================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] Annual report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 2001
[_] Transition report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____________ to ____________
Commission file number: 001-16133
DELCATH SYSTEMS, INC.
---------------------
(Exact name of Small Business Issuer as specified in its charter)
DELAWARE 06-1245881
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1100 SUMMER STREET, STAMFORD, CONNECTICUT 06905
----------------------------------------- -----
(Address of principal executive offices) (Zip Code)
203-323-8668
------------
(Issuer's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of Each Class On Which Registered
- ------------------------------------------------ ----------------------------
Common Stock, par value $.01 per share Boston Stock Exchange
Redeemable Warrants Boston Stock Exchange
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, par value $0.01 per share
Redeemable Warrants
Check whether the Issuer: (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 [_]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B in this form, and no disclosure will be contained, to the best of
the Issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this form. [_]
The issuer's revenues for its most recent fiscal year were: $0.
The aggregate market value of the voting common stock held by non-affiliates of
the issuer, based on the closing sales price of $1.39 per share, was $ 3,331,435
as of February 21, 2002.
At February 21, 2002, the registrant had outstanding 3,903,816 shares of par
value $0.01 Common Stock.
================================================================================
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
Delcath Systems, Inc. ("Delcath" or the "Company") was originally formed by a
team of physicians on August 5, 1988 as BGH Medical Products, Inc., a Delaware
corporation. On August 22, 1988, BGH Medical Products Inc., a Connecticut
corporation, was merged into it. On May 7, 1990, the surviving Delaware
corporation changed its name to Delcath Systems, Inc.
Delcath has developed a system, the Delcath system, to isolate the liver from
the general circulatory system and to administer chemotherapy and other
therapeutic agents directly to the liver.
The Delcath system is not currently approved for marketing by the United States
Food and Drug Administration, and it cannot be marketed in the United States
without FDA pre-marketing approval. We plan to conduct Phase III clinical trials
designed to secure marketing approval for the system in the United States and
possibly in foreign markets.
STRATEGY
Our objective is to establish the use of the Delcath system as the standard
technique for delivering chemotherapy agents to the liver and to expand the
Delcath technology so that it may be used in the treatment of other liver
diseases and of cancers in other parts of the body. Our strategy includes the
following:
o Complete clinical trials to obtain FDA pre-marketing approval for use of
the Delcath system with doxorubicin to treat malignant melanoma that has
spread to the liver. Our highest priority is completing the Phase III
clinical trials, data preparation, statistical analysis and regulatory
documents associated with an application for pre-market approval of
commercial sale of the Delcath system in the United States. FDA
pre-marketing approval of our application will permit us to market the
Delcath system to administer doxorubicin in the treatment of melanoma that
has spread to the liver.
o Obtain approval to market the Delcath system in the United States for the
treatment of other forms of liver cancer using other chemotherapy agents
and treatment of hepatitis using anti-viral drugs. In August 2001, we
commenced a Phase I clinical trial using melphalan, a chemotherapeutic
agent. See "Our Clinical Trials and Agreement with National Cancer
Institute." In addition to researching the use of other chemotherapeutic
agents with the Delcath system to treat cancer, we plan to research the
use of other compounds with the Delcath system to treat other diseases,
such as hepatitis. Our timing to begin these studies will depend on our
ability to establish strategic alliances with pharmaceutical manufacturers
or other strategic partners in conjunction with our research into other
therapeutic compounds or raise additional funds for these purposes. FDA
pre-marketing approval will be required to market the Delcath system for
these uses.
o Introducing the Delcath system into foreign markets. We will seek to
establish strategic relationships with domestic and foreign firms that
have recognized presence or experience in foreign markets that we intend
to target. Our strategy is to focus on markets that have a high incidence
of liver cancer and the means to provide and pay for cancer treatments.
According to the World Health Organization, many Asian and European
countries, including China, Japan, Greece, Hong Kong, the Philippines,
France, Germany, Italy and Spain have a higher incidence of liver cancer
than the United States. We intend to seek to enter into arrangements with
strategic partners who have experience with obtaining regulatory approval
and marketing medical devices in those markets and are willing to bear the
cost of those activities.
THE CANCER TREATMENT MARKET
The American Cancer Society projects that about 1,285,000 Americans will be
diagnosed with cancer in 2002. According to the American Cancer Society's
"Cancer Facts and Figures 2002", cancer remains the second leading
1
cause of death in the United States. While researchers continue to develop
innovative new treatments for some forms of this disease, surgical resection,
chemotherapy, radiation and hormone therapy continue to be the most commonly
used treatments.
The financial burden of cancer is great for patients, their families and
society. The National Institutes of Health, in the American Cancer Society's
"Cancer Facts & Figures 2002," estimates the overall costs of cancer, in the
year 2001, to be $157 billion, including $56 billion in direct medical costs,
$16 billion for indirect morbidity costs attributable to lost productivity due
to illness, and $85 billion for indirect mortality costs attributable to lost
productivity due to death.
THE LIVER CANCER MARKET
Liver cancer is one of the most prevalent and lethal forms of cancer throughout
the world. There are two forms of liver cancer: primary and metastatic. Primary
liver cancer originates in the liver. Secondary, or metastatic, liver cancer
results from the spread of cancer from other places in the body to the liver.
With our initial Phase III clinical trials, we will seek to develop data on
metastatic melanoma which has spread to the liver. In the liver, tumors can be
surgically removed only when they are located in one of the liver's two lobes.
According to a January 3, 2000 article on liver cancer in the HOUSTON CHRONICLE,
an estimated 75% of cancerous liver tumors cannot be surgically removed at the
time of diagnosis. A significant number of patients treated for primary and
metastatic liver cancer will experience a recurrence of their disease.
Metastatic liver cancer is characterized by microscopic pieces of other forms of
cancer that detach from the primary site and travel via the blood stream and
lymphatic system into the liver, where they grow into new tumors. This growth
often continues even after removal of the primary cancer or cancerous organ.
When cancer cells enter the liver and develop into tumors, they tend to grow
very quickly. In many cases, the patient dies not from the primary cancer, but
from the tumors in the liver; the liver becomes the "life limiting organ."
People cannot survive without a liver capable of performing its critical
biologic functions: facilitating the conversion of food into energy and
filtering toxic agents from the blood. The liver is one of the three most common
sites to which cancer may spread. Due to numerous factors, including the absence
of viable treatment options, metastatic liver cancer often causes death.
According to a 1999 article in the WASHINGTON POST, liver cancer is the third
most common form of cancer worldwide. The worldwide incidence of liver cancer is
estimated to be in excess of 1,500,000 new patients each year, and there are an
estimated 1,250,000 deaths worldwide caused by all forms of liver cancer.
According to a 1999 article in the NEW ENGLAND JOURNAL OF MEDICINE, researchers
reported that annual new diagnoses of liver cancer increased from 1.4 cases per
100,000 persons in the late 1970s to 2.4 cases per 100,000 persons in the 1990s.
The American Cancer Society has projected that in the United States there will
be approximately 16,600 new cases of primary liver cancer and 53,600 new cases
of malignant melanoma in 2002.
Liver cancer is among the most virulent forms of cancer. In the United States,
five-year survival rates are usually not more than 5%, according to the National
Cancer Institute.
Primary liver cancer is particularly prevalent in Southern Europe, Asia and
developing countries, where the primary risk factors for the disease are
present. These risk factors include: hepatitis-B, hepatitis-C, relatively high
levels of alcohol consumption, aflatoxin, cigarette smoking and exposure to
industrial pollutants.
LIVER CANCER TREATMENTS
The prognosis for primary and secondary liver cancers is poor. Although limited
treatment options are currently available for liver cancer, they are typically
ineffective, are generally associated with significant side-effects and can even
cause death. Traditional treatment options include surgery, chemotherapy,
cryosurgery, percutaneous ethanol injection and radiation.
2
SURGERY
While surgery is considered the "gold standard" treatment option to address
liver tumors, an estimated 75% of liver cancer patients are unresectable, which
means they do not qualify for surgical removal. This is most often due to the
following:
o Operative risk: limited liver function or poor patient heath threatens
survival as a result of the surgery; or
o Technical feasibility: the proximity of a cancerous tumor to a critical
organ or artery, or the size, location on the liver or number of tumors
makes surgery not feasible.
For the patients who qualify for surgery, there are significant complications
related to the procedure. Recurrence of tumors is common and in that event,
surgery typically cannot be repeated.
We believe that delivery of drugs with the Delcath system may enable surgical
resection in some of the cases which are currently inoperable by reducing the
size and number of tumors sufficiently to make resection feasible. Shrinking a
tumor using chemotherapy and then removing the tumor is a procedure known as
adjuvant therapy. After resection, chemotherapy can be administered through the
Delcath system with the objective of destroying micro metastases in the liver
that may remain undetected, thus preventing or delaying any recurrence of tumor
growth.
CHEMOTHERAPY
The most prevalent form of liver cancer treatment is intravenous chemotherapy.
The effectiveness of this treatment, however, is limited by its side effects.
Generally, the higher the dosage of chemotherapy administered, the greater its
ability to kill cancer cells. However, due to the toxic nature of chemotherapy
agents, the higher the dosage administered, the greater damage chemotherapy
agents cause to healthy tissues. As a result, the dosage of chemotherapy
required to kill cancer cells can be lethal to patients.
The side effects caused by doxorubicin, the drug we are seeking to have approved
for use in the Delcath system, are representative of the side-effects associated
with many chemotherapy agents. Doxorubicin causes irreversible heart tissue
damage. Depending on dosage levels, the damage caused by doxorubicin can be
serious and lead to congestive heart failure. Doxorubicin can also cause severe
mucositis leading to ulceration of the mouth and digestive organs, damage to a
patient's immune system through destruction of bone marrow cells, as well as
acute nausea, severe vomiting, dermatological problems and hair loss. The use of
doxorubicin can be fatal even when it is administered with careful patient
monitoring.
The limited effectiveness of intravenous chemotherapy treatment and its
debilitating, often life-threatening side-effects makes the decision to undergo
chemotherapy treatment difficult. In some instances, in an attempt to shrink
tumors, a physician may prescribe a radically high-dose of chemotherapy, despite
its side effects. In other cases, recognizing the inevitable result of liver
cancer, the physician and patient choose only to manage the patient's discomfort
from cancer with pain killers while foregoing treatment.
To address this trade-off between the efficacy of intravenous chemotherapy
treatment and its dire side effects, physicians have experimented with
techniques to isolate the liver from the general circulatory system and to
achieve a targeted delivery of chemotherapy agents to the liver. In the 1980s, a
physician developed a procedure in which he surgically diverted the blood flow
from the liver while infusing high dosages of chemotherapy agents into the
liver. A filtration circuit reduced drug concentrations before returning the
diverted blood to the patient. The treatment, however, was not embraced by the
medical community because it is highly invasive, resulting in prolonged recovery
times, long hospital stays and excessive costs. Other physicians have
experimented with the delivery of chemotherapy agents to the liver by catheter,
attempting to use one or more catheters to remove chemotherapy agents before
they enter the general circulatory system. We are unaware of any system,
however, which contains the patented attributes of the Delcath design.
3
CRYOSURGERY
Cryosurgery is the destruction of cancer cells using sub-zero temperatures in an
open surgical procedure. During cryosurgery, multiple stainless steel probes are
placed into the center of the tumor and liquid nitrogen is circulated through
the end of the device, creating an ice ball. Cryosurgery involves a cycle of
treatments in which the tumor is frozen, allowed to thaw and then refrozen.
While cryosurgery is considered to be relatively effective, we believe adoption
of this procedure has been limited because:
o It is not an option for patients who cannot tolerate an open surgical
procedure;
o It involves significant complications which are similar to other open
surgical procedures, as well as liver fracture and hemorrhaging caused by
the cycle of freezing and thawing;
o It is associated with mortality rates estimated to be between one and five
percent; and
o It is expensive compared to other alternatives.
PERCUTANEOUS ETHANOL INJECTION
Percutaneous ethanol injection, or PEI, involves the injection of alcohol into
the center of the tumor. The alcohol causes cells to dry out and cellular
proteins to disintegrate, ultimately leading to tumor cell death.
While PEI can be successful in treating some patients with primary liver cancer,
it is generally considered ineffective on large tumors as well as metastatic
tumors. Patients are required to receive multiple treatments, making this option
unattractive for many patients. Complications include pain and alcohol
introduction to bile ducts and major blood vessels. In addition, this procedure
can cause cancer cells to be deposited along the needle tract when the needle is
withdrawn.
RADIATION THERAPY
Radiation therapy uses high dose x-rays to kill cancer cells. Radiation therapy
is not considered an effective means of treating liver cancer and is rarely used
for this purpose. Radiation is often used as an adjunct to other cancer
treatments.
IMPLANTED INFUSION PUMPS
Implanted Infusion Pumps can be used to better target the delivery of
chemotherapy agents to the tumor. Arrow International markets an implantable
pump typically used to treat colorectal cancer which has metastasized to the
liver. This pump, however, lacks a means of preventing the entry of chemotherapy
agents into the patient's general circulation after it passes through the liver.
This technique does not enable physicians to prescribe higher doses of
chemotherapy.
OTHER METHODS OF TREATMENT
Still other liver cancer treatments include: liver transplants, embolization,
tumor ablation through the use of radio frequency waves and the use of
biological response modulators, monoclonal antibodies and liposomes. The
effectiveness of these treatments is limited, many have dose limiting
side-effects, and none is widely used.
THE DELCATH SYSTEM
The Delcath system is designed to address the critical shortcomings of
conventional intravenous chemotherapy delivery. The Delcath system isolates the
liver from the general circulatory system during liver cancer treatments
4
with chemotherapy and then returns the blood exiting the liver to the general
circulatory system only after the chemotherapy agent has been substantially
removed by filtration outside the body. We believe that such protection from the
side-effects of chemotherapy that is provided by the Delcath system to other
parts of the body allows for higher chemotherapy doses to be administered to the
liver than can be administered by conventional intravenous delivery. By
filtering out a substantial portion of the chemotherapy agent before the blood
is returned to the blood stream, other organs of the body receive less exposure
than the liver to the chemotherapy agent. Therefore, these organs are less
likely to suffer from the harmful side-effects of chemotherapy, including the
cumulative harmful effect that doxorubicin has on the heart muscle.
The Delcath system kit includes the following disposable components:
o Infusion catheter -- a thin-walled arterial infusion catheter used to
deliver chemotherapy to the liver;
o Double balloon catheter -- a multi-passageway catheter used to isolate and
divert the drug-laden blood exiting the liver;
o Extracorporeal filtration circuit -- a blood tubing circuit incorporating
the disposable components used with a blood pump to push the isolated
blood through the system's filters and guide the cleansed blood back to
the patient;
o Filters -- activated carbon blood filters used to remove most of the
chemotherapy agent from the isolated blood after it has flowed through the
liver and before it returns to the patient's general circulation; and
o Return catheter -- a thin-walled blood sheath used to deliver the filtered
blood from the extracorporeal filtration circuit back into one of the
major veins returning blood to the right atrium of the heart.
The double balloon catheter has one large passageway and three smaller
passageways. Each of two low-pressure balloons is inflated through one of the
three smaller passageways. Blood flows out of the liver through the large
passageway to the filtration system. A separate access port attaches to the
large passageway and is designed for sampling fluid or flushing the system. The
third smaller passageway allows blood exiting the legs and kidneys to bypass the
liver and return to the heart.
The Delcath procedure involves a series of three catheter insertions, each of
which is made through the skin. During test procedures, patients are treated
with intravenous sedation and local anesthesia at catheter insertion sites. In
some cases general anesthesia has been used. An infusion catheter is inserted
into the artery through which blood normally flows to the liver. A second
catheter -- the Delcath double balloon catheter -- is inserted through the
inferior vena cava. The balloons on the double balloon catheter are then
inflated. This procedure prevents the normal flow of blood from the liver to the
heart through the inferior vena cava because the inferior vena cava has been
blocked. A chemotherapy agent is then infused into the liver through the
infusion catheter. The infused blood is prevented from flowing to the heart, but
exits the liver through perforations on the double balloon catheter and flows
through this catheter out of the body where the infused blood is pumped through
activated charcoal filters to remove most of the chemotherapy agent. The
filtered blood is returned to the patient through the jugular vein which leads
to the superior vena cava and the heart, thus restoring the cleansed blood to
normal circulation. Infusion is administered over a period of 30 minutes.
Filtration occurs during infusion and for 30 minutes afterward. The catheters
are removed and manual pressure is maintained on the catheter puncture sites for
approximately 15 minutes. The entire procedure takes approximately two to three
hours to administer.
During Phase I and II clinical trials, patients remained in the hospital
overnight for observation after undergoing treatment with the Delcath system.
Once physicians become familiar with using the Delcath system, we expect the
procedure to be performed on an outpatient basis, with the patient resuming
normal activities the day after the procedure is performed. We expect a patient
to undergo an average of four treatments, one every three weeks. A new Delcath
system kit is used for each treatment.
Integral to our research and development efforts is our program of clinical
research with prominent researchers and physicians that is being conducted
presently at The National Cancer Institute; and was previously conducted at Yale
5
University, M.D. Anderson Cancer Center, and the Robert Wood Johnson Medical
School/Cancer Institute of New Jersey.
OUR PHASE III CLINICAL TRIALS
Phase III human clinical trials are a prerequisite for FDA pre-marketing
approval of Delcath's pre-marketing application. During these trials,
administration of doxorubicin through the Delcath system must be proven to be
safe and effective for the treatment of liver cancer. The FDA requires us to
demonstrate that delivering doxorubicin using the Delcath system results in
patient survival times that are longer than those obtained from administering
chemotherapy agents intravenously.
We have conducted Phase I and II human clinical trials at three United States
medical centers under investigational device and investigational new drug
exemptions granted by the FDA. The trials were designed to demonstrate the
system's "functionality," or its ability to administer to and extract from the
liver approved and marketed chemotherapy agents. Forty-four patients
participated in the trials. Twenty-one of these test subjects had primary liver
cancer or melanoma which had spread to the liver and were treated with
doxorubicin. The remaining 23 test subjects suffered from other forms of liver
cancer, and/or were treated with another chemotherapy agent, 5-FU. These trials
demonstrated that the Delcath system was capable of extracting approximately 70%
to 85% of the chemotherapy agent administered to the liver. Therefore, the
Delcath system permits the delivery of higher dosages of chemotherapy agents to
the cancer site.
