<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 11, 2000
REGISTRATION NO. 333-32370
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
AMENDMENT NO. 1
TO
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
PAIN THERAPEUTICS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 7841 91-1911336
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
250 EAST GRAND AVENUE, SUITE 70
SOUTH SAN FRANCISCO, CALIFORNIA 94080
(650) 624-8200
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
REMI BARBIER
PRESIDENT AND CHIEF EXECUTIVE OFFICER
250 EAST GRAND AVENUE, SUITE 70
SOUTH SAN FRANCISCO, CALIFORNIA 94080
(650) 624-8200
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
MICHAEL J. O'DONNELL, ESQ. PETER T. HEALY, ESQ.
MARTIN J. WATERS III, ESQ. O'MELVENY & MYERS LLP
WILSON SONSINI GOODRICH & ROSATI EMBARCADERO CENTER WEST
PROFESSIONAL CORPORATION 275 BATTERY STREET, SUITE 2600
650 PAGE MILL ROAD SAN FRANCISCO, CA 94111-3305
PALO ALTO, CA 94304-1050 (415) 984-8833
(650) 493-9300
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] __________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] __________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] __________
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL HEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
EXPLANATORY NOTE
This registration statement contains two forms of prospectus front cover
page: (a) one to be used in connection with an offering in the United States and
Canada and (b) one to be used in connection with a concurrent offering outside
of the United States and Canada. The U.S. prospectus and the international
prospectus are otherwise identical in all respects. The international version of
the front cover is included immediately before Part II of this registration
statement.
<PAGE> 3
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT
SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER
OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED MAY 11, 2000
LOGO
5,000,000 SHARES
COMMON STOCK
Pain Therapeutics, Inc. is offering 5,000,000 shares of its common stock.
This is our initial public offering, and no public market currently exists for
our shares. We have applied to have our common stock approved for quotation on
the Nasdaq Stock Market's National Market under the symbol "PTIE." We anticipate
that the initial public offering price will be between $11 and $13 per share.
-------------------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
-------------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
---------- ------
<S> <C> <C>
Public Offering Price..................................... $ $
Underwriting Discounts and Commissions.................... $ $
Proceeds to Pain Therapeutics, Inc........................ $ $
</TABLE>
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE
NOT APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS
IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
Pain Therapeutics, Inc. has granted the underwriters a 30-day option to
purchase up to an additional 750,000 shares of common stock to cover
over-allotments.
-------------------------
ROBERTSON STEPHENS
CIBC WORLD MARKETS
LAZARD FRERES & CO. LLC
THE DATE OF THIS PROSPECTUS IS , 2000.
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Summary..................................................... 1
Risk Factors................................................ 6
Forward-Looking Statements.................................. 17
Use of Proceeds............................................. 18
Dividend Policy............................................. 18
Capitalization.............................................. 19
Dilution.................................................... 20
Selected Financial Data..................................... 21
Management's Discussion and Analysis of Financial Condition
and
Results of Operations..................................... 23
Business.................................................... 29
Management.................................................. 42
Certain Relationships and Related Transactions.............. 51
Principal Stockholders...................................... 52
Description of Capital Stock................................ 55
Shares Eligible for Future Sale............................. 58
U.S. Tax Consequences to Non-U.S. Holders................... 60
Underwriting................................................ 64
Legal Matters............................................... 67
Experts..................................................... 67
Where You Can Find More Information......................... 68
Index to Financial Statements............................... F-1
</TABLE>
-------------------------
You should rely only on the information contained in this prospectus. You
should not rely on press releases, news articles or other information not
contained in this prospectus. We have not authorized anyone to provide you with
information different from that contained in this prospectus. We are offering to
sell and seeking offers to buy shares of common stock only in jurisdictions
where offers and sales are permitted.
i
<PAGE> 5
SUMMARY
Because this is only a summary, it does not contain all the information
that may be important to you. You should read the following summary together
with the more detailed information in this prospectus, including risk factors,
before making a decision to invest in our company and the common stock being
sold in this offering.
PAIN THERAPEUTICS, INC.
Pain Therapeutics is developing a new generation of opioid painkillers.
Opioids are drugs derived from the poppy plant. We use our technology to
reformulate opioid drugs, such as morphine, into new painkillers with improved
clinical benefits. We currently have four opioid painkillers in Phase II
clinical trials. We believe our drugs offer enhanced pain relief, fewer adverse
side effects and reduced tolerance and addiction compared to existing opioid
painkillers. If approved by the Food and Drug Administration, or FDA, we believe
our proprietary drugs could replace many commonly used opioid painkillers. Our
product candidates consist of drugs, which individually, are FDA approved. For
this reason, we believe we will encounter fewer clinical and regulatory hurdles
than if we were developing new chemical entities.
OPIOID PAINKILLERS
The clinical use of opioid painkillers is widely accepted throughout the
world. Despite their widespread clinical use, opioid painkillers have
significant adverse side effects including respiratory depression, nausea,
vomiting, dizziness, sedation, mental clouding, constipation, urinary retention
and severe itching. Chronic use leads to tolerance and, potentially, addiction.
Adverse side effects limit the usefulness of opioid painkillers. In many cases,
patients voluntarily take less than the prescribed dosage to avoid adverse side
effects. Some patients even prefer to endure pain rather than to suffer from
adverse side effects. As a result, many patients are seriously under-treated and
may be suffering from pain unnecessarily.
To date, innovations in the field of opioid painkillers have largely
focused on changing the convenience of opioid drugs. In contrast, we are
focusing on improving clinical benefits. Based on clinical and pre-clinical
data, we believe our painkillers address the shortcomings of existing opioids.
OUR MARKET
Medical economists estimate the direct and indirect costs associated with
pain to be $100 billion annually in the United States. Drugs are the key element
in the treatment of pain. In the United States and Western Europe, the market
for pain drugs totaled nearly $12 billion in 1997. This market has grown by
approximately 15% annually over the past five years. In 1999, U.S. opioid
painkiller sales exceeded $2.4 billion.
OUR PRODUCTS
Each of our product candidates consists of two components: an opioid
agonist, such as morphine, and a low-dose opioid antagonist, such as naltrexone
or naloxone. An opioid agonist is a drug that blocks pain, and an opioid
antagonist is a compound that blocks pain relief. Normally, combining an
antagonist with an agonist cancels out the effects of the
1
<PAGE> 6
agonist. Studies indicate, however, that with opioids, combining a low-dose
antagonist with an agonist actually improves the performance of the agonist. By
combining low-dose opioid antagonists, such as naltrexone or naloxone, with
opioid agonists such as morphine, we believe our drugs will:
- enhance pain relief;
- minimize adverse side effects; and
- reduce tolerance and addiction.
Clinical results from four studies involving a total of over 750 patients
support our technology. For example, we recently completed a 200 patient Phase
II clinical trial of our oral morphine product candidate. Results of this trial
indicate that an optimal dose of our painkiller provided patients with 50% more
pain relief than morphine alone during the first four hours after
administration. This result is statistically significant at the level of
p=0.058, which means the likelihood that this result occurred by chance is less
than 1 in 17.
We have worldwide exclusive rights to our technology. We have five issued
U.S. patents, one U.S. Notice of Allowance, two pending U.S. patent applications
and ten corresponding pending foreign patent applications or issued patents
relating to our technology.
OUR STRATEGY
Our goal is to build a speciality pharmaceutical company focused on pain
management. We plan to achieve this goal by:
- Developing products with reduced clinical and regulatory risks compared
to the development of new chemical entities. We believe this approach may
enable us to commercialize our drugs rapidly and cost effectively.
- Focusing on clinical development and late-stage products. We believe this
focus will enable us to generate product revenues earlier than if we were
discovering new chemical entities.
- Retaining significant rights. In general, we intend to independently
develop our product candidates through late-stage clinical trials. As a
result, we expect to capture a greater percentage of the profits from
drug sales than we would have if we had outlicensed our drugs earlier in
the development process.
- Using our technology to develop multiple drugs for both pain and non-pain
indications. We are initially focusing our efforts on developing four
opioid painkillers. However, we believe our technology can be broadly
applied to other indications.
- Outsourcing key functions. We intend to outsource preclinical studies,
clinical trials, formulation and manufacturing. We believe outsourcing
will produce significant time savings and allow for more efficient
deployment of our resources.
OTHER INFORMATION
We incorporated in Delaware in May 1998. Our principal executive office is
located at 250 East Grand Avenue, Suite 70, South San Francisco, California
94080. Our telephone number at this location is (650) 624-8200. Pain
Therapeutics and our logo are trademarks of Pain Therapeutics, Inc. This
prospectus also contains trademarks and tradenames of other parties.
2
<PAGE> 7
THE OFFERING
Common stock offered by Pain
Therapeutics, Inc. ........ 5,000,000 shares
Common stock to be
outstanding after this
offering................... 25,827,142 shares
Use of proceeds.............. Working capital and general corporate purposes,
including the continued development of existing
product candidates, clinical research and
development, formulation and manufacturing and
commercialization activities.
Proposed Nasdaq National
Market symbol.............. PTIE
The number of shares to be outstanding after this offering is based on
shares outstanding as of March 31, 2000. This number excludes:
- 1,757,970 shares of common stock issuable upon exercise of options then
outstanding, at a weighted average exercise price of $0.50 per share;
- 190,000 shares of common stock issuable upon exercise of warrants then
outstanding at a weighted average exercise price of $3.53 per share;
- 150,000 shares of series A convertible preferred stock issuable upon
exercise of warrants then outstanding at an exercise price of $1.00 per
share;
- 223,800 shares of common stock then available for issuance, under our
1998 Stock Plan, as amended; and
- 500,000 additional shares of common stock which will be available for
issuance under our 2000 Employee Stock Purchase Plan immediately
following the offering.
Except as otherwise indicated, all information in this prospectus assumes:
- the automatic conversion of all shares of series A, B and C preferred
stock into an aggregate 11,108,912 shares of common stock upon completion
of this offering; and
- no exercise of the underwriters' over-allotment option.
3
<PAGE> 8
SUMMARY FINANCIAL DATA
The following table presents summary financial information for Pain
Therapeutics, Inc. The pro forma balance sheet data gives effect to:
- the conversion of all of our convertible preferred and redeemable
convertible preferred stock outstanding as of March 31, 2000 into
11,108,912 shares of common stock upon completion of the offering; and
- the sale of 5,000,000 shares of common stock in the offering at an
assumed initial offering price of $12 per share, after deducting
estimated underwriting discounts, commissions and offering expenses.
The summary statement of operations data for the period from May 4, 1998
(inception) through December 31, 1998, the year ended December 31, 1999 and the
period from May 4, 1998 (inception) through December 31, 1999 and the summary
balance sheet data as of December 31, 1999 are derived from our audited
financial statements. The summary statement of operations data for the three
months ended March 31, 1999 and 2000 and the period from May 4, 1998 (inception)
through March 31, 2000 and the summary balance sheet data as of March 31, 2000
are derived from our unaudited financial statements. You should read this
information together with the financial statements and related notes included in
this prospectus.
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM THREE MONTHS ENDED
MAY 4, 1998 MAY 4, 1998 MARCH 31,
(INCEPTION) THROUGH YEAR ENDED (INCEPTION) THROUGH --------------------------
DECEMBER 31, 1998 DECEMBER 31, 1999 DECEMBER 31, 1999 1999 2000
------------------- ----------------- ------------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating expenses
Licensing fees............. $ 100,000 $ -- $ 100,000 $ -- $ --
Research and development... 200,000 2,092,119 2,292,119 -- 1,433,268
General and
administrative........... 122,168 2,567,355 2,689,523 118,257 4,619,719
--------- ----------- ----------- --------- ------------
Total operating
expenses............... 422,168 4,659,474 5,081,642 118,257 6,052,987
--------- ----------- ----------- --------- ------------
Operating loss........... (422,168) (4,659,474) (5,081,642) (118,257) (6,052,987)
Interest income.............. 33,961 160,689 194,650 27,407 245,050
Income tax expense........... 800 800 1,600 200 200
--------- ----------- ----------- --------- ------------
Net loss................. (389,007) (4,499,585) (4,888,592) (91,050) (5,808,137)
Return to series C preferred
shareholders for beneficial
conversion feature......... -- -- -- -- (14,231,595)
--------- ----------- ----------- --------- ------------
Loss available to common
shareholders............... $(389,007) $(4,499,585) $(4,888,592) $ (91,050) $(20,039,732)
========= =========== =========== ========= ============
Basic and diluted loss per
share...................... $ (0.06) $ (0.48) $ (0.01) $ (2.10)
========= =========== ========= ============
Weighted average shares used
in computing basic and
diluted loss per share..... 6,948,637 9,322,441 9,000,000 9,528,957
========= =========== ========= ============
<CAPTION>
PERIOD FROM
MAY 4, 1998
(INCEPTION) THROUGH
MARCH 31, 2000
-------------------
<S> <C>
STATEMENT OF OPERATIONS DATA:
Operating expenses
Licensing fees............. $ 100,000
Research and development... 3,725,387
General and
administrative........... 7,309,242
------------
Total operating
expenses............... 11,134,629
------------
Operating loss........... (11,134,629)
Interest income.............. 439,700
Income tax expense........... 1,800
------------
Net loss................. (10,696,729)
Return to series C preferred
shareholders for beneficial
conversion feature......... (14,231,595)
------------
Loss available to common
shareholders............... $ 24,928,324
============
Basic and diluted loss per
share......................
Weighted average shares used
in computing basic and
diluted loss per share.....
</TABLE>
4
<PAGE> 9
<TABLE>
<CAPTION>
AT MARCH 31, 2000
----------------------------
PRO FORMA
DECEMBER 31, 1999 ACTUAL AS ADJUSTED
----------------- ------------ ------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.......................... $ 9,339,669 $ 22,179,362 $ 76,879,362
Working capital.................................... 9,095,831 21,795,444 76,495,444
Total assets....................................... 9,441,173 22,864,799 77,564,799
Series C redeemable convertible preferred
stock(1)......................................... -- -- --
Series B redeemable convertible preferred stock.... 9,703,903 9,703,903 --
Series A convertible preferred stock............... 2,660 2,660 --
Common stock....................................... 9,445 9,718 25,827
Additional paid-in capital......................... 9,367,750 31,929,354 96,319,808
Deferred compensation.............................. (4,980,180) (8,448,370) (8,448,370)
Deficit accumulated during the development stage... (4,888,592) (10,696,729) (10,696,729)
Total stockholders' equity (deficit)............... (563,317) 12,673,233 77,077,136
</TABLE>
(1) See Note 7 to the Financial Statements
5
<PAGE> 10
RISK FACTORS
An investment in our common stock is very risky. You should carefully
consider the risks described below before making an investment decision. Our
business, operating results or financial condition could be materially adversely
affected by any of the following risks, as well as by risks that we are unaware
of or that we currently believe are immaterial. The market price of our common
stock could decline due to any of such risks, and you might lose all or part of
your investment.
RISKS RELATED TO OUR BUSINESS
WE HAVE NOT YET SUCCESSFULLY DEVELOPED OR COMMERCIALIZED ANY PRODUCTS, AND OUR
BRIEF OPERATING HISTORY PROVIDES YOU WITH A LIMITED BASIS ON WHICH TO ASSESS OUR
ABILITY TO DO SO AND EVALUATE OUR BUSINESS.
Our brief operating history may make it difficult for you to evaluate the
success of our business to date and to assess its future viability. We were
founded in May 1998 and we are still in the development stage. Our operations to
date have been limited to organizing and staffing our company, acquiring,
developing and securing our technology and undertaking preclinical studies and
clinical trials. We have not yet demonstrated our ability to obtain regulatory
approval, formulate and manufacture product or conduct sales and marketing
activities. Consequently, any predictions you make about our future success or
viability may not be as accurate as they could be if we had a longer operating
history.
WE HAVE A HISTORY OF LOSSES AND EXPECT TO INCUR SUBSTANTIAL LOSSES AND NEGATIVE
OPERATING CASH FLOWS FOR THE FORESEEABLE FUTURE, AND WE MAY NOT ACHIEVE OR
MAINTAIN PROFITABILITY.
Since our inception, we have incurred significant net losses, including net
losses of $389,000 in the period from May 4, 1998 (inception) through December
31, 1998, $4.5 million in the year ended December 31, 1999 and $5.8 million in
the three months ended March 31, 2000. As a result of ongoing operating losses,
we had an accumulated deficit of $10.7 million as of March 31, 2000. We are not
currently profitable. Even if we succeed in developing and commercializing one
or more of our drugs, we expect to incur substantial losses for the foreseeable
future and may never become profitable. We also expect to continue to incur
significant operating and capital expenditures and anticipate that our expenses
will increase substantially in the foreseeable future as we:
- continue to undertake preclinical and clinical trials for our product
candidates;
- seek regulatory approvals for our product candidates;
- develop, formulate, manufacture and commercialize our drugs;
- implement additional internal systems and infrastructure; and
- hire additional personnel.
We also expect to experience negative cash flow for the foreseeable future
as we fund our operating losses and capital expenditures. As a result, we will
need to generate significant revenues to achieve and maintain profitability. If
we cannot successfully develop and commercialize our products, we will not be
able to generate such revenues or achieve profitability in the future. Our
failure to achieve or maintain profitability could negatively impact the market
price of our common stock.
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<PAGE> 11
IF WE CANNOT RAISE ADDITIONAL CAPITAL ON ACCEPTABLE TERMS, WE MAY BE UNABLE TO
COMPLETE PLANNED CLINICAL TRIALS OF ANY OF OUR PRODUCT CANDIDATES.
Until we receive regulatory approval and commercialize one or more of our
products, we will have to fund all of our operations and capital expenditures
from the net proceeds of this offering and cash on hand. We expect that the net
proceeds from this offering and cash on hand will be sufficient to meet our
working capital and capital expenditure needs for at least the next twelve
months. However, if we experience unanticipated cash requirements, we may need
to raise additional funds much sooner and additional financing may not be
available on favorable terms, if at all. Even if we succeed in selling
additional equity securities to raise funds, our existing stockholders'
ownership percentage would be reduced and new investors may demand rights,
preferences or privileges senior to those of existing stockholders. If we do not
succeed in raising additional funds, we may be unable to complete planned
clinical trials or obtain FDA approval of our product candidates, and we could
be forced to discontinue product development, reduce sales and marketing efforts
and forego attractive business opportunities.
IF WE ARE UNABLE TO DESIGN, CONDUCT AND COMPLETE CLINICAL TRIALS SUCCESSFULLY,
WE WILL NOT BE ALLOWED TO SELL ANY OF OUR DRUGS AND WE WILL NOT GENERATE ANY
PRODUCT REVENUES.
In order to obtain FDA approval of any of our product candidates, we must
submit to the FDA a New Drug Application, or NDA, which demonstrates that the
product candidate is safe for humans and effective for its intended use. This
demonstration requires significant research and animal tests, which are referred
to as pre-clinical studies, as well as human tests, which are referred to as
clinical trials. Our four product candidates are still in the early stages of
clinical trials and we will have to commit substantial time and additional
resources to conducting further pre-clinical and clinical studies in several
types of pain before we can submit NDAs with respect to any of these product
candidates. Our first clinical trials for our PTI-555, PTI-501 and PTI-601
product candidates were completed only recently, in the past six months. We
intend to continue to conduct Phase II trials for these and our PTI-701 product
candidate. We will not be able to proceed to Phase III trials for any product
candidate until we determine appropriate dosages and submit such data to the
FDA. Our other product candidates are at a much earlier stage of development and
will require extensive pre-clinical testing before we can make any decision to
proceed to clinical trials. In addition, before we can commence human clinical
trials of these product candidates, we may have to submit an Investigational New
Drug, or IND, application to the FDA.
Human clinical trials are very expensive and difficult to design and
implement, in part because they are subject to rigorous requirements. The
clinical trial process is also time consuming. We estimate that clinical trials
of our four leading product candidates will take a minimum of three years to
complete and may take longer. Furthermore, failure can occur at any stage of the
trials, and we could encounter problems that cause us to abandon clinical trials
or to repeat clinical studies.
In order to satisfy such requirements, we plan to incur substantial
expenses for, and devote significant time and resources to, clinical trials of
our product candidates. Even if our clinical trials are completed as planned, we
cannot be certain that their results will support our product claims. Success in
pre-clinical testing and early clinical trials does not ensure that later
clinical trials will be successful, and we cannot be sure that the results of
later clinical trials will replicate the results of prior clinical trials and
pre-clinical testing. The clinical trial process may fail to demonstrate that
our product candidates are safe for
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<PAGE> 12
humans and effective for indicated uses. Such failure would cause us to abandon
a product candidate and may delay development of other product candidates. Any
delay in, or termination of, our clinical trials will delay the filing of our
NDAs to the FDA and, ultimately, our ability to commercialize our drugs and
generate product revenues.
IF WE FAIL TO OBTAIN THE NECESSARY REGULATORY APPROVALS, WE WILL NOT BE ALLOWED
TO COMMERCIALIZE OUR DRUGS AND WILL NOT GENERATE PRODUCT REVENUES.
Satisfaction of all regulatory requirements typically takes many years, is
dependent upon the type, complexity and novelty of the product candidate and
requires the expenditure of substantial resources for research and development
and testing. We cannot predict whether our research and clinical approaches will
lead to drugs that the FDA considers safe for humans and effective for indicated
uses. The FDA may require us to conduct additional clinical testing or to commit
to perform post-marketing studies, in which cases we would have to expend
additional unanticipated time and resources. The approval process may also be
delayed by changes in government regulation, future legislation or
administrative action or changes in FDA policy that occur prior to or during our
regulatory review. We cannot predict with any certainty if or when we might
submit a completed NDA for regulatory approval of any of our current four
product candidates.
Even if we comply with all FDA requests, the FDA may ultimately deny one or
more of our NDAs. We cannot be sure that we will ever obtain regulatory
clearance for any of our product candidates. Failure to obtain FDA approval of
any of our leading product candidates will severely undermine our business plan
by reducing our number of salable products and corresponding product revenues.
In foreign jurisdictions, we must receive marketing authorizations from the
appropriate regulatory authorities before we can commercialize our drugs.
Foreign regulatory approval processes generally include all of the risks
associated with the FDA approval procedures described above.
IF PHYSICIANS AND PATIENTS DO NOT ACCEPT AND USE OUR DRUGS, WE WILL NOT GENERATE
SUFFICIENT PRODUCT REVENUES AND, AS A RESULT, WE MAY NOT SUCCEED IN ACHIEVING OR
MAINTAINING PROFITABILITY.
Even if the FDA approves our drugs, physicians and patients may not accept
and use them. Acceptance and use of our drugs will depend on a number of factors
including:
- perceptions by members of the health care community, including
physicians, about the safety and effectiveness of our drugs;
- cost-effectiveness of our drugs relative to competing products;
- availability of reimbursement for our products from government or
healthcare payers; and
- effectiveness of marketing and distribution efforts by us and our
licensees and distributors, if any.
Because we expect to rely on sales generated by our current four product
candidates for substantially all of our product revenues for the foreseeable
future, the failure of any of these drugs to find market acceptance would make
it difficult for us to achieve or maintain profitability.
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<PAGE> 13
IF OUTSIDE RESEARCHERS FAIL TO DEVOTE SUFFICIENT TIME AND RESOURCES TO OUR DRUG
DEVELOPMENT PROGRAMS, OR IF THEIR PERFORMANCE IS SUBSTANDARD, THE APPROVAL OF
OUR FDA APPLICATIONS AND OUR PRODUCT INTRODUCTIONS MAY BE DELAYED.
We depend on independent investigators and collaborators, such as
universities and medical institutions, to conduct our clinical trials under
agreements with us. These collaborators are not our employees and we cannot
control the amount or timing of resources that they devote to our programs. Such
investigators may not assign as great a priority to our programs or pursue them
as diligently as we would if we were undertaking such programs ourselves. If
outside collaborators fail to devote sufficient time and resources to our drug
development programs, or if their performance is substandard, the approval of
our FDA applications and our introductions of new drugs will be delayed. These
collaborators may also have relationships with other commercial entities, some
of whom may compete with us. If outside collaborators assist our competitors at
our expense, our competitive position could be harmed.
IF THIRD-PARTY MANUFACTURERS OF OUR PRODUCT CANDIDATES FAIL TO DEVOTE SUFFICIENT
TIME AND RESOURCES TO OUR CONCERNS, OR IF THEIR PERFORMANCE IS SUBSTANDARD, OUR
CLINICAL TRIALS AND PRODUCT INTRODUCTIONS MAY BE DELAYED AND OUR COSTS MAY RISE.
We have no manufacturing facilities and no experience in drug formulation
or manufacturing. We lack the resources and expertise to formulate or
manufacture our own product candidates. We currently rely on a single contract
manufacturer to supply, store and distribute drug supplies for our clinical
trials. Our reliance on a single third-party manufacturer exposes us to the
following risks, any of which could delay our clinical trials, the approval of
our product candidates by the FDA, or the commercialization of our products,
result in higher costs or deprive us of potential product revenues:
- Contract manufacturers often encounter difficulties in achieving volume
production, quality control and quality assurance, as well as shortages
of qualified personnel. Accordingly, our manufacturer might not be able
to meet our clinical schedules.
- Switching manufacturers may be difficult because the number of potential
manufacturers is limited. It may be difficult or impossible for us to
find a replacement manufacturer on acceptable terms quickly, or at all.
- Our contract manufacturers may not perform as agreed or may not remain in
the contract manufacturing business for the time required to successfully
produce, store and distribute our products.
- Drug manufacturers are subject to ongoing periodic unannounced inspection
by the FDA, the U.S. Drug Enforcement Agency, or DEA, and corresponding
state agencies to ensure strict compliance with good manufacturing
practice and other government regulations and corresponding foreign
standards. We do not have control over third-party manufacturers'
compliance with these regulations and standards.
WE RELY ON OUR INTELLECTUAL PROPERTY, AND ANY FAILURE BY US TO PROTECT OUR
INTELLECTUAL PROPERTY COULD ENABLE OUR COMPETITORS TO MARKET PRODUCTS WITH
SIMILAR FEATURES THAT MAY REDUCE DEMAND FOR OUR PRODUCTS.
Our success, competitive position and potential future revenues will depend
in part on our ability to protect our intellectual property. If either we or
Albert Einstein College of Medicine fails to file, prosecute or maintain any of
our existing patents, our competitors
9
<PAGE> 14
could market products that contain features and clinical benefits similar to
those of our products, and demand for our products could decline as a result. We
intend to file additional patent applications relating to our technology,
products and processes. We may direct Albert Einstein College of Medicine to
file additional patent applications relating to the licensed technology or we
may do so ourselves. However, our competitors may challenge, invalidate or
circumvent any of these or future patents. These patents may also fail to
provide us with meaningful competitive advantages. We cannot be sure what degree
of protection any patents will afford, whether patents will be issued or whether
we will be able to avoid violating or infringing upon patents issued to others.
We expect that we will rely upon trade secrets, know-how, continuing
technological innovations and licensing opportunities to develop and maintain
our competitive position. We cannot be sure that others will not independently
develop substantially equivalent proprietary information or be issued patents
that may prevent the sale of our products or know-how or require us to license
such information and pay significant fees or royalties in order to produce our
products. Moreover, we cannot be sure that our technology does not infringe upon
any valid claims of patents owned by others. If we were found to be infringing
on a patent held by another, we might have to seek a license to use the patented
technology. There can be no assurance that, in that case, we would be able to
obtain such a license on terms acceptable to us, or at all. If a legal action
were to be brought against us or our licensors, we could incur substantial
defense costs, and we cannot assure you that any such action would be resolved
in our favor. If such a dispute were to be resolved against us, we may have to
pay the other party large sums of money and our use of our technology and the
testing, manufacture, marketing or sale of one or more of our proposed products
could be restricted or prohibited. Despite the use of confidentiality
agreements, which may be of limited effectiveness, we may not be able to protect
our trade secrets.
WE RELY ON THE SERVICES OF OUR CHIEF EXECUTIVE OFFICER AND OTHER EXECUTIVE
OFFICERS, AS WELL AS OUR PRINCIPAL SCIENTIFIC, MEDICAL AND MANAGEMENT ADVISORS
AND EMPLOYEES, AND THOSE PERSONS' KNOWLEDGE OF OUR BUSINESS AND TECHNICAL
EXPERTISE WOULD BE DIFFICULT TO REPLACE.
We are highly dependent on our president, chief executive officer and
chairman, Remi Barbier, as well as our other executive officers and our
principal scientific and medical advisors and employees. We have entered into an
employment agreement with Mr. Barbier and employment offer letters with each of
our other executive officers. We have only obtained key man life insurance
covering Mr. Barbier. The loss of the technical knowledge and management and
industry expertise of any of our key personnel could result in delays in product
development, loss of customers and sales and diversion of management resources,
which could adversely affect our operating results.
COMPETITION FOR QUALIFIED PERSONNEL IN THE PHARMACEUTICAL INDUSTRY IS INTENSE,
AND IF WE ARE NOT SUCCESSFUL IN ATTRACTING AND RETAINING QUALIFIED PERSONNEL, WE
COULD EXPERIENCE DELAYS IN COMPLETING NECESSARY CLINICAL TRIALS AND THE
REGULATORY APPROVAL PROCESS OR IN FORMULATING, MANUFACTURING, MARKETING AND
SELLING OUR POTENTIAL PRODUCTS.
We will need to hire additional qualified personnel with expertise in
clinical research, preclinical testing, government regulation, formulation and
manufacturing and sales and marketing. We compete for qualified individuals with
numerous biopharmaceutical companies, universities and other research
institutions. Competition for such individuals, particularly in the San
Francisco Bay area, is intense, and we cannot be certain that our search for
such personnel will be successful. Attracting and retaining qualified personnel
will be critical to our success.
10
<PAGE> 15
BECAUSE OUR PRODUCTS CONTAIN CONTROLLED SUBSTANCES, THE U.S. GOVERNMENT MAY
LIMIT OUR SUPPLY OF SUCH SUBSTANCES FOR CLINICAL TRIALS, AND LATER FOR
COMMERCIAL DISTRIBUTION. OUR INABILITY TO SECURE ADEQUATE SUPPLIES OF THESE
SUBSTANCES COULD DELAY OUR CLINICAL TRIALS, AND IN THE FUTURE, COULD NEGATIVELY
IMPACT OUR ABILITY TO MEET CONSUMER DEMAND.
The DEA regulates chemical compounds as Schedule I, II, III, IV or V
substances, with Schedule I substances considered to present the highest risk of
substance abuse and Schedule V substances the lowest risk. The active
ingredients in our current product candidates, including morphine and
hydrocodone, are listed by the DEA as Schedule II or III substances under the
Controlled Substances Act of 1970. Consequently, their manufacture, shipment,
storage, sale and use are subject to a high degree of regulation. For example,
all Schedule II drug prescriptions must be signed by a physician and may not be
refilled without a new prescription. Furthermore, the amount of Schedule II
substances we can obtain for clinical trials and commercial distribution is
limited by the DEA and our quota may not be sufficient to complete clinical
trials or meet commercial demand. There is a risk that DEA regulations may
interfere with the supply of the drugs used in our clinical trials, and in the
future, our ability to produce and distribute our products in the volume needed
to meet commercial demand.
WE MAY INCUR SUBSTANTIAL LIABILITIES AND MAY BE REQUIRED TO LIMIT
COMMERCIALIZATION OF OUR PRODUCTS IN RESPONSE TO PRODUCT LIABILITY LAWSUITS.
The testing and marketing of medical products entail an inherent risk of
product liability. If we cannot successfully defend ourselves against product
liability claims, we may incur substantial liabilities or be required to limit
commercialization of our products. Our inability to obtain sufficient product
liability insurance at an acceptable cost to protect against potential product
liability claims could prevent or inhibit the commercialization of
pharmaceutical products we develop, alone or with corporate collaborators. We
currently carry clinical trial insurance but do not carry product liability
insurance. We, or any corporate collaborators, may not be able to obtain
insurance at a reasonable cost, if at all. Even if our agreements with any
future corporate collaborators entitle us to indemnification against losses,
such indemnification may not be available or adequate should any claim arise.
RISKS RELATED TO COMMERCIALIZING OUR PRODUCTS
IF WE ARE UNABLE TO DEVELOP OUR OWN SALES, MARKETING AND DISTRIBUTION
CAPABILITIES, OR IF WE ARE NOT SUCCESSFUL IN CONTRACTING WITH THIRD PARTIES FOR
THESE SERVICES ON FAVORABLE TERMS, OUR PRODUCT REVENUES COULD BE LOWER THAN
ANTICIPATED.
We currently have no sales, marketing or distribution capabilities. In
order to commercialize our products, if any are approved by the FDA, we will
either have to develop such capabilities internally or collaborate with third
parties who can perform these services for us. If we decide to commercialize any
of our drugs ourselves, we may not be able to hire the necessary experienced
personnel and build sales, marketing and distribution operations which are
capable of successfully launching new drugs and generating sufficient product
revenues. In addition, establishing such operations will take time and involve
significant expense. On the other hand, if we decide to enter into co-promotion
or other licensing arrangements with third parties, we may be unable to locate
acceptable collaborators. Even if we are able to identify one or more acceptable
collaborators, we may not be able to enter into any collaborative arrangements
on favorable terms, or at all. In addition, due to the nature of the market for
pain management products, it may be
11
<PAGE> 16
necessary for us to license all or substantially all of our product candidates
to a single collaborator, thereby eliminating our opportunity to commercialize
other pain management products independently. In addition, the significant
number of recent business combinations among pharmaceutical companies has
reduced the number of potential future collaborators. If we enter into any
collaborative arrangements, our product revenues are likely to be lower than if
we marketed and sold our products ourselves. In addition, any revenues we
receive would depend upon the efforts of our collaborators which may not be
adequate due to lack of attention or resource commitments, management turnover,
change of strategic focus, further business combinations or other factors
outside of our control. Depending upon the terms of our collaboration, the
remedies we have against an under-performing collaborator may be limited. If we
were to terminate a relationship, it may be difficult or impossible to find a
replacement collaborator on acceptable terms, or at all.
IF WE CANNOT COMPETE SUCCESSFULLY FOR MARKET SHARE AGAINST OTHER DRUG COMPANIES,
WE MAY NOT ACHIEVE SUFFICIENT PRODUCT REVENUES AND OUR BUSINESS WILL SUFFER.
The market for our product candidates is characterized by intense
competition and rapid technological advances. If our products receive FDA
approval, they will compete with a number of existing and future drugs and
therapies developed, manufactured and marketed by others. Existing or future
competing products may provide greater therapeutic convenience or clinical or
other benefits for a specific indication than our products, or may offer
comparable performance at a lower cost. If our products are unable to capture
and maintain market share, we may not achieve sufficient product revenues and
our business will suffer.
We will compete for market share against fully integrated pharmaceutical
companies and smaller companies that are collaborating with larger
pharmaceutical companies, academic institutions, government agencies and other
public and private research organizations. Many of these competitors have opioid
painkillers already approved or in development. In addition, many of these
competitors, either alone or together with their collaborative partners, operate
larger research and development programs and have substantially greater
financial resources than we do, as well as significantly greater experience in:
- developing drugs;
- undertaking preclinical testing and human clinical trials;
- obtaining FDA and other regulatory approvals of drugs;
- formulating and manufacturing drugs; and
- launching, marketing and selling drugs.
DEVELOPMENTS BY COMPETITORS MAY RENDER OUR PRODUCTS OR TECHNOLOGIES OBSOLETE OR
NON-COMPETITIVE.
