-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Wi5eQI6hies+yRqU3q43kF2+IFYkdhCX8tO3orAzRZBZ3RS/HYP+ddkNQ4AvjLHD vvQMaV1pJOvN+Ixb7L0WkA== /in/edgar/work/20000811/0001095811-00-002600/0001095811-00-002600.txt : 20000921 0001095811-00-002600.hdr.sgml : 20000921 ACCESSION NUMBER: 0001095811-00-002600 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000811 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ARADIGM CORP CENTRAL INDEX KEY: 0001013238 STANDARD INDUSTRIAL CLASSIFICATION: [3845 ] IRS NUMBER: 943133088 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-72037 FILM NUMBER: 692249 BUSINESS ADDRESS: STREET 1: 3929 POINT EDEN WAY CITY: HAYWARD STATE: CA ZIP: 94545 BUSINESS PHONE: 5102659000 MAIL ADDRESS: STREET 1: 3929 POINT EDEN WAY CITY: HAYWARD STATE: CA ZIP: 94545 10-Q 1 e10-q.txt FORM 10-Q QUARTERLY PERIOD ENDED JUNE 30,2000 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ------------------------ FORM 10-Q ------------------------ (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM____________ TO ____________ . COMMISSION FILE NUMBER 0-28402 ARADIGM CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CALIFORNIA 94-3133088 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
3929 POINT EDEN WAY HAYWARD, CA 94545 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES INCLUDING ZIP CODE) (510) 265-9000 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, no par value 17,960,647 (CLASS) (OUTSTANDING AT AUGUST 3, 2000)
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PAGE NO. -------- PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements Statements of Operations (Unaudited) Three months ended June 30, 2000 and 1999................... 1 Six months ended June 30, 2000 and 1999..................... 2 Balance Sheets June 30, 2000 (Unaudited) and December 31, 1999............. 3 Statements of Cash Flows (Unaudited) Six months ended June 30, 2000 and 1999..................... 4 Notes to Unaudited Financial Statements..................... 5 ITEM 2. Management's Discussion and Analysis of Financial Condition 7 and Results of Operations................................... ITEM 3. Quantitative and Qualitative Disclosure About Market Risk... 10 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings........................................... 11 ITEM 4. Submission of Matters to a Vote of Security Holders......... 11 ITEM 6. Exhibits and Reports on Form 8-K............................ 12 Signature............................................................ 13 Exhibits............................................................. 14
i 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ARADIGM CORPORATION STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED JUNE 30, ------------------ 2000 1999 ------- ------- (UNAUDITED) Contract revenues........................................... $ 4,804 $ 3,551 Expenses: Research and development.................................. 11,509 7,620 General and administrative................................ 2,453 2,312 ------- ------- Total expenses.................................... 13,962 9,932 ------- ------- Loss from operations........................................ (9,158) (6,381) Interest income............................................. 969 574 Interest expense and other.................................. (367) (220) ------- ------- Net loss.................................................... $(8,556) $(6,027) ======= ======= Basic and diluted net loss per share........................ $ (0.48) $ (0.41) ------- ------- Shares used in computing basic and diluted net loss per share..................................................... 17,810 14,661 ======= =======
See accompanying notes. 1 4 ARADIGM CORPORATION STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
SIX MONTHS ENDED JUNE 30, -------------------- 2000 1999 -------- -------- (UNAUDITED) Contract revenues........................................... $ 10,504 $ 7,137 Expenses: Research and development.................................. 22,405 15,207 General and administrative................................ 4,526 3,921 -------- -------- Total expenses.................................... 26,931 19,128 -------- -------- Loss from operations........................................ (16,427) (11,991) Interest income............................................. 1,364 994 Interest expense and other.................................. (688) (508) -------- -------- Net loss.................................................... $(15,751) $(11,505) ======== ======== Basic and diluted net loss per share........................ $ (0.96) $ (0.84) -------- -------- Shares used in computing basic and diluted net loss per share..................................................... 16,328 13,704 ======== ========
See accompanying notes. 2 5 ARADIGM CORPORATION BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE INFORMATION) ASSETS