We believe the results of the clinical trials we have conducted indicate that
the Delcath system delivered:
o more chemotherapy agent to the tumor site; and
o less chemotherapy agent to the general circulation than delivered by
administration of the same dose by intravenous means.
In addition, clinicians involved in the Phase I and Phase II clinical trials
observed:
o reduction in tumor size; and
o the safety of the system at higher dosage levels of chemotherapy than
those used in conventional intravenous chemotherapy delivery.
Further, though not demonstrated in a statistically significant manner because
of the limited number of patients, clinicians observed survival times of
patients treated with the Delcath system which exceeded those that would
generally be expected in patients receiving chemotherapy treatment through
conventional intravenous means of delivery.
Based on the results of our Phase I and Phase II clinical trials, we submitted
to the FDA our application for pre-market approval of the Delcath system as a
medical device. In response to our application, the FDA classified the Delcath
system as a drug delivery system and requires us to obtain approval of new
labeling for the drug being used in the clinical trials. The application to
change the labeling must be filed by a drug manufacturer holding an existing new
drug application or an abbreviated new drug application. The pre-marketing
approval and drug relabeling applications must demonstrate the clinical utility
of a particular drug when administered through the Delcath system. To do so, we
must demonstrate, in a statistically meaningful manner that administering
chemotherapy agents with the Delcath system results in survival times of
patients that are longer than those obtained from administering chemotherapy
agents intravenously.
With a substantial portion of the proceeds that we received from our initial
public offering, we intend to conduct Phase III human clinical trials designed
to demonstrate that administering doxorubicin with the Delcath system to treat
malignant melanoma that has spread to the liver results in patient survival
times that are longer than those obtained from administering chemotherapy agents
intravenously.
6
In December 1999, the FDA approved the protocols for conducting the Phase III
clinical trials.
We expect the Phase III clinical trials to be conducted at several medical
centers and to involve approximately 122 test subjects who will be treated for
malignant melanoma that has spread to the liver. Half of these test subjects
will be treated with doxorubicin administered using the Delcath system and half,
the control group, will be treated with chemotherapy agents delivered
intravenously. We have identified and approached a number of medical centers
that have expressed an interest in conducting the clinical trials. We expect
that we will begin to enter into agreements with medical centers to conduct the
clinical trials during the year 2002. However, our timetable is subject to
uncertainty and we cannot assure you that we can meet our planned schedule. We
cannot assure you that all of the medical centers we have identified will be
available to conduct the clinical trials when we are in a position to have them
commence or that we will be ready to commence the trials within any particular
time period.
We intend to hire a contract research firm to conduct these trials. However, we
have not begun negotiations with a contract research organization and we cannot
assure you that we will be able to engage an organization on acceptable terms
and conditions in a timely manner or at all. The contract research organizations
and principal investigators conducting the clinical trials are not our
employees. As a result, we have limited control over their activities and can
expect that only limited amounts of their time will be dedicated to the clinical
trials. They may fail to meet their contractual obligations or fail to meet
regulatory standards in the performance of their obligations and we may not be
able to prevent or correct their failures. Failure of the contract research
organization to perform as expected or required, including failure of the
principal investigators to enroll a sufficient number of patients for our
trials, could result in the failure of the clinical trials and the failure to
obtain FDA pre-marketing approval.
We believe that we will acquire sufficient data to file a submission to seek FDA
pre-marketing approval of the Delcath system within 12 to 18 months of the
commencement of the clinical trials. However, we may continue to experience
delays in beginning, conducting and completing the trials because of factors
that include, but are not limited to, delays in designing the trials to conform
to the trial protocols, complying with the requirements of institutional review
boards at the sites where the trials will be conducted, our ability to identify
clinical test sites and sponsoring physicians and the ability of the clinical
test sites to identify patients to enroll in the trials. The trials may also
take longer to complete because of difficulties we may encounter in entering
into agreements with clinical testing sites to conduct the trials and the
difficulties these sites may encounter in enrolling patients. Our ability to
conduct the trials may also be impaired by our limited experience in arranging
for clinical trials and in evaluating and submitting the data gathered from
clinical trials. Further, the FDA monitors the progress of the clinical trials
and may alter, suspend or terminate the trials based on the data that has been
accumulated to that point and its assessment of the relative risks and benefits
to the patients involved in the trials.
After acquiring sufficient data, we believe that our collation, analysis and
submission of the trial results to the FDA will take an additional three months.
Once we submit the data from the clinical trials to the FDA, we estimate that
the FDA will respond to our submission within three months. Given the short life
expectancy of liver cancer patients, we believe that the FDA will review our
pre-market application expeditiously and will respond to our submission within
three months. However, the FDA may take longer than three months to evaluate our
submission, may require that additional trials be conducted or may not grant
approval.
The FDA pre-marketing approval we are currently seeking is limited to
administration of doxorubicin with our Delcath system to treatment of patients
suffering from metastatic melanoma which has spread to the liver. If we are
granted this approval, we plan to subsequently seek additional FDA pre-marketing
approvals for using the Delcath system with other chemotherapy agents for
treatment of other liver cancers and with anti-viral drugs for treatment of
other diseases, such as hepatitis. In many instances, the process of applying
for and obtaining regulatory approvals involves rigorous pre-clinical and
clinical testing. The time, resources and funds required for completing
necessary testing and obtaining approvals is significant, and FDA pre-marketing
approval may never be obtained for some medical devices or drug delivery
systems. If we fail to raise the additional capital required or enter into
strategic partnerships to finance this testing or if we fail to obtain the
required approvals, our potential growth and the expansion of our business would
likely be limited.
7
OUR CLINICAL TRIAL AND AGREEMENT WITH THE NATIONAL CANCER INSTITUTE
In June 2001, the Company announced that The National Institutes of Health/The
National Cancer Institute approved a clinical study protocol for administering
escalating doses of another chemotherapeutic agent, melphalan hydrochloride
("melphalan") through the Delcath drug delivery system to patients with
unresectable cancer of the liver.
The trial conducted at The National Cancer Institute (the "NCI") began in August
2001, and will initially recruit a total of approximately 24 patients, all
experiencing metastatic liver cancer. The goal of the trial is to determine the
dose limiting toxicity and maximum tolerated dose of melphalan.
This clinical trial, which will include a Phase I and Phase II study, will be
undertaken subject to the terms and conditions of the Cooperative Research and
Development Agreement (the "CRADA") between the NCI and the Company. FDA
approval is necessary to conduct Phase II studies. We cannot estimate how long
it will be until we receive FDA approval to commence the Phase II study. The
scope of the study is to:
I. Develop a Delcath system-based Phase I treatment protocol for the
regional therapy of organs using escalating doses of melphalan
hydrochloride delivered through the utilization of the Delcath system.
The Phase I study is expected to be completed within one year of the
initiation date.
II. Develop Delcath system- based Phase II treatment protocols as a follow-up
to Phase I studies. The Phase II study will involve patients with
specific histologies (diseases) who have unresectable cancers confined to
the liver using the maximum tolerated dose of melphalan hydrochloride
administered using the Delcath system. The patients will be treated with
up to four series of infusions based upon toxicity and response to
treatment. The Phase II study is expected to begin shortly after
completion of the Phase I study and take twelve to eighteen months.
The CRADA commits the NCI to perform the research necessary under the Phase I
and II protocols approved by the FDA with the Company acting as the sponsor.
Delcath will provide funding to the NCI in the amount of $600,000 payable in
equal quarterly installments over the five-year term of the agreement unless the
CRADA is terminated early. The CRADA can be terminated at any time by either
party. In the event of an early termination, Delcath would be responsible for
unfunded costs incurred prior to the termination date and all reasonable
termination costs. The term of the agreement is intended to allow for what the
parties expect to be the potential maximum amount of time necessary to complete
and evaluate Phase I and II trials. An amendment to the CRADA would be necessary
if the parties decide to initiate additional clinical trials using another
chemotherapeutic agent. The Company is using money raised in its initial public
offering to fund this project. If the results of the Phase I and II trials are
successful, the Company may need to seek additional capital from investors to
pay for the expenses associated with a Phase III clinical trial.
If all three phases of our clinical trials are successful, this will provide us
with another chemotherapeutic agent to administer using the Delcath system.
RESEARCH FOR HEPATITIS TREATMENT
Another disease that attacks the liver is viral hepatitis. The incidence of
viral hepatitis in the United States and worldwide is increasing. The long-range
effects of some forms of hepatitis can include massive death of liver cells,
chronic active hepatitis, cirrhosis and hepatoma. The current treatment for
viral hepatitis is limited and includes long-term injections of interferon
alpha, which is similar to chemotherapy in its toxicity and dosage limitations.
We plan to seek a strategic partner to conduct clinical trials to determine the
feasibility of using the Delcath system to administer anti-viral drugs,
including interferon alpha, in the treatment of viral hepatitis. We have not
entered into any arrangements, understandings or agreements with potential
strategic partners.
8
SALES AND MARKETING
We intend to focus our marketing efforts on the 41 comprehensive cancer centers
in the United States recognized by the National Cancer Institute, beginning with
the hospitals participating in the Phase III clinical trials. We will focus
these efforts on two distinct groups of medical specialists in these
comprehensive cancer centers:
o oncologists who have primary responsibility for the patient; and
o interventional radiologists who are members of the hospital staff and work
with catheter-based systems.
Upon diagnosis of cancer, a patient is usually referred to a medical oncologist.
This physician generally provides palliative treatments and refers the patient
to a surgical oncologist if surgery appears to be an option. Both medical and
surgical oncologists will be included in our target market. Generally,
oncologists do not position catheters. This is done either by an interventional
radiologist or a surgeon.
We plan to hire a marketing director at such time as we receive an indication
from the FDA that approval of the Delcath system is forthcoming and then hire a
sales manager and four sales representatives to market the system in the United
States. We have not previously sold, marketed or distributed any products and
currently do not have the personnel, resources, experience or other capabilities
to adequately market the Delcath system. Our success will depend upon our
ability to attract and retain skilled sales and marketing personnel. Competition
for sales and marketing personnel is intense, and we cannot assure you that we
will be successful in attracting or retaining such personnel. Our inability to
attract and retain skilled sales and marketing personnel could adversely affect
our business, financial condition and results of operations.
In addition, if we can establish foreign testing and marketing relationships, we
plan to utilize one or more corporate partners to market products outside the
United States. We believe distribution or corporate partnering arrangements will
be cost effective, will be implemented more quickly than a direct sales force
established by us in such countries and will enable us to capitalize on local
marketing expertise in the countries we target. However, any revenues we receive
from the sale of the Delcath system in foreign markets will depend upon the
efforts of these parties and may be less than we would otherwise receive if we
marketed the product through our own sales force.
Since we plan to sell the Delcath system to a large number of hospitals and
physician practices, we do not expect to be dependent upon one or a few
customers.
Market acceptance of the Delcath system will depend upon:
o the ability of our clinical trials to demonstrate a significant reduction
in the mortality rate for the kinds of cancers treated at a cost effective
price;
o our ability to educate physicians on the use of the system and its
benefits compared to other treatment alternatives; and
o our ability to convince healthcare payors that use of the Delcath system
results in reduced treatment costs of patients.
This will require substantial efforts and expenditures. We only have limited
experience in these areas and we cannot assure you that we will be successful in
achieving these goals. Moreover, the Delcath system replaces treatment methods
in which many hospitals have made a significant investment. Hospitals may be
unwilling to replace their existing technology in light of their investment and
experience with competing technologies. Many doctors and hospitals are reluctant
to use a new medical technology until its value has been demonstrated. As a
result, the Delcath system may not gain significant market acceptance among
physicians, patients and healthcare payors.
9
NISSHO AGREEMENT
In December 1996, we entered into an agreement with Nissho Corporation, a large
manufacturer and distributor of medical devices and pharmaceuticals based in
Osaka, Japan which grants to Nissho the exclusive right to distribute the
Delcath system in Japan, China, Korea, Hong Kong and Taiwan until December 31,
2004. Nissho, which has invested $1,000,000 in Delcath, has previously advised
Delcath of its intention to commence clinical trials in Japan. Nissho may also
seek to conduct clinical trials in the other countries in the territory.
Products covered by the agreement include the Delcath system for the treatment
of cancer in the liver and the lower extremities, as well as new products that
may be added by mutual agreement. Nissho is required to purchase products from
Delcath in connection with clinical trials and for resale in its market at
prices to be determined by mutual agreement. Nissho has agreed, in its
territory, not to engage in the business of manufacturing, distributing or
selling systems similar to the Delcath system for the liver or other organs or
body regions.
THIRD-PARTY REIMBURSEMENT
Currently, because the Delcath system is characterized by the FDA as an
experimental device, its use is not reimbursable in the United States. We will
not seek to have third-party payors, such as Medicare, Medicaid and private
health insurance plans, reimburse the use of the Delcath system until after its
use is approved by the FDA. Even if approved by the FDA, these payors may
require us, as a condition to reimbursement, to provide extensive supporting
scientific, clinical and cost effectiveness data for our Delcath system to the
American Medical Association. New products are under increased scrutiny with
respect to a determination as to whether or not they will be covered by the
various healthcare plans and with respect to the level of reimbursement which
will be applicable to respective covered products and procedures. Third-party
payors may deny reimbursement for the treatment and medical costs associated
with the Delcath system, notwithstanding FDA or other regulatory approval, if it
is determined that the Delcath system is unnecessary, inappropriate, not cost
effective, experimental or for a non-approved indication. Third-party payors
currently provide reimbursement for many of the components of the Delcath system
based on established general reimbursement codes, in connection with their use
in liver perfusion and other therapies.
We believe that the Delcath system will provide significant cost savings to the
extent that it can reduce treatment and hospitalization costs associated with
the side-effects of chemotherapy. Our planned wholesale price for the Delcath
system kit is $4,000. A patient normally undergoes four treatments with the
Delcath system, each requiring a new system kit. Each treatment with the system
costs approximately $12,000, resulting in a total treatment cost of
approximately $48,000. This compares to a total cost of conventional aggressive
chemotherapy treatment of approximately $160,000 to $180,000, which includes the
hospitalization and treatment costs associated with the side-effects of the
systemic delivery of chemotherapy agents.
MANUFACTURING
We plan to utilize contract manufacturers to produce the components of the
Delcath system. In order to maintain quality control, we plan to perform final
assembly and packaging in our own facility. If we undertake these operations our
facility will be required to comply with the FDA's good manufacturing practice
and quality system requirements. If we sell the Delcath system in some foreign
markets, our facility will also need ISO 9000 approval from the European Union.
The double balloon catheter will be manufactured domestically by the Burron OEM
division ("Burron") of B. Braun Medical, Inc. of Germany ("B. Braun"). The
double balloon catheter must be manufactured in accordance with manufacturing
and performance specifications that are on file with the FDA. Burron has
demonstrated that the components it manufactures meet these specifications.
Burron's manufacturing facility is ISO 9000 approved, which will allow the use
of the catheter in European markets. B. Braun has experience in obtaining
regulatory approval for medical products in European markets and has indicated
informally that it will assist us in this process. We have not entered into a
written agreement with Burron to manufacture the catheter either for the
clinical trials or for
10
commercial sale. To ensure sufficient supply of catheters to complete the
clinical trials, we intend to purchase our total trial requirements before
commencement of the trials.
Medtronic USA, Inc. ("Medtronic") manufactures the components of the blood
filtration circuit located outside of the body, including the medical tubing
through which a patient's blood flows and various connectors, as well as the
blood filtration pump head. Medtronic is a manufacturer of components used for
extracorporeal blood circulation during cardiac surgery. The components
manufactured by Medtronic have been cleared by the FDA for other applications
and can, therefore, be sourced off the shelf. These components, however, must
comply with manufacturing and performance specifications for the Delcath system
that are on file with the FDA. Medtronic has demonstrated that the components it
manufactures meet these specifications. Medtronic's manufacturing facility is
also ISO 9000 approved and, thus, the components it manufactures may be used in
European markets.
The activated charcoal filters used in the Delcath system are manufactured by
Asahi Medical Products of Japan ("Asahi"). These filters have been cleared by
the FDA for other applications and can be sourced off the shelf. Asahi has
demonstrated that the filters it supplies fall within the performance parameters
and meet the specifications on file with the FDA. We have not entered into a
written agreement with Asahi to supply the filters either for the Phase III
clinical trials or for commercial sale.
We do not have any contracts with suppliers for the manufacture of components
for the Delcath system. To date, we have only had components of the Delcath
system manufactured for us in small quantities for use in pre-clinical studies
and clinical trials. We will require greater quantities for the clinical trials
and significantly greater quantities to commercialize the product. If we are
unable to obtain adequate supplies of components from our existing suppliers, or
need to switch to an alternate supplier, the completion of our clinical trials
and commercialization of the Delcath system could be delayed.
COMPETITION
The healthcare industry is characterized by extensive research efforts, rapid
technological progress and intense competition from numerous organizations,
including biotechnology firms and academic institutions. Competition in the
cancer treatment industry, and specifically the markets for systems and devices
to improve the outcome of chemotherapy treatment for cancer, is intense. We
believe that the primary competitive factors for products addressing cancer
include safety, efficacy, ease of use, reliability and price. We also believe
that physician relationships, especially relationships with leaders in the
interventional radiology and oncology communities, are important competitive
factors.
The Delcath system competes with all forms of liver cancer treatments that are
alternatives to resection including radiation, intravenous chemotherapy and
chemotherapy through implanted infusion pumps, liver transplants, embolization,
cryosurgery, radiowave ablation and the use of biological response modulators,
monoclonal antibodies and liposomes. Many of Delcath's competitors have
substantially greater financial, technological, research and development,
marketing and personnel resources. In addition, some of our competitors have
considerable experience in conducting clinical trials and other regulatory
approval procedures. Our competitors may develop more effective or more
affordable products or treatment methods, or achieve earlier product development
or patent protection, in which case our chances to achieve meaningful revenues
or profitability will be substantially limited.
Many large pharmaceutical companies and research institutions are developing
systems and devices to improve the outcome of chemotherapy treatment for cancer.
