1
EXHIBIT 13.1
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
Since its inception in October 1989, DepoTech Corporation (the "Company")
has devoted substantially all of its resources to the development of its
potential products. To date, the Company has not received any revenues from the
sale of products. The Company has funded its development programs primarily from
equity-derived working capital and through strategic alliances with other
companies. The Company has been unprofitable since its inception and expects to
incur additional operating losses over at least the next two years. As of
December 31, 1997, the Company's accumulated deficit was approximately $63.8
million.
The following discussion is qualified in its entirety by the more detailed
information and the Financial Statements and Notes thereto appearing elsewhere
in this Annual Report, including information under "Risks and Uncertainties."
This report may contain, in addition to historical information, forward-looking
statements that involve risks and uncertainties. The Company's actual results
could differ materially from the results discussed in such forward-looking
statements. Factors that could cause or contribute to such differences include
those discussed under "Risks and Uncertainties."
Results of Operations
The Company had total revenues of $6.9 million for the year ended December
31, 1997 compared to $4.4 million for 1996 and $6.8 million for 1995. Total
revenues were principally generated by the Company's collaborative agreements
with Chiron Corporation ("Chiron") and Pharmacia & Upjohn S.p.A., an affiliate
of Pharmacia & Upjohn, Inc. ("P&U"). Total revenues were primarily derived from
milestone payments earned and reimbursement of certain clinical trial and
manufacturing scale-up expenses for the Company's lead product, DepoCyt, under
the two collaboration agreements. In addition, Chiron reimbursed DepoTech for
100% of certain pre-clinical and feasibility studies performed on their behalf.
Further, DepoTech is reimbursed for conducting feasibility studies for various
pharmaceutical companies.
Total revenues in 1995 included a one-time marketing rights fee and
reimbursement of prior year clinical trial expenses for DepoCyt totaling $3.5
million, earned by the Company upon achievement of a development milestone under
the Chiron agreement. Included in total revenue for 1997 is a milestone payment
from Chiron of $1.0 million paid to DepoTech upon the filing of a New Drug
Application for DepoCyt. In July 1997, the Company entered into a Marketing and
Distribution Agreement with P&U for rights to market and sell DepoCyt in
countries outside the U.S. The Company received a cash payment of $2.0 million
upon signing of the agreement. Revenues from the reimbursement of clinical trial
expenses from prior years and the marketing rights fee were one time payments
which will not re-occur in future periods. Revenues may fluctuate from year to
year depending on the level of clinical and development activity for projects
under collaborative agreements and the achievement of future milestones.
Research and development expenses increased to $20.1 million for the year
ended December 31, 1997, from $18.0 million in 1996 and $12.7 million in 1995.
Factors contributing to these increases include expanded efforts in clinical
trials, manufacturing scale-up, and preclinical development of potential
DepoFoam products. The Company is continuing Phase III clinical studies of
DepoCyt in neoplastic meningitis from leukemia and lymphomas, as well as a Phase
IV nonrandomized trial in solid tumor patients. In 1997, DepoTech began a
dose-finding study of DepoCyt in pediatric patients, and completed a Phase I
study of DepoMorphine sustained-release encapsulated morphine sulfate to treat
acute post-surgical pain. Manufacturing scale-up of DepoMorphine is underway.
The Company has completed a Phase I study of DepoAmikacin as well as certain
preclinical and feasibility studies with partner, Chiron. Further, the Company
is evaluating the feasibility of developing several early stage compounds
internally and for corporate partners. Research and development expenses are
expected to increase in 1998.
General and administrative expenses increased to $6.8 million during 1997
from $4.1 million in 1996 and $2.8 million in 1995. The increases were primarily
due to expansion in administrative staffing and higher facility cost and
business development expenses. Included in general and administrative expenses
for 1997 and 1996 are $1.5 million and $0.5 million, respectively, of pre-launch
expenses incurred for DepoCyt prior to the onset of any product revenue. Under
the collaborative agreement with Chiron, the Company is obligated to share in
the funding of these expenses.
Chiron and DepoTech have been jointly developing DepoCyt in the U.S.,
Canada and Europe since March 1994.
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In June 1997, DepoTech reacquired rights to DepoCyt in Canada and Europe from
Chiron. Chiron will retain exclusive marketing rights to DepoCyt in the U.S.
Included in operating expenses for the year ended December 31, 1997 were
expenses of $2.0 million associated with the repurchase of DepoCyt which was
paid to Chiron in December 1997.
Interest income was $1.7 million for the year ended December 31, 1997
compared to $1.7 million in 1996 and $1.1 million in 1995. The increase from
1995 to 1996 was principally due to higher average cash investment balances and
increases in available market interest rates. Interest expense was $1.2 million
for the year ended December 31, 1997 compared to $0.8 million in 1996 and $0.4
million in 1995. The increases in interest expense were due to higher balances
outstanding for obligations under capital leases and a note payable.
Liquidity and Capital Resources
Since its inception, DepoTech has financed its operations primarily through
public and private placements of equity securities, which provided aggregate net
proceeds of approximately $101.9 million through December 31, 1997, and through
capital equipment leases and notes payable. In October 1995, the Company
completed its initial public offering of common stock with net proceeds of $38.1
million. In January 1997, the Company completed the private placement of 1.5
million newly issued shares of common stock raising net proceeds of $18.9
million. In September 1997, the Company raised net proceeds of $14.6 million
through the sale of 1.0 million newly issued shares of DepoTech common stock to
a private investment company.
Chiron and DepoTech have been jointly developing DepoCyt in the U.S.,
Canada and Europe since March 1994. In June 1997, DepoTech reaquired rights to
DepoCyt in Canada and Europe from Chiron for aggregate cash payments of up to
$13.7 million, of which $2.0 million was paid to Chiron in December 1997. Chiron
will retain exclusive marketing rights to DepoCyt in the U.S. If prior to
December 31, 1998, the U.S. Food and Drug Administration ("FDA") issues a letter
or other notification to DepoTech indicating that DepoCyt is approvable or
approved, the remaining balance of $11.7 million shall be payable no later than
December 31, 1998. If no FDA notification is received prior to December 31,
1998, the remaining amount shall be payable no later than six months from the
earlier of U.S. or European Union regulatory notification that the application
to market or sell DepoCyt is approvable or approved. If all applications for
regulatory approval to sell DepoCyt in the U.S. and European Union are
permanently withdrawn, DepoTech shall be relieved of any obligation to pay the
remaining $11.7 million.
In July 1997, DepoTech entered into a Marketing and Distribution Agreement
with P&U for rights to market and sell DepoCyt in countries outside the U.S. P&U
will be responsible for submitting regulatory filings, labeling, packaging,
distribution, marketing and sales of DepoCyt in this territory. The Company will
manufacture DepoCyt and receive a share of the net sales of DepoCyt sold by P&U.
