<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 5, 1998
Registration No. 333-____
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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CYPRESS BIOSCIENCE, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 3845 22-2389839
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of incorporation Industrial Classification Identification Number)
or organization) Code Number)
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4350 EXECUTIVE DRIVE, SUITE 325
SAN DIEGO, CA 92121
(619) 452-2323
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
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JAY D. KRANZLER
CHIEF EXECUTIVE OFFICER, CHIEF FINANCIAL OFFICER AND
VICE CHAIRMAN OF THE BOARD OF DIRECTORS
CYPRESS BIOSCIENCE, INC.
4350 EXECUTIVE DRIVE, SUITE 325
SAN DIEGO, CA 92121
(619) 452-2323
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
FREDERICK T. MUTO, ESQ.
CARL R. SANCHEZ, ESQ.
COOLEY GODWARD LLP
4365 EXECUTIVE DRIVE, SUITE 1100
SAN DIEGO, CA 92121
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Approximate date of commencement of proposed sale to the public:
FROM TIME TO TIME AFTER THE REGISTRATION STATEMENT BECOMES EFFECTIVE.
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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. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) of the Securities Act, please check the following box
and list the Securities Act registration serial 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 delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF SECURITIES AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION
TO BE REGISTERED REGISTERED SHARE(1) PRICE (1) FEE
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Common Stock, $.02 par value .. 350,000 $2.8905 $962,500 $820.72
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(1) Estimated in accordance with Rule 457(c) solely for the purpose of
calculating the amount of the registration fee based on the average of the high
and low prices of the Registrant's Common Stock as reported on the Nasdaq
SmallCap Market on February 2, 1998.
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 THEREAFTER 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 SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
PROSPECTUS
350,000 SHARES
CYPRESS BIOSCIENCE, INC.
COMMON STOCK
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This Prospectus relates to the offer and sale by Spear, Leeds & Kellogg
(the "Selling Securityholder") of up to 350,000 shares of Common Stock, $.02 par
value per share (the "Shares") of Cypress Bioscience, Inc. (the "Company"). The
Selling Securityholder acquired the Shares directly from the Company pursuant to
a private placement of Common Stock of the Company completed in October 1997
(the "Private Placement"). None of the proceeds from the sale of the Shares by
the Selling Securityholder will be received by the Company.
The Shares may be offered by the Selling Securityholder from time to
time in transactions on the Nasdaq SmallCap Market, in privately negotiated
transactions or a combination of such methods of sale, at fixed prices which may
be changed, at market prices prevailing at the time of sale, at prices related
to such prevailing market prices or at negotiated prices. The Selling
Securityholder may effect such transactions by selling the Shares to or through
broker-dealers, and such broker-dealers may receive compensation in the form of
discounts, concessions or commissions from the Selling Securityholder or the
purchasers of the Shares for whom such broker-dealers may act as agent or to
whom they sell as principal or both (which compensation to a particular
broker-dealer might be in excess of customary commissions). See "Principal
Stockholders and Selling Securityholder" and "Plan of Distribution."
The Common Stock of the Company is traded on the Nasdaq SmallCap Market
under the symbol "CYPB." The last reported sales price of the Company's Common
Stock on the Nasdaq SmallCap Market on February 2, 1998 was $2.75 per share. See
"Price Range of Common Stock."
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FOR A DISCUSSION OF MATERIAL FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION
WITH AN INVESTMENT IN THE SHARES, SEE "RISK FACTORS"
COMMENCING ON PAGE 4 HEREOF.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
No underwriting commissions or discounts will be paid by the Company in
connection with this offering. Estimated expenses payable by the Company in
connection with this offering are $20,000. The aggregate proceeds to the Selling
Securityholder from the sale of the Shares will be the sales price of the Shares
sold less the aggregate agents' commissions and underwriters' discounts, if any,
and other expenses of issuance and distribution not borne by the Company. See
"Plan of Distribution."
THE DATE OF THIS PROSPECTUS IS FEBRUARY ___, 1998.
<PAGE> 3
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more
detailed information and consolidated financial statements and Notes thereto,
appearing elsewhere in this Prospectus. This Prospectus contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 as
amended, that involve risks and uncertainties. The Company's actual results
could differ materially from those projected in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed in "Risk Factors," as well as those discussed elsewhere in this
Prospectus.
THE COMPANY
Cypress Bioscience, Inc. (the "Company") researches, develops,
manufactures and markets medical devices and therapeutics for the treatment of
certain types of immune system disorders and is engaged in the development of
novel therapeutic agents for the treatment of blood platelet disorders. The
Company's first product, the PROSORBA(R) column, a medical device, treats a
patient's defective immune system so that it can more effectively respond to
certain diseases. The Company received marketing approval from the U.S. Food and
Drug Administration (the "FDA") in December 1987 to distribute the PROSORBA(R)
column for the treatment of idiopathic thrombocytopenic purpura ("ITP"), an
immune-mediated bleeding disorder. The Company is also developing its
Cyplex(TM) platelet alternative, previously known as Infusible Platelet
Membranes ("IPM"), as an alternative to traditional platelet transfusions.
The Company's current clinical efforts to expand the approved
indications for the PROSORBA(R) column are focused primarily on rheumatoid
arthritis. In January 1998, the Company's Phase III clinical trial evaluating
the use of the PROSORBA(R) column in the treatment of rheumatoid arthritis was
stopped early due to the achievement of favorable safety and statistically
significant results. Based on such results, the Company plans to file for
pre-market approval of the PROSORBA(R) column for the treatment of rheumatoid
arthritis with the FDA.
The Company was incorporated under the laws of the State of Delaware
in 1981. The Company's executive offices are located at 4350 Executive Drive,
Suite 325, San Diego, California 92121 and its telephone number is (619)
452-2323.
THE OFFERING
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Common Stock to be offered by the Selling
Securityholder ............................... 350,000 shares
Common Stock to be outstanding after the
offering ................................... 38,652,003 shares (1)
Use of proceeds............................... The Company will not receive any
of the proceeds from the sale of
Common Stock by the Selling
Securityholder. See "Use of
Proceeds."
Nasdaq SmallCap Market symbol................. CYPB
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(1) Based upon the number of shares of Common Stock of the Company outstanding
as of January 30, 1998. Excludes, as of January 30, 1998, an aggregate of
(i) 2,755,399 shares of Common Stock reserved for issuance upon exercise of
outstanding publicly-traded warrants at an exercise price of $2.00 per
share; (ii) 279,000 shares of Common Stock reserved for issuance upon
exercise of outstanding nonpublicly-traded warrants at a weighted average
exercise price of $1.93 per share; (iii) 300,000 shares of Common Stock
reserved for issuance upon exercise of warrants issued to Allen & Company
Incorporated at an exercise price of $2.875 per share; (iv) 7,598,250
shares of Common Stock reserved under the Company's various stock option
plans, of which 6,738,789 shares of Common Stock are issuable upon exercise
of outstanding stock options with a weighted average exercise price of
$1.63 per share; (v) 892,105 shares of Common Stock issuable upon the
exercise of outstanding stock options granted outside the Company's stock
option plans at a weighted average exercise price of $2.31 per share; and
(vi) 139,130 shares of Common Stock reserved for issuance upon conversion
of outstanding 7% Convertible Debentures (the "Convertible Debentures").
See "Description of Capital Stock" and "Management--Equity Incentive
Plans."
2.
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SUMMARY CONSOLIDATED FINANCIAL DATA
(in thousands, except per share amounts)
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Nine Months Ended
Years Ended December 31, September 30,
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1992 1993 1994 1995 1996 1996 1997
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CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Total revenue and
interest Income ........ $ 4,478 $ 5,593 $ 4,990 $ 4,223 $ 2,426 $ 1,621 $ 2,683
Total costs and expenses . 7,921 10,514 11,141 11,049 15,690 6,738 10,087
Net loss ................. (3,443) (4,921) (6,151) (6,826) (13,264) (5,117) (7,404)
Net loss per share ....... $ (0.25) $ (0.33) $ (0.40) $ (0.39) $ (0.45) $ (0.19) $ (0.21)
Shares used in computing
of net loss per share .. 14,030 14,716 15,244 17,599 29,206 27,649 34,593
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December 31, 1996 September 30, 1997
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CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments $ 10,936 $ 4,467
Working capital.................................. 10,161 3,699
Total assets..................................... 14,961 8,039
Accumulated deficit.............................. (57,306) (64,710)
Total stockholder's equity....................... 12,135 5,425
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3.
<PAGE> 5
RISK FACTORS
In addition to the other information in this Prospectus, the following
risk factors should be considered carefully in evaluating the Company and its
business before purchasing shares of Common Stock offered hereby. This
Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including the matters set forth in the following risk factors and elsewhere in
this Prospectus.
NEED FOR ADDITIONAL CAPITAL
The Company is actively seeking opportunities to raise additional
capital to be used primarily to fund existing operations related to the
manufacture and sale of the PROSORBA(R) column, to develop new and complete
existing research and development activities, including development of the
PROSORBA(R) column for the treatment of rheumatoid arthritis. In addition, the
Company will require substantial additional capital over a period of a number of
years to further the development and marketing of Cyplex(TM) platelet
alternative. Except in very limited circumstances, the Company is obligated to
expend no less than $4 million on the development of Cyplex(TM) platelet
alternative, of which the Company has expended approximately $3.3 million as of
December 31, 1997. To the extent the Company decides to continue the development
of products other than the PROSORBA(R) column and Cyplex(TM) platelet
alternative, it will be required to raise additional capital. The amount of
capital required by the Company is primarily dependent upon the following
factors: results of clinical trials, results of current research and development
efforts, the Food and Drug Administration ("FDA") regulatory process, potential
competitive and technological advances and levels of product sales. Because the
Company is unable to predict the outcome of the previously noted factors, some
of which are beyond the Company's control, the Company is unable to estimate,
with certainty, its mid- to long-term total capital needs. Although the Company
may seek to raise additional capital through a combination of additional equity
offerings, joint ventures, strategic alliances, borrowings and other available
sources, there can be no assurance that the Company will be able to raise
additional capital through such sources or that funds raised thereby will allow
the Company to maintain its current and planned operations as provided herein.
If the Company is unable to obtain additional financing, it may be required to
delay, scale back or eliminate some or all of its research and development
activities, to license to third parties technologies that the Company would
otherwise seek to develop itself, to seek financing through the debt market at
potentially higher costs to the Company and/or to seek additional methods of
financing. The Company believes that current capital amounts will be sufficient
to fund operations through 1998.
HISTORY OF OPERATING LOSSES
The Company has operated at a loss since its formation in October 1981.
