full Exercise of
Fee Per Share Over-Allotment Option Over-Allotment Option
------------- --------------------- ---------------------
Discounts and
commissions paid by
us.................... $ $ $
53
In addition, we estimate that our share of the total expenses of this
offering, excluding underwriting discounts and commissions, will be
approximately $ .
We have agreed to indemnify the underwriters against some specified types of
liabilities, including liabilities under the Securities Act, and to contribute
to payments the underwriters may be required to make in respect of any of these
liabilities.
Each of our officers and directors, and substantially all of our
stockholders and holders of options and warrants to purchase our stock, have
agreed not to offer, sell, contract to sell or otherwise dispose of, or enter
into any transaction that is designated to, or could be expected to, result in
the disposition of any shares of our common stock or other securities
convertible into or exchangeable or exercisable for shares of our common stock
or derivatives of our common stock owned by these persons prior to this
offering or common stock issuable upon exercise of options or warrants held by
these persons for a period of 180 days after the effective date of the
registration statement of which this prospectus is a part without the prior
written consent of Deutsche Bank Securities Inc. They may give this consent at
any time without public notice. We have entered into a similar agreement with
the representatives of the underwriters except that without such consent we may
grant options and sell shares pursuant to our stock option plan and we may
issue shares of our common stock in connection with a strategic partnering
transaction or in exchange for all or substantially all of the equity or assets
of a company in connection with a merger or acquisition. There are no
agreements between the representatives and any of our stockholders or
affiliates releasing them from these lock-up agreements prior to the expiration
of the 180-day period.
The representatives of the underwriters have advised us that the
underwriters do not intend to confirm sales to any account over which they
exercise discretionary authority.
In order to facilitate the offering of our common stock, the underwriters
may engage in transactions that stabilize, maintain, or otherwise affect the
market price of our common stock. Specifically, the underwriters may over-allot
shares of our common stock in connection with this offering, thus creating a
short sales position in our common stock for their own account. A short sales
position results when an underwriter sells more shares of common stock than
that underwriter is committed to purchase. A short sales position may involve
either "covered" short sales or "naked" short sales. Covered short sales are
sales made for an amount not greater than the underwriters' over-allotment
option to purchase additional shares in the offering described above. The
underwriters may close out any covered short position by either exercising
their over-allotment option or purchasing shares in the open market. In
determining the source of shares to close out the covered short position, the
underwriters will consider, among other things, the price of shares available
for purchase in the open market as compared to the price at which they may
purchase shares through the over-allotment option. Naked short sales are sales
in excess of the over-allotment option. The underwriters will have to close out
any naked short position by purchasing shares in the open market. A naked short
position is more likely to be created if the underwriters are concerned that
there may be downward pressure on the price of the shares in the open market
after pricing that could adversely affect investors who purchase in the
offering. Accordingly, to cover these short sales positions or to stabilize the
market price of our common stock, the underwriters may bid for, and purchase,
shares of our common stock in the open market. These transactions may be
effected on the Nasdaq National Market or otherwise.
Additionally, the representatives, on behalf of the underwriters, may also
reclaim selling concessions allowed to an underwriter or dealer if the
underwriting syndicate repurchases shares distributed by that underwriter or
dealer. Similar to other purchase transactions, the underwriters' purchases to
cover the syndicate short sales or to stabilize the market price of our common
stock may have the effect of raising or maintaining the market price of our
common stock or preventing or mitigating a decline in the market price of our
common stock. As a result, the price of the shares of
54
our common stock may be higher than the price that might otherwise exist in the
open market. The underwriters are not required to engage in these activities
and, if commenced, may end any of these activities at any time.
At our request, the underwriters have reserved for sale at the initial
public offering price up to shares of our common stock being sold in
this offering for our vendors, employees, family members of employees,
customers and other third parties. The number of shares of our common stock
available for the sale to the general public will be reduced to the extent
these reserved shares are purchased. Any reserved shares not purchased by these
persons will be offered by the underwriters to the general public on the same
basis as the other shares in this offering.
A prospectus in electronic format is being made available on Internet web
sites maintained by one or more of the lead underwriters of this offering and
may be made available on web sites maintained by other underwriters. Other than
the prospectus in electronic format, the information on any underwriter's web
site and any information contained in any other web site maintained by an
underwriter is not part of the prospectus or the registration statement of
which the prospectus forms a part.
Pricing of this Offering
Prior to this offering, there has been no public market for our common
stock. Consequently, the initial public offering price of our common stock will
be determined by negotiation among us and the representatives of the
underwriters. Among the primary factors that will be considered in determining
the public offering price are:
. prevailing market conditions,
. our results of operations in recent periods,
. the present stage of our development,
. the market capitalizations and stages of development of other companies
that we and the representatives of the underwriters believe to be
comparable to our business, and
. estimates of our business potential.
Deutsche Bank Securities Inc. acted as a placement agent in connection with
the private placement of our Series A convertible preferred stock and, in
connection with that placement received compensation consisting of cash and
warrants to purchase our common stock. In addition, several employees of
Deutsche Bank Securities Inc. purchased a total of 4,652 shares of the Series A
convertible preferred stock on the same terms as those on which such securities
were offered to other investors in the Series A placement. These shares will
convert automatically into shares of our common stock upon the
completion of this offering.
55
VALIDITY OF COMMON STOCK
The validity of the common stock offered hereby will be passed upon for us
by Ropes & Gray, Boston, Massachusetts. Piper Marbury Rudnick & Wolfe LLP,
Baltimore, Maryland has represented the underwriters in this offering.
Attorneys of Ropes & Gray own 4,652 shares of our common stock through a
collective investment vehicle.
EXPERTS
The financial statements as of December 31, 1998, 1999 and for each of the
three years in the period ended December 31, 1999 included in this prospectus
have been so included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of that firm as experts in
auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION ABOUT US
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act concerning the common stock
offered in this offering. This prospectus does not contain all of the
information set forth in the registration statement or its exhibits and
schedules. For further information about us and our common stock, we refer you
to the registration statement and to its attached exhibits and schedules.
Statements made in this prospectus concerning the contents of any document are
not necessarily complete. With respect to each document filed as an exhibit to
the registration statement, we refer you to the exhibit for a more complete
description of the matter involved.
You may inspect our registration statement and the attached exhibits and
schedules without charge at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
regional offices of the Commission located at Seven World Trade Center, 13th
Floor, New York, NY 10048, and at 500 West Madison Street, Suite 1400, Chicago,
IL 60661. You may obtain information on the operation of these reference
facilities by calling the Commission at 1 (800) SEC-0330. You may obtain copies
of all or any part of our registration statement from the Commission upon
payment of prescribed fees. You may also inspect reports, proxy and information
statements and other information that we file electronically with the
Commission without charge at the Commission's Internet site,
http://www.sec.gov.
We intend to furnish our stockholders with annual reports containing
financial statements audited by our independent auditors.
56
CONTROL DELIVERY SYSTEMS, INC.
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Accountants.......................................... F-2
Balance Sheets as of December 31, 1998 and 1999 and unaudited as of
September 30, 2000 and unaudited pro forma as of September 30, 2000....... F-3
Statements of Operations for the years ended December 31, 1997, 1998 and
1999 and for the nine months ended September 30, 1999 and 2000
(unaudited)............................................................... F-4
Statements of Changes in Stockholders' Deficit for the years ended December
31, 1997, 1998 and 1999 and for the nine months ended September 30, 2000
(unaudited)............................................................... F-5
Statements of Cash Flows for the years ended December 31, 1997, 1998 and
1999 and for the nine months ended September 30, 1999 and 2000
(unaudited)............................................................... F-6
Notes to Financial Statements.............................................. F-7
F-1
Report of Independent Accountants
To the Board of Directors and Stockholders ofControl Delivery Systems, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, changes in stockholders' deficit and cash flows present fairly,
in all material respects, the financial position of Control Delivery Systems,
Inc. at December 31, 1998 and 1999, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1999,
in conformity with accounting principles generally accepted in the United
States of America. 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 of these
statements in accordance with auditing standards generally accepted in the
United States of America, which 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, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
December 1, 2000, except as to
the information in note 14,
for which the date is
December 15, 2000
F-2
CONTROL DELIVERY SYSTEMS, INC.