The Company received a cash payment of $2.0 million upon execution of the
agreement and may receive additional payments of up to $17.0 million upon
achievement of certain regulatory milestones. The agreement also provides for
P&U to reimburse the Company for certain clinical trial expenses and regulatory
fees incurred by the Company. Future milestone payments, if any, totaling up to
the obligation to Chiron of $11.7 million will be set aside in a restricted cash
account for payment to Chiron for the repurchase of DepoCyt rights.
Working capital increased to $22.1 million as of December 31, 1997 compared
to $14.9 million as of December 31, 1996. The increase in working capital in
1997 was primarily due to $33.5 million of net proceeds received from two
private placements and $8.0 million of proceeds from a note payable, which was
partially offset by net cash used to fund operations of $18.2 million, purchases
of property and equipment of $12.0 million, and debt repayments totalling $2.9
million. As of December 31, 1997, DepoTech had cash, cash equivalents and
short-term investments totaling $27.4 million. In May 1996, the Company signed a
bank credit facility for $9.0 million to finance future capital equipment
purchases, all of which was utilized through December 31, 1997. In October 1997,
DepoTech expanded the bank credit facility by $4.5 million, of which $1.2
million was utilized through December 31, 1997. The Company believes the impact
of inflation on its business activities has not been significant to date.
Through December 31, 1997, the Company has invested an aggregate of $31.9
million in leasehold improvements, and manufacturing, laboratory and office
equipment, of which $19.4 million has been funded through capital leases or bank
credit facilities. The Company intends to continue to fund capital expenditures
through external financing supplemented by internal cash resources where
appropriate. The Company leases its headquarters which house most of its
administrative, research and clinical and manufacturing activities. The minimum
rental commitment for this facility
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ranges from approximately $2.5 million to $4.3 million per year, over 18 years,
based upon pre-established annual rent increases. The Company is installing a
manufacturing line in this facility to support clinical and commercial
production of DepoFoam products under development. The cost of equipment and
tenant improvement expenses for this manufacturing line total approximately $7.5
million through 1997. DepoTech intends to finance such expenditures through
existing bank credit facilities. Capital expenditures for 1998 are expected to
be lower than the prior year.
The Year 2000 Issue is the result of computer programs written in the past
that use two digits rather than four to define the applicable year. As a result,
these computer programs may not properly recognize calendar dates beginning in
the Year 2000. This problem may cause systems to fail or miscalculate causing
disruptions of operations, including a temporary inability to process
transactions or engage in similar normal business activities.
The Company believes that the total internal Year 2000 Issue costs will be
minimal and that the Year 2000 conversion requirements will be achieved through
routine upgrades to its software programs. The Company expects to complete these
upgrades by the end of 1998. These costs and the expected completion date are
based on management's best estimates and there can be no assurance that these
estimates will be achieved and actual results could differ materially from those
anticipated. The Company has also initiated communications with all of its
significant suppliers to determine the extent to which the Company's systems are
vulnerable to those third parties' failure to remediate their own Year 2000
Issues. There can be no assurance that the systems of other companies on which
the Company's systems rely will be timely converted and will not have an adverse
effect on the Company's systems.
The Company's operations to date have consumed substantial amounts of cash,
which is expected to continue over the foreseeable future. The amount of net
losses and the time required for the Company to achieve profitability are highly
uncertain. There can be no assurance that the Company will be able to achieve
profitability at all or on a sustained basis. DepoTech anticipates that its
existing available cash, cash equivalents and short-term investments, committed
future contract revenue, projected funding from equipment financing and interest
income will be adequate to satisfy its capital requirements and fund operating
losses through 1998. The development and commercialization of the Company's
potential products will require substantial funds to conduct research and
development and preclinical and clinical testing of products and to manufacture
and commercialize any products that are approved for commercial sale. The
Company's future capital requirements will depend on many factors, including,
without limitation, the time and costs involved in obtaining regulatory
approvals, continued scientific progress in its products and process development
programs and changes in existing collaborative programs. The Company anticipates
that it will be required to raise additional capital in the near-term in order
to continue to conduct its operations. Such capital may be raised through public
or private financings, as well as collaborative arrangements, borrowings and
other available sources. There can be no assurance that additional funding, if
necessary, will be available on favorable terms, if at all. If adequate funds
are not available, the Company will be required to curtail operations
significantly or to obtain funds through entering into arrangements with
collaborative partners or others that may require the Company to relinquish
rights to certain of its technologies, potential products or potential markets
that the Company would not otherwise relinquish. The failure to receive
additional funding would have a material adverse effect on the Company.
Risks and Uncertainties
EARLY STAGE COMPANY.
DepoTech's products are at an early stage of development, and, to date,
only three of the company's DepoFoam formulations have been subject to human
clinical testing. The Company's potential products will require extensive
research, formulation, development, preclinical and clinical testing, and may
involve a lengthy regulatory approval process prior to commercialization. There
can be no assurance that DepoCyt, DepoMorphine, or any of the Company's other
products or potential products will prove safe and effective in clinical trials,
meet applicable regulatory standards, be capable of being produced in commercial
quantities at acceptable cost or be successfully commercialized. In addition,
there can be no assurance that preclinical or clinical testing will accurately
predict safety or efficacy in broader human use, or that delays in the
regulatory approval process will not arise, delaying approval longer than
currently anticipated. Even if all of the Company's products prove to be safe
and effective and are approved for marketing by the FDA and other regulatory
authorities, there can be no assurance that health care providers, payors and
patients will accept the
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Company's products. Any failure of the Company to achieve technical
feasibility, demonstrate safety, achieve clinical efficacy, obtain regulatory
approval or, alone or together with its partners, successfully market products
would have a material adverse effect on the Company.
In April 1997, the Company completed a New Drug Application ("NDA") for
DepoCyt for the treatment of neoplastic meningitis ("NM") from solid tumors. As
with all drugs subject to accelerated approval, the FDA requested that the
Company conduct a Phase IV clinical trial on DepoCyt which is in process. In
December 1997, the Oncologic Drugs Advisory Committee to the FDA declined to
recommend approval of DepoCyt for use in patients with NM from solid tumors. In
March 1998, DepoTech reached an agreement with the FDA to submit an amendment to
the NDA to provide data from the Phase IV study of NM from solid tumors, and
interim data from a Phase III clinical trial of NM from lymphomas. Submission of
the amendment will approximately double the number of patients treated with
DepoCyt under review and extend the review time for a FDA decision by three
months. The final decision regarding marketing approval of new therapeutics
resides with FDA officials subsequent to any recommendation of the Committee.
There can be no assurance that the data from the DepoCyt Phase III or
Phase IV clinical trials will be sufficient to gain FDA approval for marketing
for any indication, that additional results from ongoing pivotal Phase III
trials will be consistent with earlier results or that the Phase IV and other
clinical trials of DepoCyt will generate positive results. Any of these
occurrences would have a material adverse effect on the Company.