Arrow International currently markets an implantable infusion pump, which has
been successful in facilitating regional drug delivery. However, Arrow's pump
lacks a means of preventing the entry of these agents into the patient's general
circulation after they pass through the liver. Other companies, including Merck
& Co., Inc., are developing various chemotherapy agents with reduced toxicity,
while other companies are developing products to reduce the toxicity and
side-effects of chemotherapy treatment. In addition, gene therapy, vaccines and
other minimally invasive procedures are currently being developed as
alternatives to chemotherapy.
Technological developments are expected to continue at a rapid pace in both
industry and academia which could result in a short product life cycle for our
Delcath system.
11
GOVERNMENT REGULATION
UNITED STATES FOOD AND DRUG ADMINISTRATION
GENERAL. The manufacture and sale of medical devices and drugs are subject to
extensive governmental regulation in the United States and in other countries.
The Delcath system is regulated in the United States as a drug delivery system
by the FDA under the Federal Food, Drug, and Cosmetic Act. As such, it requires
approval by the FDA of a pre-marketing application prior to commercial
distribution.
Doxorubicin, the drug that we are initially seeking to have approved for
delivery by the Delcath system, is a widely used chemotherapy agent that has
been approved by the FDA. Melphalan, the drug that will be administered through
the Delcath system in the NCI-sponsored study, ia a chemotherapy agent that has
been approved by the FDA. Like all approved drugs, the approved labeling
includes indications for use, method of action, dosing, side-effects and
contraindications. Because the Delcath system delivers doxorubicin through a
mode of administration and at dose strength that differs from those currently
approved, we must obtain approval for revised labeling of doxorubicin and
melphalan products permitting their use with the Delcath system. The application
to change the labeling must be filed by a drug manufacturer holding an existing
new drug application or an abbreviated new drug application.
Under the Federal, Food, Drug, and Cosmetic Act, the FDA regulates the
pre-clinical and clinical testing, design, manufacture, labeling, distribution,
sales, marketing, post-marketing reporting, advertising and promotion of medical
devices and drugs in the United States. Noncompliance with applicable
requirements could result in different sanctions such as:
o the refusal of the government to grant approvals;
o suspension or withdrawal of clearances or approvals;
o total or partial suspension of production, distribution, sales and
marketing;
o fines;
o injunctions;
o civil penalties;
o recall or seizure of products; and
o criminal prosecution of a company and its officers and employees.
Our contract manufacturers also are subject to numerous federal, state and local
laws relating to such matters as safe working conditions, manufacturing
practices, environmental protection, fire hazard control and disposal of
hazardous or potentially hazardous substances.
MEDICAL DEVICES. The Delcath system is a Class III medical device. It is subject
to the most stringent controls applied by the FDA to reasonably assure safety
and effectiveness. An application for pre-market approval must be supported by
data concerning the device and its components, including the manufacturing and
labeling of the device and including the results of animal and laboratory
testing and human clinical trials. The conducting of Phase III trials is subject
to regulations and to continuing oversight by Institutional Review Boards and
the FDA. These regulations include required reporting of adverse events from use
of the device during the trials. Before commencing clinical trials, we obtained
an investigational device exemption providing for the initiation of clinical
trials. We also obtained approval of our investigational plan, including the
proposed protocols and informed consent statement that patients signed before
undergoing treatment with the Delcath system, by the institutional review boards
at the sites
12
where the trials were conducted. Under the Federal Food, Drug, and Cosmetic Act,
clinical studies for "significant risk" Class III devices require obtaining such
approval by institutional review boards and the filing with the FDA of an
investigational device exemption at least 30 days before initiation of the
studies.
Given the short life expectancy of patients suffering from metastatic melanoma
of the liver, we believe the FDA will review our pre-market application
expeditiously and respond to our submission of the Delcath system for commercial
sale within three months. However, approval of the Delcath system may take
longer if the FDA requests substantial additional information or clarification,
or if any major amendments to the application are filed. In addition, the FDA
may refer this matter to an advisory committee of experts to obtain views about
the Delcath system. This process is referred to as a "panel review," and could
delay the approval of the Delcath system. The FDA will usually inspect the
applicant's manufacturing facility to ensure compliance with quality systems
regulations prior to approval of an application. The FDA also may conduct
bioresearch monitoring inspections of the clinical trial sites and the applicant
to ensure data integrity, and that the studies were conducted in compliance with
the applicable FDA regulations, including good clinical practice regulations.
If the FDA's evaluations of the application, clinical study sites and
manufacturing facilities are favorable, the FDA will issue either an approval
letter, or an "approvable letter" containing a number of conditions that must be
met in order to secure approval of an application. If and when those conditions
have been fulfilled to the satisfaction of the FDA, the agency will issue an
order approving the application, authorizing commercial marketing of the device
under specified conditions of use. If the FDA's evaluation of the application,
the clinical study sites or the manufacturing facilities is not favorable, the
FDA will deny approval of the application or issue a "not approvable letter."
The FDA may also determine that additional pre-clinical testing or human
clinical trials are necessary before approval, or that post-approval studies
must be conducted.
The FDA's regulations require agency approval of an application supplement for
changes to a device if they affect the safety and effectiveness of the device,
including new indications for use; labeling changes; the use of a different
facility or establishment to manufacture, process, or package the device;
changes in vendors supplying components for the device; changes in manufacturing
methods or quality control systems; and changes in performance or design
specifications. Changes in manufacturing procedures or methods may be
implemented and the device distributed 30 days after the FDA is provided with
notice of these changes unless the FDA advises the pre-market approval
application holder within 30 days of receipt of the notice that the notice is
inadequate or that preapproval of an application supplement is required.
Approved medical devices remain subject to extensive regulation. Advertising and
promotional activities are subject to regulation by the FDA and by the Federal
Trade Commission. Other applicable requirements include the FDA's medical device
reporting regulations, which require that we provide information to the FDA on
deaths or serious injuries that may have been caused or contributed to by the
use of marketed devices, as well as product malfunctions that would likely cause
or contribute to a death or serious injury if the malfunction were to recur. If
safety or efficacy problems occur after the product reaches the market, the FDA
may take steps to prevent or limit further marketing of the product.
Additionally, the FDA actively enforces regulations prohibiting marketing or
promotion of devices or drugs for indications or uses that have not been cleared
or approved by the FDA. Further, the Food, Drug, and Cosmetic Act authorizes the
FDA to impose post-market surveillance requirements with respect to a Class III
device which is reasonably likely to have a serious adverse health consequence
or which is intended to be implanted in the human body for more than one year or
to be a life sustaining or life supporting device used outside a device user
facility.
The Food, Drug, and Cosmetic Act regulates a device manufacturer's design
control, quality control and manufacturing procedures by requiring the
manufacturer to demonstrate and maintain compliance with quality systems
regulations including good manufacturing practices and other requirements. These
regulations require, among other things, that:
o there are in place design controls, including initial design and design
changes;
o the manufacturing process be regulated, controlled, and documented by the
use of written procedures; and
13
o the ability to produce devices which meet the manufacturer's
specifications be validated by extensive and detailed testing of every
aspect of the process.
The FDA monitors compliance with quality systems regulations, including good
manufacturing practice requirements, by conducting periodic inspections of
manufacturing facilities. If violations of the applicable regulations are found
during FDA inspections, the FDA will notify the manufacturer of such violations
and the FDA, administratively or through court enforcement action, can prohibit
further manufacturing, distribution, sales and marketing of the device until the
violations are cured. If violations are not cured within a reasonable length of
time after the FDA provides notification of such violations, the FDA is
authorized to withdraw approval of the pre-market approval application.
Investigational devices that require FDA pre-marketing approval in the United
States but have not received such approval, may be exported to countries
belonging to the European Union, European Economic Area, and to some other
specified countries, provided that the device is intended for investigational
use in accordance with the laws of the importing country; has been manufactured
in accordance with the FDA's good manufacturing practices or ISO standards; is
labeled on the outside of the shipping carton "for export only," is not sold or
offered for sale in the United States; and complies with the specifications of
the foreign purchaser. The export of an investigational device for
investigational use to any other country requires prior authorization from the
FDA. An investigational device may be exported for commercial use only as
described below, under "Foreign Regulation."
DRUGS. A manufacturer of a chemotherapy agent must obtain FDA pre-marketing
approval of a supplemental or original new drug application for a chemotherapy
product providing for its use with the Delcath system before the system may be
marketed in the United States to deliver that agent to the liver or any other
site. The FDA-approved labeling for both doxorubicin and melphalan does not
provide for its delivery with the Delcath system. We must partner with the
holders of an approved new drug application for doxorubicin and melphalan to
make this change to the labeling of both agents. We are seeking to partner with
drug companies for this purpose, but we have no assurance that we will find
partners or that the FDA will approve the application. If this approval is
obtained, it would not have a negative effect on the manufacturers of either
doxorubicin or melphalan. Rather, they will have the opportunity to expand the
use of the drugs as a result of changing their label to include the Delcath
labeling.
Phase III clinical trial protocols using doxorubicin have been approved by the
FDA under the Company's investigational new drug application. FDA regulations
also require that prior to initiating the trials the sponsor of the trials
obtain institutional review board approval from each investigational site that
will conduct the trials. We are seeking the approval of institutional review
boards at several medical centers by assembling and providing them with
information with respect to the trials.
The FDA requires that, in order to obtain approval to re-label doxorubicin for
delivery using the Delcath system, we demonstrate that delivering doxorubicin
using the system results in patient survival times that are longer than those
obtained from administering chemotherapy agents intravenously.
The approved Phase III clinical trial protocols are designed to obtain approval
of both new drug labeling and a pre-marketing approval application providing for
the use of doxorubicin with the Delcath system. The trial protocols were
approved by both the FDA division that approves new drugs and the division that
reviews applications to market new devices. All of the data generated in the
trials will be submitted to both of these FDA divisions. The foregoing facts
will also apply if our clinical trial using melphalan is successful in Phases I,
II and III.
If we successfully complete the clinical trials with both agents, we believe the
manufacturers of doxorubicin and melphalan will submit to the FDA an application
to deliver the agent to the liver through the Delcath system. Under the Food,
Drug, and Cosmetic Act, the Delcath system cannot be marketed until the new drug
application, or supplemental new drug application, and the pre-marketing
approval application approvals are obtained, and then only in conformity with
conditions of use set forth in the approved labeling.
FOREIGN REGULATION. In order for Nissho or any other foreign strategic partner
to market our products in Asia, Europe, Latin America and other foreign
jurisdictions, they must obtain required regulatory approvals or clearances and
otherwise comply with extensive regulations regarding safety and manufacturing
processes and quality. These
14
regulations, including the requirements for approvals or clearances to market,
may differ from the FDA regulatory scheme. In addition, there may be foreign
regulatory barriers other than pre-market approval or clearance.
In April 1996, FDA legislation was enacted that permits that a medical device
which requires FDA pre-marketing approval but which has not received such
approval to be exported to any country for commercial use, provided that the
device:
o complies with the laws of that country;
o has valid marketing authorization or the equivalent from the appropriate
authority in any of a list of industrialized countries including
Australia, Canada, Israel, Japan, New Zealand, Switzerland, South Africa
and countries in the European Economic Union; and
o meets other regulatory requirements regarding labeling, compliance with
the FDA's good manufacturing practices or ISO manufacturing standards, and
notification to the FDA.
We must obtain a CE mark in order for us to market and sell the Delcath system
in the European Union, except for limited use as a clinical trial device.
Supplemental device approvals also might be required to market and sell the
Delcath system.
PATENTS, TRADE SECRETS AND PROPRIETARY RIGHTS
Our success depends in large part on our ability to obtain patents, maintain
trade secret protection and operate without infringing on the proprietary rights
of third parties. Because of the length of time and expense associated with
bringing new products through development and regulatory approval to the
marketplace, the health care industry has traditionally placed considerable
importance on obtaining patent and trade secret protection for significant new
technologies, products and processes. We hold the following seven United States
patents, as well as three corresponding foreign patents in Canada, Europe and
Japan:
Summary Description of Patents Patent No.
------------------------------ ---------------
Isolated perfusion method for cancer treatment U.S. #5,069,662
Isolated perfusion device -- catheter for use in
isolated perfusion in cancer treatment U.S. #5,411,479
Device and method for isolated pelvic perfusion U.S. #5,817,046
Catheter design to allow blood flow from renal
veins and limbs to bypass occluded segment of IVC U.S. #5,893,841
Balloon inside catheter to restrict blood flow or
prevent catheter from moving U.S. #5,897,533
Catheter with slideable balloon to adjust isolated
segment U.S. #5,919,163
Isolated perfusion method for kidney cancer U.S. #6,186,146
We plan to vigorously enforce our intellectual property rights. In addition, we
will conduct searches and other activity relating to the protection of existing
patents and the filing of new applications.
Litigation may be necessary to enforce any patents issued or assigned to us or
to determine the scope and validity of third-party proprietary rights.
Litigation would be costly and divert our attention from our business. If others
file patent applications with respect to inventions for which we already have
issued patents or have patent applications pending, we may be forced to
participate in interference proceedings declared by the United States Patent and
Trademark Office to determine priority of invention, which would also be costly
and divert our attention from our business. If a third party violates our
intellectual property rights, we may be unable to enforce our rights because of
our limited resources.
15
In addition to patent protection, we rely on unpatented trade secrets and
proprietary technological expertise. We rely, in part, on confidentiality
agreements with our marketing partners, employees, advisors, vendors and
consultants to protect our trade secrets and proprietary technological
expertise. These agreements may not provide meaningful protection of our
proprietary technologies or other intellectual property if unauthorized use or
disclosure occurs.
PRODUCT LIABILITY
Clinical trials, manufacturing, marketing and product sales may expose us to
liability claims from the use of the Delcath system. Though participants in
clinical trials are generally required to execute consents and waivers of
liability they may still be able to assert product liability claims against us.
Claims for damages, whether or not successful, could cause delays in the
clinical trials and result in the loss of physician endorsement. We do not
currently carry product liability insurance and we may not be able to acquire
product liability insurance at sufficient coverage levels or at an acceptable
cost. If we are unable to obtain sufficient insurance coverage at an acceptable
cost, we may not be able to commercialize the Delcath system. A successful
product liability claim or recall would have a material adverse effect on our
business, financial condition and results of operations.
EMPLOYEES
As of February 21, 2002, we had six employees all of whom were full-time. We
intend to recruit additional personnel in connection with the research,
development, manufacturing and marketing of our products. None of our employees
is represented by a union, and we believe relationships with our employees are
good. Our success will depend, in large part, upon our ability to attract and
retain qualified employees. We face competition in this regard from other
companies, research institutions and other organizations.
In addition to our full-time employees, we engage the services of medical and
scientific consultants.
ITEM 2. DESCRIPTION OF PROPERTIES.
Delcath currently occupies approximately 3,300 square feet of office space at
1100 Summer Street, Stamford, Connecticut, pursuant to an informal arrangement
with the landlord. We have occupied these facilities since 1992, and the space
is adequate for our current needs. If we require additional space in the future,
we believe that satisfactory space will be available at commercially reasonable
rates in or near our current facility, although there can be no assurance that
additional facilities and equipment will be available upon reasonable or
acceptable terms, if at all. The Company believes that its properties are
adequately covered by insurance.
The Company believes that its facilities and equipment are in good condition and
are suitable for its operations as presently conducted and for its foreseeable
future operations.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock has traded on the Nasdaq National Market under the
symbol "DCTHU" from October 19, 2000, the effective date of our registration
statement, filed on Form SB-2 under the Securities Act of 1933 (no. 333-39470)
relating to our initial public offering of our Common Stock, until October 19,
2001. In
16
accordance with the terms of our initial public offering, effective October 22,
2001, the Company's common shares and warrants were decoupled from the units
issued October 19, 2000 and commenced separate trading. The common shares trade
under the sysmbol "DCTH", and the warrants trade under the symbol "DCTHW". The
following table sets forth the per share range of high and low sales prices of
our Common Stock for the periods indicated:
Common Stock Price Range
------------------------
2001
----
High Low
---- ---
Quarter ended December 31, 2001 (Since
October 19 only) $1.795 $0.56
Unit Price Range
----------------
2000
----
High Low
---- ---
Quarter ended December 31, 2000 $6.344 $3.313
2001
----
Quarter ended March 31, 2001 $5.69 $2.19
Quarter ended June 30, 2001 $3.20 $1.25
Quarter ended September 30, 2001 $2.92 $1.26
October 1, 2001- October 19, 2001 $1.35 $1.00
As of February 21, 2002, there were approximately 87 stockholders of record of
our Common Stock and approximately 730 additional beneficial owners of our
Common Stock.
Dividend Policy
We have never paid cash dividends on our Common Stock and anticipate that we
will continue to retain our earnings, if any, to finance the growth of our
business.
Use of Proceeds of Initial Public Offering
As noted above, the effective date of our first registration statement, filed on
Form SB-2 under the Securities Act of 1933 (no. 333-39470) relating to our
initial public offering of our Common Stock, was October 19, 2000. A total of
1,200,000 units were sold for $6.00 per unit, each unit consisting of one share
of our Common Stock and one redeemable warrant to purchase one share of our
Common Stock for $6.60 per share until October 18, 2005. The initial public
offering resulted in gross proceeds of $7.2 million, $720,000 of which was
applied toward the underwriting discount. Cash expenses relating to the
offering, including a non-accountable expense reimbursement to the underwriters,
totaled approximately $1.45 million. Net proceeds to Delcath were approximately
$5.4 million. From the time of receipt through December 31, 2001, the net
proceeds were applied toward:
- --------------------------------------------------------------------------------
Approximate
Application of Net Proceeds Dollar Amount
- --------------------------------------------------------------------------------
Research and development:
- --------------------------------------------------------------------------------
Phase III clinical trials using the Delcath system
with doxorubicin $1,422,000
- --------------------------------------------------------------------------------
Research and development stage clinical trials for
other chemotherapy agents 130,000
- --------------------------------------------------------------------------------
Repayment of indebtedness 270,000
- --------------------------------------------------------------------------------
Working capital and general corporate purposes 283,000
- --------------------------------------------------------------------------------
Total $2,105,000
- --------------------------------------------------------------------------------
17
The remaining net proceeds are being held in temporary investments in short term
commercial paper.
ITEM 6. PLAN OF OPERATION.