BALANCE SHEETS
Pro Forma
Stockholders'
December 31, Equity at
------------------------ September 30, September 30,
1998 1999 2000 2000
----------- ----------- ------------- -------------
(unaudited)
Assets
Current assets:
Cash and cash
equivalents........... $ 129,319 $ 1,143,763 $31,027,652
Accounts receivable.... 118,999 99,111 96,000
Other current assets... 1,500 13,000 32,450
----------- ----------- -----------
Total current
assets.............. 249,818 1,255,874 31,156,102
Property and equipment,
net.................... 26,046 256,066 802,926
Other assets (Note 12).. 10,000 13,125 48,334
----------- ----------- -----------
Total assets........ $ 285,864 $ 1,525,065 $32,007,362
=========== =========== ===========
Liabilities and
Stockholders' Deficit
Current liabilities:
Accounts payable....... $ 296,671 $ 340,398 $ 969,973
Accrued expenses....... 39,551 108,382 92,087
Accrued royalties...... 61,100 65,564 48,000
Accrued payroll,
officers.............. 215,696 -- --
Deferred revenue....... 121,352 1,263,761 1,726,004
----------- ----------- -----------
Total current
liabilities......... 734,370 1,778,105 2,836,064
Commitments (Note 9)
Series A redeemable
convertible preferred
stock, $0.01 par value;
no shares authorized,
issued and outstanding
December 31, 1998 and
1999; 650,000 shares
authorized, 641,642
shares issued and
outstanding September
30, 2000; no shares
authorized, issued and
outstanding pro forma
September 30, 2000.
(Liquidation value at
September 30, 2000
$34,481,841) .......... -- -- 31,258,054 $ --
----------- ----------- ----------- -----------
Stockholders' (deficit)
equity:
Undesignated preferred
stock, $0.01 par
value; no shares
authorized, issued
and outstanding
December 31, 1998;
100,000 shares
authorized, no shares
issued and
outstanding December
31, 1999; 1,350,000
shares authorized, no
shares issued and
outstanding September
30, 2000; 20,000,000
shares authorized, no
shares issued and
outstanding and pro
forma September 30,
2000..................
Common stock, $0.01
par value; 3,000,000
shares authorized,
2,101,830 shares
issued and
outstanding December
31, 1998; 3,000,000
shares authorized,
2,119,335 shares
issued and
outstanding December
31, 1999; 3,000,000
shares authorized,
1,847,500 shares
issued and
outstanding September
30, 1999; 100,000,000
shares authorized,
2,489,142 shares
issued and
outstanding pro forma
September 30, 2000.... 21,018 21,193 18,475 24,891
Additional paid-in
capital............... 1,604,652 2,009,787 1,561,000 32,812,638
Deferred stock
compensation.......... -- (116,173) (404,830) (404,830)
Accumulated deficit.... (2,074,176) (2,167,847) (3,261,401) (3,261,401)
----------- ----------- ----------- -----------
Total stockholders'
(deficit) equity.... (448,506) (253,040) (2,086,756) $29,171,298
----------- ----------- ----------- ===========
Total liabilities
and stockholders'
deficit............ $ 285,864 $ 1,525,065 $32,007,362
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
F-3
CONTROL DELIVERY SYSTEMS, INC.
STATEMENTS OF OPERATIONS
For the Nine Months
For the Years Ended December 31, Ended September 30,
---------------------------------- ----------------------
1997 1998 1999 1999 2000
---------- ---------- ---------- ---------- ----------
(unaudited)
Revenues:
Royalties.............. $1,108,742 $ 638,005 $ 496,378 $ 364,002 $ 283,041
License fees and
collaborative research
and development....... -- -- 1,889,537 1,148,052 3,282,612
Government research
grants................ 240,266 476,602 399,512 264,934 610,000
---------- ---------- ---------- ---------- ----------
Total revenues...... 1,349,008 1,114,607 2,785,427 1,776,988 4,175,653
---------- ---------- ---------- ---------- ----------
Operating expenses:
Royalties.............. 491,840 315,185 496,164 430,600 307,911
Research and
development........... 844,777 1,155,561 1,549,359 996,377 2,522,674
General and
administrative........ 413,252 513,547 872,223 630,096 1,251,575
---------- ---------- ---------- ---------- ----------
Total operating
expenses........... 1,749,869 1,984,293 2,917,746 2,057,073 4,082,160
---------- ---------- ---------- ---------- ----------
Income (loss) from
operations............. (400,861) (869,686) (132,319) (280,085) 93,493
Interest income......... 6,586 3,395 38,648 28,728 337,366
Interest expense........ -- -- -- -- (30,211)
---------- ---------- ---------- ---------- ----------
Net income (loss)....... (394,275) (866,291) (93,671) (251,357) 400,648
---------- ---------- ---------- ---------- ----------
Accretion on redeemable
convertible preferred
stock and warrants..... -- -- -- -- (78,629)
---------- ---------- ---------- ---------- ----------
Net income (loss)
attributable to common
stockholders........... $ (394,275) $ (866,291) $ (93,671) $ (251,357) $ 322,019
========== ========== ========== ========== ==========
Net income (loss) per
share:
Basic.................. $ (0.20) $ (0.42) $ (0.05) $ (0.12) $ 0.16
Diluted................ $ (0.20) $ (0.42) $ (0.05) $ (0.12) $ 0.15
Shares used in computing
net income (loss) per
share:
Basic.................. 2,000,000 2,050,346 2,065,885 2,065,222 1,952,572
Diluted................ 2,000,000 2,050,346 2,065,885 2,065,222 2,088,858
Unaudited pro forma
basic and diluted net
income (loss) per
share.................. $ (0.03) $ 0.15
Shares used in computing
unaudited pro forma net
income (loss) per
share:
Basic.................. 2,707,527 2,594,214
Diluted................ 2,707,527 2,730,500
The accompanying notes are an integral part of these financial statements.
F-4
CONTROL DELIVERY SYSTEMS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
For the Years Ended December 31, 1997, 1998 and 1999
And for the nine months ended September 30, 2000 (unaudited)
Common Stock Additional Deferred Total
------------------ Paid-in Stock Accumulated Stockholders'
Shares Amount Capital Compensation Deficit Deficit
--------- ------- ---------- ------------- ------------- -------------
Balance at December 31,
1996................... 100,000 $ 1,000 $ 605,250 $ -- $ (813,610) $ (207,360)
Stock dividend.......... 1,900,000 19,000 (19,000) -- -- --
Compensation expense
associated with stock
options................ -- -- 4,214 -- -- 4,214
Net loss................ -- -- -- -- (394,275) (394,275)
--------- ------- ---------- ------------- ------------- -------------
Balance at December 31,
1997................... 2,000,000 20,000 590,464 -- (1,207,885) (597,421)
Sale of common stock.... 101,830 1,018 998,982 -- -- 1,000,000
Compensation expense
associated with stock
options................ -- -- 15,206 -- -- 15,206
Net loss................ -- -- -- -- (866,291) (866,291)
--------- ------- ---------- ------------- ------------- -------------
Balance at December 31,
1998................... 2,101,830 21,018 1,604,652 -- (2,074,176) (448,506)
Sale of common stock.... 17,505 175 249,825 -- -- 250,000
Deferred compensation
related to employee
stock option grants.... -- -- 128,687 (128,687) -- --
Amortization of deferred
stock compensation..... -- -- -- 12,514 -- 12,514
Compensation expense
associated with stock
options................ -- -- 26,623 -- -- 26,623
Net loss................ -- -- -- -- (93,671) (93,671)
--------- ------- ---------- ------------- ------------- -------------
Balance at December 31,
1999................... 2,119,335 21,193 2,009,787 (116,173) (2,167,847) (253,040)
Purchase and retirement
of Company's common
stock (Note 7)......... (279,335) (2,793) (2,033,010) -- (1,494,202) (3,530,005)
Issuance of warrants in
conjunction with
redeemable convertible
preferred stock
offering, at fair
value.................. -- -- 1,098,082 -- -- 1,098,082
Accretion of redeemable
convertible preferred
stock to redemption
value.................. -- -- (78,629) -- -- (78,629)
Exercise of employee
stock options.......... 7,500 75 89,925 -- -- 90,000
Deferred compensation
related to employee
stock option grants.... -- -- 330,590 (330,590) -- --
Amortization of deferred
stock compensation..... -- -- -- 41,933 41,933
Compensation expense
associated with stock
options................ -- -- 144,255 -- -- 144,255
Net income.............. -- -- -- -- 400,648 400,648
--------- ------- ---------- ------------- ------------- -------------
Balance at September 30,
2000 (unaudited)....... 1,847,500 $18,475 $1,561,000 $ (404,830) $ (3,261,401) $ (2,086,756)
========= ======= ========== ============= ============= =============
The accompanying notes are an integral part of these financial statements.