Companies that currently sell generic or proprietary opioid drugs, or both,
include Roxane Laboratories, Purdue Pharma, Janssen Pharmaceutica, Knoll
Laboratories, Abbott Laboratories, Anesta, Endo Pharmaceuticals, Elkins-Sinn,
Watson Laboratories, Alza Pharmaceuticals, Ortho-McNeil Pharmaceutical, Forest
Pharmaceuticals and Astra Pharmaceutical. Alternative technologies and products
are being developed to improve or replace the use of opioids for pain
management, several of which are in clinical trials or are awaiting approval
from the FDA. Such alternatives include Elan's SNX-111, as well as combination
products from Endo Pharmaceuticals. In addition, companies pursuing different
but related fields represent substantial competition. Many of these
organizations competing with us have substantially greater capital resources,
larger research and
12
<PAGE> 17
development staffs and facilities, greater experience in drug development and in
obtaining regulatory approvals and greater manufacturing and marketing
capabilities than we do. These organizations also compete with us to attract
qualified personnel, parties for acquisitions, joint ventures or other
collaborations.
OUR ABILITY TO GENERATE PRODUCT REVENUES WILL BE DIMINISHED IF WE FAIL TO OBTAIN
ACCEPTABLE PRICES OR AN ADEQUATE LEVEL OF REIMBURSEMENT FOR OUR PRODUCTS FROM
HEALTHCARE PAYERS.
Our ability to commercialize our drugs, alone or with collaborators, will
depend in part on the extent to which reimbursement for the products will be
available from:
- government and health administration authorities;
- private health maintenance organizations and health insurers; and
- other healthcare payers.
Significant uncertainty exists as to the reimbursement status of newly
approved healthcare products. Healthcare payers, including Medicare, are
challenging the prices charged for medical products and services. Government and
other healthcare payers increasingly are attempting to contain healthcare costs
by limiting both coverage and the level of reimbursement for drugs, and by
refusing, in some cases, to provide coverage for uses of approved products for
disease indications for which the FDA has or has not granted labeling approval.
Third-party insurance coverage may not be available to patients for any products
we develop. If government and other healthcare payers do not provide adequate
coverage and reimbursement levels for any such products, market acceptance of
any such products will be reduced.
RISKS RELATED TO THE OFFERING
WE HAVE BROAD DISCRETION IN HOW WE USE THE NET PROCEEDS OF THIS OFFERING, AND WE
MAY NOT USE SUCH PROCEEDS EFFECTIVELY.
We have not designated the amount of net proceeds we will use for any
particular purpose. Accordingly, our management will have broad discretion as to
the application of the net proceeds and could use them for purposes other than
those contemplated at the time of this offering. Our stockholders may not
approve of the manner in which our management chooses to allocate and spend the
net proceeds. Moreover, our management may use the net proceeds for corporate
purposes that may not increase our profitability or our market value. Our
primary purpose in conducting this offering is to create a public market for our
common stock. As of the date of this prospectus, we plan to use the net proceeds
from this offering for working capital and general corporate purposes, including
the continued development of existing product candidates, clinical research and
development, formulation and manufacturing and commercialization activities.
OUR STOCK PRICE COULD BE VOLATILE WHICH MAY LEAD TO LOSSES BY INVESTORS.
Before this offering, there was no public market for our common stock. An
active public market for our common stock may not develop or be sustained after
this offering. We will determine the initial public offering price of our common
stock based on negotiations between the representatives of the underwriters and
our management concerning the valuation of our common stock, and such price may
not be indicative of future market prices. The public market may not agree with
or accept this valuation. After
13
<PAGE> 18
this offering, you may not be able to resell your shares at or above the initial
public offering price. The trading price of our common stock is likely to be
volatile.
The stock market in general, and the market prices for securities of
biotechnology companies in particular, has experienced extreme volatility and
may continue to be highly volatile in the future. The following factors, in
addition to other risk factors described in this section, may have a significant
impact on the market price of our common stock:
- publicity regarding actual or potential clinical results relating to
products under development by our competitors or us;
- announcements of technological innovations or new commercial products by
our competitors or us;
- developments concerning proprietary rights, including patents;
- developments concerning our collaborations;
- regulatory developments in the United States and foreign countries;
- litigation;
- economic or other crises and other external factors; or
- period to period fluctuations in our financial results.
WE ARE AT RISK OF SECURITIES CLASS ACTION LITIGATION DUE TO OUR EXPECTED STOCK
PRICE VOLATILITY.
In the past, securities class action litigation has often been brought
against companies following periods of volatility in the market price of their
securities. Due to the expected volatility of our stock price, we may be the
target of securities litigation in the future. Securities litigation could
result in substantial costs and divert management's attention and resources from
our business.
OUR OFFICERS, DIRECTORS AND PERSONS AFFILIATED WITH OUR DIRECTORS WILL RETAIN
SIGNIFICANT CONTROL OVER US AFTER THIS OFFERING, WHICH MAY LEAD TO CONFLICTS
WITH OTHER STOCKHOLDERS ON CORPORATE GOVERNANCE ISSUES.
We anticipate that our officers, directors and individuals or entities
affiliated with our directors will beneficially own approximately % of our
outstanding common stock as a group after this offering closes. Acting together,
these stockholders would be able to exercise significant influence over all
matters that our stockholders vote upon, including the election of directors and
the approval of significant corporate transactions. This concentration of
ownership may also delay, deter or prevent a change in our control and may make
some transactions more difficult or impossible to complete without the support
of the stockholders.
THE PROVISIONS OF OUR CHARTER DOCUMENTS MAY INHIBIT POTENTIAL ACQUISITION BIDS
THAT A STOCKHOLDER MAY BELIEVE ARE DESIRABLE, AND THE MARKET PRICE OF OUR COMMON
STOCK MAY BE LOWER AS A RESULT.
Upon completion of this offering, our board of directors will have the
authority to issue up to 10,000,000 shares of preferred stock. The board of
directors can fix the price, rights, preferences, privileges and restrictions of
the preferred stock without any further vote or action by our stockholders. The
issuance of shares of preferred stock may delay or prevent a change in control
transaction. As a result, the market price of our common stock
14
<PAGE> 19
and the voting and other rights of our stockholders may be adversely affected.
The issuance of preferred stock may result in the loss of voting control to
other stockholders. We have no current plans to issue any shares of preferred
stock.
In addition to the foregoing, our charter documents contain the following
anti-takeover devices:
- only one of the three classes of directors is elected each year;
- the ability of our stockholders to remove directors without cause is
limited;
- the right of stockholders to act by written consent has been eliminated;
- the right of stockholders to call a special meeting of stockholders has
been eliminated; and
- a requirement of advance notice to nominate directors or submit proposals
for consideration at stockholder meetings.
These provisions could discourage potential acquisition proposals and could
delay or prevent a change in control transaction. They could also have the
effect of discouraging others from making tender offers for our common stock. As
a result, these provisions may prevent the market price of our common stock from
increasing substantially in response to actual or rumored takeover attempts.
These provisions may also prevent changes in our management.
DELAWARE LAW MAY INHIBIT POTENTIAL ACQUISITION BIDS; THIS MAY ADVERSELY AFFECT
THE MARKET PRICE OF OUR COMMON STOCK, DISCOURAGE MERGER OFFERS AND PREVENT
CHANGES IN OUR MANAGEMENT.
Upon completion of this offering, we will be subject to the anti-takeover
provisions of the Delaware General Corporation Law, which regulate corporate
acquisitions. Delaware law will prevent us from engaging, without the approval
of our board of directors or a large majority of our stockholders, in certain
transactions with any stockholder who controls, alone or together with
affiliates, 15% or more of our outstanding common stock for three years
following the date on which the stockholder first acquired 15% or more of our
outstanding common stock. Although we may opt out of these anti-takeover
provisions, we do not intend to do so. In addition, until November 2000, the
Delaware General Corporation Law may discourage, delay or prevent a third party
from acquiring us.
FUTURE SALES OF COMMON STOCK BY OUR EXISTING STOCKHOLDERS COULD CAUSE OUR STOCK
PRICE TO DECLINE.
If our stockholders sell substantial amounts of common stock in the public
market, including shares that we may issue upon the exercise of outstanding
options and warrants, the market price of our common stock could decline. The
perception among investors that these sales will occur could produce the same
effect. After this offering, we will have 25,827,142 shares of common stock
outstanding. The shares we are selling in this offering will be freely tradable
in the public market. If we take into account the lock-up
15
<PAGE> 20
agreements executed by our existing stockholders, the remaining shares of common
stock outstanding after this offering will be available for sale in the public
market as follows:
<TABLE>
<CAPTION>
PERCENT OF TOTAL
NUMBER OF SHARES SHARES OUTSTANDING DATE OF AVAILABILITY FOR SALE
- ---------------- ------------------ -----------------------------
<S> <C> <C>
, 2000 (date of this prospectus) to
, 2000 (180 days after the date
of this prospectus)
, 2000 (180 days after the date of this
prospectus), in some cases under Rule 144
At various times after ,
2000
</TABLE>
FleetBoston Robertson Stephens Inc. could waive the selling restrictions
imposed by the lock-up agreements at any time, which could accelerate the resale
of outstanding shares of common stock. However, FleetBoston Robertson Stephens
Inc. has no agreement or intention to release any stockholder from the lock-up
agreements. In addition, some of our securityholders have rights to require us
to register their shares for resale in the public market.
YOU WILL SUFFER IMMEDIATE AND SUBSTANTIAL DILUTION BECAUSE THE NET TANGIBLE BOOK
VALUE OF SHARES PURCHASED IN THIS OFFERING WILL BE SUBSTANTIALLY LOWER THAN THE
INITIAL PUBLIC OFFERING PRICE.
The initial public offering price of the shares of common stock in this
offering will significantly exceed the net tangible book value per share of our
common stock. Any shares of common stock that investors purchase in this
offering will have a post-closing net tangible book value per share of $9.02 per
share less than the initial public offering price paid, assuming an initial
public offering price per share of $12 and based on our pro forma net tangible
book value as of March 31, 2000. Accordingly, if you purchase common stock in
this offering, you will incur immediate and substantial dilution of your
investment. If outstanding options or warrants are exercised, you will incur
additional dilution.
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<PAGE> 21
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements under the captions
"Summary," "Risk Factors," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business," and elsewhere. These
forward-looking statements include statements about the following:
- anticipated operating losses and capital expenditures;
- our clinical development efforts;
- the success of our technology;
- the timing of regulatory processes for our product candidates;
- the future growth of markets for our products;
- our intention to rely on third parties for key functions such as
formulation and manufacturing and sales and marketing;
- anticipated increases in our expenses;
- the sufficiency of the net proceeds of this offering, together with our
cash on hand, to fund our operations for the next 12 months; and
- the lack of a material impact of the adoption of SFAS No. 133.
When used in this prospectus, the words "believe," "anticipate,"
"estimate," "expect," "seek," "intend," "may," "will," "plan" and similar
expressions are generally intended to identify "forward-looking statements." The
matters discussed in our forward-looking statements are subject to known and
unknown risks, uncertainties and other factors which may cause our actual
results, performance or achievements, or industry results, to be materially
different from the results, performance or achievements expressed or implied by
our forward-looking statements. These factors are discussed in more detail
elsewhere in this prospectus, including under the captions "Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and "Business." Because of these uncertainties, you
should not place undue reliance on our forward-looking statements.
Market data and forecasts used in this prospectus, including, for example,
estimates of the size and growth rates of the pain management market, have been
obtained from independent industry sources, and we have not independently
verified such data.
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<PAGE> 22
USE OF PROCEEDS
Our net proceeds from the sale of the shares of common stock we are
offering are estimated to be $54.7 million ($63.1 million if the underwriters
exercise their over-allotment option in full) assuming a public offering price
of $12 per share and after deducting the underwriting discounts and commissions
and our estimated offering expenses.
We will retain broad discretion in the allocation of the net proceeds of
this offering. We currently anticipate using the net proceeds from this offering
for working capital and general corporate purposes, including the continued
development of existing product candidates, clinical research and development,
formulation and manufacturing and commercialization activities. We may also, as
opportunities arise, use a portion of the net proceeds to acquire or invest in
businesses, products or technologies that are complementary to our own. While we
periodically engage in preliminary discussions with respect to acquisitions, we
are not currently a party to any agreements or commitments, and we have no
understandings with respect to any acquisitions.
The amounts and timing of our actual expenditures for each purpose may vary
significantly depending upon numerous factors, including:
- the size, scope and progress of our product candidate development
efforts;
- regulatory approvals;
- competition;
- market acceptance of any of our drugs;
- marketing and sales activities;
- future revenue growth, if any; and
- the amount of cash, if any, we generate from operations.
The precise uses to which we will apply the net proceeds of this offering
will be selected by management, under the supervision of our board of directors,
in light of future circumstances and our business prospects. As a result, we
will retain broad discretion in the allocation of the net proceeds of this
offering. Pending the use of the net proceeds, we intend to invest the net
proceeds in short-term, investment grade, interest bearing instruments.
DIVIDEND POLICY
We have never declared or paid cash dividends on our capital stock. We
expect to retain our future earnings, if any, for use in the operation and
expansion of our business and do not anticipate paying any cash dividends in the
foreseeable future. Any future declaration and payment of dividends will be
subject to the discretion of our board of directors, will be subject to
applicable law and will depend on our results of operations, earnings, financial
condition, contractual limitations, cash requirements, future prospects and
other factors deemed relevant by our board of directors.
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<PAGE> 23
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 2000:
- on an actual basis derived from our financial statements;
- on a pro forma basis to give effect to the conversion of all of our
convertible preferred and redeemable convertible preferred stock
outstanding as of March 31, 2000 into 11,108,912 shares of common stock
upon completion of the offering;
- on a pro forma as adjusted basis to give effect to the sale of 5,000,000
shares of common stock in the offering at an assumed initial offering
price of $12 per share, after deducting estimated underwriting discounts,
commissions and offering expenses, and our amended and restated
certificate of incorporation to be filed upon closing of this offering.
<TABLE>
<CAPTION>
AS OF MARCH 31, 2000
--------------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------------ ------------- -------------
<S> <C> <C> <C>
Redeemable convertible preferred stock, $0.001 par value:
Series B, 5,405,405 shares authorized, issued and
outstanding actual; none issued and outstanding pro forma
and pro forma as adjusted................................. $ 9,703,903 $ -- $ --
Series C, 3,200,000 shares authorized and 3,044,018 issued
and outstanding actual; none issued and outstanding, pro
forma and pro forma as adjusted (See Note 7 to the
Financial Statements)..................................... -- -- --
------------ ------------ ------------
Total redeemable convertible preferred stock....... 9,703,903 -- --
------------ ------------ ------------
Stockholders' equity:
Convertible preferred stock: series A, $0.001 par value;
3,500,000 shares authorized and 2,659,489 issued and
outstanding actual; none issued and outstanding pro forma
and pro forma as adjusted................................. 2,660 -- --
Preferred stock 10,000,000 shares authorized, none issued
and outstanding pro forma as adjusted..................... -- -- --
Common stock, $0.001 par value; 22,000,000 shares
authorized, 9,718,230 shares issued and outstanding
actual; 20,827,142 shares issued and outstanding pro
forma; 120,000,000 shares authorized, 25,827,142 issued
and outstanding pro forma as adjusted..................... 9,718 20,827 25,827
Additional paid-in-capital.................................. 31,929,354 41,624,808 96,319,808
Deferred compensation....................................... (8,448,370) (8,448,370) (8,448,370)
Notes receivable............................................ (123,400) (123,400) (123,400)
Deficit accumulated during the development stage............ (10,696,729) (10,696,729) (10,696,729)
------------ ------------ ------------
Total stockholders' equity......................... 12,673,233 22,377,136 77,077,136
------------ ------------ ------------
Total capitalization............................... $ 22,377,136 $ 22,377,136 $ 77,077,136
============ ============ ============
</TABLE>
- -------------------------
The data in the table above excludes:
- 1,757,970 shares of common stock issuable upon exercise of options
outstanding as of March 31, 2000, at a weighted average exercise price of
$0.50 per share;
- 223,800 shares of common stock available for issuance at March 31, 2000,
under our 1998 Stock Plan, as amended;
- 70,000 shares of common stock issuable upon exercise of warrants
outstanding as of March 31, 2000 at an exercise price of $1.00 per share;
- 150,000 shares of series A convertible preferred stock issuable upon
exercise of warrants outstanding at March 31, 2000 at an exercise price
of $1 per share; and
- 120,000 shares of common stock issuable upon exercise of warrants issued
in conjunction with the February 2000 sale of series C redeemable
convertible preferred stock at an exercise price of $5 per share.
See Notes 3 and 7 to the Financial Statements.
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<PAGE> 24
DILUTION
Our pro forma net tangible book value as of March 31, 2000 was $22,377,136,
or $1.07 per share of common stock. Pro forma net tangible book value per share
represents the amount of our total tangible assets less total liabilities,
divided by the pro forma number of shares of common stock outstanding at March
31, 2000 and assumes the conversion of all outstanding shares of preferred stock
into an aggregate 11,108,912 shares of common stock automatically upon
completion of this offering.
Dilution in net tangible book value per share represents the difference
between the amount per share paid by purchasers of shares of common stock in
this offering and the net tangible book value per share of our common stock
immediately after the completion of this offering. After giving effect to the
sale of the shares of our common stock in this offering at an assumed public
offering price of $12 per share, after deducting underwriting discounts and
commissions and estimated offering expenses, our pro forma as adjusted net
tangible book value as of March 31, 2000 would have been $77,077,136, or $2.98
per share. This represents an immediate increase in pro forma net tangible book
value of $1.91 per share to existing stockholders and an immediate dilution of
$9.02 per share to new investors, or approximately 75% of the assumed offering
price of $12 per share. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed offering price per share............................ $12.00
Pro forma net tangible book value per share at March 31,
2000................................................... $1.07
Increase per share attributable to new investors.......... 1.91
-----
Pro forma as adjusted net tangible book value per share
after this offering....................................... 2.98
------
Dilution per share to new investors......................... $ 9.02
======
</TABLE>
If the underwriters exercise their over-allotment option in full, the pro
forma and as adjusted net tangible book value per share to existing stockholders
will be $3.22 per share, the increase in the net tangible book value per share
to existing stockholders will be $2.15 per share and the dilution in net
tangible book value to new investors will be $8.78 per share.
The following table summarizes, on a pro forma basis as of March 31, 2000
after giving effect to the automatic conversion of all outstanding shares of
preferred stock into common stock upon the closing of this offering, the total
number of shares of common stock purchased from us, the total consideration paid
to us and the average price per share paid to us by existing stockholders and by
new investors before deducting the underwriting discounts and commissions and
estimated offering expenses, at an assumed initial public offering price of $12
per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------- --------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders................... 20,827,142 81% $27,693,779 32% $ 1.33
New investors........................... 5,000,000 19 60,000,000 68 $12.00
---------- ----- ----------- ------
Total................................. 25,827,142 100.0% $87,693,779 100.0%
========== ===== =========== ======
</TABLE>
The foregoing discussion assumes no exercise of any stock options or
warrants to purchase common stock outstanding as of March 31, 2000. As of March
31, 2000, there were options and warrants outstanding to purchase 2,097,970
shares of common stock at a weighted average exercise price of $0.81 per share.
To the extent any of these options are exercised, there will be further dilution
to investors. In addition, there were 223,800 shares available for issuance upon
the exercise of options which may be granted under our 1998 stock plan, as
amended after March 31, 2000.
20
<PAGE> 25
SELECTED FINANCIAL DATA
The selected statement of operations data for the period from May 4, 1998
(inception) through December 31, 1998, for the year ended December 31, 1999 and
the period from May 4, 1998 (inception) through December 31, 1999 and the
selected balance sheet data as of December 31, 1998 and 1999 are derived from
our audited financial statements and notes appearing elsewhere in this
prospectus. The selected statements of operations data for the three months
ended March 31, 1999 and 2000 and for the period from May 4, 1998 (inception)
through March 31, 2000, and the selected balance sheet data as of March 31, 2000
are derived from our unaudited financial statements appearing elsewhere in this
prospectus which reflect, in the opinion of management, all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the results for these periods and the financial condition as of
that date. Historical results are not necessarily indicative of results that may
be expected for any future period. You should read the following selected
financial data in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" on page 23 and the financial
statements and related notes beginning on page F-1.
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM THREE MONTHS ENDED
MAY 4, 1998 MAY 4, 1998 MARCH 31,
(INCEPTION) THROUGH YEAR ENDED (INCEPTION) THROUGH --------------------------
DECEMBER 31, 1998 DECEMBER 31, 1999 DECEMBER 31, 1999 1999 2000
------------------- ----------------- ------------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating expenses:
Licensing fees............. $ 100,000 $ -- $ 100,000 $ -- $ --
Research and development... 200,000 2,092,119 2,292,119 -- 1,433,268
General and
administrative........... 122,168 2,567,355 2,689,523 118,257 4,619,719
--------- ----------- ----------- --------- ------------
Total operating
expenses............... 422,168 4,659,474 5,081,642 118,257 6,052,987
--------- ----------- ----------- --------- ------------
Operating loss........... (422,168) (4,659,474) (5,081,642) (118,257) (6,052,987)
Interest income.............. 33,961 160,689 194,650 27,407 245,050
Income tax expense........... 800 800 1,600 200 200
--------- ----------- ----------- --------- ------------
Net loss................. (389,007) (4,499,585) (4,888,592) (91,050) (5,808,137)
Return to series C preferred
shareholders for beneficial
conversion feature......... -- -- -- -- (14,231,595)
--------- ----------- ----------- --------- ------------
Loss available to common
shareholders............... $(389,007) $(4,499,585) $(4,888,592) $ (91,050) $(20,039,732)
========= =========== =========== ========= ============
Basic and diluted loss per
share...................... $ (0.06) $ (0.48) $ (0.01) $ (2.10)
========= =========== ========= ============
Weighted average shares used
in computing basic and
diluted loss per share..... 6,948,637 9,322,441 9,000,000 9,528,957
========= =========== ========= ============
<CAPTION>
PERIOD FROM
MAY 4, 1998
(INCEPTION) THROUGH
MARCH 31, 2000
-------------------
<S> <C>
STATEMENT OF OPERATIONS DATA:
Operating expenses:
Licensing fees............. $ 100,000
Research and development... 3,725,387
General and
administrative........... 7,309,242
------------
Total operating
expenses............... 11,134,629
------------
Operating loss........... (11,134,629)
Interest income.............. 439,700
Income tax expense........... 1,800
------------
Net loss................. (10,696,729)
Return to series C preferred
shareholders for beneficial
conversion feature......... (14,231,595)
------------
Loss available to common
shareholders............... $(24,928,324)
============
Basic and diluted loss per
share......................
Weighted average shares used
in computing basic and
diluted loss per share.....
</TABLE>
See Note 1 of Notes to Financial Statements for an explanation of the
determination of the weighted-average common shares used to compute basic and
diluted loss per share.
21
<PAGE> 26
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- MARCH 31,
1998 1999 2000
----------- ----------- -----------
<S> <C> <C> <C>
SELECTED BALANCE SHEET DATA:
Cash and cash equivalents.......................... $ 2,333,512 $ 9,339,669 $22,179,362
Working capital.................................... 2,264,038 9,095,831 21,795,444
Total assets....................................... 2,382,600 9,441,173 22,864,799
Series C redeemable convertible preferred
stock(1)......................................... -- -- --
Series B redeemable convertible preferred stock.... -- 9,703,903 9,703,903
Series A convertible preferred stock............... 2,660 2,660 2,660
Common stock....................................... 9,000 9,445 9,718
Additional paid-in-capital......................... 2,686,839 9,367,750 31,929,354
Deferred compensation.............................. -- (4,980,180) (8,448,370)
Deficit accumulated during the development stage... (389,007) (4,888,592) (10,696,729)
Total stockholders' equity (deficit)............... 2,274,492 (563,317) 12,673,233
</TABLE>
(1) See Note 7 to the Financial Statements
22
<PAGE> 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Financial Data" and our financial statements and the related notes
included elsewhere in this prospectus.
OVERVIEW
Pain Therapeutics is a clinical stage specialty pharmaceutical company
engaged in the development of a new generation of opioid painkillers. We use our
proprietary technology, to reformulate opioid drugs, such as morphine, into new
opioid painkillers with improved clinical benefits. We currently have four
product candidates in Phase II clinical trials. We believe our drugs offer
enhanced pain relief, fewer adverse side effects and reduced tolerance and
addiction compared to existing opioid painkillers.
We have yet to generate any revenues from product sales. We have not been
profitable and, since our inception, we have incurred a cumulative deficit of
approximately $10.7 million through March 31, 2000. These losses have resulted
principally from costs incurred in connection with research and development
activities, including costs of clinical trials associated with our four product
candidates and general and administrative expenses.
Product revenue will depend on our ability to receive regulatory approvals
for, and successfully market, our product candidates. In the event that our
development efforts result in regulatory approval and successful
commercialization of our product candidates, we will generate revenue from
direct sales of our products and/or, if we license our products to future
collaborators, from the receipt of license fees and royalties from licensed
products.
Sources of revenue for the foreseeable future may also include payments
from potential collaborative arrangements, including license fees, funded
research payments and milestone payments and royalties based on revenues
received from products commercialized under such arrangements.
We expect to incur additional operating losses for the next several years.
We also expect to continue to incur significant operating and capital
expenditures and anticipate that our expenses will increase substantially in the
foreseeable future as we:
- continue to undertake preclinical and clinical trials for our product
candidates;
- seek to obtain regulatory approvals for our product candidates;
- develop, manufacture and market our product candidates and products;
- implement additional internal systems and infrastructure; and
- hire additional personnel.
Deferred Non-Cash Compensation
During the three month period ended March 31, 2000 and the year ended
December 31, 1999 we granted stock options to employees and non-employee
consultants for which we recorded deferred compensation of approximately $4.7
million and $6.5 million, respectively. No options were granted in 1998.
For employees, deferred compensation represents the difference between the
exercise price of the option and the fair value of our common stock on the date
of grant in
23
<PAGE> 28
accordance with Accounting Principles Board Opinion No. 25 and its related
interpretations. For non-employees, deferred compensation is recorded at the
fair value of the options granted in accordance with Statement of Financial
Accounting Standards No. 123 and Emerging Issues Task Force No. 96-18.
Compensation expense is being recognized over the vesting period for
employees and the service period for non-employees in accordance with Financial
Accounting Standards Board Interpretation No. 28. For the three month period
ended March 31, 2000 and the year ended December 31, 1999, amounts amortized to
the statement of operations as compensation expense for both employees and
non-employees totalled $1.2 million and $1.5 million, respectively.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
Licensing Fees
In May 1998, we entered into an exclusive, worldwide license agreement with
Albert Einstein College of Medicine for all patents and pending patent
applications relating to low-dose opioid antagonist technology. Pursuant to the
terms of the license, we paid Albert Einstein College of Medicine a one time
licensing fee and are required to pay clinical milestone payments and royalties
based on a percentage of net sales. If a product is combined with a drug or
other substance for which we are paying an additional royalty, the royalty rate
we pay to Albert Einstein College of Medicine is generally reduced by one-half
of the amount of such additional royalty. The licensing fee payments made
through March 31, 2000 have been charged to licensing fees in accordance with
Statement of Financial Accounting Standards No. 2, Accounting for Research and
Development Costs, as this technology has no alternative future use. No such
payments were made during the three month periods ended March 31, 2000 and 1999.
Research and Development
Research and development expense consists of drug development work
associated with product candidates, including costs of clinical trials and
clinical supplies, and research payments to the Albert Einstein College of
Medicine. Research and development expenses were $1.4 million for the three
months ended March 31, 2000. For the three months ended March 31, 1999 no
research and development was incurred as clinical trial activity was initiated
during the second quarter of 1999.
General and Administrative
General and administrative expense consists primarily of amortization of
deferred compensation for options granted to employees and consultants, charges
resulting from stock issuances pursuant to restricted stock purchase agreements,
salaries and related benefit costs, facilities expenses, consulting and
professional services expenses, travel and other general corporate expenses.
General and administrative expenses increased to $4.6 million for the three
months ended March 31, 2000 from $118,000 for the three months ended March 31,
1999. This increase was primarily attributable to the hiring of additional
personnel and related expenses, the amortization of deferred compensation,
charges resulting from stock issuances pursuant to restricted stock purchase
agreements and increased consulting and professional services expenses. There
will be future non-cash charges for options granted to employees and
consultants.
24
<PAGE> 29
Interest Income
Interest income increased to approximately $245,000 for the three months
ended March 31, 2000 from $27,000 for the period ended March 31, 1999. This
increase resulted from higher average balances of cash and cash equivalents
following the sale of our series B and series C redeemable convertible preferred
stock.
Return to Series C Preferred Stockholders for Beneficial Conversion Feature
We determined that our series C preferred stock was issued with a
beneficial conversion feature. The beneficial conversion feature has been
recognized by allocating a portion of the preferred stock proceeds equal to the
intrinsic value of that feature, approximately $14.2 million, to additional
paid-in capital. The intrinsic value is calculated at the date of issue as the
difference between the conversion price of the preferred stock and the fair
value of our common stock, into which the preferred stock is convertible,
multiplied by the number of common shares into which the preferred stock is
convertible. The $14.2 million resulting from the allocation of proceeds to the
beneficial conversion feature has been treated as a dividend and is recognized
as a return to the preferred stockholders for purposes of computing basic and
diluted loss per share.
YEAR ENDED DECEMBER 31, 1999 AND PERIOD FROM MAY 4, 1998 (INCEPTION) THROUGH
DECEMBER 31, 1998
Licensing Fees
The licensing fee payments made pursuant to the terms of the license
agreement with the Albert Einstein College of Medicine have been charged to
licensing fees in accordance with Statement of Financial Accounting Standards
No. 2, Accounting for Research and Development Costs, as this technology has no
alternative future use.
Research and Development
Research and development expenses increased to $2.1 million for the year
ended December 31, 1999 from $200,000 for the period ended December 31, 1998.
This increase was attributable to the initiation of clinical trials during 1999.
General and Administrative
General and administrative expenses increased to $2.6 million for the year
ended December 31, 1999 from $122,000 for the period ended December 31, 1998.
This increase was primarily attributable to the hiring of additional personnel,
the amortization of deferred compensation, increased professional services
expenses and the longer period over which general corporate expenses were
incurred in 1999. There will be future non-cash charges for options granted to
employees and consultants.
Interest Income
Interest income increased to approximately $161,000 for the year ended
December 31, 1999 from $34,000 for the period ended December 31, 1998. This
increase resulted from higher average balances of cash and cash equivalents
following the sale of our series B redeemable convertible preferred stock.
25
<PAGE> 30
Income Taxes
We have incurred net operating losses since inception and, consequently,
have not recorded any federal or state income taxes other than the minimum
California state franchise tax. Our deferred tax assets primarily consist of net
operating loss carryforwards and research and development tax credits. We have
recorded a valuation allowance for the full amount of our deferred tax asset as
the future realization of the tax benefit is not assured.
As of December 31, 1999, we had net operating loss carryforwards of
approximately $3.3 million for federal and state income tax purposes. These
federal and state tax loss carryforwards are available to reduce future taxable
income. If not utilized, the net operating loss carryforwards expire at various
dates through 2019 for federal purposes and 2006 for state purposes. Annual
limitations may result in the expiration of net operating loss and credit carry
forwards before they are used. Under the provisions of the Internal Revenue
Code, substantial changes in our ownership may limit the amount of net operating
loss carryforwards that could be utilized annually in the future to offset
taxable income.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations primarily from the net proceeds generated
from sales of our preferred stock. Through the date of this filing we have
received total net proceeds of approximately $27.5 million from the sales of:
- an aggregate 2,659,489 shares of our series A convertible preferred stock
in August and October 1998 raising total net proceeds of approximately
$2.6 million;
- an aggregate 5,405,405 shares of our series B redeemable convertible
preferred stock in October and November 1999 raising total net proceeds
of approximately $9.7 million; and
- an aggregate 3,044,018 shares of our series C redeemable convertible
preferred stock in February 2000 raising total net proceeds of
approximately $15.2 million. We have allocated approximately $14.2
million of these proceeds to a beneficial conversion feature which we
have treated as a dividend to the preferred shareholders.
All of these shares of preferred stock will convert 1-for-1 into common
stock upon completion of this offering. As of the date of this offering, there
are warrants outstanding to purchase a total of 190,000 shares of our common
stock at a weighted average exercise price of $3.53 per share and 150,000 shares
of our series A convertible preferred stock at an exercise price of $1.
As of March 31, 2000, cash and cash equivalents were $22.2 million, up from
$9.3 million at the end of 1999 and $2.3 million at the end of 1998.
For the three months ended March 31, 2000 we used approximately $1.8
million of cash for operations principally as a result of the net loss of $5.8
million offset by non-cash compensation of approximately $1.2 million, non-cash
charges resulting from stock issuances pursuant to restricted stock purchase
agreements of $2.6 million and the increase in accounts payable of $187,000. In
the year ended December 31, 1999 we used approximately $2.7 million of cash for
operations principally as a result of the net loss of $4.5 million offset by
non-cash compensation of approximately $1.5 million and the increase in accounts
payable of $162,000. We used approximately $300,000 of cash for operations in
the 1998 period.
26
<PAGE> 31
Our investing activities used cash of approximately $83,000 in the three
months ended March 31, 2000. For the year ended December 31, 1999 our investing
activities used cash of approximately $39,000 compared to approximately $11,000
in the 1998 period. These activities consisted of purchases of property and
equipment. We expect to continue to make investments in our infrastructure,
including the purchase of property and equipment to support our operations.
Financing activities provided cash of $14.7 million in the three months
ended March 31, 2000. Our financing activities in the year ended December 31,
1999 and for the period ended December 31, 1998 generated approximately $9.7
million and $2.7 million, respectively. These amounts are primarily from the
private sales of preferred stock. The 2000 period also includes approximately
$460,000 of deferred charges related to our initial public offering. Our series
B and C redeemable convertible preferred stock have redemption features that may
require us to make cash payments in the absence of certain events at set future
dates in amounts equal to their purchase price plus unpaid, declared dividends.
We currently occupy approximately 3,250 square feet of leased space, for
which the operating lease expires in September 2000. We are searching for
additional space to meet our requirements as we implement internal systems and
infrastructure and hire additional personnel. The combination of our need for
additional square footage and increased rents in the San Francisco Bay Area will
likely result in a significantly higher occupancy expense going forward.
We expect our cash requirements to increase significantly in 2000, as we
continue our research and development efforts, hire and expand our product
development personnel, grow our administrative support activities and expand our
leased facilities. Additionally, as our clinical development efforts grow we
anticipate a significant cash requirement for working capital growth, capital
expenditures and investment in infrastructure. The amount and timing of cash
requirements will depend on regulatory and market acceptance of our products, if
any, and the resources we devote to researching and developing, formulating,
manufacturing, commercializing and supporting our products. We believe that the
net proceeds from this offering together with our current cash and cash
equivalents should be sufficient to fund our operations for at least the next 12
months. However, we may require additional financing within this timeframe and
such additional funding, if needed, will may not be available on terms
acceptable to us or at all. Further, any additional equity financing may be
dilutive to current stockholders.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, or SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133 establishes
accounting and reporting standards requiring that every derivative instrument be
recorded in the balance sheet as either an asset or liability measured at its
fair value. SFAS No. 133, as recently amended by SFAS No. 137, is effective for
fiscal years beginning after June 15, 2000. Management believes the adoption of
SFAS No. 133 will not have a material effect on our financial position, results
of operations or cash flows.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, or FIN No. 44, Accounting for Certain Transactions
Involving Stock Compensation. This Interpretation clarifies the application of
APB Opinion No. 25, Accounting for Stock Issued to Employees and is generally
effective July 1, 2000, with certain conclusions in this Interpretation covering
specific events that occur after either
27
<PAGE> 32
December 15, 1998, or January 12, 2000. To the extent that this Interpretation
covers events occurring during the period after December 15, 1998, or January
12, 2000, but before the effective date of July 1, 2000, the effects of applying
this Interpretation are recognized on a prospective basis from July 1, 2000.
