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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549




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Form 10-Q



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(Mark One)


þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended
March 31, 2004


Or

o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period
from     to     .


Commission File Number 0-28402

Aradigm Corporation

(Exact name of registrant as specified in its charter)


California
    
    94-3133088(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)


3929 Point Eden Way
Hayward, CA 94545(Address of principal executive offices including zip code)(510) 265-9000(Registrants telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes o No þ

Indicate the number of shares outstanding of each of the issuers classes
of common stock, as of the latest practicable date.

Common Stock, no par value
    
    63,539,370(Class)
    
    (Outstanding at April 30, 2004)






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ARADIGM CORPORATION
INDEX  
 PART I. FINANCIAL INFORMATIONITEM 1. Condensed Financial StatementsCondensed Balance Sheets At March 31, 2004 and December 31, 2003 (unaudited)Condensed Statements of Operations Three months ended March 31, 2004 and 2003 (unaudited)Condensed Statements of Cash Flows Three months ended March 31, 2004 and 2003 (unaudited)Notes to Unaudited Condensed Financial StatementsITEM 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsITEM 3. Quantitative and Qualitative Disclosure About Market RiskITEM 4. Controls and ProceduresPART II. OTHER INFORMATIONITEM 6. Exhibits and Reports on Form 8-KSignaturesExhibitsEXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1




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PART I. FINANCIAL INFORMATION 
 Item 1.Condensed Financial Statements ARADIGM CORPORATIONCONDENSED BALANCE SHEETS March 31,
    
    December 31,2004
    
    2003(Unaudited)
    
    (Note 1)(In thousands, except shares data)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    18,309
    
    
    $
    18,327Short-term investments
    
    
    7,048
    
    
    
    11,443Receivables
    
    
    28
    
    
    
    140Current portion of notes receivable from officers and
employees
    
    
    125
    
    
    
    104Prepaid expenses and other current assets
    
    
    1,468
    
    
    
    1,910Total current assets
    
    
    26,978
    
    
    
    31,924Property and equipment, net
    
    
    61,503
    
    
    
    62,612Noncurrent portion of notes receivable from officers and employees
    
    
    259
    
    
    
    294Other assets
    
    
    461
    
    
    
    388Total assets
    
    $
    89,201
    
    
    $
    95,218LIABILITIES, REDEEMABLE CONVERTIBLE PREFERREDSTOCK AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,612
    
    
    $
    885Accrued clinical and cost of other studies
    
    
    149
    
    
    
    149Accrued compensation
    
    
    2,849
    
    
    
    2,021Deferred revenue
    
    
    7,796
    
    
    
    7,891Current portion of capital lease obligations
    
    
    216
    
    
    
    427Other accrued liabilities
    
    
    1,036
    
    
    
    843Total current liabilities
    
    
    13,658
    
    
    
    12,216Noncurrent portion of deferred revenue
    
    
    4,681
    
    
    
    5,040Noncurrent portion of deferred rent
    
    
    1,563
    
    
    
    1,323Commitments and contingenciesRedeemable convertible preferred stock, no par value;
5,000,000 shares authorized; issued and outstanding shares: 1,544,626 at March 31, 2004 and December 31, 2003;
liquidation preference of $37,380 at March 31, 2004 and
December 31, 2003
    
    
    23,669
    
    
    
    23,669




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March 31,
    
    December 31,2004
    
    2003(Unaudited)
    
    (Note 1)(In thousands, except shares data)Shareholders equity:Common stock, no par value; 100,000,000 shares authorized;
issued and outstanding shares: 63,036,410 at March 31, 2004
and 62,751,196 at December 31, 2003
    
    
    268,781
    
    
    
    268,406Accumulated deficit
    
    
    (223,151
    )
    
    
    (215,436
    )Total shareholders equity
    
    
    45,630
    
    
    
    52,970Total liabilities, redeemable convertible
preferred stock and shareholders equity
    
    $
    89,201
    
    
    $
    95,218
 See accompanying notes.