F-5
CONTROL DELIVERY SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
Nine Months Ended
For the Years Ended December 31, September 30,
----------------------------------- -----------------------
1997 1998 1999 1999 2000
--------- ----------- ---------- ---------- -----------
(unaudited)
Cash flows from
operating activities:
Net income (loss)..... $(394,275) $ (866,291) $ (93,671) $ (251,357) $ 400,648
Adjustments to
reconcile net income
(loss) to net cash
provided by (used in)
operating activities:
Depreciation.......... 17,881 15,911 22,140 11,602 76,520
Compensation expense
associated with stock
options.............. 4,214 15,206 39,137 22,192 186,188
License maintenance
fee offset by common
stock repurchase..... -- -- -- -- (303,400)
Changes in operating
assets and
liabilities:
Accounts receivable.. 112,818 85,184 19,888 25,311 3,111
Other current
assets.............. 30,000 (1,500) (11,500) 1,500 (19,450)
Other assets......... -- -- (3,125) (3,000) (9,440)
Accounts payable..... 19,039 (54,717) 43,727 79,633 379,575
Accrued expenses..... 25,686 13,866 68,831 (7,784) (16,295)
Accrued royalties.... 121,390 (60,290) 4,464 49,367 (17,564)
Deferred revenue..... (85,499) (161,261) 1,142,409 1,094,210 (234,357)
--------- ----------- ---------- ---------- -----------
Net cash provided by
(used in) operating
activities......... (148,746) (1,013,892) 1,232,300 1,021,674 445,536
--------- ----------- ---------- ---------- -----------
Cash flows from
investing activities:
Purchase of property
and equipment........ (20,101) (5,093) (252,160) (105,947) (623,380)
--------- ----------- ---------- ---------- -----------
Cash flows from
financing activities:
Accrued payroll,
officers............. 116,273 24,423 -- -- --
Payment of accrued
payroll, officers.... -- -- (215,696) (24,106) --
Issuance of note
receivable to related
party................ -- -- -- -- (25,769)
Proceeds from the
issuance of preferred
stock, net of
issuance costs, and
warrants............. -- -- -- -- 32,277,507
Payments to purchase
and retire Company's
common stock (Note
7)................... -- -- -- -- (215,000)
Payment of note
payable (Note 7)..... -- -- -- -- (2,065,005)
Proceeds from the sale
of common stock...... -- 1,000,000 250,000 250,000 90,000
--------- ----------- ---------- ---------- -----------
Net cash provided by
financing
activities......... 116,273 1,024,423 34,304 225,894 30,061,733
--------- ----------- ---------- ---------- -----------
Net increase (decrease)
in cash and cash
equivalents........... (52,574) 5,438 1,014,444 1,141,621 29,883,889
Cash and cash
equivalents at
beginning of period... 176,455 123,881 129,319 129,319 1,143,763
--------- ----------- ---------- ---------- -----------
Cash and cash
equivalents at end of
period............... $ 123,881 $ 129,319 $1,143,763 $1,270,940 $31,027,652
========= =========== ========== ========== ===========
Supplemental disclosure
of cash flow
information:
Cash paid for
interest............. $ -- $ -- $ -- $ -- $ 30,211
Supplemental disclosure
of non-cash financing
activities:
Purchase and
retirement of 143,105
shares of Company's
common stock for
issuance of a note
payable of
$2,065,005........... $ 2,065,005
Purchase and
retirement of 119,335
shares of Company's
common stock for a
one-time license
maintenance fee of
$1,000,000 and
establishment of
accounts payable..... $ 1,250,000
The accompanying notes are an integral part of these financial statements.
F-6
CONTROL DELIVERY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Information as of September 30, 2000 and for the nine months ended
September 30, 1999 and 2000 is unaudited)
1. The Company
Nature of Business
Control Delivery Systems, Inc. (the "Company") designs, develops and
manufactures innovative, sustained-release drug delivery products.
The Company is subject to risks common to companies in the biopharmaceutical
industry including, but not limited to, the successful development and
commercialization of products, clinical trial uncertainty, fluctuations in
operating results and financial risks, potential need for additional funding,
protection of proprietary technology and patent risks, compliance with
government regulations, dependence on key personnel and collaborative partners,
competition, technological and medical risks, customer demand, compliance with
Food and Drug Administration and other government regulations, management of
growth and effectiveness of marketing by the Company and by third parties.
2. Summary of Significant Accounting Policies
Change in Company Fiscal Year End
In November 2000, the Company changed its fiscal year end from November 30
to a calendar year end. Accordingly, previously prepared financial statements
have been restated to reflect the revised year end.
Interim Financial Information
The financial statements for the nine months ended September 30, 1999 and
2000 are unaudited but include all adjustments (consisting only of normal
recurring adjustments), which the Company considers necessary for a fair
presentation of the operating results and cash flows for such periods.
Use of Estimates and Assumptions
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the dates of the financial
statements, and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
Cash Equivalents
The Company considers all highly liquid investment instruments with an
original maturity of three months or less to be cash equivalents. Cash
equivalents, which consist of money market accounts, are stated at cost, which
approximates market value.
F-7
CONTROL DELIVERY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information of September 30, 2000 and for the nine months ended
September 30, 1999 and 2000 is unaudited)
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations
of credit risk primarily consist of cash and cash equivalents. The Company
places its cash and cash equivalents with financial institutions which
management believes are of high credit quality.
At December 31, 1998 and 1999 and as of September 30, 2000, 100% of the
Company's accounts receivable was due from one customer. Revenue from one
customer represented 82%, 57% and 86% of total revenues during the years ended
December 31, 1997, 1998 and 1999, and 85% and 85% of total revenues for the
nine months ended September 30, 1999 and 2000, respectively.
Net Income (Loss) Per Common Share
The Company accounts for and discloses net income (loss) per common share in
accordance with Statement of Financial Accounting Standards ("SFAS") 128
"Earnings Per Share," ("SFAS 128") and SEC Staff Accounting Bulletin No. 98
("SAB 98"). Under the provisions of SFAS 128 and SAB 98, basic net income
(loss) per common share ("Basic EPS") is computed by dividing net income (loss)
by the weighted average number of common shares outstanding. Diluted net income
(loss) per common share ("Diluted EPS") is computed by dividing net income
(loss) by the weighted average number of common shares and dilutive potential
common share equivalents then outstanding. Potential common shares consist of
shares issuable upon the exercise of stock options and warrants and the
weighted average conversion of the preferred stock into shares of common stock.
The calculation of the net income (loss) per share for the years ended December
31, 1997, 1998 and 1999 does not include common stock equivalents as their
impact would be antidilutive.
Comprehensive Income (Loss)
The Company accounts for comprehensive income (loss) under SFAS 130,
"Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards
for reporting and displaying comprehensive income and its components in the
financial statements. Comprehensive income, as defined, includes all changes in
equity during a period from non-owner sources. The Company had no items of
other comprehensive income during the years ended December 31, 1997, 1998 and
1999, or the nine months ended September 30, 1999 and 2000.
Pro Forma Stockholders' Equity (Unaudited)
In August 2000, the Board of Directors authorized management of the Company
to select underwriters in anticipation of filing a Registration Statement with
the Securities and Exchange Commission to sell shares of its common stock in an
initial public offering. If the initial public offering contemplated by this
Registration Statement raises gross proceeds of $20 million dollars or more at
an offering price per share greater than $107.48, all outstanding shares of
redeemable convertible preferred stock at September 30, 2000 will convert into
641,642 shares of common stock. Also, on the closing of the initial public
offering, the Company expects to file an Amended and Restated Certificate of
Incorporation which will authorize the Company to issue 100,000,000 shares of
common stock and 20,000,000 shares of preferred stock. The unaudited pro forma
balance sheet presentation of Stockholders' Equity has been prepared assuming
all preferred stock was converted into common stock at September 30, 2000.