GOVERNMENT REGULATION; UNCERTAINTY OF OBTAINING REGULATORY APPROVAL.
DepoTech's research and development activities are, and its future
business will be, subject to significant regulation by governmental authorities
in the United States, primarily by the FDA, and internationally. The clinical
testing and the regulatory review process for new drugs or biologics requires
substantial time, effort and expense. There can be no assurance that any
approval will be granted to the Company's potential products on a timely basis,
if at all. The FDA or its international equivalent may refuse to approve a drug
or biological product for commercial sale or shipment if applicable statutory
and/or regulatory criteria are not satisfied, or may require additional testing
or information. There can be no assurance that such additional testing or the
provision of such additional information, if required, will not have a material
adverse effect on the Company. Also, the regulatory process can be modified by
legislatures, the FDA or international regulators in a manner that could have a
material adverse effect on the Company.
LIMITED MANUFACTURING EXPERIENCE; RISK OF SCALE-UP; RELIANCE ON
MANUFACTURING PROCESS.
The Company has no experience manufacturing products for commercial
purposes. The Company's manufacturing operations will need to meet ongoing
commercial requirements for all markets in which products have been approved.
The Company will also need to comply with current Good Manufacturing Practices
("cGMPs") and other regulations prescribed by various regulatory agencies in the
United States and other countries to achieve the required levels of production
of each of its products and to obtain and retain marketing approval, if any.
Failure by the Company to successfully scale-up its manufacturing processes or
to comply with cGMPs and other regulations would have a material adverse effect
on the Company, including the loss of manufacturing rights to DepoCyt under the
Chiron and P&U agreements. To date, the Company has relied on a particular
proprietary method of manufacture. There can be no assurance that this method
will be applicable to all pharmaceuticals or biologics the Company desires to
commercialize. Further, the yield of product incorporated into the delivery
system is likely to be highly variable for different therapeutic agents.
Finally, the Company will need to successfully meet any manufacturing challenges
associated with the specific characteristics of the drug to be encapsulated.
FUTURE CAPITAL NEEDS.
The development and commercialization of the Company's potential products
will require substantial funds to conduct research and development and
preclinical and clinical testing of products and to manufacture and
commercialize any products that are approved for commercial sale. The Company's
future capital requirements will depend on many factors, including, without
limitation, the time and costs involved in obtaining regulatory approvals,
continued scientific progress in its products and process development programs
and changes in existing collaborative programs. The Company anticipates that it
will be required to raise additional capital in the near-term in order to
continue to conduct its operations. Such capital may be raised through public or
private financings, as well as collaborative arrangements, borrowings and other
available sources. There can be no
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assurance that additional funding will be available on favorable terms, if at
all. If adequate funds are not available, the Company will be required to
curtail operations significantly or to obtain funds through entering into
arrangements with collaborative partners or others that may require the Company
to relinquish rights to certain of its technologies, potential products or
potential markets that the Company would not otherwise relinquish. The failure
to receive additional funding would have a material adverse effect on the
Company.
DEPENDENCE UPON PARTNERS FOR DEVELOPMENT AND COMMERCIALIZATION.
The Company does not currently possess all of the resources necessary to
develop, complete the FDA approval process and commercialize all of its
potential therapeutic products. The Company hopes to enter into collaborative
arrangements with other companies to fund research, development and clinical
trials, to assist in obtaining regulatory approvals and to commercialize its
products in the United States and internationally. In addition, the Company's
ability to apply its drug delivery technology to a broad range of
pharmaceuticals will depend upon its ability to establish and maintain
collaborative arrangements because the rights to many of the pharmaceuticals
most suited to the Company's drug delivery technology are currently owned or
controlled by third parties. While the Company has entered into preliminary
arrangements to test the feasibility of its delivery technology with certain
pharmaceuticals and has entered into more extensive collaborations with Chiron
and P&U, there can be no assurance that the Company will be able to enter into
additional collaborations to develop commercial applications of its drug
delivery technology. In addition, there can be no assurance that the Company
will be able to enter into or maintain existing or future collaborations or that
such collaborations will be successful. The failure of the Company to enter into
a collaboration with the owner of rights to a particular formulation or
pharmaceutical would preclude the Company from developing its drug delivery
technology with respect to such formulation or pharmaceutical. The failure to
enter into or maintain existing or future collaborations would have a material
adverse effect on the Company.
LIMITED SALES AND MARKETING CAPABILITY.
Commercialization of the Company's products is expected to be expensive and
time-consuming. To the extent the Company relies on its collaborators for sales,
marketing or other capabilities, the Company will be dependent on the efforts of
third parties and there can be no assurance that any of these collaborators will
successfully perform their duties in commercializing the Company's products.
PATENTS AND PROPRIETARY TECHNOLOGY.
DepoTech relies on a combination of technical leadership, patents, trade
secrets, copyright and trademark protection and nondisclosure agreements to
protect its proprietary rights. There can be no assurance that any patents
issued to the Company will provide significant protection or will not be
challenged or that the Company will be issued any additional patents. Even if
issued patents are enforceable, the Company anticipates that any attempts to
enforce its patents would be time consuming and costly. Additionally, the
coverage claimed in a patent application can be significantly reduced before the
patent is issued. Defense of any lawsuit or failure to obtain a license to
intellectual property rights of third parties required to commercialize the
Company's potential products would have a material adverse affect on the
Company. In February 1994, the Company entered into an Assignment Agreement with
the Research Development Foundation ("RDF"), pursuant to which RDF assigned to
DepoTech exclusive rights to certain intellectual property relating to the
DepoFoam technology, including corresponding patents and patent applications for
such property. RDF retains the right to terminate the agreement or to convert
the exclusive nature of the rights granted under the agreement into a
nonexclusive license in the event that the Company does not satisfy its
contractual obligations, including making certain minimum annual payments. The
termination of the Assignment Agreement or the conversion of its exclusive
nature to a nonexclusive agreement would have a material adverse effect on the
Company.
POSSIBLE VOLATILITY OF STOCK PRICE.
Factors such as the announcements of technological innovations or new
products by the Company, its competitors and other third parties, the status of
submissions to the FDA or its international equivalent, as well as variations in
the Company's results of operations, market conditions, analysts' estimates and
the stock market in general may cause the market price of the Company's common
stock to fluctuate significantly. Also, future sales of shares by existing
shareholders pursuant to Rule 144 of the Securities Act of 1933, as amended, or
through the exercise of outstanding registration rights, could have a material
adverse effect on the price of the Company's common stock.