JUNE 30, DECEMBER 31, 2000 1999 ----------- ------------ (UNAUDITED) Current assets: Cash and cash equivalents................................. $ 57,471 $ 9,347 Short-term investments.................................... 5,907 21,912 Receivables............................................... 1,885 3,886 Other current assets...................................... 682 1,187 -------- -------- Total current assets.............................. 65,945 36,332 Property and equipment, net................................. 15,889 14,160 Notes receivable from officers.............................. 96 130 Other assets................................................ 168 168 -------- -------- Total assets...................................... $ 82,098 $ 50,790 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 2,293 $ 2,506 Accrued compensation...................................... 2,046 1,275 Deferred revenue.......................................... 5,754 7,361 Other accrued liabilities................................. 1,508 356 Current portion of capital lease obligations.............. 2,343 1,863 -------- -------- Total current liabilities......................... 13,944 13,361 Notes payable............................................... 6,180 3,956 Noncurrent portion of deferred revenue...................... 2,847 3,663 Capital lease obligations, less current portion............. 5,467 5,653 Commitments and contingencies Shareholders' equity: Preferred stock, no par value; 5,000,000 shares authorized; no shares issued or outstanding............ -- -- Common stock, no par value; 40,000,000 shares authorized; issued and outstanding shares: June 30, 2000 -- 17,949,246; December 31, 1999 -- 14,749,777.... 144,754 99,603 Shareholder notes receivable................................ (141) (163) Deferred compensation....................................... (298) (379) Accumulated deficit......................................... (90,655) (74,904) -------- -------- Total shareholders' equity........................ 53,660 24,157 -------- -------- Total liabilities and shareholders' equity........ $ 82,098 $ 50,790 ======== ========
See accompanying notes. 3 6 ARADIGM CORPORATION STATEMENTS OF CASH FLOWS (IN THOUSANDS)
SIX MONTHS ENDED JUNE 30, -------------------- 2000 1999 -------- -------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss.................................................. $(15,751) $(11,505) Adjustments to reconcile net loss to cash used in operating activities: Depreciation and amortization.......................... 1,379 1,050 Amortization of deferred compensation.................. 81 81 Changes in operating assets and liabilities: Receivables.......................................... 2,001 (1,957) Other current assets................................. 505 (81) Other assets......................................... -- (90) Accounts payable..................................... (213) (912) Accrued liabilities.................................. 1,923 (522) Deferred revenue..................................... (2,423) (491) -------- -------- Net cash used in operating activities............. (12,498) (14,427) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures...................................... (3,108) (884) Sale (purchase) of available-for-sale investments......... (4,822) 109 Proceeds from maturities of available-for-sale investments............................................ 20,825 3,035 -------- -------- Net cash provided by investing activities......... 12,895 2,260 -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock, net............... 45,151 25,352 Issuance of notes payable................................. 2,224 -- Proceeds from repayments of shareholder notes............. 22 40 Notes receivable from officers............................ 34 13 Proceeds from equipment loans............................. 1,275 2,243 Payments on lease obligations and equipment loans......... (979) (675) -------- -------- Net cash provided by financing activities......... 47,727 26,973 -------- -------- Net increase in cash and cash equivalents................... 48,124 14,806 Cash and cash equivalents at beginning of period............ 9,347 10,765 -------- -------- Cash and cash equivalents at end of period.................. $ 57,471 $ 25,571 ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest.................................... $ 435 $ 462 ======== ======== NON-CASH INVESTING AND FINANCING ACTIVITIES: Issuance of warrants for services......................... $ -- $ 221 ======== ========
See accompanying notes. 4 7 ARADIGM CORPORATION NOTES TO THE UNAUDITED FINANCIAL STATEMENTS JUNE 30, 2000 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Basis of Presentation Aradigm Corporation (the "Company") is a California corporation. Since inception, Aradigm has been engaged in the development and commercialization of non-invasive pulmonary drug delivery systems. Through June 1997, the Company was in the development stage. The Company does not anticipate receiving significant revenue from the sale of products in the upcoming year. Principal activities to date have included obtaining financing, recruiting management and technical personnel, securing operating facilities, conducting research and development, and expanding commercial production capabilities. These factors indicate that the Company's ability to continue its research, development and commercialization activities is dependent upon the ability of management to obtain additional financing as required. In the opinion of management, the financial statements reflect all adjustments, which are of a normal recurring nature, necessary for a fair presentation. The accompanying financial statements should be read in conjunction with the financial statements and notes thereto included with the Company's Annual Report on Form 10-K, as amended. The results of the Company's operations for the interim periods presented are not necessarily indicative of operating results for the full fiscal year or any future interim period. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Cash Equivalents and Investments The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. The Company places its cash and cash equivalents in money market funds, commercial paper and corporate notes. The Company's short-term investments consist of commercial paper and corporate notes with maturities ranging from three to twelve months. The Company classifies its investments as available-for-sale. Available-for-sale investments are recorded at fair value with unrealized gains and losses reported in the statement of shareholders' equity. Fair values of investments are based on quoted market prices, where available. Realized gains and losses, which have been immaterial to date, are included in interest and other income and are derived using the specific identification method for determining the cost of investments sold. Dividend and interest income is recognized when earned. Depreciation and Amortization The Company records property and equipment at cost and calculates depreciation using the straight-line method over the estimated useful lives of the respective assets, generally three to seven years. Machinery and equipment acquired under capital leases is amortized over the useful lives of the assets. Leasehold improvements are amortized over the shorter of the term of the lease or useful lives of the improvements. Revenue Recognition Contract revenues consist of revenue from collaboration agreements and feasibility studies. The Company recognizes revenue under the agreements as reimbursable costs are incurred. Deferred revenue represents the portion of research payments received that has not been earned. In accordance with contract terms, milestone payments from collaborative research agreements are considered reimbursements for costs incurred under the agreements and, accordingly, are generally deferred when received and recognized as revenue based on actual 5 8 ARADIGM CORPORATION NOTES TO THE UNAUDITED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 2000 efforts expended over the remaining terms of the agreements. Costs of contract revenues approximate such revenue and are included in research and development expenses. Refundable development and license fee payments are deferred until the specified performance criteria are achieved. Net Loss Per Share Basic net loss per share has been computed using the weighted average number of shares of common stock outstanding less the weighted average number of shares subject to repurchase during the period. No diluted loss per share information has been presented in the accompanying statements of operations since potential common shares from stock options and warrants are antidilutive. 2. SHAREHOLDERS' EQUITY In April 2000, the Company completed a follow-on public offering of common stock, which raised approximately $42.6 million in net proceeds with the issuance of 2,875,000 shares of common stock. In March 1999, the Company completed a private offering, which raised approximately $24.8 million in net proceeds with the issuance of 2,428,338 shares of common stock. 3. CONTINGENCIES In June 1998, Eli Lilly and Company ("Lilly") filed a complaint against the Company in the United States District Court for the Southern District of Indiana. The complaint made various allegations against the Company, arising from the Company's decision to enter into an exclusive collaboration with Novo Nordisk A/S with respect to the development and commercialization of a pulmonary delivery system for insulin and insulin analogs. The Company has sponsored various studies of the pulmonary delivery of insulin analogs using materials supplied by Lilly under a series of agreements dating from January 1996. The Company and Lilly had also conducted negotiations concerning a long-term supply agreement under which Lilly would supply bulk insulin to the Company for commercialization in the Company's AERx Diabetes Management System, and a separate agreement under which the Company would license certain intellectual property to Lilly. These negotiations were terminated after the Company proceeded with its agreement with Novo Nordisk A/S. The complaint seeks a declaration that Lilly scientists were co-inventors of a patent application filed by the Company relating to pulmonary delivery of an insulin analog or, in the alternative, enforcement of an alleged agreement to grant Lilly a nonexclusive license under such patent application. The complaint also contains allegations of misappropriation of trade secrets, breach of fiduciary duty, conversion and unjust enrichment and seeks unspecified damages and injunctive relief. The Company filed an answer denying all material allegations of the complaint and a motion for summary judgment directed against all claims in Eli Lilly's complaint. The Court has issued two written rulings on the Company's motion substantially limiting the claims against the Company. Specifically, the Court granted the Company's motion as to Lilly's claim to enforce an alleged license agreement, for misappropriation of trade secrets, breach of fiduciary duty, conversion, estoppel and breach of contract (in part) and dismissed those claims from the case. The Court denied the Company's motion to Lilly's claims for declaratory relief, unjust enrichment and breach of contract (in part), based on factual disputes between the parties, and those issues remain