F-8
CONTROL DELIVERY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information of September 30, 2000 and for the nine months ended
September 30, 1999 and 2000 is unaudited)
Segment Reporting
SFAS 131, "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS 131") requires companies to report information about
operating segments in interim and annual financial statements. It also
established standards for related disclosures about products and services,
geographic areas and major customers. The Company has determined that it
operates in only one segment.
Property and Equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method over their estimated useful lives. Leaseholds are
amortized over the shorter of the asset life or the lease term. Property and
equipment held under capital leases are initially recorded at the lower of the
fair market value of the related asset or the present value of the minimum
lease payments at the inception of the lease. Repairs and maintenance which do
not improve or extend the life of the respective assets are charged to
operations. On disposal, the related accumulated depreciation or amortization
is removed from the accounts and any resulting gain or loss is included in the
results of operations.
Fair Value of Financial Instruments
The carrying value of the Company's financial instruments, including cash
and cash equivalents, accounts receivable and accounts payable, at December 31,
1998 and 1999 and September 30, 2000 approximated their fair value due to the
short-term nature of these items.
Impairment of Long-lived Assets
The Company evaluates the recoverability of its property and equipment and
other long-lived assets when circumstances indicate that an event of impairment
may have occurred in accordance with the provisions of SFAS 121, "Accounting
for the Impairment of Long-lived Assets and Long-lived Assets to be Disposed
Of" ("SFAS 121"). SFAS 121 requires recognition of impairment of long-lived
assets in the event the net book value of such assets exceeds the future
undiscounted cash flows attributable to such assets or the business to which
such assets relate. Impairment is measured based on the difference between the
carrying value of the related assets or businesses and the discounted future
cash flows of such assets or businesses. No impairment was required to be
recognized for the years ended December 31, 1997, 1998 and 1999, and the nine
months ended September 30, 1999 and 2000.
Revenue Recognition
The Company enters into licensing and development agreements with
collaborative partners for the development of products. The terms of the
agreements may include nonrefundable license fees, funding for research and
development, payments based on the achievement of certain milestones and
royalties on product sales.
Nonrefundable license fees, milestone payments and collaborative research
and development payments under licensing and development agreements are
recognized as revenue on a retrospective percentage of completion basis. The
cost of the total effort to complete the expected research and
F-9
CONTROL DELIVERY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information of September 30, 2000 and for the nine months ended
September 30, 1999 and 2000 is unaudited)
development activities under an agreement is estimated from the commencement
date. At each reporting period, the Company determines the cost of the effort
that has been incurred to date and divides this amount by the amount of total
expected research and development costs under the agreement. Revenue is
recognized for license fees, milestone payments and collaborative research and
development efforts
by multiplying the resulting percentage completion by the total license,
milestone and research and development revenue expected to be received under
that agreement, less revenue previously recognized. The remainder is spread
over the remaining performance period in a similar manner. Total revenue
expected to be received under an agreement includes amounts due from the
collaborative partner at the time a contingency has been removed and the
collaborative partner becomes obligated to make a payment related to
achievement of a milestone. Payments received in advance of being earned are
recorded as deferred revenue.
Government research grants are nonrefundable and are recognized as revenue
when the related expense is incurred. Revenue recognized under government
research grants is recorded consistent with guidelines issued by the governing
body issuing the grant.
Royalty revenue is recognized based on actual sales of licensed products in
licensed territories as reported by licensees and is generally recognized in
the period the sales occur. If a portion of the royalty revenue relates to
sponsored research and development, it is deferred and amortized consistent
with retrospective percentage of completion for that contract.
The Company evaluates all collaborative agreements on a monthly basis to
determine the appropriate revenue recognition for that period. The evaluation
includes all of the potential revenue components from each specific
collaborative agreement.
Research and Development and Patents
All research and development costs and costs incurred to secure patents are
expensed as incurred.
Stock-based Compensation
SFAS 123, "Accounting for Stock-based Compensation," ("SFAS 123")
encourages, but does not require, companies to record compensation costs for
stock-based employee compensation at fair value. The Company has chosen to
adopt SFAS 123 for employees for disclosure purposes only. In accounting for
its stock-based compensation plan, the Company applies Accounting Principles
Board Opinion No. 25 ("APB 25"), and related interpretations for all awards
granted to employees. Under APB 25, when the exercise price of options granted
to employees under the plan equals the market price of the common stock on the
date of grant, no compensation cost is required. When the exercise price of
options granted to employees under the plan is less than the market price of
the common stock on the date of grant, related compensation costs are expensed
over the vesting period. For stock options granted to nonemployees, the Company
recognizes compensation costs in accordance with the requirements of SFAS 123
and Emerging Issues Task Force ("EITF") Issue No. 96-18, "Accounting for Equity
Instruments that Are Issued to Other than Employees for Acquiring, or in
Conjunction with Selling Goods or Services" ("EITF 96-18"). SFAS 123 and EITF
96-18 require that companies recognize compensation expense for grants of
stock, stock options and other equity instruments based on fair value.
F-10
CONTROL DELIVERY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information of September 30, 2000 and for the nine months ended
September 30, 1999 and 2000 is unaudited)
Income Taxes
The Company recognizes deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under
this method, deferred tax liabilities and assets are determined based on the
difference between the financial statement and tax bases of assets and
liabilities, as well as net operating loss carryforwards, and are measured
using enacted tax rates in effect for the year in which the differences are
expected to reverse. Deferred tax assets may be reduced by a valuation
allowance to reflect the uncertainty associated with their ultimate
realization.
Recent Accounting Pronouncements
In June 2000, the FASB issued SFAS 138, "Accounting for Certain Derivative
Instruments--an amendment of SFAS 133" ("Accounting for Derivative Instruments
and Hedging Activities") ("SFAS 138"). This statement amends the accounting and
reporting standards for certain derivative instruments and hedging activities.
The Company will adopt SFAS 138 in 2001, in accordance with SFAS 137, which
deferred the effective date of SFAS 133. The adoption of this standard in 2001
is not expected to have a material impact on the Company's consolidated
financial statements.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" ("SAB 101"), which summarizes certain of the staff's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. The Company has retroactively adopted the guidance of SAB
101 for all periods presented in these financial statements.
3. Net Income (Loss) per Share and Unaudited Pro Forma Net Income (Loss) per
Share
Net income (loss) per share is computed under SFAS 128. Basic net income
(loss) per share is computed using the weighted average number of shares of
common stock outstanding during the period. Shares used to compute diluted net
income (loss) per share differs from shares used to compute basic net income
(loss) per share due to common stock equivalent shares resulting from the
assumed exercise of outstanding stock options. Potential common shares from the
exercise of warrants are antidilutive for all periods presented and therefore
are excluded from the calculation of diluted net income (loss) per share. Pro
forma basic and diluted net income (loss) per share have been calculated
assuming the conversion of all outstanding shares of preferred stock into
common shares, as if the shares had been converted at the beginning of the
period.