As of September 30, 1997, the Company had an accumulated deficit of
approximately $64.7 million. The ability of the Company to achieve profitability
is dependent upon, among other things, successful completion of anticipated
clinical trials and obtaining FDA marketing approval of the PROSORBA(R) column
in disease indications other than idiopathic thrombocytopenic purpura ("ITP") in
a timely manner. The Company would have to significantly scale back its plans,
curtail clinical trials, and limit its present operations in order to become
profitable or operate on a break-even basis if it does not receive marketing
approval from the FDA for the PROSORBA(R) column for the treatment of diseases
in addition to ITP or for Cyplex(TM) platelet alternative for the treatment of
platelet disorders. There can be no assurance that the Company will successfully
complete any present or future clinical trials, gain approval to begin any new
clinical trials, meet applicable regulatory standards or successfully market its
products to generate sufficient revenues to render the Company profitable. See
"--Recently Established Sales Force."
FDA APPROVAL AND REGULATIONS
The Company's Phase III clinical trial evaluating the use of the
PROSORBA(R) column in the treatment of rheumatoid arthritis ("RA") was stopped
early in January 1998 on the recommendation of an independent Data Safety
Monitoring Board after the achievement of favorable safety and statistically
significant results. The Company intends to file a premarket approval ("PMA")
application with the FDA in mid-1998 to request new labeling for the PROSORBA(R)
column to incorporate the RA indication. However, there can be no assurance that
the Company will successfully file such PMA application by mid-1998, if at all,
or when filed, if FDA approval of
4.
<PAGE> 6
such application will be received on a timely basis, if at all. In addition,
there can be no assurance that the FDA will approve the PROSORBA(R) column for
treatment of any other disease indications in a timely manner, if at all. Even
if FDA approval is received, there can be no assurance that the Company will be
successful in marketing the PROSORBA(R) column for the treatment of RA. Any such
failure to successfully market the PROSORBA(R) column for use in the treatment
of RA could have a material adverse effect on the Company's business.
The Company plans to continue development of Cyplex(TM) platelet
alternative with an additional Phase II clinical trial currently scheduled to
start in March 1998. Clinical trials are vigorously regulated by the FDA and
must meet requirements for institutional review board oversight and informed
consent as well as FDA review and oversight and good clinical practice
regulations. There can be no assurance that the clinical trials being conducted
for Cyplex(TM) platelet alternative will be completed successfully within any
specified period of time, if at all, or that if successful the Company will be
able to further develop and successfully commercialize Cyplex(TM) platelet
alternative. Furthermore, the Company or the FDA may delay or suspend clinical
trials at any time if it is determined that the subjects participating in such
trials are being exposed to unacceptable health risks. Any such delay or
suspension could have a material adverse effect on the Company's business.
The PROSORBA(R) column is commercially distributed for use in the
treatment of ITP under a PMA application that was approved by the FDA in
December 1987. Changes to the product and its manufacturing process, and certain
types of labeling changes must be approved by the FDA before the PROSORBA(R)
column can be used in the treatment of disease indications other than ITP. There
can be no assurance that any new PMA applications or supplements will be
approved by the FDA.
Even if FDA approval is granted to market a product for the treatment of
a particular disease, subsequent discovery of previously unknown problems may
result in restrictions on the product's future use or withdrawal of the product
from the market. In addition, any other products developed in the future will
require clinical testing and FDA marketing approval before they can be
commercially exploited in the United States. Such approval process is typically
very lengthy and there is no assurance that FDA approvals will be obtained.
The manufacture and distribution of medical devices are subject to
continuing FDA regulation. In addition to the requirement that the device be
marketed only for its approved use, applicable law requires compliance with the
FDA's Good Manufacturing Process ("GMP") regulations. Failure to comply with the
FDA's GMP regulations or with other applicable legal requirements can lead to
federal seizure of non-complying products, injunctive actions brought by the
federal government, and potential criminal liability on the part of the Company
and of the officers and employees of the Company who are responsible for the
activities that lead to the violations. Any such seizure, injunctive action or
other enforcement measure could have a material adverse effect on the Company's
business.
The Company produces commercial quantities of the raw materials utilized
in the production of the PROSORBA column and assembles the column at its
GMP-approved facility located in Redmond, Washington. In addition, PRP, a
wholly-owned subsidiary of the Company, occupies a facility that includes a
GMP-approved pilot production plant where all phases of production of
clinical-grade Cyplex(TM) occurs, except for filling and lyophilization. There
can be no assurance that the Company will be able to maintain its facilities'
GMP-approved status or that, if approval is not maintained, it will be able to
find alternate GMP-approved production facilities.
DEPENDENCE UPON KEY PERSONNEL
The Company's success is dependent upon certain key management and
technical personnel, including the members of senior management. The loss of the
services of any of these key employees could have a material adverse effect on
the Company. The Company does not currently maintain any key employee insurance
coverage.
COMPETITIVE ENVIRONMENT; TECHNOLOGICAL CHANGE; EFFECTIVENESS OF PRODUCTS
The field of medical devices in general and the particular areas in
which the Company will market its products are extremely competitive. In
developing and marketing medical devices to treat immune-mediated diseases, the
Company competes with other products, therapeutic techniques and treatments
which are offered by national and international healthcare and pharmaceutical
companies, many of which have greater marketing, human and financial resources
than the Company.
5.
<PAGE> 7
The immunological therapy market is characterized by rapid technological
change and potential introductions of new products or therapies. To respond to
these changes, the Company may be required to develop or purchase new products
to protect its technology from obsolescence. There can be no assurance that the
Company will be able to develop or obtain such products, or, if developed or
obtained, that such products will be commercially viable. In addition, there can
be no assurance that the Company's PROSORBA(R) column will prove effective in
the treatment of diseases other than ITP or that Cyplex(TM) platelet
alternative, if approved for sale by the FDA, will be an effective alternative
to traditional platelet therapy.
DEPENDENCE ON THIRD PARTY ARRANGEMENTS
The Company's commercial sale of its proposed products and its future
product development may be dependent upon entering into arrangements with
corporate partners and other third parties for the development, marketing,
distribution and/or manufacturing of products utilizing the Company's
proprietary technology. While the Company is currently seeking collaborative
research and development arrangements and joint venture opportunities with
corporate sponsors and other partners, there can be no assurance that the
Company will be successful in entering into such arrangements or joint ventures
or that any such arrangements will prove to be successful.
RECENTLY ESTABLISHED SALES FORCE
In March 1996, the Company and Baxter Healthcare Corporation ("Baxter")
terminated their exclusive distribution agreement, whereby, effective May 1,
1996, the Company regained the right, among other things, to sell its
PROSORBA(R) column directly to customers who had previously purchased
PROSORBA(R) columns through Baxter as well as to any other potential customers
who wish to purchase PROSORBA(R) columns. As a result of the termination of the
distribution agreement with Baxter, the Company has established a domestic sales
force to sell the PROSORBA(R) column directly to customers who previously
purchased PROSORBA(R) columns from Baxter and to other potential customers who
wish to purchase PROSORBA(R) columns directly from the Company. However, there
can be no assurance that the Company's domestic sales force will be successful
in selling the PROSORBA(R) column for use in the treatment of ITP.
Furthermore, to date, the Company's sales force has made commercial
sales of the PROSORBA(R) column only for use in the treatment of idiopathic
thrombocytopenic purpura (ITP). The Company's sales force has had no experience
in marketing the PROSORBA(R) column for use in the treatment of disease
indications other than ITP, and there can be no assurance that, if the Company
receives FDA approval to use the PROSORBA (R) column in the treatment of
disease indications other than ITP, the Company's sales force will be
successful in marketing the PROSORBA(R) column for any such use. Any such
failure to successfully market the PROSORBA(R) column for disease indications
other than ITP could have a material adverse effect on the Company's business.
In addition, there can be no assurance that the Company's sales force
will be successful in marketing the Company's Cyplex (TM) platelet alternative
or any other products developed by the Company, if and when the Company
receives FDA approval for and is able to commercialize for sale any such
products. Any such failure to receive FDA approvals or otherwise successfully
market the Company's products could have a material adverse effect on the
Company's business.
LIMITED INTERNATIONAL SALES AND MARKETING
The Company conducts limited marketing of the PROSORBA(R) column outside
the United States through foreign distributors. Sales to foreign distributors
have not been material to the Company's results from operations. There can be no
assurance that foreign sales arrangements will become material to the Company's
results of operations.
UNCERTAINTY OF PATENT PROTECTION AND CLAIMS TO TECHNOLOGY
The Company believes that its success depends primarily on the
experience, capabilities, and skills of its personnel. Notwithstanding this
fact, however, the Company seeks to protect its intellectual property rights by
a variety of means, including patents, the maintenance of trade secrets and
proprietary know-how, and technological innovation to develop and maintain its
competitive position. There can be no assurance that the Company will be able to
obtain additional patents either in the United States or in foreign
jurisdictions or that, if issued, such patents will provide sufficient
protection or be of commercial benefit to the Company. Insofar as the Company
relies on trade secrets and unpatented proprietary know-how, there can be no
assurance that others will not independently develop similar technology or that
secrecy will not be breached. Finally, there can be no assurance that the
Company will be able to develop further technological innovations.
The Company presently owns nine issued U.S. patents and six
international patents (excluding patents relating to the area of platelet
therapeutics) which expire during 2004 to 2009. The process used in
manufacturing the PROSORBA(R) column is covered by one of these patents. Certain
U.S. and international applications are pending. The Company has an exclusive
license for a U.S. patent for a genetic screening test to predict which
rheumatoid arthritis patients will develop severe disease. In addition, the
Company has an exclusive license for a U.S. patent for treating cellular Fc
receptor-mediated hypersensitivity immune disorders.
6.
<PAGE> 8
The Company presently owns four issued U.S. patents and three pending
U.S. patent applications relating to the area of platelet therapeutics.
International patent applications corresponding to the issued U.S. patents have
been filed. To date, four foreign patents have been issued while others are
still pending in countries or jurisdictions outside the U.S. These patents and
those that might issue on the pending patent applications are scheduled to
expire during 2010 to 2014.
There can be no assurance that the Company's patents will afford
commercially significant protection of its proprietary technology or have
commercial application. There has been no judicial determination of the validity
or scope of the Company's proprietary rights. Moreover, the patent laws in
foreign countries may differ from those of the United States, and the degree of
protection afforded by foreign patents may be different.
Others have filed applications for, or have been issued, patents and may
obtain additional patents and other proprietary rights relating to products or
processes competitive with those of the Company. The scope and validity of such
patents is presently unknown. If existing or future patents are upheld as valid
by courts, the Company may be required to obtain licenses to use technology
covered by such patents.
