<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
November 1, 1996
------------------------------------------------
Date of Report (Date of earliest event reported)
CYPRESS BIOSCIENCE, INC.
------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 0-12943 22-2389839
- ------------------------------- ------------ ---------------------------------
(State or other jurisdiction of (Commission (IRS Employer Identification No.)
incorporation) File Number)
4350 Executive Drive, Suite 325
San Diego, CA 92121
-------------------------------
(Address of principal executive offices)
(619) 452-2323
------------------------------------------------
(Registrant's telephone number, including area code)
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE
- ---- ----
<S> <C> <C>
1. Changes in Control of Registrant *
2. Acquisition or Disposition of Assets 3
3. Bankruptcy or Receivership *
4. Changes in Registrant's Certifying Accountant *
5. Other Events *
6. Resignations of Registrant's Directors *
7. Financial Statements and Exhibits
(a) Financial statements of businesses acquired 4
(b) Pro forma financial information 4
(c) Exhibits 5
Signatures 6
</TABLE>
*No information provided due to inapplicability of item.
2
<PAGE> 3
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On November 1, 1996, Cypress Bioscience, Inc., a Delaware corporation (the
"Company") completed its acquisition (the "Merger") of PRP, Inc., a Delaware
corporation ("PRP") pursuant to that certain Agreement and Plan of Merger and
Reorganization dated October 10, 1996 by and among the Company, Cypress
Acquisition Sub, Inc. and PRP (the "Merger Agreement"). Pursuant to the terms of
the Merger Agreement, upon the consummation of the Merger, the Company assumed
all of the assets and liabilities of PRP.
In connection with the Merger, the Company issued to the holders of certain
indebtedness of PRP (the "Bridge Debtholders") in full satisfaction and
settlement of such indebtedness a total of 1,118,438 Units (with each Unit
consisting of two shares of Common Stock of the Company (the "Shares") and one
warrant (the "Warrants") to purchase one share of Common Stock of the Company
(the "Warrant Shares"), with a total value equal to $4,473,799.85 (based upon a
price of $4.00 per Unit).
In addition, the holders of PRP equity securities (including holders of options
and warrants of PRP) (the "Equity Holders") will be entitled to receive certain
payments (the "Earn-Out Payments"), if any, on a pro rata basis, on net sales of
products developed using PRP's technology acquired by the Company in the Merger
(the "Earn-Out Products"). The Company's obligation to make Earn-Out Payments
with respect to Earn-Out Products shall commence on the date of first commercial
sale to any third party of such Earn-Out Product by the Company, its affiliates
or licensees and shall terminate on a country-by-country basis upon the later of
(i) the expiration or invalidation of the last issued patent owned, licensed or
otherwise controlled by the Company in such country, or abandonment, disclaimer
or rejection of the last pending patent application owned, licensed or otherwise
controlled by the Company in such country, covering the manufacture, use or sale
of such Earn-Out Product, and (ii) fourteen years after the first commercial
sale anywhere in the world of the Earn-Out Product by the Company, its
affiliates or sublicensees. The amount of any Earn-Out Payment to be paid on
Earn-Out Products sold in a country in which, at the time of such sale, the
Earn-Out Product is not covered by and encompassed within the scope of one or
more claims contained in an unexpired patent or in a pending patent application
included in the patents and patent applications acquired by the Company pursuant
to the Merger, shall be reduced by 50%.
In addition to the Earn-Out Payments described above, within 30 days of the
earlier of the date of (i) public announcement of an approvable letter or other
substantially similar form of approval from the United States Food and Drug
Administration (the "FDA") relating to the approval of the use of Infusible
Platelet Membranes ("IPM") for the treatment of thrombocytopenia (the "FDA
Approvable Letter"), and (ii) public announcement by the FDA of an equivalent
approval of IPM, if any, the Company shall make a payment of $5,000,000 (the
"Milestone Payment") to the Equity Holders, with such payment being in the form
of, at the Company's sole and absolute discretion, cash, Company Common Stock or
a combination of cash and Company Common Stock. In the event the Company elects
to make the Milestone Payment, in whole or in part, in the form of Company
Common Stock, the value of such Common Stock shall be determined based upon the
average closing sales prices, if the Company's Common Stock is quoted on a stock
exchange or the Nasdaq National Market System (or the average of the bid and
asked prices of the Company's Common Stock as reported by the National
Association of Securities Dealers, Inc. electronic interdealer quotation system)
for the 15 trading day period commencing on the 10 trading days immediately
prior to and including the day of public announcement of the FDA Approvable
Letter or the public announcement by the FDA of an equivalent approval of IPM,
as the case may be, and for the 5 trading days immediately after the day of the
public announcement of the FDA Approvable Letter or the public announcement of
an equivalent approval of IPM, as the case may be. In the event the Company
elects to make the Milestone Payment, in whole or in part, in Company Common
Stock, the Company will be obligated, at its own expense, to register such
shares for resale under the Securities Act of 1933, as amended.
3
<PAGE> 4
In consideration of certain investment banking advisory services provided by EGS
Securities Corp. ("EGS") to PRP in connection with the transactions contemplated
by the Merger, the Company issued to EGS 27,961 Units with a total value equal
to $118,845 (based upon a price of $4.00 per Unit). In addition, the Company is
obligated, upon the payment of the Milestone Payment, if any, and each time any
Earn-Out Payment is made to the Equity Holders, to pay to EGS, for services
rendered to PRP in connection with the Merger, from such Milestone Payment or
Earn-Out Payment, as the case may be, prior to any distribution to be made to
the Equity Holders, an amount in cash equal to two and one-half percent (2 1/2%)
of the Milestone Payment and each Earn-Out Payment.