F-11
CONTROL DELIVERY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information of September 30, 2000 and for the nine months ended
September 30, 1999 and 2000 is unaudited)
The following sets forth the computation of basic and diluted net income
(loss) per share:
Nine Months Ended
Year Ended December 31, September 30,
---------------------------------- ----------------------
1997 1998 1999 1999 2000
---------- ---------- ---------- ---------- ----------
(unaudited)
Basic net income (loss)
per share:
Net income (loss)
attributable to common
stockholders.......... $ (394,275) $ (866,291) $ (93,671) $ (251,357) $ 322,019
========== ========== ========== ========== ==========
Weighted average number
of common shares
outstanding........... 2,000,000 2,050,346 2,065,885 2,065,222 1,952,572
========== ========== ========== ========== ==========
Basic net income (loss)
per share............... $ (0.20) $ (0.42) $ (0.05) $ (0.12) $ 0.16
========== ========== ========== ========== ==========
Diluted net income (loss)
per share:
Net income (loss)
attributable to common
stockholders and
assumed conversions... $ (394,275) $ (866,291) $ (93,671) $ (251,357) $ 322,019
========== ========== ========== ========== ==========
Weighted average number
of common shares
outstanding........... 2,000,000 2,050,346 2,065,885 2,065,222 1,952,572
Weighted average effect
of dilutive stock
options at average
market value.......... -- -- -- -- 136,286
---------- ---------- ---------- ---------- ----------
Weighted average number
of common shares
outstanding assuming
dilution.............. 2,000,000 2,050,346 2,065,885 2,065,222 2,088,858
========== ========== ========== ========== ==========
Diluted net income (loss)
per share............... $ (0.20) $ (0.42) $ (0.05) $ (0.12) $ 0.15
========== ========== ========== ========== ==========
The following potentially dilutive securities were excluded because their
effect was antidilutive:
Nine Months Ended
Year Ended December 31, September 30,
---------------------------------- ----------------------
1997 1998 1999 1999 2000
---------- ---------- ---------- ---------- ----------
Options.................. 100,500 100,500 155,100 137,600 --
Warrants................. -- -- -- -- 37,402
Redeemable convertible
preferred stock......... -- -- -- -- 641,642
Pro forma basic and diluted net income per share is computed using the
weighted average number of shares of common stock outstanding, including
potential dilutive common shares arising from the assumed exercise of
outstanding stock options and warrants and conversion of the preferred stock
(using the if-converted method), which automatically converts into common
stock upon an initial public offering, as if converted at the beginning of the
period for both basic and diluted earnings per share.
F-12
CONTROL DELIVERY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information of September 30, 2000 and for the nine months ended
September 30, 1999 and 2000 is unaudited)
The following sets forth the computation of pro forma net income per share
(unaudited):
For the Year Nine Months
Ended Ended
December 31, September 30,
1999 2000
------------ -------------
Pro forma net income (loss):
Net income (loss) attributable to common
stockholders...................................... $ (93,671) $ 322,019
Accretion of preferred stock to redemption value... -- 78,629
--------- ----------
Pro forma net income (loss).......................... $ (93,671) $ 400,648
========= ==========
Shares used in computing pro forma basic net income
per share:
Weighted average number of common shares
outstanding....................................... 2,065,885 1,952,572
Weighted average impact of assumed conversion of
preferred stock at the beginning of the period.... 641,642 641,642
--------- ----------
Shares used in computing pro forma basic net income
(loss) per share.................................... 2,707,527 2,594,214
========= ==========
Basic pro forma net income (loss) per share.......... $ (0.03) $ 0.15
========= ==========
Shares used in computing pro forma diluted net income
per share:
Weighted average number of common shares
outstanding....................................... 2,065,885 1,952,572
Weighted average impact of assumed exercise of
stock options and conversion of preferred stock at
the beginning of the period....................... 641,642 777,928
--------- ----------
Shares used in computing pro forma diluted net income
(loss) per share.................................... 2,707,527 2,730,500
========= ==========
Diluted pro forma net income (loss) per share........ $ (0.03) $ 0.15
========= ==========
Potentially dilutive common shares of 37,402 related to the assumed exercise
of the outstanding warrants were excluded from the pro forma diluted
calculation because their effect was antidilutive.
4. Property and Equipment
Property and equipment consist of the following:
December 31,
Estimated Useful ----------------- September 30,
Life (Years) 1998 1999 2000
---------------- -------- -------- -------------
Computer equipment and
software.................... 3 $ 39,549 $ 71,278 $121,692
Office furniture and
equipment................... 5 11,389 11,389 38,992
Research and development
equipment................... 5 51,478 179,321 502,331
Leasehold improvements....... * -- 14,393 43,704
Construction in progress..... -- 78,195 271,237
-------- -------- --------
102,416 354,576 977,956
Less accumulated
depreciation................ 76,370 98,510 175,030
-------- -------- --------
Property and equipment, net.. $ 26,046 $256,066 $802,926
======== ======== ========
- --------
* Shorter of asset life or lease term.
F-13
CONTROL DELIVERY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information of September 30, 2000 and for the nine months ended
September 30, 1999 and 2000 is unaudited)
Depreciation and amortization expense was $17,881, $15,911 and $22,140 for
the years ended December 31, 1997, 1998 and 1999, respectively. Depreciation
expense for the nine months ended September 30, 1999 and 2000 was $11,602 and
$76,520, respectively.
5. Preferred Stock
Preferred stock, $0.01 par value, is issuable in series with rights and
preferences designated by series. In June 1999, the Board of Directors
designated 50,000 shares as Series A redeemable preferred stock and the Company
granted a stockholder an option to purchase up to 50,000 shares of this series
at an aggregate price of up to $50 million, subject to reduction for payments
made pursuant to a licensing and development agreement. The shares were not
transferrable and were redeemable at their purchase price at the option of the
Company or a majority of the holders under various circumstances. In July 2000,
the option was terminated and the Company eliminated the series.
In August 2000, the Board of Directors designated 650,000 shares as Series A
convertible preferred stock ("Series A"). Also, in August 2000, the Company
sold 641,642 of these Series A shares to third-party investors at $53.74 per
share for a total of $31,179,425 in cash, net of issuance costs of $3,302,416,
including cash costs of $2,204,334 and the fair value of warrants in the amount
of $1,098,082 issued in conjunction with the preferred stock offering. The
carrying value of the Series A preferred stock is being accreted to the
liquidation value on a straight-line basis through the first redemption date of
August 2007.
Series A stockholders vote together with the common stockholders as a single
class. Series A stock is convertible into common stock on a one-for-one basis
subject to anti-dilution adjustments and is entitled to non-cumulative
dividends when and if declared, at the annual rate of $4.30 per share. Holders
of a majority of the outstanding Series A shares may elect on and after August
8, 2007 to have the Company redeem all then outstanding Series A shares at the
issue price plus any accrued and unpaid dividends. On liquidation, the holders
of the Series A shares are entitled to a liquidation preference equal to the
issue price plus all accrued and unpaid dividends. The Series A shares
outstanding will automatically be converted into shares of common stock upon
the earliest of (1) the closing by the Company of a public offering raising
gross proceeds of $20 million or more at an offering price per share greater
than or equal to 200% of the conversion price ($53.74, prior to any
adjustments), (2) following completion of a public offering not triggering
conversion under (1) above, the date on which the average closing price of the
common stock has exceeded 200% of the issue price of the Series A preferred
stock for any 20 consecutive trading days, and (3) the receipt by the Company
of a written consent of the holders of at least 66 2/3% of the Series A
preferred stock then outstanding or conversion of at least 66 2/3% of the
Series A preferred stock originally issued.
6. Warrants
In connection with its issuance of the Series A preferred stock, the Company
issued warrants to a third party to purchase up to 37,402 shares of the
Company's common stock at an exercise price of $53.74 per share. The warrants
expire upon the earlier of April 7, 2002, or 12 months following the Company's
initial public offering.
F-14
CONTROL DELIVERY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information of September 30, 2000 and for the nine months ended
September 30, 1999 and 2000 is unaudited)
The net proceeds from the issuance of Series A preferred stock were
allocated between these warrants and the Series A preferred stock based on
their respective fair values. The fair value of the warrants was determined
using the Black-Scholes pricing model and $1,098,082 was recorded in equity as
additional paid-in capital and as a discount on the preferred stock. The
discount is to be amortized to additional paid-in capital.
7.Common Stock
In 1998 and 1999, Bausch & Lomb Incorporated ("Bausch & Lomb") purchased
101,830 and 17,505 shares of common stock for $1,000,000 and $250,000,
respectively. In April 1998, the Company gave Bausch & Lomb the right to pay
license fees and royalties owed to the Company by transferring these shares of
common stock back to the Company at their original purchase price, and Bausch &
Lomb gave the Company the right to require payment of royalties due from Bausch
& Lomb with such shares at such price. In June 2000, these agreements were
terminated, and Bausch & Lomb sold all of these shares to the Company in
consideration of the waiver of the payment of $1,000,000 in license maintenance
fees and a $250,000 cash payment made in November 2000 by the Company. After
this transaction, Bausch & Lomb continues to own 600,000 shares of common stock
which it or one of its subsidiaries has held since 1992.