The Company also has certain exclusive rights with respect to the use,
manufacture and sale of products and/or processes related to analogs of the
compound diadenosine tetraphosphate("AP4A"), which rights were granted to PRP,
Inc. ("PRP") in July 1992 pursuant to a license agreement between PRP and a
collaborator of PRP (the "Licensor"). Under the terms of the license agreement,
PRP was obligated to file an Investigational New Drug Application ("IND") with
respect to the commercial application of such rights within four years of
acquiring such rights. Neither PRP nor the Company has filed such IND. Due to
such failure, Licensor has the right to cancel upon 30 days written notice the
exclusive license or to convert the exclusive license to a nonexclusive license.
If Licensor elects to cancel such license, there can be no assurance that the
Company will be able to acquire or license the similar rights on terms
acceptable to the Company, if at all.
CONCENTRATION OF OWNERSHIP
As of January 30, 1998, Allen & Company Incorporated and Mr. Richard M.
Crooks, a director of the Company, beneficially owned approximately 14.7% and
2.9% respectively, of the outstanding Common Stock of the Company. Mr. Crooks is
also a director and consultant to Allen & Company Incorporated. In addition,
Paramount Capital, Inc., through its affiliates, currently beneficially holds
13.4% of the Company's outstanding Common Stock. Together, Mr. Crooks, Allen &
Company Incorporated and Paramount Capital, Inc. own a significant amount of the
total outstanding Common Stock of the Company and may be able to exert
substantial influence over the outcome of matters requiring stockholder
approval.
INSURANCE REIMBURSEMENT
Successful commercialization of a new medical product, such as the
PROSORBA(R) column or Cyplex(TM) platelet alternative depends, in part, on
reimbursement by public and private health insurers to health care providers for
use of such products. The availability of such reimbursement is subject to a
variety of factors, many of which could affect the Company as it commercializes
use of the PROSORBA(R) column and continues development and commercialization of
Cyplex(TM). Although the Company has been generally successful in assisting
health care providers in arranging reimbursement for the use of the PROSORBA(R)
column in the treatment of ITP, there can no assurance that public and private
insurers will continue to reimburse the Company for the use of the PROSORBA(R)
column or that such reimbursement will be available in connection with the use
of the PROSORBA(R) column in the treatment of other disease indications approved
by the FDA, if any. In addition, there can be no assurance that health care
providers will reimburse the Company for the use of Cyplex(TM) platelet
alternative, when and if commercialized.
7.
<PAGE> 9
PRODUCT LIABILITY
The use of the PROSORBA(R) column and, when and if approved for use by
the FDA, Cyplex(TM) platelet alternative, involves the possibility of adverse
effects occurring to end-users that could expose the Company to product
liability claims. The Company believes that its product liability insurance
coverage is adequate in light of the Company's business. However, although the
Company currently maintains product liability insurance coverage, there can be
no assurance that such coverage or any increased amount of coverage will be
adequate to protect the Company and there can be no assurance that the Company
will have sufficient resources to pay any liability resulting from such a claim.
UNCERTAINTY OF HEALTH CARE REFORM
There are widespread efforts to control health care costs in the U.S.
and worldwide. Various federal and state legislative initiatives regarding
health care reform and similar issues continue to be at the forefront of social
and political discussion. These trends may lead third-party payors to decline or
limit reimbursement for the Company's product, which could negatively impact the
pricing and profitability of, or demand for, the Company's product. The Company
believes that government and private efforts to contain or reduce health care
costs are likely to continue. There can be no assurance concerning the
likelihood that any such legislative or regulatory initiative will be enacted,
or market reform initiated, or that, if enacted such reform or initiative will
not result in a material adverse impact on the business, financial condition or
results of operations of the Company.
POSSIBLE VOLATILITY OF STOCK PRICE; ABSENCE OF DIVIDENDS
There has been significant volatility in the market prices of securities
of biomedical companies in general, including the Company's securities. Factors
such as announcements by the Company or by others of technological innovations,
results of clinical trials, new commercial products, regulatory approvals or
proprietary rights developments, coverage decisions by third-party payors for
therapies and public concerns regarding the safety and other implications of
biotechnology and biomedical products may have a significant impact on the
Company's business and market price of the Company's securities. In addition, in
connection with the acquisition of PRP, the Company is obligated to make a
$5,000,000 milestone payment to the former holders of equity securities
(including holders of warrants and options) of PRP upon the public announcement
of an FDA approval letter relating to the use of Cyplex(TM) platelet alternative
for the treatment of thrombocytopenia. The Company has the option to make such
milestone payment in the form of cash or Common Stock of the Company. The
payment of $5 million in cash could have a material adverse effect on the
Company's financial condition. In addition, the issuance of Common Stock with a
value of $5 million could have a significant impact on the market price of the
Company's securities.
No dividends have been paid on the Company's Common Stock to date, and
the Company does not anticipate paying dividends on its capital stock in the
foreseeable future.
HAZARDOUS MATERIAL
The Company's research and development programs involve the controlled
use of biohazardous materials such as viruses, and may include the use of the
HIV virus that causes AIDS. Although the Company believes that its safety
procedures for handling such materials comply with the standards prescribed by
state and federal regulations, the risk of accidental contamination or injury
from these materials cannot be completely eliminated. In the event of such an
accident, the Company could be held liable for any damages that result, and any
such liability could exceed the resources of the Company.
8.
<PAGE> 10
LIMITATION OF NET OPERATING LOSS CARRYFORWARDS
The Company's sales of Common Stock in November 1990 and September 1991,
when taken together with prior issuances, caused the limitation of Section 382
of the Internal Revenue Code of 1986, as amended, to be applicable. This
limitation will allow the Company to use only a portion of the net operating
loss carryforwards to offset future taxable income, if any, for federal income
tax purposes. Based upon the limitations of Section 382 and before consideration
of the effect of issuances of Common Stock after 1991, the Company may be
allowed to use no more than a prescribed amount of such losses each year to
reduce taxable income, if any. To the extent not utilized by the Company, unused
losses will carry forward subject to the limitations to offset future taxable
income, if any, until such unused losses expire. All unused net operating losses
will expire 15 years after any year in which they were generated. The years in
which such expiration will take place range from 1998 to 2010.
9.
<PAGE> 11
USE OF PROCEEDS
This Prospectus relates to the registration and offering of the Shares for
resale by the Selling Securityholder, who acquired the Shares in the Private
Placement. The Company will not receive any of the proceeds from the sale of any
of the Shares offered hereunder by the Selling Securityholder.
Proceeds to the Company from the Private Placement are being, and will
continue to be, used for research and development, preclinical and clinical
testing, and working capital and general corporate purposes.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital
stock. The Company currently intends to retain any future earnings to finance
the growth and development of its business and therefore does not anticipate
paying any cash dividends in the foreseeable future.
10.
<PAGE> 12
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded on the Nasdaq SmallCap Market under
the symbol CYPB. The principal market for the Company's Common Stock is the
over-the-counter market. Set forth below are the high and low closing prices for
the Company's Common Stock for the first quarter of 1998 (through January 30,
1998) and for each quarter of 1997 and 1996 as reported by the Nasdaq Stock
Market, Inc.
<TABLE>
<CAPTION>
Price Range of Common Stock
---------------------------
High Low
----- -----
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1998:
First Quarter (through January 30, 1998).... $3.38 $1.34
YEAR ENDED DECEMBER 31, 1997
First Quarter............................... $2.00 $1.56
Second Quarter.............................. 2.56 1.22
Third Quarter............................... 2.44 1.53
Fourth Quarter.............................. 1.97 1.19
YEAR ENDED DECEMBER 31, 1996
First Quarter............................... $2.63 $1.88
Second Quarter.............................. 2.56 2.25
Third Quarter............................... 2.25 1.75
Fourth Quarter.............................. 2.38 1.63
</TABLE>
On January 30, 1998, the last reported sale price of the Common Stock
was $2.94 per share. As of January 30, 1998, there were approximately 1,023
holders of record of the Common Stock of the Company.
11.
<PAGE> 13
CAPITALIZATION
The following table sets forth the capitalization of the Company at
September 30, 1997.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------
(IN THOUSANDS)
<S> <C>
Long-term debt, less current portion........................... $ 409
STOCKHOLDERS' EQUITY:
Preferred Stock, $.02 par value, 15,000,000 shares authorized, no
Shares issued and outstanding................................ --
Common Stock, $.02 par value, 60,000,000 shares authorized,
34,636,067(1) shares issued and outstanding.................. 693
Additional paid-in capital..................................... 70,205
Deferred compensation.......................................... (763)
Accumulated deficit............................................ (64,710)
--------
Total stockholders' equity................................. 5,425
--------
Total capitalization....................................... $ 5,834
========
</TABLE>
- ------------
(1) Based upon the number of shares of Common Stock of the Company outstanding
as of September 30, 1997. Excludes, as of September 30, 1997, an aggregate
of (i) 2,755,399 shares of Common Stock reserved for issuance upon exercise
of outstanding publicly-traded warrants at an exercise price of $2.00 per
share; (ii) 293,800 shares of Common Stock reserved for issuance upon
exercise of outstanding nonpublicly-traded warrants at an exercise price of
$1.93 per share; (iii) 300,000 shares of Common Stock reserved for issuance
upon exercise of warrants issued to Allen & Company Incorporated at an
exercise price of $2.875 per share; (iv) 7,632,000 shares of Common Stock
reserved under the Company's various stock option plans, of which 6,609,023
shares of Common Stock are issuable upon exercise of outstanding stock
options with a weighted average exercise price of $1.65 per share; (v)
961,605 shares of Common Stock issuable upon the exercise of outstanding
stock options granted outside the Company's stock option plans at a weighted
average exercise price of $2.28 per share; and (vi) 139,130 shares of Common
Stock reserved for issuance upon conversion of outstanding 7% Convertible
Debentures (the "Convertible Debentures"). See "Description of Capital
Stock" and "Management--Equity Incentive Plans."
12.
<PAGE> 14
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below with respect to
the Company's consolidated statement of operations for each of the three years
in the period ended December 31, 1996 and with respect to the Company's
consolidated balance sheets at December 31, 1995 and 1996, are derived from the
consolidated financial statements of the Company that have been audited by Ernst
& Young LLP, which are included elsewhere herein and are qualified by reference
to such consolidated financial statements. The selected consolidated financial
data with respect to the Company's consolidated balance sheet at December 31,
1994 are derived from financial statements that have been audited by Ernst &
Young LLP which are not included herein. The selected consolidated financial
data with respect to the Company's consolidated statements of operations for
each of the two years in the period ended December 31, 1993 and with respect to
the Company's consolidated balance sheet data at December 31, 1992 and 1993, are
derived from consolidated financial statements that have been audited by Coopers
& Lybrand L.L.P. which are not included herein. The unaudited consolidated
statement of operations data for the nine months ended September 30, 1996 and
1997 and the unaudited consolidated balance sheet data at September 30, 1997
have been derived from unaudited consolidated financial statements also
appearing herein which, in the opinion of management, include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the Company's consolidated financial position at September 30,
1997 and consolidated results of operations for the unaudited interim periods.
