-----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, VpdVb898OSxsAehFnnhZNLLFZ+QyZfzDZ82mWddaMzrdGUP40Hs5vtdoCGYfI1zN MSf8ApTrQP0unuclTj2AHQ== 0001095811-00-000501.txt : 20000313 0001095811-00-000501.hdr.sgml : 20000313 ACCESSION NUMBER: 0001095811-00-000501 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000310 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALLERGAN SPECIALTY THERAPEUTICS INC CENTRAL INDEX KEY: 0001049711 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 330779207 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-23641 FILM NUMBER: 566177 BUSINESS ADDRESS: STREET 1: 2525 DUPONT DRIVE CITY: IRVINE STATE: CA ZIP: 92612 BUSINESS PHONE: 7142466912 MAIL ADDRESS: STREET 1: 2525 DUPONT DRIVE CITY: IRVINE STATE: CA ZIP: 92612 10-K405 1 FORM 10-K405 FOR FISCAL YEAR ENDED 12/31/99 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 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 NO. 0-23641 ALLERGAN SPECIALTY THERAPEUTICS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 33-0779207 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 2525 DUPONT DRIVE IRVINE, CALIFORNIA 92612 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 246-4500 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: CLASS A COMMON STOCK (TITLE OF CLASS) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the Registrant as of February 29, 2000 was $20,202,705.* The number of shares outstanding of the Registrant's Class A Common Stock was 3,272,690 as of February 29, 2000. DOCUMENTS INCORPORATED BY REFERENCE Registrant's Definitive Proxy Statement to be filed with the Securities and Exchange Commission (the "Commission") pursuant to Regulation 14A in connection with the 2000 Annual Meeting of Stockholders to be held on April 28, 2000 (the "2000 Annual Meeting") is incorporated herein by reference into Part III of this Report. TRADEMARK CLAIMS Zorac(R) and Tazorac(R) (tazarotene) are trademarks of Allergan, Inc. Accutane(R) (isotretinoin) is a trademark of Roche. - --------------- * Excludes the Class A Common Stock held by executive officers, directors and stockholders whose beneficial ownership equals or exceeds 10% of the Class A Common Stock outstanding at December 31, 1999, as well as the 1,000 shares of Class B Common Stock that were issued and outstanding on such date, for which no public market currently exists. Exclusion of such shares should not be construed to indicate that any such stockholder possesses the power, direct or indirect, to direct or cause the direction of the management or policies of the Registrant or that such person is controlled by or under common control with the Registrant. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 This Annual Report on Form 10-K contains certain forward-looking statements that involve risks and uncertainties. The actual future results for Allergan Specialty Therapeutics, Inc. ("ASTI" or the "Company") may differ materially from those discussed here. Additional information concerning factors that could cause or contribute to such differences can be found in this Annual Report on Form 10-K in Part II, Item 7 entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Certain Risk Factors Related to the Company's Business" and elsewhere throughout this Annual Report. PART I ITEM 1. BUSINESS BACKGROUND ASTI was formed by Allergan, Inc., a technology-driven, global health care company ("Allergan"), in November 1997 to research and develop various pharmaceutical products, including compounds based on retinoid and neuroprotective technologies. In March 1998, Allergan distributed all of the currently outstanding ASTI Class A Common Stock (the "ASTI Shares") to holders of Allergan's Common Stock, with such holders receiving one share of ASTI Class A Common Stock for each 20 shares of Allergan Common Stock held (the "Distribution"). Prior to the Distribution, Allergan contributed $200 million and licensed certain Allergan technology to ASTI, and ASTI issued to Allergan 1,000 shares of its Class B Common Stock. As the sole holder of ASTI's outstanding Class B Common Stock, Allergan has the option to repurchase all of the outstanding ASTI Shares under specified conditions. In addition, Allergan and ASTI entered into a Technology License Agreement, a Research and Development Agreement, a License Option Agreement, a Distribution Agreement and a Services Agreement (the "Allergan/ASTI Agreements"), each of which is described in the Prospectus of ASTI dated March 6, 1998 (the "Prospectus") as well as in the Notes to the Financial Statements in this Annual Report on Form 10-K. To date, ASTI has not performed, and does not intend to perform, any research, development or other activities on its own behalf, as it pays Allergan to perform all such activities pursuant to the terms of the Research and Development Agreement. At the inception of ASTI, ASTI focused its research and development activities on the following ASTI Products (the terms "ASTI Product," "Product Payments," "Pre-Selection Work," "Pre-Selection Product," "Developed Technology," "Developed Technology Product," "Developed Technology Royalties," "Licensed Product," "Technology Fee," and "Allergan Technology" as used herein have the definitions given them in the Prospectus): (1) Tazarotene (oral) for the treatment of cancer, acne, and psoriasis worldwide; (2) Memantine, a glutamate blocker being developed as a potential treatment to be used to halt the progression of optic nerve damage and for other ocular indications in the United States; (3) AGN 194310, an RAR antagonist/inverse agonist, being developed as a topical antidote to systemic retinoid-induced mucocutaneous toxicity and for the topical treatment of psoriasis worldwide. In addition to researching and developing ASTI Products, ASTI also anticipated at its inception that it would fund research and pre-clinical development of Pre-Selection Work projects to determine the suitability of projects to be elevated to ASTI Products. Since its inception, ASTI's Board of Directors has accepted additional ASTI Products offered by Allergan and has funded, and continues to fund, a number of additional promising Pre-Selection Work projects. ASTI PRODUCTS The following are each of the ASTI Products owned by ASTI and on which ASTI expended research and development funds in 1999: 1. AGN 194310 AGN 194310 is an RAR antagonist/inverse agonist, a class of compounds having a unique biology distinct from that observed for retinoid agonists. In late 1998, ASTI filed an Investigational New Drug application ("IND") for AGN 194310 for two indications: (1) topical antidote to systemic 2 3 retinoid-induced mucocutaneous toxicity and (2) topical treatment of psoriasis. AGN 194310 is currently in Phase II clinical development. Mucocutaneous toxicity is an almost universally observed side effect associated with the use of systemic retinoids such as Accutane(R). It is well established that mucocutaneous toxicity induced by systemic retinoids results from activation of RARs, particularly RAR gamma, and AGN 194310 is a potent antagonist of retinoid agonist activity at RARs. Thus, AGN 194310 may be effective in human clinical studies as a topical antidote to systemic retinoid-induced mucocutaneous toxicity. 2. Tazarotene (Oral) Tazarotene is a potent RAR beta gamma selective agonist which was recently introduced into the market as a topical treatment for psoriasis and acne under the brand name "Tazorac(R)" in the United States and Canada and "Zorac(R)" outside the United States and Canada. Although ASTI has no rights in the topical formulation of Tazarotene, the oral formulation of Tazarotene is an ASTI Product, and ASTI is currently investigating a number of possible indications, including acne and psoriasis as well as oncology. ASTI is currently in Phase II clinical development for the oral Tazarotene acne and psoriasis indications. A Phase I study is also currently ongoing to determine the maximum tolerated dose for use in oncology. 3. Memantine Memantine is a glutamate receptor blocker, which has been shown to protect nerve cells from injury and death in a number of in vitro and in vivo studies. In 1995, Allergan obtained exclusive ophthalmic rights to Memantine from Children's Hospital, Boston Massachusetts, and Merz + Co. GmbH & Co. The Allergan United States rights to Memantine were given to ASTI as an ASTI Product, and ASTI is investigating Memantine as a possible treatment for glaucoma. Memantine is in Phase III clinical development for the treatment of glaucoma. 4. Androgen Tears Dry eye or keratoconjunctivitis ("KCS") is a potentially debilitating disease, which affects more than 30 million people worldwide. Topical androgens have been shown to suppress the abnormal cell death associated with KCS and may also reestablish the normal anti-inflammatory ocular surface and lachrymal glands and allow for resolution of the symptoms associated with KCS. An IND was filed for Androgen Tears and the project was elevated to an ASTI Product in 1999, and a Phase I study was completed in 1999. In addition to the ASTI Products on which research and development funds were expended in 1999, Allergan proposed and ASTI's Board accepted three additional ASTI Products for 2000 and beyond: (1) A hypotensive lipid/timolol combination compound to be studied for the treatment of ocular hypertension and primary open angle glaucoma (currently in pre-clinical development); (2) A ketorolac/oflaxacin combination compound to be studied for the treatment of infectious corneal ulcers (currently in Phase I); (3) A novel clostridia endotoxin derivative. 3 4 PRE-SELECTION WORK In addition to ASTI Products, ASTI funded research and development in Pre-Selection Work projects, including those below, to explore additional candidates for ASTI Products: 1. RAR Alpha Selective Retinoids and Other Retinoids ASTI has funded research and development of retinoid compounds, including retinoid compounds which are selective for receptor families, as well as for individual receptor subtypes, in search of potential candidates for additional ASTI Products. For instance, Allergan has identified several series of RAR alpha specific agonists. Studies in pre-clinical models suggest that RAR alpha specific agonists may be of potential use in cancer such as breast cancer and leukemia. 2. Vision Sparing Project In collaboration with Cambridge NeuroSciences, Inc. ("CNSI"), ASTI has been funding research and development to identify novel treatments designed to protect the retina and optic nerve from glaucomatous injury. 3. Retinal Disease Project In 1999, ASTI continued to fund research and development into treatment of unwanted growth of new blood vessels in the retina or subretinal space, which growth has been associated with vision loss in patients with retinal diseases such as age-related macular degeneration. 4. Cytochroma Project In 1999, ASTI also funded research into the development of a specific P450 RAI inhibitor for the topical treatment of photo-damaged skin and acne. This work is being conducted pursuant to a collaboration with Cytochroma, Inc. POTENTIAL RESEARCH AND DEVELOPMENT EXPENDITURES Product development activity includes costs of pre-clinical studies; costs of Phase I, Phase II and Phase III human clinical trials; and costs of preparation and filing with the FDA (or similar governmental bodies in other countries) to register drugs for sale. It is anticipated that if ASTI were to fund the continued research and development of the current ASTI Products through FDA review for marketing clearance, the funding of these activities, together with the Pre-Selection Work expected to be undertaken by Allergan and funded by ASTI, would substantially exceed the remaining "Available Funds" (the $200 million contributed to ASTI by Allergan in connection with the Distribution, plus any investment income earned thereon, less certain research and development costs, ASTI's administrative expenses and the Technology Fee). Any estimates regarding costs and the use of Available Funds will change as ASTI Products are researched and developed and as projects are added or removed as ASTI Products. Because of the long-range nature of any pharmaceutical product research and development plan, research and development of a particular product or products could accelerate, slow down or be discontinued, research and development with respect to additional ASTI Products could be commenced, technology or products could be purchased or licensed, and other unforeseen events could occur, all of which would significantly affect the timing and amount of expenditures. The Board of Directors of ASTI recently approved a research and development plan for the year ending December 31, 2000 which, if executed in its entirety, would represent an acceleration in spending on ASTI's research and development programs. This potential accelerated spending is the result of the acceptance by ASTI of more research and development projects as well as more rapid research and development of compounds than anticipated at the time of ASTI's formation. ASTI anticipates the acceleration of spending could result in the use of substantially all of the funds available for research and development remaining in ASTI in the first half of 2001. See "Certain Risk Factors Related to the Company's Business -- No Assurance of Continued Research or Development of ASTI Products." 