In September 1999, the Company gave a shareholder a right to require the
Company to repurchase over a period of years up to 200,000 shares at $10.00 per
share. Prior to 2009, the Company had a right to purchase such shares at $14.43
with cash and a promissory note. In January 2000, the Company purchased 6,500
shares for cash at $10.00 per share. On June 15, 2000, the Company and the
shareholder terminated this agreement and the Company purchased 153,500 shares
at a price of $14.43 per share. The Company paid $150,000 in cash and
$2,065,005 with an 8.75% promissory note due June 2001, secured by 143,105
shares of the Company's common stock. In August 2000, the Company paid the
principal amount of the note, plus interest.
8.Stock Option Plan
In July 1997, the Company adopted the 1997 Stock Option Plan (the "1997
Plan") under which up to 300,000 shares may be issued. The 1997 Plan provides
for the grant of incentive stock options ("ISOs") as well as nonqualified
options to employees, directors and other individuals providing services to the
Company. The Board of Directors determines the term of each option, exercise
price, number of shares for which each option is granted, whether restrictions
will be imposed on the shares subject to options and the vesting period over
which each option is exercisable. The exercise price for ISOs cannot be less
than the fair market value per share of the underlying common stock on the date
granted. The exercise price for ISOs granted to holders of more than 10% of the
voting stock of the Company cannot be less than 110% of the fair market value
per share of the underlying common stock on the grant date. The term of ISOs
cannot exceed ten years. The term of ISOs granted to holders of more than 10%
of the voting stock of the Company cannot exceed five years. A total of 300,000
shares of common stock have been reserved for issuance upon the exercise of
options granted under the 1997 Plan.
F-15
CONTROL DELIVERY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information of September 30, 2000 and for the nine months ended
September 30, 1999 and 2000 is unaudited)
A summary of the status of options granted to employees under the Company's
stock option plan as of December 31, 1997, 1998 and 1999 and changes during the
years then ended is presented below:
1997 1998 1999
--------------- --------------- -----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------- --------
Outstanding at beginning of
year........................ -- $ -- 95,500 $6.25 95,500 $6.25
Granted.................... 95,500 6.25 -- -- 69,600 9.01
Exercised.................. -- -- -- -- -- --
Canceled................... -- -- -- -- (15,000) 6.25
------ ----- ------ ----- ------- -----
Outstanding at end of year... 95,500 $6.25 95,500 $6.25 150,100 $7.53
====== ===== ====== ===== ======= =====
Outstanding and exercisable
at year end................. -- $ -- 23,875 $6.25 47,750 $7.15
Weighted average grant date
fair value:
Options granted at fair
value..................... $1.94 $ -- $3.48
Options granted at less
than fair value........... $ -- $ -- $2.73
The following table summarizes information about employee stock options
outstanding at December 31, 1999:
Options Outstanding Options Exercisable
------------------------------------------ -----------------------
Weighted Average Weighted Weighted
Exercise Remaining Average Average
Price Number Contractual Life Exercise Number Exercise
Per Share Outstanding (In Years) Price Exercisable Price
- ----------- ----------- ---------------- -------- ----------- --------
$ 6.25 80,500 7.72 $ 6.25 40,250 $ 6.25
8.00 52,100 9.65 8.00 -- --
12.00 17,500 9.86 12.00 7,500 12.00
------- ------
$6.25-12.00 150,100 8.64 $ 7.53 47,750 $ 7.15
======= ======
During 1999, the Company granted some options to employees of the Company at
less than fair market value. Under APB 25, the Company recorded stock-based
compensation expense of $12,514 for the year ended December 31, 1999, and
$3,129 and $41,933 for the nine months ended September 30, 1999 and 2000,
respectively.
During 1997, the Company granted 5,000 options to a nonemployee. Under EITF
96-18, the Company recorded compensation expense of $4,214, $15,206 and $26,623
for fiscal years ended December 31, 1997, 1998 and 1999, respectively, and
$19,063 and $144,255 for the nine months ended September 30, 1999 and 2000,
respectively.
There were 144,900 shares reserved for future option grants as of December
31, 1999.
F-16
CONTROL DELIVERY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information of September 30, 2000 and for the nine months ended
September 30, 1999 and 2000 is unaudited)
If compensation costs for the Company's stock-based compensation plan had
been determined based on the fair value at the grant dates as calculated in
accordance with SFAS 123, the Company's net loss and net loss per share for the
years ended December 31, 1997, 1998 and 1999 would have increased to the pro
forma amounts shown below:
Year Ended December 31,
-------------------------------
1997 1998 1999
--------- --------- ---------
Net loss as reported......................... $(394,275) $(866,291) $ (93,671)
Pro forma net loss........................... (394,275) (912,676) (166,177)
Basic and diluted net loss per share as
reported.................................... (0.20) (0.42) (0.05)
Pro forma basic and diluted net loss per
share....................................... (0.20) (0.45) (0.08)
The fair value of each option grant is estimated on the date of grant using
the minimum value method with the following assumptions:
Year Ended December 31,
-------------------------------
1997 1998 1999
--------- --------- ---------
Expected option term (in years).............. 8.0 -- 5.0-6.0
Risk-free interest rate...................... 5.9% -- 5.5%-5.9%
Expected dividend yield...................... None -- None
9. Commitments
The Company leases its office facilities under noncancelable operating lease
agreements which expire through November 30, 2003. Under the terms of the
facilities leases, the Company is obligated to pay its pro rata share of real
estate taxes, utilities, insurance and common operating costs as well as base
rents. The facilities leases contain renewal provisions.
Future minimum lease payments under noncancelable operating leases as of
December 31, 1999 are as follows:
Operating
Fiscal Year Leases
----------- ---------
2000............................................................... $205,667
2001............................................................... 202,580
2002............................................................... 199,498
2003............................................................... 194,388
--------
Total minimum lease payments..................................... $802,133
========
Rental expense associated with operating leases was $48,745, $70,920 and
$90,449 for the years ended December 31, 1997, 1998 and 1999, respectively, and
$52,233 and $146,863 for the nine months ended September 30, 1999 and 2000,
respectively. During February 2000, the Company leased additional office
facilities under a noncancelable operating lease which expires in 2003 with
annual rentals of $133,800.
F-17
CONTROL DELIVERY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information of September 30, 2000 and for the nine months ended
September 30, 1999 and 2000 is unaudited)
10. Income Taxes
At December 31, 1999, the Company had federal and state net operating loss
carryforwards ("NOL") of approximately $334,000 and $252,000, respectively,
which expire at various dates through 2018. These net operating loss
carryforwards may be used to offset future federal and state taxable income tax
liabilities. Based upon the Internal Revenue Code and changes in company
ownership, utilization of the NOL may be subject to an annual limitation.
The components of the Company's net deferred tax asset are as follows:
Year Ended December 31,
------------------------
1998 1999
----------- -----------
Depreciation......................................... $ (3,133) $ (4,564)
Deferred revenue..................................... 48,868 508,917
Federal and state NOL................................ 386,351 129,454
Other................................................ 99,689 123,820
----------- -----------
Total deferred tax asset............................ 531,775 757,627
Valuation allowance.................................. (531,775) (757,627)
----------- -----------
Net deferred tax asset.............................. $ -- $ --
=========== ===========
A valuation allowance is established if it is more likely than not that all
or a portion of the deferred tax asset will not be realized. Accordingly, a
valuation allowance has been recorded for the full amount of the deferred tax
asset due to the uncertainty of realization.
11. Agreements
University of Kentucky Research Foundation ("UKRF")
UKRF has granted the Company exclusive, worldwide rights to make, use, sell
and sublicense products using certain United States and related foreign
patents. The Company is required to pay royalties at various percentages of net
sales or net royalties it receives. Under these agreements, the Company
recorded royalty expense totaling $491,840, $315,185 and $496,164 for the
fiscal years ended December 31, 1997, 1998 and 1999, respectively. The Company
also recorded royalty expense of $430,600 and $307,911 for the nine months
ended September 30, 1999 and 2000, respectively.