The selected financial data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's consolidated financial statements and notes
thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
-------------------------------------------------------------------- --------------------------
1992 1993 1994 1995 1996 1996 1997
------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues:
Product sales $ 4,076,021 $ 5,410,530 $ 4,918,126 $ 1,104,224 $ 1,967,976 $ 1,277,549 $ 2,207,631
Grant revenue -- -- -- -- -- -- 179,197
Revenue under
distribution
agreement -- -- -- 3,000,000 -- -- --
------------ ------------ ------------ ------------ ------------ ------------ ------------
4,076,021 5,410,530 4,918,126 4,104,224 1,967,976 1,277,549 2,386,828
Costs and expenses:
Production costs 1,166,025 1,582,986 2,571,168 2,041,422 1,482,563 837,192 1,316,045
Sales and marketing 3,952,481 4,758,427 3,550,037 819,907 794,356 429,417 1,015,696
Research and development 1,506,742 2,059,129 2,107,694 3,219,324 4,002,968 2,140,659 5,430,987
General and administrative 1,279,077 2,105,743 2,694,489 2,626,817 3,529,378 2,641,048 2,300,604
Acquired in-process research
and development(1) -- -- 625,000 5,146,943 -- --
Restructuring -- -- 644,656 493,712 460,090 --
Debt conversion -- -- 810,386 183,688 183,68 183,688 --
------------ ------------ ------------ ------------ ------------ ------------ ------------
7,904,325 10,506,285 10,923,388 10,787,512 15,633,608 6,692,094 10,063,332
Other income (expense):
Interest income 363,539 134,483 71,986 118,994 458,070 343,632 296,186
Interest expense (16,721) (7,659) (218,036) (261,958) (56,726) (45,835) (24,088)
------------ ------------ ------------ ------------ ------------ ------------ ------------
346,818 126,824 (146,050) (142,964) 401,344 297,797 272,098
------------ ------------ ------------ ------------ ------------ ------------ ------------
Loss from operations (3,481,486) (4,968,931) (6,151,312) (6,826,252) (13,264,288) (5,116,748) (7,404,406)
Minority interest in loss 38,260 47,711 -- -- -- -- --
============ ============ ============ ============ ============ ============ ============
Net loss $ (3,443,226) $ (4,921,220) $ (6,151,312) $ (6,826,252) $(13,264,288) $ (5,116,748) $ (7,404,406)
============ ============ ============ ============ ============ ============ ============
Net loss per share $ (0.25) $ (0.33) $ (0.40) $ (0.39) $ (0.45) $ (0.19) (0.21)
============ ============ ============ ============ ============ ============ ============
Shares used in computing
net loss per share 14,030,224 14,716,472 15,243,860 17,598,735 29,206,470 27,649,052 34,592,569
============ ============ ============ ============ ============ ============ ============
</TABLE>
13.
<PAGE> 15
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------------- -------------
1992 1993 1994 1995 1996 1997
---------- ---------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE
SHEET DATA:
Cash, cash equivalents
and short-term investments $1,286,679 $2,283,583 $3,670,616 $ 1,009,878 $10,935,668 $4,467,274
Total assets 8,441,703 7,761,598 7,721,013 4,563,709 14,961,076 8,038,719
Long term debt (net of
current portion) -- -- 4,247,759 1,539,722 412,020 408,843
Total stockholder's equity
(deficit) 7,492,047 4,839,725 1,980,719 (524,762) 12,134,565 5,424,770
Working capital (deficit) $6,902,330 $3,787,412 $4,360,749 $ (688,771) $10,161,170 $3,699,329
</TABLE>
(1) Reflects the acquisition of in-process research and development associated
with the acquisition by the Company of PRP in 1996 and the merger of the
Company in 1995 with one of its subsidiaries.
14.
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations and other parts of this Prospectus contain forward-looking
statements that involve risks and uncertainties. The Company's actual results
could differ materially from those anticipated in these forward-looking
statements. Factors that may cause such differences include, but are not limited
to, those discussed under "Risk Factors" and elsewhere in this Prospectus.
RESULTS OF OPERATIONS
Revenues
Nine Months Ended September 30, 1996 and 1997
Revenues associated with shipments of the Company's PROSORBA(R) column
were $2.2 million and $1.3 million for the nine months ended September 30, 1997
and 1996, respectively. The increase in sales for the nine months ended
September 30, 1997 is primarily attributable to the Company regaining from
Baxter Healthcare Corporation ("Baxter") the distribution rights to the
PROSORBA(R) column in May 1996 and initiating direct sales and marketing efforts
thereafter. Although the Company's direct sales and marketing efforts have
proven more effective than those under the Baxter distribution agreement,
idiopathic thrombocytopenic purpura (ITP) remains a small market. However, due
to increased competition for patients from other ITP studies, below expected
enrollment in the Company's study, and the increased opportunities in the
rheumatoid arthritis market, the Company terminated its ITP trial during the
fourth quarter of 1997. Lack of data from that study will make it difficult to
effect any appreciable increase in sales of the PROSORBA(R) column above their
current levels until the Company obtains, if and when it does, FDA approval for
sale of the PROSORBA(R) column for the treatment of RA. The Company hopes to
obtain such approval by mid to late 1999, however, there can be no assurance
that such approval will be obtained in the time expected, if at all.
Years ended December 31, 1994, 1995 and 1996
Revenues associated with product shipments were $2.0 million, $1.1
million and $4.9 million in 1996, 1995, and 1994, respectively. The decrease of
$3.8 million in revenue in 1995 from 1994 was due primarily to Baxter selling
approximately 50% less product to customers than when the Company sold directly
to health care providers. In addition, a lower sales price was charged to Baxter
than the Company previously charged to its customers. A substantial amount of
the PROSORBA(R) columns shipped by the Company to Baxter remained in Baxter's
ending inventory as of December 31, 1995. Revenues associated with product
shipments began to increase in 1996 in conjunction with the Company regaining
distribution rights effective in May 1996 and initiating direct sales and
marketing efforts thereafter.
In April 1994, Baxter assumed sales and marketing responsibilities under
a 10-year exclusive distribution agreement, granting distribution rights of the
PROSORBA(R) column in the United States and Canada for the treatment of
thrombocytopenia. Baxter, at its own expense, was to provide sales and marketing
support for the sale of the product during the term of the agreement. The
Company was to provide significant marketing and promotional support to Baxter
for the first three years of the agreement.
In March 1995, the two companies amended the agreement whereby Baxter:
(a) made a take-or-pay payment on March 31, 1995 for the first sales year of
$3.0 million, (b) agreed to purchase $1.0 million of product during the second
quarter of 1995, (c) released the Company from its obligation to provide
marketing and promotional support for the second and third years of the
agreement, (d) gave the Company the right to co-market with Baxter, (e)
relinquished its first right to negotiate for new PROSORBA(R) column
indications, and (f) agreed under certain circumstances to provide advance
payments to the Company for Baxter's 1996 purchases. The Company agreed to
eliminate purchase minimums and the take-or-pay concept included in the original
agreement and freed Baxter to pursue competing thrombocytopenia therapies.
The impact of the revised Baxter agreement referred to above had a
variety of effects on the operations of the Company during the year ended
December 31, 1995. The Company's revenue included the $3.0 million take or
15.
<PAGE> 17
pay payment made by Baxter in March 1995. Sales and marketing costs relative to
sales decreased based on Baxter agreeing to assume all marketing and promotional
costs.
Net sales decreased 77.5% from $4.92 million in 1994 to $1.10 million in
1995. Approximately 91% of the 1995 sales were attributed to Baxter, with the
remaining 9% attributed to international customers of the Company. The decrease
in net sales was due primarily to Baxter selling approximately 50% less product
to customers than when the Company sold directly to health care providers.
Effective May 1, 1996, the Company and Baxter terminated the exclusive
distribution agreement, whereby the Company regained the right to sell its
PROSORBA(R) column directly to customers who had previously purchased the
PROSORBA(R) column through Baxter as well as to any other potential customers
who wish to purchase the PROSORBA(R) column.
Operating Expenses
Nine months ended September 30, 1996 and September 30, 1997
Production costs increased to $1.3 million for the nine months ended
September 30, 1997, an increase of 57% compared to $837,000 for the nine months
ended September 30, 1996. During the first half of 1996, production was impacted
by both the termination of the Baxter distribution agreement and the
consolidation of the Company's manufacturing facilities undertaken in connection
with the Company's restructuring. There were very few PROSORBA(R) columns
shipped during the first four months of 1996 as the Company did not resume
direct shipments to domestic customers until May 1996. Production costs for the
first nine months of 1996 and 1997 reflect this unusual activity.
Sales and marketing expenses increased to $1 million for the nine months
ended September 30, 1997 from $429,000 for the same period in 1996. This
increase is a result of Company's initiation of direct sales and marketing
efforts in May of 1996.
Research and development expenses for the nine months ended September
30, 1997, were approximately $5.4 million. For the same period in 1996, such
expenses were $2.1 million. The significant increase in 1997 is attributable to
the Company's efforts to establish a stronger scientific base for its products.
The majority of these efforts are directed to the Company's controlled clinical
trial for use of the PROSORBA(R) column in the treatment of rheumatoid
arthritis. In January of 1998, the Company announced that its Phase III pivotal
trial evaluating the efficacy of the PROSORBA(R) column in the treatment of RA
had been stopped early due to achieving favorable safety and statistically
significant efficacy results on an intent-to-treat basis. The Company expects
further increases in research and development expenses in future periods as the
aforementioned trial is concluded and with the expected commencement in March
1998 of a Phase II efficacy trial for Cyplex(TM) platelet alternative.
General and administrative expenses were $2.3 million in the nine months
ended September 30, 1997, a decrease of 13% compared to $2.6 million for the
nine months ended September 30, 1996. The decrease was principally a result of
the Company's efforts to control costs, and nonrecurring expenses in 1996
associated with the hiring of the Company's new Chief Executive Officer, and
President and Chief Operating Officer, both of whom joined the Company in
December 1995, and severance payments paid to the Company's former Chief
Scientific Officer in connection with his resignation in March 1996.