On November 4, 1996, the Company filed a registration statement on Form S-3 with
the Securities and Exchange Commission (the "SEC") registering for resale the
Shares, Warrants and Warrant Shares issued to the Bridge Debtholders and EGS in
connection with the Merger.
Pursuant to the terms of the Merger Agreement, subject to limited exceptions,
the Company is obligated to spend $4,000,000 to commercialize and advance IPM as
a principal product of the Company. The only circumstances under which the
Company may decrease or cease commercialization of IPM prior to expending
$4,000,000 would be if the Company encounters critical problems with the
commercialization of IPM, including problems related to IPM's safety, efficacy
or economic viability, such as would render IPM, on a stand-alone basis, unsafe,
ineffective or incapable of generating a reasonable, positive cash flow. After
the Company has expended $4,000,000 on the commercialization of IPM, the Company
has agreed to use commercially reasonable efforts to optimize commercialization
of Earn-Out Products.
There were no material relationships between the Company or any of its
affiliates, directors or officers and the persons to whom the Company issued
securities or to whom the Company is obligated to make future payments, if any,
in connection with the Merger.
The Company's principal executive offices are located at 4350 Executive Drive,
Suite 325, San Diego, California, 92121. The Company develops, manufactures and
markets medical devices for the treatment and diagnosis of select
immune-mediated diseases, transplantations and cancers.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
a. FINANCIAL STATEMENTS OF BUSINESS ACQUIRED
Financial Statements of PRP, Inc. filed as Exhibit 99.1 herewith
b. PRO FORMA FINANCIAL INFORMATION
Proforma Condensed Consolidated Financial Statements of Cypress
Bioscience, Inc. and PRP, Inc. filed as Exhibit 99.2 herewith
4
<PAGE> 5
C. EXHIBITS
<TABLE>
<S> <C>
Exhibit Number Document
Exhibit 2.1* Agreement and Plan of Merger and Reorganization dated October 10, 1996, by
and among Registrant, Cypress Acuqiestion Sub, Inc. and PRP, Inc.
Exhibit 4.1* Warrant Agreement date September 18, 1996, between Registrant and American
Stock Transfer & Trust Company
Exhibit 4.2* Warrant Certificate
Exhibit 4.3* Exchange of Bridge Debt and Warrant Termination Agreement between Registrant
and certain holders of indebtedness of PRP, Inc.
Exhibit 4.4* Modified Fee Agreement date by and among Registrant, PRP, Inc. and EGS
Securities Corp.
Exhibit 99.1 Financial Statements of PRP, Inc.
Exhibit 99.2 Pro Forma Condensed Consolidated Financial Statements of Cypress Bioscience,
Inc. and PRP, Inc.
</TABLE>
*Previously filed with the SEC on November 1, 1996 with the initial filing
of this Form 8K
5
<PAGE> 6
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of San Diego, County of San
Diego, State of California, on the 15th day of January, 1997.
CYPRESS BIOSCIENCE, INC.
By /s/ Susan E. Feiner
_______________________________________________
Susan E. Feiner
Director of Finance
(Principal Financial and Accounting Officer)
6
<PAGE> 7
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Number Document
- -------------- --------
<S> <C>
Exhibit 2.1* Agreement and Plan of Merger and Reorganization dated October 10, 1996, by
and among Registrant, Cypress Acquisition Sub, Inc. and PRP, Inc.
Exhibit 4.1* Warrant Agreement date September 18, 1996, between Registrant and American
Stock Transfer & Trust Company
Exhibit 4.2* Warrant Certificate
Exhibit 4.3* Exchange of Bridge Debt and Warrant Termination Agreement between
Registrant and certain holders of indebtedness of PRP, Inc.
Exhibit 4.4* Modified Fee Agreement date by and among Registrant, PRP, Inc. and EGS
Securities Corp.
Exhibit 99.1 Financial Statements of PRP, Inc.
Exhibit 99.2 Pro Forma Condensed Consolidated Financial Statements of Cypress
Bioscience, Inc. and PRP, Inc.