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ARADIGM CORPORATION
CONDENSED STATEMENTS OF OPERATIONS Three Months EndedMarch 31,2004
    
    2003(Unaudited)(In thousands, except per share data)Contract revenues (Including amounts from related parties:2004  $6,610; 2003  $7,569)
    
    $
    6,643
    
    
    $
    7,690Operating expenses:Research and development
    
    
    11,887
    
    
    
    12,999General and administrative
    
    
    2,536
    
    
    
    2,669Total operating expenses
    
    
    14,423
    
    
    
    15,668Loss from operations
    
    
    (7,780
    )
    
    
    (7,978
    )Interest income
    
    
    66
    
    
    
    108Interest expense and other
    
    
    (10
    )
    
    
    (56
    )Net loss
    
    $
    (7,724
    )
    
    $
    (7,926
    )Basic and diluted net loss per share
    
    $
    (0.12
    )
    
    $
    (0.22
    )Shares used in computing basic and diluted net loss per share
    
    
    62,942
    
    
    
    35,601
 See accompanying notes.




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ARADIGM CORPORATION


CONDENSED STATEMENTS OF CASH FLOWS Three months EndedMarch 31,2004
    
    2003(Unaudited)(In thousands)Cash flows from operating activities:Net loss
    
    $
    (7,724
    )
    
    $
    (7,926
    )Adjustments to reconcile net loss to cash used in operating activities:Depreciation and amortization
    
    
    1,374
    
    
    
    1,592Issuance of warrants and common stock for
services
    
    
    70
    
    
    
    5Changes in operating assets and liabilities:Receivables
    
    
    113
    
    
    
    203Other current assets
    
    
    441
    
    
    
    (283
    )Other assets
    
    
    (73
    )
    
    
    5Accounts payable
    
    
    727
    
    
    
    (507
    )Accrued compensation
    
    
    828
    
    
    
    780Other accrued liabilities
    
    
    194
    
    
    
    251Deferred rent
    
    
    239
    
    
    
    54Deferred revenue
    
    
    (454
    )
    
    
    (1,569
    )Net cash used in operating activities
    
    
    (4,265
    )
    
    
    (7,395
    )Cash flows from investing activities:Capital expenditures
    
    
    (264
    )
    
    
    (1,280
    )Purchases of available-for-sale investments
    
    
    (2,518
    )
    
    
    Proceeds from maturities of available-for-sale investments
    
    
    6,922
    
    
    
    237Net cash provided (used) in investing activities
    
    
    4,140
    
    
    
    (1,043
    )Cash flows from financing activities:Proceeds from issuance of common stock, net
    
    
    305
    
    
    
    14,233Notes receivable from officers and employees
    
    
    13
    
    
    
    (147
    )Payments on capital lease obligations and equipment loans
    
    
    (211
    )
    
    
    (620
    )Net cash provided by financing activities
    
    
    107
    
    
    
    13,466Net (decrease) increase in cash and cash equivalents
    
    
    (18
    )
    
    
    5,028




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Three months EndedMarch 31,2004
    
    2003(Unaudited)(In thousands)Cash and cash equivalents at beginning of period
    
    
    18,327
    
    
    
    22,800Cash and cash equivalents at end of period
    
    $

    18,309
    
    
    $
    27,828Supplemental disclosure of cash flow information:Cash paid for interest
    
    $
    10
    
    
    $
    55Non-cash investing and financing activities:Issuance of options and warrants to purchase common stock for services
    
    $
    70
    
    
    $
    5Issuance of warrants in conjunction with private placement of common stock
    
    $
    
    
    
    $
    2,469
 See accompanying notes.




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ARADIGM CORPORATION

NOTES TO THE UNAUDITED CONDENSED FINANCIAL STATEMENTS
March 31, 2004  1.
    
