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United States Securities and Exchange Commission
WASHINGTON DC 20549
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Form 10-QSB
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Quarterly Report under Section 13 or 15d of the Securities Exchange Act of 1934
For the Quarterly Period Ended Commission File No. 0-27282
September 30, 1998
Atlantic Pharmaceuticals, Inc.
1017 Main Campus Drive, Suite 3900
Raleigh, North Carolina, 27606
Telephone (919)513-7020
Incorporated in Delaware IRS ID # 36-3898269
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the last 90 days:
Yes [X] No [ ]
4,466,829 shares of common stock, $.001 par value per share, were
outstanding on September 30, 1998
Transitional Small Business Disclousre Format Yes [ ] No [X]
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Atlantic Pharmaceuticals , Inc. and Subsidiaries
Part One - Financial Information Page
Item 1 - Financial Statements
Consolidated Balance Sheets
as of September 30, 1998(unaudited) and December 31, 1997. 1
Consolidated Statements of Operations (unaudited)
for the three months ended September 30, 1998 and 1997
for the nine months ended September 30, 1998 and 1997
and the period from July 13, 1993(inception) to September 30, 1998. 2
Consolidated Statements of Cash Flows (unaudited)
for the nine months ended September 30, 1998 and 1997
and the period from July 13, 1993(inception) to September 30, 1998. 3
Notes to Consolidated Financial Statements (unaudited) 4
Item 2 - Management's Discussion and Analysis
of Financial Condition and Results of Operations 6
Part Two - Other Information
Item 4- Submission of Matters to a Vote of Security Holders 21
Item 6 - Exhibits and Report on Form 8-K 23
PART ONE- FINANCIAL INFORMATION
ITEM 1- FINANCIAL STATEMENTS
ATLANTIC PHARMACEUTICALS, INC. AND SUBSIDIARIES
(a development stage company)
Consolidated Balance Sheets
September 30, 1998 (unaudited) and December 31, 1997
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Assets 9/30/98 12/31/97
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(unaudited) (audited)
Current assets:
Cash and cash equivalents $ 7,025,389 8,543,495
Amounts due from Bausch & Lomb 293,480 --
Prepaid expenses 52,365 1,250
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Total current assets 7,371,234 8,544,745
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Furniture and equipment, net of accumulated depreciation
of $273,764 and $150,086 at September 30,1998 (unaudited)
and December 31, 1997, respectively 305,045 250,961
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7,676,279 8,795,706
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Liabilities and Stockholders' Equity
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Current liabilities:
Accrued expenses 576,648 392,566
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Total current liabilities 576,648 392,566
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Stockholders' equity
Preferred stock, $.001 par value. Authorized 50,000,000
shares; 1,375,000 designated as Series A convertible
preferred stock Series A convertible preferred stock, $.001
par value; authorized 1,375,000 shares, 642,956 and
1,214,723 shares issued and outstanding at September 30,
1998 (unaudited) and December 31, 1997, respectively 643 1,215
Series A convertible preferred stock warrants,117,195 and
123,720 issued and outstanding at September 30, 1998
(unaudited)and December 31, 1997, respectively 540,073 570,143
Common stock $.001 par value. Authorized 80,000,000 shares;
4,466,829 and 3,064,571 shares issued and outstanding at
September 30, 1998 (unaudited) and December 31,1997,
respectively 4,467 3,065
Common stock subscribed. 182 shares at September 30,1998
(unaudited) and December 31,1997 -- --
Additional paid-in capital 21,607,770 21,493,715
Deficit accumulated during development stage (15,052,780) (13,590,056)
Deferred compensation -- (74,400)
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7,100,173 8,403,682
Less common stock subscriptions receivable (218) (218)
Less treasury stock, at cost (324) (324)
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Total stockholders' equity 7,099,631 8,403,140
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$ 7,676,279 $ 8,795,706
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See accompanying notes to consolidated financial statements.
Page 1
ATLANTIC PHARMACEUTICALS, INC. AND SUBSIDIARIES
(a development stage company)
Consolidated Statements of Operations (Unaudited)
Three months ended September 30, 1998 and 1997, the nine months
ended September 30, 1998 and 1997 and the period from July 13,
1993 (inception) to September 30, 1998.
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Three Months Ended Nine Months Ended
----------------------------- ----------------------------- Cumulative
September, 30 September, 30 September, 30 September, 30 from July 13,
1998 1997 1998 1997 1993 (inception) to
September 30, 1998
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Revenue:
Grant Revenue $ -- -- -- 2,288 99,932
License Rvenue 2,500,000 -- 2,500,000
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Total Revenue 2,500,000 2,288 2,599,932
Costs and expenses:
Research and development $ 476,744 507,194 1,885,001 1,795,375 6,131,920
License fees -- -- -- -- 173,500
General and administrative 842,605 555,121 2,439,311 2,030,880 11,497,806
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Total operating expenses 1,319,349 1,062,315 4,324,312 3,826,255 17,803,226
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Other expense (income):
Interest income (106,304) (80,483) (361,588) (125,556) (776,089)
Interest expense -- -- -- -- 625,575
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Total other expense (income) (106,304) (80,483) (361,588) (125,556) (150,514)
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Net Income (Loss) $(1,213,045) (981,832) (1,462,724) (3,698,411) (15,052,780)
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Imputed Preferred Stock dividend $ (106,009) (1,775,479) (1,628,431) (1,896,593) (5,225,547)
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Net Income(Loss) to common stockholders (1,319,054) (2,757,311) (3,091,155) (5,595,004) (20,278,327)
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Basic net income (loss) per common share $ (0.37) (0.91) (0.91) (1.89) (13.28)
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Shares used in calculation
of basic net Income(loss) per common share 3,608,211 3,016,920 3,408,417 2,965,887 1,527,431
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See accompanying notes to consolidated financial statements.
Page 2
ATLANTIC PHARMACEUTICALS, INC. AND SUBSIDIARIES
(a development stage company)
Consolidated Statements of Cash Flows (Unaudited)
Nine months ended September 30, 1998 and 1997 and the period from
July 13, 1993 (inception) to September 30, 1998
Cumulative from
July 13, 1993
Nine Months Ended (inception) to
September 30, September 30, September 30,
1998 1997 1998
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Cash flows from operating activities:
Net loss $(1,462,724) (3,698,411) (15,052,780)
Adjustments to reconcile net loss to net
cash used in operating activities:
Compensation Expense relating to
Warrants 129,036 143,922 427,238
Stock Options -- -- 134,382
Channel Merger -- 657,900 657,900
Discount on notes payable-bridge financing -- -- 300,000
Depreciation 123,678 47,390 273,764
Changes in assets and liabilities:
(Increase) decrease in prepaid expenses (51,115) (3,366) (52,365)
(Increase) decrease in accounts receivable (293,480) -- (293,480)
Increase (decrease) in accrued expenses 184,082 1,102 576,648
Increase (decrease) in accrued interest -- -- 172,305
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Net cash used in operating activities (1,370,523) (2,851,463) (12,856,388)
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Net cash used in investing activities
Acquisition of furniture and equipment (177,762) (181,675) (578,810)
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Cash flows from financing activities:
Proceeds from issuance of demand notes payable -- -- 2,395,000
Repayment of demand notes payable -- -- (125,000)
Proceeds from the issuance of notes payable -
bridge financing -- -- 1,200,000
Proceeds of issuance of warrants -- -- 300,000
Repayment of notes payable - bridge financing -- -- (1,500,000)
Repurchase of common stock -- -- (324)
Proceeds from the issuance of common stock 30,179 18 7,577,727
Proceeds from the issuance of Preferred Stock -- 10,703,082 10,613,184
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Net cash provided by (used in) financing activities 30,179 10,703,100 20,460,587
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Net increase (decrease) in cash and cash equivalents (1,518,106) 7,669,962 7,025,389
Cash and cash equivalents at beginning of period 8,543,495 2,269,532 --
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Cash and cash equivalents at end of period $ 7,025,389 9,939,494 7,025,389
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Supplemental disclosure of noncash financing activities:
Issuance of common stock in exchange for
common stock subscriptions $ -- -- 7,027
Conversion of demand notes payable and the
related accrued interest to common stock -- -- 2,442,304
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See accompanying notes to consolidated financial statements.
Page 3
Atlantic Pharmaceuticals, Inc. and Subsidiaries
(A development stage company)
Notes to Consolidated Financial Statements (Unaudited)
September 30, 1998 and 1997
(1) BASIS OF PRESENTATION
The accompanying financial statements have been prepared in accordance with
Generally Accepted Accounting Principles for interim financial information.