4 5 RELATIONSHIP BETWEEN ASTI AND ALLERGAN ASTI performs its research and development through a number of agreements with Allergan, including a Distribution Agreement, Technology License Agreement, Research and Development Agreement, License Option Agreement, and Services Agreement, each of which agreements is more fully described in the Prospectus. Additionally, ASTI's Restated Certificate of Incorporation provides that Allergan has an irrevocable option to purchase all of the issued and outstanding ASTI Shares (the "Purchase Option"). This Purchase Option will terminate on the 90th day after the date on which Allergan receives notice that the amount of cash and marketable securities held by ASTI is less than $15 million. If the Purchase Option is exercised, the exercise price will be the greatest of: (a) (i) 25 times the aggregate of (a) all worldwide payments made by and all worldwide payments due to be made by Allergan to ASTI with respect to all Licensed Products, Developed Technology Products and Pre-Selection Products for the four calendar quarters immediately preceding the quarter in which the Purchase Option is exercised (the "Base Period") and (b) all payments that would have been made and all payments due to be made by Allergan to ASTI during the Base Period if Allergan had not previously exercised its payment buy-out option with respect to any product; provided, however, that, for the purposes of the foregoing calculation, for any product which has not been commercially sold during each of the four calendar quarters in the Base Period, Allergan will be deemed to have made Product Payments, Developed Technology Royalties and Pre-Selection Product payments to ASTI for each such quarter equal to the average of the payments made during each of such calendar quarters during which such product was commercially sold, less (ii) any amounts previously paid to exercise any payment buy-out option for any product; (b) the fair market value of 1,000,000 shares of Allergan Common Stock determined as of the date Allergan provides notice of its intention to exercise its Purchase Option; (c) $250 million less the aggregate amount of all Technology Fee payments and research and development costs paid or incurred by ASTI as of the date the Purchase Option is exercised; or (d) $60 million. Pursuant to the License Option Agreement, ASTI has also granted a License Option to Allergan pursuant to which Allergan may, on a product-by-product and country-by-country basis, obtain from ASTI a perpetual, exclusive license (with the right to sublicense) to research, develop, make, have made and use an ASTI Product and to sell and have sold such product in the country or countries as to which the License Option is exercised. The License Option is described more fully in the Prospectus. GOVERNMENTAL REGULATION All ASTI Products, Developed Technology Products and Pre-Selection Products will require clearance by the FDA and comparable agencies in other countries before they can be marketed. During the research and development stage and as required, INDs for all new products will be filed with the FDA prior to the commencement of initial (Phase I) clinical testing in human subjects in the United States. In some instances this process could result in substantial delay and expense. After Phase I/II testing, which is intended to demonstrate the safety and functional characteristics of a product, extensive efficacy and safety studies in patients must be conducted. After completion of Phase III clinical testing, an NDA is submitted, and its clearance involves an extensive review process. There can be no marketing in the United States of any product for which an NDA has been submitted until that NDA has been accepted for filing and cleared by the FDA. It is impossible to determine the amount of time that will be required to obtain clearance from the FDA to market any product or the cost of obtaining such clearance. Whether or not FDA clearance has been obtained, marketing clearance of a product by the relevant regulatory authorities must be obtained in each foreign country before the product may be marketed in that country. The clearance procedures vary from country to country, and the time required may be longer or 5 6 shorter than that required for FDA clearance. In many foreign countries, pricing and reimbursement approvals are also required. Although there are certain procedures for unified filing in the European Community, in general each country has its own procedures and requirements. All facilities and manufacturing techniques used for the manufacture of products for clinical use or for sale must conform with "current Good Manufacturing Practices," the FDA regulations governing the production of pharmaceutical products. These regulations govern a range of activities including manufacturing, packaging, quality assurance and recordkeeping. Other FDA regulations govern labeling and advertising materials. From time to time, the FDA and other federal, state and local government agencies may adopt regulations that affect the manufacturing and marketing of pharmaceutical products. Environmental regulations will also affect the manufacture of such products. Pharmaceutical products and their manufacture often use chemicals and materials that may be classified as hazardous or toxic and/or require special handling and disposal. Some of the therapeutic agents used in ASTI Products, Developed Technology Products and Pre-Selection Products may also be regulated by the United States Drug Enforcement Administration. PATENTS ASTI believes that Allergan's current patents, and patents that may be obtained in the future, are important to ASTI's operations. Patent protection generally has been important in the pharmaceutical industry, and the commercial success of ASTI Products, Pre-Selection Products and Developed Technology Products may depend, in part, upon Allergan's ability to obtain patent protection. Although Allergan's existing patents, pending patents, and any patents obtained in the future may be of importance to ASTI, there can be no assurance that any additional patents will be issued or that any patents now or hereafter issued will be of commercial benefit. Although a patent has a statutory presumption of validity in the United States, the issuance of a patent is not conclusive as to such validity or as to the enforceable scope of the claims therein, and the validity and enforceability of a patent after its issuance by the United States Patent Office can be challenged in litigation. If the outcome of such litigation is adverse to the owner of the patent, third parties may then be able to use the invention pertaining to the patent, in some cases without payment. There can be no assurance that patents covering ASTI Products, Developed Technology Products or Pre-Selection Products, if and when issued, will not be infringed or successfully avoided through design innovation. It is also possible that third parties will obtain patents or other proprietary rights that might be necessary or useful to Allergan or ASTI. In cases where third parties are the first to invent a particular product or technology, it is possible that those parties will obtain patents that will be sufficiently broad so as to prevent Allergan or ASTI from using certain Developed Technology or other Allergan Technology or from marketing certain products. If licenses from third parties are necessary and cannot be obtained, commercialization of such products could be delayed or prevented. Third parties may claim that ASTI Products infringe their patents; in such event Allergan or ASTI would need to defend against such claims. Defense of such claims could be costly and time consuming. If licenses to the third party's patents are available, the payments required by the third parties could be significant. In addition, ASTI may use substantial unpatented technology. There can be no assurance that others will not develop similar technology. Allergan licenses certain intellectual property from third parties which it will sublicense to ASTI pursuant to the Technology License Agreement. Under the terms of certain of its license agreements, Allergan may be obligated to exercise diligence and make certain royalty and milestone payments as well as incur costs related to filing and prosecuting the underlying patents. Each agreement is terminable by either party upon notice if the other party defaults in its obligations. Should Allergan default under any of its agreements, Allergan and therefore ASTI may lose their rights to market and sell products based upon such licensed technology. In addition, there can be no assurance that Allergan's licensors will meet their obligations to Allergan pursuant to such licenses. In such event, ASTI's results of operations and business prospects would be materially and adversely affected. See "Certain Risk Factors Related to the Company's Business -- Reliance on Proprietary Technologies; Unpredictability of Patent Protection." 6 7 FACILITIES AND PERSONNEL ASTI is not expected to hire a significant number of employees or to acquire significant property or assets prior to completion of the development stage of the ASTI Products. However, pursuant to the Research and Development Agreement, Allergan has been engaged by ASTI to research and develop human pharmaceutical products under work plans and cost estimates recommended by Allergan and accepted by ASTI. Decisions as to whether and/or when to hire employees, purchase property or assets, perform administrative functions, engage Allergan to perform administrative services under the Services Agreement, engage others to do so or engage third parties other than or in addition to Allergan to perform research and development activities will be made by ASTI. COMPETITION Any ASTI Product successfully developed under the Research and Development Agreement will face competition from other therapies for the same indications. Competitors potentially include any of the world's pharmaceutical and biotechnology companies. Allergan is also free to develop competitive products for its own account. Furthermore, the fundamental technology underlying retinoids licensed to ASTI is also cross-licensed to Ligand Pharmaceuticals Incorporated ("Ligand") and therefore competition from similar activities by Ligand in retinoids is likely. In addition, pursuant to the agreement between Allergan and Ligand, each party has been granted non-exclusive rights to use the Allergan Ligand Retinoid Therapeutics, Inc. ("ALRT") technology with respect to any unsynthesized compounds, provided that such license will become exclusive with respect to any compound with respect to which an IND is filed with and accepted by the FDA. Accordingly, no assurance can be given that Ligand will not be the first party to file an IND with respect to any retinoid compound under research by ASTI, thereby preventing ASTI and Allergan from undertaking any further research, development or commercialization with respect to such compound. See "Certain Risk Factors Related to the Company's Business -- Competition." EMPLOYEES At December 31, 1999, ASTI had no full-time employees, and all of the Company's executive officers are affiliated with Allergan, the holder of all of the Company's outstanding Class B Common Stock. 7 8 EXECUTIVE OFFICERS The executive officers of ASTI and their ages as of March 1, 2000 are as follows:
NAME AGE POSITION ---- --- -------- William C. Shepherd.................. 61 Chairman of the Board, President and Chief Executive Officer Douglas S. Ingram.................... 37 General Counsel and Secretary Dwight J. Yoder...................... 54 Chief Financial Officer
Officers are appointed by and hold office at the pleasure of the Board of Directors. Mr. Shepherd has been President and Chief Executive Officer of the Company since March 1998. He also served as Chairman of the Board of Allergan, from January 1996, and as Allergan's President and Chief Executive Officer from 1992, until his retirement effective January 1, 1998. Since his retirement, Mr. Shepherd has served as a consultant to Allergan. Mr. Shepherd first joined Allergan in 1966 and from 1984 to 1991, was its President and Chief Operating Officer. He serves on the Board of Directors of ANSYS Diagnostics, Inc., a private company engaged in the development, manufacture and marketing of disposable medical diagnostic products. Mr. Shepherd was elected to the ASTI Board in 1998. Mr. Ingram has been the General Counsel and Secretary of the Company since October 1998. He has also been the Associate General Counsel of Allergan since August 1998, and its Assistant Secretary since November 1998. Prior to that, Mr. Ingram was Allergan's Assistant General Counsel from January 1998 and Senior Attorney and Chief Litigation Counsel of Allergan from March 1996, when he first joined Allergan. Prior to joining Allergan, Mr. Ingram was, from August 1988 to March 1996, an attorney with the Orange County office of the law firm Gibson, Dunn & Crutcher. Mr. Yoder has been the Chief Financial Officer of the Company since its formation in November 1997 and had been the Chief Financial Officer of Allergan Ligand Retinoid Therapeutics, Inc. from July 1995 until November 1997. Mr. Yoder has been Senior Vice President of Allergan from January 2000. Mr. Yoder was Senior Vice President and Controller of Allergan from July 1996 to January 2000, and was its Vice President and Controller from 1990, when he first joined Allergan. Mr. Yoder is a member of the Board of Directors of the Southern California Chapter of the Arthritis Foundation. ITEM 2. PROPERTIES ASTI's offices are located at Allergan's principal offices at 2525 Dupont Drive, Irvine, California 92612. ASTI does not own or lease any properties. ITEM 3. LEGAL PROCEEDINGS From time to time, ASTI may be involved in litigation relating to claims arising out of its operations in the normal course of business. As of the date of this Annual Report on Form 10-K, the Company is not a party to any legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 8 9 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The ASTI Shares are subject to the Purchase Option. See "Relationship Between ASTI and Allergan" under Part I above. The following table shows the quarterly price range of the ASTI Shares during the period listed, as reported on the Nasdaq National Market. Such quotations represent inter-dealer prices without retail markup, markdown or commission and may not necessarily represent actual transactions.