    Organization and Basis of Presentation Organization Aradigm Corporation (the Company) is a California corporation engaged in
the development and commercialization of non-invasive drug delivery systems.
Principal activities to date have included obtaining financing, recruiting
management and technical personnel, securing operating facilities, conducting
research and development, and expanding commercial production capabilities.
The Company does not anticipate receiving any revenue from the sale of products
in the upcoming year. These factors indicate that the Companys ability to
continue its research, development and commercialization activities is
dependent upon the ability of management to obtain additional financing as
required. The Company operates as a sole operating segment. Basis of Presentation The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to the
Securities and Exchange Commissions rules and regulations. In the opinion of
management, the financial statements reflect all adjustments, which are of a
normal recurring nature, necessary for a fair presentation. The accompanying
condensed financial statements should be read in conjunction with the financial
statements and notes thereto included with the Companys 2003 Annual Report on
Form 10-K as filed with the Securities and Exchange Commission. The results of
the Companys operations for the interim periods presented are not necessarily
indicative of operating results for the full fiscal year or any future interim
period. The Balance Sheet at December 31, 2003 has been derived from the audited
financial statements at that date, but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.  2.
    
    Summary of Significant Accounting Policies Stock Based Compensation The Company has elected to follow Accounting Principles Board Opinion No.
(APB) 25, Accounting for Stock Issued to Employees, and related
interpretations in accounting for its employee stock options. Compensation
expense is based on the difference, if any, between the fair value of the
Companys common stock and the exercise price of the option or share right on
the measurement date, which is typically the date of grant. This amount is
recorded as Deferred Stock Compensation in the Balance Sheet and amortized as
a charge over the vesting period of the applicable options or share rights. In
accordance with Statement of Financial Accounting Standards (SFAS) 123,
Accounting for Stock-Based Compensation, as amended by SFAS 148, Accounting
for Stock-Based Compensation  Transition and Disclosure, the Company has
provided below, the pro forma disclosures of the effect on net loss and loss
per share as if SFAS 123 had been applied in measuring compensation expense for
all periods presented (in thousands, except per share data). Three Months EndedMarch 31, 2004
    
    March 31, 2003Net loss applicable to common shareholders  as reported
    
    $
    (7,724
    )
    
    $
    (7,926
    )Add:Stock-based employee
compensation expense included
in reported net loss
    
    
    
    
    
    
    5




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Three Months EndedMarch 31, 2004
    
    March 31, 2003Less:Total stock-based employee
compensation expense
determined under fair value
based method for all awards
    
    
    (1,104
    )
    
    
    (1,556
    )Pro forma net loss applicable to common shareholders
    
    $
    (8,828
    )
    
    $
    (9,477
    )Basic and diluted net loss per share applicable to common
shareholders As reported
    
    $
    (0.12
    )
    
    $
    (0.22
    )Pro forma
    
    $
    (0.14
    )
    
    $
    (0.27
    )
 The Company accounts for options and warrants issued to non-employees
under SFAS 123 and Emerging Issues Task Force (EITF) Issue No. 96-18,
Accounting for Equity Instruments that are Issued to Other than Employees for
Acquiring, or in Conjunction with Selling Goods or Services, using the
Black-Scholes option pricing model. The value of options and warrants are
periodically remeasured over their vesting terms. Computation of Net Loss Per Share Basic net loss per share has been computed using the weighted average
number of shares of common stock outstanding less the weighted average number
of shares subject to repurchase during the period. No diluted loss per share
information has been presented in the accompanying statements of operations
since potential common shares from stock options, warrants and redeemable
convertible preferred stocks are antidilutive.  3.
    
    Shareholders Equity In January 2004, holders of warrants to purchase 284,808 shares of common
stock elected to exercise the warrants. The Company issued an aggregate of
285,214 shares of common stock in connection with the exercise of options and
warrants during the three months ending March 31, 2004. In January 2004, we amended the operating lease for one of our facilities.
Effective January 1, 2004, the new agreement reduces the aggregate annual
lease payments by $1.1 million through 2006 and increases the aggregate annual
payments by $1.1 million from 2007 through 2010. In consideration for the
amended lease agreement, we replaced warrants to purchase 135,000 shares of
common stock at prices ranging from $10.16 to $21.72 per share with new
warrants to purchase 135,000 shares of common stock at $1.71 per share. The
repricing resulted in additional expense of $88,000 that we will amortize on a
straight-line basis over the remaining life of the lease.  4.
    