BACKGROUND
Delcath was founded in 1988 by a team of physicians. Since our inception, we
have been a development stage company engaged primarily in developing and
testing the Delcath system for the treatment of liver cancer. A substantial
portion of our historical expenses have been in support of the development and
the clinical trials of our product. To date, we have been dependent upon the
sale of Preferred and Common Stock to fund our activities. Without an
FDA-approved product, we have had no commercial sales. We have been unprofitable
to date and have had losses of $960,185 and $1,876,007 for the years ended
December 31, 2000 and 2001. Included in such losses are non-cash expenses
related to the issuance of Common Stock warrants for consulting services. The
value of the services is based on the fair value of the warrants on the date of
grant using the Black-Scholes pricing model. Cumulative losses from inception
through December 31, 2001 were $14,148,154 plus $1,498,605 in accrued Preferred
Stock dividends, of which $499,535 was paid in cash and the balance was paid
with Common Stock. We expect to incur additional losses over the next three
years and anticipate these losses will increase significantly in this period due
to continued requirements for product development, clinical studies, regulatory
activities, manufacturing and establishment of a sales and marketing
organization. The amount of future net losses and time required to reach
profitability are uncertain. Our ability to generate significant revenue and
become profitable will depend on our success in commercializing our device.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2001, we had $3,295,300 of cash and cash equivalents. As of
that date, our principal commitments consisted of $176,080 in accounts payable
and accrued expenses. Cash used to fund operations from inception through
December 31, 2001 was $11,253,412.
Until completion of its initial public offering, the Company financed its
operations primarily through private placements of our Common and Preferred
Stock. Prior to the completion of the initial public offering, the Company
raised $9,816,686 through the private sale of shares of its Class A Preferred
Stock, Class B Preferred Stock and Common Stock. In August and September 2000,
the Company also borrowed $230,000 for which it issued $230,000 principal amount
of promissory notes, which paid interest at an annual rate of 22% and which were
repaid on May 27, 2001. Of these notes, $50,000 in principal amount was
subscribed to by M.S. Koly, Chief Executive Officer, President and Director of
the Company, and $40,000 principal amount was subscribed to by the mother of
Samuel Herschkowitz, M.D., our Chairman of the Board and Chief Technology
Officer.
In October 2000, the Company completed an initial public offering. We sold
1,200,000 units for $6.00 per unit, each unit consisting of one share of our
Common Stock and one redeemable warrant to purchase one share of our Common
Stock for $6.60 per share until October 18, 2005. The Company received $7.2
million before offering costs and before paying cash related to dividends on
preferred shares of $499,535. After underwriting discounts and cash expenses of
the offering, the net proceeds to us were approximately $5.4 million.
Over the next 12 months, we expect to continue to incur expenses related to the
research and development of our technology, including:
o Phase III clinical trials using doxorubicin with the Delcath system.
o Phase I clinical trials using melphalan with the Delcath system.
o Pre-clinical and clinical trials for the use of other chemotherapy agents
with the Delcath system for the treatment of liver cancer; and
18
o The development of additional products and components.
In January 2002, we announced that the New York University School of Medicine
plans to proceed with a Phase III study using the Delcath system pending budget
approval by NYU and upon approval by NYU's Institutional Review Board. These
trials will involve a portion of the total of 122 patients that will participate
in the Phase III trials at several institutions, and are expected to take 12 to
18 months to complete. The collation, analysis and submission of the results of
the trials to the FDA will take an additional three months and we estimate that
the FDA will respond to our submission within three months after that. We cannot
estimate when these trials will begin, but we do not expect these trials to
begin within the next fiscal year.
We expect to incur significant additional operating losses over each of the next
several years and expect cumulative losses to increase significantly as we
continue to expand our research and development, clinical trials and marketing
efforts. During the next 12 months, we expect to purchase approximately $42,000
in computer, laboratory and testing equipment. We also expect to hire one
additional employee in the areas of research and development, regulatory and
clinical management. The number and timing of this hiring will vary depending
upon the success of the international marketing efforts and progress of the
clinical trials.
We currently anticipate that our available funds will be sufficient to meet our
anticipated needs for working capital and capital expenditures through at least
the next 12 months. We may need to raise additional funds prior to the
expiration of such period if, for example, we pursue business or technology
acquisitions or experience operating losses that exceed our current
expectations. If we raise additional funds through the issuance of equity,
equity-related or debt securities, such securities may have rights, preferences
or privileges senior to those of the rights of our Common Stock and our
stockholders may experience additional dilution. We cannot be certain that
additional financing will be available to us on favorable terms when required,
or at all. Our future liquidity and capital requirements, however, will depend
on numerous factors, including:
o the progress of our research and product development programs, including
clinical studies;
o the timing and costs of various United States and foreign regulatory
filings;
o the timing and effectiveness of product commercialization activities,
including marketing arrangements overseas;
o the timing and costs involved in obtaining regulatory approvals, if ever,
and complying with regulatory requirements;
o the timing and costs involved in preparing, filing, prosecuting, defending
and enforcing intellectual property rights; and
o the effect of competing technological and market developments.
If our currently available funds are not sufficient to satisfy our spending
plans, we will be required to revise our capital requirements or to seek
additional funding through borrowings and/or additional sales of securities. We
cannot assure you that our available funds will be sufficient to fund our
clinical trials with respect to the use of the Delcath system with doxorubicin
or melphalan to treat liver cancer. We also cannot assure you that additional
financing will become available if needed.
FORWARD LOOKING STATEMENTS
Certain statements in this Form 10-KSB, including statements of our and
management's expectations, intentions, plans, objectives and beliefs, including
those contained in or implied by "Management's Discussion and Analysis or Plan
of Operation", are "forward-looking statements", within the meaning of Section
21E of the Securities Exchange Act of 1934, that are subject to certain events,
risks and uncertainties that may be outside our control. These forward-looking
statements may be identified by the use of words such as "expects,"
"anticipates," "intends," "plans" and similar expressions. They include
statements of our future plans and objectives for our future operations and
19
statements of future economic performance, information regarding our expansion
and possible results from expansion, our expected growth, our capital budget and
future capital requirements, the availability of funds and our ability to meet
future capital needs, the realization of our deferred tax assets, and the
assumptions described in this report underlying such forward-looking statements.
Actual results and developments could differ materially from those expressed in
or implied by such statements due to a number of factors, including without
limitation, those described in the context of such forward-looking statements,
our expansion and acquisition strategy, our ability to achieve operating
efficiencies, our dependence on network infrastructure, capacity,
telecommunications carriers and other suppliers, industry pricing and technology
trends, evolving industry standards, domestic and international regulatory
matters, general economic and business conditions, the strength and financial
resources of our competitors, our ability to find and retain skilled personnel,
the political and economic climate in which we conduct operations, the risks
discussed in Item 1 above under "Description of Business" and other risk factors
described from time to time in our other documents and reports filed with the
Securities and Exchange Commission (the "Commission"). We do not assume any
responsibility to publicly update any of our forward-looking statements
regardless of whether factors change as a result of new information, future
events or for any other reason. We advise you to review any additional
disclosures we make in our Form 10-QSB, Form 10-QSB/A, Form 8-K and Form 10-KSB
reports filed with the Commission.
FUTURE CAPITAL NEEDS; ADDITIONAL FUTURE FUNDING
The Company's future results are subject to substantial risks and uncertainties.
The Company has operated at a loss for its entire history and there can be no
assurance of it ever achieving consistent profitability. The Company had working
capital at December 31, 2001 of $3,189,943. The Company may still require
additional working capital in the future and there can be no assurance that such
working capital will be available on acceptable terms, if at all. In addition,
the Company may need additional capital in the future to fully implement its
business strategy as set forth herein.
ITEM 7. FINANCIAL STATEMENTS.
Please refer to pages F-1 through F-14 Independent Auditors' Report Balance
Sheet as of December 31, 2001
Statements of Operations for the years ended December 31, 2001 and 2000
(restated) and cumulative from inception (August 5, 1988) to December 31, 2001
Statements of Stockholders' Equity for the years ended December 31, 2001 and
2000 and cumulative from inception (August 5, 1988) to December 31, 2001
Statements of Cash Flows for the years ended December 31, 2001 and 2000 and
cumulative from inception (August 5, 1988) to December 31, 2001 Notes to
Financial Statements
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.
EXECUTIVE OFFICERS, KEY PERSONS AND DIRECTORS
The executive officers and directors of the Company as of February 21, 2001 are
as follows:
NAME AGE POSITION
---- --- --------
M. S. Koly 61 President, Chief Executive Officer,
Treasurer and Director
Samuel Herschkowitz, M.D. 52 Chairman and Chief Technology Officer
Thomas S. Grogan 50 Chief Financial Officer
20
Mark A. Corigliano 38 Director
Daniel Isdaner 37 Director
Victor Nevins 80 Director
M. S. KOLY has been our President, Chief Executive Officer and Treasurer since
1988. In 1988, Mr. Koly was elected to our Board of Directors. From 1987 until
June 1998, Mr. Koly managed Venkol Ventures, L.P. and Venkol Ventures, Ltd.,
firms he co-founded with Dr. Herschkowitz. From 1983 to 1987, Mr. Koly was
president of Madison Consulting Corporation, a firm he founded. From 1978 to
1983, Mr. Koly was president of Becton-Dickinson Respiratory Systems. Prior to
that time, he held various senior management positions at Abbott Laboratories,
Stuart Pharmaceuticals and National Patent Development Corp. He received a B.A.
from American University and an M.B.A. in marketing and finance from
Northwestern University.
SAMUEL HERSCHKOWITZ, M.D., has been our Chief Technical Officer since 1991. In
1988, Dr. Herschkowitz was elected to be the Chairman of our Board of Directors.
In 1987, he co-founded Venkol Ventures L.P. and Venkol Ventures, Ltd., two
affiliated venture capital funds specializing in medical technology investments,
which are no longer active. Dr. Herschkowitz is board certified in psychiatry
and neurology. He is an assistant professor at New York University Medical
Center, and has held academic positions at Beth Israel Hospital, Mount Sinai
Medical School and Downstate Medical Center. Dr. Herschkowitz graduated from
Syracuse University and received his medical degree from Downstate Medical
Center College of Medicine.
THOMAS S. GROGAN was appointed the Company's Chief Financial Officer in
September 2001. Prior to joining Delcath, Mr. Grogan was V.P. of Business
Development for The Jockey Club from 2000-2001. In 1999, he was the Chief
Financial Officer for U.S. Homecare Corporation, a publicly traded provider of
home healthcare services. From 1998-1999, he was the Chief Financial Officer of
the healthcare division of Fairchild Properties, a privately held owner and
operator of skilled nursing facilities. From 1993-1998, he was the Chief
Financial Officer of NHS National Health Services, Inc., a privately held
provider of medical services to corporations, industrial sites and corrections
institutions. He is a C.P.A., and holds a B.A. degree from Fordham University
and an M.B.A. degree from Cornell University.
MARK A. CORIGLIANO was elected to our Board of Directors in 2001. Since 1991,
Mr. Corigliano has been Managing Director of Coast Cypress Associates, a company
that designs and implements microcomputer systems. Since 1993, he has served as
Officer and Manager of Special Projects for DC Associates, a restaurant
management organization located in New York City. He holds a B.S. degree from
Seton Hall University.
DANIEL ISDANER was elected to our Board of Directors in 2001. Since 1994, Mr.
Isdaner has been the owner and director of Camp Mataponi, Inc., a childrens'
summer camp located in Naples, Maine. He also serves on the Board of Directors
of the American Camping Association-New England Division and the Jewish
Community Center of Southern New Jersey. Mr. Isdaner holds a B.S.B.A. degree
from the Boston University School of Management.
VICTOR NEVINS was elected to our Board of Directors in 2001. Since 1957, Mr.
Nevins has been Chief Executive Officer of Max Abramson Enterprises, a
medium-sized privately held conglomerate headquartered in Flushing, New York. He
also is a licensed real estate broker and, in 1962, he founded Victor Nevins
Realty. From 1968-1997, he served on the Board of Directors of Flushing Hospital
and Medical Center as Vice President of the Board, member of the Finance
Committee, Chairman of both the House and Grounds and Human Resources Committees
and liaison to the Medical Board. He currently is a Director and past President
of the Flushing Chamber of Commerce, a Director of the Flushing Merchants
Association, and a Director of the American Red Cross, North Shore Chapter.
21
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
directors, officers, and persons who are beneficial owners of more than ten
percent of the Company's Common Stock to file with the Securities and Exchange
Commission (the "Commission") reports of their ownership of the Company's
securities and of changes in that ownership. To the Company's knowledge, based
upon a review of copies of reports filed with the Commission with respect to the
fiscal years ended December 31, 2001 and 2000, except as noted below, all
reports required to be filed under Section 16(a) by the Company's directors and
officers and persons who were beneficial owners of more than ten percent of the
Company's Common Stock were timely filed.
Form 4 reports due January 10, 2001 by former directors, William Bergman and
James V. Sorrentino and Messrs. Koly and Herschkowitz were inadvertently not
timely filed. Such reports were filed in May 2001. Form 3 reports due November
10, 2001 by Messrs. Corigliano, Isdaner and Nevins were inadvertently not timely
filed. Such reports were filed in December 2001. Form 3 report due September 25,
2001 by Mr. Grogan was inadvertently not timely filed. This report was filed in
January 2002.
The Company is in the process of implementing a Section 16(a) compliance program
to assist reporting persons in meeting their reporting obligations in a timely
manner.
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth, for the fiscal years ended December 31, 2001,
2000, and 1999, certain compensation paid by the Company, including salary,
bonuses and certain other compensation, to its Chief Executive Officer and all
other executive officers whose annual compensation for the years ended December
31, 2001, 2000, and 1999, exceeded $100,000 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
- ----------------------------- ----------- ------------------ ------------------ --------------------- -----------------
NAME AND SECURITIES ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS UNDERLYING OPTIONS COMPENSATION
($) ($) (#)
- ----------------------------- ----------- ------------------ ------------------ --------------------- -----------------
M. S. Koly 2001 164,750 17,500 (1) 100,000 0
- ----------------------------- ----------- ------------------ ------------------ --------------------- -----------------
President 2000 98,200 0 102,000 0
- ----------------------------- ----------- ------------------ ------------------ --------------------- -----------------
1999 101,250 0 139,746 0
- ----------------------------- ----------- ------------------ ------------------ --------------------- -----------------
Samuel Herschkowitz 2001 120,000 10,000 (1) 30,000 0
- ----------------------------- ----------- ------------------ ------------------ --------------------- -----------------
Chairman
- -----------------------------------------------------------------------------------------------------------------------
- -------------------
(1) Bonuses were declared payable in January 2002.
OPTION GRANTS IN LAST FISCAL YEAR
Stock options were granted to the Named Executive Officers during the 2001
fiscal year as follows:
- ----------------------------- ------------------------ ---------------------- ------------------ -------------------
NAME Number of Shares of Percent of Total Exercise Price Expiration Date
Common Stock Options Granted to ($/Sh.)
Underlying Option Employees in 2001
- ----------------------------- ------------------------ ---------------------- ------------------ -------------------
M. S. Koly 100,000 52.6% .60 November 2006
- ----------------------------- ------------------------ ---------------------- ------------------ -------------------
S. Herschkowitz 30,000 15.8% .85 December 2006
- ----------------------------- ------------------------ ---------------------- ------------------ -------------------
22
AGGREGATED FISCAL YEAR END OPTION VALUES
- -------------------------------------------------------------------------------------------------------------------------
NAME Number of Shares of Value of Unexercised
Common Stock Underlying In-the-Money Options at
Unexercised Options at December 31, 2001 (1)
December 31, 2001
- ------------------------ -------------------------- --------------------------- ---------------------- ------------------
Exercisable Unexercisable Exercisable Unexercisable
- ------------------------ -------------------------- --------------------------- ---------------------- ------------------
M. S. Koly 86,263 0 0 0
- ------------------------ -------------------------- --------------------------- ---------------------- ------------------
M. S. Koly 53,483 0 0 0
- ------------------------ -------------------------- --------------------------- ---------------------- ------------------
M. S. Koly 102,000 0 0 0
- ------------------------ -------------------------- --------------------------- ---------------------- ------------------
M. S. Koly 0 100,000 0 52,000
- ------------------------ -------------------------- --------------------------- ---------------------- ------------------
S. Herschkowitz 51,757 0 0 0
- ------------------------ -------------------------- --------------------------- ---------------------- ------------------
S. Herschkowitz 32,779 0 0 0
- ------------------------ -------------------------- --------------------------- ---------------------- ------------------
S. Herschkowitz 60,300 0 0 0
- ------------------------ -------------------------- --------------------------- ---------------------- ------------------
S. Herschkowitz 0 30,000 0 8,100
- -------------------------------------------------------------------------------------------------------------------------
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information with respect to the Named Executive
Officers concerning the exercise of options during fiscal years ended December
31, 2001, 2000, and 1999 and unexercised options held as of the end of fiscal
2001.
- -----------------------------------------------------------------------------------------------------------------------------
NUMBER OF VALUE OF
SECURITIES UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS AT
SHARES TO BE OPTIONS AT FY- FY-END ($) (1)
RECEIVED END EXERCISABLE/ EXERCISABLE/
NAME YEAR ON EXERCISE UNEXERCISABLE UNEXERCISABLE
- ------------------------ ------------------- ----------------------- ------------------------- ------------------------------
M. S. Koly 2001 0 241,746/100,000 0/52,000
- ------------------------ ------------------- ----------------------- ------------------------- ------------------------------
President 2000 0 191,307/50,439 0/0
- ------------------------ ------------------- ----------------------- ------------------------- ------------------------------
1999 0 119,457/20,289 0/0
- ------------------------ ------------------- ----------------------- ------------------------- ------------------------------
S. Herschkowitz 2001 0 144,836/30,000 0/8,100
- ------------------------ ------------------- ----------------------- ------------------------- ------------------------------
Chairman 2000 0 112,616/32,220 0/0
- ------------------------ ------------------- ----------------------- ------------------------- ------------------------------
1999 0 66,077/18,459 0/0
- -----------------------------------------------------------------------------------------------------------------------------
- -------------------
(1) Calculated based on the fair market value of $1.12 per share at the close of
trading on December 31, 2001 as reported by THE WALL STREET JOURNAL, minus the
exercise price of the option.