to be resolved. No trial date has been set. Management believes that it has meritorious defenses against each of Eli Lilly's claims and that this litigation will not have a material adverse effect on the Company's results of operations, cash flows or financial position. However, there can be no assurance that the Company will prevail in this case. 6 9 ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The discussion below contains forward-looking statements that are based on the beliefs of management, as well as assumptions made by, and information currently available to management. Future results, performance or achievements could differ materially from those expressed in, or implied by, any such forward-looking statements as a result of certain factors, including, but not limited to, those discussed in this section as well as in the section entitled "Risk Factors" and elsewhere in the Company's Form 10-K/A filed with the Securities and Exchange Commission on March 30, 2000. The business is subject to significant risks including, but not limited to, the success of research and development efforts, dependence on corporate partners for marketing and distribution resources, obtaining and enforcing patents important to the business, clearing the lengthy and expensive regulatory process and possible competition from other products. Even if the products appear promising at various stages of development they may not reach the market or may not be commercially successful for a number of reasons. Such reasons include, but are not limited to, the possibilities that the potential products may be found to be ineffective during clinical trials, fail to receive necessary regulatory approvals, are difficult to manufacture on a large scale, are uneconomical to market, are precluded from commercialization by proprietary rights of third parties or may not gain acceptance from health care professionals and patients. Readers are cautioned not to place undue reliance on the forward-looking statements contained herein. We undertake no obligation to publicly release the results of any revision to these forward-looking statements which may be made to reflect events or circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events. OVERVIEW Since our inception in 1991, we have been engaged in the development of pulmonary drug delivery systems. As of June 30, 2000, we had an accumulated deficit of $90.7 million. We have not been profitable since inception and expect to incur additional operating losses over the next several years as research and development efforts, preclinical and clinical testing activities and manufacturing scale-up efforts expand and as we plan and build our late-stage clinical and early commercial production capabilities. To date, we have not had any material product sales and do not anticipate receiving significant revenue from product sales during 2000. The sources of working capital have been equity financings, equipment lease financings, contract revenues and interest earned on investments. We have performed initial feasibility work on a number of compounds and have been compensated for expenses incurred while performing this work in several cases pursuant to feasibility study agreements with third parties. Once feasibility is demonstrated with respect to a potential product, we seek to enter into development contracts with pharmaceutical corporate partners. We currently have such agreements pursuant to which we are developing pulmonary delivery systems with Genentech, to manage cystic fibrosis with dornase alfa, the active ingredient in Pulmozyme, with Novo Nordisk, to manage diabetes using insulin and other blood glucose regulating compounds and with SmithKline Beecham, to manage acute and breakthrough pain using opioid analgesics. Our collaborative agreements with Novo Nordisk and SmithKline Beecham provide for reimbursement of research and development expenses as well as additional payments to us as we achieve certain significant milestones. We also expect to receive royalties from these development partners based on revenues from partner sales of product and to receive revenue from the manufacturing of unit dose packets and hand-held devices. We recognize revenues under the terms of these collaborative agreements as research and development expenses are incurred, but only to the extent they are reimbursable. Our collaborative development agreement with Genentech, entered into May 21, 1999, provides that certain expense reimbursements received from Genentech under this agreement are subject to repayment if the product does not receive approval from the Food and Drug Administration ("FDA"). Genentech reimburses development expenses incurred in the form of loans supported by promissory notes bearing interest at 2% over the prime rate. Upon receipt of FDA approval, we will receive a milestone payment that is larger than the loan principal and accrued interest, allowing the loan to be fully repaid at that time. We will also receive certain milestone payments at various points of product development. 