    Related Party Novo Nordisk and its affiliate, Novo Nordisk Pharmaceuticals, Inc., are
considered related parties, and in addition to being the Companys primary
revenue source, own approximately 11.4% of the Companys total outstanding
common stock (on an as-converted basis) at March 31, 2004. 
 Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations The discussion below contains forward-looking statements that are based on
the beliefs of management, as well as assumptions made by, and information
currently available to, management. Our future results, performance or
achievements could differ materially from those expressed in, or implied by,
any such forward-looking statements as a result of certain factors, including,
but not limited to, those discussed in this section as well as in the section
entitled Risk Factors and elsewhere in the Companys most recent Form 10-K
andForm 10-Qfiled with the Securities and Exchange Commission. The business is subject to significant risks including, but not limited
to, the success of research and development efforts, dependence on corporate
partners for marketing, distribution and other resources,




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obtaining and enforcing patents important to the business, clearing the lengthy
and expensive regulatory process and possible competition from other products.
Even if the products appear promising at various stages of development, they
may not reach the market or may not be commercially successful for a number of
reasons. Such reasons include, but are not limited to, the possibilities that
the potential products may be found to be ineffective during clinical trials,
fail to receive necessary regulatory approvals, are difficult to manufacture on
a large scale, are uneconomical to market, are precluded from commercialization
by proprietary rights of third parties or may not gain acceptance from health
care professionals and patients. Readers are cautioned not to place undue
reliance on the forward-looking statements contained herein. We undertake no
obligation to publicly release the results of any revision to these
forward-looking statements which may be made to reflect events or circumstances
occurring after the date hereof or to reflect the occurrence of unanticipated
events. Overview Since our inception in 1991, we have been engaged in the development of
innovative drug delivery systems. Beginning with our AERx pulmonary delivery
system and more recently with the Intraject subcutaneous delivery technology
acquired in May 2003 from Weston Medical, we are building a solid platform in
needle-free drug delivery. As of March 31, 2004, we had an accumulated deficit
of $223 million. We have never been profitable since inception and expect to
incur additional operating losses over the next several years as research and
development efforts, preclinical and clinical testing activities and
manufacturing scale-up efforts expand and as we plan and build our late-stage
clinical and early commercial production capabilities. To date, we have not had
any material product sales and do not anticipate receiving any revenue from the
sale of products in the upcoming year. Our sources of working capital have been
equity financings, equipment lease financings, contract revenues and interest
earned on investments. We have performed initial feasibility work on a number of compounds with
the AERx system and have been compensated for expenses incurred while
performing this work in several cases pursuant to feasibility study agreements
with third parties. Once feasibility is demonstrated with respect to a
potential product, we seek to enter into development contracts with
pharmaceutical corporate partners. We currently have an agreement pursuant to
which we are developing pulmonary delivery systems with Novo Nordisk A/S, to
manage diabetes using insulin. We expect to perform various studies evaluating our Intraject subcutaneous
delivery platform following the completion of clinical performance verification
trials scheduled for later this year. While Aradigm will be actively engaging
partners for discussions on Intraject, we believe that it is unlikely that a
new commercial deal for Intraject will be signed until the clinical
verification trial is completed and presented to potential partners later this
year. In some cases, a partnership may not be disclosed until a long-term
development agreement has been established. Our lead development program is developing pulmonary delivery systems to
manage diabetes using insulin with
our partner Novo Nordisk. Since Novo Nordisk and we successfully initiated
Phase 3 clinical trials in September 2002, we have been focused on supporting
our partner in the existing and planned additional Phase 3 clinical trials that
will be needed for their regulatory submission and commercial scale-up
activities. In April 2004, we and Novo Nordisk announced results from a
planned interim analysis of the initial phase 3 trial. Although the results
showed that the trial met its primary safety and efficacy endpoints, the
analysis showed delayed post-meal plasma glucose suppression in type 1
diabetics using the AERx system. Because of the unexpected nature of these
observations, Novo Nordisk has decided to amend the current trial protocol to
conclude the study in advance of the planned 24 months of patient exposure.
Novo Nordisk will make decisions concerning the structure and timing of
additional clinical trials after these observations have been fully assessed. The collaborative agreement with Novo Nordisk provides for reimbursement
of research and development expenses as well as additional payments to us as we
achieve certain significant milestones. We also expect to receive royalties
from this development partner based on revenues from product sales and to
receive revenue from the manufacturing of unit dose packets and hand-held
devices. We recognize