Management believes the adoption of FIN No. 44 will not have a material impact
on our financial position, results of operations or cash flows.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary objective of our investment activities is to preserve principal
while at the same time maximizing the income we receive from investments without
significantly increasing risk. Some of the securities that we may invest in may
be subject to market risk. This means that a change in prevailing interest rates
may cause the value of the investment to fluctuate. For example, if we purchase
a security that was issued with a fixed interest rate and the prevailing
interest rate later rises, the value of our investment will probably decline. To
minimize this risk in the future, we intend to maintain our portfolio of cash
equivalents and short-term investments in a variety of securities including
commercial paper, money market funds and government and non-government debt
securities. In general, money market funds are not subject to market risk
because the interest paid on such funds fluctuates with the prevailing interest
rate. As of March 31, 2000, we neither had any holdings of derivative financial
or commodity instruments, nor any foreign currency denominated transactions, and
all of our cash and cash equivalents were in money market and checking funds.
Our series B and C redeemable convertible preferred stock is carried at its
redemption value which approximates fair value and it is not subject to interest
rate risk.
28
<PAGE> 33
BUSINESS
Pain Therapeutics, Inc. is developing a new generation of opioid
painkillers with improved clinical benefits. We use our technology to
reformulate existing opioid painkillers into new drugs, which we believe offer
enhanced pain relief, fewer adverse side effects and reduced tolerance and
addiction compared to existing opioid painkillers. If approved by the FDA, we
believe our proprietary drugs could replace many existing opioid painkillers
commonly used to treat moderate to severe pain. We believe our products will
encounter fewer clinical and regulatory hurdles than new chemical entities,
because they consist of drugs that, individually, are already FDA approved.
BACKGROUND
Clinical Pain
Clinical pain is any unpleasant sensation that occurs as a result of injury
or disease. Pain can have a protective role by warning of imminent or actual
tissue damage, which can help prevent additional injury. Pain can also trigger a
biological response that helps to preserve or regenerate damaged tissue. In this
respect, pain is usually a normal, predictable response to events such as
surgery, trauma and illness.
Types of Pain and Pain Relief
Drugs are often used to reduce or eliminate pain, especially when the pain
is severe. The type of drug used to relieve pain depends on both the severity
and the duration of the pain. Pain can be classified into three categories of
severity:
- Mild Pain. Almost everyone experiences mild pain, such as headaches or
joint pain, at one time or another. People typically treat mild pain with
over-the-counter drugs such as aspirin and acetaminophen.
- Moderate Pain. Pain resulting from minor surgery or arthritis are
examples of moderate pain. Physicians typically prescribe opioid
painkillers to treat moderate pain. Opioid painkillers come in three
varieties: weak opioids, strong opioids and synthetic opioids. Weak
opioids such as hydrocodone or codeine are generally used to treat
patients with moderate pain.
- Severe Pain. Patients experiencing severe pain often suffer from a
serious underlying illness, such as AIDS or cancer. Severe pain can also
result from major surgery, nerve damage or undetermined causes. Patients
experiencing severe pain often require a strong opioid, such as morphine
or fentanyl, to achieve adequate pain relief.
Pain can also be classified in terms of its duration as either acute or
chronic. Acute pain, such as pain resulting from knee surgery, is brief and
rarely results in long-term consequences. Most acute pain subsides within hours,
days or weeks. Chronic pain persists long after an injury has healed, and
typically results from a chronic illness or appears spontaneously and persists
for undefined reasons. Examples of chronic pain include chronic lower back pain,
and pain resulting from bone cancer or advanced arthritis. The effect of chronic
pain tends to be more pervasive than that of acute pain. Chronic pain often
affects a patient's mood, personality and social relationships. As a result, a
patient with chronic pain commonly suffers from both their state of physical
pain as well as a general decline in their quality of life.
29
<PAGE> 34
In general, the more severe or chronic the pain, the more likely an opioid
painkiller will be prescribed to treat the pain. The following diagram
illustrates the types of pain which physicians typically treat with opioid
painkillers:
[GRAPHIC]
Pain Management Market
The medical effort to treat pain, known as pain management, addresses a
large market. Clinical pain is a worldwide problem with serious health and
economic consequences. For example, in the United States:
- medical economists estimate that the effects of pain result in
approximately $100 billion of costs annually, including costs associated
with an estimated 515 million lost work days;
- according to the National Institutes of Health, approximately 40 million
Americans are unable to find relief from their pain;
- more than 30 million Americans suffer chronic pain for which they visit a
doctor;
- approximately one million cancer patients suffer from severe pain at any
given time; and
- an estimated 10% of the more than 200,000 AIDS patients suffer severe
pain.
Drugs are the key element in the treatment of pain. The worldwide market
for pain drugs totaled over $16 billion in 1997. In the United States and
Western Europe the corresponding market for pain drugs totaled nearly $12
billion. The pain management market has grown significantly in recent years and
is expected to continue to grow significantly. The pain market has grown by
approximately 15% per year during the past five years due to a number of
factors, including:
- a rapidly aging population;
- patients' demand for effective pain relief;
- increasing recognition of the therapeutic and economic benefits of
effective pain management by physicians and healthcare providers and
payers; and
30
<PAGE> 35
- longer survival times for patients with painful chronic conditions, such
as cancer and AIDS.
This accelerating growth rate appears to be attributable in part to recent
innovations in the treatment of mild pain. For example, in 1999, Monsanto, which
is now part of Pharmacia, and Merck, all of which are large pharmaceutical
companies, launched non-opioid prescription pain relievers approved for the
treatment of certain types of pain called COX-2 inhibitors. These drugs achieved
first-year sales exceeding $1.0 billion in the United States. COX-2 inhibitors
have fewer side effects than aspirin, and sell for more than twenty times its
cost. The success of COX-2 inhibitors demonstrates the potential for rapid
market acceptance and premium pricing of pain products with reduced side
effects.
There has been little innovation in the area of opioid painkillers. Sales
of opioid painkillers in the United States are primarily of older off-patent
pain drugs, such as morphine and oxycodone. Notwithstanding the lack of novel
drugs, U.S. opioid painkiller sales exceeded $2.4 billion in 1999.
Approximately 90% of U.S. patients who receive opioids are treated on an
outpatient basis. A portion of these patients receive care at one of the 3,400
specialty pain programs. The relatively low number of pain treatment centers
allows for focused distribution channels for pain management products. This
market structure permits midsize pharmaceutical companies to market and sell
pain products cost-effectively.
OPIOID DRUGS
The history of opium use dates back more than 3,000 years. Today, the use
of opioid drugs to treat patients with moderate to severe pain is widely
accepted throughout the world. Opioids are the drugs of preference for many
caregivers because they have an extensive clinical history, are easy to use and
are available in a variety of doses and formulations. In the United States,
Europe and Japan, physicians use a variety of strong, weak and synthetic opioids
to manage patients' pain.
OPIOID DRUG SEGMENTS
<TABLE>
<CAPTION>
MARKET SEGMENT TYPICAL USE EXAMPLES REPRESENTATIVE BRAND 1999 U.S. SALES
-------------- ----------- --------------- -------------------- ---------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Strong Opioids Cancer pain Morphine MS Contin and others $ 700
Weak Opioids Outpatient Hydrocodone and Vicodin and others
surgery oxycodone $1,300
Synthetic Opioids Back pain Tramadol Ultram $ 450
---------------
Total $2,450
===============
</TABLE>
Source: IMS Health, Retail & Provider Perspectives 1999
Patients experiencing acute pain require fast acting, short-lived opioids
and rapid delivery. The most common acute use of opioids is post-surgical pain.
Opioid drugs used to treat acute pain include intravenous morphine, hydrocodone
and oral oxycodone, which provide rapid pain relief.
In contrast, patients experiencing chronic severe pain often require
long-term, regular use of opioid drugs. Because rapid dose adjustments are not
necessary, patients experiencing chronic pain typically use opioid drugs in
sustained release formulations. Such formulations include fentanyl patches and
sustained release morphine. Although curing chronic pain is
31
<PAGE> 36
possible, it is infrequent. The aim of using opioid drugs for patients with
chronic pain is to decrease pain and suffering while improving overall physical
and mental functions.
SHORTCOMINGS OF CURRENT PAIN MANAGEMENT
Despite widespread clinical use of opioids, pain management remains less
than optimal. At all doses, opioid painkillers have significant adverse side
effects that limit their usefulness. Adverse side effects include: respiratory
depression, nausea, vomiting, dizziness, sedation, mental clouding,
constipation, urinary retention and severe itching. In addition, chronic use of
opioid painkillers can lead to the need for increasing dosage, and potentially,
addiction. Concerns about addiction often influence clinicians to prescribe less
than adequate doses of opioids. Many patients dislike the adverse side effects
of opioid treatment and voluntarily take less than the prescribed dosage. In all
cases, however, patients and clinicians must reach an appropriate balance
between pain relief and adverse side effects. In addition, patients often use a
process of trial and error with different opioids to identify an opioid that
yields the optimal balance between pain relief and adverse side effects. Some
patients may even prefer to endure pain rather than to withstand the side
effects of opioid therapy. As a result, many patients are seriously under-
treated and may be suffering from pain unnecessarily. In particular, infants and
children receive disproportionately fewer and lower doses of opioid painkillers
than adults.
Historically, there has been little innovation in the opioid painkillers
used to treat moderate to severe pain. To date, product innovations have focused
on increasing convenience, rather than improving clinical benefits. For example,
novel dosing or delivery systems make it more convenient for patients to use
opioid drugs, but neither enhance pain relief or reduce adverse side effects.
OUR SOLUTION
We are developing a new generation of drugs that address the shortcomings
of existing opioid painkillers. We believe our drugs will:
- enhance pain relief;
- minimize adverse side effects; and
- reduce tolerance and addiction.
If approved by the FDA, we believe our drugs could replace many commonly
used opioid painkillers. We also believe our drugs could be used in chronic pain
cases where physicians have been reluctant to prescribe opioid painkillers due
to concerns about adverse side effects or addiction.
We have clinical results from four completed Phase II trials involving 750
patients, including two company-sponsored trials and two independent clinical
trials. We believe the results of these clinical trials demonstrate that our
product candidates offer superior pain relief as compared to equivalent dose
levels of an opioid painkiller alone.
Our product candidates use a novel technology developed at Albert Einstein
College of Medicine. Our technology combines very low doses of opioid inhibitors
with standard opioid painkillers. We believe that the addition of a low dose of
an opioid antagonist to opioid painkillers has an unexpected and beneficial
effect. We believe that this effect includes enhancing potency, minimizing
adverse side effects and attenuating tolerance and addiction.
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Our technology has the added advantage of combining components which the
FDA has individually approved for human use. We believe that we may encounter
fewer clinical and regulatory hurdles than if we were developing new chemical
entities because the safety and therapeutic profiles of these individual
components are well-established.
STRATEGY
Our goal is to build a leading specialty pharmaceutical company in pain
management. We intend to achieve this goal by:
Developing Products with Reduced Clinical and Regulatory Hurdles. We intend
to develop drugs that we believe may have lower clinical and regulatory risks
compared to the development of new chemical entities. Our technology combines
separate drugs, each independently approved by the FDA, whose safety and
pharmacology are well established. We believe this approach will enable us to
commercialize our drugs rapidly and cost effectively.
Focusing on Clinical Development and Late Stage Products. We continue to
focus on managing clinical trials. All four of our current product candidates
are in Phase II clinical trials. The conduct of human trials is a complex,
highly regulated and highly specialized effort. We believe that our clinical
development focus will enable us to generate product revenues earlier than if we
were discovering new chemical entities.
Retaining Significant Rights. We currently retain worldwide
commercialization rights to all of our technology and pain management product
candidates in all markets and indications. In general, we intend to
independently develop our product candidates through late-stage clinical trials.
As a result, we expect to capture a greater percentage of the profits from drug
sales than we would if we outlicensed our drugs earlier in the development
process. In market segments that require large or specialized sales forces, such
as the market for morphine products, we may seek sales and marketing alliances
with third parties. We believe that such alliances will enable us to
commercialize our drugs rapidly and cost-effectively.
Using Our Technology to Develop Multiple Drugs for Both Pain and Non-Pain
Indications. We are initially focusing our efforts on developing four opioid
painkillers. However, we believe our technology can be broadly applied to
additional segments of the pain market, as well as non-pain indications.
Outsourcing Key Functions. We intend to continue to outsource preclinical
studies, clinical trials, formulation and manufacturing. We believe outsourcing
will produce significant time savings and allow for more efficient deployment of
our resources.
PRODUCTS IN DEVELOPMENT
We have four painkillers in Phase II clinical trials. Each painkiller is a
proprietary combination of opioids. The first component is an opioid agonist,
such as morphine. The second component is an opioid antagonist, such as
naltrexone or naloxone. Normally, adding an antagonist to an agonist blocks the
action of the agonist. This effect is clinically useful, for example, to reverse
heroin overdose. At a very low-dose, however, studies indicate that this effect
is reversed: a very low-dose of an opioid antagonist can enhance pain relief,
reduce adverse side-effects and attenuate the development of tolerance and
addiction. Our technology takes advantage of this effect by combining opioid
agonists with low doses of opioid antagonists. The two individual components of
our combination drugs have the advantage of having been previously approved by
the FDA for human use at high
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<PAGE> 38
dose. However, the use of both components in combination, or the use of low-dose
opioid antagonist alone, has not been approved by the FDA.
Our trials are designed to produce clinical information about how our
painkillers perform compared to placebo and existing opioid painkillers. We plan
to test each of our painkillers in several clinical models of pain in order to
support a broad approval by the FDA for use of the drug for the relief of
moderate to severe acute and chronic pain. FDA guidelines recommend that we
demonstrate efficacy of our new painkillers in more than one clinical model of
pain, typically including dental pain. Other acceptable clinical models of pain
include post-operative pain, cancer pain and various types of trauma and
arthritis pain. Because clinical models differ in their sensitivity to detect
pain, we expect to complete Phase II studies in multiple clinical models of
pain. We have designed all of our clinical trials to date as randomized,
double-blind, placebo-controlled, dose-ranging studies. A randomized study is
one in which patients are randomly assigned to the various study arms. A
double-blind study is one in which the patient, the physician and the company's
monitor are unaware if the patient is receiving placebo or study drug in order
to preserve the integrity of the trial. A placebo-controlled study is one in
which a subset of patients is purposefully not given study drug. Our initial
clinical goals are to obtain regulatory approval of the following four
combination opioid painkillers:
<TABLE>
<CAPTION>
PRODUCT STAGE OF DEVELOPMENT FORMULATION
- ------- -------------------- -----------
<S> <C> <C>
PTI-555 Phase II Oral morphine/low-dose naltrexone
PTI-501 Phase II Injectable morphine/low-dose naloxone
PTI-601 Phase II Tramadol/low-dose naltrexone
PTI-701 Phase II Hydrocodone-acetaminophen/low-dose naltrexone
</TABLE>
PTI-555: oral morphine
PTI-555 is our proprietary substitute for oral morphine. We are developing
this combination drug to treat moderate to severe pain in an acute or chronic
setting. PTI-555 is a combination of oral morphine and low-dose naltrexone. If
the FDA approves PTI-555, we believe it could be an effective substitute for
oral morphine. The principal use of oral morphine is the treatment of patients
suffering from chronic moderate to severe pain, such as cancer pain.
Clinical Results
In August 1999, we initiated a 200 patient Phase II clinical trial of
PTI-555. This trial compared three different doses of PTI-555 with placebo and
with oral morphine. Each dose of PTI-555 consisted of a fixed dose of morphine
with a different low dose of naltrexone. The trial enrolled patients
experiencing moderate to severe pain following dental surgery, in which two or
more teeth were extracted. We completed patient enrollment on schedule in
November 1999.
In December 1999 we completed the analysis of this Phase II clinical study.
In this trial we demonstrated the following results:
- PTI-555 is safe in humans;
- three different doses of PTI-555 clearly provide patients with three
different levels of pain relief;
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<PAGE> 39
- an optimal dose of PTI-555 provides patients with meaningful pain relief
compared to placebo; this result is statistically significant at the
level of pl0.001, which means the likelihood that this result could have
occurred by chance is less than 1 in 1,000; and
- an optimal dose of PTI-555 provides patients with 50% more pain relief
than morphine alone in the first four hours of the study period; this
result is statistically significant at the level of p=0.058, which means
the likelihood that this result could have occurred by chance is less
than 1 in 17.
Based on these encouraging results, in January 2000 we initiated a new
Phase II clinical trial with PTI-555. This trial is designed to confirm the
safety, the efficacy and the optimal dose of PTI-555 in 300 patients suffering
from moderate to severe pain following dental surgery. We expect to complete
patient enrollment for this Phase II clinical trial by the third quarter of
2000.
PTI-501: injectable morphine
PTI-501 is our proprietary substitute for injectable morphine. We are
developing this combination drug to treat moderate to severe pain in an acute or
chronic setting. PTI-501 consists of a pre-mixed combination of injectable
morphine and low-dose naloxone. If the FDA approves PTI-501, we believe it could
be an effective substitute for injectable morphine. The principal use of
injectable morphine is the treatment of patients with acute severe pain, such as
trauma pain.
Clinical Results
Our clinical data on PTI-501 includes a company-sponsored Phase II clinical
trial, as well as an independent clinical trial. The company-sponsored Phase II
clinical trial enrolled 120 patients suffering from moderate to severe
post-surgical pain. We completed patient enrollment for this clinical trial in
December 1999, and we expect to receive final clinical results by the third
quarter of 2000.
In 1997, independent researchers at Duke University Medical Center
conducted a physician-sponsored, randomized, double-blind, placebo-controlled,
dose-ranging clinical trial of 60 patients suffering from post-surgical pain.
Published results of this trial indicated an approximate 50% reduction in
certain morphine-related adverse side effects in patients who received an
optimal dose of study drug compared to patients who received morphine without
low-dose naloxone. This result is statistically significant at the level of
p<0.05, which means the likelihood that this result could have occurred by
chance is less than 1 in 20.
PTI-601: tramadol
PTI-601 is our proprietary substitute for tramadol. In 1999, U.S. sales of
tramadol exceeded $450 million. We are developing this combination drug to treat
patients with moderate pain in an acute or chronic setting. PTI-601 is a
combination of tramadol and low-dose naltrexone. If the FDA approves PTI-601, we
believe it could be an effective substitute for tramadol. Tramadol is
principally used to treat patients with acute or chronic moderate pain, such as
arthritis pain. Ortho-McNeil Pharmaceutical currently markets proprietary
tramadol hydrochloride tablets under the brand name Ultram. The relevant patents
for Ultram expire in 2001.
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<PAGE> 40
Clinical Results
In August 1999, we initiated a 250 patient Phase II trial of PTI-601. This
trial compared three different doses of PTI-601 with placebo and with tramadol.
Each dose of PTI-601 consisted of a fixed dose of tramadol combined with a
different low dose of naltrexone. The trial enrolled patients suffering from
moderate to severe pain following dental surgery, in which three or more teeth
were extracted. We completed patient enrollment on schedule in December 1999.
In January 2000 we completed the analysis of this Phase II clinical study.
In this trial we demonstrated the following results:
- PTI-601 is safe in humans;
- different doses of PTI-601 clearly provide patients with different levels
of pain relief; and
- an optimal dose of PTI-601 provides patients with meaningful pain relief
compared to placebo; this result is statistically significant at the
level of p<0.008, which means the likelihood that this result could have
occurred by chance is less than 1 in 125. By contrast patients who
received tramadol alone did not achieve statistically meaningful pain
relief compared to placebo.
PTI-701: hydrocodone
PTI-701 is our proprietary substitute for hydrocodone, oxycodone and
similar weak opioids. In 1999, U.S. sales of such drugs exceeded $1.3 billion.
We are developing PTI-701 to treat moderate to severe pain in an acute or
chronic setting. PTI-701 is a combination of hydrocodone, acetaminophen and
low-dose naltrexone. If the FDA approves PTI-701, we believe it could be an
effective substitute for hydrocodone/ acetaminophen. In the United States, all
hydrocodone is sold in combination with acetaminophen. The principal use of
hydrocodone is the treatment of patients with chronic moderate to severe pain,
such as cancer pain. Hydrocodone combination products are currently sold under
various trade names, including Knoll Laboratories' Vicodin, Forest
Pharmaceuticals' Lorcet and Watson Laboratories' Norco.
In January 2000, we initiated a Phase II clinical trial with PTI-701. This
trial is designed to demonstrate the safety, the efficacy and the optimal dose
of PTI-701 in 300 patients suffering from moderate to severe pain following
dental surgery. We expect to complete patient enrollment for this trial by the
third quarter of 2000.
Other Product Candidates
We believe the use of low-dose opioid antagonists, either alone or in
combination with existing opioid drugs, may have commercial applications beyond
our four current product candidates. We believe that our technology can be
broadly applied to additional segments of the pain market, as well as non-pain
indications. Examples include certain drugs used in anesthesiology and those
used to treat opioid and alcohol addiction. Until we undertake preclinical
studies and clinical trials, we cannot be certain that our technology will have
such additional applications.
We anticipate initiating several Phase I/II pilot studies in an effort to
assess the clinical utility of our proprietary low-dose antagonist technology
within and outside the field of pain management. In particular, in 2000, we may
explore the use of our technology
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in patients undergoing methadone maintenance treatment and in patients suffering
from irritable bowel syndrome.
MANUFACTURING
We have no manufacturing facilities. We have entered into an agreement with
a qualified third party for the formulation and manufacture of our clinical
supplies. These supplies and the manufacturing facilities must comply with DEA
regulations and current good manufacturing practices, or GMPs, reviewed by the
FDA. We plan to continue to outsource formulation and manufacturing.
TECHNOLOGY OVERVIEW
According to the current understanding of pain mediation, opioid
painkillers produce their pain relieving effect by activating an inhibitory
pathway in the nervous system. Inhibitory pathways inhibit the transmission of
pain signals into the brain. Scientists at Albert Einstein College of Medicine
have published results suggesting that opioids also stimulate an excitatory
pathway in the nervous system. The excitatory pathway partially counteracts pain
inhibition and is believed to be a major cause of adverse side effects
associated with opioid use, including the development of tolerance and
addiction. In vitro studies on isolated nerve cells have helped researchers
detect and analyze the unique properties of the inhibitory and excitatory
pathways. At the normal clinical doses, the activation of the excitatory pathway
was previously undetected probably due to masking by the inhibitory pathway.
Published results suggest that the selective blockade of the excitatory
pathway promotes the pain relieving potency of morphine in mice by blocking the
excitatory pain-enhancing effect. In addition, preclinical studies have
demonstrated that co-treatment with a very low dose of an opioid antagonist,
such as naloxone or naltrexone, preferentially blocks the excitatory pathway
over the inhibitory pathway, thereby enhancing morphine's ability to inhibit
pain.
We believe that the excitatory pathway plays an important role in
modulating the adverse side effects of opioid use. After repeated administration
of morphine or other opioid painkillers, increasing doses of opioids are
required in order to obtain the same level of pain relief, a process known as
tolerance. If chronic opioid treatment is terminated abruptly, withdrawal
symptoms rapidly appear. Continued administration of opioids prevents the
appearance of withdrawal symptoms, at which point a patient is considered
dependent, and, potentially addicted. Published results also show that tolerance
and dependence in mice are due to sustained activation of the excitatory
pathway, and that tolerance and dependence can be prevented by co-administration
of low-dose naltrexone, a pure opioid antagonist. At very low concentrations, we
believe such opioid antagonists preferentially block excitatory pathways. These
results provided the rationale for our human clinical trials.
The low-dose effect is the most important component of our technology
wherein a very low dose of an opioid antagonist is combined with an opioid
painkiller. Optimal dose ratios of low-dose opioid antagonist to opioid
painkiller depend on their specific pharmacology and the mode of administration.
Published preclinical and clinical dose response studies provide guidance in
formulating optimal ratios of low-dose opioid antagonist to opioid painkiller
for clinical development.
Upon our formation in May 1998, we licensed our technology from Albert
Einstein College of Medicine. We have worldwide exclusive rights to the
technology. Our rights
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<PAGE> 42
terminate upon the expiration of the patents used to protect the technology
between 2013 and 2015. Pursuant to the terms of the license, we paid Albert
Einstein College of Medicine a one time licensing fee and are required to pay
clinical milestone payments and royalties based on a percentage of net drug
sales. If a product is combined with a drug or other substance for which we are
paying an additional royalty, the royalty that we pay to Albert Einstein College
of Medicine will be reduced by one-half of the amount of such additional
royalty.
We seek to protect our technology by, among other methods, filing and
prosecuting U.S. and foreign patents and patent applications with respect to our
technology and products and their uses. The issued patents expire between 2013
and 2015. We plan to prosecute and defend our patent applications, issued
patents and proprietary information. We have an exclusive, worldwide license for
five issued U.S. patents, one U.S. Notice of Allowance and two pending U.S.
patent applications relating to the low-dose opioid antagonist technology under
our license agreement with Albert Einstein College of Medicine, and ten
corresponding pending foreign patent applications or issued patents.
The focus of our patent strategy is to secure and maintain intellectual
property rights to technology for the following categories of our business:
- the clinical use of a low-dose opioid antagonist, either alone or in
combination with an opioid painkiller, for pain management and opioid and
other addiction;
- the use of a low-dose opioid antagonist to render opioid-based anesthesia
products, such as fentanyl or fentanyl analogs, more effective; and
- the clinical use of a low-dose opioid antagonist, either alone or in
combination with any opioid painkiller, for the treatment of other
conditions.
GOVERNMENT REGULATION
Our product candidates will be subject to rigorous FDA regulation. The
process of completing clinical trials and obtaining FDA approvals for any of our
product candidates is likely to take a number of years and require the
expenditure of substantial resources. We cannot be certain that any of our
product candidates will receive FDA approval on a timely basis, if at all.
Regulation of Combination Products
Applicable FDA regulations treat our combination of opioid painkillers,
such as morphine, and low-dose opioid antagonists, such as naloxone, as new
drugs and require the filing of a NDA and approval by the FDA prior to
commercialization in the U.S. Our clinical trials seek to demonstrate that an
opioid painkiller/low-dose opioid antagonist combination produces greater
beneficial effects than either drug alone. Because each drug has been separately
approved for human use by the FDA, we believe that we may encounter fewer
regulatory hurdles than if we were developing new chemical entities.
The Drug Approval Process
We will be required to take several steps before we can market any of our
drugs for human use in the United States, including:
- preclinical studies;
- submission to the FDA of an IND which must become effective before human
clinical trials commence;
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<PAGE> 43
- adequate and well-controlled human clinical trials to establish the
safety and efficacy of the product candidate;
- submission to the FDA of a NDA; and
- FDA approval of the NDA prior to any commercial sale or shipment of the
drug.
Preclinical studies consist of conducting animal studies to assess the
potential safety and efficacy of the product candidate. We must submit the
results of the preclinical studies to the FDA as a part of an IND for review by
the FDA prior to the commencement of human clinical trials. Unless the FDA
objects to, or otherwise responds to, an IND, the IND becomes effective 30 days
following its receipt by the FDA.
We will continue to conduct human clinical trials in several phases that
may overlap:
- Phase I: We initially introduce the product candidate into healthy human
subjects or patients and test for safety, dosage tolerance, absorption,
metabolism, distribution and excretion. In addition, we may, to the
extent feasible, assess pain relief in our Phase I trials.
- Phase II: Involves studies in a limited patient population to identify
possible adverse effects and safety risks, to determine the efficacy of
the product candidate and to determine optimal dosage.
- Phase III: Once Phase II evaluations demonstrate that a dosage range of
the product candidate is effective and has an acceptable safety profile,
we can undertake Phase III trials to evaluate dosage and clinical
efficacy further, and to test for safety in an expanded patient
population at geographically dispersed clinical study sites.
The FDA publishes industry guidelines specifically for the clinical
evaluation of painkillers. We rely in part on these guidelines to design a
clinical strategy for the approval of each of our product candidates. In
particular, FDA guidelines recommend that we demonstrate efficacy of our new
painkillers in more than one clinical model of pain, typically including dental
pain. Other acceptable clinical models of pain include post-operative pain,
cancer pain and various types of trauma and arthritis pain. Since models differ
in their pain intensity and their sensitivity to detect pain, we expect to
complete several Phase II studies in multiple clinical models of pain. Upon a
clear demonstration of the safety and efficacy of painkillers in multiple
clinical models of pain, the FDA has historically approved pain killers with
broad indications. Such general purpose labeling often takes the form of "for
the management of moderate to severe pain."
Phase II efficacy studies have sometimes served as pivotal studies for
painkiller product candidates. Phase III studies for these products normally
focus greater attention on safety in larger patient populations rather than on
efficacy. We cannot be certain that we will successfully complete Phase I, Phase
II or Phase III testing within any specified time period, or at all, with
respect to any of our product candidates. Furthermore, the FDA may suspend
clinical trials at any time in response to concerns that we are exposing
participants to an unacceptable health risk.
We must submit the results of pharmaceutical development, preclinical
studies, and clinical trials to the FDA in the form of a NDA for approval of the
marketing and commercial shipment of the subject drug. The FDA may require
additional testing or information before approving the NDA. The FDA may deny a
NDA approval if we fail to satisfy safety, efficacy, or other regulatory
requirements. Even if the FDA approves the drug, it may require post-marketing
testing and surveillance to monitor the safety of the drug or may impose
limitations on the indicated uses for which we may market the drug.
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In addition, the FDA may withdraw its approval if we fail to maintain compliance
with regulatory standards or if problems occur following our initial marketing
of the drug.
Other Regulatory Requirements
The FDA mandates that drugs be manufactured in conformity with good
manufacturing practices regulations. If the FDA approves any of our product
candidates we will be subject to requirements for labeling, advertising, record
keeping and adverse experience reporting. Failure to comply with these
requirements could result, among other things, in suspension of regulatory
approval, recalls, injunctions or civil or criminal sanctions. We may also be
subject to regulations under other federal, state, and local laws, including the
Occupational Safety and Health Act, the Environmental Protection Act, the Clean
Air Act, national restrictions on technology transfer, and import, export, and
customs regulations. In addition, any of our products that contain narcotics
will be subject to DEA regulations relating to manufacturing, storage,
distribution and physician prescribing procedures. It is possible that any
portion of the regulatory framework under which we operate may change and that
such change could have a material adverse effect on our current and anticipated
operations.
Whether or not the FDA grants approval, we must obtain similar approvals by
comparable governmental regulatory authorities in foreign countries prior to the
commencement of clinical trials and subsequent sales and marketing efforts in
those countries. The approval procedure varies in complexity from country to
country, and the time required may be longer or shorter than that required for
FDA approval.
The Controlled Substances Act imposes various registration, record-keeping
and reporting requirements, procurement and manufacturing quotas, labeling and
packaging requirements, security controls and a restriction on prescription
refills on certain pharmaceutical products. A principal factor in determining
the particular requirements, if any, applicable to a product is its actual or
potential abuse profile. The DEA regulates chemical compounds as Schedule I, II,
III, IV or V substances, with Schedule I substances considered to present the
highest risk of substance abuse and Schedule V substances the lowest risk. Any
of our product candidates that contains a scheduled substance will be subject to
regulation as a drug of that class.
COMPETITION
Our success will depend, in part, upon our ability to achieve market share
at the expense of existing and established and future products in the relevant
target markets. Existing and future products, therapies, technological
approaches or delivery systems will compete directly with our products.
Competing products may provide greater therapeutic benefits for a specific
indication, or may offer comparable performance at a lower cost. Companies that
currently sell generic or proprietary opioid formulations include Roxane
Laboratories, Purdue Pharma, Janssen Pharmaceutica, Knoll Laboratories, Abbott
Laboratories, Anesta, Endo Pharmaceuticals, Elkins-Sinn, Watson Laboratories,
Alza Pharmaceuticals, Ortho-McNeil Pharmaceutical, Forest Pharmaceuticals and
Astra Pharmaceutical. Alternative technologies are being developed to increase
opioid potency, as well as alternatives to opioid therapy for pain management,
several of which are in clinical trials or are awaiting approval from the FDA.
Such alternatives include Elan's SNX-111 and Endo Pharmaceuticals' Morphidex.
We compete with fully integrated pharmaceutical companies, smaller
companies that are collaborating with larger pharmaceutical companies, academic
institutions, government
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agencies and other public and private research organizations. Many of these
competitors have opioid painkiller products already approved by the FDA or in
development and operate larger research and development programs in these fields
than we do. In addition, many of these competitors, either alone or together
with their collaborative partners, have substantially greater financial
resources than we do, as well as significantly greater experience in:
- developing drugs;
- undertaking preclinical testing and human clinical trials;
- obtaining FDA and other regulatory approvals of drugs;
- formulating and manufacturing drugs; and
- launching, marketing, distributing and selling drugs.
Developments by competitors may render our product candidates or
technologies obsolete or non-competitive.
EMPLOYEES
As of March 31, 2000, we had approximately 18 employees and seven executive
consultants, including five M.D./Ph.D.s, one M.D./D.D.S. and one Ph.D. We engage
additional consultants from time to time to perform services on a per diem or
hourly basis.
FACILITIES
Our executive office is located at 250 East Grand Avenue, Suite 70, South
San Francisco, California 94080. Our leased property consists of approximately
3,250 square feet of office space. We believe that our facilities are sufficient
to meet anticipated staffing up to the expiration of our lease in September
2000. We are searching for additional space to meet our future requirements as
we implement internal systems and infrastructure and hire additional personnel.
LEGAL PROCEEDINGS
We are not a party to any legal proceedings.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table presents information about our executive officers, key
employees and directors. Upon completion of this offering our board of directors
will be divided into three classes serving staggered three-year terms.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Remi Barbier......................... 40 President, Chief Executive Officer and
Chairman of the Board
Barry M. Sherman, M.D. .............. 58 Executive Vice President and Chief
Medical Officer
Edmon R. Jennings.................... 53 Chief Commercialization Officer
David L. Johnson..................... 46 Chief Financial Officer
Gert Caspritz, Ph.D.(1).............. 50 Director
Nadav Friedmann, M.D., Ph.D.(2)...... 57 Director
Wilfred R. Konneker, Ph.D.(1)........ 78 Director
Michael J. O'Donnell, Esq............ 41 Director and Secretary
Sanford R. Robertson(1)(2)........... 68 Director
</TABLE>
- -------------------------
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
Remi Barbier, our founder, has served as our President, Chief Executive
Officer and Chairman since our inception in May 1998. Prior to that time, Mr.
Barbier helped in the growth or founding of: Exelixis Inc., a functional
genomics company, ArQule, a chemistry company, and EnzyMed (now owned by Albany
Molecular Research), a chemistry company. Mr. Barbier served as Chief Operating
Officer of Exelixis from January 1996 to May 1998. Prior to that, he was Vice
President of Corporate Development and Clinical Project Manager of Xoma
Corporation, a biotechnology company, from October 1993 to December 1995. Mr.
Barbier received his B.A. from Oberlin College and his M.B.A. from the
University of Chicago. He is a Director of Mendel Biotechnology, Inc.