</TABLE>
*Previously filed with the SEC on November 1, 1996, with the initial filing of
this Form 8K
<PAGE> 1
EXHIBIT 99.1
REPORT OF INDEPENDENT PUBLIC ACCOUNTS
To the Stockholders and Board of Directors of
PRP, Inc.:
We have audited the accompanying balance sheets of PRP, Inc. (a Delaware
corporation in the development stage) as of January 31, 1995 and 1996, and the
related statements of operations, stockholders' investment (deficit) and cash
flows for each of the three years in the period ended January 31, 1996. 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 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 PRP, Inc. as of January 31,
1995 and 1996, and the results of its operations and its cash flows for each of
the three years in the period ended January 31, 1996, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discuss in Note 1 to the financial
statements, the Company is a development stage company, has suffered significant
losses from operations and has a net capital deficiency that raise substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are described in Note 1. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/S/ Arthur Andersen LLP
Boston, Massachusetts
May 10, 1996
1
<PAGE> 2
PRP, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 31,
--------------------------------
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 77,665 $ 1,345,386
Prepaid expenses and other assets 57,125 115,816
------------ ------------
Total current assets 134,790 1,461,202
------------ ------------
Property and equipment, at cost (Note 1)
Office equipment 54,460 54,233
Laboratory equipment 775,882 771,778
Leasehold improvements 40,458 40,458
------------ ------------
870,800 866,469
Less-Accumulated depreciation amortization 645,266 495,851
------------ ------------
225,534 370,618
------------ ------------
Other assets 20,150 46,150
------------ ------------
Total assets $ 380,474 $ 1,877,970
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Notes payable to related parties $ 2,866,280 $ --
Accounts payable 12,851 154,068
Accrued expenses 340,559 222,602
------------ ------------
Total current liabilities $ 3,219,690 376,670
------------ ------------
Notes Payable to Related Parties (Note 4) -- 2,000,000
Commitments (Note 5)
Stockholders' deficit:
Series A convertible preferred stock, $.01 par value-
Authorized - 220,000
shares Issued and outstanding - 220,000 shares in 1996 and 1995
liquidation preference of $ 1,100,000 2,200 2,200
Series B convertible preferred stock, $.01 par value-
Authorized - 80,000 shares
Issued and outstanding - 51,635 shares in 1996 and 1995
liquidation preference of $ 335,628 516 516
Series C convertible preferred stock, $.01 par value-
Authorized - 2,000,000 shares
Issued and outstanding - 637,003 shares in 1996 and 1995
liquidation preference of $ 4,892,736 6,370 6,370
Nonvoting convertible preferred stock, $.01 par value-
Authorized - 500,000 shares
Issued and outstanding - 190,682 shares and 188,765 in
1996 and 1995, respectively, liquidation preference of $ 953,410 1,907 1,888
Common stock, $.01 par value-
Authorized - 10,000,000 shares
Issued and outstanding - 1,429,778 shares in 1996 and 1995 14,298 14,298
Additional paid-in capital 8,824,470 8,689,226
Deficit accumulated during the development stage (11,688,977) (9,213,198)
------------ ------------
Total stockholders' deficit (2,839,216) (498,700)
------------ ------------
Total Liabilities and Shareholder Deficit $ 380,474 $ 1,877,970
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 3
PRP, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
CUMULATIVE
FROM INCEPTION
FOR THE YEARS ENDED JANUARY 31, FEBRUARY 27, 1984
---------------------------------------------------- TO JANUARY 31,
1996 1995 1994 1996
------------ ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C>
General and Administrative Expenses $ (726,960) $ (692,941) $ (904,993) $ (4,147,940)
Research and Development Expenses (1,550,656) (2,586,566) (2,592,312) (9,819,854)
------------ ------------ ------------ ------------
Loss from Operations (2,277,616) (3,279,507) (3,497,305) (13,967,794)
Interest Expense, Net (198,163) (7,954) 14,581 (51,242)
Loss on Abandonment of Facility (Note 8) -- (162,128) -- (162,128)
Officer's Life Insurance Proceeds -- -- 2,492,187 2,492,187
------------ ------------ ------------ ------------
Net Loss $ (2,475,779) $ (3,449,589) $ (990,537) $(11,688,977)
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
PRP, INC.
(A Development Stage Company)
FOR THE YEARS ENDED JANUARY 31, 1995 AND 1996
AND FROM THE PERIOD FROM INCEPTION (FEBRUARY 27, 1984) TO JANUARY 31,
1996
<TABLE>
<CAPTION>
Series A Convertible Series B Convertible Series C Convertible
Preferred Stock Preferred Stock Preferred Stock
Number $.01 Par Number $.01 Par Number $.01 Par
of Shares Value of Shares Value of Shares Value
----------- --------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
SALE OF COMMON STOCK SINCE INCEPTION - $ - - $ - - $ -
Issuance of common stock for property and equipment - - - - - -
Issuance of common stock for services render - - - - - -
Sale of nonvoting convertible preferred stock, net of
issuance costs - - - - - -
Issuance of nonvoting convertible preferred stock for
services rendered - - - - - -
Sale of Series A convertible preferred stock, net of 220,000 2,200 - - - -
issuance costs
Sale of Series B convertible preferred stock, net of - - 51,616 516 - -
issuance costs
Sale of Series C convertible preferred stock, net of - - - - 572,463 5,725
issuance costs
Net Loss from inception to January 31, 1993 - - - - - -
----------- --------- ---------- ---------- ---------- --------
BALANCE, JANUARY 31, 1993 220,000 2,200 51,616 516 572,463 5,725
Issuance of common stock for services rendered - - - - - -
Issuance of nonvoting convertible preferred stock for
services rendered and property and equipment - - - - - -
Sale of Series B convertible preferred stock, net of - - 742 7 - -
issuance costs
Sale of Series C convertible preferred stock, net of - - - - 70,485 705
issuance costs
Stock options granted for rent expense - - - - - -
Net loss - - - - - -
----------- --------- ---------- ---------- ---------- --------
BALANCE, JANUARY 31, 1994 220,000 2,200 52,358 523 642,948 6,430
Issuance of nonvoting convertible preferred stock for
services rendered - - - - - -
Exercise of stock options - - - - - -
Repurchase of preferred stock - - (723) (7) (5,945) (60)
Net loss - - - - - -
----------- --------- ---------- ---------- ---------- --------
BALANCE, JANUARY 31, 1995 220,000 2,200 51,635 516 637,003 6,370
Issuance of nonvoting convertible preferred stock for
services rendered - - - - - -
Stock options granted for rent expense - - - - - -
Net loss - - - - - -
----------- --------- ---------- ---------- ---------- --------
BALANCE, JANUARY 31, 1996 220,000 $ 2,200 51,635 $ 516 637,003 $ 6,370
=========== ========= ========== ========== ========== ========
</TABLE>
<TABLE>
<CAPTION>
Nonvoting Convertible
Preferred Stock Common Stock Additional
Number $.01 Par Number $.01 Par Paid-in
of Shares Value of Shares Value Capital
----------- --------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C>
SALE OF COMMON STOCK SINCE INCEPTION - $ - 1,412,247 $ 14,222 $ 1,032,016