Accordingly, they do not include all information and footnotes required by
Generally Accepted Accounting Principles for complete financial statements. In
the opinion of management, the accompanying financial statements reflect all
adjustments, consisting of only normal recurring adjustments, considered
necessary for fair presentation. Operating results are not necessarily
indicative of results that may be expected for the year ending December 31,
1998. These financial statements should be read in conjunction with the
Company's Annual Report on Form 10 - KSB for the year ended December 31, 1997.
(2) STOCK OPTIONS
The 1995 Stock Option Plan, as amended, provides for the granting of equity
incentives of up to 1,009,783 shares of the Company's common stock, par value
$0.001 per share (the "Common Stock"), to officers, directors, employees and
consultants of the Company.
On August 7, 1998 the Company granted 175,000 options to various employees
and directors of the Company at an exercise price of $3.25 a share which was the
fair market value at the date of grant. These options will vest over a
three-year period.
Jon Douglas Lindjord, formerly the Chief Executive Officer and President as
well as a member of the Board of Directors of the Company, as of September 30,
1998 had exercised during the third quarter of fiscal 1998 33,000 options at an
exercise price of $ 0.75 a share.
As of September 30, 1998, options to purchase 94,428 shares of the
Company's Common Stock were available for future issuance under the Company's
1995 Stock Option Plan.
(3) COMPENSATION EXPENSE
In connection with the resignation of the Chief Executive Officer and
President, Jon Douglas Lindjord, the Company recognized an expense of $211,250
in the third quarter for severance pay in the form of salary continuation for
the next nine months.
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the results of operations and financial
condition should be read in conjunction with the Company's Annual Report on Form
10 - KSB for the year ended December 31, 1997.
Results of Operations for the quarter ended September 30, 1998
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For the third quarter ended September 30, 1998, research and development
expense was $476,744 which represents a decrease of 6% over the similar period
in 1997, primarily due to the fact that Bausch & Lomb Surgical ("Bausch & Lomb")
is paying for the Catarex technology development.
For the third quarter of 1998, general and administrative expense was
$842,605 which represents an increase of 52% over the similar period of 1997,
primarily as a result of an increase in compensation and consulting expenses, as
well as severance expense that is described in note # 3.
For the third quarter of 1998, interest income was $106,304, compared to
$80,483 in the third quarter of 1997. The increase is due to the continued
availability of cash from the May and August 1997 private placement of the
Company's Series A Convertible Preferred Stock (the "Series A Preferred") and
from the first milestone payment from Bausch & Lomb.
Results of Operations for the nine-month period ended September 30, 1998
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For the nine-month period ended September 30, 1998, license revenue was
$2,500,000 compared with no license revenue in the similar period of 1997. This
license revenue represents a milestone payment that was received from Bausch &
Lomb in connection with the Development & License Agreement (the "Development &
License Agreement") dated May 14, 1998, between Optex and Bausch & Lomb.
For the nine-month period ended September 30, 1998, research and
development expense was $1,885,001 which represents an increase of 5% over the
similar period in 1997, primarily due to increased spending on the Company's
technologies as money became available from the proceeds of the May and August
1997 private placement of the Company's Series A Preferred.
For the nine-month period ended September 30, 1998, general and
administrative expense was $2,439,311 which represents an increase of 20% over
the similar period of 1997, primarily as a result of increased compensation
expenses, legal expenses and consulting expenses.
For the nine-month period ended September 30, 1998, interest income was
$361,588, compared to $125,556 for the nine-month period ended September 30,
1997. The increase is due to the availability of cash from the May and August
1997 private placement of the Company's Series A Preferred and from the first
milestone payment from Bausch & Lomb.
Liquidity and Capital Resources
- -------------------------------
The Company has incurred an accumulated deficit of $15,052,780 since
inception and expects to continue to incur additional losses through the year
ending December 31, 1998 and the foreseeable future as it continues to develop
its product candidates.
As of September 30, 1998 the Company anticipates that its current resources
will be sufficient to finance the Company's currently anticipated needs for
operating and capital expenditures for at least eighteen months. In addition,
the Company will attempt to generate additional capital through a combination of
collaborative agreements, strategic alliances and public and private equity and
debt financings. However, no assurance can be
5
provided that additional capital will be obtained through these or other
sources. If the Company is not able to obtain continued financing, the Company
may cease operation and in all likelihood all of the Company's securityholders
will lose their entire investment.
The Company's working capital requirements will depend upon numerous
factors, including: progress of the Company's research and development programs;
preclinical and clinical testing; timing and cost of obtaining regulatory
approvals; technological advances; status of competitors; and ability of the
Company to establish collaborative arrangements with other organizations.
RESEARCH AND DEVELOPMENT ACTIVITIES
Preclinical studies with all four technologies are proceeding as follows:
Optex's development of the Catarex device is continuing. Bausch & Lomb,
pursuant to the Development & License Agreement, is directing the further
development of the device. The focus is on the continued refinement of the
clinical prototype device and the subsequent integration of the device into
other systems, with the aim of beginning human clinical trials as soon as
possible. Much of the current engineering work is focused on refinement of the
manufacturing process to decrease manufacturing expense and subsequent total
cost of the device. Provisional patent applications have been filed and
additional patent applications are likely for new developments with the device.
A development team consisting of members of both Optex and Bausch & Lomb is
working on the development program.
The toxicology program for CT-3, the potential analgesic and
anti-inflammatory analgesic agent under development by Atlantic, is in progress.
The focus of the toxicology program is to prepare for Clinical Phase I study in
man to be conducted in the third quarter of 1999. To date, initial dose ranging
and tolerance studies have been completed as well as the necessary formulation
work. The Company believes that data available to date supports the continued
development of the compound. In addition to the toxicology work, studies are
being evaluated to further define the mechanism of action of CT-3. The current
focus of the development program is on the analgesic action of the compound. In
vivo studies have shown potent analgesic activity with CT-3.
Gemini Technologies, Inc. ("Gemini") research on the antisense enhancing
technology is continuing with a focus on the program to treat Respiratory
Syncytial Virus ("RSV"). A lead product candidate oligonucletoide against RSV
has been selected and has completed in vitro testing. The Company believes that
data obtained to date supports the continued development of the compound. The
planned definitive in vivo studies will be in a primate model and are scheduled
to begin in the second quarter 1999 with results anticipated to be available in
the third quarter of 1999. Some of the data from the RSV program was published
in the July 1998 issue of the Proceedings of the National Academy of Sciences.
The published data indicates that the in vitro activity of the 2-5A
oligonucletoide under development would be 80 to 100 times more potent in
inhibiting RSV replication than ribavarin, the only FDA-approved treatment
available for RSV. In vitro and in vivo studies are continuing using an
anti-telomerase oligonucletoide against several potential cancer targets.
Continued in vitro and in vivo testing will be undertaken against a variety of
malignancies, utilizing a variety of regimens, including potential combination
therapy. The research in the telomerase program in the next several months will
be focused on defining the mechanism of action of the telomerase
oligonucleotides. Additional work will continue on increasing the stability of
all selected oligonucleotides, with supporting work on the mechanism of action
of the 2-5A technology.
Data analysis for the large animal studies has been completed for Channel's
sulfated cyclodextrin compounds CT-1 (the monomeric form) and CT-2 (the
polymeric form). The data showed promising results with continuous intravenous
("IV") infusion with CT-1 but significant inflammation was seen with CT-2.
Consequently, no additional resources will be used to further the development of
CT-2. The results of the studies were presented during the third quarter at the
IBC Restenosis Conference. The current focus is on testing follow up compounds
to CT-1 in large animal models which are scheduled to begin during the first
quarter 1999 and continuing business development discussions with potential
partners for CT-1. In addition, work is continuing to
6
determine the feasibility of binding CT-1 to vascular stents. The Company
intends to conduct additional studies on the compounds that have been developed
as follow up compounds to CT-1 and CT-2.
FUTURE OUTLOOK
In addition to historical information, this report contains predictions,
estimates and other forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Actual results could differ materially from
any future performance suggested in this report as a result of the risk factors
set forth below and in the Company's Annual Report on Form 10-KSB filed with the
Securities and Exchange Commission on March 19, 1998.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, in
approximately two years, computer systems and/or software used by many companies
may need to be upgraded to comply with such "Year 2000" requirements.