7 10 RESULTS OF OPERATIONS Three Months Ended June 30, 2000 and 1999 Contract Revenues: Contract revenues for the three months ended June 30, 2000 increased to $4.8 million from $3.6 million for the same period in 1999. The revenue increase results primarily from the expansion of partner-funded project development programs with Novo Nordisk and SmithKline Beecham. Costs associated with contract revenues are included in research and development expenses. Research and Development Expenses: Research and development expenses for the three months ended June 30, 2000 increased to $11.5 million from $7.6 million for the same period in 1999. The increase results primarily from the hiring of additional scientific personnel and the expansion of research and development efforts to support the ongoing programs with Novo Nordisk, SmithKline Beecham and Genentech. These expenses represent proprietary research expenses as well as costs related to contract revenues and include salaries and benefits of scientific and development personnel, laboratory supplies, consulting services and expenses associated with the development of manufacturing processes. We expect research and development spending to increase significantly over the next few years as we continue to expand our development activities to support current and potential future collaborations and initiate commercial manufacturing of the AERx systems. The increase in research and development expenditures cannot be predicted accurately as it depends in part upon future success in pursuing existing development collaborations, as well as obtaining new collaborative agreements. General and Administrative Expenses: General and administrative expenses for the three months ended June 30, 2000 increased to $2.5 million from $2.3 million for the same period in 1999. The increase results primarily from additional personnel and leased facilities to support our expansion of research, development and manufacturing activities, and increased efforts to develop collaborative relationships with corporate partners. Interest Income: Interest income for the three months ended June 30, 2000 increased to $969,000 from $574,000 for the same period in 1999. The increase is due to the Company maintaining larger cash and investment balances. The higher cash and investment balances in the current period are due to the Company receiving net proceeds from a follow-on public offering of common stock for approximately $42.6 million in April 2000. The cash and investment balances for the same prior year period are due to the Company receiving net proceeds from a private offering of common stock for approximately $24.8 million in March 1999. Interest Expense and Other: Interest expense and other for the three months ended June 30, 2000 increased to $367,000 from $220,000 for the same period in 1999. The increase is the result of higher outstanding capital lease and equipment loan balances under existing equipment and lease lines of credit. Six Months Ended June 30, 2000 and 1999 Contract Revenues: Contract revenues for the six months ended June 30, 2000 increased to $10.5 million from $7.1 million for the same period in 1999. The revenue increase resulted primarily from the expansion of our partner-funded project development programs with Novo Nordisk and SmithKline Beecham. Research and Development Expenses: Research and development expenses for the six months ended June 30, 2000 increased to $22.4 million from $15.2 million for the same period in 1999. The increase is primarily attributable to the hiring of additional scientific personnel and the expansion of research and development efforts to support the ongoing programs with Novo Nordisk, SmithKline Beecham and Genentech. General and Administrative Expenses: General and administrative expenses for the six months ended June 30, 2000 increased to $4.5 million from $3.9 million for the same period in 1999. The increase results primarily from additional personnel and leased facilities to support our expansion of research, development and manufacturing activities, and increased efforts to develop collaborative relationships with corporate partners. 8 11 Interest Income: Interest income for the six months ended June 30, 2000 increased to $1.4 million from $1.0 million for the same period in 1999. The increase is due to the Company maintaining larger cash and investment balances. The higher cash and investment balances in the current period are due to the Company receiving net proceeds from a follow-on public offering of common stock for approximately $42.6 million in April 2000. The cash and investment balances in the same prior year period are due to the Company receiving net proceeds from a private offering of common stock for approximately $24.8 million in March 1999. Interest Expense and Other: Interest expense and other for the six months ended June 30, 2000 increased to $688,000 from $508,000 for the same period in 1999. The increase is the result of higher outstanding capital lease and equipment loan balances under existing equipment and lease lines of credit. LIQUIDITY AND CAPITAL RESOURCES The business has financed its operations since inception primarily through private placements and public offerings of capital stock, proceeds from equipment lease financing, contract revenues and interest earned on investments. As of June 30, 2000, we have received approximately $144.8 million in net proceeds from sales of capital stock. All equipment lines of credit have been fully utilized by June 2000. As of June 30, 2000, we had cash, cash equivalents and short-term investments of approximately $63.4 million. In April 2000, we completed a follow-on public offering of common stock, which raised approximately $42.6 million in net proceeds with the issuance of 2,875,000 shares of common stock. Net cash used in