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revenues under the terms of our collaborative agreement as the research and
development expenses are incurred, to the extent they are reimbursable. For the
three months ended March 31, 2004, this partner-funded program has contributed
approximately 99.5% of our total contract revenues. At March 31, 2004, Novo
Nordisk and its affiliate, Novo Nordisk Pharmaceuticals, Inc., own approximately
11.4% of our total outstanding common stock (on an as-converted basis) and are
considered a related party. In general, it is our policy not to disclose the partner and/or the drug
until a long-term development agreement has been established; both parties
agree to highlight a clinical advancement in the program or under special
circumstances in which both parties agree to disclosure. Critical Accounting Policies We consider certain accounting policies related to revenue recognition and
the use of estimates to be critical accounting policies that require the use of
significant judgments and estimates relating to matters that are inherently
uncertain and may result in materially different results under different
assumptions and conditions. Revenue Recognition Contract revenues consist of revenue from collaboration agreements and
feasibility studies. We recognize revenue under the agreements as costs are
incurred. Deferred revenue represents the portion of all refundable and
nonrefundable research payments received that have not been earned. In
accordance with contract terms, milestone payments from collaborative research
agreements are considered reimbursements for costs incurred under the
agreements and, accordingly, are generally recognized as revenue either upon
the completion of the milestone effort when payments are contingent upon
completion of the effort or are based on actual efforts expended over the
remaining term of the agreements when payments precede the required efforts.
Costs of contract revenues are approximate to or are greater than such revenue
and are included in research and development expenses. Refundable development
and license fee payments are deferred until the specified performance criteria
are achieved. Refundable development and license fee payments are generally not
refundable once the specific performance criteria are achieved and accepted and
such payments are no longer refundable. Impairment of Long-Lived Assets We review for impairment whenever events or changes in circumstances
indicate that the carrying amount of property and equipment may not be
recoverable. Determination of recoverability is based on an estimate of
undiscounted future cash flows resulting from the use of the asset and its
eventual disposition. In the event that such cash flows are not expected to be
sufficient to recover the carrying amount of the assets, the assets are written
down to their estimated fair values and the loss is recognized on the
Statements of Operations. Use of Estimates The preparation of financial statements in conformity with generally
accepted accounting principles requires us to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes to the financial statements. These estimates include useful lives for
property and equipment and related depreciation calculations, estimated
amortization period for payments received from product development and license
agreements as they relate to the revenue recognition of deferred revenue and
assumptions for valuing options and warrants. Actual results could differ from
these estimates. Results of Operations Three Months Ended March 31, 2004 and 2003 Contract and License Revenues:Contract revenues for the three months
ended March 31, 2004 decreased to $6.6 million from $7.7 million for the same
period in 2003. Revenue from Novo Nordisk was