DIRECTOR COMPENSATION
Directors who are employees of Delcath do not currently receive any compensation
for serving on the board of directors. Non-employee directors receive $750 for
each meeting of the board of directors attended in person or participated in
telephonically. In addition, three former non-employee directors each received a
one-time option grant in January 1999 of stock options to purchase 34,505 shares
of Common Stock at a price of $4.93 per share, all of which have vested. Each
one also received a separate one-time option grant in December 1999 of stock
options to purchase 22,428 shares of Common Stock at a price of $2.90 per share,
all of which have vested.
23
On November 12, 2001, Delcath's Compensation Committee granted stock options to
a director of Delcath, at an exercise price equal to $ .60 per share, the fair
market value at the close of trading on that date as reported by THE WALL STREET
JOURNAL. On December 17, 2001, Delcath's Compensation Committee granted stock
options to directors, at an exercise price of $ .85 per share, the fair market
value at the close of trading on that date as reported by THE WALL STREET
JOURNAL. The stock options granted to the directors are indicated below:
- -------------------------------------------------------------------------------------------------
Name Incentive Stock Options Non-Qualified Stock Options
- ---------------------------- --------------------------------- ----------------------------------
M. S. Koly 100,000 0
- ---------------------------- --------------------------------- ----------------------------------
Samuel Herschkowitz, M.D. 30,000 0
- ---------------------------- --------------------------------- ----------------------------------
Mark. Corigliano 0 30,000
- ---------------------------- --------------------------------- ----------------------------------
D. Isdaner 0 30,000
- ---------------------------- --------------------------------- ----------------------------------
V. Nevins 0 30,000
- -------------------------------------------------------------------------------------------------
STOCK OPTION PLANS
On October 15, 1992, our board of directors and stockholders adopted our 1992
Incentive Stock Option Plan and our 1992 Non-Incentive Stock Option Plan. On
June 15, 2000, the board of directors adopted our 2000 Stock Option Plan (the
"2000 Plan"). On May 8, 2001, the Board of Directors adopted the 2001 Stock
Option Plan (the "2001 Plan"). The 2000 Plan and the 2001 Plan were each
approved by the shareholders at the Annual Meeting of Shareholders held on June
12, 2001. On November 13, 2001, our board of directors authorized the amendment
of the 2001 Plan to give the Stock Option and Compensation Committee discretion
to issue stock options with net issuance provisions. We have reserved 236,359
shares of Common Stock for issuance upon exercise of options granted from time
to time under the 1992 Incentive Stock Option Plan, 207,030 shares of Common
Stock for issuance upon exercise of options granted from time to time under the
1992 Non-Incentive Stock Option Plan; 300,000 shares of Common Stock for
issuance from time to time under the 2000 Plan, and 750,000 shares of Common
Stock for issuance from time to time under the 2001 Plan. The stock option plans
are intended to assist us in securing and retaining key employees, directors and
consultants by allowing them to participate in our ownership and growth through
the grant of incentive and non-qualified options.
Under the 1992 Incentive Stock Option Plan we may grant incentive stock options
only to employees. Under the 1992 Non-Incentive Stock option Plan, we may grant
non-qualified options to our employees, officers, directors, consultants, agents
and independent contractors. Under the 2000 and 2001 Plans, we may grant
incentive options to employees, and non-incentive options to employees and
non-employees including directors, consultants, agents and independent
contractors. The stock option plans are administered by the Stock Option and
Compensation Committee (the "Committee"), appointed by our Board of Directors.
Subject to the provisions of each of the stock option plans, the Committee will
determine who shall receive options, the number of shares of Common Stock that
may be purchased under the options, the time and manner of exercise of options
and exercise prices. The term of options granted under each of the stock option
plans may not exceed ten years, or five years for an incentive stock option
granted to an optionee owning more than 10% of our voting stock. The exercise
price for incentive stock options shall be equal to or greater than 100% of the
fair market value of the shares of the Common Stock at the time granted;
provided that incentive stock options granted to an optionee owning more than
10% of our voting stock shall be exercisable at a price equal to or greater than
110% of the fair market value of the Common Stock on the date of the grant. The
exercise price for non-qualified options will be set by the committee, in its
discretion, but in no event shall the exercise price be less than the fair
market value of the shares of Common Stock on the date of grant. Shares of
Common Stock received upon exercise of options granted under each of the plans
will be subject to restrictions on sale or transfer.
As of December 31, 2001, we have granted incentive stock options to purchase
236,359 shares of Common Stock under our 1992 Incentive Stock Option Plan at a
weighted average price of $4.02 and non-incentive stock options to purchase
205,305 shares of Common Stock under our 1992 Non-Incentive Stock Option Plan at
a weighted average price of $4.26. All of these options were granted to
employees and directors and terminate on the fifth anniversary of their vesting
date. We will not grant any additional options under these plans. As of February
21, 2002, we have granted incentive stock options to purchase 150,600 shares of
Common Stock under our 2000 Plan at a weighted average price of $2.96 and
non-incentive stock options to purchase 133,420 shares, net of 84,000 expired
shares, of
24
Common Stock under our 2000 Plan at a weighted average price of $1.65. As of
February 21, 2002, we have granted incentive stock options to purchase 160,000
shares of Common Stock under our 2001 Plan at a weighted average price of $ .69.
There have been no awards under our 2001 Plan of non-incentive stock options.
Each of our stock option plans includes a provision that an optionholder, upon
exercise of an option, must execute a stockholder's agreement containing
provisions to be determined by Delcath at the time of such exercise.
KEY EMPLOYEE AGREEMENTS
On October 30, 2001 the Company amended the Key Employee Agreements dated April
30, 1996, respectively, with M. S. Koly and Samuel Herschkowitz, M.D. Mr. Koly's
amendment provides for a base salary of $225,000 per annum, and a lump-sum
severance payment of one year's base salary upon notice of termination at any
time without cause, and, in the event of termination without cause due to a
change in control (as defined) a lump sum severance payment equal to the greater
of two years' base salary or the base salary due for the remaining term of the
Agreement. The term of the Agreement was extended until December 1, 2004. Dr.
Herschkowitz's amendment provides for a base salary of $140,000 per annum
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information known to the Company
regarding the beneficial ownership of the Company's Common Stock as of February
21, 2002, for (i) each stockholder known by the Company to own beneficially 5%
or more of the outstanding shares of its Common Stock; (ii) each director; and
(iii) all directors and executive officers as a group. The Company believes that
the beneficial owners of the Common Stock listed below, based on information
furnished by such owners, have sole investment and voting power with respect to
such shares, subject to community property laws where applicable.
The address for each listed director and officer is c/o Delcath Systems, Inc.,
1100 Summer Street, Stamford, Connecticut 06905.
DIRECTORS, SHARES PERCENTAGE OF
EXECUTIVE OFFICERS BENEFICIALLY COMMON SHARES
AND 5% STOCKHOLDERS: OWNED OUTSTANDING
-------------------- ----- -----------
M. S. Koly (4) 1,673,497 40.4%
Venkol Trust (5) 1,374,013 35.2%
Samuel Herschkowitz, M.D. (6) 343,472 8.5%
Frank G. Mancuso, Jr. (7) 110,891 2.8%
James V. Sorrentino, PhD (8) 68,663 1.7%
William I. Bergman (9) 63,833 1.6%
Mark A. Corigliano (10) - *
Victor Nevins (11) - *
Daniel Isdaner (12) - *
Thomas S. Grogan (13) - *
All directors and executive officers as a group
(nine persons) (14) 2,064,981 46.3%
- ----------------
* Less than 1% of total voting securities
(1) Except as otherwise noted in the footnotes to this table, each person or
entity named in the table has sole voting and investment power with
respect to all shares owned, based on the information provided to use by
the persons or entities named in the table.
(2) Shares of Common Stock subject to options exercisable within 60 days of
December 31, 2001 are deemed
25
outstanding for computing the percentage of the person or entity holding
such securities.
(3) Percentage of beneficial ownership is calculated on the basis of the
amount of outstanding securities (Common Stock) at December 31, 2001
(3,903,816 common shares) plus, for each person or entity, any securities
that person or entity has the right to acquire within 60 days pursuant to
stock options or other rights.
(4) Mr. Koly is a director of Delcath. Includes 38,507 shares held by Mr.
Koly, and 19,231 shares held by M. Ted Koly, Mr. Koly's minor son. The
figure above also includes the vested portion (241,746 shares) of
incentive/nonqualified stock options to purchase 114,350 shares of the
Company's Common Stock under the Company's 1992 Incentive Stock Option
Plan for a weighted average exercise price of $3.98 per share and 25,396
shares of Common Stock under the Company's 1992 Non-Incentive Stock Option
Plan for an exercise price of $4.93 per share; and 102,000 shares of
Common Stock under the Company's 2000 Stock Option Plan for $3.3125 per
share. The figure also includes 1,374,013 shares held by Venkol Trust. The
figure above does not include the unvested portion (100,000 shares) of an
incentive stock option to purchase 100,000 shares of the Company's Common
Stock under the Company's 2001 Stock Option Plan for an exercise price of
$0.60 per share.
(5) Mr. Koly is the trustee of Venkol Trust and is deemed the beneficial owner
of its shares.
(6) Dr. Herschkowitz is the Chairman of the Board of Directors of Delcath. The
figure above includes 17,738 shares held by Dr. Herschkowitz; and an
estimated 180,898 shares held by Venkol Trust, as to which Dr.
Herschkowitz has a beneficial remainder interest. The Venkol Trust share
amount is a maximum estimated distribution because the Venkol Trust has
not determined the final distribution amounts. The figure also includes
the vested portion (144,836 shares) of an incentive/non-qualified stock
options to purchase 75,427 shares of the Company's Common Stock under the
Company's 1992 Incentive Stock Option Plan for a weighted average exercise
price of $4.05 per share, and 9,109 shares of Common Stock under the
Company's 1992 Non-Incentive Stock Option Plan for $4.93 per share; and
60,300 shares of Common Stock under the Company's 2000 Stock Option Plan
for an exercise price of $4.93 per share. The figure above does not
include the unvested portion (30,000 shares) of an incentive stock option
to purchase 30,000 shares of the Company's Common Stock under the
Company's 2001 Stock Option Plan for an exercise price of $ .85 per share.
(7) Mr. Mancuso's resigned as a director of the Company on October 1, 2001.
The figure above includes an estimated 14,477 shares held by Venkol Trust,
as to which Mr. Mancuso has a beneficial remainder interest. The Venkol
Trust share amount is a maximum estimated distribution because the Venkol
Trust has not determined the final distribution amounts. The figure above
also includes 504 shares issuable upon the exercise of warrants at a price
of $10.87 per share until April 30, 2002. Also includes the vested portion
(56,932 shares) of a non-incentive stock option to purchase 56,932 shares
of the Company's Common Stock under the Company's 1992 Non-Incentive Stock
Option Plan for a weighted average exercise price of $4.13 per share. Also
includes 281,424 shares issuable upon exercise of Warrants.
(8) Mr. Bergman resigned as director on September 21, 2001. Includes vested
portion (56,932 shares) of a non- incentive stock option to purchase
56,932 shares of the Company's Common Stock under the Company's 1992
Non-Incentive Stock Option Plan for a weighted average exercise price of
$4.13 per share.
(9) Mr. Sorrentino resigned as director on October 26, 2001. Includes vested
portion (56,932 shares) of a non- incentive stock option to purchase
56,932 shares of the Company's Common Stock under the Company's 1992
Non-Incentive Stock Option Plan for a weighted average exercise price of
$4.13 per share.
(10) Mr.Corigliano is a director of Delcath. Does not include a non-incentive
stock option to purchase 30,000 shares of the Company's Common Stock under
the Company's 2000 Stock Option Plan for an exercise price of $.85 per
share, none of which are vested.
26
(11) Mr. Isdaner is a director of Delcath. Does not include a non-incentive
stock option to purchase 30,000 shares of the Company's Common Stock under
the Company's 2000 Stock Option Plan for an exercise price of $.85 per
share, none of which are vested.
(12) Mr. Nevins is a director of Delcath. Does not include a non-incentive
stock option to purchase 30,000 shares of the Company's Common Stock under
the Company's 2000 Stock Option Plan for an exercise price of $.85 per
share, none of which are vested.
(13) Mr. Grogan is the Chief Financial Officer of Delcath. Does not include a
non-incentive stock option to purchase 30,000 shares of the Company's
Common Stock under the Company's 2001 Stock Option Plan for an exercise
price of $.85 per share, none of which are vested.
(14) The number of shares beneficially owned by all directors and executive
officers as a group includes 1,406,773 shares of Common Stock issuable
upon exercise of certain stock options granted to directors and executive
officers pursuant to the Company's various Stock Option Plans.
RIGHTS AGREEMENT
On October 30, 2001, the Company entered into a Rights Agreement with American
Stock Transfer & Trust Company (the "Rights Agreement") in connection with the
implementation of the Company's stockholder rights plan (the "Rights Plan"). A
copy of the Rights Agreement is incorporated by reference herein as Exhibit 4.7.
The purposes of the Rights Plan are to deter, and protect the Company's
shareholders from, certain coercive and otherwise unfair takeover tactics and to
enable the Board of Directors to represent effectively the interests of
shareholders in the event of a takeover attempt. The Rights Plan does not deter
negotiated mergers or business combinations that the Board of Directors
determines to be in the best interests of the Company and its shareholders.
To implement the Rights Plan the Board of Directors declared a dividend of one
Common Stock purchase right (a "Right") for each share of Common Stock of the
Company, par value $0.01 per share (the "Common Stock") outstanding at the close
of business on November 14, 2001 (the "Record Date") or issued by the Company on
or after such date and prior to the earlier of the Distribution Date, the
Redemption Date or the Final Expiration Date (as such terms are defined in the
Rights Agreement). The dividend was issued on November 14, 2001 to stockholders
of record on the Record Date. Each Right entitles the registered holder to
purchase from the Company one share of Common Stock, at a price of $5.00 per
share, subject to adjustment (the "Purchase Price"). The description and terms
of the Rights are set forth in the Rights Agreement.
RIGHTS ATTACHED TO COMMON STOCK INITIALLY
Common Stock certificates will evidence the Rights. A notation on the
certificates will incorporate the Rights Plan and advise the certificate holder
of the existence of the Rights. Until triggered, the Rights are transferred only
with the Common Stock certificates. Common Stock certificates issued after
November 14, 2001 will contain a legend referencing the existence of a
stockholder rights plan. The surrender for transfer of outstanding Common Stock
certificates will also constitute the transfer of the Rights associated with the
Common Stock.
DISTRIBUTION OF RIGHTS
The Company will mail separate certificates evidencing the Rights to holders of
record of the Common Stock on the Distribution Date. The Distribution Date will
be the date the Rights separate from the Common Stock, and will be the earlier
to occur of the following two events:
- - the close of business on the first day of a public announcement that a person
or group of affiliated or associated persons (an "Acquiring Person") has
acquired beneficial ownership of 15% or more of the outstanding Common Stock; or
- - 10 business days following the commencement of, or announcement of an
intention to make, a tender or exchange offer the consummation of which would
result in the beneficial ownership by a person or group of 15% or more of
27
such outstanding Common Stock.
As soon as practicable following the Distribution Date, separate certificates
evidencing the Rights ("Right Certificates") will be mailed to holders of record
of the Common Stock as of the close of business on the Distribution Date and
such separate Right Certificates alone will evidence the Rights. The Rights are
not exercisable until the Distribution Date. The Rights will expire on October
30, 2011, unless earlier redeemed or extended by the Board.
RIGHT TO PURCHASE COMPANY STOCK
In the event a person becomes the owner of 15% or more of the outstanding shares
of Common Stock and thus becomes an Acquiring Person (a "Flip-In Event"), the
Rights not held by the Acquiring Person "flip-in" and, instead of continuing as
rights to buy one share of Common Stock, become rights to buy from the Company
shares of Common Stock having a value equal to two times the Purchase Price of
the Right. In other words, a Rights holder (other than the Acquiring Person) may
purchase Common Stock at a 50% discount.
In the event there is insufficient Common Stock to permit exercise in full of
the Rights, the Company must issue cash, property or other securities of the
Company with an aggregate value equal to twice the Purchase Price.
Upon the occurrence of any such Flip-In Event, any Rights owned by an Acquiring
Person, its affiliates and associates and certain transferees thereof, shall
become null and void.
RIGHT TO PURCHASE ACQUIRING PERSON STOCK
In the event that a person becomes an Acquiring Person, the Company is then
merged, and the Common Stock is exchanged or converted in the merger, then each
Right (other than those formerly held by the Acquiring Person, which became
void) would "flip-over" and be exercisable for a number of shares of Common
Stock of the acquiring company having a market value of two times the Purchase
Price of the Right. In other words, a Rights holder may purchase the acquiring
company's common stock at a 50% discount.
EXCHANGE OF RIGHTS FOR COMMON STOCK
After a Flip-In Event but before a "flip-over" event (as described above) occurs
and before an Acquiring Person becomes the owner of 50% or more of the Common
Stock, the Board may cause the Rights (either in whole or in part) to be
exchanged for shares of Common Stock (or equivalent securities, of equal value)
at a one-to-one exchange ratio or pursuant to an equivalent cashless exercise
method. Rights held by the Acquiring Person, however, which became void upon the
Flip-In Event, would not be entitled to participate in such exchange.
REDEMPTION
The Rights may be redeemed by the Board at a redemption price of $0.01 per Right
at any time prior to the earlier of:
- - the time that a person or a group becomes an Acquiring Person, or
- - October 30, 2011, the expiration date of the Rights Agreement.
Immediately upon redemption and without further action and without any notice,
the right to exercise the Rights will terminate and the only right of the
holders will be to receive the redemption price.
EXPIRATION OF RIGHTS
The Rights will expire on October 30, 2011, unless the expiration date is
extended by amendment or unless the Rights are earlier redeemed or exchanged by
the Company as described above.
28
AMENDMENTS OR SUPPLEMENTS
For so long as the Rights are redeemable, the terms of the Rights may be amended
or supplemented by the Board of Directors at any time and from time to time
without the consent of the holders of the Rights. At any time when the Rights
are not redeemable, the Board of Directors may amend or supplement the terms of
the Rights, provided that such amendment does not adversely affect the interests
of the holders of the Rights.