Issuance of common stock for property and equipment - - 5,250 53 10,477
Issuance of common stock for services render - - 4,281 43 13,875
Sale of nonvoting convertible preferred stock, net of
issuance costs 149,859 1,498 - - 743,126
Issuance of nonvoting convertible preferred stock for
services rendered 27,388 274 - - 173,380
Sale of Series A convertible preferred stock, net of - - - - 1,066,970
issuance costs
Sale of Series B convertible preferred stock, net of - - - - 320,988
issuance costs
Sale of Series C convertible preferred stock, net of - - - - 4,336,946
issuance costs
Net Loss from inception to January 31, 1993 - - - - -
----------- --------- ----------- ---------- -------------
BALANCE, JANUARY 31, 1993 177,247 1,772 1,421,778 14,218 7,697,748
Issuance of common stock for services rendered - - 6,600 66 22,374
Issuance of nonvoting convertible preferred stock for
services rendered and property and equipment 23,670 237 - - 184,695
Sale of Series B convertible preferred stock, net of - - - - 4,816
issuance costs
Sale of Series C convertible preferred stock, net of - - - - 586,493
issuance costs
Stock options granted for rent expense - - - - 149,040
Net loss - - - - -
----------- --------- ----------- ---------- -------------
BALANCE, JANUARY 31, 1994 200,917 2,009 1,428,378 14,284 8,645,166
Issuance of nonvoting convertible preferred stock for
services rendered 7,848 79 - - 45,074
Exercise of stock options - - 1,400 14 1,386
Repurchase of preferred stock (20,000) (200) - - (2,400)
Net loss - - - - -
----------- --------- ----------- ---------- -------------
BALANCE, JANUARY 31, 1995 188,765 1,888 1,429,778 14,298 8,689,226
Issuance of nonvoting convertible preferred stock for
services rendered 1,917 19 - - 8,075
Stock options granted for rent expense - - - - 127,169
Net loss - - - - -
----------- --------- ----------- ---------- -------------
BALANCE, JANUARY 31, 1996 190,682 $ 1,907 1,429,778 $ 14,298 $ 8,824,470
=========== ========= =========== ========== =============
</TABLE>
<TABLE>
<CAPTION>
Deficit
Accumulated Total
during the Stockholders
Development Investment
Stage Deficit
--------------- -------------
<S> <C> <C>
SALE OF COMMON STOCK SINCE INCEPTION $ - $ 1,046,138
Issuance of common stock for property and equipment - 10,500
Issuance of common stock for services render - 13,918
Sale of nonvoting convertible preferred stock, net of
issuance costs - 744,624
Issuance of nonvoting convertible preferred stock for
services rendered - 173,654
Sale of Series A convertible preferred stock, net of - 1,069,170
issuance costs
Sale of Series B convertible preferred stock, net of - 321,504
issuance costs
Sale of Series C convertible preferred stock, net of - 4,342,671
issuance costs
Net Loss from inception to January 31, 1993 (4,773,072) (4,773,072)
--------------- -------------
BALANCE, JANUARY 31, 1993 (4,773,072) 2,949,107
Issuance of common stock for services rendered - 22,400
Issuance of nonvoting convertible preferred stock for
services rendered and property and equipment - 184,932
Sale of Series B convertible preferred stock, net of - 4,823
issuance costs
Sale of Series C convertible preferred stock, net of - 587,198
issuance costs
Stock options granted for rent expense - 149,040
Net loss (990,537) (990,537)
--------------- -------------
BALANCE, JANUARY 31, 1994 (5,763,609) 2,907,003
Issuance of nonvoting convertible preferred stock for
services rendered - 45,153
Exercise of stock options - 1,400
Repurchase of preferred stock - (2,667)
Net loss (3,449,589) (3,449,589)
--------------- -------------
BALANCE, JANUARY 31, 1995 (9,213,198) (498,700)
Issuance of nonvoting convertible preferred stock for
services rendered - 8,094
Stock options granted for rent expense - 127,169
Net loss (2,475,779) (2,475,779)
--------------- -------------
BALANCE, JANUARY 31, 1996 $ 11,688,977 $ 2,839,216
=============== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
PRP, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
CUMULATIVE
FROM INCEPTION
FOR THE YEARS ENDED JANUARY 31, FEBRUARY 27, 1984
------------------------------------------- TO JANUARY 31,
1996 1995 1994 1996
----------- ----------- ----------- ------------
(Unaudited)
<S> <C> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss $(2,475,779) $(3,449,589) $ (990,537) $(11,688,977)
Adjustments to reconcile net loss to net cash used
by operating activities
Issuance of debt for services 516,280 -- -- 516,280
Issuance of stock for services 8,094 45,153 75,360 316,160
Issuance of stock options for rent expense 105,994 62,100 86,940 255,034
Depreciation and amortization 149,415 161,811 149,844 670,662
Write-off of fixed assets related to the loss on abandonment
of facility -- 151,263 -- 151,263
Changes in assets and liabilities
Prepaid expenses and other current assets 79,885 (25,671) (9,041) (35,931)
Life insurance proceeds receivable -- 2,500,000 (2,500,000) --
Accounts payable (141,217) 76,488 (211,017) 12,851
Accrued expenses 117,938 (128,994) 101,155 340,559
----------- ----------- ----------- ------------
Net cash used by operating activities (1,639,390) (607,439) (3,297,296) (9,462,099)
----------- ----------- ----------- ------------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property and equipment (4,331) (25,317) (172,253) (904,947)
Decrease (increase) in other assets 26,000 4,865 68,932 (20,150)
----------- ----------- ----------- ------------
Net cash (used in) provided by investing activities 21,669 (20,452) (103,321) (925,097)
----------- ----------- ----------- ------------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from notes payable to related parties 350,000 2,000,000 -- 2,350,000
Repayment of note payable to stockholder -- (1,000,000) 1,000,000 --
Proceeds from sale of common stock -- -- -- 1,046,138
Proceeds from exercise of stock options -- 1,400 -- 1,400
Proceeds from sale of preferred stock -- -- 592,021 7,069,990
Repurchase of preferred stock -- (2,667) -- (2,667)
----------- ----------- ----------- ------------
Net cash provided by financing activities 350,000 998,733 1,592,021 10,464,861
----------- ----------- ----------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,267,721) 370,842 (1,808,596) 77,665
Cash and cash equivalents at beginning of period 1,345,386 974,544 2,783,140 --
----------- ----------- ----------- ------------
Cash and cash equivalents at end of period $ 77,665 $ 1,345,386 $ 974,544 77,665
=========== =========== =========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ -- $ 51,291 $ -- $ 51,291
=========== =========== =========== ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Issuance of stock for property and equipment $ -- $ -- $ 132,012 $ 145,512
=========== =========== =========== ============
Decrease (increase) in prepaid expenses relating to
deferred rent expense $ 21,194 $ (62,100) $ 62,100 $ 21,194
=========== =========== =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
PRP, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 1996
1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
PRP, Inc. (the Company) was incorporated in the State of Delaware on February
27, 1984. The Company was organized to develop, produce and distribute blood
platelet-based health care products.