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STATEMENTS OF OPERATIONS
DepoTech Corporation
Years Ended December 31,
1997 1996 1995
Revenues:
Contract revenue $ 3,877,701 $ 4,391,024 $ 5,825,784
Licensing/milestone payments 3,000,000 -- --
Marketing rights fee -- -- 1,000,000
- ----------------------------------------------------------------------------------------------------------------
Total revenues 6,877,701 4,391,024 6,825,784
Costs and expenses:
Research and development 20,058,158 17,951,636 12,699,247
General and administration 6,763,775 4,087,436 2,826,538
Repurchasing of marketing rights 2,000,000 -- --
- ----------------------------------------------------------------------------------------------------------------
Total costs and expenses 28,821,933 22,039,072 15,525,785
- ----------------------------------------------------------------------------------------------------------------
Loss from operations (21,944,232) (17,648,048) (8,700,001)
Interest income 1,722,434 1,659,852 1,084,244
Interest expense (1,186,532) (787,409) (404,790)
- ----------------------------------------------------------------------------------------------------------------
Net loss $(21,408,330) $(16,775,605) $ (8,020,547)
==============================================
Basic and diluted net loss per share $ (1.59) $ (1.46) $ (0.94)
==============================================
Shares used in computing basic and diluted net loss per share 13,433,915 11,451,334 8,492,711
==============================================
See accompanying notes.
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Balance Sheets
DepoTech Corporation
December 31,
1997 1996
Assets
Current assets:
Cash and cash equivalents $ 6,194,153 $ 1,966,626
Short-term investments 21,166,402 16,231,471
Accounts receivable from collaborations 1,361,837 614,580
Other current assets 1,141,210 1,160,394
- ---------------------------------------------------------------------------------------------------------------
Total current assets 29,863,602 19,973,071
Property and equipment, net 26,948,328 16,851,574
Restricted cash 216,516 289,023
Deposits and other assets 641,240 494,737
- ---------------------------------------------------------------------------------------------------------------
Total assets $ 57,669,686 $ 37,608,405
=================================
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 2,101,983 $ 1,633,756
Current portion of note payable 2,509,467 493,481
Current portion of obligations under capital leases 2,037,416 2,040,578
Other accrued liabilities 1,148,477 939,331
- ---------------------------------------------------------------------------------------------------------------
Total current liabilities 7,797,343 5,107,146
Deferred rent 2,313,133 1,377,623
Deferred revenue -- 54,839
Note payable, less current portion 6,901,982 1,709,813
Obligations under capital leases, less current portion 2,089,931 4,129,750
Other long-term liabilities 494,506 --
Commitments
Shareholders' equity
Common stock, no par value; 30,000,000 shares authorized; 14,237,216 and
11,543,816 shares issued and outstanding at
December 31, 1997 and 1996, respectively 101,970,346 67,797,617
Deferred compensation related to stock options, net (109,472) (161,960)
Unrealized gain (loss) on short-term investments 15,784 (10,886)
Accumulated deficit (63,803,867) (42,395,537)
- ---------------------------------------------------------------------------------------------------------------
Total shareholders' equity 38,072,791 25,229,234
- ---------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 57,669,686 $ 37,608,405
=================================
See accompanying notes
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Statements of Cash Flows
DepoTech Corporation
Years Ended December 31,
1997 1996 1995
Operating activities
Net loss $(21,408,330) $(16,775,605) $ (8,020,547)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 1,959,210 1,512,151 837,168
Deferred revenue from collaboration -- -- (1,000,000)
Amortization of deferred compensation 52,488 52,488 47,990
Deferred rent 935,510 989,676 275,602
Deferred revenue (54,839) 54,839 --
Forgiveness of employee notes receivable -- 39,283 56,333
Changes in operating assets and liabilities:
Accounts receivable from collaborations (747,257) (214,580) (156,123)
Other current assets 19,184 (632,753) (494,873)
Deposits and other assets (158,947) (196,931) (115,614)
Accounts payable and other accrued liabilities 1,171,878 125,495 1,376,791
- ------------------------------------------------------------------------------------------------------------------
Net cash used by operating activities (18,231,103) (15,045,937) (7,193,273)
Investing activities
Purchases of short-term investments (32,496,584) (17,244,027) (38,410,705)
Proceeds from sale or maturities of short-term investments 27,588,323 33,573,121 11,171,032
Purchases of property and equipment (12,043,520) (6,395,815) (1,419,044)
Restricted cash 72,507 131,837 16,740
- ------------------------------------------------------------------------------------------------------------------
Net cash (used) provided by investing activities (16,879,274) 10,065,116 (28,641,977)
Financing activities
Repayment of capital lease obligations (2,042,980) (1,803,637) (831,262)
Repayment of note payable (834,015) -- --
Proceeds from note payable 8,042,170 2,203,294 --
Proceeds from issuance of common stock, net 34,172,729 663,879 38,163,652
Repayment of facilities payable -- -- (237,569)
Proceeds from bank borrowing -- -- 4,000,000
Repayment of bank borrowing -- -- (4,000,000)
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 39,337,904 1,063,536 37,094,821
- ------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 4,227,527 (3,917,285) 1,259,571
Cash and cash equivalents at the beginning of year 1,966,626 5,883,911 4,624,340
- ------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at the end of year 6,194,153 1,966,626 5,883,911
Short-term investments at the end of year 21,166,402 16,231,471 32,777,623
- ------------------------------------------------------------------------------------------------------------------
Cash, cash equivalents and short-term investments
at the end of year $ 27,360,555 $ 18,198,097 $ 38,661,534
==================================================
Supplemental information
Property and equipment acquired through
capital leases and loans $ -- $ 3,337,461 $ 3,677,018
==================================================
Issuance of common stock in exchange for note payable $ -- $ -- $ 231,938
==================================================
Interest paid $ 1,186,532 $ 787,409 $ 404,790
==================================================
See accompanying notes.