NO RIGHTS AS STOCKHOLDERS
Until a Right is exercised, the holder thereof will have no rights as a
stockholder of the Company, including, without limitation, the right to vote or
to receive dividends.
MISCELLANEOUS
In order to prevent dilution, the Purchase Price, the number of Common Stock or
other securities or property purchasable upon exercise of each Right and the
number of Rights outstanding are subject to adjustment from time to time as
provided in the Rights Agreement.
The Company is not required to issue fractions of Rights or to distribute Right
Certificates which evidence fractional Rights (except as may be provided for in
the Rights Agreement). In lieu of such fractional Rights, the Company will pay
to the registered holders of the Right Certificates with regard to which such
fractional Rights would otherwise be issuable, an amount of cash equal to the
same fraction of the current market value of a whole Right.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
All of our preferred stockholders converted their Preferred Stock into 833,873
shares of Common Stock. The preferred stockholders also accepted 690,910 shares
of Common Stock as payment of $999,070 of accumulated dividends, and a cash
dividend of $499,535 as payment of the balance of the accrued dividend. Venkol
Trust held all 2,000,000 shares of our class A Preferred Stock and received
690,099 shares of Common Stock on conversion of those shares, 616,127 shares of
Common Stock in partial payment of accumulated dividends and a cash dividend of
$223,202 in payment of the balance of the accrued dividend. Frank Mancuso, Jr.
and Venkol Trust owned 19,608 and 117,650 shares of our class B Preferred Stock
and received 6,766 and 40,595 shares of Common Stock, upon conversion of those
shares, 3,519 shares and 21,115 shares of Common Stock in payment of $26,008 and
$156,048 of accumulated dividends and cash dividends of $13,004 and $78,024, as
payment of the balance of the accrued dividends.
In April 2000, we issued 230,873 shares of Common Stock to existing security
holders and their designees for proceeds of $501,825 in a rights offering. Each
of M.S. Koly, Samuel Herschkowitz, our Chairman and Chief Technical Officer, and
James Sorrentino, a director of Delcath, purchased 11,732 shares for $25,500,
and William Bergman, a director of Delcath, purchased 6,901 shares for $15,000.
In August and September 2000, Delcath borrowed an aggregate of $230,000 for
which it issued promissory notes due on May 27, 2001. The promissory notes bear
interest at an annual rate of 22%. Of these loans, $205,000 was borrowed from
existing stockholders or relatives of existing stockholders of Delcath. M.S.
Koly, Chief Executive Officer, President and a director of Delcath, and Mary
Herschkowitz, the mother of Samuel Herschkowitz, M.D., Chairman and Chief
Technical Officer of Delcath, provided $50,000 and $40,000 of the loans.
We believe that each of the transactions with our officers, directors and
principal stockholders and their affiliates were on terms no less favorable than
could have been obtained from unaffiliated third parties. All future
transactions, including loans between us and our officers, directors and
stockholders beneficially owning 5% or more of our outstanding voting
securities, or their affiliates, will be on terms no less favorable to us than
could be obtained in arm's length transactions from unaffiliated third parties.
Further, all transactions and loans and any forgiveness of indebtedness owed by
any of our officers, directors and stockholders beneficially owning 5% or more
of our outstanding voting securities, or their affiliates, to us, must be
approved by a majority of our independent directors
29
who do not have an interest in the transactions and who have access, at our
expense, to either our legal counsel or independent legal counsel.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
Except where indicated, the following exhibits were previously filed in
connection with the Company's Registration Statement on Form SB-2,
Registration No. 333-39470 or subsequent periodic reports, and are
incorporated by reference.
Exhibit
Number Description
------ -----------
1.1 Form of Underwriting Agreement
3.1 Revised form of Amended and Restated Certificate of
Incorporation of the Registrant
3.2 Revised form of By-Laws of the Registrant
4.1 Specimen Stock Certificate
4.2 Form of Underwriter's Warrant Agreement
4.3 Warrant Agreement among Registrant, Underwriter and Transfer
Agent
4.4 Specimen Redeemable Warrant
4.5 Warrant Agreement between the Registrant and Euroland
Marketing Solutions, Ltd.
4.6 Warrant No. W-2 to purchase up to 150,000 units granted to
Euroland Marketing Solutions, Ltd.
4.7 Rights Agreement dated October 30, 2001
5.1 Opinion of Morse, Zelnick, Rose & Lander, LLP
10.1 1992 Incentive Stock Option Plan
10.2 1992 Non-Incentive Stock Option Plan
10.3 2000 Stock Option Plan
10.4 Employment Agreement between the Registrant and M.S Koly, as
amended
10.5 Employment Agreement between the Registrant and Samuel
Herschkowitz, M.D., as amended
10.6 Distributorship Agreement with Nissho Corporation
10.7 Form of Lock-up Agreement
10.8 Form of Promissory Note
10.9 Consulting Services Agreement between the Registrant and
Euroland Marketing Solutions, Ltd.
10.10 Amendment to Key Employee Agreement between the Registrant
and M. S. Koly dated October 30, 2001
10.11 Amendment to Key Employee Agreement between the Registrant
and Samuel Herschkowitz, M.D. dated October 30, 2001
10.12 2001 Stock Option Plan
10.13(*) Engagement Agreement between the Registrant and Redington
Inc. for the period from November 1, 2000-October 31, 2001
24 Power of Attorney (included in signature page). (*)
(*) Filed herewith.
30
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the Company's fiscal
quarter December 31, 2001.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DELCATH SYSTEMS, Inc.
Registrant
/s/ M. S. Koly
--------------------------------------
M. S. Koly, President
March 11, 2002
Each person whose signature appears below appoints M. S. Koly as his
attorney-in-fact, with full power of substitution and resubstitution to sign any
and all amendments to this report on Form 10-KSB of Delcath Systems, Inc. and to
file the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that said attorney-in-fact and agent or his substitute or
substitutes may lawfully do or cause to be done by virtue hereof.
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ M. S. Koly President, Chief Executive Officer, March 11, 2002
- ------------------------------------ Treasurer and Director (Principal
M. S. Koly Executive Officer)
/s/ Thomas S. Grogan Chief Financial Officer March 11, 2002
- ------------------------------------ (Principal Financial Officer and
Thomas S. Grogan Principal Accounting Officer)
/s/ Samuel Herschkowitz, M.D. Chairman of the Board March 11, 2002
- ------------------------------------
Samuel Herschkowitz, M.D.
/s/ Mark Corigliano Director March 11, 2002
- ------------------------------------
Mark A. Corigliano
/s/ Daniel Isdaner Director March 11, 2002
- ------------------------------------
Daniel Isdaner
/s/ Victor Nevins Director March 11, 2002
- ------------------------------------
Victor Nevins
31
DELCATH SYSTEMS, INC.
(A Development Stage Company)
INDEX TO FINANCIAL STATEMENTS
PAGE
Independent Auditors' Report F-2
Balance Sheet as of December 31, 2001 F-3
Statements of Operations for the years ended December 31,
2001 and 2000 (restated) and cumulative from incep-
tion (August 5, 1988) to December 31, 2001 F-4
Statements of Stockholders' Equity for the years ended
December 31, 2001 and 2000 and cumulative from
inception (August 5, 1988) to December 31, 2001 F-5
Statements of Cash Flows for the years ended December 31,
2001 and 2000 and cumulative from inception
(August 5, 1988) to December 31, 2001 F-6
Notes to Financial Statements F-7
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Delcath Systems, Inc.:
We have audited the accompanying balance sheet of Delcath Systems, Inc. (a
development stage enterprise) as of December 31, 2001 and the related statements
of operations, stockholders' equity, and cash flows for each of the years in the
two-year period ended December 31, 2001 and for the period from August 5, 1988
(inception) to December 31, 2001. 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 auditing standards generally accepted
in the United States of America. 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 Delcath Systems, Inc. (a
development stage enterprise) as of December 31, 2001 and the results of its
operations and its cash flows for each of the years in the two-year period ended
December 31, 2001 and for the period August 5, 1988 (inception) to December 31,
2001, in conformity with accounting principles generally accepted in the United
States of America.
As discussed in Note 1 (g) to the financial statements, Delcath Systems, Inc.
has restated the net loss attributable to common stockholders and the loss per
share for the year ended December 31, 2000 to give effect to preferred stock
dividends paid in common stock.
KPMG LLP
New York, NY
February 22, 2002
F-2
DELCATH SYSTEMS, INC.
(A Development Stage Company)
Balance Sheet
December 31,
Assets 2001
------------
Current assets:
Cash and cash equivalents $ 3,295,300
Interest receivable 1,056
Prepaid insurance 69,667
------------
Total current assets 3,366,023
Furniture and fixtures, net 13,496
Due from affiliate 24,000
------------
Total assets $ 3,403,519
============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 176,080
------------
Total current liabilities 176,080
------------
Stockholders' equity (note 2):
Preferred stock, $.01 par value: 10,000,000 shares
authorized; no shares issued and outstanding -
Common stock, $.01 par value; 15,000,000 shares authorized;
3,903,816 shares issued and outstanding 39,038
Additional paid-in capital 18,835,160
Deficit accumulated during development stage (15,646,759)
------------
Total stockholders' equity 3,227,439
------------
Total liabilities and stockholders'
equity $ 3,403,519
============
See accompanying notes to financial statements.
F-3
DELCATH SYSTEMS, INC.
(A Development Stage Company)
Statements of Operations
Cumulative
Years ended December 31, from inception
---------------------------- (August 5, 1988)
2000 2001 to
(Restated) December 31, 2001
----------- ----------- -----------
Costs and expenses:
Legal, consulting and accounting fees $ 474,061 1,034,025 6,025,255
Stock option compensation expense -- -- 2,520,170
Compensation and related expenses 259,446 557,087 3,304,703
Other operating expenses 298,204 477,544 2,967,024
----------- ----------- -----------
Total costs and expenses 1,031,711 2,068,656 14,817,152
----------- ----------- -----------
Operating loss (1,031,711) (2,068,656) (14,817,152)
Interest income 94,555 208,220 840,471
Interest expense (23,029) (15,571) (171,473)
----------- ----------- -----------
Net loss (960,185) (1,876,007) (14,148,154)
===========
Preferred stock dividends paid in
common stock (999,070) --
Preferred stock dividends paid in cash (499,535) --
----------- -----------
Net loss attributable to common
stockholders $(2,458,790) $(1,876,007)
=========== ===========
Common share data:
Basic and diluted loss per share $ (1.52) $ (0.48)
=========== ===========
Weighted average number of basic
and diluted common stock
outstanding 1,621,723 3,903,816
=========== ===========
See accompanying notes to financial statements.
F-4
DELCATH SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
Statements of Stockholders' Equity
Years ended December 31, 2001 and 2000 and
cumulative from inception (August 5, 1988) to December 31, 2001
Common stock $.01 par value
--------------------------------------------------------------------------------------------
Issued In treasury Outstanding
---------------------------- ---------------------------- ----------------------------
No. of No. of No. of
shares Amount shares Amount shares Amount
------------ ------------ ------------ ------------ ------------ ------------
Shares issued in connection with the
formation of the Company as of
August 22, 1988 621,089 $ 6,211 -- $ -- 621,089 $ 6,211
Sale of preferred stock,
August 22, 1988 -- -- -- -- -- --
Shares returned as of March 9, 1990 -- -- (414,059) (4,141) (414,059) (4,141)
Sale of stock, October 2, 1990 -- -- 17,252 173 17,252 173
Sale of stock, January 23, 1991 -- -- 46,522 465 46,522 465
Sale of stock, August 30, 1991 -- -- 1,353 14 1,353 14
Sale of stock, December 31, 1992 -- -- 103,515 1,035 103,515 1,035
Sale of stock, July 15, 1994 -- -- 103,239 1,032 103,239 1,032
Sale of stock, December 19, 1996 -- -- 39,512 395 39,512 395
Shares issued in connection with
conversion of short-term
borrowings as of
December 22, 1996 58,491 585 98,388 984 156,879 1,569
Sale of stock, December 31, 1997 53,483 535 -- -- 53,483 535
Exercise of stock options 13,802 138 3,450 35 17,252 173
Shares issued as compensation 2,345 23 828 8 3,173 31
Amortization of compensatory
stock options granted -- -- -- -- -- --
Forfeiture of stock options -- -- -- -- -- --
Shares issued in connection with
exercise of warrants 21,568 216 -- -- 21,568 216
Sale of stock, January 16, 1998 34,505 345 -- -- 34,505 345
Sale of stock, September 24, 1998 3,450 35 -- -- 3,450 35
Shares returned, April 17, 1998 (3,450) (35) -- -- (3,450) (35)
Amortization of compensatory
stock options granted -- -- -- -- -- --
Forfeiture of stock options -- -- -- -- -- --
Exercise of stock options 8,626 86 -- -- 8,626 86
Sale of stock, June 30, 1999 46,987 470 -- -- 46,987 470
Amortization of compensatory
stock options granted -- -- -- -- -- --
Forfeiture of stock options -- -- -- -- -- --
Shares issued in connection with
exercise of warrants 2,300 23 -- -- 2,300 23
Deficit accumulated from inception
to December 31, 1999 -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1999 863,196 8,632 -- -- 863,196 8,632
Sale of stock, April 14, 2000 230,873 2,309 -- -- 230,873 2,309
Dividends paid on preferred stock 690,910 6,909 -- -- 690,910 6,909
Conversion of preferred stock 833,873 8,339 -- -- 833,873 8,339
Sale of stock, October 19, 2000 1,200,000 12,000 -- -- 1,200,000 12,000
Shares issued as compensation
for stock sale 85,000 850 -- -- 85,000 850
Stock options issued as
compensation -- -- -- -- -- --
Net loss for year ended
December 31, 2000 -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 2000 3,903,852 39,039 -- -- 3,903,852 39,039
Sum of fractional common shares
cancelled after year 2000
stock splits (36) (1) -- -- (36) (1)
Stock warrants issued as
compensation -- -- -- -- -- --
Net loss for year ended
December 31, 2001 -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 2001 3,903,816 $ 39,038 -- $ -- 3,903,816 $ 39,038
============ ============ ============ ============ ============ ============
45
Class A Class B
Preferred Stock preferred stock preferred stock
--------------------------- ---------------------------- ----------------------------
$.01 par value $.01 par value $.01 par value
--------------------------- ---------------------------- ----------------------------
No. of No. of No. of
shares Amount shares Amount shares Amount
------------ ------------ ------------ ------------ ------------ ------------
Shares issued in connection with the
formation of the Company as of
August 22, 1988 -- $ -- -- $ -- -- $ --
Sale of preferred stock,
August 22, 1988 -- -- 2,000,000 20,000 -- --
Shares returned as of March 9, 1990 -- -- -- -- -- --
Sale of stock, October 2, 1990 -- -- -- -- -- --
Sale of stock, January 23, 1991 -- -- -- -- 416,675 4,167
Sale of stock, August 30, 1991 -- -- -- -- -- --
Sale of stock, December 31, 1992 -- -- -- -- -- --
Sale of stock, July 15, 1994 -- -- -- -- -- --
Sale of stock, December 19, 1996 -- -- -- -- -- --
Shares issued in connection with
conversion of short-term
borrowings as of
December 22, 1996 -- -- -- -- -- --
Sale of stock, December 31, 1997 -- -- -- -- -- --
Exercise of stock options -- -- -- -- -- --
Shares issued as compensation -- -- -- -- -- --
Amortization of compensatory
stock options granted -- -- -- -- -- --
Forfeiture of stock options -- -- -- -- -- --
Shares issued in connection with
exercise of warrants -- -- -- -- -- --
Sale of stock, January 16, 1998 -- -- -- -- -- --
Sale of stock, September 24, 1998 -- -- -- -- -- --
Shares returned, April 17, 1998 -- -- -- -- -- --
Amortization of compensatory
stock options granted -- -- -- -- -- --
Forfeiture of stock options -- -- -- -- -- --
Exercise of stock options -- -- -- -- -- --
Sale of stock, June 30, 1999 -- -- -- -- -- --
Amortization of compensatory
stock options granted -- -- -- -- -- --
Forfeiture of stock options -- -- -- -- -- --
Shares issued in connection with
exercise of warrants -- -- -- -- -- --
Deficit accumulated from inception
to December 31, 1999 -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1999 -- -- 2,000,000 20,000 416,675 4,167
Sale of stock, April 14, 2000 -- -- -- -- -- --
Dividends paid on preferred stock -- -- -- -- -- --
Conversion of preferred stock -- -- (2,000,000) (20,000) (416,675) (4,167)
Sale of stock, October 19, 2000 -- -- -- -- -- --
Shares issued as compensation
for stock sale -- -- -- -- -- --
Stock options issued as
compensation -- -- -- -- -- --
Net loss for year ended
December 31, 2000 -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 2000 -- -- -- -- -- --
Sum of fractional common shares
cancelled after year 2000
stock splits -- -- -- -- -- --
Stock warrants issued as
compensation -- -- -- -- -- --
Net loss for year ended
December 31, 2001 -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 2001 -- $ -- -- $ -- -- $ --
============ ============ ============ ============ ============ ============
Deficit
accumulated
Additional during
paid-in development
capital stage Total
------------ ------------ ------------
Shares issued in connection with the
formation of the Company as of
August 22, 1988 $ (5,211) $ -- $ 1,000
Sale of preferred stock,
August 22, 1988 480,000 -- 500,000
Shares returned as of March 9, 1990 4,141 -- --
Sale of stock, October 2, 1990 24,827 -- 25,000
Sale of stock, January 23, 1991 1,401,690 -- 1,406,322
Sale of stock, August 30, 1991 9,987 -- 10,001
Sale of stock, December 31, 1992 1,013,969 -- 1,015,004
Sale of stock, July 15, 1994 1,120,968 -- 1,122,000
Sale of stock, December 19, 1996 999,605 -- 1,000,000
Shares issued in connection with
conversion of short-term
borrowings as of
December 22, 1996 1,703,395 -- 1,704,964
Sale of stock, December 31, 1997 774,465 -- 775,000
Exercise of stock options 30,827 -- 31,000
Shares issued as compensation 34,454 -- 34,485
Amortization of compensatory
stock options granted 2,496,347 -- 2,496,347
Forfeiture of stock options (279,220) -- (279,220)
Shares issued in connection with
exercise of warrants 234,182 -- 234,398
Sale of stock, January 16, 1998 499,655 -- 500,000
Sale of stock, September 24, 1998 56,965 -- 57,000
Shares returned, April 17, 1998 (4,965) -- (5,000)
Amortization of compensatory
stock options granted 1,166,418 -- 1,166,418
Forfeiture of stock options (407,189) -- (407,189)
Exercise of stock options 67,414 -- 67,500
Sale of stock, June 30, 1999 775,722 -- 776,192
Amortization of compensatory
stock options granted 98,186 -- 98,186
Forfeiture of stock options (554,371) -- (554,371)
Shares issued in connection with
exercise of warrants 24,975 -- 24,998
Deficit accumulated from inception
to December 31, 1999 -- (11,311,962) (11,311,962)
------------ ------------ ------------
Balance at December 31, 1999 11,767,236 (11,311,962) 488,073
Sale of stock, April 14, 2000 499,516 -- 501,825
Dividends paid on preferred stock 992,161 (1,498,605) (499,535)
Conversion of preferred stock 15,828 -- --
Sale of stock, October 19, 2000 5,359,468 -- 5,371,468
Shares issued as compensation
for stock sale (850) -- --
Stock options issued as
compensation 3,800 -- 3,800
Net loss for year ended
December 31, 2000 -- (960,185) (960,185)
------------ ------------ ------------
Balance at December 31, 2000 18,637,159 (13,770,752) 4,905,446
Sum of fractional common shares
cancelled after year 2000
stock splits 1 -- --
Stock warrants issued as
compensation 198,000 -- 198,000
Net loss for year ended
December 31, 2001 -- (1,876,007) (1,876,007)
------------ ------------ ------------
Balance at December 31, 2001 $ 18,835,160 $(15,646,759) $ 3,227,439
============ ============ ============
See accompanying notes to financial statements.