operating activities for the six months ended June 30, 2000 decreased to $12.5 million from $14.4 million for the same period in 1999. The decrease in net cash used resulted from increases in accrued liabilities and decreases in receivables, other current assets, accounts payable, and deferred revenue partially offset by an increase in the net loss. Net cash provided by investing activities for the six months ended June 30, 2000 increased to $12.9 million from $2.3 million for the same period in 1999. The increase results primarily from increased maturities of available-for-sale investments partially offset by increased purchases of investments and capital expenditures. Net cash provided by financing activities for the six months ended June 30, 2000 increased to $47.7 million from $27.0 million for the same period in 1999. The increase primarily reflects receipt of proceeds from the completion of a follow-on public offering of common stock in April 2000 which raised approximately $42.6 million in net proceeds, issuance of notes payable supporting loans received under a collaborative development agreement with Genentech, and net proceeds from the use of an existing equipment line of credit. The development of our technology and proposed products will require a commitment of substantial funds to conduct the costly and time-consuming research, preclinical studies and clinical trial activities necessary to develop and refine the technology and proposed products and bring such products to market. Future capital requirements will depend on many factors, including continued progress and results from research and development for the technology and drug delivery systems, the ability to establish and maintain favorable collaborative arrangements with others, progress with preclinical studies and clinical trials and the results thereof, the time and costs involved in obtaining regulatory approvals, the cost of development and the rate of scale-up for the required production technologies, the costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims and the need to acquire licenses or other rights to new technology. We expect that our cash requirements will increase in future periods and that the business will need to raise additional capital before it becomes profitable. Based on projected cash requirements, we believe that existing capital resources and committed funding from the collaborative partners, together with the proceeds from the April 2000 offering and projected interest income will enable the business to maintain current and planned operations, including anticipated capital spending requirements of approximately $50 million, through the end of 2001. However, there can be no assurance the business will not need to raise substantial additional capital to fund the operations and capital spending during this period. We may seek additional funding through collaborations or through public or private equity or debt financing. There cannot be any assurance that 9 12 additional financing can be obtained on acceptable terms, or at all. If additional funds are raised by issuing equity securities, dilution to shareholders may result. If adequate funds are not available, the business may be required to delay, reduce the scope of, or eliminate one or more of the research and development programs, or obtain funds through arrangements with collaborative partners or other sources that may require the business to relinquish rights to certain technologies or products that would otherwise not be relinquished. NEW ACCOUNTING PRONOUNCEMENTS In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." SAB 101 provides guidance on the recognition, presentation and disclosure of revenue in financial statements of all public registrants. Any change in our revenue recognition policy resulting from the interpretation of SAB 101 is to be reported as a change in accounting principle in the quarter ending December 31, 2000. We have not fully assessed the impact of the adoption of SAB 101. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market Risk Disclosures In the normal course of business, our financial position is routinely subject to a variety of risks, including market risk associated with interest rate movement. We regularly assess these risks and have established policies and business practices to protect against these and other exposures. As a result, we do not anticipate material potential losses in these areas. As of June 30, 2000, we had cash and cash equivalents and short-term investments of $63.4 million consisting of cash and highly liquid short-term investments. Our short-term investments will decline by an immaterial amount if market interest rates increase, and therefore, our exposure to interest rate changes has been immaterial. Declines of interest rates over time will, however, reduce our interest income from our short-term investments. Our outstanding capital lease obligations are all at fixed interest rates and, therefore, have minimal exposure to changes in interest rates. 