Significant uncertainty exists concerning the potential effects associated with
such compliance. The Company has reviewed its internal system. The Company's
internal system is Year 2000 compliant. All the hardware and software used by
the Company was purchased or licensed less than three years ago and the Company
does not expect Year 2000 issues to have any material effect on the Company's
business, financial condition or operating results. The Company is in the
process of reviewing third party providers and their compliance status of year
2000.
7
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS FORM 10-QSB, THE FOLLOWING
RISK FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE COMPANY AND ITS
BUSINESS. THIS FORM 10-QSB CONTAINS FORWARD LOOKING STATEMENTS RELATING TO
FUTURE EVENTS OR FUTURE FINANCIAL PERFORMANCE OF THE COMPANY WITHIN THE MEANING
OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934. INVESTORS ARE CAUTIONED THAT SUCH STATEMENTS ARE ONLY
PREDICTIONS AND THAT EVENTS OR RESULTS MAY DIFFER MATERIALLY. IN EVALUATING SUCH
STATEMENTS, INVESTORS SHOULD SPECIFICALLY CONSIDER THE FOLLOWING FACTORS AND
OTHER FACTORS SET FORTH IN THIS FORM 10-QSB WHICH COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THOSE INDICATED BY SUCH FORWARD LOOKING STATEMENTS.
RESET DATE OF SERIES A CONVERTIBLE PREFERRED STOCK; PAYMENT IN KIND
DIVIDENDS
The shares of the Company's Series A Preferred are convertible into shares of
Common Stock of the Company. Prior to August 7, 1998 (the "Reset Date"), each
share of Series A Preferred was convertible into 2.12 shares of Common Stock and
the conversion price of the Series A Preferred was $4.72 per share. Pursuant to
the Certificate of Designations for the Series A Preferred (the "Certificate of
Designations"), the conversion price was adjusted on the Reset Date such that
the new conversion price equals $3.06 per share and each share of Series A
Preferred is convertible into 3.27 shares of Common Stock. The conversion price
is subject to adjustment as more fully described in the Certificate of
Designations. No cash is paid to the Company upon the conversion of the Series A
Preferred into shares of the Company's Common Stock. In addition, commencing on
the Reset Date the holders of the Series A Preferred are entitled to
payment-in-kind dividends ("PIK dividends"), payable semi-annually in arrears,
on their shares of Series A Preferred at the rate of 0.13 shares of Series A
Preferred for each outstanding share of Series A Preferred.
As a result of the reduction of the conversion price of the Series A Preferred,
the holders of the Series A Preferred are entitled to receive a greater number
of shares of the Company's Common Stock upon conversion of the Series A
Preferred than they would have received upon such conversion prior to August 7,
1998, and this could adversely affect the prevailing market price of the Common
Stock. If the Company is obligated to pay PIK dividends to the holders of the
Series A Preferred then more shares of Common Stock will be issuable upon
conversion of the Series A Preferred, which could also adversely affect the
prevailing market price of the Company's Common Stock. The complete description
of the rights and preferences of the Series A Preferred is contained in the
Certificate of Designations filed with the Secretary of State of the State of
Delaware.
DEVELOPMENT STAGE COMPANY; HISTORY OF OPERATING LOSSES;
ACCUMULATED DEFICIT; UNCERTAINTY OF FUTURE PROFITABILITY
The technologies and products under development by the Company are in the
research and development stage and no operating revenue (outside of a milestone
payment made by Bausch & Lomb Surgical ("Bausch & Lomb") and grant revenues) has
been generated to date. Except for any payments that Bausch & Lomb may be
obligated to make pursuant to the Development & License Agreement (the
"Development & License Agreement"), dated May 14, 1998, between Optex
Ophthalmologics, Inc., a majority-owned subsidiary of Atlantic ("Optex"), and
Bausch & Lomb, the Company does not expect to generate any revenues in the near
future. As a result, the Company must be evaluated in light of the problems,
delays, uncertainties and complications encountered in connection with recently
established businesses. The Company has incurred operating losses since its
inception. As of September 30, 1998, the Company's working capital and
accumulated deficit were $6,794,586 and $15,052,790, respectively. Operating
losses have resulted principally from costs incurred in identifying and
acquiring the technologies under development, research and development
activities, patent prosecution and maintenance costs and general and
administrative costs. The Company expects to incur significant operating losses
over the next several years, primarily due to continuation and expansion of its
research and development programs, including
8
preclinical studies and clinical trials for its products and technologies under
development, as well as costs incurred in identifying and, possibly, acquiring,
additional technologies. The Company's ability to achieve profitability depends
upon its ability (alone or with corporate partners) to develop pharmaceutical
and medical device products, obtain regulatory approval for its proposed
products and/or enter into agreements either for the sale or sublicense of its
technologies or for product development, manufacturing and commercialization.
There can be no assurance that the Company will ever achieve significant
revenues or profitable operations from the sale of its proposed products.
NEED FOR ADDITIONAL FINANCING; ISSUANCE OF SECURITIES BY THE
COMPANY AND ITS SUBSIDIARIES; FUTURE DILUTION
The Company will require, and is constantly considering potential sources for,
substantial additional financing to continue its research, to complete its
product development and to manufacture and market any products that may be
developed. Based solely upon its currently existing consulting, license,
sponsored research, independent contractor and employment agreements, the
Company currently anticipates that it will spend all of its current cash
reserves by the end of the first quarter of 2000. There can be no assurance,
however, that the Company's current cash reserves will not be expended prior to
that time. The Company anticipates that further funds may be raised at any time
through additional public or private debt or equity financings conducted either
by the Company or by one or more of its subsidiaries, or through collaborative
ventures entered into between the Company or one or more of its subsidiaries and
one or more corporate partners. There can be no assurance that the Company will
be able to obtain additional financing or that such financing, if available, can
be obtained on terms acceptable to the Company. If additional financing is not
otherwise available, the Company will be required to modify its business
development plans or reduce or cease certain or all of its operations. In such
event, holders of securities of the Company will, in all likelihood, lose their
entire investment.
Although Atlantic and each of its subsidiaries will seek to enter into
collaborative ventures with corporate partners to fund some or all of its
activities, as well as to manufacture or market the products which may be
developed, Atlantic and its subsidiaries currently have only one such
arrangement in place with a corporate partner (i.e., Bausch & Lomb), and there
can be no assurance that Atlantic or any of its subsidiaries will be able to
enter into any additional ventures on favorable terms, if at all. In addition,
no assurance can be given that Atlantic or any of its subsidiaries would be able
to complete a private placement or public offering of its securities. Failure by
Atlantic or any of its subsidiaries to enter into such collaborative ventures or
to receive additional funding either through a public offering or a private
placement to complete its proposed product development programs would have a
material adverse effect on the Company. In the event that the Company obtains
any additional funding, such financings may have a dilutive effect on the
holders of the Company's securities. In addition, if one or more of the
Company's subsidiaries raises additional funds through the issuance and sale of
its equity securities, the interest of the Company and its stockholders in such
subsidiary or subsidiaries, as the case may be, could be diluted and there can
be no assurance that the Company will be able to maintain its majority interest
in any or all of its current subsidiaries. In addition, the interest of the
Company and its stockholders in each subsidiary will be diluted or subject to
dilution to the extent any such subsidiary issues shares or options to purchase
shares of its capital stock to employees, directors, consultants and others. In
the event that the Company's voting interest in any of its current subsidiaries
falls below 50%, the Company may not be able to exercise an adequate degree of
control over the affairs and policies of such subsidiary as currently being
exercised.
In addition, the Company has outstanding convertible securities (other than the
Series A Preferred) that are exercisable into an aggregate of 4,739,905 shares
of Common Stock at exercise prices ranging from $0.75 to $10.00 per share. Most
of such convertible securities are currently exercisable at prices above the per
share price of the Common Stock as quoted on Nasdaq as of September 30, 1998. As
of September 30, 1998, the Company had outstanding 642,956 shares of its Series
A Preferred and warrants to purchase 117,198 shares of Series A Preferred, all
of which currently are convertible into shares of the Company's Common Stock at
a conversion rate of 3.27 shares of Common Stock for each share of Series A
Preferred. The aforementioned conversion rate is subject to adjustment in favor
of the holders of the Series A Preferred upon the occurrence of certain events.
The
9
exercise of such convertible securities or the conversion of the Series A
Preferred, if any, may dilute the value of the Common Stock. In addition, so
long as such convertible securities remain unexercised, the terms under which
the Company could obtain additional capital may be adversely affected.