F-5
DELCATH SYSTEMS, INC.
(A Development Stage Company)
Statement of Cash Flows
Cumulative
from inception
Years ended December 31, (August 5, 1988)
------------------------------ to
2000 2001 December 31, 2001
------------ ------------ ------------
Cash flows from operating activities:
Net loss $ (960,185) $ (1,876,007) $(14,148,154
Adjustments to reconcile net loss to
net cash used in operating activities:
Stock option compensation expense -- -- 2,520,170
Stock, option and warrant compensation expense
issued for consulting services 3,800 198,000 236,286
Depreciation expense 3,000 5,014 14,764
Amortization of organization costs -- -- 42,165
Increase decrease in prepaid expenses (64,999) (501) (69,667)
(Increase) decrease in interest receivable (29,042) 31,312 (1,056)
Due from affiliate -- -- (24,000)
(Decrease) increase in accounts
payable and accrued expenses 686,167 (622,835) 176,080
------------ ------------ ------------
Net cash used in operating activities (361,259) (2,265,017) (11,253,412)
------------ ------------ ------------
Cash flows from investing activities:
Purchase of furniture and fixtures -- (13,260) (28,260)
Purchase of short-term investments -- -- (1,030,000)
Proceeds from maturities of short-term
investments -- -- 1,030,000
Organization costs -- -- (42,165)
------------ ------------ ------------
Net cash used in
investing activities -- (13,260) (70,425)
------------ ------------ ------------
Cash flows from financing activities:
Net proceeds from sale of stock and exercise
of stock options and warrants 5,873,293 -- 13,413,708
Dividends paid (499,535) -- (499,535)
Proceeds from (Repayments) short-term borrowings 230,000 (230,000) 1,704,964
------------ ------------ ------------
Net cash provided by financing activities 5,603,758 (230,000) 14,619,137
------------ ------------ ------------
Increase (decrease) in cash and cash 5,242,499 (2,508,277) 3,295,300
equivalents
Cash and cash equivalents at beginning of period 561,078 5,803,577 --
------------ ------------ ------------
Cash and cash equivalents at end of period $ 5,803,577 3,295,300 $ 3,295,300
============ ============ ============
Cash paid for interest $ 23,029 36,141 $ 171,473
============ ============ ============
Supplemental non-cash activities:
Conversion of debt to common stock $ -- -- $ 1,704,964
============ ============ ============
Common stock issued for preferred stock dividends $ 999,070 -- $ 999,070
============ ============ ============
Conversion of preferred stock to common stock $ 24,167 $ -- $ 24,167
============ ============ ============
Common stock issued as compensation
for stock sale $ 510,000 $ -- $ 510,000
============ ============ ============
Stock, options and warrants issued as compensation
for consulting services $ 3,800 $ 198,000 $ 236,286
============ ============ ============
See accompanying notes to financial statements.
F-6
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) DESCRIPTION OF BUSINESS
Delcath Systems, Inc. (the "Company") is a development stage company
which was founded in 1988 for the purpose of developing and
marketing a proprietary drug delivery system capable of introducing,
and removing, high dose chemotherapy agents to a diseased organ
system while greatly inhibiting their entry into the general
circulation system. It is hoped that the procedure will result in a
meaningful treatment for cancer. In November 1989, the Company was
granted an IDE (Investigational Device Exemption) and an IND status
(Investigational New Drug) for its product by the FDA (Food and Drug
Administration). The Company is seeking to complete clinical trials
in order to obtain FDA pre-marketing approval for the use of its
delivery system using doxorubicin, a chemotherapeutic agent, to
treat malignant melanoma that has spread to the liver.
(b) BASIS OF FINANCIAL STATEMENT PRESENTATION
The accounting and financial reporting policies of the Company
conform to generally accepted accounting principles. The preparation
of financial statements in conformity with generally accepted
accounting principles requires management to make assumptions and
estimates that impact the amounts reported in those statements. Such
assumptions and estimates are subject to change in the future as
additional information becomes available or as circumstances are
modified. Actual results could differ from these estimates.
(c) FURNITURE AND FIXTURES
Furniture and fixtures are recorded at cost and are being
depreciated over the estimated useful lives of the assets of five
years. Accumulated depreciation amounted to $14,764 at December 31,
2001.
(d) INCOME TAXES
The Company accounts for income taxes following the asset and
liability method in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes."
Under such method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. The
Company's income tax returns are prepared on the cash basis of
accounting. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years
that the asset is expected to be recovered or the liability settled.
(e) STOCK OPTION PLAN
The Company has historically accounted for its employee stock option
plans in accordance with the provisions of Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. As such, compensation
expense is recorded on the date of grant only if the current fair
market value of the underlying stock exceeds the exercise price.
Fair market values of the Company's Common Stock at the dates
options were granted, prior to the Company's stock becoming publicly
traded, were based on third party sales of stock at or around the
dates options were granted, or in the absence of such transactions,
based on a determination by the board of directors based on current
available information. In 1996, the
F-7
Company adopted Statement of Financial Accounting Standards (SFAS)
No. 123, "Accounting for Stock-Based Compensation," which permits
entities to recognize as expense over the vesting period the fair
value of all stock-based awards on the date of grant. Alternatively,
SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income
and pro forma earnings per share disclosures for employee stock
option grants as if the fair-value-based method defined in SFAS No.
123 had been applied. The Company has elected to continue to apply
the provisions of APB Opinion No. 25 and provide the pro forma
disclosure provisions of SFAS No. 123 (see note 2(b)).
(f) LOSS PER SHARE
The Company follows the provisions of SFAS 128, "Earnings Per
Share", which requires presentation of both basic and diluted
earnings per share (EPS) on the face of the Statements of
Operations. Basic EPS excludes dilution, and is computed using the
weighted average number of common shares outstanding during the
period. The diluted EPS calculation assumes all dilutive stock
options or contracts to issue Common Stock were exercised or
converted into Common Stock at the beginning of the period. We have
excluded certain Common Stock equivalents from our diluted EPS
calculation for all years presented as their effect would have
reduced our net loss per share.
(g) RESTATEMENT OF NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS AND LOSS
PER SHARE FOR 2000
Loss per share for the year ended December 31, 2000 has been
restated from $ ( .90) per share as previously reported to $(1.52)
per share and net loss attributable to common stockholders for the
year ended December 31, 2000 has been restated from $ (1,459,720) as
previously reported to $(2,458,790) to give effect to $999,070 of
preferred stock dividends that were paid in Common Stock in 2000.
The effect of such dividends paid in Common Stock on the loss
attributable to common stockholders was not included in the
computation underlying the previously reported amount for 2000.
(h) STATEMENTS OF CASH FLOWS
For purposes of the statements of cash flows, the Company considers
highly liquid debt instruments with original maturities of three
months or less to be cash equivalents. At December 31, 2001 cash
equivalents included commercial paper of $1,741,571.
(2) STOCKHOLDERS' EQUITY
(a) STOCK ISSUANCES
BGH Medical Products, Inc. (name later changed to Delcath Systems,
Inc.), a Delaware corporation (BGH - Delaware), was formed on August
5, 1988. As of August 22, 1988, BGH Medical Products, Inc., a
Connecticut corporation (BGH - Conn.), was merged into BGH
-Delaware, the surviving corporation. As of the merger date, the
authorized capital stock of BGH - Conn. consisted of 5,000 shares of
common stock, par value $.01 per share, of which 1,000 shares were
issued and outstanding. Upon the merger, each BGH - Conn. Common
Share outstanding was exchanged into 621.089 BGH - Delaware Common
Shares. As a result of the conversion, BGH - Delaware issued 621,089
shares of Common Stock at $.01 par value. The aggregate amount of
the par value of all Common Shares issued as a result of the
exchange, $6,211, was credited as the Common Stock capital of BGH -
Delaware, and the difference in respect to the capital account
deficiency was charged to additional paid-in capital.
F-8
On August 22, 1988, BGH - Delaware then sold in a private placement
2,000,000 shares of Class A Preferred Stock, with a par value of
$.01, to two affiliated venture capital funds for an aggregate
amount of $500,000 in cash.
On March 8, 1990, 414,059 shares of Common Stock were returned to
the Company as treasury stock due to relevant technology milestones
not being fully achieved within the specified time period, in
accordance with provisions of a stockholders' agreement.
Effective May 7, 1990, the Company changed its name to Delcath
Systems, Inc.
On October 2, 1990, the Company sold 17,252 shares of Common
Treasury Stock, $.01 par value, for an aggregate amount of $25,000.
On January 23, 1991, the Company offered in a private placement
shares of Common Stock and/or Class B Preferred Stock at $7.39 and
$2.55 per share respectively for an aggregate maximum amount of
$2,000,000. Under the terms of the private placement, 46,522 shares
of Common Treasury Stock and 416,675 shares of Class B Preferred
Stock were sold, yielding net proceeds to the Company of $1,406,322.
The Common Stock and Class B Preferred Stock sold each has a par
value of $.01, resulting in an increase in additional paid-in
capital of $1,401,566. The two affiliated venture capital funds that
owned the Class A Preferred Shares purchased 117,650 of the Class B
Preferred Shares sold in the private placement.
On August 30, 1991, the Company sold an additional 1,353 shares of
Common Treasury Stock at $7.39 per share, yielding proceeds to the
Company of $10,001. The shares have a par value of $.01, resulting
in an additional paid-in capital amount of $9,987.
In a December 1992 private placement, the Company sold 103,515
shares of Common Stock held in our treasury at $10.14 per share for
a total placement of $1,050,000 ($1,015,004 after expenses). The
shares issued have a par value of $.01, resulting in an additional
paid-in capital amount of $1,048,965 ($1,013,969 after expenses).
The two affiliated venture capital funds that owned the Class A
Preferred Shares purchased 27,604 of the Common Treasury Shares
sold.
Effective January 1, 1994, the Company issued 1,725 shares of Common
Treasury Stock at $1.45 per share for a total price of $2,500 upon
the exercise of stock options by an employee of the Company.
During the first quarter of 1994, the Company increased its
authorized number of Common Shares from 5,000,000 to 15,000,000.
On July 15, 1994, the Company sold through a private placement
offering, units at a price of $51,000 per unit. Each unit consisted
of 4,693 Common Shares and 469 Warrants, each of which entitled the
holder to purchase one share of Common Stock for $10.87. In
connection therewith, the Company sold twenty-two (22) units
(103,239 Common Shares and 10,324 Warrants expiring August 30, 1997)
for total proceeds of $1,122,000. The two affiliated venture capital
funds that owned the Class A Preferred Shares purchased six (6) of
the units sold. During August 1997, the holders of Warrants
exercised 8,916 Warrants to purchase 8,916 Common Shares at $10.87
each for total proceeds of $96,900. The remaining Warrants expired
unexercised.
F-9
Effective January 1, 1995, the Company issued 1,725 shares of Common
Treasury Stock at $1.45 per share for a total price of $2,500 upon
the exercise of stock options by an employee of the Company.
Effective January 1, 1996, the Company issued 828 shares of Common
Stock, valued at $10.87 per share for a total of $9,000, as
compensation for consulting services.
On December 19, 1996, the Company sold through a private transaction
39,512 shares of Common Stock for total proceeds of $1,000,000. In
connection with the offering, the purchaser obtained sole
distribution rights for the Company's products in Japan, Korea,
China, Taiwan, and Hong Kong through December 31, 2004. No value was
attributed to the distribution rights. In addition, under certain
conditions, the purchaser will be required to buy certain products
from the Company.
On April 26, 1996, the Company entered into short-term borrowing
agreements with 26 investors under which it borrowed $1,704,964
bearing interest at 10.25% per annum. Under the terms of the
agreements, on December 22, 1996, the short-term borrowings were
converted into 156,879 shares of Common Stock, based on a conversion
price of $10.87 per share, and 78,438 Warrants, expiring April 25,
1999, entitling the holders to purchase 78,438 additional shares of
Common Stock at $10.87 per share. The two affiliated venture capital
funds discussed above provided $250,000 of the short-term loan,
converting that debt into approximately 23,003 shares of Common
Stock and 11,502 Warrants. From April 26, 1996 through December 22,
1996, interest of $114,948 accrued on the borrowings. Such interest
was paid in January 1997. During September 1997, the holders of
Warrants exercised 1,150 Warrants to purchase 1,150 Common Shares at
$10.87 each for total proceeds of $12,499. During December 1997, the
two affiliated venture capital funds exercised their 11,502 Warrants
to purchase 11,502 Common Shares at $10.87 each for total proceeds
of $124,999. During April 1999, the holders of Warrants exercised
2,300 Warrants to purchase 2,300 Common Shares at $10.87 each for
total proceeds of $24,998. The remaining Warrants expired
unexercised.
In 1997, the Company issued 2,345 shares of Common Stock, valued at
$10.87 per share based on a 1996 agreement, for a total cost of
$25,485, as compensation for consulting services.
From September 1997 through December 31, 1997, the Company received
$775,000 and issued 53,483 Common Stock. During January 1998, the
Company received an additional $500,000 and issued another 34,505
shares of Common Stock. In April 1998, under the terms of restricted
stock sale agreements, the Company issued to the purchasers of the
87,988 shares of Common Stock 11,732 three-year Warrants entitling
the holders to purchase 11,732 Common Shares at $10.87 per share.
These Warrants expired unexercised in April 2001.
In December 1997, the holder of non-incentive stock options
exercised 13,802 options to purchase 13,802 restricted Common Shares
at $1.88 each for total proceeds of $26,000.
In April 1998, a venture capital firm exercised 8,626 non-incentive
stock options to purchase 8,626 restricted Common Shares at $7.83
each for total proceeds of $67,500.
In April 1998, in connection with the settlement of a dispute with a
former director, the Company cancelled 3,450 shares of Common Stock
previously held by the former director in return for $1.45 per
share, the price originally paid by the former director.
F-10
In September 1998, the Company sold 3,450 shares of restricted
Common Stock to an individual for $16.52 per share, yielding
proceeds to the Company of $57,000.
In June 1999, the Company sold 46,987 shares of Common Stock to
individual investors for $16.52 per share and Warrants entitling the
holders to purchase 5,218 Common Shares at $14.87 per share (which
warrants expire April 30, 2002), yielding proceeds to the Company of
$776,192.
In April 2000, the Company sold 230,873 Common Shares at $2.17 per
share to existing stockholders in a rights offering yielding
proceeds to the Company of $501,825.
The Company completed an initial public offering ("IPO")
underwritten by Whale Securities Co., L. P. on October 19, 2000 of
1,200,000 units for $6.00 per unit, each unit consisting of one
share of Common Stock and one redeemable Warrant to purchase one
share of Common Stock at a price of $6.60 until October 18, 2005. In
connection with the initial public offering, the Company received
$7,200,000 before offering costs ($5,371,468 after expenses). The
Company also issued to Whale Securities Co., L. P. Warrants to
purchase 120,000 units for $6.60 per unit, each unit consisting of
one Common Share and one redeemable Warrant to purchase one share of
Common Stock at a price of $10.50 until October 18, 2005. The
Company also issued 85,000 shares of Common Stock valued at $510,000
for legal services provided in connection with the offering.
Also, in connection with the initial public offering, the holders of
the 2,000,000 outstanding shares of the Company's Class A Preferred
Stock and the 416,675 outstanding shares of the Company's Class B
Preferred Stock agreed to convert their shares into Common Stock
prior to the closing of the offering. Upon the conversion of the
Company's Class A Preferred Stock and the Company's Class B
Preferred Stock into 833,873 shares of Common Stock, the holders of
the Class A and Class B shares received an aggregate of $499,535 in
cash and 690,910 shares of Common Stock in payment of declared
dividends.
In December 2000, the Company issued 1,720 Common Stock options at
an exercise price of $3.31, fair valued at $2.21 per option for a
total of $3,800, and 1,720 Warrants to purchase Common Stock at an
exercise price of $6.00, fair valued at $0 per Warrant, as
compensation for consulting services. Both the options and Warrants
expire December 1, 2005.
The Company issued the following common stock warrants in 2001 for
consulting services: (1) 150,000 warrants to purchase 150,000 units
at $7.00 per unit, through January 4, 2005, each unit consisting of
one fully-paid and non-assessable share of common stock, and one
Common Stock Purchase Warrant entitling the holder to purchase one
share of Delcath Common Stock for $6.60 per share. None of these
warrants have been exercised as of December 31, 2001. Such warrants,
valued at $175,000, were recognized as an expense in the first
quarter of 2001; and (2) 150,000 warrants to purchase up to 150,000
shares of Delcath Common Stock, through April 30, 2005, for $6.60
per share. None of these warrants have been exercised as of December
31, 2001. 25,000 of such warrants vested in 2001 and the remaining
125,000 warrants vest if the share price of the Company's Common
Stock exceeds certain share price levels above the IPO price. As of
December 31, 2001, none of the thresholds have been met. Such
remaining warrants will not vest if the conditions are not met by
May 2002. The 25,000 vested, non-contingent warrants have been
valued at $23,000, and were recognized as an expense in the first
quarter of 2001. The expenses, as noted above, recognized with these
two warrant issues are non-cash expenses.