Years ended December 31, 1996, 1995 and 1994
Consolidated operating expenses for the years ended December 31, 1996,
1995, and 1994 were $15.6 million, $10.8 million, and $10.9 million,
respectively. The increase of $4.8 million in 1996 from 1995 relates primarily
to the $5.1 million non-recurring, and primarily non-cash, charge for acquired
in-process research and development incurred in connection with the acquisition
of PRP recorded in the fourth quarter, as well as to costs associated with the
Company's restructuring. These increases were offset, in part, by a reduction in
operating costs resulting from the Company's restructuring. For the year ended
December 31, 1996, consolidated operating expenses include only the two months
of PRP's operations subsequent to its acquisition by the Company.
16.
<PAGE> 18
Production costs were $1.5 million, $2.0 million, and $2.6 million for
the years ended December 31, 1996, 1995, and 1994, respectively. During the
first half of 1996, production was impacted by both the termination of the
Baxter agreement and the consolidation of facilities undertaken in connection
with the restructuring. There were very few PROSORBA(R) columns shipped during
the first four months of 1996 as the Company did not resume direct shipments to
domestic customers until May 1996. In anticipation of a temporary cessation of
manufacturing during the remodeling and subsequent FDA re-approval process of
the Redmond, Washington facility, the Company increased production during the
second and third quarters to build its inventories. As a result, production
costs for the year reflect this unusual activity. The decrease in production
costs in 1996 from 1995 is also attributable to a reduction in manufacturing
labor and overhead costs associated with the restructuring. The total number of
PROSORBA(R) columns produced in 1996 was in excess of that amount produced in
1995. Since manufacturing overhead was fairly consistent in 1995 and 1994, the
fluctuation in production costs is directly attributable to the decrease in the
number of units produced in 1995.
Sales and marketing expenses decreased to $794,000 in 1996, from
$820,000 in 1995 and from $3.6 million in 1994. This significant decrease over
the last two years is a result of the Company's March 1995 renegotiation of its
distribution agreement with Baxter. During the first quarter of 1995, the
Company was still obligated to provide marketing and promotional support to
Baxter. In March 1995, the Company was released from that obligation and, thus,
incurred significantly less expense through the May 1996 re-initiation of
product sales directly to customers. As a result of that termination, however,
and the related establishment of an internal sales force to directly sell the
PROSORBA(R) column, the Company anticipates an increase of sales and marketing
expenses in future periods.
Research and development expenses increased to $4.0 million in 1996,
from $3.2 million and $2.1 million in 1995 and 1994, respectively. The 24%
increase in 1996 from 1995 is indicative of the Company's increased focus on the
clinical development of new products and relates primarily to the June 1996
launch of the Company's Phase III pivotal trial of the PROSORBA(R) column for
use in rheumatoid arthritis. In 1996, research and development expenses
increased by $784,000 over 1995. The increase of $1.1 million in 1995 from 1994
was primarily a result of the Company completing its rheumatoid arthritis
clinical trial for 15 patients and the commencement of a pilot clinical trial in
kidney transplantation during the last six months of 1995. During the last six
months of 1994, the Company began its rheumatoid arthritis clinical trial. In
January 1996, the Company suspended enrollment of patients in its kidney
transplantation study in light of other clinical opportunities.
General and administrative expenses were $3.5 million, $2.6 million, and
$2.7 million for the years ended December 31, 1996, 1995 and 1994, respectively.
The increase of $900,000 in 1996 from 1995 was principally a result of costs
associated with the hirings of the Company's new Chief Executive Officer and
President, Chief Operating Officer in December 1995. Such expenses were
partially offset by the resignation of the Company's Chief Scientific Officer in
March 1996. The new Chief Executive Officer has assumed the Chief Scientific
Officer's duties. In addition, approximately $444,000 was recorded as
compensation expense in 1996 for stock options granted at less than the closing
sales price on the date of grant. The decrease of $100,000 in 1995 from 1994 was
principally a result of a reduction in investor relations and legal expenses
which was partially offset by an increase in salary expenses. This increase
resulted from $400,000 of salary expenses associated with the severance
agreement for the Company's former Chief Executive Officer who resigned in
December 1995 and $100,000 of signing bonuses paid to the Company's new Chief
Executive Officer and its new President, Chief Operating Officer.
In 1995, the Company acquired CELx Corporation, a majority owned
subsidiary of the Company. In connection with the acquisition, the Company
recorded $625,000 as acquired in-process research and development. The charge
was based upon the fair market value of the Company's Common Stock.
The Company recorded a non-cash expense of approximately $184,000 for
debt conversion expense in the year ended December 31, 1996. Such expense
represents the fair market value of the increased number of shares issued by the
Company under the terms of an exchange offering to holders of the Company's 7%
Convertible Debentures. The Company recorded a non-cash expense of $810,000 in
1995 as a debt conversion expense for the conversion of the same 7% Convertible
Debentures discussed above. The expense represents the fair market value of the
increased number of shares issued under the terms of the exchange offering
compared to the original terms of the 7% Convertible Debentures.
17.
<PAGE> 19
In December 1995, the Company recorded a restructuring charge
aggregating $645,000 relating to the Company's plan to consolidate its
manufacturing facilities to one location in the state of Washington and to move
all other operations to San Diego, California. This charge included
approximately $350,000 related to write-downs of equipment and leasehold
improvements for the manufacturing facility vacated in 1996, $200,000 related to
abandonment of leases in Seattle and Princeton with the remainder related to a
severance commitment with its former Executive Vice President who resigned in
December 1995. In January 1996, the Company notified approximately twenty
employees, which was slightly greater than half of its work force, that their
positions were being terminated immediately as part of the restructuring. Such
positions were from all departments of the Company. In March 1996, the Company
entered into a termination agreement with its former Chief Scientific Officer.
Costs related to these terminations were approximately $494,000 and were
recorded as a restructuring expense in 1996. In addition, the Company incurred
approximately $300,000 in costs associated with moving the administration,
research and medical departments to San Diego, with most costs being
attributable to relocation costs of the few members of management moving to San
Diego. Such costs were recorded as general and administrative expenses in 1996.
Acquisition of PRP, Inc.
On November 1, 1996, the Company acquired PRP. As a result of the
acquisition, the Company assumed all of the assets and liabilities of PRP. The
transaction has been accounted for as a purchase and the Company recorded a
non-recurring expense of approximately $5.1 million as acquired in-process
research and development in the fourth quarter of 1996.
In connection with the acquisition, the Company issued to certain
holders of outstanding debt of PRP, in full satisfaction and settlement of such
indebtedness, Units (with each Unit being comprised of two shares of the
Company's Common Stock and one Common Stock purchase warrant) with an
approximate total value of $4.5 million (based upon a price of $4.00 per Unit).
The holders of PRP equity securities (including holders of options and
warrants of PRP) (the "Equity Holders") will also be entitled to receive
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 acquisition. In
addition, in conjunction with obtaining approval from the FDA of the use of
Infusible Platelet Membranes ("Cyplex(TM) platelet alternative ") for the
treatment of thrombocytopenia, the Company shall make a payment of $5 million
(the "Milestone Payment") to the Equity Holders, with such payment being in the
form of, at the Company's discretion, cash, Company Common Stock, or a
combination of the two.
In consideration of certain investment banking advisory services
provided by EGS Securities Corp. ("EGS") to PRP in connection with the
acquisition, the Company issued to EGS Units with a total value of approximately
$120,000. In addition, the Company is obligated to pay EGS an amount in cash
equal to two and one-half percent (2 1/2%) of a certain milestone payment and
each earn-out payment made to the Equity Holders, at the time any such payments
are made.
Subject to limited exceptions, the Company is obligated to spend $4.0
million to commercialize and advance Cyplex(TM) platelet alternative as a
principal product of the Company. The only circumstances under which the Company
may decrease or cease commercialization of Cyplex(TM) platelet alternative prior
to expending $4.0 million would be if the Company encounters critical problems
with the commercialization of Cyplex(TM) platelet alternative, including
problems related to Cyplex(TM) platelet alternative safety, efficacy or economic
viability, such as would render Cyplex(TM) platelet alternative, on a
stand-alone basis, unsafe, ineffective or incapable of generating a reasonable,
positive cash flow.
Net Loss
The increase in total operating expenses was only partially offset by
the increase in revenues, thereby resulting in a net loss of approximately $7.4
million for the nine months ended September 30, 1997. For the year ended
December 31, 1996, the acquisition of PRP and the decrease in total revenues was
only partially offset by the decrease in recurring operating expenses thereby
resulting in an increased net loss of $13.3 million or $0.45 per share. For the
years ended December 31, 1995 and 1994, the Company reported net losses of $6.8
million and $6.2 million, respectively. The increase in net loss from 1994 to
1995 was primarily a result of the decrease in revenues.
18.
<PAGE> 20
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital as of September 30, 1997 was $3.7
million, compared to $10.2 million at December 31, 1996. The decrease in
working capital is attributable to the net loss for the nine months ended
September 30, 1997.
In October 1997, the Company sold approximately 3,851,000 shares of
common stock for $1.50 per share in a private placement. The shares were
registered for resale under the Securities Act of 1933, as amended in November
1997. The net proceeds to the Company were approximately $5,550,000, or $1.44
per share, after costs of approximately $227,000. These proceeds, combined with
existing resources, should be sufficient to complete the Company's Phase III
pivotal trial in rheumatoid arthritis.
Cash, cash equivalents and short-term investments totaled $10.9 million,
$1.0 million, and $4.5 million at December 31, 1996 and 1995, and September 30,
1997, respectively. Net working capital was $10.2 million, a deficit of
$689,000, and $4.4 million, respectively, at those same dates. The significant
increase in cash from 1995 to 1996 was due primarily to approximately $18.3
million in net proceeds raised in the equity private placements of capital stock
of the Company completed in January 1996 and October 1996, respectively. In
connection with the private placement completed in January 1996, the Company
also converted $1.5 million of outstanding Senior Convertible Debentures into
Common Stock of the Company. The $5.1 million decrease in working capital in
1995 is principally attributable to the $6.8 million net loss from operations
for the year ended December 31, 1995 and $685,000 of capital expenditures which
were partially offset by $2.7 million of expenses which did not impact working
capital.
The Company expects to incur operating losses until it can obtain
marketing approval from the FDA for additional disease indications for the
PROSORBA(R) column, or obtain FDA approval for Cyplex(TM) platelet alternative,
or until sales for the PROSORBA(R) column for its existing indication of ITP
increase significantly. There can be no assurance that the Company will be able
to obtain FDA approval to market the PROSORBA(R) column for disease indications
other than ITP.
Financing and Investing Activities
In October 1997, the Company completed a private placement of 3,851,029
shares of the Company's Common Stock at a price of $1.50 per share, resulting in
net proceeds (after deducting placement fees of $196,593) to the Company of
approximately $5,579,951.