BAUSCH & LOMB DEVELOPMENT & LICENSE AGREEMENT
On May 14, 1998, Atlantic's majority-owned subsidiary, Optex, entered into a
worldwide licensing agreement with Bausch & Lomb to complete the development of
Catarex, the cataract removal technology developed by Optex. Under the terms of
the agreement, Optex and Bausch & Lomb intend to jointly complete the final
design and development of Optex's Catarex cataract removal system. Bausch & Lomb
will assume responsibility for commercializing Catarex globally. Optex received
a milestone payment upon execution of the Development & License Agreement and is
to receive certain additional milestone payments from Bausch & Lomb. In
addition, Bausch & Lomb has committed to pay ongoing royalties on sales of
Catarex products. There can be no assurance that the Company and Bausch & Lomb
will be able to complete the development of Catarex, that the milestones that
trigger payment obligations from Bausch & Lomb will be reached or that Bausch &
Lomb will be able to successfully commercialize Catarex and, consequently, pay
royalties to the Company.
NO DEVELOPED OR APPROVED PRODUCTS
To achieve profitable operations, the Company, alone or with others, must
successfully develop, obtain regulatory approval for, introduce and market its
products under development. Most of the preclinical and clinical development
work for the products under development of the Company remains to be completed.
The Company has not generated, nor is it expected to generate in the near
future, any operating revenues (other than some grant revenues and the milestone
payment received from Bausch & Lomb). In addition, the Company has no
manufacturing or marketing facilities nor any contracts with any commercial
manufacturing or marketing entities to manufacture or market the Company's
products to consumers (except for the License & Development Agreement with
Bausch & Lomb). No assurance can be given that any of its product development
efforts will be successfully completed, that required regulatory approvals will
be obtained, or that any such products, if developed and introduced, will be
successfully marketed or achieve market acceptance.
TECHNOLOGICAL UNCERTAINTY AND EARLY STAGE OF PRODUCT DEVELOPMENT
The technologies and products which the Company intends to develop are in the
early stages of development, require significant further research, development
and testing and are subject to the risks of failure inherent in the development
of products based on innovative or novel technologies. These risks include the
possibility that any or all of the Company's proposed technologies and products
will be found to be ineffective or unsafe, will fail to meet applicable
regulatory standards or will fail to obtain required regulatory approvals or
that such technologies and products once developed, although effective, are
uneconomical to market, that third parties hold proprietary rights that preclude
the Company from marketing such technologies and products, that third parties
market superior or equivalent technologies and products or that third parties
have superior resources to market similar products or technologies. Further, the
Company's proposed technologies and products might prove to have undesirable or
unintended side effects that prevent or limit their commercial use.
The Company's agreements with licensors do not contain any representations by
the licensors as to the safety or efficacy of the inventions or discoveries
covered thereby. The Company is unable to predict whether the research and
development activities it is funding will result in any commercially viable
products or applications. In addition, there can be no assurance that the
Company's research and development schedules will be met. Further, due to the
extended testing required before marketing clearance can be obtained from the
U.S. Food and Drug Administration (the "FDA") or other similar agencies, the
Company is not able to predict with any certainty, when, if ever, the Company
will be able to commercialize any of its proposed technologies or products.
10
ANALYSIS OF RESULTS OF A PIVOTAL STUDY OF THE CYCLODEXTRIN TECHNOLOGY
The Company has performed several studies in small animal models of its
cyclodextrin technology and the results of this research have indicated that the
sulfated cyclodextrins may have potential as a treatment for restenosis and late
vein graft failure. In the first quarter 1998, the Company completed research in
large animal models of the cyclodextrin technology, as the results of studies in
large animal models are believed to be more predictive of the effect of the
cyclodextrin technology in humans for the treatment of restenosis. Data analyses
of the large animal studies of the cyclodextrin technology for restenosis
indicated promising results with continuous intravenous infusion of CT-1 and
significant inflammatory reactions with CT-2 (each sulfated beta-cyclodextrins).
Based on the results of these studies the Company has decided to discontinue the
development of CT-2. The Company intends to conduct additional studies on the
compounds that have been developed as follow up compounds to CT-1 and CT-2.
Depending on the results of these studies of the cyclodextrin technology as well
as the results of ongoing additional studies, the Company may elect, among other
alternatives, to sublicense all or some of its proprietary rights and/or to
relinquish its proprietary rights to the cyclodextrin technology.
GOVERNMENT REGULATION; NO ASSURANCE OF REGULATORY APPROVAL
The Company's proposed products and technologies are in early stages of
development. The research, preclinical development, clinical trials, product
manufacturing and marketing to be conducted by, or on behalf of, the Company is
subject to extensive regulation by the FDA, comparable agencies in state and
local jurisdictions and similar health authorities in foreign countries. FDA
approval of the Company's products, as well as the manufacturing processes and
facilities, if any used to produce such products will be required before such
products may be marketed in the United States. The processes of obtaining
approvals from the FDA are costly, time consuming and often subject to
unanticipated delays. There can be no assurance that approvals of the Company's
proposed products, processes or facilities will be granted on a timely basis, or
at all. In addition, new government regulations may be established that could
delay or prevent regulatory approval of the Company's products under
development. Any future failure to obtain or delay in obtaining any such
approval will materially and adversely affect the ability of the Company to
market its proposed products and the business, financial condition and results
of operations of the Company.
The Company's proposed products and technologies may also be subject to certain
other federal, state and local government regulations, including, but not
limited to, the Federal Food, Drug and Cosmetic Act, the Environmental
Protection Act, the Occupational Safety and Health Act and state, local and
foreign counterparts to certain of such acts. The Company intends to develop its
business to strategically address regulatory needs. However, the Company cannot
predict the extent of the adverse effect on its business or the financial and
other costs that might result from any government regulations arising out of
future legislative, administrative or judicial action.
Before a new medical device can be introduced in the market, the manufacturer
must generally obtain FDA clearance or approval through either clearance of a
510(k) notification or approval of a Pre-Market Approval Application. A 510(k)
clearance will be granted if the submitted information establishes that the
proposed device is "substantially equivalent" to certain categories of legally
marketed medical devices. The FDA recently has been requiring more rigorous
demonstration of substantial equivalence than in the past, including in some
cases requiring submission of clinical data. The FDA may determine that the
proposed device is not substantially equivalent to a predicate device or that
additional information is needed before a substantial equivalence determination
can be made. It generally takes from 4 to 12 months from submission to obtain
510(k) premarket clearance, but may take longer. A "not substantially
equivalent" determination, or a request for additional information, could
prevent or delay the market introduction of products that fall into this
category. For any devices that are cleared through the 510(k) process,
modifications or enhancements that could significantly affect
11
safety or effectiveness, or constitute a major change in the intended use of the
device, will require new 510(k) submissions.
The steps required before a drug may be approved by applicable government
agencies for marketing in the United States generally include (i) preclinical
laboratory and animal tests, (ii) the submission to the FDA of an
Investigational New Drug Application, (iii) adequate and well controlled human
clinical trials to establish the safety and efficacy of the drug, (iv)
submission to the FDA of a New Drug Application and (v) satisfactory completion
of an FDA inspection of the manufacturing facility or facilities at which the
drug is made to assess compliance with Good Manufacturing Practices. Lengthy and
detailed preclinical and clinical testing, validation of manufacturing and
quality control processes, and other costly and time-consuming procedures are
required. Satisfaction of these requirements typically takes several years and
the time needed to satisfy them may vary substantially, based on the type,
complexity and novelty of the pharmaceutical product. The effect of government
regulation may be to delay or to prevent marketing of potential products for a
considerable period of time and to impose costly procedures upon the Company's
activities. There can be no assurance that the FDA or any other regulatory
agency will grant approval for any products developed by the Company on a timely
basis, or at all. Success in preclinical or early stage clinical trials does not
assure success in later stage clinical trials. Data obtained from preclinical
and clinical activities are susceptible to varying interpretations that could
delay, limit or prevent regulatory approval. If regulatory approval of a product
is granted, such approval may impose limitations on the indicated uses for which
a product may be marketed. Further, even if such regulatory approvals are
obtained, a marketed drug or device and its manufacturer are subject to
continued review, and later discovery of previously unknown problems may result
in restrictions on such product or manufacturer, including withdrawal of the
product from the market. Any delay or failure of the Company to obtain and
maintain regulatory approval of its proposed products, processes or facilities
would have a material adverse effect on the business, financial condition and
results of operations of the Company.