The Company is in the development stage and is devoting substantially all of its
efforts toward product research and development and raising capital. The Company
is subject to a number of risks similar to those of other development stage
companies, including dependence on key individuals, competition from substitute
products and larger companies, the development of commercially usable products
and the need to obtain adequate additional financing necessary to fund the
development of its products. These factors raise substantial doubt about the
Company's ability to continue as a going concern. The accompanying financial
statements do not include any adjustments that might result from the
uncertainty. The accompanying financial statements reflect the application of
certain significant accounting policies as described in this note and elsewhere
in the accompanying notes to financial statements.
Cash Equivalents
The Company considers all highly liquid investments with original maturities of
90 days or less to be cash equivalents.
Depreciation and Amortization
The Company provides for depreciation and amortization using the straight-line
method by charges to operations in amounts that allocate the cost of property
and equipment over their estimated useful lives, as follows:
ESTIMATED
ASSET CLASSIFICATION USEFUL LIFE
Office equipment 5 years
Laboratory equipment 5 years
Leasehold improvements 5-8 years
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
6
<PAGE> 7
2. INCOME TAXES
The Company provides for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes.
At January 31, 1996, the Company had available net operating loss and research
and development tax credit carryforwards of approximately $10,000,000 and
$227,000, respectively. These carryforwards may be used to offset future taxable
income or tax, if any, and expire at various dates from 1999 through 2011. The
Internal Revenue Code contains provisions that may limit the Company's use of
the carryforwards in the event of certain changes in the ownership of the
Company. The Company has recorded a full valuation allowance against its
deferred tax asset of approximately $5,800,000 due to the uncertainty
surrounding the reliazability of this asset. Principal components of the
deferred tax asset are net operating loss, research and development tax credit
carryforwards and start-up expenditures that have been capitalized for income
tax purposes.
3. LIFE INSURANCE PROCEEDS
In January 1994, an officer/stockholder of the Company passed away. The Company
had a $2,500,000 face value life insurance policy in place on this
officer/stockholder. In March 1994, the Company received approximately
$1,500,000 from the insurance company. The remaining $1,000,000 was paid
directly to a stockholder in full satisfaction of a note payable to a
stockholder.
4. NOTES PAYABLE TO RELATED PARTIES
At January 31, 1995, the Company had term notes payable to a limited partnership
and certain shareholders of the Company for $2,000,000. This balance was
increased to $2,866,280 as of January 31, 1996. The Company has received
$2,350,000 in cash funding and $516,280 of professional services and accrued
interest in exchange for the notes. The notes bear interest at 9% per annum, and
principal and interest are due on December 31, 1996. The notes are secured by
substantially all of the Company's assets, including all patents. The carrying
value of the notes approximates its market value.
In addition, the noteholders were issued warrants that gave them the right to
purchase Series C convertible preferred stock equal to the amount of the
outstanding loan balance plus any accrued interest divided by $4.20. Each
warrant has an exercise price of $ 4.20 per share. These warrants expire the
later of 30 days after the termination of the loan commitment or repayment of
the notes. As of January 31, 1996, 749,338 warrants have been issued in
conjunction with these notes.
On February 13, 1996, the Company entered into a $700,000 working capital loan
agreement with certain shareholders and consultants of the Company. Under the
terms of the agreement, the Company received approximately $350,000 in February
and the remaining $350,000 in May 1996. The loan carries the same terms as
described above except for the warrant provision. Under the new debt agreement,
debtholders were issued two warrants that gave them the right to purchase two
share of Series C convertible preferred stock for each dollar outstanding loan
balance, plus any accrued interest exercisable at $1.50 per share. This warrant
expires five years after the termination of the loan commitment or repayment of
the notes payable; it may be accelerated by certain events.
7
<PAGE> 8
5. COMMITMENTS
The Company leases office and laboratory facilities under various operating
leases that expire through January 2001. Annual commitments under operating
leases as of January 31, 1996 are as follows:
FISCAL YEAR AMOUNT
1997 $ 105,000
1998 105,000
1999 105,000
2000 105,000
2001 96,000
---------
$ 516,000
=========
In February 1993, the Board of Directors authorized the grant of an option to
purchase 32,400 share of common stock of the Company at an exercise price of
$1.00 per share to the Company's landlord in lieu of certain cash payments under
a facility operating lease. In March 1995, the Board of Directors authorized the
grant of an additional option to purchase 39,740 shares of common stock of the
Company at an exercise price of $1.00 per share to the Company's landlord in
lieu of cash payment of rent from April 1, 1995 to March 31, 1996; the total
value of the options is $127,168. The value of the rent from April 1, 1995 to
March 31, 1996 has been included in stockholders' deficit at January 31 ,1996.