1999 1998 --------------------- ----------------- CALENDAR QUARTER HIGH LOW HIGH LOW ---------------- --------- --------- ------- ------- First(1)............................. $10 $ 9 1/4 $13 $ 9 Second............................... 11 9 33/64 12 1/2 10 Third................................ 12 1/2 10 3/8 10 5/8 9 Fourth............................... 13 11/16 11 1/2 9 7/8 8 1/4
- --------------- (1) The first quarter of 1998 is deemed to have started on March 10, 1998, the date on which the Company's Class A Common Stock was first traded on the Nasdaq National Market. The Class A Common Stock of ASTI is traded on the Nasdaq National Market under the symbol "ASTI." The last sales price for the Company's Class A Common Stock, as reported by the Nasdaq National Market on February 29, 2000, was $15.00. At February 29, 2000, there was one holder of record of the Class B Common Stock (Allergan), and there were 6,564 holders of record of the Class A Common Stock. This number does not reflect persons or entities who hold their Class A Common Stock in nominee or "street name" through various brokerage firms. The Company has not declared or paid any cash dividends on its Class A Common Stock to date. ASTI is prohibited from using Available Funds to pay dividends on the Class A Common Stock and, accordingly, does not expect to pay any dividends. 9 10 ITEM 6. SELECTED FINANCIAL DATA The following selected financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," the Financial Statements of the Company and related notes thereto included elsewhere in this Annual Report on Form 10-K.
CUMULATIVE PERIOD FROM PERIOD FROM NOVEMBER 12, NOVEMBER 12, 1997 1997 YEAR ENDED YEAR ENDED (DATE OF INCEPTION) (DATE OF INCEPTION) DECEMBER 31, DECEMBER 31, TO DECEMBER 31, TO DECEMBER 31, IN THOUSANDS, EXCEPT SHARE DATA 1999 1998 1997 1999 - ------------------------------- ----------------- ----------------- ------------------- ------------------- RESULTS OF OPERATIONS: Revenues....................... $ 7,110 $ 9,043 $ -- $ 16,153 Costs and expenses Research and development..... 49,200 35,886 -- 85,086 Technology fees.............. 5,500 6,520 -- 12,020 General and administrative expenses.................. 1,198 933 -- 2,131 ---------- ---------- ---- ---------- Total costs and expenses........... 55,898 43,339 -- 99,237 ---------- ---------- ---- ---------- Net loss....................... $ (52,806) $ (36,808) $ -- $ (89,614) ========== ========== ==== ========== Basic and diluted loss per share........................ $ (16.13) $ (11.24) $ -- $ (27.37) ========== ========== ==== ========== Basic and diluted shares outstanding.................. 3,273,690 3,273,690 100 3,273,690
DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997 ----------------- ----------------- ----------------- BALANCE SHEET DATA: Cash.......................................... $ 47 $ -- $ 1 Investments................................... 105,252 158,667 -- Total assets.................................. 112,022 165,137 1 Payable to Allergan, Inc...................... 6,047 4,509 -- Total liabilities............................. 6,047 4,804 -- Total stockholders' equity.................... 105,975 160,333 1
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES Allergan contributed a total of $200 million in cash to ASTI in March 1998. Through December 31, 1999, ASTI's funds were used primarily to fund activities conducted under the Research and Development Agreement with Allergan and to reimburse Allergan for the research and development costs relating to the ASTI Products and Pre-Selection Work. Remaining funds will be used primarily to continue the funding of activities under the Research and Development Agreement with Allergan. At the time of its formation, ASTI was projected to spend its funds over a five-year period. The Board of Directors of ASTI recently approved a research and development plan for the year ending December 31, 2000 which, if executed in its entirety, would represent an acceleration in spending on ASTI's research and development programs. This potential accelerated spending is the result of the acceptance by ASTI of more research and development projects as well as more rapid research and development of compounds than anticipated at the time of ASTI's formation. ASTI anticipates the acceleration of spending could result in the use of substantially all of the funds available for research and development remaining in ASTI in the first half of 2001. Pursuant to ASTI's Restated Certificate of Incorporation and Allergan's rights as the sole holder of all of the ASTI Class B Common Stock, Allergan has certain rights (but no obligation) to purchase all of the ASTI Class A Common Stock, which purchase rights could be triggered by the use of substantially all of ASTI's funds. Allergan's purchase rights, which expire if not exercised by Allergan by the 90th day after the date on which Allergan receives notice that the amount of cash and marketable securities held by ASTI is less than $15 million, are summarized in 10 11 ASTI's Prospectus dated March 6, 1998. See also "No Assurance of Continued Research or Development of ASTI Products" at page 13 for further discussion of factors impacting the rate of ASTI spending on research and development. ASTI is not expected to require facilities or capital equipment of its own during the term of the Research and Development Agreement. Pending the use of ASTI's cash resources for the research and development activities described in this Annual Report on Form 10-K, ASTI has invested such resources in investment grade securities including money market funds, equity securities and debt instruments of financial institutions and corporations with strong credit ratings. There can be no assurance, particularly given the existence of the Allergan/ASTI Agreements, that ASTI will be able to raise any additional capital. Such additional capital, if raised, would most likely reduce the per share proceeds available to holders of ASTI Shares if the Purchase Option were to be exercised. See "Relationship Between ASTI and Allergan." OPERATIONS From ASTI's formation and continuing through completion of the development stage of the ASTI Products or until Allergan exercises its Purchase Option, ASTI's operations will be conducted largely pursuant to the Allergan/ASTI Agreements. ASTI's revenues consist primarily of interest and investment income (which has been included in Available Funds). In later years, ASTI may receive revenues through the commercialization of ASTI Products either from Allergan in the form of Product Payments, if Allergan were to exercise its License Option for any ASTI Product, or otherwise if Allergan's License Option for any ASTI Product were to expire unexercised and ASTI were to commercialize the product alone or with a third party. ASTI also may receive revenues in the form of Developed Technology Royalties or Pre-Selection Product payments. ASTI received $400,000 in 1999 and $500,000 in 1998 in Pre-Selection Product payments in connection with a collaboration agreement between Allergan and Warner-Lambert (see note 4 to Financial Statements). However, ASTI is not expected to earn substantial revenues, other than interest and investment income, unless or until ASTI Products or, to a lesser extent, Pre-Selection Products or Developed Technology Products are successfully commercialized. As a result of the foregoing factors, it is anticipated that ASTI will incur substantial losses which will likely be recurring. ASTI incurred a net loss of $52.8 million in 1999 and $36.8 million in 1998. Interest and investment income was $7.1 in 1999 and $9.0 million in 1998 as a result of investment of the unexpended cash held by ASTI from its commencement of operations on March 10, 1998. Interest will decrease in the future, subject to general interest rate trends, as funds are used in performance of research and development activities. Research and development expenses were $49.2 million in 1999 and $35.9 million in 1998. The 1998 amount includes reimbursement to Allergan for research and development services performed during the period from October 24, 1997 through March 9, 1998. ASTI expects spending on research and development programs to accelerate in 2000. This potential accelerated spending is the result of the acceptance by ASTI of more research and development projects as well as more rapid research and development of compounds than anticipated at the time of ASTI's formation. ASTI anticipates the acceleration of spending could result in the use of substantially all of the funds available for research and development remaining in ASTI in the first half of 2001. ASTI's expenses largely have been and will in the future be incurred under the Allergan/ASTI Agreements. ASTI will have research and development expenses as a result of (i) the payment of research and development costs under the Research and Development Agreement, most likely through reimbursements to Allergan, and (ii) payment of the Technology Fee to Allergan under the Technology License Agreement. The Technology License Agreement provides that the Technology Fee will be payable monthly by ASTI over a period of four years and will be $833,333 for each of the 12 months following October 23, 1997, $558,333 per month for the following 12 months, $275,000 per month for the following 12 months and $166,667 per month for the following 12 months; provided that the Technology Fee will no longer be payable at such time as fewer 11 12 than two ASTI Products are being researched or developed by ASTI and/or have been licensed by Allergan. The Technology Fee is for ASTI's use of Allergan Technology existing as of the date of the Technology License Agreement or during the term of the Research and Development Agreement. The Technology Fee payment amounts are based upon the expected value of the originally transferred technology. The value of the technology transferred is expected to decrease as ASTI further develops the technology on its own. The Technology Fee is being expensed by ASTI on a straight-line basis over 48 months. Pursuant to the Research and Development Agreement, Allergan charges ASTI for both "direct" and "indirect" research and development costs based on Allergan's internal R&D Project Accounting System, as well as an amount equal to 10% of such direct and indirect costs representing an allocation of Allergan corporate overhead. Direct costs include third party contract costs, such as those expenses paid to outside vendors, which can be directly identified to a specific research and development program or project. Indirect costs include the fully-absorbed cost of labor which can be specifically identified with or physically traced to a project using the internal Allergan R&D Project Accounting System. The fully-absorbed cost of labor included with indirect costs consists of actual labor hours charged to ASTI projects plus research and development overhead costs of approximately 200% to 250% of such actual labor hours charged. The research and development overhead allocations are based upon Allergan's historical overhead experience arising from its research and development activities and include only overhead costs incurred by Allergan's Research and Development Department. In addition, in order to fully and fairly allocate an appropriate portion of Allergan's general corporate overhead to projects undertaken by Allergan on behalf of ASTI, an amount equal to 10% of the fully-absorbed cost of labor for each ASTI project is added to the amount charged by Allergan to ASTI. Such costs are separate and distinct from the direct and indirect costs charged to research and development identified in the Research and Development Agreement. Such costs are charged to ASTI by Allergan for the purpose of recovery of such costs applicable to ASTI projects. Items included in general corporate overhead include human resources, accounting, treasury, payroll, accounts payable, legal, procurement, tax and common area maintenance costs. None of these services is performed within Allergan's Research and Development Department. As a result, such costs are in addition to the costs incurred within research and development as described in the Research and Development Agreement. A portion of the costs of these services calculated to be attributable to Allergan's Research and Development Department comprises the 10% allocation of Allergan corporate overhead. The 10% proportionate share is based on the number of Research and Development Department personnel relative to total personnel at Allergan's corporate headquarters. CERTAIN RISK FACTORS RELATED TO THE COMPANY'S BUSINESS The Company believes that certain statements made by the Company in this report and in other reports and statements released by the Company constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, such as comments which express the Company's opinions about trends and factors which may impact future operating results. Disclosures which use words such as the Company "believes," "anticipates," "expects" and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties which could cause actual results to differ materially from expectations. Any such forward-looking statements, whether made in this report or elsewhere, should be considered in context with the various disclosures made by the Company about its businesses including, without limitation, the factors discussed below. In addition to those risks identified elsewhere in this Annual Report on Form 10-K, the Company's business and results of operations are subject to other risks, including the following risk factors: NEW COMPANY. ASTI was formed in late 1997 and is subject to the risks inherent in the establishment of a new business enterprise in the biotechnology industry. ASTI will incur substantial losses for several years due to the long-term nature of the research and development of pharmaceutical products through clinical testing and the regulatory process, which losses may never be recovered. 