DEPENDENCE ON LICENSE AND SPONSORED RESEARCH AGREEMENTS
The Company depends on license agreements from third parties that form the basis
of its proprietary technology. Optex owns the proprietary rights that form the
basis of the Catarex technology. In general, the Company also relies on
sponsored research agreements for its research and development efforts. However,
the research and development for the Catarex device is jointly conducted at the
laboratory facilities of the Company's subsidiary, Optex, and at the laboratory
facilities of Bausch & Lomb and some of the research and development concerning
the 2-5A Chimeric Antisense Technology is conducted at the laboratory facilities
of the Company's subsidiary, Gemini Technologies, Inc. The license agreements
that have been entered into by the Company typically require the Company's use
of due diligence in developing and bringing products to market and the payment
of certain milestone amounts that in some instances may be substantial. With the
exception of its license from Optex, the Company is also obligated to make
royalty payments on the sales, if any, of products resulting from such licensed
technology. The Company is also responsible for the costs of filing and
prosecuting patent applications and maintaining issued patents. Certain research
and development activities of the Company are intended to be conducted by
universities or other institutions pursuant to sponsored research agreements.
The sponsored research agreements entered into and contemplated to be entered
into by the Company generally require periodic payments on an annual, quarterly
or monthly basis.
If the Company does not meet its financial, development or other obligations
under either its license agreements or its sponsored research agreements in a
timely manner, the Company could lose the rights to its proprietary technology
or the right to have the applicable university or institution conduct its
research and development efforts. If the rights of the Company under its license
or sponsored research agreements are terminated, such termination could have a
material adverse effect on the business and research and development efforts of
the Company.
12
UNCERTAINTY REGARDING PATENTS AND PROPRIETARY RIGHTS
The success of the Company will depend in large part on its and/or its
licensors' ability to obtain patents, defend their patents, maintain trade
secrets and operate without infringing upon the proprietary rights of others,
both in the United States and in foreign countries. The patent position of firms
relying upon biotechnology is highly uncertain and involves complex legal and
factual questions. To date there has emerged no consistent policy regarding the
breadth of claims allowed in biotechnology patents or the degree of protection
afforded under such patents. The Company relies on certain United States patents
and pending United States and foreign patent applications relating to various
aspects of its products and technologies. With the exception of intellectual
property owned by Optex, all of these patents and patent applications are owned
by third parties and are licensed or sublicensed to the Company. Optex owns the
patents and the patent applications relating to the Catarex technology; however,
Optex has licensed those rights to Bausch & Lomb. The patent application and
issuance process can be expected to take several years and entail considerable
expense to the Company, as it is responsible for such costs under the terms of
its license agreements. There can be no assurance that patents will issue as a
result of any such pending applications or that the existing patents and any
patents resulting from such applications will be sufficiently broad to afford
protection against competitors with similar technology. In addition, there can
be no assurance that such patents will not be challenged, invalidated, or
circumvented, or that the rights granted thereunder will provide competitive
advantages to the Company. The commercial success of the Company will also
depend upon avoiding infringement of patents issued to competitors. A United
States patent application is maintained under conditions of confidentiality
while the application is pending, so the Company cannot evaluate any inventions
being claimed in pending patent applications filed by its competitors.
Litigation may be necessary to defend or enforce the Company's patent and
license rights or to determine the scope and validity of others' proprietary
rights. Defense and enforcement of patent claims can be expensive and time
consuming, even in those instances in which the outcome is favorable to the
Company, and can result in the diversion of substantial resources from the
Company's other activities. An adverse outcome could subject the Company to
significant liabilities to third parties, require the Company to obtain licenses
from third parties, or require the Company to alter its products or
technologies, or cease altogether any related research and development
activities or product sales, any of which could have a material adverse effect
on the Company's business, results of operations and financial condition.
The Company has certain proprietary rights and in the future may require
additional licenses from other parties to develop, manufacture and market
commercially viable products effectively, and the Company's commercial success
could depend in part on obtaining and maintaining such licenses. There can be no
assurance that such licenses could be obtained or maintained on commercially
reasonable terms, if at all, that the patents underlying such licenses would be
valid and enforceable or that the proprietary nature of the patented technology
underlying such licenses would remain proprietary.
The Company relies substantially on certain technologies that are not patentable
or proprietary and are therefore available to its competitors. The Company also
relies on certain proprietary trade secrets and know-how that are not
patentable. Although the Company has taken steps to protect its unpatented trade
secrets and know-how, in part through the use of confidentiality agreements with
its employees, consultants and contractors, there can be no assurance that these
agreements will not be breached, that the Company would have adequate remedies
for any breach, or that the Company's trade secrets will not otherwise become
known or be independently developed or discovered by competitors.
The success of the Company is also dependent upon the skills, knowledge and
experience of its scientific and technical personnel (both employees and
independent contractors). The management and scientific personnel of the Company
has been recruited primarily from other scientific companies, pharmaceutical
companies and academic institutions. In some cases, these individuals may be
continuing research in the same areas with which they were involved prior to
their employment by the Company. Although the Company has not received any
notice of any claims and knows of no basis for any claims, it could be subject
to allegations of violation of trade secrets and similar claims which could,
regardless of merit, be time consuming, expensive to defend, and have a material
adverse effect on the Company's business, results of operations and financial
condition.
13
RAPID TECHNOLOGICAL CHANGE; COMPETITION
The Company's business is characterized by intensive research efforts and
intense competition and is subject to rapid and substantial technological
change. Many companies, research institutes, hospitals and universities are
working to develop products and technologies in the Company's fields of
research. Most of these entities have substantially greater financial,
technical, research and development, manufacturing, marketing, distribution and
other resources than the Company. Certain of such entities have experience in
undertaking testing and clinical trials of new or improved products similar in
nature or that have a similar therapeutic effect to that which the Company is
developing. In addition, certain competitors have already begun testing of
similar products or technologies and may introduce such products or technologies
before the Company may do so. Accordingly, other entities may succeed in
developing products earlier than the Company or that are more effective, more
widely accepted or more economical than those proposed to be developed by the
Company. There can be no assurance that developments by others will not render
the Company's products or technologies noncompetitive or that the Company will
be able to keep pace with technological developments. Further, it is expected
that competition in the Company's fields will intensify. There can be no
assurance that the Company will be able to compete successfully in the future.
DEPENDENCE ON OTHERS FOR CLINICAL DEVELOPMENT OF, REGULATORY
APPROVALS FOR AND MANUFACTURE AND MARKETING OF PHARMACEUTICAL PRODUCTS
The Company does not have the resources to directly manufacture, market or sell
any of its proposed products and the Company has no current plans to acquire
such resources. Atlantic's subsidiary, Optex, has entered into a License &
Development Agreement with Bausch & Lomb, and the Company anticipates that it
may, in the future, enter into additional collaborative agreements with
pharmaceutical and/or biotechnology companies for the development of, clinical
testing of, seeking of regulatory approval for, manufacturing of, marketing of
and commercialization of certain of its proposed products. The Company may in
the future grant to its collaborative partners rights to license and
commercialize any products developed under these collaborative agreements, and
such rights would limit the Company's flexibility in considering alternatives
for the commercialization of such products. Under such agreements, the Company
may rely on its respective collaborative partners to conduct research efforts
and clinical trials on, obtain regulatory approvals for and manufacture, market
and commercialize certain of its products. The Company expects that the amount
and timing of resources devoted to these activities generally will be controlled
by each such individual partner. The inability of the Company to acquire such
third party development, clinical testing, seeking of regulatory approval,
manufacturing, distribution, marketing and selling arrangements on commercially
acceptable terms for the Company's long-term needs for such anticipated products
would have a material adverse effect on the Company's business. There can be no
assurance that the Company will be able to enter into any additional
arrangements for the development, clinical testing, seeking of regulatory
approval, manufacturing, marketing and selling of its products, or that, if such
arrangements are entered into, such future partners will be successful in
commercializing products or that the Company will derive any revenues from such
arrangements.