Barry M. Sherman, M.D. has served as our Executive Vice President and Chief
Medical Officer since April 1999. From April 1996 to February 1999, Dr. Sherman
was President and Chief Executive Officer of Anergen Inc., an immunology
biotechnology company. From 1985 until 1996, Dr. Sherman held various positions
at Genentech Inc., a biotechnology company, most recently serving as Senior Vice
President and Chief Medical Officer with responsibility for Genentech's overall
clinical development activities. Since 1986, Dr. Sherman has also been a
Clinical Professor of Internal Medicine at Stanford University. From 1971 to
1985, Dr. Sherman was a Professor of Internal Medicine and Director of the
Clinical Research Center at the University of Iowa College of Medicine. Dr.
Sherman received his M.D., with honors, from the University of Michigan.
Edmon R. Jennings joined Pain Therapeutics, Inc. in February 2000. Prior to
that time, Mr. Jennings held senior management positions at Genentech, including
Vice President of Corporate Development from December 1995 to January 2000, Vice
President of Sales and Marketing from January 1994 to December 1995 and Vice
President of Sales from December 1990 to December 1993. Prior to Genentech, Mr.
Jennings held positions with Bristol-Myers Oncology and Bristol Laboratories,
both of which were divisions of Bristol-Myers (now Bristol-Myers Squibb), a
pharmaceutical company, for approximately twelve years. Mr. Jennings received
his B.A. from the University of Michigan.
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David L. Johnson, CPA joined Pain Therapeutics, Inc. in January 2000. From
November 1998 to December 1999, Mr. Johnson was an independent financial
consultant, and acted as Chief Financial Officer at Aradigm, a drug delivery
technology company. From October 1997 to November 1998, Mr. Johnson held
positions as Vice President of Finance and Administration of Elan
Pharmaceuticals North America and Vice President of Finance and Chief Financial
Officer of Athena Neurosciences, both of which were divisions of Elan
Pharmaceuticals, a pharmaceutical company. From September 1996 to October 1997,
Mr. Johnson was Director of Finance at Gilead Sciences, a biopharmaceutical
company. From January 1995 to September 1996, Mr. Johnson was an independent
financial consultant and provided accounting services to Chiron, a biotechnology
company. From June 1993 to December 1994, Mr. Johnson was Director of Financial
Planning and Operational Analysis at Chiron. Mr. Johnson is a former member of
the audit staff of KPMG LLP, our auditors. Mr. Johnson received his B.S. in
Accounting from Oklahoma State University.
Gert Caspritz, Ph.D. has served as a director since November 1999. Dr.
Caspritz has been the Investment Manager of TVM-Techno Venture Management, an
international venture capital firm based in Germany, since June 1999. Prior to
joining TVM he was employed by Hoechst Marion Roussel, a pharmaceutical company,
for over 15 years, most recently as Vice President of New Technologies
Licensing. During his tenure at Hoechst Marion Roussel he was a member of
various strategy task forces, including the group that negotiated many of
Hoechst Marion Roussel's biotechnology collaborations. Dr. Caspritz serves on
the board of Coley Pharmaceutical Group, PhytoMedica and Epicept. Dr. Caspritz
received his undergraduate degree and his Ph.D. in Biology from the University
of Mainz, Germany.
Nadav Friedmann, M.D., Ph.D. has served as a director since September 1998.
Dr. Friedmann was President and Chief Executive Officer of Daiichi
Pharmaceutical Corporation, a pharmaceutical company, from 1997 to April 2000
and before that was a Consultant to the Board of Daiichi Pharmaceutical Co.,
Ltd. in Tokyo from 1995 to 1997. From 1992 to 1995, Dr. Friedmann served as Vice
President, Clinical Research at Xoma Corporation. From 1980 to 1991, Dr.
Friedmann held various leadership positions, with Johnson & Johnson, a
healthcare company, including Vice President and Head of Research of J&J
Biotechnology Center. Prior to that, Dr. Friedmann was Medical Director of
Abbott Laboratories. Dr. Friedmann is a graduate of Albert Einstein College of
Medicine, where he received an M.D., and of the University of California, San
Diego, where he received a Ph.D. degree in Biochemistry.
Wilfred Konneker, Ph.D. has served as a director since November 1999. Dr.
Konneker has been a private investor since retiring as Vice President of the
radio pharmaceuticals division of Mallinckrodt, Inc., a healthcare company, in
1973. He served as a director of Mallinckrodt from 1966 to 1975. Dr. Konneker
founded Nuclear Consultants, Inc., the first supplier of radio-isotopes to the
pharmaceutical industry, in 1950, and served as its President and Chief
Executive Officer until its merger with Mallinckrodt, Inc. in 1966. Dr. Konneker
sits on the Board of Trustees for Washington University and the Board of
Directors for Ohio University Foundation, the St. Louis Symphony, the Opera
Theatre of St. Louis and the Chautauqua Foundation. Dr. Konneker received his
Ph.D. in Nuclear Physics from Washington University and an undergraduate degree
from Ohio University.
Michael J. O'Donnell, Esq. has served as a director since June 1998. Mr.
O'Donnell has been a member of the law firm of Wilson Sonsini Goodrich & Rosati,
Professional Corporation, our corporate counsel, since 1993. Mr. O'Donnell
serves as corporate counsel to numerous public and private biopharmaceutical and
life science companies.
43
<PAGE> 48
Mr. O'Donnell received a J.D. degree, cum laude, from Harvard University and a
B.A. degree from Bucknell University, summa cum laude.
Sanford R. Robertson has served as a director since September 1998. Mr.
Robertson has been a general partner of Francisco Partners, a technology
investment fund since January 2000. From October 1998 to December 1999 he was
President of Robertson and Co. Mr. Robertson is the founder and former chairman
of Robertson, Stephens & Company, an investment banking firm founded in October
1978, with which Mr. Robertson was associated through September 1998. Mr.
Robertson is also the founder of Robertson, Colman, Siebel & Weisel, later
renamed Montgomery Securities. He is also a former director of AIM Management
Group Inc. (now AMVESCAP) and BankAmerica Corporation. Mr. Robertson received
his B.B.A. and M.B.A. degrees with distinction from the University of Michigan.
He is also a director of Big Vine.com, Inc.
BOARD OF DIRECTORS
Our board of directors currently consists of six members. Each director
holds office until his or her term expires or until his or her successor is duly
elected and qualified. Upon completion of this offering, our amended and
restated certificate of incorporation and bylaws will provide for a classified
board of directors. In accordance with the terms of our certificate, our board
of directors will be divided into three classes whose terms will expire at
different times. The three classes will be comprised of the following directors:
- Class I consists of directors O'Donnell and Konneker, who will serve
until the annual meeting of stockholders to be held in 2001;
- Class II consists of directors Caspritz and Friedmann, who will serve
until the annual meeting of stockholders to be held in 2002; and
- Class III consists of directors Barbier and Robertson, who will serve
until the annual meeting of stockholders to be held in 2003.
At each annual meeting of stockholders beginning with the 2001 annual
meeting, the successors to directors whose terms will then expire will be
elected to serve from the time of election and qualification until the third
annual meeting following election and until their successors have been duly
elected and qualified. Any additional directorships resulting from an increase
in the number of directors will be distributed among the three classes so that,
as nearly as possible, each class will consist of an equal number of directors.
Committees
Our board of directors has an executive committee, an audit committee and a
compensation committee. The executive committee consists of directors Remi
Barbier, Sanford Robertson and Nadav Friedmann. The audit committee consists of
directors Gert Caspritz, Wilfred Konneker and Sanford Robertson. The audit
committee reviews our internal accounting procedures, consults with and reviews
the services provided by our independent accountants and makes recommendations
to the board of directors regarding the selection of independent accountants.
The compensation committee consists of directors Sanford Robertson and Nadav
Friedmann. The compensation committee reviews and recommends to the board of
directors the salaries, incentive compensation and benefits of our executive
officers and administers our stock plans and employee benefit plans.
44
<PAGE> 49
Compensation Committee Interlocks and Insider Participation
Our board of directors established the compensation committee in September
1999. Prior to establishing the compensation committee, our board of directors
as a whole performed the functions delegated to the compensation committee. No
member of our compensation committee has served as a member of the board of
directors or compensation committee of any entity that has one or more executive
officers serving as a member of our board of directors or compensation
committee. Since the formation of the compensation committee, none of its
members has been an officer or employee.
Director Compensation
In March 2000, our board of directors approved guidelines for the grant of
stock options under our 1998 Stock Plan, as amended, to directors who are not
our officers or employees. These guidelines provide that such directors will
receive 20,000 shares vesting annually over four years which are to be granted
on the date of each annual stockholder meeting following the closing of this
offering at the fair market value of our common stock on the date of grant.
SCIENTIFIC AND MEDICAL ADVISORS
We have established a scientific and medical advisory board to provide
specific expertise in areas of research and development relevant to our
business. Our scientific and medical advisory board meets periodically with our
scientific and development personnel and management to discuss current and
long-term research and development activities and initiatives. Our scientific
and medical advisory board is comprised of:
<TABLE>
<S> <C>
Leslie Z. Benet, Ph.D. ................... Professor of Biopharmaceutical
Sciences, University of California,
San Francisco
Stanley Crain, Ph.D. ..................... Professor of Neurosciences,
Emeritus, Albert Einstein College of
Medicine
Nadav Friedmann, M.D., Ph.D. ............. President & Chief Executive Officer,
Daiichi Pharmaceuticals Corp.
Scott R. Hamann, M.D., Ph.D. ............. Department of Anesthesiology,
University of Kentucky College of
Medicine
Don R. Mehlisch, M.D., D.D.S. ............ Independent Consultant, Co-founder,
Scirex Corporation
Fredrick L. Minn, M.D., Ph.D. ............ Independent Consultant, formerly at
Johnson & Johnson/Ortho-McNeil
Pharmaceutical
Robert B. Raffa, Ph.D. ................... Associate Professor of Pharmacology,
Temple University
Patrick Scannon, M.D., Ph.D. ............. Chief Medical and Scientific
Officer, Xoma Corporation
Ke-Fei Shen, M.D., Ph.D. ................. Principal Associate, Albert Einstein
College of Medicine
Barry M. Sherman, M.D. ................... Executive Vice President & Chief
Medical Officer, Pain Therapeutics,
Inc.
Eric J. Simon, Ph.D. ..................... Professor of Psychiatry and
Pharmacology, New York University
School of Medicine
Frank Porreca, Ph.D. ..................... Professor of Pharmacology and
Anesthesiology, University of
Arizona College of Medicine
</TABLE>
45
<PAGE> 50
EXECUTIVE OFFICERS
Our executive officers are appointed by our board of directors and serve
until their successors are elected or appointed.
Compensation
The following table sets forth all compensation accrued during the year
ended December 31, 1999 to our President and Chief Executive Officer, and our
only other executive officer who was employed during the period. In accordance
with the rules of the SEC, the compensation described in this table does not
include perquisites and other personal benefits received by the executive
officers named in the table below which do not exceed the lesser of $50,000 or
10% of the total salary and bonus reported for these officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
ANNUAL COMPENSATION ($) SECURITIES
------------------------ UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITIONS SALARY BONUS OTHER OPTIONS (#) COMPENSATION
---------------------------- -------- ----- ----- ------------ ------------
<S> <C> <C> <C> <C> <C>
Remi Barbier................... $176,042 -- -- -- --
President, Chief Executive
Officer and Chairman
Barry M. Sherman, M.D. ........ $132,275 -- -- 600,000 --
Executive Vice President
and Chief Medical Officer
</TABLE>
Option Grants in 1999
The following table sets forth information concerning grants of stock
options to each of the executive officers named in the table above during 1999.
All options granted to these executive officers in 1999 were granted under the
1998 Stock Plan, as amended. Except as otherwise noted, one forty-eighth of the
shares subject to each option vests and becomes exercisable on the first month
after the vesting commencement date, and an additional one-forty-eighth of the
shares subject to each option vests each month thereafter. The percent of the
total options set forth below is based on an aggregate of 965,000 options
granted to employees during 1999. All options were granted at fair market value
as determined by our Board of Directors on the date of grant.
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<PAGE> 51
Potential realizable value represents hypothetical gains that could be
achieved for the options if exercised at the end of the option term assuming
that the initial public offering price of our common stock appreciates at 5% and
10% over the option term. The assumed 5% and 10% rates of stock price
appreciation are provided in accordance with rules of the Securities and
Exchange Commission and do not represent our estimate or projection of our
future common stock price.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------- POTENTIAL REALIZABLE
PERCENT OF VALUE AT ASSUMED
TOTAL ANNUAL RATES OF
NUMBER OF OPTIONS STOCK APPRECIATION
SECURITIES GRANTED TO FOR OPTION TERM($)
UNDERLYING EMPLOYEES EXERCISE ------------------------
OPTIONS DURING PRICE EXPIRATION
NAME GRANTED PERIOD(%) PER SHARE($) DATE 5% 10%
---- ---------- ---------- ------------ ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Remi Barbier......... -- -- -- -- -- --
Barry M. Sherman,
M.D................ 250,000 25.9 0.10 5/7/09 4,861,683 7,756,227
250,000 25.9 0.10 9/10/09 4,861,683 7,756,227
100,000 10.4 0.20 12/10/09 1,934,673 3,092,490
</TABLE>
Aggregate Option Exercises in 1999 and Values at December 31, 1999
The following table sets forth information concerning exercisable and
unexercisable stock options held by the executive officers named in the summary
compensation table at December 31, 1999. The value of unexercised in-the-money
options is based on an assumed initial offering price of $12 per share minus the
actual exercise prices. All options were granted under our 1998 Stock Plan, as
amended. Except as otherwise noted, these options vest over four years and
otherwise generally conform to the terms of our 1998 Stock Plan, as amended.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT DECEMBER 31,
SHARES AT DECEMBER 31, 1999(#) 1999($)(1)
ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Remi Barbier.............. -- -- -- -- -- --
Barry M. Sherman, M.D. ... -- -- 52,083 547,917 619,787 6,510,212
</TABLE>
- -------------------------
(1) Value is determined by subtracting the exercise price of an option from an
assumed $12 per share fair market value of our common stock.
EMPLOYMENT AGREEMENTS
In July 1998, we entered into an employment agreement with Mr. Barbier.
Under the terms of the agreement as amended by our board, Mr. Barbier receives
an annual salary of $275,000, and is eligible to receive an annual bonus in an
amount to be determined by the board of directors. The term of the agreement is
three years, and it automatically renews for consecutive one-year terms unless
we or Mr. Barbier terminate the agreement earlier on sixty days' notice. The
agreement entitles Mr. Barbier to serve on the board of directors for as long as
he is our President and Chief Executive Officer. Thereafter, he will remain a
member of our board of directors only if we terminate his employment without
cause. The agreement also provides that if we terminate Mr. Barbier without
cause, we must pay him
47
<PAGE> 52
his salary for twelve months following the date of his termination and
relinquish our right to repurchase any of his shares of our common stock.
In March 1999, we executed an employment offer letter for Dr. Sherman.
Under the terms of the offer as amended by our Board, Dr. Sherman receives an
annual salary of $250,000. The offer letter provides that Dr. Sherman's
employment may be terminated at any time by either Dr. Sherman or us upon thirty
days' notice.
LIMITATIONS ON DIRECTORS' AND OFFICERS' LIABILITY AND INDEMNIFICATION
Our amended and restated certificate of incorporation to be filed upon
completion of this offering limits the liability of our directors to the maximum
extent permitted by Delaware law. Delaware law provides that directors of a
corporation will not be personally liable for monetary damages for breach of
their fiduciary duties as directors, except liability associated with any of the
following:
- any breach of their duty of loyalty to the corporation or its
stockholders;
- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- unlawful payments of dividends or unlawful stock repurchases or
redemption; or
- any transaction from which the director derived an improper personal
benefit.
The limitation of our directors' liability does not apply to liabilities
arising under the federal securities laws and does not affect the availability
of equitable remedies such as injunctive relief or rescission.
Our amended and restated certificate of incorporation and bylaws also
provide that we shall indemnify our directors and executive officers and may
indemnify our other officers and employees and other agents to the fullest
extent permitted by law. We believe that indemnification under our bylaws covers
at least negligence and gross negligence on the part of indemnified parties. Our
bylaws also permit us to secure insurance on behalf of any officer, director,
employee or other agent for any liability arising out of his or her actions in
such capacity, regardless of whether our bylaws would permit indemnification.
We have entered into indemnification agreements with each of our officers
and directors containing provisions that require us to, among other things,
indemnify such officers and directors against liabilities that may arise by
reason of their status or service as directors or officers (other than
liabilities arising from willful misconduct of a culpable nature), to advance
their expenses incurred as a result of any proceeding against them as to which
they could be indemnified, and to cover our directors and officers under any of
our liability insurance policies applicable to our directors and officers. We
believe that these provisions and agreements are necessary to attract and retain
qualified persons as directors and executive officers.
STOCK PLANS
1998 Stock Plan
Our 1998 Stock Plan, as amended, was approved by our board of directors in
September 1998, and subsequently amended in May and September 1999 and February
2000. As of March 31, 2000, 223,800 shares were available for issuance under the
1998 Stock Plan.
48
<PAGE> 53
The purpose of the 1998 Stock Plan is to provide us with an opportunity to
retain and attract employees, directors and consultants who are essential to our
future growth and success by providing such individuals with an opportunity to
acquire shares of our common stock. Our 1998 Stock Plan provides for the grant
of nonstatutory stock options to our (and our parent and subsidiary
corporations) employees, directors and consultants, and for the grant of
incentive stock options, within the meaning of Section 422 of the Internal
Revenue Code, to our employees and employees of our parent and subsidiary
corporations.
A total of 3,200,000 shares of our common stock are authorized for issuance
under the 1998 Stock Plan. On the effective date of our initial public offering
a total of 1,500,000 shares will be added to reserve of shares available for
issuance under the 1998 Stock Plan. In addition, on the first day of each fiscal
year during the term of the 1998 Stock Plan, beginning with our fiscal year
2001, the number of shares available for issuance under our 1998 Stock Plan will
increase by an amount of shares equal to the lesser of 5% of the outstanding
shares of our common stock on the last day of our immediately preceding fiscal
year, 2,000,000 shares or a lesser amount as our board may determine.
Our board of directors or a committee of our board administers the 1998
Stock Plan. In the case of options intended to qualify as performance-based
compensation within the meaning of Section 162(m) of the Internal Revenue Code,
the committee will consist of two or more outside directors within the meaning
of Section 162(m) of the Internal Revenue Code. The administrator has the power
to determine the terms of the options granted, including the exercise price, the
number of shares subject to each option, the exercisability of the options and
the form of consideration payable upon exercise.
The administrator determines the exercise price of options granted under
the 1998 Stock Plan, but with respect to nonstatutory stock options intended to
qualify as performance-based compensation within the meaning of Section 162(m)
of the Internal Revenue Code and all incentive stock options, the exercise price
must at least be equal to the fair market value of our common stock on the date
of grant. The term of an incentive stock option may not exceed 10 years, except
that with respect to any participant who owns 10% of the voting power of all
classes of our outstanding capital stock, the term must not exceed five years
and the exercise price must equal at least 110% of the fair market value on the
grant date. The administrator determines the term of all other options.
No optionee may be granted an option to purchase more than 1,000,000 shares
in any fiscal year. In connection with his or her initial service, an optionee
may be granted options to purchase up to an additional 1,000,000 shares.
After termination of one of our employees, directors or consultants, he or
she may exercise his or her option for the period of time stated in the option
agreement. Generally, if termination is due to death or disability, the option
will remain exercisable for 12 months. In all other cases, the option will
generally remain exercisable for three months. However, an option may never be
exercised later than the expiration of its term.
Our 1998 Stock Plan provides for the periodic automatic grant of options to
our nonemployee directors. Each option granted under this automatic grant
provision will have an exercise price per share equal to 100% of the fair market
value per share of our common stock on the date of grant, and will have a term
of 10 years, unless terminated earlier upon the optionee's termination of
service as a director.
Our 1998 Stock Plan generally does not allow for the transfer of options
and only the optionee may exercise an option during his or her lifetime. The
administrator may, however, allow options to be transferable.
49
<PAGE> 54
Our 1998 Stock Plan provides that in the event of our merger with or into
another corporation or a sale of substantially all of our assets, the successor
corporation will assume or substitute each option. If the outstanding options
are not assumed or substituted, the administrator will provide notice to the
optionee that he or she has the right to exercise the options as to all of the
shares subject to the option, including shares which would not otherwise be
exercisable, for a period of 15 days from the date of the notice. The option
will terminate upon the expiration of the 15-day period.
Our 1998 Stock Plan will automatically terminate in 2008, unless we
terminate it sooner. In addition, our board of directors has the authority to
amend, suspend or terminate the 1998 Stock Plan provided it does not adversely
affect any option previously granted under our 1998 Stock Plan.
2000 Employee Stock Purchase Plan.
Our board of directors adopted the 2000 Employee Stock Purchase Plan in
April 2000 and our stockholders subsequently approved it. Our 2000 Employee
Stock Purchase Plan provides eligible employees the opportunity to purchase
shares of our common stock at a discount through payroll deductions.
A total of 500,000 shares of our common stock are authorized for issuance
under the 2000 Employee Stock Purchase Plan. In addition, the number of shares
authorized for issuance under the 2000 Employee Stock Purchase Plan will
increase annually on the first day of each fiscal year, beginning with our
fiscal year 2001, equal to the lesser of 1% of the outstanding shares of our
common stock on the last day of the immediately preceding fiscal year, 500,000
shares, or such other amount as may be determined by our board of directors.
Our board of directors or a committee of our board administers the 2000
Employee Stock Purchase Plan. Our board of directors or its committee has full
and exclusive authority to interpret the terms of the 2000 Employee Stock
Purchase Plan.
All of our employees are eligible to participate if they are customarily
employed by us or any participating subsidiary for at least 20 hours per week
and more than five months in any calendar year. However, an employee may not be
granted an option to purchase stock under the 2000 Employee Stock Purchase Plan
if such employee:
- immediately after grant owns stock possessing 5% or more of the total
combined voting power or value of all classes of our capital stock, or
- whose rights to purchase stock under all of our employee stock purchase
plans accrue at a rate that exceeds $25,000 worth of stock for each
calendar year.
Our 2000 Employee Stock Purchase Plan is intended to qualify under Section
423 of the Internal Revenue Code and contains consecutive, overlapping 24-month
offering periods. Each offering period includes four 6-month purchase periods.
The offering periods generally start on the first trading day on or after May
1st and November 1st of each year, except for the first such offering period
which will commence on the first trading day on or after the effective date of
this offering and will end on the last trading day on or after May 1, 2002.
Our 2000 Employee Stock Purchase Plan permits participants to purchase
common stock through payroll deductions of up to 15% of their eligible
compensation which
50
<PAGE> 55
includes a participant's base straight time gross earnings. A participant may
purchase a maximum of 7,500 shares during a 6-month purchase period.
Amounts deducted from a participant's eligible compensation and accumulated
during a six month purchase period are used to purchase shares of our common
stock at the end of the six-month purchase period. The price is 85% of the lower
of the fair market value of our common stock at the beginning of an offering
period or at the end of a purchase period. If the fair market value at the end
of a purchase period is less than the fair market value at the beginning of the
offering period, participants will be withdrawn from the current offering period
following their purchase of shares on the purchase date and will be
automatically re-enrolled in a new offering period. Participants may end their
participation at any time during an offering period, and will be paid their
payroll deductions to date. Participation ends automatically upon termination of
employment with us.
A participant may not transfer rights granted under the 2000 Employee Stock
Purchase Plan other than by will, the laws of descent and distribution or as
otherwise provided under the 2000 Employee Stock Purchase Plan.
In the event of our merger with or into another corporation or a sale of
all or substantially all of our assets, a successor corporation may assume or
substitute each outstanding option. If the successor corporation refuses to
assume or substitute for the outstanding options, the offering period then in
progress will be shortened, and a new exercise date will be set.
Our 2000 Employee Stock Purchase Plan will terminate in 2010. However, our
board of directors has the authority to amend or terminate our 2000 Employee
Stock Purchase Plan, except that, subject to certain exceptions described in the
2000 Employee Stock Purchase Plan, no such action may adversely affect any
outstanding rights to purchase stock under our 2000 Employee Stock Purchase
Plan.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PREFERRED STOCK
In August and October 1998, we sold a total of 2,659,489 shares of our
series A convertible preferred stock at a price of $1.00 per share. In October
and November 1999, we sold a total of 5,405,405 shares of our series B
redeemable convertible preferred stock at a price of $1.85 per share. In
February 2000, we sold a total of 3,044,018 shares of our series C redeemable
convertible preferred stock at a price of $5.00 per share. The following
officers, directors and 5% stockholders purchased shares of our preferred stock
in these financings:
<TABLE>
<CAPTION>
PURCHASER SERIES A SERIES B SERIES C
--------- --------- --------- ---------
<S> <C> <C> <C>
John Griffin and entities and persons
affiliated with Blue Ridge Limited
Partnership............................... 1,000,000 270,270 440,000
Cascade Investment, LLC..................... -- -- 2,000,000
GMS Capital Partners, L.P................... -- 1,000,000 146,070
TVM-Techno Venture Management III GmbH...... -- 1,459,449 184,655
Nadav Friedmann, M.D., Ph.D................. 20,000 -- --
Sanford R. Robertson........................ 200,000 -- --
Entities affiliated with Michael J.
O'Donnell................................. -- 12,838 1,876
</TABLE>
51
<PAGE> 56
INVESTOR RIGHTS AGREEMENT
We have entered into an agreement pursuant to which these and other
preferred stockholders will have registration rights with respect to their
shares of common stock following this offering. For a description of these
registration rights, see "Description of Capital Stock." Concurrently with the
completion of this offering, all shares of our outstanding preferred stock will
be automatically converted into an equal number of shares of common stock.
INDEMNIFICATION
We have entered into indemnification agreements with each of our directors
and executive officers. Such indemnification agreements require us to indemnify
our directors and officers to the fullest extent permitted by Delaware law. See
"Limitation on Directors' Liability and Indemnification."
SEVERANCE ARRANGEMENTS
We executed employment offer letters for Mr. Johnson and Mr. Jennings in
November and December 1999, respectively. Pursuant to these offer letters, Mr.
Johnson and Mr. Jennings receive annual base salaries of $155,000 and $195,000,
respectively. In addition, Mr. Johnson was permitted to purchase 190,000 shares
of our common stock at a per share exercise price of $0.20 subject to our
repurchase right, and Mr. Jennings received an option to purchase 225,000 shares
of our common stock at a per share exercise price of $1.00. We may terminate
either officer's employment at any time and for any reason or no reason.
However, if we terminate Mr. Johnson's employment without cause after November
23, 2000, or Mr. Jennings' employment without cause after December 3, 2000, we
must pay severance equal to the officer's base salary until the sooner of the
date that he secures new employment, or the date that is three months after the
date of his termination. Neither officer will receive any severance if we
terminate his employment within the first year, if he voluntarily terminates his
employment any time, or if we terminate him for cause at any time.
PRINCIPAL STOCKHOLDERS
The following table sets forth information known to us with respect to the
beneficial ownership of our common stock as of March 31, 2000 and as adjusted to
reflect the sale of common stock offered hereby by the following:
- each stockholder known by us to own beneficially more than 5% of our
common stock;
- each of our executive officers named in the compensation table above;
- each of our directors; and
- all directors and executive officers as a group.
As of March 31, 2000, there would have been 20,827,142 shares of our common
stock outstanding, assuming that all outstanding preferred stock has been
converted into common stock. Except as otherwise indicated, we believe that the
beneficial owners of the common stock listed below, on the information furnished
by such owners, have sole voting power and investment power with respect to such
shares. Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percent ownership of that person, shares
of common stock subject to options or warrants held by that person that are
currently
52
<PAGE> 57
exercisable or that will become exercisable within 60 days after March 31, 2000
are deemed outstanding, while such shares are not deemed outstanding for
purposes of computing percent ownership of any other person. Unless otherwise
indicated in the footnotes below, the persons and entities named in the table
have sole voting and investment power with respect to all shares beneficially
owned, subject to community property laws where applicable. The address for
those individuals for which an address is not otherwise indicated is 250 Grand
Avenue, Suite 70, South San Francisco, California 94080.
<TABLE>
<CAPTION>
PERCENT OF SHARES
SHARES OUTSTANDING(2)
BENEFICIALLY -------------------------
OWNED PRIOR PRIOR TO
NAME OR GROUP OF BENEFICIAL OWNERS TO OFFERING(1) OFFERING AFTER OFFERING
---------------------------------- -------------- -------- --------------
<S> <C> <C> <C>
William H. Gates, III(3)...................... 2,000,000 9.6% 7.7%
2365 Carillon Point
Kirkland, WA 98033
TVM-Techno Venture Management III GmbH(4)..... 1,644,104 7.9 6.4
101 Arch Street, Suite 1950
Boston, MA 02110
John Griffin(5)............................... 1,710,270 8.2 6.6
Blue Ridge Limited Partnership
660 Madison Avenue
New York, NY 10021
GMS Capital Partners, L.P.(6)................. 1,146,070 5.5 4.4
405 Park Avenue, 16th Floor
New York, NY 10022
Remi Barbier(7)............................... 8,180,000 39.3 31.7
Gert Caspritz, Ph.D.(8)....................... 1,644,104 7.9 6.4
101 Arch Street, Suite 1950
Boston, MA 02110
Sanford R. Robertson(9)....................... 258,333 1.2 1.0
One Maritime Plaza, Suite 2500
San Francisco, CA 94111
David L. Johnson(10).......................... 190,000 * *
Barry M. Sherman, M.D.(11).................... 114,584 * *
Nadav Friedmann, M.D., Ph.D.(12).............. 128,333 * *
91 Bacon Court
Lafayette, CA 94549
Michael J. O'Donnell(13)...................... 65,756 * *
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304-1050
Edmon R. Jennings(14)......................... 14,063 * *
Wilfred R. Konneker, Ph.D..................... -- -- --
Konneker Development Corporation
142 Enchanted Parkway, Suite 200
Manchester, MO 63021
All directors and executive officers as a
group
(9 persons)(15)............................. 10,595,173 50.9% 41.0%
</TABLE>
- -------------------------
* Represents beneficial ownership of less than one percent (1%) of the
outstanding shares of the Company's Common Stock.
(1) Beneficial ownership is determined with the rules of the Securities and
Exchange Commission and generally includes voting or investment power with
respect to securities. Shares of Common Stock subject to stock options and
warrants currently exercisable or exercisable within 60 days are deemed to
be outstanding for computing
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<PAGE> 58
the percentage ownership of the person holding such options and the
percentage ownership of any group of which the holder is a member, but are
not deemed outstanding for computing the percentage of any other person.
Except as indicated by footnote, and subject to community property laws
where applicable, the persons named in the table have sole voting and
investment power with respect to all shares of Common Stock shown
beneficially owned by them.
(2) Applicable percentage of ownership is based on 20,827,142 shares of Common
Stock outstanding prior to this offering.
(3) Includes 2,000,000 shares held by Cascade Investment, LLC, which is
controlled by William H. Gates, III.
(4) TVM Techno Venture Management III GmbH is controlled by its two Managing
Directors, Helmut Schuhsler and Friedrich Bornikee.
(5) Includes 1,090,270 shares held by Blue Ridge Limited Partnership, 40,000
shares held by Blue Ridge Private Equity Fund, and 580,000 shares held by
John Griffin. All of the shares held by Blue Ridge Limited Partnership and
Blue Ridge Private Equity Fund are beneficially owned by John Griffin.
(6) GMS Capital Investments, L.L.C. si the general partner of GMS Capital
Partners, L.P. Joachim Gfeeller, David Meek and Andrew Stallman are the
managing members of GMS Capital Investments, L.L.C.
(7) All of these shares are subject to our right of repurchase which lapses
over time.
(8) Includes 1,644,104 shares held by TVM-Techno Venture Management III GmbH.
Dr. Caspritz, a Director of the Company, is the Investment Manager of
TVM-Techno Venture Management. Dr. Caspritz disclaims beneficial ownership
of the shares held by TVM-Techno Venture Management III GmbH, except to the
extent of his partnership interest in such shares.
(9) Includes 8,333 shares issuable pursuant to options exercisable within 60
days of March 31, 2000.
(10) All of these shares are subject to our right of repurchase which lapses
over time.
(11) Includes 114,584 shares issuable pursuant to options exercisable within 60
days of March 31, 2000.
(12) Includes 8,333 shares issuable pursuant to options exercisable within 60
days of March 31, 2000.
(13) Includes 45,000 shares held by WS Investment Company 98B, 12,162 shares
held by WS Investment Company 99B, 1,777 shares held by WS Investment
Company 2000A, 5,775 shares held by Michael J. O'Donnell and 1,042 shares
issuable to Mr. O'Donnell pursuant to options exercisable within 60 days of
March 31, 2000. Mr. O'Donnell, a Director of the Company, is a General
Partner of WS Investment Company. Mr. O'Donnell disclaims beneficial
ownership of the shares held by WS Investment Company, except to the extent
of his partnership interest in such shares. Mr. O'Donnell is also a partner
in Wilson Sonsini Goodrich & Rosati, our corporate counsel.
(14) Includes 14,063 shares issuable pursuant to options exercisable within 60
days of March 31, 2000.
(15) Includes 146,355 shares issuable pursuant to options exercisable within 60
days of March 31, 2000.
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<PAGE> 59
DESCRIPTION OF CAPITAL STOCK
Upon the completion of this offering, we will be authorized to issue
shares, $0.001 par value per share, to be divided into two classes to be
designated common stock and preferred stock. Of the shares authorized,
120,000,000 shares shall be designated as common stock and 10,000,000 shares
shall be designated as preferred stock. The following description of our capital
stock is only a summary. For a complete description of our capital stock, you
should refer to our certificate of incorporation and bylaws as in effect upon
the completion of this offering, which are included as exhibits to the
registration statement of which this prospectus forms a part, and to the
provisions of applicable Delaware law.
COMMON STOCK
As of March 31, 2000, assuming the conversion of all outstanding shares of
preferred stock into common stock, there were 20,827,142 shares of common stock
outstanding which were held by approximately 85 stockholders. There will be
25,827,142 shares of common stock outstanding (assuming no exercise of the
underwriters' over-allotment option and no exercise of outstanding options after
March 31, 2000) after giving effect to the sale of our common stock in this
offering. In addition to 1,757,970 shares issuable upon exercise of outstanding
options, and 223,800 shares available for issuance under our 1998 Stock Plan, as
amended there are an aggregate of 500,000 shares reserved for issuance under our
2000 Employee Stock Purchase Plan. See "Management -- Stock Plans" for a
description of our stock plans.
The holders of our common stock are entitled to one vote per share held of
record on all matters submitted to a vote of the stockholders. Our amended and
restated certificate of incorporation to be filed concurrently with completion
of this offering, does not provide for cumulative voting in the election of
directors. Subject to preferences that may be applicable to any outstanding
preferred stock, the holders of common stock are entitled to receive ratably
such dividends, if any, as may be declared from time to time by our board of
directors out of funds legally available for that purpose. In the event of our
liquidation, dissolution or winding up, holders of our common stock are entitled
to share ratably in all assets remaining after payment of liabilities, subject
to prior distribution rights of preferred stock, if any, then outstanding.
Holders of our common stock have no preemptive or other subscription or
conversion rights. There are no redemption or sinking fund provisions applicable
to our common stock. All outstanding shares of common stock are fully paid and
non-assessable, and the shares of common stock to be issued upon the completion
of this offering will be fully paid and non-assessable.
PREFERRED STOCK
Upon the completion of this offering and filing of our amended and restated
certificate of incorporation, we will not have any shares of preferred stock
outstanding, however, our board of directors will be authorized, without action
by the stockholders, to issue up to 10,000,000 shares of preferred stock in one
or more series and to fix the rights, preferences, privileges and restrictions
of each series. These rights, preferences and privileges may include dividend
rights, conversion rights, voting rights, terms of redemption, liquidation
preferences, sinking fund terms and the number of shares constituting any series
or the designation of any series, all or any of which may be greater than the
rights of the common stock.