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Statements of Shareholders' Equity
DepoTech Corporation
Convertible
Preferred Stock Common Stock
Shares Amount Shares Amount
Balance at
January 1, 1995 5,982,991 $ 26,560,830 1,531,263 $ 82,486
Issuance of
common stock, net -- -- 78,908 36,306
Exercise of warrants -- -- 242,468 308,654
Deferred compensation
related to issuance of
stock options -- -- -- 262,438
Amortization of
deferred compensation -- -- -- --
Accretion on convertible
preferred stock -- 1,832,394 -- --
Unrealized gain on
investments -- -- -- --
Issuance of common
stock upon initial
public offering, net -- -- 3,450,000 38,050,630
Conversion of
convertible preferred
stock upon initial
public offering (5,982,991) (28,393,224) 5,982,991 28,393,224
Net loss -- -- -- --
------------------------------------------------------------
Balance at
December 31, 1995 -- -- 11,285,630 67,133,738
Issuance of
common stock, net -- -- 258,186 663,879
Amortization of deferred
compensation -- -- -- --
Unrealized loss on
investments -- -- -- --
Net loss -- -- -- --
------------------------------------------------------------
Balance at
December 31, 1996 -- -- 11,543,816 67,797,617
Issuance of
common stock, net -- -- 2,693,400 34,172,729
Amortization of deferred
compensation -- -- -- --
Unrealized gain on
investments -- -- -- --
Net loss -- -- -- --
------------------------------------------------------------
Balance at
December 31, 1997 -- $ -- 14,237,216 $101,970,346
============================================================
Defered Unrealized
Compensation Gain Total
Related (Loss) on Accumulated Shareholders'
to Stock Options Investments Deficit Equity
Balance at
January 1, 1995 $ -- $ 26,928 $(15,766,991) $ 10,903,253
Issuance of
common stock, net -- -- -- 36,306
Exercise of warrants -- -- -- 308,654
Deferred compensation
related to issuance of
stock options (262,438) -- -- --
Amortization of
deferred compensation 47,990 -- -- 47,990
Accretion on convertible
preferred stock -- -- (1,832,394) --
Unrealized gain on
investments -- 179,244 -- 179,244
Issuance of common
stock upon initial
public offering, net -- -- -- 38,050,630
Conversion of
convertible preferred
stock upon initial
public offering -- -- -- --
Net loss -- -- (8,020,547) (8,020,547)
---------------------------------------------------------------
Balance at
December 31, 1995 (214,448) 206,172 (25,619,932) 41,505,530
Issuance of
common stock, net -- -- -- 663,879
Amortization of deferred
compensation 52,488 -- -- 52,488
Unrealized loss on
investments -- (217,058) -- (217,058)
Net loss -- -- (16,775,605) (16,775,605)
---------------------------------------------------------------
Balance at
December 31, 1996 (161,960) (10,886) (42,395,537) 25,229,234
Issuance of
common stock, net -- -- -- 34,172,729
Amortization of deferred
compensation 52,488 -- -- 52,488
Unrealized gain on
investments -- 26,670 -- 26,670
Net loss -- -- (21,408,330) (21,408,330)
---------------------------------------------------------------
Balance at
December 31, 1997 $ (109,472) $ 15,784 $(63,803,867) $ 38,072,791
===============================================================
See accompanying notes.
17
10
NOTES TO FINANCIAL STATEMENTS
DepoTech Corporation - December 31, 1997
Note 1 - Summary of Significant Accounting Policies
ORGANIZATION AND BUSINESS ACTIVITIES
DepoTech Corporation (the "Company") was incorporated in California on
October 30, 1989. The Company is a drug delivery company engaged in the
development and manufacture of sustained-release therapeutic products based on
its DepoFoam drug delivery technology.
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company invests its excess cash in deposit accounts, money market
accounts, commercial paper and U.S. Government securities. The Company has
established guidelines relative to diversification and maturities that maintain
safety and an adequate level of liquidity. These guidelines are periodically
reviewed and modified to take advantage of trends in yields and interest rates.
The Company considers all highly liquid investments with a maturity of
three months or less from the date of purchase that are readily convertible into
cash to be cash equivalents. Short-term investments are classified as
available-for-sale, and are carried at market value, in accordance with
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." The unrealized gain or loss on such
investments is reported as a separate component of shareholders' equity.
Realized gains and losses are included in interest income. The cost of
securities is based on the specific identification method.
PROPERTY AND EQUIPMENT
Property and equipment consist primarily of manufacturing, laboratory and
office equipment and leasehold improvements and are stated at cost. Property and
equipment under capital leases are recorded at the present value of the minimum
lease payments. Depreciation and amortization are calculated using the
straight-line method over the shorter of the estimated useful life of the assets
(ranging from three to fifteen years) or the lease term.
RESTRICTED CASH
Restricted cash consists of certificates of deposit maintained as
collateral for letters of credit securing certain lease agreements.
PATENT COSTS
Included in deposits and other assets are patent and trademark filing costs
totaling approximately $641,000 (net of accumulated amortization of
approximately $55,000) and $453,000 (net of accumulated amortization of
approximately $43,000) at December 31, 1997 and 1996, respectively, which are
amortized over the estimated economic life of the patents or trademarks.
DEFERRED RENT
Rent expense is recognized on a straight-line basis over the term of the
lease. Accordingly, rent expense incurred in excess of rent paid is accrued and
recorded as deferred rent in the accompanying balance sheets.
CONTRACT REVENUES AND EXPENSES
Contract revenue is recorded as earned based on the performance
requirements of the contract. Research and development costs are expensed as
incurred.
STOCK OPTIONS
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for its employee stock options because the
alternative fair value accounting provided for under Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS
123") requires the use of option valuation models that were not developed for
use in valuing employee stock options. Under APB 25, when the exercise price of
the Company's employee stock options equals or exceeds the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
ACCOUNTING STANDARD ON IMPAIRMENT OF LONG-LIVED ASSETS
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121 "Accounting for Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of" ("FAS 121"), regarding the impairment
of long-lived assets, identifiable intangibles and goodwill related to those
assets. The adoption of FAS 121 had no effect on the accompanying financial
statements.
18
11
USE OF ESTIMATES IN THE
PREPARATION OF FINANCIAL STATEMENTS
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 and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NET LOSS PER SHARE
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" ("FAS 128"), which replaced
the calculation of primary and fully diluted net loss per share with basic and
diluted net loss per share. Basic net loss per share is calculated using the
weighted average number of common shares outstanding. Diluted net loss per share
is calculated using the weighted average number of common shares outstanding
plus the dilutive effect of options and warrants, if any, using the treasury
stock method. All net loss per share amounts for all periods have been
presented, and where appropriate restated, to conform to the FAS 128
requirements and the recently effective Securities and Exchange Commission Staff
Accounting Bulletin No. 98.
Net loss per share information as presented on the Statements of Operations
has been presented as if the convertible preferred stock that converted upon the
Company's initial public offering had been converted from its original date of
issuance. Basic net loss per share, without an adjustment for the assumed
conversion of the convertible preferred stock, would have been $3.21 in 1995.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS
130"). This standard is effective for fiscal years beginning after December 15,
1997. FAS 130 requires that all components of comprehensive income, including
net income, be reported in the financial statements in the period in which they
are recognized. Comprehensive income is defined as the change in equity during a
period from transactions and other events and circumstances from non-owner
sources. Net income and other comprehensive income, including unrealized gains
and losses on investments, shall be reported, net of their related tax effect,
to arrive at comprehensive income. The Company intends to adopt FAS 130 in 1998.
Operating results of prior periods will not be restated since the Company's only
component of comprehensive income other than net income has been unrealized
gains and losses on investments, which were not significant.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
current year presentation.