12 13 NO ASSURANCE OF CONTINUED RESEARCH OR DEVELOPMENT OF ASTI PRODUCTS. There can be no assurance that the ASTI Board of Directors will continue the funding of the research and development of all of the current ASTI Products or Pre-Selection Work, or that any ASTI Products can be successfully researched, developed and/or commercialized within the anticipated cost estimates or time frames, if at all. Certain of the ASTI Products are at critical stages of research and development, and technical and clinical outcomes are impossible to predict. Because of the long-range nature of any pharmaceutical product research and development plan, research and development of a particular product or project could accelerate, slow down or be discontinued, and other unforeseen events could occur, all of which would significantly affect the timing and amount of ASTI's expenditures on a particular product, or in total. As a result, estimates of costs and timing of research and development programs and for the use of Available Funds may not be accurate. There can be no assurance that Allergan will recommend, or that ASTI will approve, additional products for research and development as ASTI Products beyond the initial ASTI Products. Although ASTI has received from Allergan a license to use Allergan Technology for the purpose of researching, developing and commercializing ASTI Products, some or all of the ASTI Products may require new technologies or enhancements or modifications to existing Allergan Technology, and there can be no assurance that such technology can or will be successfully developed or acquired. Even if appropriate technology is available or developed, there can be no assurance that such ASTI Products will be successfully researched or developed (or be researched or developed in a timely fashion) or be proven to be safe and efficacious in clinical trials. NEED FOR REGULATORY CLEARANCE. All ASTI Products, Developed Technology Products and Pre-Selection Products will require FDA clearance before such products may be lawfully marketed in the United States. Applications for FDA clearance must be based on costly and extensive clinical trials designed to demonstrate safety and efficacy. Clearance to market such products will also be required from corresponding regulatory authorities in foreign countries before such products may be marketed in those countries. Such clearance often involves pricing and reimbursement approvals in addition to clearance based on safety and efficacy. Delay in obtaining FDA and/or foreign regulatory clearance or pricing or reimbursement approvals for any such product may have a material adverse effect on the commercial success of such product. There can be no assurance that the necessary regulatory clearances and approvals will be obtained in a timely fashion or, if obtained, that such clearances and approvals will not be revoked or withdrawn. NO ASSURANCE OF SUFFICIENCY OF FUNDS OR AVAILABILITY OF ADDITIONAL FUNDS. Allergan has contributed $200 million in cash to ASTI. Allergan has no obligation to contribute additional funds to ASTI, and, to the best of ASTI's knowledge, has no present intention to do so. It is anticipated that if ASTI were to fund the continued research and development of the ASTI Products through FDA review for marketing clearance, the funding of these activities, together with any Pre-Selection Work undertaken by Allergan and/or ASTI and funded by ASTI, would require substantially all of the Available Funds. There can be no assurance that ASTI will have sufficient funds to complete the research and development of any or all of the ASTI Products. Allergan's rights under the Allergan/ASTI Agreements may limit ASTI's ability to raise funds, or may prevent ASTI from doing so, if ASTI needs additional funds to continue or complete research and development of any ASTI Product. If ASTI were to attempt to raise funds following the expiration of the Purchase Option, ASTI would have very little cash, few assets and an undeterminable number of products under research and development. Allergan would at that time have the unilateral option to license any or all ASTI Products for such countries for which Allergan's License Option had not previously expired. Third parties might therefore be reluctant to lend money to ASTI, or to invest in ASTI. NO ASSURANCE OF SUCCESSFUL MANUFACTURING OR MARKETING. Even if ASTI Products are developed and receive necessary regulatory clearances and approvals, there can be no assurance that the ASTI Products will be successfully manufactured for clinical trials or successfully manufactured or marketed for commercial sale. To be successfully marketed, any ASTI Product must be manufactured in commercial quantities in compliance with regulatory requirements and at an acceptable cost. Any significant delays in the completion of validation and licensing of expanded or new facilities could have a material adverse effect on the ability to continue clinical trials of and ultimately to market ASTI Products on a timely and profitable basis. If Allergan 13 14 does not exercise its License Option for an ASTI Product (and does not exercise the Purchase Option), ASTI will have to make alternative arrangements for manufacturing that ASTI Product, and there can be no assurance that ASTI will be able to do so. If Allergan exercises its License Option for any ASTI Product, Allergan may need to develop and/or expand its marketing capabilities to commercialize such Licensed Product effectively. If Allergan exercises its License Option for any ASTI Product, and does not at the time the product is to be commercialized have a sales force in the relevant country or countries, Allergan will need to arrange for marketing by third parties outside of the United States, and, if the product is not within Allergan's target markets at such time, within the United States. If Allergan does not exercise its License Option for an ASTI Product (and does not exercise the Purchase Option), ASTI will need to find other means to commercialize that ASTI Product not involving Allergan, and there can be no assurance that ASTI will be able to do so. At the present time, ASTI does not have, nor, through the development stage of the ASTI Products, does it expect to develop, any manufacturing or marketing capability. If ASTI decides to manufacture or market one or more ASTI Products itself, ASTI will need substantial additional funds. There is no assurance that additional funds will be available, or will be available on attractive terms, and Allergan has no obligation to supply any additional funds to ASTI. In addition, ASTI may not use Available Funds for this purpose without Allergan's consent. If either Allergan or ASTI seeks a third party to manufacture or market an ASTI Product, there can be no assurance that satisfactory arrangements can be successfully negotiated or that any such arrangements will be on commercial terms acceptable to Allergan or ASTI. In addition, even if ASTI decides to license any ASTI Product to a third party, agreements with that third party, if available, may be on terms less favorable to ASTI than the terms of the Allergan/ASTI Agreements. Even if acceptable manufacturing and marketing resources are available, there can be no assurance that any ASTI Products will be accepted in the marketplace. There can be no assurance that there will be adequate reimbursement by health insurance companies or other third party payors for any ASTI Products that are marketed. NO ASSURANCE OF EXERCISE OF ALLERGAN'S OPTIONS. Allergan is not obligated to exercise the License Option for any ASTI Product or to exercise the Purchase Option, and Allergan will exercise any such option only if it is in Allergan's best interest to do so. The timing of the exercise of the Purchase Option is within Allergan's sole discretion, and Allergan may choose to exercise the Purchase Option at a time when the Purchase Option exercise price is as low as possible. Because the contractual relationship between Allergan and ASTI contemplates that Allergan will perform research and development activities on behalf of ASTI, in the event of Allergan's failure to exercise the Purchase Option, ASTI would be required to seek alternative research and development facilities, either independently or with a third party. There can be no assurance that ASTI would be able to obtain access to adequate research and development facilities in such event on a timely basis, on acceptable terms, or at all. The timing of the exercise of the License Option with respect to any Licensed Product is also within Allergan's sole discretion and thereafter research, development and funding of any such product will be controlled by Allergan. RELIANCE ON PROPRIETARY TECHNOLOGIES; UNPREDICTABILITY OF PATENT PROTECTION. Patent protection generally has been important in the pharmaceutical industry. Therefore, ASTI's financial success may depend in part upon Allergan obtaining patent protection for the technologies incorporated in ASTI Products. Allergan will determine which patent applications to pursue, and the expense of obtaining and maintaining patents covering Developed Technology will be paid by ASTI during the term of the Research and Development Agreement. However, there can be no assurance that patents will be issued covering any products, or that any existing patents or patents issued in the future will be of commercial benefit. In addition, it is impossible to anticipate the breadth or degree of protection that any such patents will afford, and there can be no assurance that any such patents will not be successfully challenged in the future. If Allergan is unsuccessful in obtaining or preserving patent protection, or if any products rely on unpatented proprietary technology, there can be no assurance that others will not commercialize products substantially identical to such products. 