UNCERTAINTY OF PRODUCT PRICING AND REIMBURSEMENT; HEALTH CARE
REFORM AND RELATED MEASURES
The levels of revenues and profitability of pharmaceutical and/or biotechnology
products and companies may be affected by the continuing efforts of governmental
and third party payors to contain or reduce the costs of health care through
various means and the initiatives of third party payors with respect to the
availability of reimbursement. For example, in certain foreign markets, pricing
or profitability of prescription pharmaceuticals is subject to government
control. In the United States there have been, and the Company expects that
there will
14
continue to be, a number of federal and state proposals to implement similar
governmental control. Although the Company cannot predict what legislative
reforms may be proposed or adopted or what impact actions taken by federal,
state or private payors for health care goods and services in response to any
health care reform proposals or legislation may have on its business, the
existence and pendency of such proposals could have a material adverse effect on
the Company in general. In addition, the Company's ability to commercialize
potential pharmaceutical and/or biotechnology products may be adversely affected
to the extent that such proposals have a material adverse effect on other
companies that are prospective collaborators with respect to any of the
Company's product candidates.
In addition, in both the United States and elsewhere, sales of medical products
and services are dependent in part on the availability of reimbursement to the
consumer from third party payors, such as government and private insurance
plans. Third party payors are increasingly challenging the prices charged for
medical products and services. If the Company succeeds in bringing one or more
products to the market, there can be no assurance that these products will be
considered desirable or cost effective and that reimbursement to the consumer
will be available or will be sufficient to allow the Company to sell its
products on a competitive basis.
DEPENDENCE UPON KEY PERSONNEL AND CONSULTANTS
The Company is highly dependent upon its officers and directors, as well as its
Scientific Advisory Board members, consultants and collaborating scientists.
Atlantic and its subsidiaries have an aggregate of only ten full-time employees,
three of whom are officers of Atlantic and each of its subsidiaries, and the
loss of any of these individuals would have a material adverse effect on the
Company. Although Atlantic has entered into employment agreements with each of
its officers, such employment agreements do not contain provisions which would
prevent such employees from resigning their positions with Atlantic at any time
or from competing with the Company, directly or indirectly. The Company does not
maintain key-man life insurance policies on any of such key personnel. Each of
the Company's non-employee directors, advisors and consultants devotes only a
portion of his or her time to the Company's business. The loss of certain of
these individuals could have a material adverse effect on the Company. On July
10, 1998, Jon Douglas Lindjord, then President and Chief Executive Officer of
the Company and a member of its Board of Directors, resigned from such
positions. This resignation may have a material adverse effect on the Company.
At this time, Robert A Fildes, Ph.D., the Company's Chairman of the Board, is
serving as Interim President and Chief Executive Officer, and the Company is
conducting an executive search for a replacement for Mr. Lindjord.
The Company may seek to hire additional personnel. Competition for qualified
employees among pharmaceutical and biotechnology companies is intense, and the
loss of any of such persons, or the inability to attract, retain and motivate
any additional highly skilled employees required for the expansion of the
Company's activities could have a material adverse effect on the Company. There
can be no assurance that the Company will be able to retain its existing
personnel or to attract additional qualified employees.
The Company's scientific advisors are employed on a full time basis by employers
unrelated to the Company and some have entered into one or more additional
consulting or other advisory arrangements with other entities which may conflict
or compete with their obligations to the Company. Inventions or processes
discovered by such persons, other than those for which the Company is able to
acquire licenses or those which were invented while performing consulting
services on behalf of the Company pursuant to a proprietary information
agreement, will not become the property of the Company, but will likely remain
the property of such persons or of such persons' full-time employers. Failure to
obtain needed patents, licenses or proprietary information held by others could
have a material adverse effect on the Company.
15
CERTAIN INTERLOCKING RELATIONSHIPS; POTENTIAL CONFLICTS OF INTEREST
Lindsay A. Rosenwald, M.D., a principal stockholder of the Company, is the
President and sole stockholder of Paramount Capital, Incorporated, a New
York-based merchant and investment banking firm specializing in the
biotechnology industry ("Paramount" or the "Placement Agent"), and the placement
agent for the Company's 1997 private placements of its Series A Preferred (the
"Private Placement"). Steven H. Kanzer, a director of the Company, is the Senior
Managing Director, Head of Venture Capital of Paramount. Michael S. Weiss, the
Company's Secretary, is the Senior Managing Director, Head of Investment Banking
of Paramount. A. Joseph Rudick, Jr., M.D., an associate of Paramount and
Paramount Capital Investments, LLC, a company wholly owned by Dr. Rosenwald, is
a director of each of Channel Therapeutics, Inc., a wholly owned subsidiary of
the Company, and Optex Ophthalmologics, Inc., a majority-owned subsidiary of the
Company. In the regular course of its business, Paramount identifies, evaluates
and pursues investment opportunities in biomedical and pharmaceutical products,
technologies and companies. Generally, Delaware corporate law requires that any
transactions between the Company and any of its affiliates be on terms that,
when taken as a whole, are substantially as favorable to the Company as those
reasonably obtainable from a person who is not an affiliate in an arms-length
transaction. The Company is bound by agreements between itself and Paramount
pursuant to which Paramount agreed to provide financial advisory services to the
Company and pursuant to which Paramount agreed to provide placement advisory
services in connection with the Private Placement. Nevertheless, none of
Paramount, Dr. Rosenwald, Mr. Kanzer, Mr. Weiss or Dr. Rudick is obligated
pursuant to any agreement or understanding with the Company to make any
additional products or technologies available to the Company, nor can there be
any assurance, and the Company does not expect and securityholders should not
expect, that any biomedical or pharmaceutical product or technology identified
by Paramount, Dr. Rosenwald, Mr. Kanzer, Mr. Weiss or Dr. Rudick in the future
will be made available to the Company. In addition, certain of the officers and
directors of the Company may from time to time serve as officers or directors of
other biopharmaceutical or biotechnology companies. There can be no assurance
that such other companies will not, in the future, have interests in conflict
with those of the Company.
CONTROL BY EXISTING STOCKHOLDERS
Dr. Rosenwald and VentureTek, L.P. (a limited partnership controlled by certain
relatives of Dr. Rosenwald but as to the partnership interests of which Dr.
Rosenwald disclaims beneficial ownership) together beneficially own
approximately 17.6% of the outstanding shares of Common Stock of the Company and
Dr. Rosenwald and certain affiliates of Paramount own Placement Warrants to
purchase approximately seven percent of the Series A Preferred. Generally, the
holders of the Common Stock and the Series A Preferred vote together as a single
class. Accordingly, such holders, if acting together, may have the ability to
exert significant influence over the election of the Company's Board of
Directors and other matters submitted to the Company's stockholders for
approval. The voting power of these holders may discourage or prevent any
proposed takeover of the Company.
NO ASSURANCE OF IDENTIFICATION OF ADDITIONAL PROJECTS
The Company is engaged in the development and commercialization of biomedical
and pharmaceutical products and technologies. From time to time, if the
Company's resources allow, the Company may explore the acquisition and
subsequent development and commercialization of additional biomedical and
pharmaceutical products and technologies. However, there can be no assurance
that the Company will be able to identify any additional products or
technologies and, even if suitable products or technologies are identified, the
Company may not have sufficient resources to pursue any such products or
technologies.
TERMS OF SERIES A PREFERRED
The Certificate of Designations of the Series A Preferred provides that the
holders of the Series A Preferred generally vote with the holders of the Common
Stock as a single class. However, so long as at least 687,500 shares of Series A
Preferred are outstanding, the Company needs the approval of 66.67% of the
outstanding shares of the Series A Preferred, voting separately as a class, to
approve certain actions of the Company. In addition, the
16
holders of the Series A Preferred receive a liquidation preference upon the
consummation of certain corporate transactions, are entitled to notice of
certain corporate transactions and the conversion price of the Series A
Preferred is adjustable upon the occurrence of certain events. The preferences
accorded to the Series A Preferred may adversely affect the prevailing market
price of the Company's other securities.
POTENTIAL ADVERSE EFFECT OF REDEMPTION OF REDEEMABLE WARRANTS
As of December 14, 1996, the Redeemable Warrants are subject to redemption
commencing December 14, 1996 by the Company under certain conditions. Redemption
of the Redeemable Warrants could encourage holders to exercise the Redeemable
Warrants and pay the exercise price at a time when it may be disadvantageous for
the holders to do so, to sell the Redeemable Warrants at the current market
price when they might otherwise wish to hold the Redeemable Warrants, or to
accept the redemption price, which may be substantially less than the market
value of the Redeemable Warrants at the time of redemption. The holders of the
Redeemable Warrants will automatically forfeit their rights to purchase the
shares of Common Stock issuable upon exercise of such Redeemable Warrants unless
the Redeemable Warrants are exercised before they are redeemed. The holders of
Redeemable Warrants do not possess any rights as stockholders of the Company
unless and until such Redeemable Warrants are exercised.