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<PAGE> 60
The issuance of preferred stock could adversely affect the voting power of
holders of common stock and the likelihood that the holders of common stock will
receive dividend payments and payments upon liquidation. In addition, the
issuance of preferred stock could have the effect of delaying or preventing a
change in our control without further action by the stockholders. We have no
present plans to issue any shares of preferred stock.
WARRANTS TO PURCHASE COMMON STOCK
As of March 31, 2000, we had the following warrants outstanding to purchase
a total of 340,000 shares of our capital stock:
- 70,000 shares of our common stock at an exercise price of $1.00 per
share, terminating 2005;
- 120,000 shares of our common stock at an exercise price of $5.00 per
share terminating 2005; and
- 150,000 shares of our series A convertible preferred stock which are
convertible into 150,000 shares or our common stock at an exercise price
of $1.00 per share, terminating June 5, 2010.
REGISTRATION RIGHTS
Pursuant to a registration rights agreement we entered into with holders of
11,108,912 shares of our common stock (assuming conversion of all outstanding
shares of preferred stock), the holders of these shares are entitled to certain
registration rights regarding these shares. The registration rights provide that
if we propose to register any securities under the Securities Act, either for
our own account or for the account of other security holders exercising
registration rights, they are entitled to notice of the registration and are
entitled to include shares of their common stock in the registration. This right
is subject to conditions and limitations, including the right of the
underwriters in an offering to limit the number of shares included in the
registration. The holders of these shares may also require us to file up to two
registration statements under the Securities Act at our expense with respect to
their shares of common stock. We are required to use our best efforts to effect
this registration, subject to conditions and limitations. Furthermore, the
holders of these shares may require us to file additional registration
statements on Form S-3, subject to conditions and limitations. These rights
terminate on the earlier of five years after the effective date of this
offering, the date on which all securities subject to registration rights have
been sold, or when a holder is able to sell all its shares pursuant to Rule 144
under the Securities Action in any 90-day period.
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS
Certain provisions of Delaware law and our certificate of incorporation and
bylaws could make the following transactions more difficult:
- the acquisition of us by means of a tender offer;
- the acquisition of us by proxy contest or other means; and
- the removal of our incumbent officers and directors.
These provisions, summarized below, are expected to discourage certain
types of coercive takeover practices and inadequate takeover bids and to
encourage persons seeking to acquire control of us to first negotiate with us.
We believe that the benefits of increased protection of our potential ability to
negotiate with the proponent of an unfriendly or unsolicited proposal to
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<PAGE> 61
acquire or restructure our company outweighs the disadvantages of discouraging
such proposals because, among other things, negotiation of such proposals could
result in an improvement of their terms. The amendment of any of the following
provisions would require approval by holders of at least 66 2/3% of our
outstanding common stock.
Election and Removal of Directors. Effective with the first annual meeting
of stockholders following completion of this offering, our amended and restated
bylaws provide for the division of our board of directors into three classes, as
nearly equal in number as possible, with the directors in each class serving for
a three-year term, and one class being elected each year by our stockholders.
This system of electing and removing directors may tend to discourage a third
party from making a tender offer or otherwise attempting to obtain control of us
and may maintain the incumbency of the board of directors, as it generally makes
it more difficult for stockholders to replace a majority of the directors.
Further, our amended and restated certificate of incorporation filed in
connection with this offering and restated bylaws do not provide for cumulative
voting in the election of directors.
Stockholder Meetings. Under our amended and restated certificate of
incorporation and amended and restated bylaws, only our board of directors,
chairman of the board or chief executive officer may call special meetings of
stockholders. Our restated bylaws establish advance notice procedures with
respect to stockholder proposals and the nomination of candidates for election
as directors, other than nominations made by or at the direction of the board of
directors or a committee thereof. In addition, our amended and restated
certificate of incorporation eliminates the right of stockholders to act by
written consent without a meeting and eliminates cumulative voting.
Undesignated Preferred Stock. The authorization of undesignated preferred
stock makes it possible for the board of directors to issue preferred stock with
voting or other rights or preferences that could impede the success of any
attempt to change control of us. These and other provisions may have the effect
of deterring or delaying hostile takeovers or delaying changes in control or
management.
Section 203. We are subject to Section 203 of the Delaware General
Corporation Law. In general, the statute prohibits a Delaware corporation from
engaging in any business combination with any interested stockholder for a
period of three years following the date that the stockholder became an
interested stockholder unless:
- prior to the date, the board of directors of the corporation approved
either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder;
- upon consummation of the transaction that resulted in the stockholder's
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding those shares owned by persons who
are directors and also officers, and employee stock plans in which
employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer; or
- on or subsequent to the date, the business combination is approved by the
board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at
least two-thirds of the outstanding voting stock that is not owned by the
interested stockholder.
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<PAGE> 62
Section 203 defines "business combination" to include:
- any merger or consolidation involving the corporation and the interested
stockholder;
- any sale, transfer, pledge or other disposition involving the interested
stockholder of 10% or more of the assets of the corporation;
- subject to exceptions, any transaction that results in the issuance or
transfer by the corporation of any stock of the corporation to the
interested stockholder; or
- the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
In general, Section 203 defines an interested stockholder as any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by the entity or person.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is ChaseMellon
Shareholder Services, LLC.
THE NASDAQ STOCK MARKET'S NATIONAL MARKET LISTING
We have applied to list our common stock on The Nasdaq Stock Market's
National Market under the symbol "PTIE."
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our stock.
After we complete this offering, based upon the number of shares outstanding at
March 31, 2000, there will be 25,827,142 shares of our common stock outstanding.
Of these outstanding shares, the 5,000,000 shares sold in this offering will be
freely tradable without restriction or further registration under the Securities
Act of 1933, except that any shares purchased by our "affiliates", as that term
is defined in Rule 144 under the Securities Act, may generally only be sold in
compliance with the limitations of Rule 144 described below.
LOCK-UP AGREEMENTS
shares of common stock outstanding after this offering are
subject to lock-up agreements which expire 180 days after the date of this
prospectus. Upon expiration of the 180-day lock-up period, all of these shares
will be eligible for sale in the public market subject to the provisions of Rule
144 or Rule 701 under the Securities Act. The lock-up agreements were entered
into by all holders of our securities, including all of our directors and
executive officers, who in the aggregate hold:
- 10,448,818 shares of our common stock of record;
- options to purchase 950,000 shares of our common stock;
- warrants to purchase 70,000 shares of our common stock;
- warrants to purchase 150,000 shares of our series A preferred stock which
are convertible into 150,000 shares of our common stock; and
- warrants to purchase 120,000 shares of our common stock.
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<PAGE> 63
In the lock-up agreements, these stockholders agreed that, for a period of
180 days after the date of this prospectus, they will not sell, contract to sell
or otherwise dispose of any shares of our common stock, or any shares
convertible into or exchangeable for shares of our common stock, owned directly
by them or with respect to which they have the power of disposition, without the
prior written consent of FleetBoston Robertson Stephens Inc.
SALES OF RESTRICTED SHARES
In addition to being subject to the lock-up agreements shares are
deemed "restricted securities" under Rule 144. In general under Rule 144 a
stockholder, including one of our affiliates, who has beneficially owned his or
her restricted securities for at least one year is entitled to sell, within any
three-month period commencing 90 days after the date of this prospectus, a
number of shares that does not exceed the greater of 1% of the then outstanding
shares of common stock (approximately 258,000 shares immediately after this
offering) or the average weekly trading volume in our common stock during the
four calendar weeks preceding the date on which notice of the sale was filed
under Rule 144, provided requirements concerning availability of public
information, manner of sale and notice of sale are satisfied. In addition, a
stockholder that is not one of our affiliates at any time during the three
months preceding a sale and who has beneficially owned the shares proposed to be
sold for at least two years is entitled to sell the shares immediately under
Rule 144(k) without compliance with the above described requirements of Rule
144.
In general, under Rule 701 of the Securities Act as currently in effect,
any of our employees, consultants or advisors who purchase shares from us under
a stock option plan or other written agreement can resell those shares 90 days
after the effective date of this offering in reliance on Rule 144, but without
complying with some of the restrictions, including the holding period, contained
in Rule 144.
STOCK OPTIONS
We intend to file registration statements on Form S-8 under the Securities
Act to register an aggregate of 5,200,000 shares of common stock issuable under
our 1998 Stock Plan and the 2000 Employee Stock Purchase Plan. Shares issued
upon exercise of stock options after the effective date of the Form S-8
registration statements will be eligible for resale in the public market without
restriction, subject to Rule 144 limitations applicable to affiliates and the
lock-up agreements noted above, if applicable.
REGISTRATION RIGHTS
Upon completion of this offering, the holders of 11,108,912 shares of our
common stock and of warrants to purchase 150,000 shares of our series A
convertible preferred stock and warrants to purchase 120,000 shares of our
common stock will be entitled to rights with respect to the registration of
their shares under the Securities Act even if the shares would have been subject
to Rule 144 restrictions. Please see "Description of Capital
Stock -- Registration Rights" for a more detailed description of these
registration rights. After registration, these shares will become freely
tradable without restriction under the Securities Act. Any sales of securities
by these shareholders could have a material adverse effect on the trading price
of our common stock.
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<PAGE> 64
UNITED STATES TAX CONSEQUENCES TO NON-U.S. HOLDERS
The following is a general discussion of the principal United States
federal income and estate tax consequences of the acquisition, ownership and
disposition of our common stock by a Non-U.S. Holder. As used in this
prospectus, the term "Non-U.S. Holder" is a person who holds our common stock
other than:
- a citizen or resident of the United States,
- a corporation or other entity taxable as a corporation created or
organized in or under the laws of the United States or of any political
subdivision of the United States,
- an estate the income of which is includable in gross income for United
States federal income tax purposes regardless of its source, or
- a trust subject to the primary supervision of a United States court and
the control of one or more United States persons, or a trust (other than
a wholly-owned grantor trust) that was treated as a domestic trust
despite not meeting the requirements described above.
This discussion does not consider:
- state, local or foreign tax consequences,
- specific facts and circumstances that may be relevant to a particular
Non-U.S. Holder's tax position in light of their particular
circumstances,
- the tax consequences for the stockholders or beneficiaries of a Non-U.S.
holder,
- special tax rules that may apply to certain Non-U.S. Holders, including
without limitation, partnerships, banks, insurance companies, dealers in
securities and traders in securities, or
- special tax rules that may apply to a Non-U.S. Holder that holds our
common stock as part of a "straddle," "hedge" or "conversion
transaction."
The following discussion is based on provisions of the United States
Internal Revenue Code of 1986, as amended, also known as the Code, applicable
Treasury regulations and administrative and judicial interpretations, all as of
the date of this prospectus, and all of which are subject to change,
retroactively or prospectively. The following discussion assumes that our common
stock is held as a capital asset. The following summary is for general
information. Accordingly, each Non-U.S. Holder should consult a tax advisor
regarding the United States federal, state, local and foreign income and other
tax consequences of acquiring, holding and disposing of shares of our common
stock.
DIVIDENDS
We do not anticipate paying cash dividends on our common stock in the
foreseeable future. See "Dividend Policy." In the event, however, that dividends
are paid on shares of our common stock, dividends paid to a Non-U.S. Holder of
our common stock generally will be subject to withholding of United States
federal income tax at a 30% rate, or such lower rate as may be provided by an
applicable income tax treaty. Non-U.S. Holders should consult their tax advisors
regarding their entitlement to benefits under a relevant income tax treaty.
Dividends that are effectively connected with a Non-U.S. Holder's conduct
of a trade or business in the United States or, if an income tax treaty applies,
attributable to a
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permanent establishment in the United States, known as United States trade or
business income, are generally subject to United States federal income tax on a
net income basis at regular graduated rates, but are not generally subject to
the 30% withholding tax if the Non-U.S. Holder files the appropriate United
States Internal Revenue Service form with the payor. Any United States trade or
business income received by a Non-U.S. Holder that is a corporation may also,
under certain circumstances, be subject to an additional "branch profits tax" at
a 30% rate or such lower rate as specified by an applicable income tax treaty.
Dividends paid prior to 2001 to an address in a foreign country are
presumed, absent actual knowledge to the contrary, to be paid to a resident of
such country for purposes of the withholding discussed above and for purposes of
determining the applicability of a tax treat rate. For dividends paid after
2000, a Non-U.S. Holder of our common stock who clams the benefit of an
applicable income tax treaty rate generally will be required to satisfy
applicable certification and other requirements.
A Non-U.S. Holder of our common stock that is eligible for a reduced rate
of United States withholding tax under an income tax treaty may obtain a refund
or credit of any excess amounts withheld by filing an appropriate claim for a
refund with the United States Internal Revenue Services.
GAIN ON DISPOSITION OF COMMON STOCK
A Non-U.S. Holder generally will not be subject to United States federal
income tax in respect of gain recognized on a disposition of our common stock
unless:
- the gain is United States trade or business income, in which case the
branch profits tax described above may apply to a corporate Non-U.S.
Holder,
- the Non-U.S. Holder is an individual who holds our common stock as a
capital asset within the meaning of Section 1221 of the Code, is present
in the United States for more than 182 days in the taxable year of the
disposition and meets certain other requirements,the Non-U.S. Holder is
subject to tax pursuant to the provisions of the United States tax law
applicable to certain United States expatriates, or
- we are or have been a United States real property holding corporation for
United States federal income tax purposes at any time during the shorter
of the five-year period ending on the date of disposition of the period
that the Non-U.S. Holder held our common stock.
Generally, a corporation is a United States real property holding
corporation if the fair market value of its United States real property
interest, such as interest in real property located in the United States or the
Virgin islands, and certain interests in other United States real property
holding corporations, equals or exceeds 50% of the sum of the fair market value
of its worldwide real property interests plus its other assets used or held for
use in a trade or business. We believe we have never been, are not currently and
are not likely to become a United States real property holding corporation for
United States federal income tax purposes.
FEDERAL ESTATE TAX
Common stock owned or treated as owned by an individual who is a Non-U.S.
Holder at the time of death will be included in the individual's gross estate
for United States
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federal estate tax purposes, unless an applicable estate tax or other treaty
provides otherwise.
INFORMATION REPORTING AND BACKUP WITHHOLDING TAX
We must report annually to the United States Internal Revenue Service and
to each Non-U.S. Holder the amount of dividends paid to that holder and the tax
withheld with respect to those dividends. Copies of the information returns
reporting those dividends and withholding may also be made available to the tax
authorities in the country in which the Non-U.S. Holder is a resident under the
provisions of an applicable income tax treaty or agreement.
Under certain circumstances, United States Treasury Regulations require
information reporting and backup withholding at a rate of 31% on certain
payments on our common stock. Under currently applicable law, Non-U.S. Holders
of our common stock, generally will be exempt from these information reporting
requirements and from backup withholding on dividends paid prior to 2001 to an
address outside the United States. For dividends paid after 2000, however, a
Non-U.S. Holder of our common stock that fails to certify its Non-U.S. holder
status in accordance with applicable United States Treasury Regulations may be
subject to backup withholding at a rate of 31% of dividends.
The payment of the proceeds of the disposition of our common stock by a
holder to or through the United States office of a broker generally will be
subject to information reporting and backup withholding at a rate of 31% unless
the holder either certifies its status as a Non-U.S. Holder under penalties of
perjury or otherwise establishes an exemption. The payment of the proceeds of
the disposition by a Non-U.S. Holder of our common stock to or through a foreign
office of a foreign broker will not be subject to backup withholding or
information reporting unless the foreign broker will not be subject to backup
withholding or information reporting unless the foreign broker is a United
States related person. In the case of the payment of proceeds from the
disposition of our common stock by or through a foreign office of a broker that
is a United States person or a "United States related person," information
reporting, but currently not backup withholding, on the payment applies unless
the broker receives a statement from the owner, signed under penalty of perjury,
certifying its foreign status or the broker has documentary evidence in its
files that the holder is a Non-U.S. Holder and the broker has no actual
knowledge to the contrary. For this purpose, a United States related person is:
- a "controlled foreign corporation" for United States federal income tax
purposes,
- a foreign person 50% or more of whose gross income from all sources for
the three-year period ending with the close of its taxable year preceding
the payment, or for such part of the period that the broker has been in
existence, is derived from activities that are effectively connected with
the conduct of a United State trade or business,
- effective after 2000, a foreign partnership if, at any time during the
taxable year, (A) at least 50% of the capital or profits interest in the
partnership is owned by United States persons, or (B) the partnership is
engaged in a United States trade or business, or
- certain U.S. branches of foreign banks or insurance companies.
Effective after 2000, backup withholding may apply to the payment of
disposition proceeds by or through a foreign office or a broker that is a United
States person or a United States related person unless certain certification
requirements are satisfied or an
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exemption is otherwise established and the broker has no actual knowledge that
the holder is a United States person. Non-U.S. Holders should consult their own
tax advisors regarding the application of the information reporting and backup
withholding rules to them, including changes to these rules that will become
effective after 2000.
Any amounts withheld under the backup withholding rules from a payment to a
Non-U.S. Holder will be refunded, or credited against the holder's United States
federal income tax liability, if any, provided that the required information is
furnished to the United States Internal Revenue Service.
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UNDERWRITING
We are offering the shares of common stock described in this prospectus
through a number of underwriters. FleetBoston Robertson Stephens Inc., CIBC
World Markets Corp. and Lazard Freres & Co. LLC will act as representatives of
the underwriters. We have entered into an underwriting agreement with the
representatives. Subject to the terms and conditions of the underwriting
agreement, we have agreed to sell to the underwriters, and each underwriter has
separately agreed to purchase from us, the number of shares of common stock
listed next to its name below at the public offering price, less the
underwriting discount described on the cover page of this prospectus:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
FleetBoston Robertson Stephens Inc. ........................
CIBC World Markets Corp. ...................................
Lazard Freres & Co. LLC.....................................
</TABLE>
<TABLE>
<CAPTION>
INTERNATIONAL UNDERWRITERS
--------------------------
<S> <C>
FleetBoston Robertson Stephens International Limited .......
CIBC World Markets Corp. ...................................
Lazard Capital Markets......................................
---------
Total..................................................... 5,000,000
=========
</TABLE>
The underwriting agreement provides that the underwriters must buy all of
these shares from us if they buy any of them. The underwriters will sell these
shares to the public when and if the underwriters buy them from us. The
underwriters are offering the common stock subject to a number of conditions,
including:
- the underwriters' receipt and acceptance of the common stock from us; and
- the underwriters' right to reject orders in whole or in part.
FleetBoston Robertson Stephens Inc. expects to deliver the shares of common
stock to purchasers on , 2000.
Over-Allotment Option. We have granted to the underwriters an option to buy
up to 750,000 additional shares of our common stock at the same price per share
as they are paying for the shares shown in the table above. The underwriters may
exercise this option only to the extent that they sell more than the total
number of shares shown in the table above. The underwriters may exercise this
option at any time within 30 days after the date of this prospectus. To the
extent that the underwriters exercise this option, the underwriters will be
obligated to purchase the additional shares from us in the same proportions as
they purchased the shares shown in the table above. If purchased, these
additional shares will be sold by the underwriters on the same terms as those on
which the other shares are being sold. We will be obligated, pursuant to this
option, to sell shares to the extent the option is exercised.
Stock Market Listing. We expect our common stock will be quoted on the
Nasdaq National Market under the symbol "PTIE."
Determination of Offering Price. Before this offering, there has been no
public market for our common stock. The initial public offering price will be
determined through negotiations between us and the representatives. In addition
to prevailing market
64
<PAGE> 69
conditions, the factors to be considered in determining the initial public
offering price will include:
- the valuation multiples of publicly-traded companies that the
representatives believe are comparable to us;
- our financial information;
- our history and prospects and the outlook for our industry;
- an assessment of our management, our past and present operations, and the
prospects for, and timing of, our future revenues;
- the present state of our development and the progress of our business
plan; and
- the above factors in relation to market values and various valuation
measures of other companies engaged in activities similar to ours.
An active trading market for our shares may not develop. Even if an active
market does develop, the public price at which our shares trade in the future
may be below the offering price.
Underwriting Discounts and Commissions. The underwriting discount is the
difference between the price the underwriters pay to us and the price at which
the underwriters initially offer the shares to the public. The underwriting
discount will be determined through an arms-length negotiation between us and
the representatives. The following table shows the per share and total
underwriting discounts and commissions to be paid by us to the underwriters.
These amounts are shown assuming no exercise and full exercise of the
underwriters' over-allotment option described above:
<TABLE>
<CAPTION>
TOTAL
----------------------------
PER SHARE WITHOUT OPTION WITH OPTION
--------- -------------- -----------
<S> <C> <C> <C>
Public offering price....................... $ $ $
Underwriting discounts and commissions...... $ $ $
Proceeds, before expenses, to us............ $ $ $
</TABLE>
The expenses of this offering, not including the underwriting discount, are
estimated to be approximately $ and will be paid entirely by us.
Expenses include the SEC filing fee, the NASD filing fee, Nasdaq listing fees,
printing expenses, transfer agent and registrar fees and other miscellaneous
fees.
Indemnification of the Underwriters. We will indemnify the underwriters
against some civil liabilities, including liabilities under the Securities Act
and liabilities arising from breaches of our representations and warranties
contained in the underwriting agreement. If we are unable to provide this
indemnification, we will contribute to payments the underwriters may be required
to make in respect of those liabilities.
Dealers' Compensation. The underwriters initially will offer our shares to
the public at the price specified on the cover page of this prospectus. The
underwriters may allow to selected dealers a concession of not more than
$ per share. The underwriters may also allow, and any other dealers may
reallow, a concession of not more than $ per share to some other dealers. If
all the shares are not sold at the public offering price, the underwriters may
change the public offering price and the other selling terms. A change in the
public offering price will not affect the amount of proceeds that we receive.
65
<PAGE> 70
Discretionary Accounts. The underwriters do not expect to sell more than 5%
of the shares of our common stock in the aggregate to accounts over which they
exercise discretionary authority.
Directed Share Program. At our request, the underwriters have reserved for
sale, at the initial public offering price, up to 250,000 shares, or 5%, of the
shares of our common stock offered by this prospectus for sale to some of our
directors, officers and employees and their family members, and other persons
with relationships with us. The number of shares of our common stock available
for sale to the general public will be reduced to the extent those persons
purchase the reserved shares. Any reserved shares which are not orally confirmed
for purchase within one day of the pricing of this offering may be offered by
the underwriters to the general public on the same terms as the other shares
offered by this prospectus.
Online Activities. A prospectus in electronic format may be made available
on the Internet sites or through other online services maintained by one or more
of the underwriters of this offering, or by their affiliates. In those cases,
prospective investors may view offering terms online and, depending on the
particular underwriter, prospective investors may be allowed to place orders
online. The underwriters may agree with us to allocate a specific number of
shares for sale to online brokerage account holders. Any such allocation for
online distributions will be made by the representatives on the same basis as
other allocations.
In particular, a copy of this prospectus in electronic format will be made
available on the Internet web sites hosted by E*OFFERING Corp. and E*TRADE
Securities, Inc. E*TRADE will accept conditional offers to purchase shares from
all of its customers that pass and complete an online eligibility profile. In
the event that the demand for shares from the customers of E*TRADE exceeds the
amounts allocated to E*TRADE, E*TRADE will use a random allocation methodology
to distribute shares in even lots of 100 shares per customer. Other than the
prospectus in electronic formation, information on these web sites is not a part
of this prospectus and you should not rely on other information on these web
sites in making a decision to invest in our shares.
Stabilization and Other Transactions. The rules of the SEC generally
prohibit the underwriters from trading in our common stock on the open market
during this offering. However, the underwriters are allowed to engage in some
open market transactions and other activities during this offering that may
cause the market price of our common stock to be above or below that which would
otherwise prevail in the open market. These activities may include
stabilization, the creation of syndicate short positions, syndicate covering
transactions and penalty bids.
- Stabilizing transactions consist of bids or purchases made by the lead
representative for the purpose of preventing or slowing a decline in the
market price of our common stock while this offering is in progress.
- A syndicate short position is created when the representatives, on behalf
of the underwriting syndicate, over-allot, or sell more of our shares
than they purchase from us in this offering. In order to cover the
resulting short position, the representatives may exercise the
over-allotment option described above and/or they may engage in syndicate
covering transactions. The representatives do not currently intend to
create a syndicate short position greater than 15% of the number of
shares shown on the cover page of this prospectus. The underwriters will
deliver a prospectus to all purchasers to whom they sell shares,
including short sale shares.
66
<PAGE> 71
The purchasers of shares in the short sales are generally entitled to the
same remedies under the federal securities laws as any other purchaser of
shares covered by this prospectus.
- Syndicate covering transactions are bids for or purchases of our common
stock on the open market by the representatives on behalf of the
underwriters in order to reduce a short position incurred by the
representatives on behalf of the underwriters.
- A penalty bid is an arrangement permitting the representatives to reclaim
the selling concession that would otherwise accrue to an underwriter if
the common stock originally sold by that underwriter was later
repurchased by the representatives and therefore was not effectively sold
to the public by such underwriter.
If the underwriters commence these activities, they may discontinue them at
any time without notice. The underwriters may carry out these transactions on
the Nasdaq National Market, in the over-the-counter market or otherwise.
Passive Market Making. Prior to the pricing of this offering, and until the
commencement of any stabilizing bid, underwriters and dealers who are qualified
market makers on the Nasdaq National Market may engage in passive market making
transactions. Passive market making is allowed during the period when the SEC's
rules would otherwise prohibit market activity by the underwriters and dealers
who are participating in this offering. Passive market makers must comply with
applicable volume and price limitations and must be identified as such. In
general, a passive market maker must display its bid at a price not in excess of
the highest independent bid for our common stock; but if all independent bids
are lowered below the passive market maker's bid, the passive market maker must
also lower its bid once it exceeds specified purchase limits. Net purchases by a
passive market maker on each day are limited to a specified percentage of the
passive market maker's average daily trading volume in our common stock during a
specified period and must be discontinued when such limit is reached.
Underwriters and dealers are not required to engage in passive market making and
may end passive market making activities at any time.
Some of the underwriters have in the past and may in the future perform
financial advisory services for us.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us
by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California. Legal matters will be passed upon for the underwriters by O'Melveny
& Myers LLP, San Francisco, California. As of the date of this prospectus,
investment partnerships composed of certain members of and persons associated
with Wilson Sonsini Goodrich & Rosati, Professional Corporation, in addition to
individual members of and persons associated with Wilson Sonsini Goodrich &
Rosati, Professional Corporation, beneficially own an aggregate of 64,714 shares
of our preferred and common stock.
EXPERTS
The financial statements of Pain Therapeutics, Inc. (a development stage
enterprise) as of December 31, 1998 and 1999, and for the period from May 4,
1998 (inception) through December 31, 1998, the year ended December 31, 1999,
and the period from May 4, 1998 (inception) through December 31, 1999 have been
included herein and in the registration statement in reliance upon the report of
KPMG LLP, independent certified public accountants, appearing elsewhere herein,
and upon the authority of said firm as experts in accounting and auditing.
67
<PAGE> 72
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission, Washington,
D.C., a registration statement on Form S-1 under the Securities Act with respect
to the shares of common stock offered hereby. This prospectus does not contain
all the information set forth in the registration statement and the exhibits and
schedules thereto. For further information with respect to us and our common
stock, you should refer to the registration statement and to the exhibits and
schedules filed therewith. Statements contained in this prospectus that describe
the contents of any contract or other document are not necessarily complete, and
in each instance reference is made to the copy of the contract or other document
filed as an exhibit to the registration statement, each statement being
qualified in all respects by this reference. A copy of the registration
statement may be inspected by anyone without charge at the Public Reference
Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549. Copies of all or any portion of the registration
statement may be obtained from the Public Reference Section of the Commission,
450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of prescribed fees.
The public may obtain information on the operation of the public reference room
by calling the SEC at 1-800-SEC-0330. The Commission maintains a Web site at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission.
68
<PAGE> 73
PAIN THERAPEUTICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-2
Balance Sheets.............................................. F-3
Statements of Operations.................................... F-4
Statements of Stockholders' Equity (Deficit)................ F-5
Statements of Cash Flows.................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 74
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Pain Therapeutics, Inc.:
We have audited the accompanying balance sheets of Pain Therapeutics, Inc.
(a development stage enterprise) as of December 31, 1998 and 1999, and the
related statements of operations, stockholders' equity (deficit) and cash flows
for the period from May 4, 1998 (inception) through December 31, 1998, for the
year ended December 31, 1999 and for the period from May 4, 1998 (inception)
through December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Pain Therapeutics, Inc. (a
development stage enterprise) as of December 31, 1998 and 1999 and the results
of its operations and its cash flows for the period from May 4, 1998 (inception)
through December 31, 1998, for the year ended December 31, 1999 and for the
period from May 4, 1998 (inception) through December 31, 1999, in conformity
with generally accepted accounting principles.