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$6.6 million for the three months ended March 31, 2004 compared to $7.6 million
for the same period in 2003. The decrease in contract and license revenues was
attributable to relatively higher reimbursement in 2003 from Novo Nordisk for
clinical supply and product development activities for the ongoing Phase 3
clinical program and completion of other projects funded in 2003. Costs
associated with collaborative agreements are included in research and
development expenses. We expect that the revenue from Novo Nordisk may trend
downward at a modest pace in subsequent quarter(s) due to the expected level of
activity in support of the ongoing Phase 3 clinical program, offset by
increases in other development efforts. Research and Development Expenses:Research and development expenses for
the three months ended March 31, 2004 decreased to $11.9 million from $13.0
million for the same period in 2003. The decrease in research and development
expenses was primarily associated with cost savings efforts, reduction of
non-funded projects, a decrease in depreciation expense, and reduction of
research and development efforts on non-Novo projects. These expenses represent proprietary research expenses as well as costs
related to contract revenues. Such costs primarily include salaries and
benefits of scientific and development personnel, laboratory supplies,
consulting services and expenses associated with the development of
manufacturing processes. We expect research and development spending to
increase over the next few years as we continue to expand our development
activities to support current and potential future collaborations, initiate
commercial manufacturing of the AERx systems, and increase ongoing development
efforts of the Intraject system. The increase in research and development
expenditures cannot be predicted accurately as it depends in part upon the
future success of, and funding levels supported by, our existing development
collaborations, as well as obtaining new collaborative agreements. General and Administrative Expenses:General and administrative expenses
were $2.5 million for the three months ended March 31, 2004 and $2.7 million
for the same period in 2003. The decrease was primarily due to lower building
maintenance and utilities expenses. Interest Income:Interest income for the three months ended March 31, 2004
decreased to $66,000 from $108,000 for the same period in 2003. The
decrease is due to lower average investment portfolio balances and lower
yields. Interest Expense and Other:Interest expense for the three months ended
March 31, 2004 decreased to $10,000 from $56,000 for the same period in 2003.
The decrease is primarily due to a reduction in outstanding capital lease and
equipment loan balances under various equipment leases. Net Loss:Net loss for the three months ended March 31, 2004 of $7.7
million was lower compared to the $7.9 million net loss for the same period in
2003 due to lower outside services expenses and cost savings made in other
operating expenses. Earnings per Share:Net loss per share for the three months ended March
31, 2004 of $0.12 per share was substantially lower compared to the $0.22 net
loss per share for the same period in 2003 due to the increase in the weighted
average number of shares of common stock outstanding from 35.6 million for the
three months ended March 31, 2003 compared to 62.9 million for the same period
in 2004 resulting from equity financing activities in 2003, conversion of
redeemable convertible preferred stock in 2003 and exercises of warrants in
2003 and 2004. Liquidity and Capital Resources We have financed our operations since inception primarily through private
placements and public offerings of capital stock, proceeds from equipment lease
financing, contract revenues and interest earned on investments. As of March
31, 2004, we had cash, cash equivalents and short-term investments of
approximately $25.4 million.




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In January 2004, we received net proceeds of approximately $305,000 and
issued an aggregate of 284,808 shares of common stock in connection with the
exercise of warrants by certain investors. Net cash used in operating activities for the three months ended March 31,
2004 decreased to $4.3 million from $7.4 million for the same period in 2003.
As the net loss for the two periods was similar, the significant decline in net
cash used in operating activities was primarily the result of the timing of
cash payment activity. Specifically, reduced prepayments made on lease
obligations significantly reduced the prepaid component of other current assets
and higher accounts payable for prototype materials and legal costs increased
the accounts payable balance at the end of the first quarter of 2004.
Additionally, the amortization of deferred revenue decreased due to an
extension in the estimated life of the milestone payments and the timing of
cash provided by Novo Nordisk for future program activities. Investing activities for the three months ended March 31, 2004 provided
cash of $4.1 million in contrast to the use of cash of $1.0 million for the
same period in 2003. The net increase in cash provided by investing activities
is primarily due to lower capital expenditures and cash provided of $4.4
million due to net proceeds received from the sales of investments and
short-term securities. Capital expenditures for the three months ended March
31, 2004 were $264,000 compared to $1.3 million for the same period in 2003.
Higher capital expenditures in 2003 related to the acquisition of manufacturing
production equipment for commercial production. Net cash provided by financing activities for the three months ended March
31, 2004 was $107,000 compared to net cash provided of $13.5 million for the
same period in 2003. Cash provided by financing activities for the same period
in 2003 was higher primarily due to the completion of a private placement
financing in March 2003. The development of our technology and proposed products, including the
Intraject development program, will require a commitment of substantial funds
to conduct the costly and time-consuming research, preclinical studies and
clinical trial activities necessary to develop and refine the technology and
proposed products and bring such products to market. Our future capital
requirements will depend on many factors, including continued progress and
results from research and development for the technology and drug delivery
systems, the ability to establish and maintain favorable collaborative
arrangements with others, progress with preclinical studies and clinical trials
and the results thereof, the time and costs involved in obtaining regulatory
approvals, the cost of development and the rate of scale-up for the required
production technologies, the costs involved in preparing, filing, prosecuting,
maintaining and enforcing patent claims and the need to acquire licenses or
other rights to new technology. We continue to review our planned operations through the end of 2004 and
beyond. We particularly focus on capital spending requirements to ensure that
capital outlays are not expended sooner than necessary. We expect our total
annual capital outlays for 2004 not to exceed $8.0 million. In January 2004,
we amended the operating lease for one of our facilities. Effective January 1,
2004, the new agreement reduces the aggregate annual lease payments by $1.1
million through 2006 and increases the aggregate annual payments by $1.1
million from 2007 through 2010. We believe that our existing cash balances at
March 31, 2004, funding commitments from corporate development partners and
interest earned on our investments should be sufficient to meet our needs for
at least the next 12 months. There can be no assurance that our funding
commitments from corporate development partners will not be amended or
terminated, and if they are amended or terminated, we will need to obtain
additional sources of capital sooner than would otherwise be the case. If our development programs, including the Intraject development program,
continue to progress, we would expect our cash requirements for capital
spending and operations to increase in future periods. We will need to raise
additional capital to fund our capital spending and operations before we become
profitable. We may seek additional funding through collaborations, borrowing
arrangements or through public or private equity financings. There can be no
assurance that additional financing can be obtained on acceptable terms, or at
all. Dilution to shareholders may result if funds are raised by issuing
additional equity securities. If adequate funds are not available, we may be
required to delay, to reduce the scope of, or to eliminate one or more of our
research and development programs, or to obtain funds through