During fiscal 1994, 1995 and 1996, the Company recorded $133,000, $151,000 and
$114,000, respectively, of rent expense, of which approximately $87,000, $62,000
and $106,000, respectively, was noncash rent expense. The noncash rent expense
was related to stock options granted to the Company's landlord at an amount that
represented the fair market value of the rent. During fiscal 1995, the Company
terminated a lease for a portion of its laboratory space and recorded a loss on
abandonment of the facility as discussed in Note 8.
6. STOCKHOLDERS' DEFICIT
Common Stock
As of January 31, 1996, 10,000,000 shares of common stock (Common Stock) were
authorized, of which 1,099,320 shares were reserved for the conversion of the
outstanding preferred stock, 798,000 share were reserved for the exercise of
stock options and 749,338 shares were reserved for the exercise warrants.
During fiscal 1994, the Company issued 6,600 shares of Common stock to
consultants for services rendered, which resulted in a charge to operations of
$22,440. The Company has charged operations for this issuance based on the fair
value of the stock, as determined by the Board of Directors.
Preferred Stock
The Company's Board of Directors has authorized the issuance of up to 5,000,000
shares of preferred stock (Preferred Stock), $.01 par value, of which 500,000
shares have been designated as nonvoting preferred stock (Nonvoting Preferred),
220,000 shares have been designated as Series B preferred stock (Series A
Preferred), 80,000 shares have been designated as Series B preferred stock
(Series B Preferred), 2,000,000 shares have been designated as Series C
preferred stock (Series C Preferred) and 2,200,000 shares remain authorized but
undesignated and unissued.
8
<PAGE> 9
6. STOCKHOLDERS' DEFICIT (CONTINUED)
Preferred Stock (Continued)
During fiscal 1994, 1995 and 1996, the Company issued 6,300, 7,848 and 1,917
shares, respectively, of Nonvoting Preferred to certain stockholders/directors
and consultants for services rendered, which resulted in charges to operations
of approximately $52,920, $45,000 and $8,100, respectively. The Company has
charged operations for these issuances based on the fair value of the stock, as
determined by the Board of Directors. In fiscal 1994, the Company executed an
operating lease for additional laboratory facilities. Under the terms of this
agreement, the Company issued a total of 17,370 share of Nonvoting Preferred for
certain leasehold improvements and consulting services. The Company capitalized
$132,012 as leasehold improvements relating to this Nonvoting Preferred
issuance. This lease has since been terminated (Note 8). In addition, the
Company sold 742 shares of Series B Preferred at a price of $6.50 per share in
fiscal 1994. In fiscal 1994, the Company also sold 6,094 shares and 64,391
shares of Series C Preferred at a price of $7.60 and $8.40 per share,
respectively.
The rights, preferences and privileges of the Preferred Stock are detailed
below.
TRANSFER RESTRICTIONS
All shares of Preferred Stock are subject to certain transfer restrictions,
including the Company's right to repurchase any shares offered for sale and the
right of the holders of Preferred Stock, and such holders of Common Stock as the
Company deems appropriate, to purchase the offered shares if the Company refuses
to do so.
CONVERSION
Each class of Preferred Stock is convertible (as described below) in to Common
Stock at the rate of one share of Common Stock for each share of Preferred
Stock, adjustable for certain dilutive events.
The Series A and C Preferred are convertible upon the occurrence of certain
events at the option of the holder, as defined. The Nonvoting Preferred and
Series B Preferred may not be converted at the option of the holders. All of the
Preferred Stock is convertible into shares of Common Stock at the option of the
Company in the event of the closing of a public offering resulting in at least
$5,000,000 of gross proceeds to the Company at various per share prices.
DIVIDENDS
Each share of Preferred Stock is entitled to participate in any dividend or
distribution declared or paid on the Common Stock on the basis of the number of
shares of Common Stock into which it is the convertible. Preferred Stockholders
will be entitled to receive their dividends before any dividends are paid to
Common Stockholders.
LIQUIDATION PREFERENCES
In the event of a liquidation, dissolution or winding up of the Company,
1. the holders of Series A Preferred are entitled to receive,
subsequent to any distribution to holders of Nonvoting Preferred and
Series A Preferred, but before holder of any other class of
Preferred Stock or Common Stock, $5.00 per share plus any accrued
but unpaid dividends;
9
<PAGE> 10
6. STOCKHOLDERS' DEFICIT (CONTINUED)
Preferred Stock (Continued)
LIQUIDATION PREFERENCES (CONTINUED)
2. the holders of Series B Preferred are entitled to receive,
subsequent to any distribution to holders of Nonvoting Preferred and
Series A Preferred, but before holder of any other class of
Preferred Stock or Common Stock, $6.50 per share plus any accrued
but unpaid dividends;
3. the holders of Series C Preferred are entitled to receive,
subsequent to any distribution to holders of Nonvoting Preferred,
Series A Preferred and Series B Preferred but before holder of any
other class of Preferred Stock or Common Stock, the amount paid per
share (572,612 shares at $7.60 per share and 64,391 shares at $8.40
per share) plus any accrued but unpaid dividends; and
4. the holders of Nonvoting Preferred are entitled to receive, $5.00
per share plus any accrued but unpaid dividends prior to the
distribution of any proceeds to holders of any other class of
Preferred Stock or holders of Common Stock.