/s/ KPMG LLP
San Francisco, California
February 26, 2000, except as to note 7
which is as of March 9, 2000
F-2
<PAGE> 75
PAIN THERAPEUTICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, 2000
----------------------------
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, DECEMBER 31, EQUITY
1998 1999 ACTUAL (NOTE 1)
------------ ------------ ------------ -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............. $2,333,512 $ 9,339,669 $ 22,179,362
Interest receivable.................... 3,138 15,362 32,095
Prepaid expenses....................... 35,496 41,387 71,650
---------- ----------- ------------
Total current assets................. 2,372,146 9,396,418 22,283,107
Property and equipment, net.............. 10,454 44,755 121,513
Deferred financing costs................. -- -- 460,179
---------- ----------- ------------
Total assets......................... $2,382,600 $ 9,441,173 $ 22,864,799
========== =========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Liabilities:
Accounts payable....................... $ 108,108 $ 300,587 $ 487,663
---------- ----------- ------------
Total liabilities.................... 108,108 300,587 487,663
---------- ----------- ------------
Commitments and contingencies
Redeemable convertible preferred stock --
Series C $.001 par value; 3,044,018
shares authorized; 3,044,018 shares
designated, issued and outstanding at
March 31, 2000; none pro forma;
liquidation preference and redemption
value of $5 per share less discount
for beneficial conversion feature.... -- -- -- --
Series B $.001 par value; 5,405,405
shares authorized; 5,405,405 shares
designated, issued and outstanding in
1999 and 2000; none pro forma;
liquidation preference and redemption
value of $1.85 per share............. -- 9,703,903 9,703,903 --
---------- ----------- ------------ -----------
-- 9,703,903 9,703,903 --
---------- ----------- ------------ -----------
Stockholders' equity (deficit):
Convertible preferred stock -- Series A
$.001 par value; 3,500,000 shares
authorized; 2,659,489 shares issued
and outstanding in 1998, 1999 and
2000; none pro forma; liquidation
preference of $1.00 per share........ 2,660 2,660 2,660 --
Common stock, $.001 par value;
20,000,000 shares authorized and
9,000,000 and 9,445,000 issued and
outstanding as of December 31, 1998
and 1999, respectively; 22,000,000
shares authorized and 9,718,230
shares issued and outstanding as of
March 31, 2000, 20,827,142 shares
issued and outstanding pro forma..... 9,000 9,445 9,718 20,827
Additional paid-in-capital............. 2,686,839 9,367,750 31,929,354 41,624,808
Deferred compensation.................. -- (4,980,180) (8,448,370) (8,448,370)
Notes receivable....................... (35,000) (74,400) (123,400) (123,400)
Deficit accumulated during the
development stage.................... (389,007) (4,888,592) (10,696,729) (10,696,729)
---------- ----------- ------------ -----------
Total stockholders' equity
(deficit).......................... 2,274,492 (563,317) 12,673,233 22,377,136
---------- ----------- ------------ ===========
Total liabilities and stockholders'
equity (deficit)................... $2,382,600 $ 9,441,173 $ 22,864,799
========== =========== ============
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 76
PAIN THERAPEUTICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
MAY 4, 1998 MAY 4, 1998
(INCEPTION) (INCEPTION) THREE MONTHS ENDED MAY 4, 1998
THROUGH YEAR ENDED THROUGH MARCH 31, (INCEPTION)
DECEMBER 31, DECEMBER 31, DECEMBER 31, -------------------------- THROUGH
1998 1999 1999 1999 2000 MARCH 31, 2000
------------ ------------ ------------ ----------- ------------ --------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Operating expenses:
Licensing fees............... $ 100,000 $ -- $ 100,000 $ -- $ -- $ 100,000
Research and development..... 200,000 2,092,119 2,292,119 -- 1,433,268 3,725,387
General and administrative... 122,168 2,567,355 2,689,523 118,257 4,619,719 7,309,242
---------- ----------- ----------- ---------- ------------ ------------
Total expenses............. 422,168 4,659,474 5,081,642 118,257 6,052,987 11,134,629
---------- ----------- ----------- ---------- ------------ ------------
Operating loss............. (422,168) (4,659,474) (5,081,642) (118,257) (6,052,987) (11,134,629)
Other income:
Interest income.............. 33,961 160,689 194,650 27,407 245,050 439,700
---------- ----------- ----------- ---------- ------------ ------------
Net loss before income
taxes.................... (388,207) (4,498,785) (4,886,992) (90,850) (5,807,937) (10,694,929)
Income tax expense............. 800 800 1,600 200 200 1,800
---------- ----------- ----------- ---------- ------------ ------------
Net loss................... (389,007) (4,499,585) (4,888,592) (91,050) (5,808,137) (10,696,729)
Return to series C preferred
shareholders for beneficial
conversion feature........... -- -- -- -- (14,231,595) (14,231,595)
---------- ----------- ----------- ---------- ------------ ------------
Loss available to common
shareholders................. $ (389,007) $(4,499,585) $(4,888,592) $ (91,050) $(20,039,732) $(24,928,324)
========== =========== =========== ========== ============ ============
Basic and diluted loss per
share........................ $ (0.06) $ (0.48) $ (0.01) $ (2.10)
========== =========== ========== ============
Weighted-average shares used in
computing basic and diluted
loss per share............... 6,948,637 9,322,441 9,000,000 9,528,957
========== =========== ========== ============
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 77
PAIN THERAPEUTICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD MAY 4, 1998 (INCEPTION) THROUGH
DECEMBER 31, 1998, THE YEAR ENDED DECEMBER 31, 1999,
AND THE THREE MONTHS ENDED MARCH 31, 2000
<TABLE>
<CAPTION>
SERIES A CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL NOTE
--------------------- --------------------- PAID-IN DEFERRED RECEIVABLE
SHARES PAR VALUE SHARES PAR VALUE CAPITAL COMPENSATION FOR STOCK
--------- --------- --------- --------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance -- May 4, 1998
(inception)...................... -- $ -- -- $ -- $ -- $ -- $ --
Common stock issued on June 22,
1998 at $.001 per share.......... -- -- 8,500,000 8,500 -- -- --
Series A convertible preferred
stock issued between August 14,
1998 and October 28, 1998 at
$1.00 per share
(net of issuance costs of
$19,490)......................... 2,659,489 2,660 -- -- 2,637,339 -- --
Common stock issued on September
23, 1998 at $.10 per share for
notes receivable................. -- -- 350,000 350 34,650 -- (35,000)
Common stock issued on September
23, 1998 at $.10 per share for
cash............................. -- -- 150,000 150 14,850 -- --
Net loss........................... -- -- -- -- -- -- --
--------- ------ --------- ------ ----------- ----------- ---------
Balance -- December 31, 1998....... 2,659,489 2,660 9,000,000 9,000 2,686,839 -- (35,000)
Payment on note receivable......... -- -- -- -- -- -- 5,000
Common stock issued between April 1
and May 3, 1999 at $.10 per share
for notes receivable............. -- -- 444,000 444 43,956 -- (44,400)
Issuance of common stock pursuant
to exercise of stock options..... -- -- 1,000 1 99 -- --
Issuance of warrants in connection
with lease in August 1999........ -- -- -- -- 33,810 -- --
Deferred compensation with respect
to options issuances during
1999............................. -- -- -- -- 6,515,027 (6,515,027) --
Amortization of deferred
compensation..................... -- -- -- -- -- 1,534,847 --
Compensation expense with respect
to non-employee option grants.... -- -- -- -- 88,019 -- --
Net loss........................... -- -- -- -- -- -- --
--------- ------ --------- ------ ----------- ----------- ---------
Balance -- December 31, 1999....... 2,659,489 2,660 9,445,000 9,445 9,367,750 (4,980,180) (74,400)
Common stock issued between January
1 and March 31, 2000 at $0.20 per
share for notes receivable
(unaudited)...................... -- -- 245,000 245 48,755 -- (49,000)
Issuance of common stock pursuant
to exercise of stock options
(unaudited)...................... -- -- 28,230 28 3,014 -- --
Issuance of warrants in connection
with the series C preferred stock
offering (unaudited)............. -- -- -- -- 963,240 -- --
Deferred compensation with respect
to option issuances
(unaudited)...................... -- -- -- -- 4,669,000 (4,669,000) --
Amortization of deferred
compensation (unaudited)......... -- -- -- -- -- 1,200,810 --
Charges related to stock purchase
rights (unaudited)............... -- -- -- -- 2,646,000 -- --
Beneficial conversion feature of
series C preferred stock
(unaudited)...................... -- -- -- -- 14,231,595 -- --
Net loss (unaudited)............... -- -- -- -- -- -- --
--------- ------ --------- ------ ----------- ----------- ---------
Balance -- March 31, 2000
(unaudited)...................... 2,659,489 $2,660 9,718,230 $9,718 $31,929,354 $(8,448,370) $(123,400)
========= ====== ========= ====== =========== =========== =========
<CAPTION>
DEFICIT
ACCUMULATED
DURING STOCKHOLDERS'
DEVELOPMENT EQUITY
STAGE (DEFICIT)
------------ -------------
<S> <C> <C>
Balance -- May 4, 1998
(inception)...................... $ -- $ --
Common stock issued on June 22,
1998 at $.001 per share.......... -- 8,500
Series A convertible preferred
stock issued between August 14,
1998 and October 28, 1998 at
$1.00 per share
(net of issuance costs of
$19,490)......................... -- 2,639,999
Common stock issued on September
23, 1998 at $.10 per share for
notes receivable................. -- --
Common stock issued on September
23, 1998 at $.10 per share for
cash............................. -- 15,000
Net loss........................... (389,007) (389,007)
------------ -----------
Balance -- December 31, 1998....... (389,007) 2,274,492
Payment on note receivable......... -- 5,000
Common stock issued between April 1
and May 3, 1999 at $.10 per share
for notes receivable............. -- --
Issuance of common stock pursuant
to exercise of stock options..... -- 100
Issuance of warrants in connection
with lease in August 1999........ -- 33,810
Deferred compensation with respect
to options issuances during
1999............................. -- --
Amortization of deferred
compensation..................... -- 1,534,847
Compensation expense with respect
to non-employee option grants.... -- 88,019
Net loss........................... (4,499,585) (4,499,585)
------------ -----------
Balance -- December 31, 1999....... (4,888,592) (563,317)
Common stock issued between January
1 and March 31, 2000 at $0.20 per
share for notes receivable
(unaudited)...................... -- --
Issuance of common stock pursuant
to exercise of stock options
(unaudited)...................... -- 3,042
Issuance of warrants in connection
with the series C preferred stock
offering (unaudited)............. -- 963,240
Deferred compensation with respect
to option issuances
(unaudited)...................... -- --
Amortization of deferred
compensation (unaudited)......... -- 1,200,810
Charges related to stock purchase
rights (unaudited)............... -- 2,646,000
Beneficial conversion feature of
series C preferred stock
(unaudited)...................... -- 14,231,595
Net loss (unaudited)............... (5,808,137) (5,808,137)
------------ -----------
Balance -- March 31, 2000
(unaudited)...................... $(10,696,729) $12,673,233
============ ===========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 78
PAIN THERAPEUTICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
MAY 4, 1998 MAY 4, 1998 THREE MONTHS MAY 4, 1997
(INCEPTION) (INCEPTION) ENDED (INCEPTION)
THROUGH YEAR ENDED THROUGH MARCH 31, THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31, ------------------------ MARCH 31,
1998 1999 1999 1999 2000 2000
------------ ------------ ------------ ---------- ----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss................................. $ (389,007) $(4,499,585) $(4,888,592) $ (91,050) $(5,808,137) $(10,696,729)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization.......... 518 4,244 4,762 549 6,454 11,216
Amortization of deferred
compensation......................... -- 1,534,847 1,534,847 17,083 1,200,810 2,735,657
Noncash expense for options and
warrants issued...................... -- 121,829 121,829 -- 2,646,000 2,767,829
Changes in operating assets and
liabilities:
Interest receivable.................. (3,138) (12,224) (15,362) (171) (16,733) (32,095)
Prepaid expenses..................... (35,496) (5,891) (41,387) (27,951) (30,263) (71,650)
Accounts payable..................... 108,108 162,479 270,587 (100,988) 187,076 457,663
---------- ----------- ----------- ---------- ----------- ------------
Net cash used in operating
activities....................... (319,015) (2,694,301) (3,013,316) (202,528) (1,814,793) (4,828,109)
---------- ----------- ----------- ---------- ----------- ------------
Cash flows used in investing
activities -- purchase of property and
equipment................................ (10,972) (38,545) (49,517) -- (83,212) (132,729)
---------- ----------- ----------- ---------- ----------- ------------
Cash flows from financing activities:
Proceeds from issuance of series B
redeemable convertible preferred stock
(net of issuance costs of $296,096).... -- 9,733,903 9,733,903 -- -- 9,733,903
Proceeds from issuance of series C
redeemable convertible preferred stock
(net of cash issuance costs of
$25,255)............................... -- -- -- -- 15,194,835 15,194,835
Deferred financing costs................. -- -- -- -- (460,179) (460,179)
Stock subscription received.............. -- 5,000 5,000 5,000 -- 5,000
Proceeds from issuance of series A
convertible preferred stock (net of
issuance costs of $19,490)............. 2,639,999 -- 2,639,999 -- -- 2,639,999
Proceeds from issuance of common stock... 23,500 100 23,600 33,810 3,042 26,642
---------- ----------- ----------- ---------- ----------- ------------
Net cash provided by financing
activities....................... 2,663,499 9,739,003 12,402,502 38,810 14,737,698 27,140,200
---------- ----------- ----------- ---------- ----------- ------------
Net increase (decrease) in cash and cash
equivalents.............................. 2,333,512 7,006,157 9,339,669 (163,718) 12,839,693 22,179,362
Cash and cash equivalents at beginning of
period................................... -- 2,333,512 -- 2,333,512 9,339,669 --
---------- ----------- ----------- ---------- ----------- ------------
Cash and cash equivalents at end of
period................................... $2,333,512 $ 9,339,669 $ 9,339,669 $2,169,794 $22,179,362 $ 22,179,362
========== =========== =========== ========== =========== ============
Supplemental cash flow information:
Cash paid for income taxes............... $ -- $ 1,600 $ 1,600
========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 79
PAIN THERAPEUTICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
(1) THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Pain Therapeutics, Inc. (a development stage enterprise) is a
clinical-stage specialty pharmaceutical company which was incorporated on May 4,
1998. Since our inception in May 1998, we have licensed proprietary technology
from Albert Einstein College of Medicine and have devoted substantially all of
our resources to the development of a new generation of opioid painkillers with
improved clinical benefits, which are based on the acquired technology.
Our development activities involve inherent risks. These risks include,
among others, dependence on key personnel and determination of patentability of
our products and processes. In addition, we have product candidates which have
not yet obtained Food and Drug Administration approval. Successful future
operations depend on our ability to obtain approval for and commercialize these
products.
On March 9, 2000, our Board of Directors authorized our management to file
a Registration Statement with the Securities and Exchange Commission to sell
shares of our common stock to the public.
Interim Financial Statements
The financial information as of March 31, 2000 and for the three months
ended March 31, 1999 and 2000 and the period from May 4, 1998 (inception)
through March 31, 2000 is unaudited. This interim financial information has been
prepared on substantially the same basis as the audited financial statements and
in the opinion of management, contains all adjustments, consisting only of
normal recurring adjustments, necessary for the fair presentation of the
financial information set forth therein.
Cash and Cash Equivalents
We consider all highly liquid financial instruments with original
maturities of three months or less to be cash equivalents. We maintain our cash
at one financial institution. Our balances are in excess of federal depository
insurance limitations.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Income Taxes
Income taxes are accounted for under the asset and liability 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, and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply
F-7
<PAGE> 80
PAIN THERAPEUTICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
to taxable income in the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period that includes the
enactment date. Deferred tax assets are reduced by a valuation allowance when,
in the opinion of management, it is more likely than not that some or all of the
deferred tax assets may not be realized.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Depreciation is calculated using the straight-line method over
the estimated useful lives of the assets, generally three to five years.
Fair Value of Financial Instruments
Interest and stock subscriptions receivables are considered to have
carrying amounts that approximate fair value because of the short maturity of
these financial instruments. Notes receivable are considered to have carrying
amounts that approximate fair value as they bear a market rate of interest. The
series B and series C redeemable, convertible preferred stock has a carrying
amount that approximates fair value as the redemption amount equals the carrying
amount (see note 7 regarding series C redeemable convertible preferred stock).
Research and Development Costs
Research and development costs and the costs of obtaining licenses used in
research and development are charged to expense as incurred.
Impairment of Long-Lived Assets
We review, as circumstances dictate, the carrying amount of our long-lived
assets. The purpose of these reviews is to determine whether the carrying
amounts are recoverable. Recoverability is determined by comparing the projected
undiscounted net cash flows of the long-lived assets against their respective
carrying amounts. The amount of impairment, if any, is measured based on the
excess of the carrying value over the fair value. No such events have occurred
with respect to the Company's long-lived assets.
Stock-Based Compensation
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation, establishes a fair-value method of accounting for
stock options and similar equity instruments. The fair-value method requires
compensation cost to be measured at the grant date based on the value of the
award, and is recognized over the service period. SFAS No. 123 allows companies
to either account for stock-based compensation to employees under the provisions
of SFAS No. 123 or under the provisions of Accounting Principles Board (APB)
Opinion No. 25 and its related interpretations. We have elected to account for
our stock-based compensation to employees in accordance with the provisions of
APB Opinion No. 25 and provide the pro forma disclosures required under SFAS No.
123.
F-8
<PAGE> 81
PAIN THERAPEUTICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
We have recorded deferred compensation for the difference between the
exercise price and the fair value of the common stock for financial reporting
purposes of stock options granted to employees. The compensation expense related
to such grants is amortized over the vesting period of the related stock options
in accordance with Financial Accounting Standards Board Interpretation No. 28
(FIN 28).
We account for equity instruments issued to nonemployees in accordance with
the provisions of SFAS No. 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.
Comprehensive Loss
We have no components of other comprehensive loss other than our net loss
and, accordingly, our comprehensive loss is equivalent to our net loss for all
periods presented.
Business Segments
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, requires an enterprise to report segment information based on how
management internally evaluates the operating performance of its business units
(segments). Our operations are confined to one business segment: the discovery
and development of new opioid painkillers.
Loss per Share
Basic loss per share is computed on the basis of the weighted-average
number of shares outstanding for the reporting period. Diluted loss per share is
computed on the basis of the weighted-average number of common shares plus
dilutive potential common shares outstanding using the treasury-stock method.
Potential dilutive common shares consist of convertible preferred stock, shares
issuable to holders of unexercised employee stock options and outstanding
warrants. Convertible preferred stock, options and warrants equivalent to, in
the aggregate, 2,809,489 and 9,580,094 shares of common stock as of December 31,
1998 and 1999 and 2,809,489 and 13,206,882 shares of common stock as of March
31, 1999 and 2000, respectively, were not included in the calculation of diluted
loss per share because the representative share increments would be
antidilutive.
Pro Forma Stockholders' Equity (Unaudited)
The unaudited pro forma stockholders' equity gives effect to the conversion
of 11,108,912 shares of series A convertible preferred stock and B and C
redeemable convertible preferred stock outstanding as of March 31, 2000 into
shares of common stock, at a conversion rate of 1 common share for each
preferred share of series A convertible preferred stock and each share of series
B and C redeemable convertible preferred stock, upon the closing of our initial
public offering.
F-9
<PAGE> 82
PAIN THERAPEUTICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(2) PROPERTY AND EQUIPMENT
Property and equipment consisted of the following as of December 31:
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
Machinery and equipment.................................... $ 7,195 $14,703
Fixtures................................................... 3,777 34,814
------- -------
10,972 49,517
Less accumulated depreciation.............................. (518) (4,762)
------- -------
Property and equipment, net................................ $10,454 $44,755
======= =======
</TABLE>
(3) STOCKHOLDERS' EQUITY (DEFICIT)
Common Stock
On June 22, 1998, we issued 8,500,000 shares of common stock at $0.001 per
share. Of these shares, 8,480,000 were issued subject to a repurchase option.
The shares are released from our repurchase option over a four-year vesting
period at the rate of 1/48 at the end of each month from the date of purchase
until all shares are released. Our repurchase option is exercisable only within
90 days following the termination of the purchaser's employment, at which time
we are able to repurchase the unvested shares at the original purchase price of
$0.001 per share. As of December 31, 1999 4,416,667 shares of common stock were
not vested and, therefore, were subject to repurchase by us in the event of
termination of the purchaser's employment.
On September 23, 1998, under the terms of the 1998 Stock Plan (see below),
we granted stock purchase rights to and subsequently issued 500,000 shares of
common stock at $0.10 per share in exchange for $35,000 in promissory notes and
$15,000 in cash. Such shares were issued pursuant to a restricted stock purchase
agreement. The shares are released from our repurchase option over a four-year
vesting period at the rate of 1/48 at the end of each month from the date of
purchase until all shares are released. Our repurchase option is exercisable
only within 90 days following the termination of the purchaser's employment or
provision of services, at which time we are able to repurchase the unvested
shares at the original purchase price of $0.10 per share. As of December 31,
1999, 350,000 shares of common stock were not vested and, therefore, were
subject to repurchase by us in the event of termination of the purchaser's
employment or provision of services to us.
On February 25, 1999, under the terms of the 1998 Stock Plan (see below),
we granted stock purchase rights to and subsequently issued 444,000 additional
shares of common stock at $0.10 per share in exchange for promissory notes. Such
shares were issued pursuant to a restricted stock purchase agreement. The shares
are released from our repurchase option over a two-year vesting period at the
rate of 1/24 at the end of each month from the date of purchase until all shares
are released. Our repurchase option is exercisable only within 90 days following
the termination of the purchaser's employment or provision of services, at which
time we are able to repurchase the unvested shares at the original repurchase
price per share. As of December 31, 1999, 190,500 shares of common stock were
not vested and, therefore, subject to repurchase by us in the event of
termination of the purchaser's employment or provision of services to us.
F-10
<PAGE> 83
PAIN THERAPEUTICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Preferred Stock
We are authorized to issue 10,000,000 shares of preferred stock.
We issued 2,659,489 shares of series A convertible preferred stock at $1.00
per share during August and October 1998.
We issued 5,405,405 shares of series B redeemable convertible preferred
stock at $1.85 per share during October and November 1999.
A summary of the rights, preferences, privileges and restrictions relative
to the series A convertible preferred stock and series B redeemable convertible
preferred stock (Preferred Stock) follows:
Dividends. The holders of both the series A convertible preferred stock and
series B redeemable convertible preferred stock are entitled to receive
dividends, prior and in preference to holders of common stock and on a pari
passu basis, at the rate of $0.06 per annum, when and if declared by the Board
of Directors. Such dividends are not cumulative. No dividends have been declared
to date.
Liquidation. In the event that we liquidate, dissolve or wind up, the
holders of preferred stock shall be entitled to receive, prior and in preference
to the holders of common stock, an amount per share equal to (i) $1.00 per share
for each share of series A convertible preferred stock, plus declared but unpaid
dividends; and (ii) $1.85 per share for each outstanding share of series B
redeemable convertible preferred stock, plus declared but unpaid dividends. If,
upon the occurrence of such event, the assets and funds thus distributed are
insufficient to pay the full preferential amounts to all the holders of the
preferred stock, then our entire assets legally available for distribution shall
be distributed ratably among the holders of the preferred stock in proportion to
the preferential amount each such holder is otherwise entitled to receive. After
the liquidation preference has been paid to the holders of the preferred stock,
all remaining assets and funds shall be distributed ratably among the holders of
common stock. A merger, consolidation or sale of all or substantially all of our
assets, which will result in our stockholders immediately prior to such
transaction not holding at least 50% of the voting power of the surviving
corporation, shall be treated as a liquidation.
Conversion. Each share of preferred stock shall be convertible, at the
option of the holder thereof, at any time after the date of issuance of such
share into common stock. Each share of preferred stock shall be convertible into
the number of shares of common stock as is determined by dividing (i) $1.00 in
the case of series A convertible preferred stock; or (ii) $1.85 in the case of
series B redeemable convertible preferred stock by the conversion price
applicable to such shares. The initial conversion price is $1.00 per share of
series A convertible preferred stock and $1.85 per share of series B redeemable
convertible preferred stock. The preferred stock shall be automatically
converted into shares of common stock at the then applicable conversion rate
upon the Company's sale of its common stock in a firm commitment underwritten
public offering with a sales price per share (as adjusted) of at least $5.00 per
share and with aggregate gross proceeds to the Company of at least $15,000,000.
F-11
<PAGE> 84
PAIN THERAPEUTICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Antidilution Adjustments. The conversion price of each series of preferred
stock is subject to adjustment upon the occurrence of certain events described
in our Certificate of Incorporation, including the issuance of common stock for
a consideration per share less than the conversion price in effect for each
respective series of preferred stock, common stock dividends, common stock
splits and recapitalizations.
Redemption. The series A convertible preferred stock is not redeemable.
Each holder of series B redeemable convertible preferred stock has the right to
require us to redeem up to one-third of such series B redeemable convertible
preferred stock on each of October 1, 2005, October 1, 2006 and October 1, 2007,
with the right to carryforward such redemption onto subsequent anniversaries to
the extent it is not exercised in full on the applicable redemption date. The
redemption price per share shall be equal to the original series B redeemable
convertible preferred stock purchase price (subject to adjustment) plus all
declared but unpaid dividends.
Voting. Except as otherwise provided or required by law, the holders of
both series of preferred stock shall be entitled to vote on an as-converted
basis on all matters with the holders of common stock. Consent of more than 50%
of the holders of preferred stock, voting together as a class, shall be required
in order to (i) amend the Certificate of Incorporation or Bylaws; (ii)
liquidate, dissolve or wind up the Company; or (iii) sell or otherwise dispose
of all or substantially all of the Company's assets or merge into or consolidate
with another entity, as a result of which the holders of the outstanding shares
of the Company prior to the transaction hold less than 50% of the voting power
of the surviving corporation and which generates gross proceeds to the Company
and its stockholders of $50,000,000 or more. Consent of two-thirds of the
holders of series B redeemable convertible preferred stock, voting as a class,
is required to consummate a change of control involving gross proceeds to us and
our stockholders of less than $50,000,000.
Registration Rights. The holders of both series of preferred stock have
certain registration rights with respect to the preferred stock and the common
stock into which the preferred stock is convertible.
Piggyback Registration Rights. The holders of both series of preferred
stock have the right to request that shares of common stock issued or issuable
upon conversion of said preferred stock be included in any registration of
common stock that we perform. In any such registration, the underwriters may,
for marketing reasons, exclude all or part of the shares requested to be
registered on behalf of the holder. Notwithstanding the foregoing, we have the
right to terminate any such registration prior to its effectiveness regardless
of any request for inclusion by a holder.
Warrants
In June 1998, we issued a warrant to purchase 150,000 shares of series A
convertible preferred stock at an exercise price of $1.00 per share to one of
the holders of the series A convertible preferred stock, in consideration of
such holder's advance of funds to us prior to the closing of the series A
convertible preferred stock financing. The warrant expires on June 5, 2010. The
shares of Series A convertible preferred stock underlying this warrant
F-12
<PAGE> 85
PAIN THERAPEUTICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
are entitled to the benefits of the registration rights granted by us to the
holders of series A convertible preferred stock.
In August 1999, we issued a warrant to purchase 70,000 shares of common
stock at an exercise price of $1.00 per share to the Company's landlord in
connection with the commercial lease of the Company's facilities. The warrant
will expire on the fifth anniversary of the Company's initial public offering
(or sooner under certain circumstances). The shares of common stock underlying
this warrant are not entitled to any registration rights. The fair value of
these warrants of $33,810 was estimated using a Black-Scholes model and the
following assumptions: estimated volatility of 60%, a risk-free interest rate of
5.27%, no dividend yield, and an expected life of 5 years. This fair value is
being amortized to rent expense over the lease term.
1998 Stock Plan
Pursuant to approval by the board of directors, effective September 23,
1998 we adopted the 1998 Stock Plan, allowing issuance of up to 1,500,000 shares
of common stock. The board of directors subsequently amended the 1998 Stock Plan
to increase the number of shares of common stock reserved for issuance under the
1998 Stock Plan to 2,500,000. The 1998 Stock Plan will terminate on September
23, 2008 or an earlier date as determined by the board of directors.
Under the 1998 Stock Plan, employees, directors and consultants (Service
Providers) may be granted options that allow for the purchase of shares of our
common stock. Nonstatutory stock options and stock purchase rights (see above)
may be granted to all Service Providers. Incentive stock options may only be
granted to employees.
Nonstatutory stock options may be granted under the 1998 Stock Plan at a
price not less than 110% and 85% of the fair value of the stock on the date the
option is granted where (a) the options are granted to Service Providers who, at
the time of grant, own stock representing more than 10% of the voting power of
all classes of stock, and (b) the options are granted to any other Service
Provider, respectively. Incentive stock options may be granted under the 1998
Stock Plan at a price not less than 110% and 100% of the fair market value of
the stock on the date the option is granted where (a) the options are granted to
employees who, at the time of the grant, own stock representing more than 10% of
the voting power of all classes of stock, and (b) the options are granted to any
other employee, respectively. The term of the nonstatutory and incentive stock
options granted is ten years or less from the date of the grant, as provided for
in the individual option agreement.
Vesting provisions of individual options may vary, except in the case of
options granted to officers, directors and consultants where vesting is at a
rate of no less than 20% per year over five years from the date of grant.
Forfeited options become available for reissuance under the 1998 Stock Plan.
There were no options granted during the period from May 4, 1998
(inception) through December 31, 1998.
F-13
<PAGE> 86
PAIN THERAPEUTICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes option activity under the 1998 Stock Plan:
<TABLE>
<CAPTION>
WEIGHTED-
RANGE OF NUMBER AVERAGE
EXERCISE OF EXERCISE
PRICES OPTIONS PRICE
----------- --------- ---------
<S> <C> <C> <C>
Options outstanding as of December 31,
1998.................................... $ -- -- $ --
Granted................................. 0.10 - 0.20 1,361,200 0.12
Exercised............................... 0.10 (1,000) 0.10
Forfeited............................... 0.10 (65,000) 0.10
----------- --------- -----
Options outstanding as of December 31,
1999.................................... $0.10 - 0.20 1,295,200 $0.12
----------- --------- -----
Total number of shares exercisable as of
December 31, 1999....................... $0.10 - 0.20 133,213 $0.11
=========== ========= =====
</TABLE>
As of December 31, 1999, 14,800 shares of common stock were available for
issuance under the 1998 Stock Plan either under stock options or stock purchase
rights.
Pursuant to SFAS No. 123, Accounting for Stock-Based Compensation, we are
required to disclose the pro forma effects on net loss and net loss per share as
if we had elected to use the fair value approach to account for all of our
employee stock-based compensation plans. Had compensation cost of our plans been
determined in a manner consistent with the fair value approach of SFAS No. 123,
our pro forma net loss and pro forma net loss per share would have been reduced
to the pro forma amounts indicated below:
Pro forma net loss:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1998 1999
-------- -----------
<S> <C> <C>
Net loss as reported.......................... $389,007 $ 4,499,585
Adjusted pro forma net loss................... 389,007 4,505,402
Net loss per share basic and diluted as
reported.................................... 0.06 0.48
Adjusted pro forma............................ 0.06 0.48
</TABLE>
The per share weighted-average fair value of stock options granted during
1999 was $4.90 on the date of grant using the minimum value method with the
following weighted-average assumptions for grants during the period ended
December 31, 1999:
<TABLE>
<S> <C>
Expected dividend yield............................ 0%
Risk-free interest rate range...................... 5.49 - 6.20%
Expected life...................................... 5 years
</TABLE>
F-14
<PAGE> 87
PAIN THERAPEUTICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information about stock options outstanding
as of December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------- ---------------------
WEIGHTED-
AVERAGE
REMAINING WEIGHTED- NUMBER WEIGHTED-
NUMBER CONTRACTUAL AVERAGE OF AVERAGE
EXERCISE OF LIFE EXERCISE VESTED EXERCISE
PRICES OPTIONS (YEARS) PRICE OPTIONS PRICE
- -------- --------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
$0.10.. 992,200 9.48 $0.10 124,588 $0.10
0.20.. 303,000 9.94 0.20 8,625 0.20
--------- ---- ----- ------- -----
1,295,200 9.59 $0.12 133,213 $0.11
--------- ---- ----- ------- -----
</TABLE>
During the year ended December 31, 1999 we granted stock options under the
1998 Stock Plan to employees and non-employee consultants for which we recorded
deferred compensation of $2,283,565 and $4,231,462, respectively. No options
were granted in 1998.
For employees, deferred compensation represents the difference between the
exercise price of the option and the fair value of our common stock on the date
of grant in accordance with APB No. 25 and its related interpretations. For
non-employees, deferred compensation is recorded at the fair value of the
options granted in accordance with SFAS No. 123 and EITF 96-18. The fair value
for non-employee options was determined using a Black-Scholes model and the
following assumptions: estimated volatility of 60%, a risk free interest rate
ranging from 5.54 - 6.28%, no dividend yield, and an expected life of the option
equal to the options contractual life of ten years from the date of grant.
Compensation expense is being recognized over the vesting period for
employees and the service period for non-employees in accordance with FIN No.
28. For the year ended December 31, 1999, amounts amortized to the statement of
operations as compensation expense for employees and non-employees was $187,621
and $1,347,226, respectively.
(4) INCOME TAXES
Income tax expense for the period from May 4, 1998 (inception) through
December 31, 1998 and for the year ended December 31, 1999 is comprised of the
following:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- -----
<S> <C> <C> <C>
1998:
Federal...................................... $ -- -- $ --
State........................................ 800 -- 800
---- ---- ----
$800 -- $800
==== ==== ====
1999:
Federal...................................... $ -- -- $ --
State........................................ 800 -- 800
---- ---- ----
Total $800 -- $800
==== ==== ====
</TABLE>
F-15
<PAGE> 88
PAIN THERAPEUTICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Tax expense differed from the amounts computed by applying the U.S. federal
income tax rate of 34% to pretax income for the period from May 4, 1998
(inception) through December 31, 1998 and for the year ended December 31, 1999
as a result of the following:
<TABLE>
<CAPTION>
1998 1999
--------- -----------
<S> <C> <C>
Computed "expected" tax expense (benefit)......... $(131,990) $(1,529,587)
Current NOLs for which no benefit was realized.... 130,098 1,528,441
Permanent differences............................. 1,892 1,146
State taxes....................................... 800 800
--------- -----------
$ 800 $ 800
========= ===========
</TABLE>
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets as of December 31, 1998 and 1999 is as
follows:
<TABLE>
<CAPTION>
1998 1999
--------- -----------
<S> <C> <C>
Deferred tax assets:
Intangible assets........................... $ 11,275 $ 8,817
Issuance of options and warrants............ -- 634,542
Net operating loss carryforward............. 141,451 1,323,944
State taxes................................. 272 571
Research and development credit............. 13,000 120,247
--------- -----------
Gross deferred tax assets................ 165,998 2,088,121
Valuation allowance......................... (165,998) (2,088,121)
--------- -----------
Net deferred tax assets.................. $ -- $ --
========= ===========
</TABLE>
We have recorded a valuation allowance of $165,998 and $2,088,121 against
the deferred tax assets related to temporary differences and credits for federal
and state income tax purposes as of December 31, 1998 and 1999, respectively. We
believe that realization of these deferred tax assets is not assured, and
therefore we have not recognized the related deferred tax benefits. The change
in the valuation allowance for the years ended December 31, 1998 and 1999 was
$165,998 and $1,922,123, respectively.
As of December 31, 1999, we have operating loss carryforwards (expiring
through 2019 for federal purposes and 2006 for state purposes) of approximately
$3,324,000 and $3,323,000 for federal and state income tax purposes,
respectively. We have federal research credits (expiring through 2019) of
approximately $114,000. We have California research credits (carrying forward
indefinitely) of approximately $9,000.
Under provisions of the Internal Revenue Code, should substantial changes
in our ownership occur, the utilization of net operating loss carryforwards may
be limited.
(5) AGREEMENT WITH ALBERT EINSTEIN COLLEGE OF MEDICINE
On May 5, 1998, we entered into an exclusive, worldwide license agreement
(the Agreement) with Albert Einstein College of Medicine (AECOM) to gain
exclusive rights to certain intellectual property developed and patented by
AECOM. In consideration for the terms of the Agreement, we paid AECOM a one-time
licensing fee. In addition, we have paid
F-16
<PAGE> 89
PAIN THERAPEUTICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
the first three of four research funding installments to be paid over the first
two years of the Agreement. We are not obligated to pay the remaining research
funding payments in the event that the Agreement is terminated. We are also
required to make milestone payments upon achievement of certain events with
respect to licensed intellectual property. Royalties for the life of the
agreement equal 4% of net product sales. If a product is combined with a drug or
other substance for which we are paying an additional royalty, the royalty rate
we pay to AECOM is reduced by one-half the amount of such additional royalty.
(6) LEASES
We lease office space and equipment pursuant to noncancelable operating
leases that will expire at various dates through 2002.
Minimum annual rentals are as follows:
<TABLE>
<S> <C>
Through December 31, 2000................................... $25,325
Through December 31, 2001................................... 1,992
Through December 31, 2002................................... 1,328
Through December 31, 2003................................... --
Through December 31, 2004 and thereafter.................... --
-------
Total..................................................... $28,645
=======
</TABLE>
Rent expense under noncancelable operating leases was $9,428 and $36,992
for the period from May 4, 1998 through December 31, 1998 and for the year ended
December 31, 1999, respectively.
(7) FIRST QUARTER 2000 EVENTS
Series C Redeemable Convertible Preferred Stock
On February 1, 2000, we issued 3,044,018 shares of series C redeemable
convertible preferred stock for approximately $14,232,000, net of issuance
costs. The series C redeemable convertible Preferred Stock has the same rights,
preferences and privileges as the series B redeemable convertible preferred
stock.
In connection with the issuance of the series C redeemable convertible
preferred stock, we issued warrants to purchase 120,000 shares of common stock
at $5 a share. The fair value of these warrants of $963,240 was estimated using
a Black-Scholes model and the following assumptions: estimated volatility of
60%, a risk-free interest rate of 4.59%, no dividend yield, and an expected life
equal to the contractual term of 5 years. This fair value was recognized as an
increase to additional paid-in capital in the three months ended March 31, 2000.
We determined that our series C preferred stock was issued with a
beneficial conversion feature. The beneficial conversion feature has been
recognized by allocating a portion of the preferred stock proceeds equal to the
intrinsic value of that feature, approximately $14.2 million, to additional
paid-in capital. The intrinsic value is calculated at the date of issue as the
difference between the conversion price of the preferred stock and the fair
value of our common stock, into which the preferred stock is convertible,
multiplied by the number of common shares into which the preferred stock is
convertible.
F-17
<PAGE> 90
PAIN THERAPEUTICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The $14.2 million discount resulting from the allocation of proceeds to the
beneficial conversion feature has been treated as a dividend and is recognized
as a return to the preferred stockholders for purposes of computing basic and
diluted loss per share.
Board Resolutions
In February 2000 our stockholders approved an amendment to our 1998 Stock
Plan increasing the number of shares of common stock available for issuance
under the plan by 700,000 to 3,200,000.
On February 1, 2000, our Board of Directors approved an amendment to our
certificate of incorporation increasing the total number of shares authorized to
34,150,000 shares, 22,000,000 of which are common stock and 12,150,000 of which
are preferred stock.
On March 9, 2000, our board of directors approved, subject to stockholder
approval, and effective upon the closing of our proposed initial public offering
the following resolutions:
- an amendment to our Certificate of Incorporation to increase the number
of authorized shares of common stock to 120,000,000, and
- an amendment to our 1998 Stock Plan providing non-employee directors with
an annual grant of options to purchase 20,000 shares of common stock.
2000 Employee Stock Purchase Plan
Our 2000 Employee Stock Purchase Plan was adopted by our board of directors
in April 2000 and is subject to shareholder approval. A total of 500,000 shares
of common stock have been reserved for issuance under our 2000 Employee Stock
Purchase Plan, plus annual increases equal to the lesser of (i) 1,000,000
shares, (ii) 1% of the outstanding shares on such date, or (iii) a lesser amount
determined by our board of directors.
Our 2000 Employee Stock Purchase Plan, which is intended to qualify under
Section 423 of the United States tax code, contains consecutive, overlapping
24-month offering periods. Each offering period includes four six month purchase
periods. The offering periods generally start on the first trading day on or
after May 1 and November 1 of each year, except for the first such offering
period which commences on the first trading day on or after the effective date
of this offering and ends on the last trading day on or before May 1, 2002.
Employees are eligible to participate if they are customarily employed by
us or any participating subsidiary for at least 20 hours per week and more than
five months in any calendar year. However, any employee who immediately after
grant owns stock possessing 5% or more of the total combined voting power or
value of all classes of our capital stock, or whose rights to purchase stock
under all of our employee stock purchase plans accrues at a rate which exceeds
$25,000 worth of stock for each calendar year may not be granted an option to
purchase stock under this plan. The 2000 Employee Stock Purchase Plan permits
participants to purchase common stock through payroll deductions of up to 15% of
the participant's "compensation." Compensation is defined as the participant's
base straight time gross earnings and commissions but is exclusive of payments
for overtime, shift premium payments, incentive compensation, incentive
payments, bonuses and other
F-18
<PAGE> 91
PAIN THERAPEUTICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
compensation. The maximum number of shares a participant may purchase during a
six month purchase period is 7,500 shares.
Amounts deducted and accumulated by the participants are used to purchase
shares of common stock at the end of each purchase period. The price of stock
purchased under the 2000 Employee Stock Purchase Plan is generally 85% of the
lower of the fair market value of the common stock at the beginning of the
offering period or at the end of the purchase period. Participants may end their
participation at any time during an offering period, and they will be paid their
payroll deductions to date. Participation ends automatically upon termination of
employment with us.