The value of the above warrants were $1.17 per warrant for warrants
described in (1) above, and $ .90 per warrant for the 25,000
warrants that vested immediately described in (2) above, and
F-11
were estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average
assumptions, respectively: risk free interest rates of 4.95% and
5.9%, volatility of 26.7% and 22.9%, expected lives of four years
and four and one half years, with no dividend yield for either
issue.
In 2001, the Company cancelled a total of 36 shares which
represented the total of fractional shares resulting from year 2000
stock splits.
On October 30, 2001, the Company entered into a Rights Agreement
with American Stock Transfer & Trust Company (the "Rights
Agreement") in connection with the implementation of the Company's
stockholder rights plan (the "Rights Plan"). The purposes of the
Rights Plan are to deter, and protect the Company's shareholders
from, certain coercive and otherwise unfair takeover tactics and to
enable the Board of Directors to represent effectively the interests
of shareholders in the event of a takeover attempt. The Rights Plan
does not deter negotiated mergers or business combinations that the
Board of Directors determines to be in the best interests of the
Company and its shareholders.
To implement the Rights Plan, the Board of Directors declared a
dividend of one Common Stock purchase right (a "Right") for each
share of Common Stock of the Company, par value $0.01 per share (the
"Common Stock") outstanding at the close of business on November 14,
2001 (the "Record Date") or issued by the Company on or after such
date and prior to the earlier of the Distribution Date, the
Redemption Date or the Final Expiration Date (as such terms are
defined in the Rights Agreement). The rights expire October 30,
2011. Each Right entitles the registered holder to purchase from the
Company one share of Common Stock, at a price of $5.00 per share,
subject to adjustment (the "Purchase Price"), in the event that a
person, or group announces that it has acquired, or intends to
acquire, 15% or more of the Company's outstanding Common Stock.
The two affiliated venture capital funds discussed above were
liquidated in 1998 and the shares of the Company then owned by the
funds were distributed to the individual investors of the funds, or
their nominee, if so directed.
(b) STOCK OPTION PLANS
The Company established an Incentive Stock Option Plan and a
Non-Incentive Stock Option Plan under which stock options may be
granted. Additionally, the Company has entered into separate
contracts apart from the Incentive Stock Option Plan and the
Non-Incentive Stock Option Plan under which options to purchase
Common Stock have been granted. A stock option grant allows the
holder of the option to purchase a share of the Company's Common
Stock in the future at a stated price. The Plans are administered by
the Board of Directors which determines the individuals to whom the
options shall be granted as well as the terms and conditions of each
option grant, the option price and the duration of each option.
The Company's Incentive and Non-Incentive Stock Plans were approved
and became effective on November 1, 1992. During 2000 and 2001,
respectively, the 2000 and 2001 Stock Option Plans became effective.
The Incentive Stock Options vest as determined by the Company and
expire over varying terms, but not more than five years from the
date of grant. Stock option activity for the period January 1, 2000
through December 31, 2001 is as follows:
F-12
NON-INCENTIVE AND
INCENTIVE OPTION PLANS OTHER OPTION GRANTS
---------------------- -------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
------ ----- ------ -----
Outstanding at
December 31, 1999 441,664 $ 4.13 17,252 $ 2.90
Granted during 2000 248,020 3.31 -- --
--------- --------
Outstanding at
December 31, 2000 689,684 3.82 17,252 2.90
--------- --------
Granted during 2001 280,000 .83 -- --
Expired during 2001 (84,000) 3.31 -- --
--------- --------
Outstanding at
December 31, 2001 885,684 $ 2.94 17,252 $ 2.90
========= ========
The following summarizes information about shares subject to option at December
31, 2001:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- -------------------------------------------------------------------------------------- -----------------------------------------
WEIGHTED
WEIGHTED AVERAGE WEIGHTED
NUMBER RANGE OF AVERAGE REMAINING NUMBER AVERAGE
OUTSTANDING EXERCISE PRICES EXERCISE PRICE LIFE IN YEARS EXERCISABLE EXERCISE PRICE
- ------------------ ------------------------ --------------------- ------------------ ------------------ ---------------------
100,000 $ .60 $ .60 4.92 - -
150,000 .85 .85 5.00 - -
30,000 1.53 1.53 4.67 - -
189,777 2.90 2.90 3.00 189,777 $ 2.90
164,020 3.31 3.31 3.95 164,020 3.31
269,139 4.93 4.93 2.00 269,139 4.93
------- -------
902,936 $ .60 - $4.93 $2.94 3.47 622,936 $3.89
======= ============= ===== ==== ======= =====
The Company applies APB 25 and related interpretations in accounting
for its plans. As such, compensation cost is measured at the date of
grant as the excess, if any, of the fair market value of the
underlying stock over the exercise price. Such cost is then
recognized over the period the recipient is required to perform
services to earn such compensation. If a stock option is not
exercised because an employee fails to fulfill an obligation, the
estimate of compensation expense recorded in previous periods is
adjusted by decreasing compensation expense in the period of
forfeiture. Stock option compensation expense associated with the
Incentive and Non-Incentive Stock Plans for the years ended December
31, 2000 and 2001 was $3,800 and $ -, respectively. Had compensation
cost for the Company's stock option grants been determined based on
the fair value at the grant dates consistent with the methodology of
SFAS 123, the Company's net loss
F-13
and net loss per share for the years ended December 31, 2000 and
2001 would have been increased to the pro forma amounts indicated as
follows:
2000 2001
----------- -----------
Net loss:
As reported $ (960,185) $(1,876,007)
Pro forma (1,431,352) (2,186,270)
Basic and diluted loss per share
As reported (Restated for 2000) $ (1.52) $ (0.48)
Pro forma (Restated for 2000) (1.75) (0.56)
The per share weighted average fair value of stock options granted
during 2000 and 2001 were $2.21 and $.30, respectively, estimated on
the date of grant using the Black-Scholes option-pricing model with
the following weighted-average assumptions used for the grants for
2000 and 2001 , respectively: risk free interest rates of 6.5% and
3.6% - 4.95%, respectively, and volatility of 76.7% and 26.7% -
36.3%, respectively, while no dividend yield and expected lives of
five years were assumed for both years.
(3) INCOME TAXES
As of December 31, 2001, the Company had net operating loss
carryforwards for federal income tax purposes of approximately
$11,109,000 which are available to offset future federal taxable
income, if any, through 2021. The net operating loss carryforwards
resulted in a deferred tax asset of approximately $3,777,000 at
December 31, 2001 ($3,209,000 at December 31, 2000). Management does
not expect the Company to be taxable in the near future and
established a 100% valuation allowance against the deferred tax
asset created by the net operating loss carryforwards at December
31, 2001 and 2000.
(4) DUE FROM AFFILIATE
The Company sublets office space from an affiliate pursuant to an
informal arrangement. In addition, the Company paid the affiliate
$24,000, which the affiliate then paid to the landlord as a deposit
on the lease.
F-14
EXHIBIT 10.13
-------------
Redington, Inc.
Engagement Agreement
Delcath Systems, Inc.
FIVE PAGES IN ALL
DELCATH SYSTEMS, INC. ("CLIENT") HAS ENGAGED REDINGTON, INC.("REDINGTON"), A
CONNECTICUT CORPORATION, TO PERFORM CERTAIN INVESTOR RELATIONS SERVICES OUTLINED
BELOW BETWEEN NOVEMBER 1, 2000 AND OCTOBER 31, 2001 AND WHICH MAY BE AGREED FROM
TIME TO TIME IN THE FUTURE BY BOTH PARTIES.
REDINGTON WILL IMPLEMENT THE FOLLOWING PROGRAMS AND ACTIVITIES WHICH ARE MORE
FULLY DESCRIBED IN THE SHEET ENTITLED "PROGRAM ELEMENTS" ATTACHED HERETO AS
EXHIBIT A:
1. Production and distribution of Delcath At A Glance.
2. Outbound/Inbound contacts in the total amount of 600 hours by the
Redington Investor Contact Unit (ICU) to the Redington Retail Database
over the 12-month program period with a planned utilization of 100-125
hours monthly during the first three months of the program.
3. Advise on Delcath investor presentation; revise road show deck.
4. Staging of investor road shows in twelve US markets.
5. Editing of corporate news release during program period.
6. Senior staff services as budgeted for above items 2, 3, 5 and counseling
and advice on all investor/financial communications programs and issues
during program period.
AGENCY PROFESSIONAL SERVICES:
COSTS FOR ON-GOING AGENCY PROFESSIONAL SERVICES TOTAL $52,000, AND COSTS FOR
SERVICES FOR SPECIAL PROJECTS TOTAL $68,000, OR A TOTAL OF $120,000 AS FOLLOWS:
1. $36,000 for Redington Investor Contact Unit (ICU) outbound/inbound
broker contract program; average 50 hours monthly (total 600 hours) at
$000/hr. vs. normal rate of $125/hr.
2. $16,000 for 00 hours program management, counseling, client meetings,
reports, correspondence, editing of news releases, billed at $000/hr vs.
normal rate of $250/hr.
3. $60,000 for audience development, logistical staging and on-site
management of twelve market road shows.
4. $8,000 for research, writing, editing, production supervision of Delcath
At A Glance.
AGENCY SERVICES FOR SENIOR STAFF AND ICU (#1 AND #2 ABOVE) ARE BILLED IN ADVANCE
MONTHLY ($4,333) AND AGENCY SERVICES FOR SPECIAL PROJECTS (#3 AND #4) ARE BILLED
ONE-HALF IN ADVANCE AND ONE-HALF ON COMPLETION. STATE SALES TAXES MAY APPLY TO
THESE CHARGES.
OUT-OF-POCKET DISBURSEMENTS:
For the 12 month period in the following approximate categories and allocations:
Typesetting/Printing At A Glances $ 6,500
Mail AAGs/Kits/Invites 8,000
Meeting Hospitality/AV 12 Mtgs/$2,500 Avg. Ea. 30,000
Long Distance Telephone - Meetings 4,200
Long Distance Telephone - Ongoing 4,800
FAX/FAX Broadcast 4,500
FedEx 2,500
Agency Travel 6,500
Contingencies 6,000
Total Disbursements: $73,000
DISBURSEMENTS ARE BILLED MONTHLY AS INCURRED OR EARLIER IN THE CASE OF COMPLETED
SPECIAL PROJECTS. LONG DISTANCE PHONE IS BILLED AT A FLAT RATE OF $350 MONTHLY
AND $400 FOR EACH ROAD SHOW.
COMPENSATION PROVISIONS
Agency services compensation under this program totaling $191,000 will be paid
net 10 days to Redington as provided for herein.
All out-of-pocket disbursements incurred by Redington on behalf of Client will
be paid net 10 days to Redington as provided for herein. The
disbursement budget in this agreement is approximate to the best of Redington's
ability to estimate such expenses in advance of project execution. No expenses
beyond the total presented in said budget will be committed without prior
written approval of Client.
INCENTIVE COMPENSATION PROVISIONS
Client will issue Redington a warrant (the "Incentive Warrant") upon execution
of this agreement for the purchase of $150,000 shares of Client Common Stock at
an exercise price of $6.60 (Base Price) for five years with cashless exercise
and ownership transfer provisions. The Incentive Warrant, which expires on April
30, 2005, vests as follows:
1. 25,000 shares upon start of program
2. 50,000 shares upon meeting call provisions of the IPO Unit Warrants
3. 25,000 shares upon share price goal of 75% above the Base Price
4. 12,500 shares upon share price goal of 100% above the Base Price
5. 37,500 shares upon share price goal of 75% above the Base Price
All provisions of the first vesting event (25,000 warrants) are met upon
execution of this agreement.
All provisions of the second vesting event (50,000 warrants) are met when the
call provisions of the Warrants issued as part of the Client's IPO Unit offering
are met, whether or not client elects or is able to execute the call. If
provisions of the second vesting event are met, Client additionally agrees to
make payment to Redington of either $125,000 or 20,000 fully paid shares of
Client common stock. The choice of payment is the decision of Redington if 75
percent or more of subject warrants are exercised, or if less than 75 percent of
subject warrants are exercised , the choice of payment is the decision of the
Client. Whichever the outcome, the payments to Redington will be made to within
15 days of the second vesting event's provisions being met.
All provisions of the third and fourth vesting events (37,500 shares) are deemed
met when the average closing price on the principal exchange of trading the
company's shares is at or above the goal on eight of any 10 consecutive trading
days between the dates of November 1, 2000 and April 30, 2002.
All provisions of the fifth vesting event (37,500 shares) are deemed met when
the average closing price on the principal exchange of trading the company's
shares is at or above the goal during the last three weeks of the 12th month and
the first week of the 13th month following the effective date of the client IPO,
or if 50 percent or more of the so-called "Founder's" shares to have been sold
in a private or best-efforts, or underwritten
transaction at any price by the end of the 14th week following the effective
date of the Client IPO.
Any of the above goals can be met sequentially or simultaneously.
The actual number of shares of Common Stock awarded under this program will be
adjusted for any stock splits and the rights of the warrant holder with regard
to any dividends or any restructuring will be the same as if the warrant holder
held the shares of Common Stock underlying the warrants at the time of any such
actions.
Client agrees to use its best efforts to provide freely tradable shares upon
exercise of any part of Incentive Warrant described above or the issuance of any
fully paid for Client shares and will provide piggy back registration of said
shares on any registration of shares Client may undertake for other parties. If
no such registration occurs within one month of any vesting of the Incentive
Warrants or payment to Redington of any fully paid for Client shares, Redington
can demand Client to file for registration of such shares by any means available
which Client agrees to support in all respects so that a registration of
Redington's shares can proceed in a timely manner. The costs of a demand
registration, exclusive of costs incurred by Client in preparation of customary
or other documents issuer's are or may be required to provide for such a
registration, will be born by Redington unless any other warrant or shareholder
of Client seeks piggyback registration with the Redington registration, in which
case all reasonable costs of the registration, including all reasonable costs
already incurred by Redington or its agents, will be paid by Client. Client
agrees these registration provisions will not be subordinated or otherwise
changed, overridden or mitigated by any historic or future agreements or
occurrences unless written approval of Redington and that any disputes will be
resolved as provided for herein.
OTHER PROVISIONS
The intent of this program is to broaden sponsorship of Client in the US
financial community; however, no assurances can be given that the desired result
will be achieved, it being a function of many factors, most of which are not
controllable by either the Client or Redington
o Client agrees that the Redington financial community database is
Redington property and will be available for Client use and activities
only during the term of this agreement.
o Client acknowledges that Redington mastheads (i.e., At A Glance,
Preview, Profile and other similar mastheads that may be developed) are
exclusive and will be available for client use only during this
agreement; Client, however, is deemed to own the text developed for
it by Redington and is free to use it at will after the expiration or
termination of this program, assuming all Client financial obligations
to Redington are met
o Redington will exercise its best professional efforts in execution of
this program.
o Client will advise Redington immediately in writing of any material
change in its business and, in particular, any changes that may
influence an investor's decision to either buy, hold or sell Client
securities.
o Client agrees to hold Redington harmless against any action (whether or
not in connection with litigation in which Redington is a party)
resulting form dissemination of Client-approved written information or
oral information consistent in all material respects with such written
information, including any legal fees or other costs that may be
reasonably incurred by Redington in defense of any such actions, or in
giving testimony or furnishing documents in response to a subpoena or
otherwise. Redington will give Client prompt notice of any claim
asserted or threatened against Redington on the basis of which Redington
intends to be held harmless as herein provided. Client may also
participate at its own expense in the defense of such action.
o Redington will not disseminate written information about Client without
prior written approval from Client.
o Either party may cancel this agreement and the cash compensation
provisions on 45 days written notice. The provisions of the "Incentive
Warrant's" vesting schedule will survive termination of this agreement
for 90 days after written notification of such termination by either
party.
o Redington invoices are payable net 10 days upon presentation with
interest of 1.5 percent on any amounts due past 30 days. In the event
any dispute, controversy or claim between the parties arises out of the
subject matter of this agreement or its interpretation, it shall be
settled by arbitration taking place in New York, New York by a sole
arbitrator acting under and pursuant to the Rules of Commercial
Arbitration of the American Arbitration Association. Any award rendered
shall be final and conclusive upon the parties, and a judgment thereon
may be entered in the highest court of the forum, whether state or
federal, having jurisdiction. The party ultimately prevailing shall be
entitled to be awarded and receive in the arbitration award or judgment
thereon its costs and reasonable
attorney's fees incurred in connection therewith and the enforcement
thereof.
/s/ /s/
-------------------- ------------------
M. S. Koly Thomas Redington
Chief Executive Officer President
Delcath Systems, Inc. Redington, Inc.
Date Date
------------------ ----------------
Exhibit A
DELCATH SYSTEMS, INC.
Implementation Schedule
2002-2001 Program Year
FIRST QUARTER
Local/Opportunistic Media
Prepare/Distribute Delcath At A Glance
Stage 6 market road shows
Start Redington outbound contacts
Stage 10-15 fund manager meetings
Stage 2-3 sell-side analyst meetings
Issue corporate milestones
SECOND QUARTER
Stage 6 market road shows
Continue Redington outbound contacts
Evaluate Nova Link conference calls
Stage 2-3 sell-side analyst meetings
Stage 8-12 fund manager meetings
Opportunistic Media
Issue corporate milestones
Review program progress
THIRD QUARTER
Continue Redington outbound contacts
Edit/re-issue Delcath At A Glance
Evaluate NovaLink conference calls
Stage 3 market road shows
Stage 4-6 fund manager meetings
Opportunistic Media
Issue corporate milestones
FOURTH QUARTER
Evaluate NovaLink conference calls
Evaluate additional road shows
Stage 12-18 fund manager meetings
Opportunistic Media
Issue corporate milestones
Discuss/submit Year Two program