In October 1996, the Company completed a private placement of Units
(with each Unit consisting of two shares of Common Stock and one warrant)
collectively priced at $4.00 per Unit (the "October Private Placement"). Holders
of each five-year warrant (the "1996 Warrants") are entitled to purchase one
share of the Company's Common Stock at an exercise price of $2.00 per share. A
total of 1,734,000 units were sold resulting in net proceeds of approximately
$6.3 million.
In December 1995 and January 1996, the Company completed an offering of
$1,500,000 of Senior Convertible Debentures to certain accredited investors. In
January 1996, the Company completed a private placement of approximately 8.5
million shares of its Common Stock resulting in net proceeds to the Company of
approximately $12.0 million (the "January Private Placement"). Upon the closing
of the January Private Placement, $1.5 million of outstanding Senior Convertible
Debentures were converted into an additional 1,000,000 shares of Common Stock of
the Company.
During 1996, the Company implemented a restructuring plan which included
consolidating its manufacturing facilities to one location in the state of
Washington and moving all other operations of the Company to San Diego,
California. The Company has incurred approximately $1.3 million of capital
expenditures through December 31, 1996 to consolidate its two Washington
manufacturing facilities. The Company believes that the funds resulting from the
January and October Private Placements, coupled with the Company's reduction in
expenses as a result of the restructuring, will provide the resources necessary
to fund operations, including clinical trials, until 1999.
In September 1995, the Company completed an exchange offering to holders
of its 7% Convertible Debentures. The Company offered to exchange the 7%
Convertible Debentures for Common Stock at a price of $2.25 per share. Of the
original $4,245,000 outstanding principal amount of the 7% Convertible
Debentures, $2,200,000 was converted pursuant to the exchange offering. In the
fourth quarter of 1995 and the first quarter of 1996, an additional $700,000 and
$100,000, respectively, of outstanding principal amount of the 7% Convertible
Debentures was converted into Common Stock under their original $2.875 per share
conversion price. In March 1996, the Company completed a second exchange
offering made to holders of its outstanding 7% Convertible Debentures. The
Company offered to exchange the 7% Convertible Debentures for Common Stock of
the Company at a price of $2.25 per share. Of the $1,245,000 outstanding
principal amount, $845,000 was converted into 399,252 shares of Common Stock of
the Company (which amount includes 23,700 shares issued as interest on the 7%
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<PAGE> 21
Convertible Debentures), pursuant to the exchange offering. At December 31,
1997, there was outstanding principal of $400,000 of the 7% Convertible
Debentures.
The Company will require additional financing in order to continue
developing the use of the Proforma(R) column in rheumatoid arthritis, initiate
pivotal clinical trials using the PROSORBA(R) column in other diseases and to
apply the Company's technology to applications beyond the PROSORBA(R) column.
The Company is seeking corporate partners to fund additional clinical trials.
The principal changes in the components of working capital from 1994 to
1995 were a $2.7 million decrease in cash resulting from the excess of cash
expenditures for 1995 over the $1.0 million of proceeds received from debt
financing, a $390,000 decrease in trade accounts receivable resulting from the
lower amount of sales during the end of 1995 compared to 1994, a decrease of
$350,000 in inventory to reflect the lower sales demands of Baxter, and a
combined increase of $540,000 in accounts payable, accrued compensation and
accrued liabilities due primarily to increasing payment cycles to suppliers to
preserve the Company's cash position as of December 31, 1995.
20.
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BUSINESS
The following Business section contains forward-looking statements which
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under "Risk Factors" and
elsewhere in this Prospectus.
COMPANY OVERVIEW
Cypress Bioscience, Inc. (the "Company") researches, develops,
manufactures and markets medical devices and therapeutics for the treatment of
certain types of immune system disorders and is engaged in the development of
novel therapeutic agents for the treatment of blood platelet disorders. The
Company's first product, the PROSORBA(R) column, a medical device, treats a
patient's defective immune system so that it can more effectively respond to
certain diseases. The Company received marketing approval from the U.S. Food and
Drug Administration (the "FDA") in December 1987 to distribute the PROSORBA(R)
column for the treatment of idiopathic thrombocytopenic purpura ("ITP"), an
immune-mediated bleeding disorder. The Company is also developing its
Cyplex(TM) platelet alternative, previously known as Infusible Platelet
Membranes ("IPM"), as an alternative to traditional platelet transfusions.
The Company's current clinical efforts to expand the approved
indications for the PROSORBA(R) column are focused primarily on rheumatoid
arthritis. In January 1998, the Company's Phase III clinical trial evaluating
the use of the PROSORBA(R) column in the treatment of rheumatoid arthritis was
stopped early due to the achievement of favorable safety and statistically
significant results. Based on such results, the Company plans to file for
pre-market approval of the PROSORBA(R) column for the treatment of rheumatoid
arthritis with the FDA.
THE PROSORBA(R) COLUMN
The Company's PROSORBA(R) column is a therapeutic, extracorporeal
immunoadsorption device which removes circulating immune complexes (CICs) and
immunoglobulin G (IgG) from a patient's plasma in a procedure that takes place
in an extracorporeal loop (i.e., outside the body) and returns all the other
necessary plasma components back to the patient. During the PROSORBA(R) column
therapy, blood is drawn from one arm of the patient, plasma and red blood cells
are separated, the plasma is filtered through the PROSORBA(R) column to remove
unwanted CICs and IgG, then combined with the red blood cells and returned to
the patient's other arm. The PROSORBA(R) column therapy is noninvasive and
administered on an outpatient basis. The Company received marketing approval
from the FDA in December 1987 to distribute the PROSORBA(R) column for the
treatment of ITP, an immune-mediated bleeding disorder.
The PROSORBA(R) column treats a defective immune system by modulating
the immune system to respond more effectively. The modulation can result in the
clearance of antigens or control of an autoimmune disease. The Company believes
that the PROSORBA(R) column treats a dysfunctional immune system response rather
than treating the disease itself. The Company is providing financial support for
an extramural program with leading academic laboratories to study the mechanisms
of action of the PROSORBA(R) column.
The PROSORBA(R) column is a plastic cylinder measuring three inches in
diameter and three and one half inches in height. The cylinder contains a solid
binding matrix composed of protein A bound to dry silica (sand) granules.
Protein A, a molecule produced by the fermentation of a bacterium, specifically
binds to both CICs and IgG, with preference for CICs. The FDA considers the
PROSORBA(R) column to be a medical device. The Company has historically produced
the PROSORBA(R) column at its own manufacturing facility which meets FDA GMP
regulations for the manufacture of the product in commercial quantities.
The Company believes that key factors in the Company's commercial
performance will be its ability to improve PROSORBA(R) column sales for its
currently approved indication, obtain FDA marketing approval for additional
disease indications for the PROSORBA(R) column, and obtain and develop
complementary therapeutic and diagnostic technologies. The Company's current
clinical efforts to expand the approved indications for the PROSORBA(R) column
are focused primarily on rheumatoid arthritis.
Rheumatoid Arthritis
Rheumatoid arthritis is a potentially crippling autoimmune disease that
is estimated to affect over 5,000,000 people in North America and Europe. In
rheumatoid arthritis, the body's immune system inappropriately
21.
<PAGE> 23
makes antibodies, called rheumatoid factors, that collect in the joints and
surrounding soft tissue causing inflammation and tissue damage. Joints,
typically those in the hand, become painful and swollen, lose movement, and
become deformed. These individuals not only suffer a significantly reduced
quality of life, but also a shortened life expectancy.
In September 1995, the Company announced the results of its 15 patient
pilot clinical trial that used the PROSORBA(R) column for therapy in rheumatoid
arthritis. The results showed a statistically significant 76% reduction in
painful joints and a 70% reduction in swollen joints in 11 patients three months
after completing treatment with the PROSORBA(R) column. The Company believes
that these findings confirm the potential utility of the PROSORBA(R) column in
treating rheumatoid arthritis reported by an earlier independent study published
in the JOURNAL OF RHEUMATOLOGY in May 1994.
In June 1996, the Company commenced a Phase III pivotal trial designed
to confirm the findings of the pilot study in a larger group of patients. Up to
approximately 250 patients were enrolled in the prospective, randomized,
multi-center, double-blind, controlled trial. The patients are to be randomly
entered into two treatment groups. Approximately half of the patients were
treated with the PROSORBA(R) column and the other half of the patients with a
placebo treatment.
In January 1998, the Company announced that an independent Data Safety
and Monitoring Board recommended the early cessation of the Company's Phase III
clinical trial evaluating the use of the PROSORBA(R) column in the treatment of
rheumatoid arthritis. The recommendation to cease the Phase III trial was based
on the achievement of favorable safety and statistically significant results.
The Company is now in the process of preparing a PMA for submission to the
FDA requesting new labeling for the PROSORBA(R) column to incorporate the RA
indication. The Company expects to file the PMA by mid-1998, and, if FDA
approval is granted, expects to begin marketing the PROSORBA(R) column for use
in the treatment of RA in 1999. However, there can be no assurance that the
Company will be able to file the PMA by mid-1998 or, if it is, that FDA
approval of the PROSORBA(R) column for the treatment of RA will be received on a
timely basis, if at all. See "Risk Factors--FDA Approval and Regulations."
In 1996, the Company began providing financial support to several
leading research facilities to further their efforts in studying the mechanism
of action of the PROSORBA(R) column in the treatment of rheumatoid arthritis.
Other Indications
While there are multiple additional indications in which the PROSORBA(R)
column has demonstrated some clinical effects, the Company has most recently
dedicated most of its internal resources, apart from rheumatoid arthritis,
toward the indications of pediatric ITP, paraneoplastic syndrome and kidney
transplantation.
In August 1995, the Company began a pilot clinical trial to evaluate the
PROSORBA(R) column as a means to increase the number of patients eligible for
kidney transplantation. The study was designed to determine if the PROSORBA(R)
column treatment would reduce the level of sensitizing antibodies which cause
acute organ rejection and which prevent a significant portion of the patient
population from receiving donor kidneys. The Company suspended enrollment of
patients in this study and has determined not to continue the study at this
time.
The Company intends to pursue applications for the use of the
PROSORBA(R) column in the treatment of certain other autoimmune diseases. The
Company's Investigational Device Exemptions ("IDEs") which allow the Company to
perform human clinical trials include the following diseases: rheumatoid
arthritis, myasthenia gravis, systemic lupus erythematosus, multiple sclerosis,
thrombotic thrombocytopenic purpura, and kidney transplantation. Such trials
would be initiated if sufficient financing were obtained and the business
potential of each therapeutic opportunity were consistent with the Company's
goals. The Company is presently unable to predict when, or if, FDA-approval for
any such indications will be obtained.