Note 2 - Chiron Collaboration
In March 1994, the Company entered into a collaboration agreement ("the
Collaboration Agreement") with Chiron Corporation ("Chiron") to develop and
commercialize sustained-release formulations of DepoCyt and certain Chiron
proprietary products using the Company's drug delivery technology. Under the
agreement, Chiron purchased 400,000 shares of the Company's Series C preferred
stock for $6.25 per share, or an aggregate consideration of $2.5 million, and a
warrant to purchase 365,000 shares of Series C preferred stock at an exercise
price of $6.25 per share for $1.0 million. The warrant was terminated and
converted into a marketing rights fee to the Company upon the achievement of a
development milestone in January 1995.
In June 1997, DepoTech reacquired rights to DepoCyt in Canada and Europe
from Chiron for aggregate cash payments of up to $13.7 million. Chiron will
retain exclusive marketing rights to DepoCyt in the United States. An initial
$2.0 million cash payment was paid by DepoTech to Chiron and expensed in 1997.
If, prior to December 31, 1998, the U.S. Food and Drug Administration ("FDA")
issues a letter or other notification to DepoTech indicating that DepoCyt is
approvable or approved, the remaining balance of $11.7 million shall be payable
no later than December 31, 1998. If no FDA notification is received prior to
December 31, 1998, the remaining amount shall be payable no later than six
months from the earlier of U.S. or European Union regulatory notification that
the application to market or sell DepoCyt is approvable or approved. If all
applications for regulatory approval to sell DepoCyt in the U.S. and European
Union are permanently withdrawn, DepoTech shall be relieved of any obligation to
pay the remaining $11.7 million. Therefore, such amount will be recorded upon
the receipt of the required notification.
19
12
Reimbursable clinical and manufacturing scale up costs for DepoCyt incurred
by the Company totaled $1,662,000, $3,194,000 and $2,542,000 for the years ended
December 31, 1997, 1996, and 1995, respectively. The cumulative amount due
through December 31, 1994 became billable and was recognized as contract revenue
upon the achievement of a development milestone in January 1995. In April 1997,
the Company earned $1.0 million upon completing the filing of the New Drug
Application for DepoCyt.
The Collaboration Agreement also provides for the joint development of
DepoFoam formulations of certain compounds proprietary to Chiron ("Chiron
Products"). Chiron must fund one feasibility program for a Chiron Product per
year or lose its option to develop DepoFoam formulations of additional Chiron
proprietary compounds. Through 1997, the Company had completed feasibility
studies on three Chiron Products. A fourth feasibility study is on-going. The
agreement provides that Chiron will pay the Company for its feasibility efforts,
and that Chiron will be responsible for all development costs thereafter. The
agreement also provides for Chiron to make payments to the Company upon
achievement of certain development milestones for the Chiron Products. Chiron
will have exclusive, worldwide distribution rights to all Chiron Products and
will manufacture the bulk unencapsulated drug. The Company will then encapsulate
the bulk drug in DepoFoam particles creating the Chiron Products, and Chiron
will market, sell and distribute the Chiron Products. Chiron will compensate the
Company based on its manufacturing costs, including a manufacturing profit, and
a percentage of Chiron's net sales of the Chiron Products.
Both the Company and Chiron have the ability to terminate a portion or all
of the collaboration at certain intervals and with advance notice. In addition,
Chiron has the ability to terminate the development of a Chiron Product with a
limited amount of advance notice.
Note 3 - Pharmacia & Upjohn Agreement
In July 1997, DepoTech entered into a Marketing and Distribution Agreement
with Pharmacia & Upjohn S.p.A ("P&U"), an affiliate of Pharmacia & Upjohn Inc.,
for rights to market and sell DepoCyt in countries outside the United States.
P&U will generally be responsible for submitting regulatory filings, labeling,
packaging, distribution, marketing and sales of DepoCyt in this territory. The
Company will manufacture DepoCyt and receive a share of the net sales of DepoCyt
sold by P&U. The Company received a cash payment of $2.0 million upon execution
of the agreement and may receive additional payments of up to $17.0 million upon
achievement of certain regulatory milestones. The agreement also provides for
reimbursement of certain clinical trial expenses and regulatory fees incurred by
the Company. Cumulative reimbursable costs for clinical trial costs incurred by
the Company under this agreement totaled $1,221,000 as of December 31, 1997.
Note 4 - Balance Sheet Details
SHORT-TERM INVESTMENTS
The following is a summary of available-for-sale short-term investments:
================================================================================
Gross Gross
Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
================================================================================
December 31, 1997
U.S. government
securities $ 13,640,812 $ 22,442 $ -- $ 13,663,254
Corporate
obligations 7,509,806 -- (6,658) 7,503,148
- --------------------------------------------------------------------------------
$ 21,150,618 $ 22,442 $ (6,658) $ 21,166,402
================================================================================
December 31, 1996
U.S. government
securities $ 12,208,677 $ -- $ (13,986) $ 12,194,691
Certificates
of deposit 498,940 1,020 -- 499,960
Corporate
obligations 3,534,740 2,080 -- 3,536,820
- --------------------------------------------------------------------------------
$ 16,242,357 $ 3,100 $ (13,986) $ 16,231,471
================================================================================
The amortized cost and estimated fair value of short-term investments at
December 31, 1997, by contractual maturity, are shown below:
================================================================================
Estimated
Cost Fair Value
================================================================================
Due in one year or less $13,738,024 $13,759,317
Due after one year through three years 7,412,594 7,407,085
- --------------------------------------------------------------------------------
$21,150,618 $21,166,402
================================================================================
20
13
PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
================================================================================
December 31,
1997 1996
================================================================================
Manufacturing, laboratory and
office equipment $ 15,630,844 $ 12,254,274
Leasehold improvements 4,085,399 2,041,001
Leasehold improvements and
manufacturing equipment under
construction 12,167,119 5,552,015
- --------------------------------------------------------------------------------
31,883,362 19,847,290
Less accumulated depreciation
and amortization (4,935,034) (2,995,716)
- --------------------------------------------------------------------------------
$ 26,948,328 $ 16,851,574
================================================================================
OTHER ACCRUED LIABILITIES
Included in other accrued liabilities as of December 31, 1997 and 1996 are
$783,723 and $774,754, respectively, of employee compensation related expenses.
Note 5 - Commitments
LEASE OBLIGATIONS
The Company leases its facilities and certain equipment under operating and
capital leases. Provisions of the facilities leases provide for abatement of
rent during certain periods and escalating rent payments during the lease terms
which extend to dates through August 1, 2015. Included in restricted cash and
deposits and other assets are $228,000 and $301,000 related to these agreements
at December 31, 1997 and 1996, respectively. Annual future minimum lease
payments as of December 31, 1997 are as follows:
================================================================================
Operating Capital
Leases Leases
================================================================================
1998 $ 3,297,221 $ 2,407,967
1999 3,378,035 1,627,461
2000 3,423,641 631,866
2001 3,551,623 --
2002 3,684,819 --
Thereafter 48,633,338 --
===========
Total $65,968,677 4,667,294
- --------------------------------------------------------------------------------
Less amount representing interest (539,947)
- --------------------------------------------------------------------------------
Present value of net minimum payments 4,127,347
Less current portion (2,037,416)
- --------------------------------------------------------------------------------
Amounts due after one year $ 2,089,931
================================================================================
The Company subleased certain of its existing laboratory and administrative
facilities. Rental income from the sublease agreement over the next three years
will range from $223,000 to $290,000 per year.