10 13 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In June 1998, Eli Lilly and Company ("Lilly") filed a complaint against the Company in the United States District Court for the Southern District of Indiana. The complaint made various allegations against the Company, arising from the Company's decision to enter into an exclusive collaboration with Novo Nordisk A/S with respect to the development and commercialization of a pulmonary delivery system for insulin and insulin analogs. The Company has sponsored various studies of the pulmonary delivery of insulin analogs using materials supplied by Lilly under a series of agreements dating from January 1996. The Company and Lilly had also conducted negotiations concerning a long-term supply agreement under which Lilly would supply bulk insulin to the Company for commercialization in the Company's AERx Diabetes Management System, and a separate agreement under which the Company would license certain intellectual property to Lilly. These negotiations were terminated after the Company proceeded with its agreement with Novo Nordisk A/S. The complaint seeks a declaration that Lilly scientists were co-inventors of a patent application filed by the Company relating to pulmonary delivery of an insulin analog or, in the alternative, enforcement of an alleged agreement to grant Lilly a nonexclusive license under such patent application. The complaint also contains allegations of misappropriation of trade secrets, breach of fiduciary duty, conversion and unjust enrichment and seeks unspecified damages and injunctive relief. The Company filed an answer denying all material allegations of the complaint and a motion for summary judgment directed against all claims in Eli Lilly's complaint. The Court has issued two written rulings on the Company's motion substantially limiting the claims against the Company. Specifically, the Court granted the Company's motion as to Lilly's claim to enforce an alleged license agreement, for misappropriation of trade secrets, breach of fiduciary duty, conversion, estoppel and breach of contract (in part) and dismissed those claims from the case. The Court denied the Company's motion to Lilly's claims for declaratory relief, unjust enrichment and breach of contract (in part), based on factual disputes between the parties, and those issues remain to be resolved. No trial date has been set. Management believes that it has meritorious defenses against each of Eli Lilly's claims and that this litigation will not have a material adverse effect on the Company's results of operations, cash flows or financial position. However, there can be no assurance that the Company will prevail in this case. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) The Annual Meeting of shareholders of Aradigm Corporation was held on May 19, 2000. (b) Frank H. Barker, Wayne I. Roe, Reid M. Rubsamen, Richard P. Thompson and Virgil D. Thompson were elected to the Board of Directors to hold office until the next Annual Meeting of Shareholders and until their successors are elected and qualified. (c) The matters voted upon at the meeting and the voting of the shareholders with respects thereto were as follows: (1) The election of Frank H. Barker as Director to hold office until the next Annual Meeting of Shareholders and until his successor is elected and qualified: For: 14,197,595 Against: 27,107 (2) The election of Wayne I. Roe as Director to hold office until the next Annual Meeting of Shareholders and until his successor is elected and qualified: For: 14,197,995 Against: 26,707 (3) The election of Reid M. Rubsamen as Director to hold office until the next Annual Meeting of Shareholders and until his successor is elected and qualified: For: 14,202,695 Against: 22,007 11 14 (4) The election of Richard P. Thompson as Director to hold office until the next Annual Meeting of Shareholders and until his successor is elected and qualified: For: 14,192,693 Against: 32,009 (5) The election of Virgil D. Thompson as Director to hold office until the next Annual Meeting of Shareholders and until his successor is elected and qualified: For: 14,198,795 Against: 25,907 (6) Approval of an amendment to the Employee Stock Purchase Plan increasing the total number of shares of common stock authorized for issuance by 120,000 shares: For: 14,155,155 Against: 53,801 Abstained: 15,746 (7) Ratification of the selection of Ernst & Young LLP as independent auditors of the company for its fiscal year ended December 31, 2000: For: 14,085,808 Against: 128,583 Abstained: 10,311 ITEM 6. EXHIBITS (a) Exhibits 10.1* Employee Stock Purchase Plan, as amended. 27.1.1 Financial Data Schedule
- --------------- * Filed as an exhibit to the Company's Proxy Statement filed April 19, 2000 and incorporated herein by reference. (b) Reports on Form 8-K The Company did not file any reports on Form 8-K during the quarter ended June 30, 2000. 12 15 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: August 10, 2000 ARADIGM CORPORATION (Registrant) /s/ RICHARD P. THOMPSON -------------------------------------- Richard P. Thompson President and Chief Executive Officer /s/ NORMAN HALLEEN -------------------------------------- Norman Halleen Vice President, Finance and Administration and Chief Financial Officer 13 16 ARADIGM CORPORATION FORM 10-Q INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.1* Employee Stock Purchase Plan, as amended. 27.1 Financial Data Schedule
- --------------- * Filed as an exhibit to the Company's Proxy Statement filed April 19, 2000 and incorporated herein by reference. 14 EX-27.1 2 ex27-1.txt FINANCIAL DATA SCHEDULE
5 1,000 6-MOS DEC-31-2000 JAN-01-2000 JUN-30-2000 57,471 5,907 1,885 0 0 65,945 22,741 6,852 82,098 13,944 0 0 0 144,754 (91,094) 82,098 0 10,504 0 26,931 0 0 (676) 0 0 0 0 0 0 (15,751) (0.96) (0.96)
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