14 15 Patents have been issued to third parties covering various therapeutic agents, products and technologies. There can be no assurance that any ASTI Products, Developed Technology Products or Pre-Selection Products will not infringe patents held by third parties. In such event, licenses from such third parties would be required, or their patents would have to be designed around. There can be no assurance that such licenses would be available or that they would be available on commercially attractive terms, or that any necessary redesign could be successfully completed. Allergan licenses certain intellectual property from third parties which it will sublicense to ASTI pursuant to the Technology License Agreement. Under the terms of certain of its license agreements, Allergan may be obligated to exercise diligence and make certain royalty and milestone payments as well as incur costs related to filing and prosecuting the underlying patents. Each agreement is terminable by either party upon notice if the other party defaults in its obligations. Should Allergan default under any of its agreements, Allergan and therefore ASTI may lose their rights to market and sell products based upon such licensed technology. In addition, there can be no assurance that Allergan's licensors will meet their obligations to Allergan pursuant to such licenses. In such event, ASTI's results of operations and business prospects would be materially and adversely affected. COMPETITION. ASTI Products, Developed Technology Products and Pre-Selection Products are likely to face competition from other therapies for the same indications. Competitors potentially include any of the world's pharmaceutical and biotechnology companies. Many pharmaceutical companies have greater financial resources, technical staffs and manufacturing and marketing capabilities than Allergan or ASTI. A number of companies have developed and are developing competing technologies and products. To the extent that ASTI Products, Developed Technology Products and Pre-Selection Products incorporate therapeutic agents that are off-patent or therapeutic agents marketed by multiple companies, such products will face more competition than products incorporating proprietary therapeutic agents. The fundamental technology underlying retinoids licensed to ASTI is also cross-licensed to Ligand and therefore competition from similar activities by Ligand and its collaborators in retinoids is likely. In addition, pursuant to an agreement between Allergan and Ligand, each party has been granted non-exclusive rights to use any unsynthesized compounds developed by ALRT provided that such license will become exclusive with respect to any compound for which an IND is filed with and accepted by the FDA. Accordingly, no assurance can be given that Ligand will not be the first party to file an IND with respect to any retinoid compound under research by ASTI, thereby preventing ASTI and Allergan from undertaking any further research, development or commercialization with respect to such compound. POTENTIAL CONFLICTS OF INTEREST BETWEEN ALLERGAN AND ASTI. Because Allergan may develop and/or market products (including Developed Technology Products and Pre-Selection Products) for its own account, independent of ASTI, that compete directly with ASTI Products, Allergan and ASTI may have conflicting interests with respect to certain products and/or certain markets. In addition, ASTI Products, Developed Technology Products and Pre-Selection Products may compete with one another. Allergan Technology excludes, and ASTI will have no rights with respect to, any topical formulation of Tazarotene. Allergan is currently marketing a topical formulation of Tazarotene for the treatment of psoriasis and acne in the United States and Canada under the brand name "Tazorac" and outside of the United States and Canada under the brand name "Zorac." DEPENDENCE ON ALLERGAN FOR PERSONNEL AND FACILITIES. ASTI will depend substantially on Allergan for research and development activities to be performed under the Research and Development Agreement. Although ASTI may perform directly, or engage other third parties to perform on its behalf, some of these activities, it is likely that Allergan will be responsible for executing substantially all of ASTI's research and development activities. While Allergan believes that its current and planned personnel and facilities will be adequate for the performance of its duties under the Research and Development Agreement, such personnel will perform services in the same facilities for Allergan itself. Subject to Allergan's obligation to use diligent efforts under the Research and Development Agreement, Allergan may allocate its personnel and facilities as it deems appropriate. Allergan's own research and development activities may restrict the resources that 15 16 otherwise would be available for performing Allergan's duties under the Research and Development Agreement. RELATIONSHIP BETWEEN ASTI AND ALLERGAN MAY LIMIT ASTI'S ACTIVITIES AND MARKET VALUE. The terms of the Allergan/ASTI Agreements and ASTI's Restated Certificate of Incorporation were not determined on an arm's-length basis and certain terms may limit ASTI's activities and its market value. ASTI's Restated Certificate of Incorporation prohibits ASTI from taking or permitting any action that might impair Allergan's rights under the Purchase Option. Prior to the expiration of the Purchase Option, ASTI may not, without the consent of the holders of ASTI Class B Common Stock, merge or liquidate, or sell, lease, exchange, transfer or dispose of any substantial assets, or amend its Restated Certificate of Incorporation to alter the Purchase Option, ASTI's authorized capitalization, or the provisions of the Restated Certificate of Incorporation governing ASTI's Board of Directors. Because Allergan owns all of the outstanding Class B Common Stock, Allergan is able to influence significantly or control the outcome of any of the foregoing actions requiring approval by the Class B stockholders of ASTI. The ability of Allergan to significantly influence or control such matters, together with the provisions of ASTI's Restated Certificate of Incorporation eliminating the right of the ASTI stockholders to call special meetings of stockholders, could affect the liquidity of the ASTI Shares and have an adverse effect on the price of the ASTI Shares, and may have the effect of delaying or preventing a change in control of ASTI, including transactions in which stockholders might otherwise receive a premium for their shares over the current market price. Neither the terms of the ASTI/Allergan Agreements nor ASTI's Restated Certificate of Incorporation prohibit Allergan from transferring its ASTI Class B Common Stock. The special rights accorded to the holder or holders of the ASTI Class B Common Stock will expire upon expiration of the Purchase Option. So long as the Purchase Option is exercisable, the market value of the ASTI Shares will be limited by the Purchase Option exercise price. The Purchase Option exercise price was not determined on an arm's-length basis. The Purchase Option exercise price was determined by Allergan, giving consideration to the structure of the Distribution, ASTI's planned business, the Allergan/ASTI Agreements, advice given by Merrill Lynch, Pierce, Fenner & Smith Incorporated, and such other factors as Allergan deemed appropriate. The existence of the Purchase Option and Allergan's rights as holder of the ASTI Class B Common Stock may inhibit ASTI's ability to raise capital. Additional capital raised by ASTI, if any, would most likely reduce the per share proceeds available to holders of ASTI Shares if the Purchase Option were exercised. The existence of the Purchase Option and Allergan's rights as the holder of the ASTI Class B Common Stock may inhibit a change of control and may make an investment in ASTI Shares less attractive to certain potential stockholders, which could adversely affect the liquidity and market value of ASTI Shares. If Allergan exercises its License Option for any ASTI Product, Allergan will have the right to commercialize the product with third parties on such terms as Allergan deems appropriate. In such event, payments from Allergan to ASTI with respect to the ASTI Products will be based solely on sublicensing revenues received from such third parties. COMMON MANAGEMENT. Each of the current executive officers of ASTI is employed by or retained as a consultant to Allergan and receives compensation solely from Allergan, which may further contribute to Allergan's ability to influence significantly or control the outcome of actions taken by ASTI. LIMITATION ON ASTI'S ABILITY TO LICENSE PRODUCTS TO THIRD PARTIES. ASTI has granted Allergan the License Option, which is exercisable on a product-by-product and country-by-country basis. During the term of the License Option for each ASTI Product, ASTI will not be able to license such ASTI Product to any party other than Allergan. Furthermore, ASTI may perform research with respect to product candidates which become ASTI Products only if recommended by Allergan and accepted by ASTI. In particular, it is expected that Allergan will perform Pre-Selection Work with respect to various product candidates. If such product candidates do not become ASTI Products, ASTI will have no rights with respect thereto except the right to receive limited royalties from Allergan on commercial sales of such products, if any. POSSIBLE DILUTION; REDUCTION OF PER SHARE PURCHASE OPTION EXERCISE PRICE. All ASTI Shares issued by ASTI after the Distribution will be subject to the Purchase Option, and the Purchase Option exercise price 16 17 will not increase as a result of any such issuance. Accordingly, if additional ASTI Shares were to be issued, the percentage of the Purchase Option exercise price payable with respect to each ASTI Share in the event Allergan exercises the Purchase Option would be reduced. Liabilities, including any debt issued by ASTI, but excluding any accounts payable to Allergan, will reduce the Purchase Option exercise price to the extent that such liabilities exceed ASTI's cash, cash equivalents, and short-term and long-term investments (excluding Available Funds), unless repaid or discharged by ASTI prior to exercise of the Purchase Option. NO DIVIDENDS. ASTI's Restated Certificate of Incorporation prohibits the payment of dividends from Available Funds. HAZARDOUS MATERIALS. ASTI's research and development activities are conducted by Allergan on ASTI's behalf and involve the controlled use of hazardous materials, chemicals and various radioactive compounds. Although ASTI believes that Allergan's safety procedures for handling and disposing of such materials comply with the standards prescribed by state and federal regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of an accident, ASTI could be held liable for any damages that result and any such liability could exceed the resources of ASTI. ASTI may be required to reimburse Allergan for substantial costs it incurs to comply with environmental regulations. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ASTI does not use derivative financial instruments in its non-trading investment portfolio. The Company's primary investment objective is preservation of capital in order to fund research and development of potential pharmaceutical products incurred pursuant to the Company's agreements with Allergan. (See note 4 to Financial Statements). As such, the Company invests its excess cash in money market funds, equity securities and debt instruments of financial institutions and corporations that have at least an "A" or equivalent credit rating. Interest and investment income earned on the Company's investment portfolio is most sensitive to fluctuations in the general level of U.S. interest rates. The Company mitigates interest rate risk by a program of diversification so that exposure to risks relating to a single security or investment manager is minimal. Further, the Company invests in money market funds and debt instruments with varying maturity dates to correspond to anticipated research and development expenses. These securities typically bear minimal credit risk and ASTI has not experienced any losses on its investments to date due to credit risk. At December 31, 1999, the Company had investments in equity securities with a fair market value of $14,813,000 and such investments are subject to price risk. The Company's equity securities are generally invested in companies that have a history of paying dividends. The Company addresses price risk by a program of diversification so that exposure to risks relating to a single security is minimal. The following tables provide information about the Company's investment portfolio as of December 31, 1999 and 1998.
1999 ------------------------------------------------------ AMORTIZED UNREALIZED UNREALIZED FAIR MARKET COST GAIN LOSS VALUE ------------ ---------- ----------- ------------ Commercial paper and money market funds............................. $ 26,831,000 $ 59,000 $ -- $ 26,890,000 Certificates of deposit............. 13,551,000 (15,000) 13,536,000 U.S. government debt securities..... 25,644,000 (241,000) 25,403,000 Corporate debt securities........... 24,831,000 (221,000) 24,610,000 Equity securities................... 16,414,000 (1,601,000) 14,813,000 ------------ -------- ----------- ------------ $107,271,000 $ 59,000 $(2,078,000) $105,252,000 ============ ======== =========== ============
17 18
1998 ------------------------------------------------------ AMORTIZED UNREALIZED UNREALIZED FAIR MARKET COST GAIN LOSS VALUE ------------ ---------- ----------- ------------ Commercial paper and money market funds............................. $ 5,709,000 $ 4,000 $ -- $ 5,713,000 Certificates of deposit............. 19,621,000 68,000 -- 19,689,000 U.S. government debt securities..... 57,706,000 457,000 -- 58,163,000 Corporate debt securities........... 60,800,000 145,000 -- 60,945,000 Equity securities................... 14,205,000 -- $ (48,000) 14,157,000 ------------ -------- ----------- ------------ $158,041,000 $674,000 $ (48,000) $158,667,000 ============ ======== =========== ============
The amortized cost, estimated fair value of investments and range of rates of return of debt securities at December 31, 1999, by contractual maturity, are presented below. Investments in equity securities are classified as due after three years. Actual maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties. Further, all of the Company's investments are classified as available-for-sale, and the Company may instruct its professional investment managers to liquidate any or all of its investments prior to their contractual maturity dates.