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CYPLEX(TM) PLATELET ALTERNATIVE
The Company's strategy is to produce therapeutic agents that enhance,
inhibit, modify or replace the natural activity of platelets that have been
depleted or damaged by disease or therapy. In November 1996, the Company
acquired PRP. PRP's primary product, Cyplex(TM) platelet alternative, which is
still in the clinical research phase, is being developed as a potential
substitute for traditional platelet transfusions. Currently, the Company is
focusing most of its efforts on the development of Cyplex(TM) platelet
alternative, a freeze-dried (lyophilized) powder prepared from either fresh or
outdated human platelets. A proprietary production process removes interior
platelet components, resulting in a product consisting primarily of platelet
membrane fragments. Cyplex(TM) platelet alternative is heat-treated during
processing to inactivate, below detection levels, any viruses (HIV, hepatitis,
etc.) that may be present. Preclinical and clinical trials conducted to date
have shown that Cyplex(TM) platelet alternative is not thrombogenic or
immunogenic, and no dose limiting toxicity has been determined in humans or
animals. The lead indication for Cyplex(TM) platelet alternative is as an
alternative to platelet transfusions to restore control of bleeding due to
platelet deficiency in refractory patients.
Cyplex(TM) platelet alternative for the Treatment of Thrombocytopenia
If blood platelet levels become too low (severe thrombocytopenia), the
hemostasis system begins to deteriorate. Left untreated, thrombocytopenia can
lead to spontaneous bruising and bleeding and may progress to shock, circulatory
collapse, and death. Thrombocytopenia is a common side effect of the chemo- and
radiation therapies used to treat cancer and can also be caused by liver disease
or by major blood loss from traumatic injuries. Platelet dysfunction that is
similar in consequences to thrombocytopenia is caused by prolonged exposure to
some medical devices, such as heart-lung bypass machines used in open-heart
surgery.
Thrombocytopenia is currently treated with transfusion of human
platelets. Current sales of platelets to hospitals for this purpose are about
$1.5 billion worldwide, including approximately $600 million in the U.S.
Associated costs with platelet transfusions, including filters, HLA
cross-matching and donor recruitment add another approximately $200 million in
the U.S. Platelet usage in the U.S. grew at an average annual rate of about 5%
over the period 1980 to 1992, and the Company expects this growth to continue
for at least the next several years. Cyplex(TM) platelet alternative has the
potential to replace a major fraction of platelet transfusions for
thrombocytopenia.
Platelet transfusion is generally an effective therapy, but it has a
number of significant drawbacks. Cyplex(TM) platelet alternative characteristics
allow it to overcome a majority of the disadvantages of platelet transfusion, as
summarized in the table below:
<TABLE>
<CAPTION>
Human Platelets Cyplex(TM) Benefits Cyplex(TM) Economic Impact
- --------------- ------------------- --------------------------
<S> <C> <C>
Can transmit viruses Viral Inactivation Increased safety, reduced
liability and testing costs
Patients frequently become Does not induce Reduced hospitalization, no
alloimmunized* alloimmunization platelet typing, improved
outcomes
Platelets do not control IPM(TM) controls bleeding in Reduced morbidity and mortality
bleeding in some patients many of these patients
Shelf life of 3 to 5 days Shelf life of at least 3 years Reduced loss from out-dating,
emergency availability,
improved logistics and reduced
infrastructure
Must be agitated constantly Small vial in refrigerator Reduced storage costs
</TABLE>
- --------
* Alloimmunization is the process whereby the body develops antibodies to
platelets that cause later transfusions to be ineffective
23.
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In addition to safety and toxicity testing in animals and humans, the
Company recently concluded a trial designed to study efficacy in patients with
low platelet counts during active bleeding episodes. The Phase II trial, which
began in early 1996, showed that Cyplex(TM) platelet alternative controlled or
halted bleeding in 17 of 26 patients, a 65% response rate. Of the 26 patients,
12 had previously not responded to platelet transfusions, the traditional
therapy for uncontrolled bleeding. In this subgroup of refractory
non-responders, Cyplex(TM) platelet alternative was effective in controlling or
halting bleeding in 7 out of 12 patients, or 58% of the time. The Company had
originally planned to study 36 patients but due to the positive results, the
trial was halted at 31 patients so that the Company could begin a pivotal trial
in refractory patients.
The Company anticipates that if continued clinical success is achieved,
Cyplex(TM) platelet alternative may be marketed and sold in the U.S. and Europe
in 1999 for control of bleeding in patients who do not respond to platelets, and
one or two years later for prevention of bleeding more generally in
thrombocytopenia. However, there can be no assurance that regulatory approvals
for the use of Cyplex(TM) platelet alternative will be received on a timely
basis, if at all, or if received, whether the Company can successfully
commercialize such product.
Potential Follow-on Indications
The Company believes that Cyplex(TM) platelet alternative may also be
useful in treating arterial restenosis. Of the nearly 500,000 patients who
currently undergo coronary angioplasty to open blocked arteries in the U.S. each
year, about 25% will suffer reocclusion (restenosis) of the treated artery
within a few months, and nearly half with a couple of years. A key factor in the
development of restenosis is exposure of smooth muscle cells in the artery walls
to platelet derived growth factory (PDGF). This happens when the patient's
platelets adhere to injuries in the artery walls that are always produced as a
side effect of the angioplasty procedure. After adhesion, the platelets
activate, releasing their interior components, including PDGF and various
coagulation-inducing factors. If platelets can be prevented from adhering to
these injured areas, they will not activate and release PDGF, and, therefore,
will not contribute to restenosis. Both animal and invitro work at the Company
have shown that Cyplex(TM) platelet alternative binds to arterial lesions and
reduces platelet adhesion. Work at the Company and elsewhere has shown that the
Cyplex(TM) platelet alternative can carry anti-platelet agents to the lesions
and, in principle, concentrate activity of those agents to further reduce
platelet adhesion.
Other areas of potential interest include the use of Cyplex(TM) platelet
alternative during open heart surgery to prevent peri-operative bleeding and
other complications, the use of IPM(TM) to prevent or control bleeding that can
result from the use of anti-platelet agents, (in particular anti-GP IIb/IIIa
agents), and the use of Cyplex(TM) platelet alternative in disseminated
intravascular coagulation.
Cyplex(TM) platelet alternative may also be studied in general surgical
and emergency room indications such as trauma. Efficacy in preventing or
improving bleeding in these indications could have great benefits in situations
where the storage of human platelets presents logistical difficulties, such as
in military use and in rural areas, and in situations in which there are
potential imbalances between supply and demand (e.g., in liver transplants which
require hundreds of units of platelets).
AP4A
Platelets play a key role in hemostasis and maintenance of normal
vascular impermeability. Although the process of hemostasis is critical, it
sometimes creates unnecessary blood clots that can lead to a wide variety of
ailments including heart attacks, strokes, phlebitis and pulmonary embolisms.
The Company is testing chemical analogs of a compound know as AP4A (diadenosine
tetraphosphate) that inhibit platelet aggregation, the first step in clot
formation, and therefore have potential to prevent the formations of excessive
clots an anti-thrombotic effect.
Working together, the Company and Worcester Foundation for Experimental
Biology have shown that AP4A inhibits platelet aggregation response and thrombus
formation, and that several analogs of AP4A have shown even more potential
anti-thrombotic effects than AP4A itself.
Funded by an NIH Small Business Innovation Research (SBIR) Phase I
grant, the Company discovered that one particular AP4A analog has promising
characteristics. The Company intends to focus on this compound for further
preclinical development under support of a $750,000 Phase II grant the NIH
awarded to the Company in the fall of 1996.
24.
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OTHER TECHNOLOGY
In November 1994, the Company's diagnostic division entered into a
licensing agreement under which it has licensed the right to use proprietary
nucleic acid probe technology (a genetic screening test) to predict which
rheumatoid arthritis patients will develop severe disease and hence may benefit
from early aggressive therapy. The test is currently a manually performed
reference laboratory test. In January 1995, the Company obtained the rights to
hybridization and chemical signal generation technology as well as to automated
clinical instrumentation which combined could provide the Company with the
opportunity to create an automated laboratory test using the nucleic acid probe
technology.
The Company's diagnostics division was originally created to employ
proprietary immunoassay technology to develop specific assays that provide
greater sensitivity and specificity than presently available in the market. The
diagnostics program is currently under evaluation within the Company and an
active effort to find appropriate partners for the program is underway.
MARKETING AND SALES
Prior to 1994, the PROSORBA(R) column was sold by the Company's internal
sales force to physicians in the fields of immunology, hematology and oncology.
In April 1994, Baxter assumed sales and marketing responsibilities under a
10-year exclusive distribution agreement, granting distribution rights of the
PROSORBA(R) column in the United States and Canada for the treatment of
thrombocytopenia. Baxter, at its own expense, was to provide sales and marketing
support for the sale of the product during the term of the agreement. The
Company was to provide significant marketing and promotional support to Baxter
for the first three years of the agreement.
Effective May 1, 1996, the Company and Baxter terminated the exclusive
distribution agreement, whereby the Company regained the right to sell its
PROSORBA(R) column directly to customers who had previously purchased the
PROSORBA(R) column through Baxter as well as to any other potential customers
who wish to purchase the PROSORBA(R) column.
In August 1996, the Company established an internal sales and marketing
program. The program included hiring a domestic sales force of approximately six
representatives as well as initiating marketing efforts including medical
education, direct mail, trade show participation and journal advertising.
In the latter part of the year, the Company launched a controlled
clinical study evaluating the efficacy of the PROSORBA(R) column in ITP. This is
the first prospective and controlled study of the device in its approved
indication and has been designed to confirm observations from 10 years of
historical use. Although the trial is not expected to be completed until 1998,
the Company expects to release interim data after approximately one-third of the
subjects have completed the protocol.
Internationally, the Company has entered into exclusive agreements for
distribution of the PROSORBA(R) column in Spain, Korea, Mexico, Brazil,
Argentina, and Hong Kong. However, sales to international customers represent
less than 10% of the Company's product sales.
Generally, in the United States the cost of treatment for ITP using the
PROSORBA(R) column has been reimbursed by third-party payors.
No customer represented more than 10% of the Company's annual sales
during the years ended December 31, 1996 and 1997. For the years ended December
31, 1994 and 1995, sales to Baxter represented approximately 70% and 91%,
respectively, of the Company's sales.
Sale of the PROSORBA(R) column is not subject to seasonal fluctuation.