Rights granted under the 2000 Employee Stock Purchase Plan are not
transferable by a participant other than by will, the laws of descent and
distribution, or as otherwise provided under the plan. The 2000 Employee Stock
Purchase Plan provides that, in the event of our merger with or into another
corporation or a sale of substantially all our assets, each outstanding option
may be assumed or substituted for by the successor corporation. If the successor
corporation refuses to assume or substitute for the outstanding options, the
offering period then in progress will be shortened and a new exercise date will
be set. The 2000 Employee Stock Purchase Plan will terminate automatically in
2010, unless terminated earlier. The Board of Directors has the authority to
amend or terminate the purchase plan, except that no such action may adversely
affect any outstanding rights to purchase stock under the 2000 Employee Stock
Purchase Plan. Our Board of Directors has the exclusive authority to interpret
and apply the provisions of the purchase plan.
F-19
<PAGE> 92
DESCRIPTION OF ARTWORK:
INSIDE FRONT COVER PAGE:
The following words will appear across the top of the page in large, bold
type letters:
"Pain Therapeutics, Inc. is developing a new generation of opioid
painkillers. Our strategic goal is to build a specialty pharmaceutical
franchise in pain management."
Below, there will be an outline of an opium poppy plant with an overlay of
a table depicting our clinical development progress for product candidates
PTI-555, PTI-501, PTI-601 and PTI-701. The following text will appear in the
far left column of the table:
PTI-555
o Our new oral morphine painkiller for patients with moderate to
severe pain
PTI-501
o Our new injectable morphine painkiller for patients with moderate
to severe pain
PTI-601
o Our new tramadol painkiller for patients with moderate pain
PTI-701
o Our new hydrocodone/acetaminophen painkiller for patients with
moderate pain
The following words appear at the bottom of the page:
The clinical development process involves several phases of human clinical
trials. Phase I trials involve the introduction of the test drug into healthy
humans to analyze various effects, including pain relief, safety and dosage
tolerance. Phase II and Phase III trials evaluate dosage and assess pain relief
in an expanded population at geographically dispersed clinical study sites.
Phase III trials must be completed prior to seeking approval of the test drug by
the Food and Drug Administration through the submission of a New Drug
Application or NDA.
BUSINESS SECTION:
On page 30, we have included a diagram depicting the types of pain, with
examples of each type, that are typically treated with opioid drugs.
On page 31, we have included a table describing the three segments of the
pain management market and 1999 U.S. sales for typical opioid pain killers in
each segment.
On page 34, we have included a table summarizing our current four product
candidates and the stage of development and a description of the formulation of
each product candidate.
<PAGE> 93
LOGO
UNTIL , 2000, ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER
A PROSPECTUS WHEN ACTING AS AN UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS
OR SUBSCRIPTIONS.
<PAGE> 94
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT
SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER
OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED MAY 11, 2000
LOGO
5,000,000 SHARES
COMMON STOCK
Pain Therapeutics, Inc. is offering 5,000,000 shares of its common stock.
This is our initial public offering, and no public market currently exists for
our shares. We have applied to have our common stock approved for quotation on
the Nasdaq Stock Market's National Market under the symbol "PTIE." We anticipate
that the initial public offering price will be between $11 and $13 per share.
-------------------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
-------------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
---------- ------
<S> <C> <C>
Public Offering Price..................................... $ $
Underwriting Discounts and Commissions.................... $ $
Proceeds to Pain Therapeutics, Inc........................ $ $
</TABLE>
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE
NOT APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS
IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
Pain Therapeutics, Inc. has granted the underwriters a 30-day option to
purchase up to an additional 750,000 shares of common stock to cover
over-allotments. FleetBoston Robertson Stephens Inc. expects to deliver the
shares to the purchasers on , 2000.
-------------------------
ROBERTSON STEPHENS INTERNATIONAL
CIBC WORLD MARKETS
LAZARD FRERES & CO. LLC
THE DATE OF THIS PROSPECTUS IS , 2000.
<PAGE> 95
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by Pain Therapeutics, Inc. in
connection with the sale of common stock being registered. All amounts are
estimates except the SEC registration fee, the NASD filing fee and the Nasdaq
National Market listing fee.
<TABLE>
<S> <C>
SEC registration fee....................................... $ 19,800
NASD filing fee............................................ 8,000
Nasdaq National Market listing fee......................... 95,000
Printing and engraving costs............................... 200,000
Legal fees and expenses.................................... 425,000
Accounting fees and expenses............................... 300,000
Blue Sky fees and expenses................................. 1,500
Transfer Agent and Registrar fees.......................... 10,000
Miscellaneous expenses..................................... 40,700
----------
Total.................................................... $1,100,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law permits a corporation
to include in its charter documents, and in agreements between the corporation
and its directors and officers, provisions expanding the scope of
indemnification beyond that specifically provided by the current law.
Article VIII of the Registrant's Amended and Restated Certificate of
Incorporation provides for the indemnification of directors to the fullest
extent permissible under Delaware law.
Article VI of the Registrant's Amended and Restated Bylaws provides for the
indemnification of officers, directors and third parties acting on behalf of the
Registrant if such person acted in good faith and in a manner reasonably
believed to be in and not opposed to the best interest of the Registrant, and,
with respect to any criminal action or proceeding, the indemnified party had no
reason to believe his or her conduct was unlawful.
The Registrant has entered into indemnification agreements with its
directors and executive officers, in addition to indemnification provided for in
the Registrant's Amended and Restated Bylaws, and intends to enter into
indemnification agreements with any new directors and executive officers in the
future.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since inception, we have issued unregistered securities to a limited number
of persons as described below:
Common Stock:
(1) In June 1998, we sold 8,480,000 shares of our common stock at a price
of $0.001 per share to a founder for $8,480.
II-1
<PAGE> 96
(2) In June 1998, we sold an aggregate of 20,000 shares of our common stock
at a price of $0.001 per share to investors for an aggregate purchase
price of $20.
(3) In September 1998, we sold 100,000 shares of our common stock at a
price of $0.10 per share to an investor for a purchase price of
$10,000.
(4) In September 1998, we sold an aggregate of 400,000 shares of our common
stock at a price of $0.10 per share to investors for an aggregate
purchase price of $40,000.
(5) In April 1999, we sold 300,000 shares of our common stock to an
investor at a price of $0.10 per share for a purchase price of $30,000.
(6) In May 1999, we sold an aggregate of 144,000 shares of our common stock
to investors at a price of $0.10 per share for an aggregate purchase
price of $14,400.
(7) In June 1999, we sold 1,000 shares of our common stock to a consultant
at a price of $0.10 per share for a total value of $100.
(8) In February 2000, we sold an aggregate of 245,000 shares of our common
stock at a price of $0.20 per share for an aggregate purchase price of
$49,000.
Preferred Stock:
(1) In August 1998, we sold an aggregate of 1,100,000 shares of our series
A convertible preferred stock to investors at a price of $1.00 per
share for an aggregate purchase price of $1,100,000.
(2) In October 1998, we sold an aggregate of 1,559,489 shares of our series
A convertible preferred stock to investors at a price of $1.00 per
share for an aggregate purchase price of $1,559,489.
(3) In October 1999, we sold an aggregate of 4,846,320 shares of our series
B redeemable convertible preferred stock to investors at a price of
$1.85 per share for an aggregate purchase price of $8,956,692.
(4) In November 1999, we sold an aggregate of 559,085 shares of our series
B redeemable convertible preferred stock to investors at a price of
$1.85 per share for an aggregate purchase price of $1,034,307.
(5) In February 2000, we sold an aggregate of 3,044,018 shares of our
series C redeemable convertible preferred stock to investors at a price
of $5.00 per share for an aggregate purchase price of $15,220,090.
Stock Options and Stock Purchase Rights:
(1) From inception through March 2000, we granted stock options and stock
purchase rights to acquire an aggregate of 3,041,200 shares of our
common stock at prices ranging from $0.10 to $2.00 per share to
employees, consultants and directors pursuant to our 1998 Stock Plan.
(2) From inception through March 2000, we issued an aggregate of 1,218,230
shares of our common stock to employees, consultants and directors
pursuant to the exercise of stock options and stock purchase rights
under our 1998 Stock Plan, for aggregate consideration of $146,541.80.
II-2
<PAGE> 97
Warrants:
(1) In June 1998, we issued a warrant to acquire 150,000 shares of our
series A convertible preferred stock at an exercise price of $1.00 per
share to an investor.
(2) In August 1998, we issued a warrant to acquire 70,000 shares of our
common stock at an exercise price of $1.00 per share to our landlord.
(3) In February 2000, we issued a warrant to acquire 120,000 shares of our
common stock at an exercise price of $5.00 per share to an investor.
For additional information concerning these equity investment transactions,
reference is made to the information contained under the caption "Certain
Transactions" in the form of prospectus included herein. The sales of the above
securities were deemed to be exempt from registration in reliance on Rule 701
promulgated under Section 3(b) under the Securities Act as transactions pursuant
to a compensatory benefit plan or a written contract relating to compensation,
or in reliance on Section 4(2) of the Securities Act or Regulation D promulgated
thereunder as transactions by an issuer not involving any public offering. The
recipients of securities in each such transaction represented their intention to
acquire the securities for investment only and not with a view to or for sale in
connection with any distribution thereof and appropriate legends were affixed to
the share certificates and other instruments issued in such transactions. All
recipients either received adequate information about Pain Therapeutics, Inc. or
had access, through employment or other relationships, to such information.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------
<C> <S>
1.1** Form of Underwriting Agreement
3.1* Form of Amended and Restated Certificate of Incorporation of
the Registrant to be in effect upon closing of this offering
3.2* Form of Bylaws of the Registrant to be in effect upon
closing of this offering
4.1 Form of stock certificates
5.1** Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation
10.1* Form of Indemnification Agreement between the Registrant and
each of its directors and officers
10.2+* License Agreement, dated May 5, 1998, between Registrant and
Albert Einstein College of Medicine
10.3* Research Agreement dated May 14, 1999 between the Registrant
and KP Pharmaceutical Technology, Inc.
10.4* Lease Agreement dated August 25, 1998 between the Registrant
and Britannia Pointe Grand Limited Partnership
10.5 1998 Stock Plan, as amended, and form of agreements
thereunder between the Registrant and certain
securityholders
10.6 2000 Employee Stock Purchase Plan
10.7* Second Amended and Restated Investors' Rights Agreement
dated as of February 1, 2000 between Registrant and the
holders of its series B and series C redeemable convertible
preferred stock
10.8* Employment Agreement dated July 1, 1998 between the
Registrant and Mr. Barbier
10.9* Employment Offer Letter dated December 3, 1999 between the
Registrant and Mr. Jennings
</TABLE>
II-3
<PAGE> 98
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------
<C> <S>
10.10* Employment Offer Letter dated November 23, 1999 between the
Registrant and Mr. Johnson
10.11* Employment Offer Letter dated March 29, 1999 between the
Registrant and Dr. Sherman
23.1 Consent of KPMG LLP, Independent Certified Public
Accountants
23.2** Consent of Counsel (see Exhibit 5.1)
24.1* Power of Attorney (included on p. II-5 of the original
filing)
27.1 Financial Data Schedule
27.2 Financial Data Schedule
</TABLE>
- -------------------------
+ Confidential treatment has been requested for certain portions of this
agreement. The omitted portions will be separately filed with the Securities
and Exchange Commission.
* Previously filed.
** To be filed by amendment.
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 14 of
this Registration Statement or otherwise, the Registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by a director,
officer or controlling person in connection with the securities being registered
hereunder, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of Prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 99
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Palo Alto,
State of California, on the 11th day of May, 2000.
PAIN THERAPEUTICS, INC.
By: /s/ REMI BARBIER
-----------------------------------
Remi Barbier,
President, Chief Executive Officer
and Chairman of the Board of
Directors
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ REMI BARBIER* President, Chief Executive May 11, 2000
- --------------------------------------------- Officer and Chairman of the
Remi Barbier Board of Directors
(Principal Executive
Officer)
/s/ DAVID L. JOHNSON* Vice President, Finance and May 11, 2000
- --------------------------------------------- Chief Financial Officer
David L. Johnson (Principal Financial and
Accounting Officer)
/s/ GERT CASPRITZ, PH.D.* Director May 11, 2000
- ---------------------------------------------
Gert Caspritz, Ph.D.
/s/ NADAV FRIEDMANN, M.D., PH.D.* Director May 11, 2000
- ---------------------------------------------
Nadav Friedmann, M.D., Ph.D.
/s/ WILFRED R. KONNEKER, PH.D.* Director May 11, 2000
- ---------------------------------------------
Wilfred R. Konneker, Ph.D.
/s/ MICHAEL J. O'DONNELL* Director May 11, 2000
- ---------------------------------------------
Michael J. O'Donnell
/s/ SANFORD R. ROBERTSON* Director May 11, 2000
- ---------------------------------------------
Sanford R. Robertson
*By: /s/ REMI BARBIER Attorney-In-Fact May 11, 2000
----------------------------------------
Remi Barbier
Attorney-In-Fact
</TABLE>
II-5
<PAGE> 100
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------
<C> <S>
1.1** Form of Underwriting Agreement
3.1* Form of Amended and Restated Certificate of Incorporation of
the Registrant to be in effect upon closing of this offering
3.2* Form of Bylaws of the Registrant to be in effect upon
closing of this offering
4.1 Form of stock certificates
5.1** Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation
10.1* Form of Indemnification Agreement between the Registrant and
each of its directors and officers
10.2+* License Agreement, dated May 5, 1998, between Registrant and
Albert Einstein College of Medicine
10.3* Research Agreement dated May 14, 1999 between the Registrant
and KP Pharmaceutical Technology, Inc.
10.4* Lease Agreement dated August 25, 1998 between the Registrant
and Britannia Pointe Grand Limited Partnership
10.5 1998 Stock Plan, as amended, and form of agreements
thereunder between the Registrant and certain
securityholders
10.6 2000 Employee Stock Purchase Plan
10.7* Second Amended and Restated Investors' Rights Agreement
dated as of February 1, 2000 between Registrant and the
holders of its series B and C redeemable convertible
preferred stock
10.8* Employment Agreement dated July 1, 1998 between the
Registrant and Mr. Barbier
10.9* Employment Offer Letter dated December 3, 1999 between the
Registrant and Mr. Jennings
10.10* Employment Offer Letter dated November 23, 1999 between the
Registrant and Mr. Johnson
10.11* Employment Offer Letter dated March 29, 1999 between the
Registrant and Dr. Sherman
23.1 Consent of KPMG LLP, Independent Certified Public
Accountants
23.2** Consent of Counsel (see Exhibit 5.1)
24.1* Power of Attorney (included on page II-5 of the original
filing)
27.1 Financial Data Schedule
27.2 Financial Data Schedule
</TABLE>
- -------------------------
+ Confidential treatment has been requested for certain portions of this
agreement. The omitted portions will be separately filed with the Securities
and Exchange Commission.
* Previously filed.
** To be filed by amendment.
<PAGE> 1
EXHIBIT 4.1
[PAIN THERAPEUTICS, INC. LOGO]
PAIN THERAPEUTICS, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
COMMON STOCK
SEE REVERSE FOR
CERTAIN DEFINITIONS
CUSIP 695621 00 7
THIS CERTIFIES THAT
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK, PAR VALUE $0.001 EACH, OF
=========================== PAIN THERAPEUTICS, INC. ============================
(hereinafter called the "Corporation") transferable on the books of the
Corporation by the holder hereof in person or by duly authorized attorney upon
surrender of this certificate properly endorsed. This certificate and the shares
represented hereby are issued and shall be held subject to all of the provisions
of the Certificate of Incorporation and the By-Laws, as from time to time
amended, of the Corporation (copies of which are on file at the office of the
Transfer Agent), and the holder hereof, by acceptance of this certificate,
consents to and agrees to be bound by all of said provisions. This certificate
is not valid unless countersigned and registered by the Transfer Agent and
Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated:
[PAIN THERAPEUTICS, INC. CORPORATE SEAL]
/s/ MICHAEL J. O'DONNELL REMI BARBIER
SECRETARY PRESIDENT, CHIEF EXECUTIVE OFFICER AND
CHAIRMAN OF THE BOARD OF DIRECTORS
COUNTERSIGNED AND REGISTERED:
CHASEMELLON SHAREHOLDER SERVICES, L.L.C.
BY TRANSFER AGENT AND REGISTRAR
AUTHORIZED SIGNATURE
<PAGE> 2
PAIN THERAPEUTICS, INC.
THE COMPANY WILL FURNISH WITHOUT CHARGE TO EACH STOCKHOLDER WHO SO
REQUESTS, A COPY OF THE DESIGNATIONS, POWERS, PREFERENCES AND RELATIVE,
PARTICIPATING, OPTIONAL OR OTHER SPECIAL RIGHTS OF EACH CLASS OF STOCK OR
SERIES THEREOF AND THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH
PREFERENCES AND/OR RIGHTS. ANY SUCH REQUESTS MAY BE ADDRESSED TO THE SECRETARY
OF THE CORPORATION.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM --as tenants in common UNIF GIFT MIN ACT- _________ Custodian _________
TEN ENT --as tenants by the entireties (Cust) (Minor)
JT TEN --as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act ____________
in common (State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
For Value Received, ____________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE.
- ---------------------------------------
- ---------------------------------------
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP OR POSTAL CODE OF
ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Shares of the Common Stock represented by the within certificate and do hereby
irrevocably constitute and appoint
- --------------------------------------------------------------------------------
Attorney to transfer the said stock on the books of the within named
Corporation with full power of substitution in the premises.
Dated
-------------------------
-----------------------------------------------------------------
THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE
NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY
NOTICE: PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY
CHANGE WHATEVER
Signature(s) Guaranteed:
- ---------------------------------------------
THE SIGNATURE(S) MUST BE GUARANTEED BY AN
ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS,
SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION
PROGRAM), PURSUANT TO SEC RULE 17Ad-15
KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN, MUTILATED OR
DESTROYED, THE CORPORATION WILL REQUIRE A BOND OF INDEMNITY AS A CONDITION TO
THE ISSUANCE OF A REPLACEMENT CERTIFICATE.
<PAGE> 1
EXHIBIT 10.5
PAIN THERAPEUTICS, INC.
1998 STOCK PLAN
(AMENDED AND RESTATED AS OF ______, 2000)
1. Purposes of the Plan. The purposes of this 1998 Stock Plan are:
- to attract and retain the best available personnel for
positions of substantial responsibility,
- to provide additional incentive to Employees, Directors
and Consultants, and
- to promote the success of the Company's business.
Options granted under the Plan may be Incentive Stock Options or
Nonstatutory Stock Options, as determined by the Administrator at the time of
grant.
2. Definitions. As used herein, the following definitions shall apply:
(a) "Administrator" means the Board or any of its Committees as
shall be administering the Plan, in accordance with Section 4 of the Plan.
(b) "Applicable Laws" means the requirements relating to the
administration of stock option plans under U. S. state corporate laws, U.S.
federal and state securities laws, the Code, any stock exchange or quotation
system on which the Common Stock is listed or quoted and the applicable laws of
any other country or jurisdiction where Options are granted under the Plan.
(c) "Board" means the Board of Directors of the Company.
(d) "Code" means the Internal Revenue Code of 1986, as amended.
(e) "Committee" means a committee of Directors appointed by the
Board in accordance with Section 4 of the Plan.
(f) "Common Stock" means the common stock of the Company.
(g) "Company" means Pain Therapeutics, Inc., a Delaware
Corporation.
(h) "Consultant" means any natural person, including an advisor,
engaged by the Company or a Parent or Subsidiary to render services to such
entity.
(i) "Director" means a member of the Board.
(j) "Disability" means total and permanent disability as defined
in Section 22(e)(3) of the Code.
<PAGE> 2
(k) "Employee" means any person, including Officers and
Directors, employed by the Company or any Parent or Subsidiary of the Company. A
Service Provider shall not cease to be an Employee in the case of (i) any leave
of absence approved by the Company or (ii) transfers between locations of the
Company or between the Company, its Parent, any Subsidiary, or any successor.
For purposes of Incentive Stock Options, no such leave may exceed ninety days,
unless reemployment upon expiration of such leave is guaranteed by statute or
contract. If reemployment upon expiration of a leave of absence approved by the
Company is not so guaranteed, then three (3) months following the 91st day of
such leave any Incentive Stock Option held by the Optionee shall cease to be
treated as an Incentive Stock Option and shall be treated for tax purposes as a
Nonstatutory Stock Option. Neither service as a Director nor payment of a
director's fee by the Company shall be sufficient to constitute "employment" by
the Company.
(l) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(m) "Fair Market Value" means, as of any date, the value of
Common Stock determined as follows:
(i) If the Common Stock is listed on any established
stock exchange or a national market system, including without limitation the
Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market,
its Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system on
the day of determination, as reported in The Wall Street Journal or such other
source as the Administrator deems reliable;
(ii) If the Common Stock is regularly quoted by a
recognized securities dealer but selling prices are not reported, the Fair
Market Value of a Share of Common Stock shall be the mean between the high bid
and low asked prices for the Common Stock on the day of determination, as
reported in The Wall Street Journal or such other source as the Administrator
deems reliable; or
(iii) In the absence of an established market for the
Common Stock, the Fair Market Value shall be determined in good faith by the
Administrator.
(n) "Incentive Stock Option" means an Option intended to qualify
as an incentive stock option within the meaning of Section 422 of the Code and
the regulations promulgated thereunder.
(o) "Inside Director" means a Director who is an Employee.
(p) "Nonstatutory Stock Option" means an Option not intended to
qualify as an Incentive Stock Option.
(q) "Notice of Grant" means a written or electronic notice
evidencing certain terms and conditions of an individual Option grant. The
Notice of Grant is part of the Option Agreement.
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<PAGE> 3
(r) "Officer" means a person who is an officer of the Company
within the meaning of Section 16 of the Exchange Act and the rules and
regulations promulgated thereunder.
(s) "Option" means a stock option granted pursuant to the Plan.
(t) "Option Agreement" means an agreement between the Company and
an Optionee evidencing the terms and conditions of an individual Option grant.
The Option Agreement is subject to the terms and conditions of the Plan.
(u) "Optioned Stock" means the Common Stock subject to an Option.
(v) "Optionee" means the holder of an outstanding Option granted
under the Plan.
(w) "Outside Director" means a Director who is not an Employee.
(x) "Parent" means a "parent corporation," whether now or
hereafter existing, as defined in Section 424(e) of the Code.
(y) "Plan" means this 1998 Stock Plan, as amended.
(z) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any
successor to Rule 16b-3, as in effect when discretion is being exercised with
respect to the Plan.
(aa) "Section 16(b) " means Section 16(b) of the Exchange Act.
(bb) "Service Provider" means an Employee, Director or
Consultant.
(cc) "Share" means a share of the Common Stock, as adjusted in
accordance with Section 13 of the Plan.
(dd) "Subsidiary" means a "subsidiary corporation", whether now
or hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 13 of
the Plan, the maximum aggregate number of Shares that may be optioned and sold
under the Plan is 3,200,000 Shares, plus (a) an increase of 1,500,000 shares to
be added on the day immediately following the date the Common Stock is publicly
traded pursuant to an effective registration statement filed under the Exchange
Act, plus (b) an annual increase to be added on the first day of the Company's
fiscal year, beginning fiscal year 2001, equal to the lesser of (i) 2,000,000
Shares, (ii) 5% of the outstanding Shares of Common Stock on the last day of the
immediately preceding fiscal year or (iii) an amount determined by the Board.
The Shares may be authorized, but unissued, or reacquired Common Stock.
If an Option expires or becomes unexercisable without having been
exercised in full, the unpurchased Shares which were subject thereto shall
become available for future grant or sale under the Plan (unless the Plan has
terminated); provided, however, that Shares that have actually been issued under
the Plan upon exercise of an Option shall not
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<PAGE> 4
be returned to the Plan and shall not become available for future distribution
under the Plan, except that if unvested Shares are repurchased by the Company at
their original purchase price, such Shares shall become available for future
grant under the Plan.
4. Administration of the Plan.
(a) Procedure.
(i) Multiple Administrative Bodies. Different
Committees with respect to different groups of Service Providers may administer
the Plan.
(ii) Section 162(m). To the extent that the
Administrator determines it to be desirable to qualify Options granted hereunder
as "performance-based compensation" within the meaning of Section 162(m) of the
Code, the Plan shall be administered by a Committee of two or more "outside
directors" within the meaning of Section 162(m) of the Code.
(iii) Rule 16b-3. To the extent desirable to qualify
transactions hereunder as exempt under Rule 16b-3, the transactions contemplated
hereunder shall be structured to satisfy the requirements for exemption under
Rule 16b-3.
(iv) Other Administration. Other than as provided
above, the Plan shall be administered by (A) the Board or (B) a Committee, which
committee shall be constituted to satisfy Applicable Laws.
(b) Powers of the Administrator. Subject to the provisions of the
Plan, and in the case of a Committee, subject to the specific duties delegated
by the Board to such Committee, the Administrator shall have the authority, in
its discretion:
(i) to determine the Fair Market Value;
(ii) to select the Service Providers to whom Options
may be granted hereunder;
(iii) to determine the number of shares of Common
Stock to be covered by each Option granted hereunder;
(iv) to approve forms of agreement for use under the
Plan;
(v) to determine the terms and conditions, not
inconsistent with the terms of the Plan, of any Option granted hereunder. Such
terms and conditions include, but are not limited to, the exercise price, the
time or times when Options may be exercised (which may be based on performance
criteria), any vesting acceleration or waiver of forfeiture restrictions, and
any restriction or limitation regarding any Option or the shares of Common Stock
relating thereto, based in each case on such factors as the Administrator, in
its sole discretion, shall determine;
(vi) to construe and interpret the terms of the Plan
and awards granted pursuant to the Plan;
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<PAGE> 5
(vii) to prescribe, amend and rescind rules and
regulations relating to the Plan, including rules and regulations relating to
sub-plans established for the purpose of satisfying applicable foreign laws;
(viii) to modify or amend each Option (subject to
Section 15(c) of the Plan), including the discretionary authority to extend the
post-termination exercisability period of Options longer than is otherwise
provided for in the Plan;
(ix) to allow Optionees to satisfy withholding tax
obligations by electing to have the Company withhold from the Shares to be
issued upon exercise of an Option that number of Shares having a Fair Market
Value equal to the minimum amount required to be withheld. The Fair Market Value
of the Shares to be withheld shall be determined on the date that the amount of
tax to be withheld is to be determined. All elections by an Optionee to have
Shares withheld for this purpose shall be made in such form and under such
conditions as the Administrator may deem necessary or advisable;
(x) to authorize any person to execute on behalf of
the Company any instrument required to effect the grant of an Option previously
granted by the Administrator;
(xi) to make all other determinations deemed
necessary or advisable for administering the Plan.
(c) Effect of Administrator's Decision. The Administrator's
decisions, determinations and interpretations shall be final and binding on all
Optionees and any other holders of Options or Shares issued under the Plan.
5. Eligibility. Nonstatutory Stock Options may be granted to Service
Providers. Incentive Stock Options may be granted only to Employees.
6. Limitations.
(a) Each Option shall be designated in the Option Agreement as
either an Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designation, to the extent that the aggregate Fair Market
Value of the Shares with respect to which Incentive Stock Options are
exercisable for the first time by the Optionee during any calendar year (under
all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such
Options shall be treated as Nonstatutory Stock Options. For purposes of this
Section 6(a), Incentive Stock Options shall be taken into account in the order
in which they were granted. The Fair Market Value of the Shares shall be
determined as of the time the Option with respect to such Shares is granted.
(b) Neither the Plan nor any Option shall confer upon an Optionee
any right with respect to continuing the Optionee's relationship as a Service
Provider with the Company, nor shall they interfere in any way with the
Optionee's right or the Company's right to terminate such relationship at any
time, with or without cause.
(c) The following limitations shall apply to grants of Options:
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<PAGE> 6
(i) No Service Provider shall be granted, in any
fiscal year of the Company, Options to purchase more than 1,000,000 Shares.
(ii) In connection with his or her initial service, a
Service Provider may be granted Options to purchase up to an additional
1,000,000 Shares, which shall not count against the limit set forth in
subsection (i) above.
(iii) The foregoing limitations shall be adjusted
proportionately in connection with any change in the Company's capitalization as
described in Section 13.
7. Term of Plan. Subject to Section 19 of the Plan, the Plan shall
become effective upon its adoption by the Board. It shall continue in effect for
a term of ten (10) years unless terminated earlier under Section 15 of the Plan.
8. Term of Option. The term of each Option shall be stated in the Option
Agreement. In the case of an Incentive Stock Option, the term shall be ten (10)
years from the date of grant or such shorter term as may be provided in the
Option Agreement. Moreover, in the case of an Incentive Stock Option granted to
an Optionee who, at the time the Incentive Stock Option is granted, owns stock
representing more than ten percent (10%) of the total combined voting power of
all classes of stock of the Company or any Parent or Subsidiary, the term of the
Incentive Stock Option shall be five (5) years from the date of grant or such
shorter term as may be provided in the Option Agreement.
9. Option Exercise Price and Consideration.
(a) Exercise Price. The per share exercise price for the Shares
to be issued pursuant to exercise of an Option shall be determined by the
Administrator, subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time
the Incentive Stock Option is granted, owns stock representing more than ten
percent (10%) of the voting power of all classes of stock of the Company or any
Parent or Subsidiary, the per Share exercise price shall be no less than 110% of
the Fair Market Value per Share on the date of grant.
(B) granted to any Employee other than an
Employee described in paragraph (A) immediately above, the per Share exercise
price shall be no less than 100% of the Fair Market Value per Share on the date
of grant.
(ii) In the case of a Nonstatutory Stock Option, the
per Share exercise price shall be determined by the Administrator. In the case
of a Nonstatutory Stock Option intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Code, the per Share
exercise price shall be no less than 100% of the Fair Market Value per Share on
the date of grant.
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<PAGE> 7
(iii) Notwithstanding the foregoing, Options may be
granted with a per Share exercise price of less than 100% of the Fair Market
Value per Share on the date of grant pursuant to a merger or other corporate
transaction.
(b) Waiting Period and Exercise Dates. At the time an Option is
granted, the Administrator shall fix the period within which the Option may be
exercised and shall determine any conditions that must be satisfied before the
Option may be exercised.
(c) Form of Consideration. The Administrator shall determine the
acceptable form of consideration for exercising an Option, including the method
of payment. In the case of an Incentive Stock Option, the Administrator shall
determine the acceptable form of consideration at the time of grant. Such
consideration may consist entirely of:
(i) cash;
(ii) check;
(iii) promissory note;
(iv) other Shares which, in the case of Shares
acquired directly or indirectly from the Company, (A) have been owned by the
Optionee for more than six (6) months on the date of surrender, and (B) have a
Fair Market Value on the date of surrender equal to the aggregate exercise price
of the Shares as to which said Option shall be exercised;
(v) consideration received by the Company under a
cashless exercise program implemented by the Company in connection with the
Plan;
(vi) a reduction in the amount of any Company
liability to the Optionee, including any liability attributable to the
Optionee's participation in any Company-sponsored deferred compensation program
or arrangement;
(vii) any combination of the foregoing methods of
payment; or
(viii) such other consideration and method of payment
for the issuance of Shares to the extent permitted by Applicable Laws.
Notwithstanding the foregoing, the Administrator may permit an Option to be
exercised by delivery of a full-recourse promissory note secured by the
purchased shares. All other terms of such promissory note shall be determined by
the Administrator in its sole discretion.
10. Exercise of Option.
(a) Procedure for Exercise; Rights as a Stockholder. Any Option
granted hereunder shall be exercisable according to the terms of the Plan and at
such times and under such conditions as determined by the Administrator and set
forth in the Option Agreement. Unless the Administrator provides otherwise,
vesting of Options granted hereunder shall be suspended during any unpaid leave
of absence. An Option may not be exercised for a fraction of a Share.
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<PAGE> 8
An Option shall be deemed exercised when the Company
receives: (i) written or electronic notice of exercise (in accordance with the
Option Agreement) from the person entitled to exercise the Option, and (ii) full
payment for the Shares with respect to which the Option is exercised. Full
payment may consist of any consideration and method of payment authorized by the
Administrator and permitted by the Option Agreement and the Plan. Shares issued
upon exercise of an Option shall be issued in the name of the Optionee or, if
requested by the Optionee, in the name of the Optionee and his or her spouse.
Until the Shares are issued (as evidenced by the appropriate entry on the books
of the Company or of a duly authorized transfer agent of the Company), no right
to vote or receive dividends or any other rights as a stockholder shall exist
with respect to the Optioned Stock, notwithstanding the exercise of the Option.
The Company shall issue (or cause to be issued) such Shares promptly after the
Option is exercised. No adjustment will be made for a dividend or other right
for which the record date is prior to the date the Shares are issued, except as
provided in Section 13 of the Plan.
Exercising an Option in any manner shall decrease the
number of Shares thereafter available, both for purposes of the Plan and for
sale under the Option, by the number of Shares as to which the Option is
exercised.
(b) Termination of Relationship as a Service Provider. If an
Optionee ceases to be a Service Provider, other than upon the Optionee's death
or Disability, the Optionee may exercise his or her Option within such period of
time as is specified in the Option Agreement to the extent that the Option is
vested on the date of termination (but in no event later than the expiration of
the term of such Option as set forth in the Option Agreement). In the absence of
a specified time in the Option Agreement, the Option shall remain exercisable
for three (3) months following the Optionee's termination. If, on the date of
termination, the Optionee is not vested as to his or her entire Option, the
Shares covered by the unvested portion of the Option shall revert to the Plan.
If, after termination, the Optionee does not exercise his or her Option within
the time specified by the Administrator, the Option shall terminate, and the
Shares covered by such Option shall revert to the Plan.
(c) Disability of Optionee. If an Optionee ceases to be a Service
Provider as a result of the Optionee's Disability, the Optionee may exercise his
or her Option within such period of time as is specified in the Option Agreement
to the extent the Option is vested on the date of termination (but in no event
later than the expiration of the term of such Option as set forth in the Option
Agreement). In the absence of a specified time in the Option Agreement, the
Option shall remain exercisable for twelve (12) months following the Optionee's
termination. If, on the date of termination, the Optionee is not vested as to
his or her entire Option, the Shares covered by the unvested portion of the
Option shall revert to the Plan. If, after termination, the Optionee does not
exercise his or her Option within the time specified herein, the Option shall
terminate, and the Shares covered by such Option shall revert to the Plan.
(d) Death of Optionee. If an Optionee dies while a Service
Provider, the Option may be exercised following Optionee's death within such
period of time as is specified in the Option Agreement to the extent that the
Option is vested on the date of death (but in no event may the option be
exercised later than the expiration of the term of such Option as set forth in
the Option Agreement) by the Optionee's designated beneficiary, provided such
beneficiary has been desig-
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<PAGE> 9
nated prior to Optionee's death in a form acceptable by the Administrator. If
no such beneficiary has been designated by the Optionee, then such Option may be
exercised by the personal representative of the Optionee's estate or by the
person(s) to whom the Option is transferred pursuant to the Optionee's will or
in accordance with the laws of descent and distribution. In the absence of a
specified time in the Option Agreement, the Option shall remain exercisable for
twelve (12) months following Optionee's death. If, at the time of death, the
Optionee is not vested as to his or her entire Option, the Shares covered by the
unvested portion of the Option shall immediately revert to the Plan. If the
Option is not so exercised within the time specified herein, the Option shall
terminate, and the Shares covered by such Option shall revert to the Plan.
11. Formula Option Grants to Outside Directors. Outside Directors shall
automatically be granted Options in accordance with the following provisions:
(a) All Options granted pursuant to this Section shall be
Nonstatutory Stock Options and, except as otherwise provided herein, shall be
subject to the other terms and conditions of the Plan.