PERCENTAGE AMORTIZED ESTIMATED RATES OF RETURN COST FAIR VALUE (RANGE) ------------ ------------ --------------- Due in one year or less.................... $ 61,983,000 $ 61,989,000 5.08% - 10.38% Due after one year through three years..... 25,782,000 25,474,000 5.38% - 8.71% Due after three years...................... 19,506,000 17,789,000 5.75% - 6.13% ------------ ------------ $107,271,000 $105,252,000 ============ ============
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and supplementary data of the Company required by this item are listed under item 14(a)(1) and (2). ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 18 19 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT See the section entitled "Executive Officers" in Part I, Item 1 hereof for information regarding executive officers. The information required by this item with respect to directors is incorporated by reference from the information under the caption "Election of Directors" contained in the Company's Definitive Proxy Statement to be filed with the Commission pursuant to Regulation 14A in connection with the 2000 Annual Meeting (the "Proxy Statement"). ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated by reference to the information under the caption "Compensation of Executive Officers" contained in the Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated by reference to the information under the caption "Security Ownership of Certain Beneficial Owners and Management" contained in the Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference to the information under the caption contained in "Certain Relationships and Related Transactions" contained in the Proxy Statement. 19 20 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) Index to Financial Statements The financial statements required by this item are submitted in a separate section beginning on page F-1 of this Annual Report on Form 10-K.
PAGE NUMBER ------ Report of KPMG LLP, Independent Auditors.................... F-2 Balance Sheets at December 31, 1999 and 1998................ F-3 Statements of Operations for the years ended December 31, 1999 and 1998, the period from November 12, 1997 (inception) to December 31, 1997, and the cumulative period from November 12, 1997 (inception) to December 31, 1999...................................................... F-4 Statements of Stockholders' Equity for the years ended December 31, 1998 and 1999, the period from November 12, 1997 (inception) to December 31, 1997, and the cumulative period from November 12, 1997 (inception) to December 31, 1999...................................................... F-5 Statements of Cash Flows for the years ended December 31, 1999 and 1998, the period from November 12, 1997 (inception) to December 31, 1997, and the cumulative period from November 12, 1997 (inception) to December 31, 1999...................................................... F-6 Notes to Financial Statements............................... F-7
(a)(2) Index to Financial Statement Schedules None. (a)(3) Index to Exhibits
EXHIBIT EXHIBIT FOOTNOTE NUMBER DESCRIPTION - -------- ------- ----------- (1) 3.1 Amended and Restated Certificate of Incorporation of ASTI. (2) 3.2 Bylaws of ASTI. (2) 4.1 Specimen Certificate of Class A Common Stock of ASTI. (3) 10.1 Research and Development Agreement dated as of March 6, 1998 between the Company and Allergan, Inc. ("Allergan"). (3) 10.2 Technology License Agreement dated as of March 6, 1998 between the Company and Allergan. (3) 10.3 Services Agreement dated as of March 6, 1998 between the Company and Allergan. (3) 10.4 License Option Agreement dated as of March 6, 1998 between the Company and Allergan. (3) 10.5 Distribution Agreement dated as of March 6, 1998 between the Company and Allergan. (4) 10.6 Letter agreement dated as of October 23, 1998 between the Company and Allergan. (1) 10.7 Waiver letter dated as of October 23, 1998 between the Company and Allergan. 24.1 Power of Attorney. Reference is made to page 22. 27 Financial Data Schedule.
- --------------- (1) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference. (2) Filed as an exhibit to the Registrant's Registration Statement on From S-1 (No. 333-40503) or amendments thereto and incorporated herein by reference. (3) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 and incorporated herein by reference. (4) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 and incorporated herein by reference. 20 21 (b) Reports on Form 8-K Not applicable. (c) Exhibits The exhibits required by this item are listed under Item 14(a)(3). (d) Financial Statement Schedules The financial statement schedules required by this item are listed under Item 14(a)(2). 21 22 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. ALLERGAN SPECIALTY THERAPEUTICS, INC. By: /s/ WILLIAM C. SHEPHERD ------------------------------------ William C. Shepherd Chairman of the Board, President and Chief Executive Officer Date: March 10, 2000 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Douglas S. Ingram and Dwight J. Yoder, and each of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place, and stead, in any and all capacities, to sign any and all amendments to this Report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURES TITLE DATE ---------- ----- ---- /s/ WILLIAM C. SHEPHERD Chairman of the Board, March 10, 2000 - ----------------------------------------------------- President and Chief William C. Shepherd Executive Officer (Principal Executive Officer) /s/ DWIGHT J. YODER Chief Financial Officer March 10, 2000 - ----------------------------------------------------- (Principal Financial and Dwight J. Yoder Accounting Officer) /s/ LESTER J. KAPLAN, PH.D. Director March 10, 2000 - ----------------------------------------------------- Lester J. Kaplan, Ph.D. /s/ ALAN J. LEWIS, PH.D. Director March 10, 2000 - ----------------------------------------------------- Alan J. Lewis, Ph.D. /s/ GARY L. NEIL, PH.D. Director March 10, 2000 - ----------------------------------------------------- Gary L. Neil, Ph.D. /s/ MARVIN E. ROSENTHALE, PH.D. Director March 10, 2000 - ----------------------------------------------------- Marvin E. Rosenthale, Ph.D.
22 23 ALLERGAN SPECIALTY THERAPEUTICS, INC. INDEX TO FINANCIAL STATEMENTS
PAGE NUMBER ------ Report of KPMG LLP, Independent Auditors.................... F-2 Balance Sheets at December 31, 1999 and 1998................ F-3 Statements of Operations for the years ended December 31, 1999 and 1998, the period from November 12, 1997 (inception) to December 31, 1997, and the cumulative period from November 12, 1997 (inception) to December 31, 1999...................................................... F-4 Statements of Stockholders' Equity for the years ended December 31, 1998 and 1999, the period from November 12, 1997 (inception) to December 31, 1997, and the cumulative period from November 12, 1997 (inception) to December 31, 1999...................................................... F-5 Statements of Cash Flows for the years ended December 31, 1999 and 1998, the period from November 12, 1997 (inception) to December 31, 1997, and the cumulative period from November 12, 1997 (inception) to December 31, 1999...................................................... F-6 Notes to Financial Statements............................... F-7
F-1 24 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Allergan Specialty Therapeutics, Inc.: We have audited the accompanying balance sheets of Allergan Specialty Therapeutics, Inc. as of December 31, 1999 and 1998 and the related statements of operations, stockholders' equity, and cash flows for the years ended December 31, 1999 and 1998, the period from November 12, 1997 (inception) to December 31, 1997, and the cumulative period from November 12, 1997 (inception) to December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Allergan Specialty Therapeutics, Inc. at December 31, 1999 and 1998, and the results of its operations and its cash flows for the years ended December 31, 1999 and 1998, the period from November 12, 1997 (inception) to December 31, 1997, and the cumulative period from November 12, 1997 (inception) to December 31, 1999, in conformity with generally accepted accounting principles. /s/ KPMG LLP Costa Mesa, California January 24, 2000 F-2 25 ITEM 14. FINANCIAL STATEMENTS ALLERGAN SPECIALTY THERAPEUTICS, INC. (A DEVELOPMENT STAGE COMPANY) BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) ASSETS
DECEMBER 31, -------------------- 1999 1998 -------- -------- Cash........................................................ $ 47 $ -- Investments................................................. 105,252 158,667 Prepaid technology fees..................................... 5,292 4,723 Other assets................................................ 1,431 1,747 -------- -------- $112,022 $165,137 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Payable to Allergan, Inc. ................................ $ 6,047 $ 4,509 Accounts payable and other liabilities.................... -- 295 -------- -------- Total liabilities................................. 6,047 4,804 ======== ======== Stockholders' equity: Callable Class A Common Stock, $.01 par value; 6,000,000 shares authorized, 3,272,690 issued and outstanding in 1999 and 1998.......................................... 33 33 Class B Common Stock, $1.00 par value; 1,000 shares authorized, issued and outstanding in 1999 and 1998.... 1 1 Additional paid-in capital................................ 196,753 196,753 Accumulated other comprehensive income (loss)............. (1,198) 354 Deficit accumulated during development stage.............. (89,614) (36,808) -------- -------- Total stockholders' equity........................ 105,975 160,333 -------- -------- $112,022 $165,137 ======== ========
See accompanying notes to financial statements. F-3 26 ALLERGAN SPECIALTY THERAPEUTICS, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
PERIOD FROM CUMULATIVE PERIOD FROM NOVEMBER 12, 1997 NOVEMBER 12, 1997 YEAR ENDED YEAR ENDED (INCEPTION) TO (INCEPTION) TO DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1999 ----------------- ----------------- ----------------- ---------------------- Revenues...................... $ 7,110 $ 9,043 $ -- $ 16,153 Costs and expenses: Research and development.... 49,200 35,886 -- 85,086 Technology fees............. 5,500 6,520 -- 12,020 General and administrative expenses................. 1,198 933 -- 2,131 ---------- ---------- ---- ---------- Total costs and expenses............ 55,898 43,339 -- 99,237 ---------- ---------- ---- ---------- Loss before income taxes...... (48,788) (34,296) -- (83,084) Provision for taxes........... 4,018 2,512 -- 6,530 ---------- ---------- ---- ---------- Net loss...................... $ (52,806) $ (36,808) $ -- $ (89,614) ========== ========== ==== ========== Basic and diluted loss per share....................... $ (16.13) $ (11.24) $ -- $ (27.37) ========== ========== ==== ========== Basic and diluted shares outstanding................. 3,273,690 3,273,690 100 3,273,690
See accompanying notes to financial statements. F-4 27 ALLERGAN SPECIALTY THERAPEUTICS, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
ACCUMULATED DEFICIT CALLABLE OTHER ACCUMULATED CLASS A CLASS B ADDITIONAL COMPREHENSIVE DURING COMMON COMMON PAID-IN INCOME DEVELOPMENT COMPREHENSIVE STOCK STOCK CAPITAL (LOSS) STAGE TOTAL LOSS -------- ------- ---------- ------------- ----------- -------- ------------- Issuance of 100 shares of Common Stock (par value $1.00 per share) on November 12, 1997 (inception).................... $-- $-- $ 1 $ -- $ -- $ 1 $ -- --- --- -------- ------- -------- -------- -------- Balance at December 31, 1997..... -- -- 1 -- -- 1 Conversion of Common Stock into 1,000 shares of Class B Common Stock in March 1998............ -- 1 (1) -- -- -- Issuance of 3,272,690 shares of callable Class A Common Stock in March 1998.................. 33 -- 196,753 -- -- 196,786 Net loss......................... -- -- -- -- (36,808) (36,808) (36,808) Other comprehensive income consisting of unrealized gain on available for sale securities, net of tax......... -- -- -- 354 -- 354 354 -------- Comprehensive loss........... $(36,454) --- --- -------- ------- -------- -------- ======== Balance at December 31, 1998..... $33 $ 1 $196,753 $ 354 $(36,808) $160,333 Net loss......................... -- -- -- -- (52,806) (52,806) (52,806) Other comprehensive loss consisting of unrealized loss on available for sale securities, net of tax......... -- -- -- (1,552) -- (1,552) (1,552) -------- Comprehensive loss........... $(54,358) --- --- -------- ------- -------- -------- ======== Balance at December 31, 1999..... $33 $ 1 $196,753 $(1,198) $(89,614) $105,975 === === ======== ======= ======== ========