Assets acquired under capital leases consist of manufacturing, laboratory
and office equipment and leasehold improvements with an aggregate cost of
approximately $8.5 million and $9.1 million at December 31, 1997 and 1996,
respectively. Accumulated amortization of assets acquired under these
arrangements is included in total depreciation and amortization.
Rent expense was approximately $4,074,000, $3,895,000 and $1,467,000 during
the years ended December 31, 1997, 1996 and 1995, respectively.
NOTE PAYABLE
During June 1996, the Company established a credit line with a bank for
borrowing up to $9.0 million to finance certain capital equipment and leasehold
improvement expenditures. In October 1997, the Company expanded this credit line
by $4.5 million. Borrowings under the credit line, which total $9,411,449 and
$2,203,294 at December 31, 1997 and 1996, respectively, bear interest at a
floating rate equal to prime plus 0.5% (8.5% and 8.75% at December 31, 1997 and
December 31, 1996, respectively) on the outstanding balance. The credit line
expires on March 31, 2002 and all borrowings are secured by the capital
equipment financed. The terms of the Company's loan agreement contains a
covenant requiring the Company to maintain minimum liquidity equal to 1.67 times
the outstanding loan balance, except for during the draw down period, at which
time the Company shall maintain 1.67 times the commitment amount. At December
31, 1997, the Company was in compliance with the terms of the covenant. At
December 31, 1997, approximately $3,254,000 remains available for future
equipment acquisitions and leasehold improvements.
Annual future principal payments as of December 31, 1997 are as follows:
================================================================================
1998 $2,509,467
1999 2,561,366
2000 2,561,366
2001 1,727,351
2002 51,899
- --------------------------------------------------------------------------------
Total $9,411,449
================================================================================
21
14
Note 6 - Shareholders' Equity
PRIVATE PLACEMENTS
In January 1997, the Company completed the private placement of 1.5 million
newly issued shares of DepoTech common stock raising net proceeds of $18.9
million. In September 1997, the Company raised net proceeds of $14.6 million
through the private placement of 1.0 million newly issued shares of DepoTech
common stock.
STOCK PURCHASE WARRANTS
In connection with various stock purchase or lease financing transactions,
the Company has issued warrants to purchase shares of common stock of which
42,354, 22,400 and 453,335 shares remain outstanding as of December 31, 1997 at
prices of $2.75, $6.25 and $7.00 per share, respectively. The warrants are
generally exercisable through 2001.
DEFERRED COMPENSATION
Pursuant to certain provisions of the SEC regulations, the Company recorded
and is amortizing over the related vesting periods deferred compensation
representing the difference between the exercise price of stock options granted
and the deemed fair value (for accounting purposes) of the Company's common
stock at the date of grant. Stock options generally vest over four to five
years. Shares included in the computation of deferred compensation include
option grants to employees and officers of the Company from July 1994 through
June 1995.
STOCK OPTION PLANS
The Company's 1995 Stock Option/Stock Issuance Plan has authorized the
grant of options to employees, directors and consultants of the Company for up
to 2,750,000 shares of the Company's common stock. No options granted under the
Plan have a term in excess of ten years.
In October 1997, the Company authorized the 1997 Supplemental Stock Option
Plan. The Plan has authorized the grant of options to employees (other than
directors and officers) and consultants of the Company of up to 141,000 shares
of the Company's common stock. The options granted under the Plan are
non-qualified and no options may have a term in excess of ten years.
Pro forma information regarding net loss and net loss per share is required
by FAS 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value of these options was estimated at the date of grant using the
Black-Scholes option valuation model with the following weighted average
assumptions for 1997, 1996 and 1995, respectively: risk-free interest rates of
6.3%, 6.1% and 6.5%; dividend yields of 0%; volatility factors of the expected
market price of the Company's common stock of 56%, 58% and 73%; and a
weighted-average life of the option of four years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma net loss for the years ended December 31, 1997, 1996 and 1995 reflects
increases of approximately $807,000, $307,000 and $55,000, respectively. The pro
forma net loss per share (basic and diluted) for the years ended December 31,
1997, 1996 and 1995 was $1.65, $1.49 and $0.93 per share, respectively.
The results above are not likely to be representative of the effects of
applying FAS 123 on reported net income or loss for future years as these
amounts reflect the expense for less then four years vesting.
A summary of the Company's stock option activity, and related information
for the years ended December 31 follows:
=======================================================================================================================
1997 1996 1995
=======================================================================================================================
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
=======================================================================================================================
Outstanding-
beginning
of year 1,295,863 $ 8.03 1,102,439 $ 2.02 917,314 $ .68
Granted 943,266 $14.65 467,744 $19.77 258,300 $6.54
Exercised (79,245) $15.11 (209,848) $ .68 (48,908) $ .75
Forfeited (57,356) $12.18 (64,472) $14.46 (24,267) $1.84
- -----------------------------------------------------------------------------------------------------------------------
Outstanding-
end of year 2,102,528 $11.22 1,295,863 $ 8.03 1,102,439 $2.02
=======================================================================================================================
Exercisable
at end of year 897,219 547,407 415,790
=======================================================================================================================
Weighted average
fair value of options
granted during year $7.60 $ 9.69 $2.50
=======================================================================================================================
15
The following table summarizes information about stock options outstanding
at December 31, 1997.
==========================================================================================
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Options Outstanding Life Price Exercisable Price
==========================================================================================
$0.10 to $4.00 655,889 6.0 years $ 1.16 530,134 $ .94
$7.00 to $13.625 247,975 8.9 years $11.72 61,490 $10.08
$14.00 to $19.625 1,135,714 9.1 years $16.20 278,219 $17.38
$23.50 to $25.125 62,950 8.3 years $24.34 27,376 $24.20
- ------------------------------------------------------------------------------------------
2,102,528 897,219
==========================================================================================
The weighted average remaining contractual life of outstanding options is
8.1 years. At December 31, 1997, options for 227,236 shares were available for
future grant under the 1995 and 1997 stock option plans.
EMPLOYEE STOCK PURCHASE PLAN
In June 1995, the Company adopted an Employee Stock Purchase Plan ("the
ESPP") whereby employees, at their option, can purchase shares of Company common
stock through payroll deductions at the lower of 85% of fair market value on the
ESPP offering date or on certain other predetermined dates. The Company has
reserved 250,000 shares of common stock for issuance under the ESPP, of which
132,731 shares have been issued as of December 31, 1997.