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arrangements with collaborative partners or other sources that may require us
to relinquish rights to certain of our technologies or products that we would
not otherwise relinquish. 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk Market Risk Disclosures In the normal course of business, our financial position is routinely
subject to a variety of risks, including market risk associated with interest
rate movement. We regularly assess these risks and have established policies
and business practices to protect against these and other exposures. As a
result, we do not anticipate material potential losses in these areas. As of March 31, 2004, we had cash, cash equivalents and short-term
investments of $25.4 million consisting of cash and highly liquid short-term
investments. Our short-term investments will decline by an immaterial amount if
market interest rates increase, and therefore, our exposure to interest rate
changes has been immaterial. Declines of interest rates over time will,
however, reduce our interest income from our short-term investments. Our
outstanding capital lease obligations are all at fixed interest rates and,
therefore, have minimal exposure to changes in interest rates. 
 Item 4.Controls and Procedures Evaluation of Disclosure Controls and Procedures Based on their evaluation of our disclosure controls and procedures (as
defined in the rules promulgated under the Securities Exchange Act of 1934),
our chief executive officer and our chief financial officer concluded that our
disclosure controls and procedures were effective as of the end of the period
covered by this report. We believe that a controls system, no matter how well designed and
operated, cannot provide absolute assurance that the objectives of the controls
system are met, and no evaluation of controls can provide absolute assurance
that all control issues and instances of fraud, if any, within a company have
been detected. Our disclosure controls and procedures are designed to provide
reasonable assurance of achieving their objectives, and our chief executive
officer and our chief financial officer have concluded that these controls and
procedures are effective at the reasonable assurance level. Changes in Internal Controls There were no significant changes in our internal control over financial
reporting during the period covered by this Quarterly Report on Form 10-Q that
have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting. 
 PART II. OTHER INFORMATION 
 Item 6.Exhibits and Reports on Form 8-K (a) Exhibits  31.1
    
    Certification by Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification by Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification by Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.




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(b) Reports on Form 8-K We filed a Current Report on Form 8-K dated February 11, 2004 to furnish a
press release in which we announced our financial results for the fourth fiscal
quarter and the fiscal year ended December 31, 2003.




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. ARADIGM CORPORATION
(Registrant)/s/ RICHARD P. THOMPSONRichard P. ThompsonChairman and Chief Executive Officer/s/ THOMAS C. CHESTERMANThomas C. ChestermanSenior Vice President and Chief Financial Officer
 Dated: May 14, 2004




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INDEX TO EXHIBITS ExhibitNumber
    
    Description31.1
    
    Certification by Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    

    Certification by Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification by Chief Executive Officer and Chief
Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.