Two officers of the Company previously held academic positions at UKRF and
pursuant to agreements between them and UKRF, a portion of the royalties paid
to UKRF were disbursed to them as sub-royalties as follows: $90,612, $93,074,
$100,752, $50,752, and $44,320 in 1997, 1998, 1999 and the nine months ended
September 30, 1999 and 2000, respectively.
Strategic Collaborations
In December 1992, the Company entered into a license and development
agreement with Chiron Vision Corporation ("Chiron") with respect to the
Company's first commercialized product, Vitrasert. Bausch & Lomb acquired
Chiron in 1997. Under the terms of the agreement, Bausch & Lomb has exclusive
worldwide rights to make, use and sell Vitrasert and other products utilizing
the licensed patents for the treatment of conditions of the eye, for which the
Company receives royalty
F-18
CONTROL DELIVERY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information of September 30, 2000 and for the nine months ended
September 30, 1999 and 2000 is unaudited)
payments on worldwide net sales. Bausch & Lomb may terminate the agreement
without cause upon 180 days' written notice. Royalty payments earned from
Bausch & Lomb were $1,108,742, $638,005 and $496,378 for the fiscal years ended
December 31, 1997, 1998, 1999, and $364,002 and $283,041 for the nine months
ended September 30, 1999 and 2000, respectively.
In June 1999, the Company and Bausch & Lomb entered into a license and
development agreement with respect to treatment of conditions of the eye. The
Company granted Bausch & Lomb an exclusive, worldwide license to make, use and
sell products for treatment of the eye based on the Company's patents and other
technology. Bausch & Lomb agreed to fund the Company's costs related to the
joint development of products for the treatment of diabetic macular edema,
uveitis and age-related macular degeneration based on agreed-upon research and
development plans and budgets, and pay the Company license and license
maintenance fees and milestone payments. Based on the budget at December 31,
1999, these amounts totaled up to $35 million. Bausch & Lomb will also pay the
Company royalties based on net sales of licensed products. Bausch & Lomb may
terminate this agreement without cause upon 90 days' written notice. License
fees and collaborative research and development revenue earned from Bausch &
Lomb under this agreement, recognized on a retrospective percentage of
completion basis, was $1,889,537, $1,148,052 and $3,282,612 for the fiscal year
ended December 31, 1999, and for the nine months ended September 30, 1999 and
2000, respectively.
Government Research Grants
During 1997, 1998 and 1999, the Company received government research grants.
Total grant proceeds were $240,266, $476,602, and $399,512 for the years ended
December 31, 1997, 1998 and 1999 and $264,934 and $610,000 for the nine months
ended September 30, 1999 and 2000, respectively. Amounts remaining available to
the Company under approved grants as of September 30, 2000 totaled
approximately $615,261.
12. Related Party
The Company is a party to license and development agreements with Bausch &
Lomb, a stockholder of the Company. The Company recognized total revenue from
Bausch & Lomb of $1,108,742, $638,005 and $2,385,915 for the years ended
December 31, 1997, 1998, 1999, and $1,512,054 and $3,565,653 for the nine
months ended September 30, 1999 and 2000, respectively. The Company had
accounts receivable due from Bausch & Lomb of $118,999 and $99,111 as of
December 31, 1998 and 1999, and $96,000 as of September 30, 2000, respectively.
In April 2000, the Company loaned $25,769 to an officer of the Company,
collateralized by 1,500 shares of the Company's common stock. Interest accrues
on the note at an annual rate of 8.0%. The principal amount, plus all unpaid
interest, is payable on the earlier of April 30, 2002 or termination of
employment. As of September 30, 2000, $25,769 is included in other assets on
the balance sheet.
F-19
CONTROL DELIVERY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information of September 30, 2000 and for the nine months ended
September 30, 1999 and 2000 is unaudited)
13. Simplified Employee Pension Plan
During 1997, the Company adopted a Salary Reduction Simplified Employee
Pension Plan under Internal Revenue Code Section 408k for all employees with at
least $3,000 in gross salaries. Participants may contribute up to a maximum of
$6,000 of their gross salaries as annual compensation to the plan, subject to
certain limitations. The Company matches employee contributions at a rate of 3%
of their annual salary, up to a maximum of $6,000. Contributions to the Plan
provided by the employees were $35,930, $42,000 and $50,335 for the years ended
December 31, 1997, 1998 and 1999, and $35,811 and $57,674 for the nine months
ended September 30, 1999 and 2000, respectively. Additionally, contributions to
the Plan provided by the Company were $11,900, $22,952 and $29,801 for the
years ended December 31, 1997, 1998 and 1999, respectively, and $20,146 and
$25,642 for the nine months ended September 30, 1999 and 2000, respectively.
14. Subsequent Event
Effective January 1, 2001, the Company amended its June 1999 license and
development agreement with Bausch & Lomb. Pursuant to this amendment, the
Company will assume responsibility for the manufacture and supply of all
clinical trial materials for Phase III clinical trials of the Company's three
proposed products for treatment of conditions of the eye and will assume
primary responsibility for all product development. In exchange, Bausch & Lomb
has agreed to pay the Company milestone payments and provide the use of a
portion of the capital equipment necessary to manufacture the clinical trial
materials.
The amendment also provides Bausch & Lomb with the option to have the
Company act as a contract manufacturer of commercialized products following the
successful completion of the Phase III clinical trials.
F-20
You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide information different from that contained in
this prospectus. We are offering to sell, and seeking offers to buy, shares of
common stock only in jurisdictions where offers and sales are permitted. The
information contained in this prospectus is accurate only as of the date of
this prospectus, regardless of the time of delivery of this prospectus or of
any sale of our common stock.
TABLE OF CONTENTS
Page
----
Prospectus Summary....................................................... 1
Risk Factors............................................................. 5
Note Regarding Forward-Looking Statements................................ 15
Use of Proceeds.......................................................... 16
Dividend Policy.......................................................... 16
Capitalization........................................................... 17
Dilution................................................................. 18
Selected Financial Data ................................................. 19
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 21
Business................................................................. 27
Management............................................................... 40
Related Party Transactions............................................... 45
Principal Stockholders................................................... 46
Description of Capital Stock............................................. 48
Shares Eligible for Future Sale.......................................... 51
Underwriting............................................................. 53
Validity of Common Stock................................................. 56
Experts.................................................................. 56
Where You Can Find More Information About Us............................. 56
Index to Financial Statements............................................ F-1
Until , 2001, 25 days after the date of this prospectus, all dealers
that effect transactions of these securities, whether or not participating in
this offering, may be required to deliver a prospectus. Dealers are also
obligated to deliver a prospectus when acting as underwriters and with respect
to their unsold allotments or subscriptions.
[LOGO]
[LOGO OF CDS APPEARS HERE]
Shares
Common Stock
Deutsche Banc Alex. Brown
Banc of America Securities LLC
SG Cowen
Prospectus
, 2001
- -------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the registrant in connection
with the sale of the securities being registered. All amounts are estimates
except the SEC registration fee, the NASD fee and the Nasdaq National Market
listing fee.
SEC registration fee............................................... $22,700
NASD filing fee.................................................... 9,125
Nasdaq National Market listing fee................................. *
Printing........................................................... *
Legal fees and expenses............................................ *
Accounting fees and expenses....................................... *
Blue sky fees and expenses......................................... *
Transfer agent and registrar fees.................................. *
Miscellaneous...................................................... *
-------
Total............................................................ $ *
=======
- --------
* To be provided by amendment
Item 14. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's board of directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933, as amended (the "Securities
Act").
As permitted by the Delaware General Corporation Law, the certificate of
incorporation of the Registrant provides that its directors shall not be liable
to the Registrant or its stockholders for monetary damages for breach of
fiduciary duty as a director, except to the extent that the exculpation from
liabilities is not permitted under the Delaware General Corporation Law as in
effect at the time the liability is determined. As permitted by the Delaware
General Corporation Law, the certificate of incorporation of the Registrant
also provides that the Registrant shall indemnify its directors to the full
extent permitted by the laws of the State of Delaware.
The Registrant is in the process of obtaining policies of insurance under
which coverage will be provided (a) to its directors and officers against loss
arising from claims made by reason of breach of fiduciary duty or other
wrongful acts, including claims relating to public securities matters and (b)
to the Registrant with respect to payments which may be made by the Registrant
to these officers and directors pursuant to the above indemnification provision
or otherwise as a matter of law.