POSSIBLE ADVERSE EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE
Future sales by existing stockholders could adversely affect the prevailing
market price of the Company's securities. The outstanding shares of the
Company's Common Stock and the shares of Common Stock issuable upon conversion
of the Series A Preferred are all freely tradable, subject to volume and other
restrictions imposed by Rule 144 under the Securities Act with respect to sales
by affiliates of the Company. An 18-month restriction on transfer applicable to
the shares of Common Stock now owned or hereafter acquired by the Company's
officers, directors and certain stockholders expired on June 14, 1997. A
nine-month restriction on transfer applicable to the shares of Common Stock
issuable upon conversion of the Series A Preferred expired on August 11, 1998.
Sales of substantial amounts of Common Stock may have an adverse effect on the
market price of the Company's securities.
No prediction can be made as to the effect, if any, that sales of Units,
Redeemable Warrants and/or Common Stock or the availability of such securities
for sale will have on the market prices prevailing from time to time for such
securities. Nevertheless, the possibility that substantial amounts of such
securities may be sold in the public market may adversely affect prevailing
market prices for the Company's equity securities and could impair the Company's
ability to raise capital in the future through the sale of equity securities.
SECURITIES LAW RESTRICTIONS ON THE EXERCISE OF REDEEMABLE WARRANTS
A holder of Redeemable Warrants has the right to exercise such Redeemable
Warrants for the purchase of shares of Common Stock only if the Company has
filed with the Commission a current prospectus meeting the requirements of the
Securities Act covering the issuance of such shares of Common Stock issuable
upon exercise of the Redeemable Warrants and only if the issuance of such shares
has been registered or qualified, or is deemed to be exempt from registration or
qualification under, the securities laws of the state of residence of the holder
of the Redeemable Warrant. The Company has filed and has undertaken to keep
effective and current a prospectus permitting the purchase and sale of the
Common Stock underlying the Redeemable Warrants, but there can be no assurance
that the Company will be able to keep such prospectus effective and current.
Although the Company intends to seek to qualify for sale the shares of Common
Stock underlying the Redeemable Warrants in those states in which the securities
are to be offered, no assurance can be given that such qualification will occur.
The Redeemable Warrants may be deprived of any value if a prospectus covering
the shares of Common Stock
17
issuable upon the exercise thereof is not kept effective and current or if such
underlying shares are not, or cannot be, registered in the applicable states.
NO DIVIDENDS
The Company has not paid any cash dividends on its Common Stock since its
formation and does not anticipate paying any cash dividends in the foreseeable
future. Management anticipates that all earnings and other resources of the
Company, if any, will be retained by the Company for investment in its business.
POSSIBLE DELISTING FROM NASDAQ AND MARKET ILLIQUIDITY
Although the Common Stock, Redeemable Warrants and Units of the Company are
quoted on Nasdaq, continued inclusion of such securities on Nasdaq will require
that (i) the Company maintain at least $2,000,000 in net tangible assets, (ii)
the minimum bid price for the Common Stock be at least $1.00 per share, (iii)
the public float consist of at least 500,000 shares of Common Stock, valued in
the aggregate at more than $1,000,000, (iv) the Common Stock have at least two
active market makers, (v) the Common Stock be held by at least 300 holders and
(vi) the Company adhere to certain corporate governance requirements. If the
Company is unable to satisfy such maintenance requirements, the Company's
securities may be delisted from Nasdaq. In such event, trading, if any, in the
securities would thereafter be conducted in the over-the-counter market in the
"pink sheets" or the National Association of Securities Dealers' "Electronic
Bulletin Board." Consequently, the liquidity of the Company's securities could
be materially impaired, not only in the number of securities that can be bought
and sold at a given price, but also through delays in the timing of transactions
and reduction in security analysts' and the media's coverage of the Company,
which could result in lower prices for the Company's securities than might
otherwise be attained and could also result in a larger spread between the bid
and asked prices for the Company's securities.
In addition, if the securities are delisted from trading on Nasdaq and the
trading price of the Common Stock is less than $5.00 per share, trading in the
securities would also be subject to the requirements of Rule 15g-9 promulgated
under the Exchange Act. Under such rule, broker/dealers who recommended such
low-priced securities to persons other than established customers and accredited
investors must satisfy special sales practice requirements, including a
requirement that they make an individualized written suitability determination
for the purchaser and receive the purchaser's written consent prior to the
transaction. The Securities Enforcement Remedies and Penny Stock Reform Act of
1990 also requires additional disclosure in connection with any trades involving
a stock defined as a penny stock (generally, according to recent regulations
adopted by the Commission, any equity security not traded on an exchange or
quoted on Nasdaq that has a market price of less than $5.00 per share, subject
to certain exceptions), including the delivery, prior to any penny stock
transaction, of a disclosure schedule explaining the penny stock market and the
risks associated therewith. Such requirements could severely limit the market
liquidity of the Common Stock, Redeemable Warrants or Units of the Company.
There can be no assurance that such securities will not be delisted or treated
as penny stock.
LIQUIDITY OF INVESTMENT; VOLUME OF TRADING
The Company's securities are traded on the Nasdaq SmallCap Market and lack the
liquidity of securities traded on the principal trading markets. Accordingly, an
investor may be unable to promptly liquidate an investment in the Company's
securities.
VOLATILITY OF STOCK PRICE
The securities markets have, from time to time, experienced significant price
and volume fluctuations that may be unrelated to the operating performance of
particular companies. These fluctuations often substantially affect the market
price of a company's securities. In particular, the market prices for securities
of medical device companies and biotechnology companies have in the past been,
and can in the future be expected to be, especially
18
volatile. The market price of the Company's securities has in the past and in
the future may be subject to volatility in general and from quarter to quarter
in particular depending upon announcements regarding developments of the Company
or its competitors, or other external factors, as well as continued operating
losses by the Company and fluctuations in the Company's financial results. These
factors could have a material adverse effect on the Company's business,
financial condition and results of operations and may not be indicative of the
prices that may prevail in the public market.
RISK OF PRODUCT LIABILITY; NO INSURANCE
Should the Company develop and market any products, the marketing of such
products, through third-party arrangements or otherwise, may expose the Company
to product liability claims. The Company presently does not carry product
liability insurance. Upon clinical testing or commercialization of the Company's
proposed products, certain of the licensors require that the Company obtain
product liability insurance. There can be no assurance that the Company will be
able to obtain such insurance or, if obtained that such insurance can be
acquired in sufficient amounts to protect the Company against such liability or
at a reasonable cost. The Company is required to indemnify the Company's
licensors against any product liability claims incurred by them as a result of
the products developed by the Company. None of the Company's licensors has made,
and are not expected to make, any representations as to the safety or efficacy
of the inventions covered by the licenses or as to any products which may be
made or used under rights granted therein or thereunder. In addition, Optex is
required to indemnify Bausch & Lomb for certain matters under the terms of their
Development & License Agreement.
ENVIRONMENTAL REGULATION
In connection with its research and development activities, the Company is
subject to federal, state and local laws, rules, regulations and policies
governing the use, generation, manufacture, storage, air emission, effluent
discharge, handling and disposal of certain materials and wastes. Although the
Company believes that it has complied with these laws and regulations in all
material respects and has not been required to take any action to correct any
noncompliance, there can be no assurance that the Company will not be required
to incur significant costs to comply with environmental and health and safety
regulations in the future.
ANTITAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF
INCORPORATION AND DELAWARE LAW
Atlantic's Restated Certificate of Incorporation (the "Certificate of
Incorporation") authorizes the issuance of shares of "blank check" Preferred
Stock. Its Board of Directors has the authority to issue the Preferred Stock in
one or more series and to fix the relative rights, preferences and privileges
and restrictions thereof, including dividend rights, dividend rates, conversion
rights, voting rights, terms of redemption, redemption prices, liquidation
preferences and the number of shares constituting any series or the designation
of such series. The issuance of Preferred Stock may have the effect of delaying,
deferring or preventing a change in control of the Company without further
action by the stockholders of the Company. The issuance of Preferred Stock with
voting and conversion rights may adversely affect the voting power of the
holders of the Common Stock, including the loss of voting control to others.