VOTING
Holders of Nonvoting Preferred are not entitled to vote, except as required
under Delaware law. Holders of all other classes of Preferred Stock are entitled
to one vote for each whole share of Common Stock into which the shares of
Preferred Stock held are then convertible. Holders of Common Stock vote with the
holders of Series A Preferred, Series B Preferred and Series C Preferred as a
single class.
Stock Option Plan
The Company has a stock option plan (the Plan), pursuant to which up to 800,00
shares of Common Stock may be issued of a 10-year period. Under the Plan, the
Company may grant both incentive stock options and nonqualified stock options,
as well as award or sell shares to employees. All option grants, prices and
vesting periods are determined by the Board of Directors. Incentive stock
options may be granted at a price not less than the fair market value on the
date of grant, as determined by the Board of Directors, incentive stock options
vest at 20% per annum, and nonqualified stock options vest immediately.
10
<PAGE> 11
6. STOCKHOLDERS' DEFICIT (CONTINUED)
Stock Option Plan (Continued)
A summary of stock option activity is a follows:
<TABLE>
<CAPTION>
NUMBER OPTION PRICE
OF OPTIONS PER SHARE
---------- ------------
<S> <C> <C>
Outstanding, January 31, 1993 388,530 $1.00
Granted 152,891 1.00
Terminated 45,000 1.00
Outstanding, January 31, 1994 496,421 1.00
Granted 190,467 1.00
Exercised (1,400) 1.00
Terminated (47,600) 1.00
-------- -----
Outstanding, January 31, 1995 637,888 1.00
Granted 163,534 1.00
Terminated (1,000) 1.00
-------- -----
Outstanding, January 31, 1996 800,422 $1.00
======== =====
Exercisable, January 31, 1996 759,627 $1.00
======== =====
</TABLE>
A number of the members of the Board of Director and consultants receive stock
options as compensation. At January 31, 1996, there were 6,950 stock options
earned by not yet granted by the Company. As discussed in Note 5, the Company
has granted options in connection with the amendment of a facility operating
lease. The Company has also authorized the grant of preferred stock or stock
options for common stock to certain consultants, at the discretion of the
Company, for compensation, as defined in the agreement. All shares relating to
this agreement were granted before year-end.
7. SIMPLIFIED EMPLOYEE PLAN
On November 1, 1989, the Company set up a simplified employee plan under the
Individual Retirement Account provisions (SEP IRA). There was no Company
contribution to the SEP IRA during the fiscal years ended January 31, 1994, 1995
and 1996.
8. LOSS ON ABANDONMENT OF FACILITY
In April 1994, in an attempt to conserve cash, the Company abandoned part of its
leased facility, consisting of laboratory and office space. In conjunction with
the lease termination, the Company agreed to relinquish its right to the
leasehold improvements and some of its equipment. As a result, the Company
incurred a loss of approximately $151,000 relate to the write-off of property
and equipment. In addition, the Company forfeited its security deposit and one
months rent, which totaled approximately $11,00. The Company was released from
its lease obligation, and the lease was terminated effective June 30, 1994. The
total loss of $162,000 has been shown as a loss on abandonment of facility in
the accompanying statement of operations for the year ended January 31, 1995.
11
<PAGE> 1
EXHIBIT 99.2
CYPRESS BIOSCIENCE, INC.
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The pro forma information is based on the historical financial statements of
Cypress Bioscience, Inc. and PRP, Inc. giving effect to the assumptions and
adjustments described in the notes to the pro forma financial statements. The
pro forma condensed consolidated balance sheet is presented as if the
transaction had occurred on September 30, 1996. The pro forma condensed
consolidated statements of operations present the combined results of operations
as if the acquisition had occurred on January 1, 1995. These statements include
only preliminary adjustments relating to the purchase price allocation to the
accounts of PRP, Inc.; final adjustments will be determined at a later date and
may, therefore, differ from those reflected in the unaudited pro forma condensed
consolidated balance sheet and statements of operations. In the opinion of
management of Cypress Bioscience, Inc., the estimates used in the preparation of
the unaudited pro forma condensed consolidated balance sheet are reasonable
under the circumstances and the final purchase accounting adjustments are not
expected to have a material impact on the financial statements of Cypress
Bioscience, Inc.
The unaudited pro forma condensed consolidated balance sheet and statement of
operations may not be indicative of the results that actually would have
occurred if the acquisition had been in effect on the dates indicated or which
may be obtained in the future. The unaudited pro forma condensed consolidated
balance sheet and statement of operations should be read in conjunction with the
historical financial statements of Cypress Bioscience, Inc., from the Company's
Annual Report (Form 10-K/A), and of PRP, Inc., included elsewhere herein.
The unaudited pro forma condensed statements of operations have combined the
following periods: for Cypress Bioscience, Inc. the twelve months ended December
31, 1995 and the nine months ended September 30, 1996; for PRP, Inc., the twelve
months ended January 31, 1996 and the nine months ended October 31, 1996.