The Underwriting Agreement provides for the indemnification of officers and
directors of the Registrant by the Underwriters against some types of
liability.
Item 15. Recent Sales of Unregistered Securities.
We have sold and issued the following unregistered securities in the past
three years:
On June 9, 1999, we issued an option to purchase 50,000 shares of a series
of our preferred stock which we have since eliminated to one investor in
connection with a licensing and development agreement. This option was never
exercised and has since been terminated.
II-1
On the dates indicated below, we issued the indicated number of shares of
common stock to one investor, for aggregate consideration of $1,250,000.
Date of Issuance Number of Shares
---------------- ----------------
April 15, 1998............................................ 40,800
June 10, 1998............................................. 25,100
September 10, 1998........................................ 20,360
December 10, 1998......................................... 15,570
February 10, 1999......................................... 17,505
On August 8, 2000, we issued 641,642 shares of Series A convertible
preferred stock to 45 investors for aggregate consideration of $34,481,841.
On August 8, 2000, we issued warrants to purchase 38,499 shares of our
common stock at a purchase price of $53.74 per share to one investor in
exchange for services.
We have granted options to purchase an aggregate of 261,500 shares of common
stock to a number of our employees. We have not received consideration from any
grantee of any of our options. As of this date, options to purchase 7,500
shares have been exercised for an aggregate consideration of $60,000.
On November 3, 2000, we made a deferred issuance of an aggregate of 31,200
shares of common stock to three consultants in exchange for services rendered.
This deferred issuance will become effective January 1, 2001.
We intended that the above issuances of our securities be exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act as transactions by an issuer not involving any public offering.
In addition, we intended that the issuances of options to purchase our common
stock be exempt from registration under the Securities Act in reliance upon
Rule 701 and/or Section 4(2) promulgated under the Securities Act. The
recipients of securities in each transaction described above represented to us
their intentions to acquire the securities for investment only and not with a
view to, or for sale in connection with, any distribution. We affixed
appropriate legends to the share certificates, warrants and options issued in
the transactions described above. We believe that all recipients had adequate
access, through their relationships with us, to information about us.
II-2
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits. The following exhibits are filed as part of this
registration statement:
Number Description
------ -----------
1.1* Form of Underwriting Agreement.
3.1* Form of Amended and Restated Certificate of Incorporation of the
Registrant.
3.2* Form of Amended and Restated By-laws of the Registrant.
3.3* Form of Specimen Certificate for Common Stock of the Registrant.
4.1* Warrant to Purchase Common Stock.
5.1* Opinion of Ropes & Gray.
10.1 Registration Rights Agreement dated as of August 8, 2000 among the
Registrant, the Investors (as defined therein) and the Stockholders (as
defined therein).
10.2 1997 Stock Option Plan.
10.3 Lease, dated as of November 15, 1999, between the registrant and Rita
A. Cannistraro, as Trustee of Metro Realty Trust.
10.4+ License Agreement, dated as of October 20, 1991, by and between the
University of Kentucky Research Foundation and the Registrant,
including amendment.
10.5+ License Agreement, dated as of October 31, 1995, by and between the
University of Kentucky Research Foundation and the Registrant.
10.6+ License Agreement, dated as of September 9, 1997, by and between the
University of Kentucky Research Foundation and the Registrant.
10.7+ License Agreement, dated as of September 9, 1997, by and between the
University of Kentucky Research Foundation and the Registrant.
10.8+ License Agreement, dated as of September 9, 1997, by and between the
University of Kentucky Research Foundation and the Registrant.
10.9+ License Agreement, dated as of December 31, 1992, by and between the
Registrant and Chiron Vision Corporation (f/k/a Chiron IntraOptics,
Inc.), including amendments 1-4.
10.10+ License Agreement, dated as of June 9, 1999, between the Registrant and
Bausch & Lomb Incorporated.
10.11+ Amendment to Exhibit 10.10, effective as of January 1, 2001.
10.12 Preferred Stock Purchase Agreement, dated as of August 8, 2000, among
the Registrant and the Investors (as defined therein).
21.1 Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2* Consent of Ropes & Gray (included in Exhibit 5.1).
24.1 Power of Attorney (included on signature page).
27.1 Financial Data Schedule.
- --------
* To be filed by amendment.
+ The Registrant requests confidential treatment for portions of this exhibit.
An unredacted version of this exhibit has been filed separately with the
Commission.
II-3
Item 17. Undertakings.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 14 above, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boston, Commonwealth of
Massachusetts, on the 15th of December, 2000.
CONTROL DELIVERY SYSTEMS, INC.
By: /s/ Paul Ashton
----------------------------------
Paul Ashton
Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
immediately below constitutes and appoints Paul Ashton, Thomas J. Smith or
Michael D. Mays, or any of them, his or her true and lawful attorney-in-fact
and agent, with full power of substitution, for him or her and in his or her
name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration
Statement, and any and all additional registration statements pursuant to Rule
462(b) under the Securities Act of 1933, as amended, in connection with or
related to the offering contemplated by this Registration Statement and its
amendments, if any, and to file the same with all exhibits thereto, and other
documents in connection therewith, with the Commission, granting unto said
attorney-in-fact and agent full power and authority to do and perform each and
every act and thing requisite and necessary to be done, as fully to all intents
and purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent or his or her substitute or
substitutes may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on December 15, 2000.
Signature Title
--------- -----
/s/ Paul Ashton Chief Executive Officer, President, Secretary and
______________________________________ Director
Paul Ashton
/s/ Thomas J. Smith Chairman of the Board of Directors
______________________________________
Thomas J. Smith
/s/ Michael D. Mays Chief Financial Officer and Treasurer
______________________________________
Michael D. Mays
/s/ Alan L. Crane Director
______________________________________
Alan L. Crane
/s/ Stephen C. McCluski Director
______________________________________
Stephen C. McCluski
/s/ James L. Currie Director
______________________________________
James L. Currie
II-5
EXHIBIT INDEX
Number Description
------ -----------
1.1* Form of Underwriting Agreement.
3.1* Form of Amended and Restated Certificate of Incorporation of the
Registrant.
3.2* Form of Amended and Restated By-laws of the Registrant.
3.3* Form of Specimen Certificate for Common Stock of the Registrant.
4.1* Warrant to Purchase Common Stock.
5.1* Opinion of Ropes & Gray.
10.1 Registration Rights Agreement dated as of August 8, 2000 among the
Registrant, the Investors (as defined therein) and the Stockholders (as
defined therein).
10.2 1997 Stock Option Plan.
10.3 Lease, dated as of November 15, 1999, between the registrant and Rita
A. Cannistraro, as Trustee of Metro Realty Trust.
10.4+ License Agreement, dated as of October 20, 1991, by and between the
University of Kentucky Research Foundation and the Registrant,
including amendment.
10.5+ License Agreement, dated as of October 31, 1995, by and between the
University of Kentucky Research Foundation and the Registrant.
10.6+ License Agreement, dated as of September 9, 1997, by and between the
University of Kentucky Research Foundation and the Registrant.
10.7+ License Agreement, dated as of September 9, 1997, by and between the
University of Kentucky Research Foundation and the Registrant.
10.8+ License Agreement, dated as of September 9, 1997, by and between the
University of Kentucky Research Foundation and the Registrant.
10.9+ License Agreement, dated as of December 31, 1992, by and between the
Registrant and Chiron Vision Corporation (f/k/a Chiron IntraOptics,
Inc.), including amendments 1-4.
10.10+ License Agreement, dated as of June 9, 1999, between the Registrant and
Bausch & Lomb Incorporated.
10.11+ Amendment to Exhibit 10.10, effective as of January 1, 2001.
10.12 Preferred Stock Purchase Agreement, dated as of August 8, 2000, among
the Registrant and the Investors (as defined therein).
21.1 Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2* Consent of Ropes & Gray (included in Exhibit 5.1).
24.1 Power of Attorney (included on signature page).
27.1 Financial Data Schedule.
- --------
* To be filed by amendment.
+ The Registrant requests confidential treatment for portions of this exhibit.
An unredacted version of this exhibit has been filed separately with the
Commission.