See accompanying notes to financial statements. F-5 28 ALLERGAN SPECIALTY THERAPEUTICS, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF CASH FLOWS (IN THOUSANDS)
PERIOD FROM CUMULATIVE PERIOD FROM NOVEMBER 12, 1997 NOVEMBER 12, 1997 YEAR ENDED YEAR ENDED (INCEPTION) TO (INCEPTION) TO DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1999 ----------------- ----------------- ----------------- ---------------------- OPERATING ACTIVITIES: Net loss............................ $(52,806) $ (36,808) $-- $ (89,614) Non-cash item included in net loss Deferred income tax.............. 462 (682) -- (220) Changes in operating assets and liabilities: Other assets..................... 675 (1,065) -- (390) Prepaid technology fees.......... (569) (4,723) -- (5,292) Payable to Allergan, Inc......... 1,538 4,509 -- 6,047 Accounts payable and other liabilities.................... (23) 23 -- -- -------- --------- --- --------- Net cash used in operating activities..................... (50,723) (38,746) -- (89,469) INVESTING ACTIVITIES: Purchases of investments............ (7,350) (185,175) -- (192,525) Sales of investments................ 58,120 27,134 -- 85,254 -------- --------- --- --------- Net cash provided (used) in investing activities........... 50,770 (158,041) -- (107,271) FINANCING ACTIVITIES: Issuance of common stock............ -- 200,000 1 200,001 Offering costs...................... -- (3,214) -- (3,214) -------- --------- --- --------- Net cash provided by financing activities..................... -- 196,786 1 196,787 -------- --------- --- --------- Net increase (decrease) in cash....... 47 (1) 1 47 Cash -- beginning of period........... -- 1 -- -- -------- --------- --- --------- Cash -- end of period................. $ 47 $ -- $ 1 $ 47 ======== ========= === =========
See accompanying notes to financial statements. F-6 29 ALLERGAN SPECIALTY THERAPEUTICS, INC. NOTES TO FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES Allergan Specialty Therapeutics, Inc. ("ASTI" or the "Company") was incorporated in Delaware on November 12, 1997 and commenced operations on March 10, 1998. ASTI was formed for the purpose of conducting research and development of potential human pharmaceutical products, and to commercialize such products, most likely through licensing to Allergan, Inc. ("Allergan"). In accordance with generally accepted accounting principles, ASTI is considered a development stage company. All of the Company's efforts to date have been limited to obtaining capital and conducting research and development and the Company does not yet generate any revenues from product sales or royalties. Research and development is performed by Allergan and the costs incurred are reimbursed by ASTI. Accounting for revenues and expenses ASTI's revenues consist of interest and investment income and Pre-Selection Product Payments (see Note 4). In future years, ASTI may also derive revenues from the sale or license of its products, most likely through the sale of licensed products by Allergan. Royalty and other product revenue, if any, will be recorded as earned. ASTI incurs most of its expenses under its agreements with Allergan. Research and development costs paid to Allergan under a Research and Development Agreement ("R&D Agreement") are recorded as research and development expenses when incurred. Technology fees paid to Allergan under a Technology License Agreement ("Technology Agreement") are recorded as technology fees on a straight-line basis over the life of the Technology Agreement. Amounts paid to Allergan under a Services Agreement are recorded as administrative expenses as incurred. See Note 4 for a description of the agreements between ASTI and Allergan. Use of estimates The preparation of financial statements in accordance 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. 2. INVESTMENTS ASTI classifies investments as available-for-sale securities with net unrealized gains or losses recorded as a component of accumulated other comprehensive income (loss). Amounts classified as investments are liquidated and used to pay operating expenses as needed. The Company invests its excess cash in money market funds, equity securities and debt instruments of financial institutions and corporations that have at least an "A" or equivalent credit rating. These securities typically bear minimal credit risk and ASTI has not experienced any losses on its investments to date due to credit risk. At December 31, 1999 and 1998, the Company's investment portfolio consisted of the following:
1999 --------------------------------------------------------- AMORTIZED UNREALIZED UNREALIZED FAIR MARKET COST GAIN LOSS VALUE ------------ ---------- ----------- ------------ Commercial paper and money market funds.................................. $ 26,831,000 $59,000 $ -- $ 26,890,000 Certificates of deposit.................. 13,551,000 (15,000) 13,536,000 U.S. government debt securities.......... 25,644,000 (241,000) 25,403,000 Corporate debt securities................ 24,831,000 (221,000) 24,610,000 Equity securities........................ 16,414,000 (1,601,000) 14,813,000 ------------ ------- ----------- ------------ $107,271,000 $59,000 $(2,078,000) $105,252,000 ============ ======= =========== ============
F-7 30 ALLERGAN SPECIALTY THERAPEUTICS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1998 -------------------------------------------------------- AMORTIZED UNREALIZED UNREALIZED FAIR MARKET COST GAIN LOSS VALUE ------------ ---------- ---------- ------------ Commercial paper and money market funds.................................. $ 5,709,000 $ 4,000 $ -- $ 5,713,000 Certificates of deposit.................. 19,621,000 68,000 -- 19,689,000 U.S. government debt securities.......... 57,706,000 457,000 -- 58,163,000 Corporate debt securities................ 60,800,000 145,000 -- 60,945,000 Equity securities........................ 14,205,000 -- $(48,000) 14,157,000 ------------ -------- -------- ------------ $158,041,000 $674,000 $(48,000) $158,667,000 ============ ======== ======== ============
The amortized cost, estimated fair value of investments and the range of rates of return of debt securities at December 31, 1999, by contractual maturity, are presented below. Investments in equity securities are classified as due after three years. Actual maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties. Further, all of the Company's investments are classified as available-for-sale, and the Company may instruct its professional investment managers to liquidate any or all of its investments prior to their contractual maturity dates.
PERCENTAGE AMORTIZED ESTIMATED RATES OF RETURN COST FAIR VALUE (RANGE) ------------ ------------ --------------- Due in one year or less............... $ 61,983,000 $ 61,989,000 5.08% - 10.38% Due after one year through three years............................... 25,782,000 25,474,000 5.38% - 8.71% Due after three years................. 19,506,000 17,789,000 5.75% - 6.13% ------------ ------------ $107,271,000 $105,252,000 ============ ============
3. PER SHARE INFORMATION The following sets forth the computation of basic and diluted loss per share for the years ended December 31, 1999 and 1998:
1999 1998 ---------------------------------------- ---------------------------------------- NET LOSS SHARES PER-SHARE NET LOSS SHARES PER-SHARE (NUMERATOR) (DENOMINATOR) LOSS (NUMERATOR) (DENOMINATOR) LOSS ------------ ------------- --------- ------------ ------------- --------- Computation of basic and diluted EPS.... $(52,806,000) 3,273,690 $(16.13) $(36,808,000) 3,273,690 $(11.24)
4. ARRANGEMENTS WITH ALLERGAN, INC. On March 10, 1998, 3,272,690 shares of callable Class A Common Stock of ASTI, representing all of the issued and outstanding shares of such class, were distributed by Allergan to the holders of record of Allergan common stock at the close of business on February 17, 1998 (the "Distribution"). Prior to the Distribution, Allergan contributed $200,000,000 in cash to ASTI in exchange for all of the shares of ASTI Common Stock. On March 10, 1998, 1,000 shares of Class B Common Stock of ASTI, representing all of the issued and outstanding shares of such class, were issued to Allergan. As sole holder of all of the issued and outstanding shares of Class B Common Stock, Allergan has the option to repurchase all of the outstanding Class A Common Stock under specified conditions. In connection with the Distribution, ASTI and Allergan entered into a number of agreements, including the R&D Agreement, Technology Agreement, Services Agreement and License Option Agreement ("License Agreement"). F-8 31 ALLERGAN SPECIALTY THERAPEUTICS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) Pursuant to the R&D Agreement, ASTI reimbursed Allergan for research and development costs of $46,284,000 and $34,411,000 incurred for the years ended December 31, 1999 and 1998, respectively. The 1998 research and development costs also includes reimbursement to Allergan for research and development services performed during the period from October 24, 1997 through March 9, 1998. For the cumulative period from Inception (November 12, 1997) of operations to December 31, 1999, ASTI reimbursed Allergan for research and development costs of $80,695,000. From time to time, Allergan shall propose work plans, subject to ASTI board approval, for the continued development of product candidates. ASTI is required to utilize the cash initially contributed to ASTI by Allergan plus interest and investment income thereon, less administrative expenses and technology fees to conduct activities under the R&D Agreement. The R&D Agreement specifies payment of Developed Technology Royalties and Pre-Selection Product Payments by Allergan to ASTI under certain conditions. For the year ended December 31, 1999, no amounts have been earned by ASTI with respect to Developed Technology Royalties. In July 1998, Allergan entered into a multi-year research and development collaboration with Parke-Davis Pharmaceutical Research Division of Warner-Lambert Company ("Warner-Lambert") to identify, develop and commercialize up to two RXR subtype selective retinoid compounds for the treatment of metabolic diseases, including adult onset diabetes, insulin resistant syndromes and dyslipidemias ("Collaboration Agreement"). The technologies involved in the collaboration were previously licensed by ASTI from Allergan pursuant to the Technology Agreement. In accordance with a letter agreement between Allergan and ASTI, ASTI is entitled to receive Pre-Selection Product Payments representing ten percent of the potential $104 million in technology access fees and development milestones to be received by Allergan pursuant to Allergan's agreement with Warner-Lambert. For the years ended December 31, 1999 and 1998, ASTI earned $400,000 and $500,000, respectively, of Pre-Selection Product Payments in accordance with the letter agreement. For the cumulative period from inception (November 12, 1997) to December 31, 1999, ASTI earned $900,000 of Pre-Selection Product Payments. In addition, ASTI is entitled to royalties on net sales of developed products, depending on actual lead compound selection and sales results. ASTI intends to use the funds received for further research and development. Subject to certain limitations, the Technology Agreement grants ASTI an exclusive license to research and develop all of Allergan's proprietary and contractual rights with