1
<PAGE> 2
CYPRESS BIOSCIENCE, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
CYPRESS PRO FORMA PRO FORMA
BIOSCIENCE, INC. PRP, INC. ADJUSTMENTS COMBINED
---------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,287,639 $ 83,399 $ (555,027) $ 5,816,011
Inventories 1,283,968 -- -- 1,283,968
Other current assets 908,590 37,926 25,000 971,516
------------ ------------ ------------ ------------
Total current assets 8,480,197 121,325 (530,027) 8,071,495
Property and equipment, net 2,141,107 120,407 -- 2,261,514
Other assets 35,429 10,150 -- 45,579
============ ============ ============ ============
Total assets $ 10,656,733 $ 251,882 $ (530,027) $ 10,378,588
============ ============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities $ 837,052 $ 134,485 $ -- $ 971,537
Convertible debentures 400,000 -- -- 400,000
Notes Payable -- 3,926,836 (3,926,836)(a) --
Other liabilities 183,099 575,762 (546,964)(a) 211,897
Stockholders' equity:
Common stock 575,557 14,300 45,856(a) 621,413
(14,300)(a)
Preferred stock -- 10,993 (10,993)(a) --
Additional paid-in capital 59,238,705 8,824,668 4,109,713(a) 63,348,418
(8,824,668)(a)
Deferred compensation (1,419,298) -- -- (1,419,298)
Accumulated deficit (49,158,382) (13,235,162) 13,235,162(a) (53,755,379)
(4,596,997)(a)
------------ ------------ ------------ ------------
Total stockholders' equity (deficit) 9,236,582 (4,385,201) 3,943,773 8,795,154
============ ============ ============ ============
Total liabilities and stockholders' equity
(deficit) $ 10,656,733 $ 251,882 $ (530,027) $ 10,378,588
============ ============ ============ ============
</TABLE>
2
<PAGE> 3
CYPRESS BIOSCIENCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
CYPRESS PRO FORMA PRO FORMA
BIOSCIENCE, INC. PRP, INC. ADJUSTMENTS COMBINED
---------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue $ 1,277,549 $ -- $ -- $ 1,277,549
Grant income -- 61,797 -- 61,797
Interest income 343,632 -- -- 343,632
------------ ------------ ------------ ------------
1,621,181 61,797 -- 1,682,978
Costs and expenses:
Production costs 837,192 -- -- 837,192
Sales and marketing 429,417 -- -- 429,417
Research and development 2,140,659 825,044 -- 2,965,703
General and 2,641,048 270,865 -- 2,911,913
administrative
Purchased in process -- -- -- --
research and development
Interest expense 45,835 259,975 -- 305,810
Restructuring expense 460,090 -- -- 460,090
Debt conversion expense 183,688 -- -- 183,688
------------ ------------ ------------ ------------
6,737,929 1,355,884 -- 8,093,813
------------ ------------ ------------ ------------
Net loss $ (5,116,748) $ (1,294,087) $ -- $ (6,410,835)
============ ============ ============ ============
Net loss per share $ (0.19) $ (0.57) $ (0.21)(b)
============ ============ ============
Shares used in computing net loss per share 27,649,052 2,250,930 29,941,850(b)
============ ============ ============
</TABLE>
*Note: The above Pro Forma Condensed Consolidated Statement of Operations does
not include a $4,596,997 charge for the estimated fair value of acquired
in-process research and development of PRP, Inc. as it is a nonrecurring
charge. This amount is only an estimate and may change upon completion of
the valuation process.
3
<PAGE> 4
CYPRESS BIOSCIENCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
CYPRESS PRO FORMA PRO FORMA
BIOSCIENCE, INC. PRP, INC. ADJUSTMENTS COMBINED
---------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue $ 4,104,224 $ -- $ -- $ 4,104,224
Grant income -- -- -- --
Interest income 118,994 -- 118,994
------------ ------------ ------------ ------------
4,223,218 -- -- 4,223,218
Costs and expenses:
Production costs 2,041,422 -- -- 2,041,422
Sales and marketing 819,907 -- -- 819,907
Research and development 3,219,324 2,586,566 -- 5,805,890
General and 2,626,817 692,941 -- 3,319,758
administrative
Purchased in process 625,000 -- -- 625,000
research and
development
Interest expense 261,958 7,954 -- 269,912
Loss on abandonment -- 162,128 -- 162,128
Restructuring 644,656 -- -- 644,656
Debt conversion expense 810,386 -- -- 810,386
------------ ------------ ------------ ------------
11,049,470 3,449,589 -- 14,499,059
--
============ ============ ============ ============
Net loss $ (6,826,252) $ (3,449,589) $ -- $(10,275,841)
============ ============ ============ ============
Net loss per share $ (0.39) $ (1.58) $ (0.52)(b)
============ ============ ============
Shares used in computing net loss per share 17,598,735 2,189,405 19,891,533(b)
============ ============ ============
</TABLE>
*Note: The above Pro Forma Condensed Consolidated Statement of Operations does
not include a $4,596,997 charge for the estimated fair value of acquired
in-process research and development of PRP, Inc. as it is a nonrecurring
charge. This amount is only an estimate and may change upon completion of
the valuation process.
4
<PAGE> 5
CYPRESS BIOSCIENCE, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(a) On November 1, 1996, Cypress Bioscience, Inc., entered into an agreement to
acquire PRP, Inc. The transaction will be accounted for under the purchase
method of accounting. The total estimated purchase price of approximately
$5,000,000, including transaction costs of $400,000, has been allocated to
in-process research and development and the fair value of assets acquired and
liabilities assumed pursuant to Accounting Principles Board Opinion Number 16.
The acquired in-process research and development expense will be charged to
expense in the quarter ending December 31, 1996. The pro forma condensed
consolidated balance sheet is presented as if the transaction had occurred on
September 30, 1996. The pro forma condensed consolidated statement of operations
are presented as if the acquisition had occurred on January 1, 1995.
(b) The net loss per share and shares used in computing the per share amounts
for the year ended December 31, 1995, and the nine months ended September 30,
1996, have been calculated assuming that the acquisition occurred on January 1,
1995. Accordingly, the 2,292,798 common shares issued have been treated as
outstanding for the full period.
5