Note 7 - Income Taxes
At December 31, 1997, the Company had federal and California tax net
operating loss carryforwards of approximately $59,117,000 and $31,804,000,
respectively. The difference between the federal and California tax loss
carryforwards is primarily attributable to the capitalization of research and
development expenses for California franchise tax purposes and the fifty-percent
limitation on California loss carryforwards prior to 1997.
The federal tax loss carryforward will begin expiring in 2005 unless
previously utilized, and the California tax loss carryforward will begin to
expire in 1998. The Company also has federal and California research and
development tax credit carryforwards totaling $1,919,000 and $998,000,
respectively, which begins expiring in 2005 unless previously utilized.
Pursuant to Internal Revenue Code Sections 382 and 383, annual use of the
Company's net operating loss and credit carryforwards may be limited if a
cumulative change in ownership of more than 50% occurs within any three-year
period.
Significant components of the Company's deferred tax assets and liabilities
are shown below. A valuation allowance of $27,251,000, of which $9,629,000 is
related to 1997, has been recognized to offset the deferred tax assets as
realization of such assets is uncertain.
================================================================================
December 31,
1997 1996
================================================================================
Deferred tax assets:
Net operating loss carryforwards $ 22,599,000 $ 14,416,000
Research and development
credit carryforwards 2,567,000 1,448,000
Capitalized research expenses 1,451,000 1,713,000
Other, net 1,920,000 558,000
- --------------------------------------------------------------------------------
Net deferred tax assets 28,537,000 18,135,000
Valuation allowance for
deferred tax assets (27,251,000) (17,622,000)
- --------------------------------------------------------------------------------
Total deferred tax assests 1,286,000 513,000
Deferred tax liabilities:
Depreciation (1,286,000) (513,000)
- --------------------------------------------------------------------------------
Net deferred tax assets $ -- $ --
================================================================================
Approximately $1,059,000 of the valuation allowance for deferred tax assets
relates to stock option deductions which, when recognized, will be allocated
directly to common stock.
Note 8 - 401(k) Retirement Savings Plan
In January 1993, the Company adopted a 401(k) Retirement Savings Plan (the
"Plan") covering substantially all employees who have completed certain service
requirements. Participants may contribute a portion of their compensation to
the Plan through payroll deductions. Company matching contributions, if any, are
determined by the Company at its sole discretion. There have been no Company
contributions under the Plan through December 31, 1997
22
16
SELECTED FINANCIAL DATA
DepoTech Corporation
Years Ended December 31,
(dollars, except share amounts)
Statement of Operations Data: 1997 1996 1995 1994 1993
Total revenues $ 6,877,701 $ 4,391,024 $ 6,825,784 $ 582,120 $ 69,500
Total expenses 28,821,933 22,039,072 15,525,785 9,307,676 4,058,419
Net loss (21,408,330) (16,775,605) (8,020,547) (8,561,487) (3,896,906)
Basic and diluted
net loss per share (1.59) (1.46) (0.94) (1.33) (0.84)
Shares used in computing
basic and diluted net
loss per share 13,433,915 11,451,334 8,492,711 6,441,003 4,657,157
Balance Sheet Data:
Cash, cash equivalents and
short-term investments $ 27,360,555 $ 18,198,097 $ 38,661,534 $ 9,983,046 $ 7,519,096
Total assets 57,669,686 37,608,405 48,977,573 15,346,654 10,107,087
Long-term liabilities 11,799,552 7,272,025 3,218,957 2,618,664 408,538
Shareholders' equity 38,072,791 25,229,234 41,505,530 10,903,253 8,702,521
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
DepoTech Corporation
We have audited the accompanying balance sheets of DepoTech Corporation
as of December 31, 1997 and 1996, and the related statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of DepoTech Corporation
at December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG, LLP
San Diego, California
February 6, 1998
23
17
CORPORATE INFORMATION
DepoTech Corporation
Board of Directors
CHAIRMAN
Fred A. Middleton
General Partner, Sanderling Ventures
Chief Executive Officer, DepoTech Corporation
DIRECTORS
Roger C. Davisson
General Partner, Brentwood Associates
George W. Dunbar, Jr.
President and Chief Executive Officer, Metra Biosystems, Inc.
Stephen B. Howell, M.D.
Medical Director, DepoTech Corporation
Professor of Medicine, University of California San Diego
John P. Longenecker, Ph.D.
President and Chief Operating Officer, DepoTech Corporation
Peter Preuss
President, Preuss Foundation
Pieter J. Strijkert, Ph.D.
Chairman, IntroGene BV
Officers / Management
Fred A. Middleton
Chief Executive Officer
John P. Longenecker, Ph.D.
President and Chief Operating Officer
David B. Thomas
Senior Vice President,
Quality Assurance and Regulatory Affairs
Williams S. Ettouati, D.Pharm.
Vice President, Marketing and Business Development
Dana S. McGowan
Vice President, Finance
Chief Financial Officer, Treasurer and Assistant Secretary
Sheldon A. Schaffer, Ph.D.
Vice President, Pharmaceutical Development
Faye H. Russell, Esq.
Secretary
Thomas E. Swedberg
Senior Director, Human Resources
CORPORATE HEADQUARTERS
10450 Science Center Drive, San Diego, CA 92121
619.625.2424
www.depotech.com
SHAREHOLDER INQUIRIES
General information regarding the Company can be obtained by contacting Investor
Relations at DepoTech. Inquiries relating to lost certificates should be
directed to the Transfer Agent.
SEC FORM 10-K
A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION ON FORM 10-K IS AVAILABLE WITHOUT CHARGE BY CONTACTING
INVESTOR RELATIONS AT DEPOTECH CORPORATION.
TRANSFER AGENT AND REGISTRAR
ChaseMellon Shareholder Services, L.L.C.
Overpeck Centre, 85 Challenger Road
Ridge?eld Park, NJ 07660
800.522.6645
INDEPENDENT AUDITORS
Ernst & Young LLP, San Diego, California
CORPORATE COUNSEL
Brobeck Phleger & Harrison LLP, San Diego, California
ANNUAL MEETING OF SHAREHOLDERS
The annual meeting of shareholders will be held at 9:00 am PST on Wednesday,
May 13, 1998, at DepoTech Corporation.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is listed on the Nasdaq National Market under the
symbol DEPO. High and low sales prices are set forth below for the periods
indicated:
High Low
1996
1st Quarter $25 1/2 $18
2nd Quarter $29 1/2 $22 1/2
3rd Quarter $25 1/2 $14 1/2
4th Quarter $17 $22 1/4
1997
1st Quarter $20 1/8 $15 1/4
2nd Quarter $17 1/4 $12 1/4
3rd Quarter $15 1/4 $11 3/4
4th Quarter $15 3/8 $ 3 11/32
At March 20, 1998, there were approximately 3,300 shareholders of record.
The Company has never declared or paid dividends on its Common Stock.
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