(b) Each Outside Director shall be automatically granted an
Option to purchase up to 20,000 Shares on the date of each Annual Stockholder's
Meeting, beginning in fiscal year 2001, provided the individual continues to
serve as an Outside Director through the date of such Annual Stockholder's
Meeting.
(c) Notwithstanding the provisions of subsections (b) hereof, any
exercise of an Option granted before the Company has obtained stockholder
approval of the Plan in accordance with Section 19 hereof shall be conditioned
upon obtaining such stockholder approval of the Plan in accordance with Section
19 hereof.
(d) The terms of each Option granted pursuant to this Section
shall be as follows:
(i) the term of the Option shall be ten (10) years.
(ii) the Option shall be exercisable only while the
Outside Director remains a Director of the Company.
(iii) the exercise price per Share shall be 100% of
the Fair Market Value per Share on the date of grant of the Option.
(iv) subject to Section 13, the Option shall become
exercisable as to 25% of the Shares subject to the Option on each anniversary of
its date of grant, provided that the Optionee continues to serve as a Director
on such dates.
12. Limited Transferability of Options. Unless determined otherwise by
the Administrator, an Option may not be sold, pledged, assigned, hypothecated,
transferred, or disposed of in any manner other than by will or by the laws of
descent or distribution and may be exercised, during the lifetime of the
Optionee, only by the Optionee. If the Administrator makes an Option
transferable, such Option shall contain such additional terms and conditions as
the Administrator deems appropriate.
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<PAGE> 10
13. Adjustments Upon Changes in Capitalization, Dissolution, Merger or
Asset Sale.
(a) Changes in Capitalization. Subject to any required action by
the stockholders of the Company, the number of shares of Common Stock which have
been authorized for issuance under the Plan but as to which no Options have yet
been granted or which have been returned to the Plan upon cancellation or
expiration of an Option, the number of Shares that may be added to the Plan
pursuant to Section 3, the number of shares granted under Options pursuant to
Section 11(b), and the number of shares of Common Stock covered by each
outstanding Option as well as the price per share of Common Stock covered by
each such outstanding Option, shall be proportionately adjusted for any increase
or decrease in the number of issued shares of Common Stock resulting from a
stock split, reverse stock split, stock dividend, combination or
reclassification of the Common Stock, or any other increase or decrease in the
number of issued shares of Common Stock effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an Option.
(b) Dissolution or Liquidation. In the event of the proposed
dissolution or liquidation of the Company, the Administrator shall notify each
Optionee as soon as practicable prior to the effective date of such proposed
transaction. The Administrator in its discretion may provide for an Optionee to
have the right to exercise his or her Option until ten (10) days prior to such
transaction as to all of the Optioned Stock covered thereby, including Shares as
to which the Option would not otherwise be exercisable. In addition, the
Administrator may provide that any Company repurchase option applicable to any
Shares purchased upon exercise of an Option shall lapse as to all such Shares,
provided the proposed dissolution or liquidation takes place at the time and in
the manner contemplated. To the extent it has not been previously exercised, an
Option will terminate immediately prior to the consummation of such proposed
action.
(c) Merger or Asset Sale. In the event of a merger of the Company
with or into another corporation, or the sale of substantially all of the assets
of the Company, each outstanding Option shall be assumed or an equivalent option
substituted by the successor corporation or a Parent or Subsidiary of the
successor corporation. In the event that the successor corporation refuses to
assume or substitute for the Option, the Optionee shall fully vest in and have
the right to exercise the Option as to all of the Optioned Stock, including
Shares as to which it would not otherwise be vested or exercisable. If an Option
becomes fully vested and exercisable in lieu of assumption or substitution in
the event of a merger or sale of assets, the Administrator shall notify the
Optionee in writing or electronically that the Option shall be fully vested and
exercisable for a period of fifteen (15) days from the date of such notice, and
the Option shall terminate upon the expiration of such period. For the purposes
of this paragraph, the Option shall be considered assumed if, following the
merger or sale of assets, the option confers the right to purchase or receive,
for each Share of Optioned Stock subject to the Option immediately prior to the
merger or sale of assets, the consideration (whether stock, cash, or other
securities or property) received in the merger or sale of assets by holders of
Common Stock for each Share held on the effective date of the transaction (and
if holders were
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<PAGE> 11
offered a choice of consideration, the type of consideration chosen by the
holders of a majority of the outstanding Shares); provided, however, that if
such consideration received in the merger or sale of assets is not solely common
stock of the successor corporation or its Parent, the Administrator may, with
the consent of the successor corporation, provide for the consideration to be
received upon the exercise of the Option, for each Share of Optioned Stock
subject to the Option, to be solely common stock of the successor corporation or
its Parent equal in fair market value to the per share consideration received by
holders of Common Stock in the merger or sale of assets.
14. Date of Grant. The date of grant of an Option shall be, for all
purposes, the date on which the Administrator makes the determination granting
such Option, or such other later date as is determined by the Administrator.
Notice of the determination shall be provided to each Optionee within a
reasonable time after the date of such grant.
15. Amendment and Termination of the Plan.
(a) Amendment and Termination. The Board may at any time amend,
alter, suspend or terminate the Plan.
(b) Stockholder Approval. The Company shall obtain stockholder
approval of any Plan amendment to the extent necessary and desirable to comply
with Applicable Laws.
(c) Effect of Amendment or Termination. No amendment, alteration,
suspension or termination of the Plan shall impair the rights of any Optionee,
unless mutually agreed otherwise between the Optionee and the Administrator,
which agreement must be in writing and signed by the Optionee and the Company.
Termination of the Plan shall not affect the Administrator's ability to exercise
the powers granted to it hereunder with respect to Options granted under the
Plan prior to the date of such termination.
16. Conditions Upon Issuance of Shares.
(a) Legal Compliance. Shares shall not be issued pursuant to the
exercise of an Option unless the exercise of such Option and the issuance and
delivery of such Shares shall comply with Applicable Laws and shall be further
subject to the approval of counsel for the Company with respect to such
compliance.
(b) Investment Representations. As a condition to the exercise of
an Option, the Company may require the person exercising such Option to
represent and warrant at the time of any such exercise that the Shares are being
purchased only for investment and without any present intention to sell or
distribute such Shares if, in the opinion of counsel for the Company, such a
representation is required.
17. Inability to Obtain Authority. The inability of the Company to
obtain authority from any regulatory body having jurisdiction, which authority
is deemed by the Company's counsel to be necessary to the lawful issuance and
sale of any Shares hereunder, shall relieve the Company of any liability in
respect of the failure to issue or sell such Shares as to which such requisite
authority shall not have been obtained.
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<PAGE> 12
18. Reservation of Shares. The Company, during the term of this Plan,
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
19. Stockholder Approval. The Plan shall be subject to approval by the
stockholders of the Company within twelve (12) months after the date the Plan is
adopted. Such stockholder approval shall be obtained in the manner and to the
degree required under Applicable Laws.
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<PAGE> 1
EXHIBIT 10.6
PAIN THERAPEUTICS, INC.
2000 EMPLOYEE STOCK PURCHASE PLAN
The following constitute the provisions of the 2000 Employee Stock
Purchase Plan of Pain Therapeutics, Inc.
1. Purpose. The purpose of the Plan is to provide employees of the
Company and its Designated Subsidiaries with an opportunity to purchase Common
Stock of the Company through accumulated payroll deductions. It is the intention
of the Company to have the Plan qualify as an "Employee Stock Purchase Plan"
under Section 423 of the Internal Revenue Code of 1986, as amended. The
provisions of the Plan, accordingly, shall be construed so as to extend and
limit participation in a manner consistent with the requirements of that section
of the Code.
2. Definitions.
(a) "Board" shall mean the Board of Directors of the Company or
any committee thereof designated by the Board of Directors of the Company in
accordance with Section 14 of the Plan.
(b) "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(c) "Common Stock" shall mean the common stock of the Company.
(d) "Company" shall mean Pain Therapeutics, Inc., a Delaware
Corporation and any Designated Subsidiary of the Company.
(e) "Compensation" shall mean all base straight time gross
earnings but exclusive of payments for commissions, overtime, shift premium,
incentive compensation, incentive payments, bonuses and other compensation.
(f) "Designated Subsidiary" shall mean any Subsidiary that has
been designated by the Board from time to time in its sole discretion as
eligible to participate in the Plan.
(g) "Employee" shall mean any individual who is an Employee of
the Company for tax purposes whose customary employment with the Company is at
least twenty (20) hours per week and more than five (5) months in any calendar
year. For purposes of the Plan, the employment relationship shall be treated as
continuing intact while the individual is on sick leave or other leave of
absence approved by the Company. Where the period of leave exceeds 90 days and
the individual's right to reemployment is not guaranteed either by statute or by
contract, the employment relationship shall be deemed to have terminated on the
91st day of such leave.
(h) "Enrollment Date" shall mean the first Trading Day of each
Offering Period.
<PAGE> 2
(i) "Exercise Date" shall mean the first Trading Day on or after
MAY 1ST AND NOVEMBER 1ST of each year.
(j) "Fair Market Value" shall mean, as of any date, the value of
Common Stock determined as follows:
(i) If the Common Stock is listed on any established
stock exchange or a national market system, including without limitation the
Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market,
its Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system on
the date of determination, as reported in The Wall Street Journal or such other
source as the Board deems reliable;
(ii) If the Common Stock is regularly quoted by a
recognized securities dealer but selling prices are not reported, its Fair
Market Value shall be the mean of the closing bid and asked prices for the
Common Stock on the date of determination, as reported in The Wall Street
Journal or such other source as the Board deems reliable;
(iii) In the absence of an established market for the
Common Stock, the Fair Market Value thereof shall be determined in good faith by
the Board; or
(iv) For purposes of the Enrollment Date of the first
Offering Period under the Plan, the Fair Market Value shall be the initial price
to the public as set forth in the final prospectus included within the
registration statement in Form S-1 filed with the Securities and Exchange
Commission for the initial public offering of the Company's Common Stock (the
"Registration Statement").
(k) "Offering Periods" shall mean the periods of approximately
twenty-four (24) months during which an option granted pursuant to the Plan may
be exercised, commencing on the first Trading Day on or after MAY 1ST AND
NOVEMBER 1ST of each year and terminating on the first Trading Day on or after
the MAY 1ST AND NOVEMBER 1ST Offering Period commencement date approximately
twenty-four months later; provided, however, that the first Offering Period
under the Plan shall commence with the first Trading Day on or after the date on
which the Securities and Exchange Commission declares the Company's Registration
Statement effective and ending on the first Trading Day on or after MAY 1, 2002.
The duration and timing of Offering Periods may be changed pursuant to Section 4
of this Plan.
(l) "Plan" shall mean this 2000 Employee Stock Purchase Plan.
(m) "Purchase Period" shall mean the approximately six month
period commencing on one Exercise Date and ending with the next Exercise Date,
except that the first Purchase Period of any Offering Period shall commence on
the Enrollment Date and end with the next Exercise Date.
(n) "Purchase Price" shall mean 85% of the Fair Market Value of a
share of Common Stock on the Enrollment Date or on the Exercise Date, whichever
is lower; provided however, that the Purchase Price may be adjusted by the Board
pursuant to Section 20.
-2-
<PAGE> 3
(o) "Reserves" shall mean the number of shares of Common Stock
covered by each option under the Plan which have not yet been exercised and the
number of shares of Common Stock which have been authorized for issuance under
the Plan but not yet placed under option.
(p) "Subsidiary" shall mean a corporation, domestic or foreign,
of which not less than 50% of the voting shares are held by the Company or a
Subsidiary, whether or not such corporation now exists or is hereafter organized
or acquired by the Company or a Subsidiary.
(q) "Trading Day" shall mean a day on which national stock
exchanges and the Nasdaq System are open for trading.
3. Eligibility.
(a) Any Employee who shall be employed by the Company on a given
Enrollment Date shall be eligible to participate in the Plan.
(b) Any provisions of the Plan to the contrary notwithstanding,
no Employee shall be granted an option under the Plan (i) to the extent that,
immediately after the grant, such Employee (or any other person whose stock
would be attributed to such Employee pursuant to Section 424(d) of the Code)
would own capital stock of the Company and/or hold outstanding options to
purchase such stock possessing five percent (5%) or more of the total combined
voting power or value of all classes of the capital stock of the Company or of
any Subsidiary, or (ii) to the extent that his or her rights to purchase stock
under all employee stock purchase plans of the Company and its subsidiaries
accrues at a rate which exceeds Twenty-Five Thousand Dollars ($25,000) worth of
stock (determined at the fair market value of the shares at the time such option
is granted) for each calendar year in which such option is outstanding at any
time.
4. Offering Periods. The Plan shall be implemented by consecutive,
overlapping Offering Periods with a new Offering Period commencing on the first
Trading Day on or after MAY 1ST AND NOVEMBER 1ST each year, or on such other
date as the Board shall determine, and continuing thereafter until terminated in
accordance with Section 20 hereof; provided, however, that the first Offering
Period under the Plan shall commence with the first Trading Day on or after the
date on which the Securities and Exchange Commission declares the Company's
Registration Statement effective and ending on the first Trading Day on or after
[MAY 1, 2002.] The Board shall have the power to change the duration of Offering
Periods (including the commencement dates thereof) with respect to future
offerings without stockholder approval if such change is announced at least five
(5) days prior to the scheduled beginning of the first Offering Period to be
affected thereafter.
5. Participation.
(a) An eligible Employee may become a participant in the Plan by
completing a subscription agreement authorizing payroll deductions in the form
of Exhibit A to this Plan and filing it with the Company's payroll office prior
to the applicable Enrollment Date.
(b) Payroll deductions for a participant shall commence on the
first payroll following the Enrollment Date and shall end on the last payroll in
the Offering Period to which such authorization is applicable, unless sooner
terminated by the participant as provided in Section 10 hereof.
-3-
<PAGE> 4
6. Payroll Deductions.
(a) At the time a participant files his or her subscription
agreement, he or she shall elect to have payroll deductions made on each pay day
during the Offering Period in an amount not exceeding fifteen percent (15%) of
the Compensation which he or she receives on each pay day during the Offering
Period; provided, however, that should a pay day occur on an Exercise Date, a
participant shall have the payroll deductions made on such day applied to his or
her account under the new Offering Period or Purchase Period, as the case may
be.
(b) All payroll deductions made for a participant shall be
credited to his or her account under the Plan and shall be withheld in whole
percentages only. A participant may not make any additional payments into such
account.
(c) A participant may discontinue his or her participation in the
Plan as provided in Section 10 hereof, or may increase or decrease the rate of
his or her payroll deductions during the Offering Period by completing or filing
with the Company a new subscription agreement authorizing a change in payroll
deduction rate. The Company may, in its discretion, limit the nature and/or
number of participation rate changes during any Offering Period, and may
establish such other conditions or limitations as it deems appropriate for Plan
administration. The change in rate shall be effective with the first full
payroll period following five (5) business days after the Company's receipt of
the new subscription agreement unless the Company elects to process a given
change in participation more quickly. A participant's subscription agreement
shall remain in effect for successive Offering Periods unless terminated as
provided in Section 10 hereof.
(d) Notwithstanding the foregoing, to the extent necessary to
comply with Section 423(b)(8) of the Code and Section 3(b) hereof, a
participant's payroll deductions may be decreased to zero percent (0%) at any
time during a Purchase Period. Payroll deductions shall recommence at the rate
provided in such participant's subscription agreement at the beginning of the
first Purchase Period which is scheduled to end in the following calendar year,
unless terminated by the participant as provided in Section 10 hereof.
(e) At the time the option is exercised, in whole or in part, or
at the time some or all of the Company's Common Stock issued under the Plan is
disposed of, the participant must make adequate provision for the Company's
federal, state, or other tax withholding obligations, if any, which arise upon
the exercise of the option or the disposition of the Common Stock. At any time,
the Company may, but shall not be obligated to, withhold from the participant's
compensation the amount necessary for the Company to meet applicable withholding
obligations, including any withholding required to make available to the Company
any tax deductions or benefits attributable to sale or early disposition of
Common Stock by the Employee.
7. Grant of Option. On the Enrollment Date of each Offering Period, each
eligible Employee participating in such Offering Period shall be granted an
option to purchase on each Exercise Date during such Offering Period (at the
applicable Purchase Price) up to a number of shares of the Company's Common
Stock determined by dividing such Employee's payroll deductions accumulated
prior to such Exercise Date and retained in the Participant's account as of the
Exercise Date by the applicable Purchase Price; provided that in no event shall
an Employee be permitted to purchase during each Purchase Period more than 7,500
shares of the Company's Common Stock
-4-
<PAGE> 5
(subject to any adjustment pursuant to Section 19), and provided further that
such purchase shall be subject to the limitations set forth in Sections 3(b) and
12 hereof. The Board may, for future Offering Periods, increase or decrease, in
its absolute discretion, the maximum number of shares of the Company's Common
Stock an Employee may purchase during each Purchase Period of such Offering
Period. Exercise of the option shall occur as provided in Section 8 hereof,
unless the participant has withdrawn pursuant to Section 10 hereof. The option
shall expire on the last day of the Offering Period.
8. Exercise of Option.
(a) Unless a participant withdraws from the Plan as provided in
Section 10 hereof, his or her option for the purchase of shares shall be
exercised automatically on the Exercise Date, and the maximum number of full
shares subject to option shall be purchased for such participant at the
applicable Purchase Price with the accumulated payroll deductions in his or her
account. No fractional shares shall be purchased; any payroll deductions
accumulated in a participant's account which are not sufficient to purchase a
full share shall be retained in the participant's account for the subsequent
Purchase Period or Offering Period, subject to earlier withdrawal by the
participant as provided in Section 10 hereof. Any other monies left over in a
participant's account after the Exercise Date shall be returned to the
participant. During a participant's lifetime, a participant's option to purchase
shares hereunder is exercisable only by him or her.
(b) If the Board determines that, on a given Exercise Date, the
number of shares with respect to which options are to be exercised may exceed
(i) the number of shares of Common Stock that were available for sale under the
Plan on the Enrollment Date of the applicable Offering Period, or (ii) the
number of shares available for sale under the Plan on such Exercise Date, the
Board may in its sole discretion (x) provide that the Company shall make a pro
rata allocation of the shares of Common Stock available for purchase on such
Enrollment Date or Exercise Date, as applicable, in as uniform a manner as shall
be practicable and as it shall determine in its sole discretion to be equitable
among all participants exercising options to purchase Common Stock on such
Exercise Date, and continue all Offering Periods then in effect, or (y) provide
that the Company shall make a pro rata allocation of the shares available for
purchase on such Enrollment Date or Exercise Date, as applicable, in as uniform
a manner as shall be practicable and as it shall determine in its sole
discretion to be equitable among all participants exercising options to purchase
Common Stock on such Exercise Date, and terminate any or all Offering Periods
then in effect pursuant to Section 20 hereof. The Company may make pro rata
allocation of the shares available on the Enrollment Date of any applicable
Offering Period pursuant to the preceding sentence, notwithstanding any
authorization of additional shares for issuance under the Plan by the Company's
stockholders subsequent to such Enrollment Date.
9. Delivery. As promptly as practicable after each Exercise Date on
which a purchase of shares occurs, the Company shall arrange the delivery to
each participant, as appropriate, of a certificate representing the shares
purchased upon exercise of his or her option.
-5-
<PAGE> 6
10. Withdrawal.
(a) A participant may withdraw all but not less than all the
payroll deductions credited to his or her account and not yet used to exercise
his or her option under the Plan at any time by giving written notice to the
Company in the form of Exhibit B to this Plan. All of the participant's payroll
deductions credited to his or her account shall be paid to such participant
promptly after receipt of notice of withdrawal and such participant's option for
the Offering Period shall be automatically terminated, and no further payroll
deductions for the purchase of shares shall be made for such Offering Period. If
a participant withdraws from an Offering Period, payroll deductions shall not
resume at the beginning of the succeeding Offering Period unless the participant
delivers to the Company a new subscription agreement.
(b) A participant's withdrawal from an Offering Period shall not
have any effect upon his or her eligibility to participate in any similar plan
which may hereafter be adopted by the Company or in succeeding Offering Periods
which commence after the termination of the Offering Period from which the
participant withdraws.
11. Termination of Employment.
Upon a participant's ceasing to be an Employee, for any reason,
he or she shall be deemed to have elected to withdraw from the Plan and the
payroll deductions credited to such participant's account during the Offering
Period but not yet used to exercise the option shall be returned to such
participant or, in the case of his or her death, to the person or persons
entitled thereto under Section 15 hereof, and such participant's option shall be
automatically terminated. The preceding sentence notwithstanding, a participant
who receives payment in lieu of notice of termination of employment shall be
treated as continuing to be an Employee for the participant's customary number
of hours per week of employment during the period in which the participant is
subject to such payment in lieu of notice.
12. Interest. No interest shall accrue on the payroll deductions of a
participant in the Plan.
13. Stock.
(a) Subject to adjustment upon changes in capitalization of the
Company as provided in Section 19 hereof, the maximum number of shares of the
Company's Common Stock which shall be made available for sale under the Plan
shall be 500,000 shares, plus an annual increase to be added on the first day of
the Company's fiscal year, beginning in 2001, equal to the lesser of (i) 500,000
shares, (ii) 1% of the outstanding shares of Common Stock on such date, or (iii)
an amount determined by the Board.
(b) The participant shall have no interest or voting right in
shares covered by his option until such option has been exercised.
(c) Shares to be delivered to a participant under the Plan shall
be registered in the name of the participant or in the name of the participant
and his or her spouse.
-6-
<PAGE> 7
14. Administration. The Plan shall be administered by the Board or a
committee of members of the Board appointed by the Board. The Board or its
committee shall have full and exclusive discretionary authority to construe,
interpret and apply the terms of the Plan, to determine eligibility and to
adjudicate all disputed claims filed under the Plan. Every finding, decision and
determination made by the Board or its committee shall, to the full extent
permitted by law, be final and binding upon all parties.
15. Designation of Beneficiary.
(a) A participant may file a written designation of a beneficiary
who is to receive any shares and cash, if any, from the participant's account
under the Plan in the event of such participant's death subsequent to an
Exercise Date on which the option is exercised but prior to delivery to such
participant of such shares and cash. In addition, a participant may file a
written designation of a beneficiary who is to receive any cash from the
participant's account under the Plan in the event of such participant's death
prior to exercise of the option. If a participant is married and the designated
beneficiary is not the spouse, spousal consent shall be required for such
designation to be effective.
(b) Such designation of beneficiary may be changed by the
participant at any time by written notice. In the event of the death of a
participant and in the absence of a beneficiary validly designated under the
Plan who is living at the time of such participant's death, the Company shall
deliver such shares and/or cash to the executor or administrator of the estate
of the participant, or if no such executor or administrator has been appointed
(to the knowledge of the Company), the Company, in its discretion, may deliver
such shares and/or cash to the spouse or to any one or more dependents or
relatives of the participant, or if no spouse, dependent or relative is known to
the Company, then to such other person as the Company may designate.
16. Transferability. Neither payroll deductions credited to a
participant's account nor any rights with regard to the exercise of an option or
to receive shares under the Plan may be assigned, transferred, pledged or
otherwise disposed of in any way (other than by will, the laws of descent and
distribution or as provided in Section 15 hereof) by the participant. Any such
attempt at assignment, transfer, pledge or other disposition shall be without
effect, except that the Company may treat such act as an election to withdraw
funds from an Offering Period in accordance with Section 10 hereof.
17. Use of Funds. All payroll deductions received or held by the Company
under the Plan may be used by the Company for any corporate purpose, and the
Company shall not be obligated to segregate such payroll deductions.
18. Reports. Individual accounts shall be maintained for each
participant in the Plan. Statements of account shall be given to participating
Employees at least annually, which statements shall set forth the amounts of
payroll deductions, the Purchase Price, the number of shares purchased and the
remaining cash balance, if any.
-7-
<PAGE> 8
19. Adjustments Upon Changes in Capitalization, Dissolution,
Liquidation, Merger or Asset Sale.
(a) Changes in Capitalization. Subject to any required action by
the stockholders of the Company, the Reserves (including the number of shares
automatically added annually to the Plan pursuant to Section 13(a)(i)), the
maximum number of shares each participant may purchase each Purchase Period
(pursuant to Section 7), as well as the price per share and the number of shares
of Common Stock covered by each option under the Plan which has not yet been
exercised shall be proportionately adjusted for any increase or decrease in the
number of issued shares of Common Stock resulting from a stock split, reverse
stock split, stock dividend, combination or reclassification of the Common
Stock, or any other increase or decrease in the number of shares of Common Stock
effected without receipt of consideration by the Company; provided, however,
that conversion of any convertible securities of the Company shall not be deemed
to have been "effected without receipt of consideration." Such adjustment shall
be made by the Board, whose determination in that respect shall be final,
binding and conclusive. Except as expressly provided herein, no issuance by the
Company of shares of stock of any class, or securities convertible into shares
of stock of any class, shall affect, and no adjustment by reason thereof shall
be made with respect to, the number or price of shares of Common Stock subject
to an option.
(b) Dissolution or Liquidation. In the event of the proposed
dissolution or liquidation of the Company, the Offering Period then in progress
shall be shortened by setting a new Exercise Date (the "New Exercise Date"), and
shall terminate immediately prior to the consummation of such proposed
dissolution or liquidation, unless provided otherwise by the Board. The New
Exercise Date shall be before the date of the Company's proposed dissolution or
liquidation. The Board shall notify each participant in writing, at least ten
(10) business days prior to the New Exercise Date, that the Exercise Date for
the participant's option has been changed to the New Exercise Date and that the
participant's option shall be exercised automatically on the New Exercise Date,
unless prior to such date the participant has withdrawn from the Offering Period
as provided in Section 10 hereof.
(c) Merger or Asset Sale. In the event of a proposed sale of all
or substantially all of the assets of the Company, or the merger of the Company
with or into another corporation, each outstanding option shall be assumed or an
equivalent option substituted by the successor corporation or a Parent or
Subsidiary of the successor corporation. In the event that the successor
corporation refuses to assume or substitute for the option, any Purchase Periods
then in progress shall be shortened by setting a new Exercise Date (the "New
Exercise Date") and any Offering Periods then in progress shall end on the New
Exercise Date. The New Exercise Date shall be before the date of the Company's
proposed sale or merger. The Board shall notify each participant in writing, at
least ten (10) business days prior to the New Exercise Date, that the Exercise
Date for the participant's option has been changed to the New Exercise Date and
that the participant's option shall be exercised automatically on the New
Exercise Date, unless prior to such date the participant has withdrawn from the
Offering Period as provided in Section 10 hereof.
-8-
<PAGE> 9
20. Amendment or Termination.
(a) The Board of Directors of the Company may at any time and for
any reason terminate or amend the Plan. Except as provided in Section 19 hereof,
no such termination can affect options previously granted, provided that an
Offering Period may be terminated by the Board of Directors on any Exercise Date
if the Board determines that the termination of the Offering Period or the Plan
is in the best interests of the Company and its stockholders. Except as provided
in Section 19 and this Section 20 hereof, no amendment may make any change in
any option theretofore granted which adversely affects the rights of any
participant. To the extent necessary to comply with Section 423 of the Code (or
any successor rule or provision or any other applicable law, regulation or stock
exchange rule), the Company shall obtain stockholder approval in such a manner
and to such a degree as required.
(b) Without stockholder consent and without regard to whether any
participant rights may be considered to have been "adversely affected," the
Board (or its committee) shall be entitled to change the Offering Periods, limit
the frequency and/or number of changes in the amount withheld during an Offering
Period, establish the exchange ratio applicable to amounts withheld in a
currency other than U.S. dollars, permit payroll withholding in excess of the
amount designated by a participant in order to adjust for delays or mistakes in
the Company's processing of properly completed withholding elections, establish
reasonable waiting and adjustment periods and/or accounting and crediting
procedures to ensure that amounts applied toward the purchase of Common Stock
for each participant properly correspond with amounts withheld from the
participant's Compensation, and establish such other limitations or procedures
as the Board (or its committee) determines in its sole discretion advisable
which are consistent with the Plan.
(c) In the event the Board determines that the ongoing operation
of the Plan may result in unfavorable financial accounting consequences, the
Board may, in its discretion and, to the extent necessary or desirable, modify
or amend the Plan to reduce or eliminate such accounting consequence including,
but not limited to:
(i) altering the Purchase Price for any Offering
Period including an Offering Period underway at the time of the change in
Purchase Price;
(ii) shortening any Offering Period so that Offering
Period ends on a new Exercise Date, including an Offering Period underway at the
time of the Board action; and
(iii) allocating shares.
Such modifications or amendments shall not require stockholder
approval or the consent of any Plan participants.
21. Notices. All notices or other communications by a participant to the
Company under or in connection with the Plan shall be deemed to have been duly
given when received in the form specified by the Company at the location, or by
the person, designated by the Company for the receipt thereof.
22. Conditions Upon Issuance of Shares. Shares shall not be issued with
respect to an option unless the exercise of such option and the issuance and
delivery of such shares pursuant
-9-
<PAGE> 10
thereto shall comply with all applicable provisions of law, domestic or foreign,
including, without limitation, the Securities Act of 1933, as amended, the
Securities Exchange Act of 1934, as amended, the rules and regulations
promulgated thereunder, and the requirements of any stock exchange upon which
the shares may then be listed, and shall be further subject to the approval of
counsel for the Company with respect to such compliance.
As a condition to the exercise of an option, the Company may
require the person exercising such option to represent and warrant at the time
of any such exercise that the shares are being purchased only for investment and
without any present intention to sell or distribute such shares if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned applicable provisions of law.
23. Term of Plan. The Plan shall become effective upon the earlier to
occur of its adoption by the Board of Directors or its approval by the
stockholders of the Company. It shall continue in effect for a term of ten (10)
years unless sooner terminated under Section 20 hereof.
24. Automatic Transfer to Low Price Offering Period. To the extent
permitted by any applicable laws, regulations, or stock exchange rules if the
Fair Market Value of the Common Stock on any Exercise Date in an Offering Period
is lower than the Fair Market Value of the Common Stock on the Enrollment Date
of such Offering Period, then all participants in such Offering Period shall be
automatically withdrawn from such Offering Period immediately after the exercise
of their option on such Exercise Date and automatically re-enrolled in the
immediately following Offering Period.
-10-
<PAGE> 11
EXHIBIT A
PAIN THERAPEUTICS, INC.
2000 EMPLOYEE STOCK PURCHASE PLAN
SUBSCRIPTION AGREEMENT
______ Original Application Enrollment Date: ______
______ Change in Payroll Deduction Rate
______ Change of Beneficiary(ies)
1. ____________________ hereby elects to participate in the Pain
Therapeutics, Inc. 2000 Employee Stock Purchase Plan (the "Employee
Stock Purchase Plan") and subscribes to purchase shares of the Company's
Common Stock in accordance with this Subscription Agreement and the
Employee Stock Purchase Plan.
2. I hereby authorize payroll deductions from each paycheck in the amount
of ____% of my Compensation on each payday (from 0 to 15%) during the
Offering Period in accordance with the Employee Stock Purchase Plan.
(Please note that no fractional percentages are permitted.)
3. I understand that said payroll deductions shall be accumulated for the
purchase of shares of Common Stock at the applicable Purchase Price
determined in accordance with the Employee Stock Purchase Plan. I
understand that if I do not withdraw from an Offering Period, any
accumulated payroll deductions will be used to automatically exercise my
option.
4. I have received a copy of the complete Employee Stock Purchase Plan. I
understand that my participation in the Employee Stock Purchase Plan is
in all respects subject to the terms of the Plan. I understand that my
ability to exercise the option under this Subscription Agreement is
subject to stockholder approval of the Employee Stock Purchase Plan.
5. Shares purchased for me under the Employee Stock Purchase Plan should be
issued in the name(s) of (Employee or Employee and Spouse only).
6. I understand that if I dispose of any shares received by me pursuant to
the Plan within 2 years after the Enrollment Date (the first day of the
Offering Period during which I purchased such shares) or one year after
the Exercise Date, I will be treated for federal income tax purposes as
having received ordinary income at the time of such disposition in an
amount equal to the excess of the fair market value of the shares at the
time such shares were purchased by me over the price which I paid for
the shares. I hereby agree to notify the Company in writing within 30
days after the date of any disposition of my shares and I will make
adequate provision for Federal, state or other tax withholding
obligations, if any, which arise upon the disposition of the Common
Stock. The Company may, but will not be obligated to, withhold
<PAGE> 12
from my compensation the amount necessary to meet any applicable
withholding obligation including any withholding necessary to make
available to the Company any tax deductions or benefits attributable to
sale or early disposition of Common Stock by me. If I dispose of such
shares at any time after the expiration of the 2-year and 1-year holding
periods, I understand that I will be treated for federal income tax
purposes as having received income only at the time of such disposition,
and that such income will be taxed as ordinary income only to the extent
of an amount equal to the lesser of (1) the excess of the fair market
value of the shares at the time of such disposition over the purchase
price which I paid for the shares, or (2) 15% of the fair market value
of the shares on the first day of the Offering Period. The remainder of
the gain, if any, recognized on such disposition will be taxed as
capital gain.
7. I hereby agree to be bound by the terms of the Employee Stock Purchase
Plan. The effectiveness of this Subscription Agreement is dependent upon
my eligibility to participate in the Employee Stock Purchase Plan.
8. In the event of my death, I hereby designate the following as my
beneficiary(ies) to receive all payments and shares due me under the
Employee Stock Purchase Plan:
NAME: (Please print)
---------------------------------------------------
(First) (Middle) (Last)
------------------------- --------------------------------------------
Relationship
--------------------------------------------
(Address)
Employee's Social
Security Number:
------------------------------------
Employee's Address:
------------------------------------
------------------------------------
------------------------------------
I UNDERSTAND THAT THIS SUBSCRIPTION AGREEMENT SHALL REMAIN IN EFFECT THROUGHOUT
SUCCESSIVE OFFERING PERIODS UNLESS TERMINATED BY ME.
Dated:
--------------------------- -------------------------------------------
Signature of Employee
-------------------------------------------
Spouse's Signature (If beneficiary other
than spouse)
-2-
<PAGE> 13
EXHIBIT B
PAIN THERAPEUTICS, INC.
2000 EMPLOYEE STOCK PURCHASE PLAN
NOTICE OF WITHDRAWAL
The undersigned participant in the Offering Period of the Pain
Therapeutics, Inc. 2000 Employee Stock Purchase Plan which began on
____________, ______ (the "Enrollment Date") hereby notifies the Company that he
or she hereby withdraws from the Offering Period. He or she hereby directs the
Company to pay to the undersigned as promptly as practicable all the payroll
deductions credited to his or her account with respect to such Offering Period.
The undersigned understands and agrees that his or her option for such Offering
Period will be automatically terminated. The undersigned understands further
that no further payroll deductions will be made for the purchase of shares in
the current Offering Period and the undersigned shall be eligible to participate
in succeeding Offering Periods only by delivering to the Company a new
Subscription Agreement.
Name and Address of Participant:
--------------------------------
--------------------------------
--------------------------------
Signature:
--------------------------------
Date:
---------------------------
<PAGE> 1
EXHIBIT 23.1
The Board of Directors
Pain Therapeutics, Inc.
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the Prospectus.
/s/ KPMG LLP
San Francisco, California
May 11, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 22,179,362
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 22,283,107
<PP&E> 132,728
<DEPRECIATION> 11,215
<TOTAL-ASSETS> 22,864,799
<CURRENT-LIABILITIES> 487,663
<BONDS> 0
9,703,903
2,660
<COMMON> 9,718
<OTHER-SE> 12,660,855
<TOTAL-LIABILITY-AND-EQUITY> 22,864,799
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 6,052,987
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (5,807,937)
<INCOME-TAX> 200
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
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<CHANGES> 0
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9,703,903
2,660
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