The Company is subject to Section 203 of the Delaware General Corporation Law,
which, subject to certain exceptions, prohibits a Delaware corporation from
engaging in any business combination with any interested stockholder for a
period of three years following the date that such stockholder became an
interested stockholder. In general, Section 203 defines an interested
stockholder as any entity or person beneficially owning 15% or more of the
outstanding voting stock of the corporation and any entity or person affiliated
with or controlling or controlled by such entity or person. The foregoing
provisions could have the effect of discouraging others from
19
making tender offers for the Company's shares and, as a consequence, they also
may inhibit fluctuations in the market price of the Company's shares that could
result from actual or rumored takeover attempts. Such provisions also may have
the effect of preventing changes in the management of the Company.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Company's Certificate of Incorporation limits, to the maximum extent
permitted by Delaware law, the personal liability of directors for monetary
damages for breach of their fiduciary duties as a director. The Company's Bylaws
provide that the Company shall indemnify its officers and directors and may
indemnify its employees and other agents to the fullest extent permitted by law.
The Company has entered into indemnification agreements with its officers and
directors containing provisions that are in some respects broader than the
specific indemnification provisions contained in Delaware law. The
indemnification agreements may require the Company, among other things, to
indemnify such officers and directors against certain liabilities that may arise
by reason of their status or service as directors or officers (other than
liabilities arising from willful misconduct of a culpable nature) and to advance
their expenses incurred as a result of any proceeding against them as to which
they could be indemnified. Section 145 of the Delaware law provides that a
corporation may indemnify a director, officer, employee or agent made or
threatened to be made a party to an action by reason of the fact that he was a
director, officer, employee or agent of the corporation or was serving at the
request of the corporation against expenses actually and reasonably incurred in
connection with such action if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. Delaware law does not
permit a corporation to eliminate a director's duty of care, and the provisions
of the Company's Certificate of Incorporation have no effect on the availability
of equitable remedies, such as injunction or rescission, for a director's breach
of the duty of care.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, in
approximately two years, computer systems and/or software used by many companies
may need to be upgraded to comply with such "Year 2000" requirements.
Significant uncertainty exists concerning the potential effects associated with
such compliance. The Company has reviewed its internal system. The Company's
internal system is Year 2000 compliant. All the hardware and software used by
the Company was purchased or licensed less than three years ago and the Company
does not expect Year 2000 issues to have any material effect on the Company's
business, financial condition or operating results. The Company is in the
process of reviewing third party providers and their compliance status of year
2000.
ITEM-3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
20
PART TWO - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
The Company's annual meeting of stockholders was convened on May 11, 1998.
A quorum was not present at the May 11, 1998 meeting and, accordingly, the
annual meeting was adjourned to June 15, 1998. At the reconvened meeting on June
15, 1998, a quorum was not present and, accordingly, the annual meeting was
adjourned to July 15, 1998. At the reconvened meeting on July 15, 1998, a quorum
was not present and, accordingly, the annual meeting was adjourned to August 28,
1998, upon due notice. On August 28, 1998 a quorum was present.
Matters Voted on by Holders of Common Stock and Series A Preferred as a Class:
- ------------------------------------------------------------------------------
Total shares of Common Stock voted were 2,068,246 out of 3,390,567 entitled
to vote. Total shares of Series A Preferred voted were 1,131,354 out of
2,262,708 entitled to vote. Each share of Common Stock was entitled, as of the
record date for the annual meeting of stockholders, to one vote for each share
of Common Stock held. Each share of Series A Preferred was entitled, as of the
record date for the annual meeting of stockholders, to 2.12 votes for each share
of Series A Preferred held, and the following tables list the number of shares
of Series A Preferred voted and not the number of votes cast by the holders of
the Series A Preferred. The holders of shares of Common Stock and the holders of
Series A Preferred voted together as a single class on the following four
matters.
Votes of Holders of Common Stock
--------------------------------
1. Election of Directors For Withheld
--- --------
Jon D. Lindjord 2,061,546 6,700
Robert A. Fildes, Ph.D. 2,060,546 7,700
Yuichi Iwaki, M.D., Ph.D. 2,060,546 7,700
Steven H. Kanzer 2,059,846 8,400
John K. A. Prendergast, Ph.D. 2,059,846 8,400
Paul D. Rubin, M.D. 2,060,546 7,700
Votes of Holders of Series A Preferred
--------------------------------------
Election of Directors For Withheld
--- --------
Jon D. Lindjord 1,083,654 47,700
Robert A. Fildes, Ph.D. 1,131,354 0
Yuichi Iwaki, M.D., Ph.D. 1,104,854 26,500
Steven H. Kanzer 1,120,754 10,600
John K. A. Prendergast, Ph.D. 1,126,054 5,300
Paul D. Rubin, M.D. 1,120,754 10,600
21
On July 10, 1998 Jon D. Lindjord, formerly the Chief Executive Officer,
President and a director of the Company, resigned from all of his positions with
the Company. Following the August 28, 1998 stockholder meeting the members of
the Board of Directors standing for election were re-elected. Subsequently, on
October 7, 1998 Paul D. Rubin, M.D. resigned from the Board. Therefore, the
Company's Board of Directors now consists of Robert A. Fildes, Ph.D., Yuichi
Iwaki, M.D., Ph.D., John K.A. Prendergast, Ph.D. and Steven H. Kanzer. The Board
of Directors currently has two vacancies.
2. Approving an amendment to the Company's Restated Certificate of
Incorporation, as amended, to decrease the number of authorized shares of Common
Stock of the Company from 80,000,000 to 50,000,000 and to decrease the number of
authorized shares of Preferred Stock of the Company from 50,000,000 to
10,000,000.
Votes of Holders of Common Stock
- --------------------------------
For Against Abstain Broker Non-Votes
- --- ------- ------- ----------------
743,103 5,548 3,500 1,316,095
Votes of Holders of Preferred Stock
- -----------------------------------
For Against Abstain
- --- ------- -------
1,104,854 10,600 15,900
Accordingly, following the August 28, 1998 meeting the amendment of the
Company's Restated Certificate of Incorporation, as amended, was approved.
3. To ratify the Board of Directors' selection of KPMG Peat Marwick LLP as the
Company's independent auditors for the year ending December 31, 1998.
Votes of Holders of Common Stock
- --------------------------------
For Against Abstain
- --- ------- -------
2,058,146 8,100 2,000
Votes of Holders of Series A Preferred
- --------------------------------------
For Against Abstain
- --- ------- -------
1,120,754 0 10,600
Accordingly, following the August 28, 1998 meeting the selection of KPMG Peat
Marwick LLP as the Company's independent auditors was ratified.
4. To transact such other business as may properly come before the Annual
Meeting and any adjournment or adjournments thereof.
Votes of Holders of Common Stock
- --------------------------------
For Against Abstain
- --- ------- -------
2,019,646 44,000 4,600
Votes of Holders of Series A Preferred
- --------------------------------------
For Against Abstain
- --- ------- -------
1,049,204 18,550 63,600
22
Accordingly, the Company was authorized to transact other business; however, no
such business came before the meeting.
There were additional items that were submitted only for the vote of the Series
- --------------------------------------------------------------------------------
A Preferred shareholders:
- -------------------------
(1) Approving the payment by the Company to each non-employee director of a
$6,000 annual fee and a fee for attendance at meetings of the Board and
committees of the Board.
(2) Approving a Consultancy Agreement and a Financial Services Agreement
between the Company and Yuichi Iwaki, M.D., Ph.D., a director of the
Company.
(3) Approving a Consultancy Agreement and a Financial Services Agreement
between the Company and John Prendergast, Ph.D., a director of the Company.
At least 66.67% of the number of outstanding shares of Series A Preferred voting
in favor of the immediately preceding three proposals was required in order to
approve these items; however, there was not a quorum present to approve these
items because only 50% of the Series A Preferred voted at the annual meeting.
Therefore, none of the foregoing three items were approved.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
27.1 Financial Data Schedule
b. Form 8-K Reports
No current reports on Form 8-K were filed in the quarter ended September 30,
1998.
23
SIGNATURES
- ----------
IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
ATLANTIC PHARMACEUTICALS, INC.
November 4, 1998
/S/ Robert A. Fildes
--------------------
Robert A. Fildes, Ph.D.
Chairman of the Board and
Interim Chief Executive Officer and President
(Principal Executive Officer)
/S/ Shimshon Mizrachi
---------------------
Shimshon Mizrachi
Chief Financial Officer
(Principal Accounting and Financial Officer)
24