respect to certain retinoid and neuroprotective technologies. As consideration for the exclusive license, ASTI will pay a technology fee of $10,000,000 in year one; $6,700,000 in year two; $3,300,000 in year three; and $2,000,000 in year four. The technology fee is charged to operations on a straight-line basis over the life of the Technology Agreement. The technology fee is payable monthly in arrears provided, however, that ASTI shall no longer be obligated to make such payments beginning with any month following the date on which the total number of ASTI Products either under development or licensed to Allergan pursuant to the License Agreement is less than two. For the years ended December 31, 1999 and 1998, ASTI paid $6,069,000 and $11,243,000 in technology fees, of which $5,292,000 and $4,723,000 were included in prepaid technology fees in the accompanying balance sheet at December 31, 1999 and 1998, respectively. For the cumulative period from inception (November 12, 1997) to December 31, 1999, ASTI paid $17,312,000 in technology fees. ASTI has granted Allergan an option to acquire a license to each product developed under the R&D Agreement on a country-by-country basis at any time until (a) with respect to the United States, 30 days after clearance by the FDA to commercially market such ASTI Product and (b) with respect to any other country, 90 days after the earlier of (i) clearance by the appropriate regulatory agency to commercially market the product and (ii) clearance by the FDA to market the product in the United States. Upon exercise of the license option, Allergan will make Product Payments to ASTI as defined in the R&D Agreement. Through December 31, 1999, no license option has been exercised. The license option will expire to the extent not previously exercised, 30 days after the expiration of Allergan's option to purchase all of the outstanding ASTI Shares, described below. F-9 32 ALLERGAN SPECIALTY THERAPEUTICS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) In accordance with ASTI's Restated Certificate of Incorporation, Allergan has the right to purchase all (but not less than all) of the ASTI Class A Common Stock (the "Purchase Option"). Allergan may exercise the Purchase Option by written notice to ASTI at any time during the period beginning immediately after the Distribution and ending on December 31, 2002; provided that such date will be extended for successive six month periods if, as of June 30, 2001, ASTI has not paid or accrued expenses for at least 95% of all Available Funds, as defined, pursuant to the R&D Agreement. In any event, the Purchase Option will expire 90 days after Allergan receives notice that the Available Funds (as defined in the R&D Agreement) held by ASTI is less than $15 million. Through December 31, 1999, Allergan has not exercised the Purchase Option. If the Purchase Option is exercised, the exercise price will be the greatest of: (a) (i) 25 times the aggregate of (1) all worldwide payments with respect to all Licensed Products, Developed Technology Products and Pre-Selection Products for the four calendar quarters immediately preceding the quarter in which the Purchase Option is exercised (Base Period) and (2) all payments that would have been made and all payments due to be made by Allergan to ASTI during the Base Period if Allergan had not previously exercised its payment buy-out option with respect to any product; provided, however, that, for the purposes of the foregoing calculation, for any product which has not been commercially sold during each of the four calendar quarters in the Base Period, Allergan will be deemed to have made Product Payments, Developed Technology Royalties and Pre-Selection Product payments to ASTI for each such quarter equal to the average of the payments made during each of such calendar quarters during which such product was commercially sold, less (ii) any amounts previously paid to exercise any payment buy-out option for any product; (b) the fair market value of 1,000,000 shares of Allergan Common Stock determined as the average of the closing sales price of Allergan Common Stock on the New York Stock Exchange for the 20 trading days ending with the trading day that is two trading days prior to the date of determination; (c) $250 million less the aggregate amount of all technology fee payments and research and development costs paid or incurred by ASTI as of the date the Purchase Option is exercised; or (d) $60 million. In each case, the amount payable as the Purchase Option exercise price will be reduced to the extent, if any, that ASTI's liabilities at the time of exercise (other than liabilities under the R&D Agreement, Services Agreement and the Technology Agreement) exceed ASTI's cash and cash equivalents and short-term and long-term investments (excluding the amount of Available Funds remaining at such time). Allergan must pay the Purchase Option exercise price in cash. ASTI and Allergan have entered into a Services Agreement pursuant to which Allergan has agreed to provide ASTI with administrative services, including accounting and legal services on a fully-burdened cost reimbursement basis. The Services Agreement will be renewed automatically for successive one year periods during the term of the R&D Agreement. ASTI may terminate the Services Agreement at any time upon 60 days' written notice. For the years ended December 31, 1999 and 1998, ASTI incurred $113,000 and $121,000, respectively, of costs pursuant to the Services Agreement. For the cumulative period from inception (November 12, 1997) to December 31, 1999, ASTI incurred $234,000 of costs pursuant to the Services Agreement. 5. INCOME TAXES The Company recognizes deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities and expected benefits of utilizing net operating loss and credit carryforwards. The impact on deferred taxes of changes in tax rates and F-10 33 ALLERGAN SPECIALTY THERAPEUTICS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) laws, if any, are applied to the years during which temporary differences are expected to be settled and reflected in the financial statements in the period of enactment. The provision for income taxes for the years ended December 31, 1999 and 1998 consists of the following:
1999 1998 ---------- ---------- Current Federal................................... $2,794,000 $2,531,000 State..................................... 762,000 663,000 ---------- ---------- Total current............................... 3,556,000 3,194,000 Deferred Federal................................... 389,000 (609,000) State..................................... 73,000 (73,000) ---------- ---------- Total deferred.............................. 462,000 (682,000) ---------- ---------- Total....................................... $4,018,000 $2,512,000 ========== ==========
The reconciliation of the federal statutory tax rate to the effective tax rate for the years ended December 31, 1998 and 1999 follows:
1999 1998 ----- ----- Statutory rate of tax benefit...................... (35.0)% (35.0)% State taxes........................................ (9.5)% (8.4)% Valuation allowance on capitalized R&D and technology fees.................................. 53.0% 50.7% Other.............................................. (0.3)% -- ----- ----- Effective tax rate................................. 8.2% 7.3% ===== =====
ASTI had taxable income for the years ended December 31, 1999 and 1998 as a result of the requirement to capitalize technology fees and its election to capitalize research and development expenses for tax purposes. The amounts paid for taxes for the years ended December 31, 1999 and 1998, were $3,834,000 and $3,246,000, respectively. Temporary differences and carryforwards, which give rise to a significant portion of deferred tax assets and liabilities at December 31, 1999 and 1998 are as follows:
1999 1998 ------------ ------------ Deferred tax assets Capitalized technology fees........... $ 5,270,000 $ 2,735,000 Capitalized R&D....................... 37,875,000 15,575,000 Unrealized loss on available-for-sale securities......................... 821,000 Start-up costs........................ 363,000 State taxes........................... 220,000 ------------ ------------ 44,549,000 18,310,000 Less: valuation allowance............. (43,506,000) (17,628,000) ------------ ------------ Total deferred tax asset................ 1,043,000 682,000 Deferred tax liabilities Unrealized gain on available-for-sale securities......................... -- 272,000 ------------ ------------ Net deferred tax asset.................. $ 1,043,000 $ 410,000 ============ ============
F-11 34 ALLERGAN SPECIALTY THERAPEUTICS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) The net deferred tax assets for 1999 and 1998 are included in other assets in the accompanying balance sheet. Based on the Company's taxable earnings, management believes it is more likely than not that the Company will realize the benefit of the existing net deferred tax asset at December 31, 1999. Management believes the existing net deductible temporary differences will reverse during periods in which the Company generates net taxable income; however, there can be no assurance that the Company will generate any earnings or any specific level of continuing earnings in future years. 6. COMPREHENSIVE INCOME (LOSS) The following summarizes the components of other comprehensive income (loss) for the years ended December 31,:
1999 1998 ---------------------------------------- -------------------------------------- TAX TAX BEFORE-TAX (EXPENSE) OR NET OF TAX BEFORE TAX (EXPENSE) OR NET OF TAX AMOUNT BENEFIT AMOUNT AMOUNT BENEFIT AMOUNT ----------- ------------ ----------- ---------- ------------ ---------- Unrealized holdings (loss) gain arising during period................... $(2,646,000) $1,094,000 $(1,552,000) $626,000 $(272,000) $354,000
7. BUSINESS SEGMENT INFORMATION ASTI's sole business segment involves conducting research and development of potential human pharmaceutical products based on retinoid and neuroprotective technologies. 8. NEW ACCOUNTING STANDARDS In June 1998, SFAS No. 133 -- "Accounting for Derivative Instruments and Hedging Activities" was issued and is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. SFAS No. 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The Company is currently evaluating the impact that SFAS No. 133 will have on its financial statements, if any. F-12 35 EXHIBIT INDEX
EXHIBIT EXHIBIT FOOTNOTE NUMBER DESCRIPTION - -------- ------- ----------- (1) 3.1 Amended and Restated Certificate of Incorporation of ASTI. (2) 3.2 Bylaws of ASTI. (2) 4.1 Specimen Certificate of Class A Common Stock of ASTI. (3) 10.1 Research and Development Agreement dated as of March 6, 1998 between the Company and Allergan, Inc. ("Allergan"). (3) 10.2 Technology License Agreement dated as of March 6, 1998 between the Company and Allergan. (3) 10.3 Services Agreement dated as of March 6, 1998 between the Company and Allergan. (3) 10.4 License Option Agreement dated as of March 6, 1998 between the Company and Allergan. (3) 10.5 Distribution Agreement dated as of March 6, 1998 between the Company and Allergan. (4) 10.6 Letter agreement dated as of October 23, 1998 between the Company and Allergan. (1) 10.7 Waiver letter dated as of October 23, 1998 between the Company and Allergan. 24.1 Power of Attorney. Reference is made to page 22. 27 Financial Data Schedule.
- --------------- (1) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference. (2) Filed as an exhibit to the Registrant's Registration Statement on From S-1 (No. 333-40503) or amendments thereto and incorporated herein by reference. (3) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 and incorporated herein by reference. (4) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 and incorporated herein by reference. EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 47 105,252 0 0 0 112,022 0 0 112,022 6,047 0 0 0 34 105,941 112,022 0 7,110 0 0 54,700 0 0 (48,788) 4,018 (52,806) 0 0 0 (52,806) (16.13) (16.13)
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