PATENTS AND PROPRIETARY TECHNOLOGY
The Company believes that its success depends primarily on the
experience, capabilities, and skills of its personnel. Notwithstanding this
fact, however, the Company seeks to protect its intellectual property rights by
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a variety of means, including patents, maintaining trade secrets and proprietary
know-how, and technological innovation to develop and maintain its competitive
position. There can be no assurance that the Company will be able to obtain
additional patents either in the United States or in foreign jurisdictions or
that, if issued, such patents will provide sufficient protection or be of
commercial benefit to the Company. Insofar as the Company relies on trade
secrets and unpatented proprietary know-how, there can be no assurance that
others will not independently develop similar technology or that secrecy will
not be breached. Finally, there can be no assurance that the Company will be
able to develop further technological innovations.
On June 30, 1997, the Company settled a patent infringement claim filed
against the Company alleging that the manufacture, use and sale of the
PROSORBA(R) column infringed a patent issued to Dr. Meir Strahilevitz (the
"Strahilevitz Patent'). Pursuant to the terms of the settlement, the Company was
granted a nonexclusive license permitting the Company to use the Strahilevitz
Patent in connection with the manufacture, use and sale of its PROSORBA(R)
column for the treatment of ITP and rheumatoid arthritis.
THE PROSORBA(R) COLUMN
The Company presently owns nine issued U.S. patents and six
international patents (excluding patents relating to the area of platelet
therapeutics) which expire during 2004 to 2009. The process used in
manufacturing the PROSORBA(R) column is covered by one of these patents. Certain
U.S. and international applications are pending. The Company has an exclusive
license for a U.S. patent for a genetic screening test to predict which
rheumatoid arthritis patients will develop severe disease. In addition, the
Company has an exclusive license for a U.S. patent for treating cellular Fc
receptor-mediated hypersensitivity immune disorders.
CYPLEX(TM) PLATELET ALTERNATIVE
The Company presently owns four issued U.S. patents and three pending
U.S. patent applications relating to the area of platelet therapeutics. Certain
international patent applications corresponding to the issued U.S. patents have
been filed. To date, four foreign patents have been issued while others are
still pending in countries or jurisdictions outside the U.S. These patents and
those that might issue on the pending patent applications are scheduled to
expire during 2010 to 2014.
GENERAL
There can be no assurance that the Company's patents will afford
commercially significant protection of its proprietary technology or have
commercial application. There has been no judicial determination of the validity
or scope of its proprietary rights. Moreover, the patent laws in foreign
countries may differ from those of the United States, and the degree of
protection afforded by foreign patents may be different.
Others have filed applications for, or have been issued, patents and may
obtain additional patents and other proprietary rights relating to products or
processes competitive with those of the Company. The scope and validity of such
patents is presently unknown. If existing or future patents are upheld as valid
by courts, the Company may be required to obtain licenses to use technology
covered by such patents.
In November 1995, a complaint was filed with the United States District
Court, Northern District of California, claiming that the Company's PROSORBA(R)
column allegedly infringes a patent issued to David S. Terman, M.D., which was
assigned in July 1993 to DTER-ENT, Inc., a California corporation ("DTER-ENT").
The Company first received notice of a claim of infringement from DTER-ENT in
July 1993. The Company has disclosed this claim in its public filings for the
past two years. The patent infringement claim was settled in April 1996 whereby
the Company was granted a non-exclusive license to use the Terman invention. The
settlement of the claim did not and will not have a material impact on the
Company's financial position or results of operations.
GOVERNMENT REGULATION
The Company's research and development activities and the future
manufacturing and marketing of products by the Company are subject to regulation
for safety and efficacy by numerous governmental authorities in the United
States and other countries. In the United States, both biologics and medical
devices are subject to
26.
<PAGE> 28
rigorous FDA regulation. The Federal Food, Drug and Cosmetic Act and the Public
Health Service Act govern the testing, manufacture, safety, efficacy, labeling,
storage, record keeping, approval, advertising and promotion of the Company's
products. In addition to the FDA regulations, the Company is also subject to
other federal and state regulations such as the Occupational Safety and Health
Act and the Environmental Protection Act. Product development and approval
within this regulatory framework takes a number of years and involves the
expenditure of substantial resources. In addition, there can be no assurance
that this regulatory framework will not change or that additional regulation
will not arise at any stage of the Company's product development which may
affect approval or delay of an application or require additional expenditures by
the Company.
The Company's regulatory strategy is to pursue clinical development and
marketing approval of its products worldwide. The Company intends to seek input
from the FDA at each stage of the clinical process to facilitate appropriate and
timely clinical development, focusing on issues such as trial design and
clinical endpoints. Where appropriate, the Company intends to pursue available
opportunities, to the extent available, for accelerated approval of products. A
corporate partner may be helpful to accelerate international development.
The time required for completing such testing and obtaining such
approvals is uncertain and approval itself may not be obtained. In addition,
delays or rejections may be encountered based upon changes in FDA policy during
the period of product development and FDA regulatory review of each submitted
new drug application or product license application. Similar delays may also be
encountered in foreign countries. There can be no assurance that even after such
time and expenditures, regulatory approval will be obtained for any products
developed by the Company. Moreover, if regulatory approval of a product is
granted, such approval may entail limitations on the indicated uses for which
the product may be marketed. Further, even if such regulatory approval is
obtained, a marketed product, its manufacturer and the facilities in which the
product is manufactured are subject to continual review and periodic
inspections. Late discovery of previously unknown problems with the product,
manufacturer or facility may result in restrictions on such product or
manufacturer, including withdrawal of the product from the market.
THE PROSORBA(R) COLUMN
The PROSORBA(R) column is regulated by the FDA as a Class III medical
device. The regulatory approval of a Class III medical device in the United
States intended for therapeutic use in humans involves many steps including
pre-clinical and clinical testing. Pre-clinical evaluation of a Class III device
includes testing to demonstrate that in clinical studies with human subjects the
product would not present an unreasonable hazard. Pre-clinical and clinical
evaluation of the PROSORBA(R) column was conducted as part of the approval
process for treatment of patients with ITP.
For each additional disease that the Company wants to treat with the
PROSORBA(R) column, clinical testing must be conducted. Before such clinical
testing can begin, an investigational device exemption ("IDE") application must
be prepared and filed with the FDA. This application consists of (i) information
on the composition of the product, (ii) manufacturing data, (iii) results of all
pre-clinical safety and effectiveness studies, and (iv) a design of the study
and protocol.
The clinical testing of a device may consist of a preliminary
feasibility study leading to a larger study of safety and effectiveness, or it
may consist of only the larger safety and effectiveness study. Upon completion
of the study and compilation of the data, a pre-market approval ("PMA")
application can be filed. The FDA is required to respond to the PMA submission
within 180 days, although the FDA may not and often does not adhere to this
schedule and further review may take additional time. After the FDA completes
its review of the PMA application, the clinical study data may be reviewed by an
advisory panel of medical experts who are not part of the FDA. The applicant is
required to answer questions posed by this panel. Based upon its review of the
data, the advisory panel may make a recommendation of approval or nonapproval to
the FDA. The FDA usually follows the recommendation of the panel but is not so
required. Assuming the advisory panel recommends approval of the PMA, the FDA
may approve the application and the product may then be commercially
distributed.
The manufacture and distribution of medical devices are subject to
continuing FDA regulation. In addition to the requirement that the device be
marketed only for its approved uses, applicable law requires compliance with the
FDA's good manufacturing practices ("GMP") regulations. Failure to comply with
the GMP regulations or with
27.
<PAGE> 29
other applicable legal requirements can lead to federal seizure of violating
products, injunctive actions brought by the federal government, and potential
criminal liability on the part of the Company and of the officers and employees
of the Company who are responsible for the activities that lead to the
violations.
Although the Company has received marketing approval from the FDA for
the treatment of ITP with the PROSORBA(R) column, there can be no assurance that
any marketing clearances for other diseases or products will be granted on a
timely basis, or at all, or that it will be economically feasible to
commercialize the PROSORBA(R) column for these other diseases. The FDA may also
require post-marketing testing and surveillance programs to monitor the
effectiveness and safety of the Company's products. Product marketing approvals
may be withdrawn for noncompliance with regulatory standards or the occurrence
of unforeseen problems following initial marketing.
The PROSORBA(R) column is commercially distributed under a PMA that was
approved by the FDA in 1987. Changes to the product and its manufacturing
process, and certain types of labeling changes must be approved by the FDA prior
to implementation. The Company currently has one supplement to the PMA pending
with the FDA for the consolidation of the Company's manufacturing facilities
into one site. There can be no assurance that the current supplement or any
future supplements will be approved by the FDA.
CYPLEX(TM) PLATELET ALTERNATIVE
Cyplex(TM) platelet alternative is regulated by the FDA as a biologic.
The steps required before a biologic may be marketed in the United States
include (i) preclinical laboratory and animal tests, (ii) the submission to the
FDA of an application for an Investigational New Drug ("IND"), which must become
effective before human clinical trials may commence in the United States, (iii)
adequate and well-controlled human clinical trials to establish the safety and
efficacy of the biologic, (iv) the submission of a Product License Application
("PLA") to the FDA and (v) the FDA approval of the PLA prior to any commercial
sale or shipment of the biologic. In addition to obtaining FDA approval for each
product, each domestic biologic manufacturing establishment must be registered
with, and approved by, the FDA.
Preclinical tests include laboratory evaluation of product chemistry and
animal studies to assess the safety and efficacy of the product and its
formulation. The results of the preclinical tests are submitted to the FDA as
part of an IND, and unless the FDA objects, the IND will become effective 30
days following its receipt by the FDA.
Clinical trials involve the administration of the biologic to healthy
volunteers, or to patients identified as ones with the condition for which the
biologic is being tested, under the supervision of a qualified principal
investigator. Clinical trials are conducted in accordance with protocols that
detail the objectives of the study, the parameters to be used to monitor safety,
and the efficacy criteria to be evaluated. Each protocol is submitted to the FDA
as part of the IND. Each clinical study is conducted under the auspices of an
independent Institutional Review Board ("IRB") at the institution at which the
study will be conducted. The IRB will consider, among other things, ethical
factors, the safety of human subjects and the possible liability of the
institution.
Clinical trials are typically conducted in three sequential phases, but
the phases may overlap. In Phase I, the initial introduction of the biologic
into healthy human subjects, the product is tested for safety (adverse effects),
dosage tolerance, metabolism, distribution, excretion and clinical pharmacology.
Phase II involves studies in a limited patient population to (i) determine the
efficacy of the drug for specific targeted indications, (ii) determine dosage
tolerance and optimal dosage and (iii) identify possible adverse side effects
and safety risks. When a compound is found to be effective and to have an
acceptable safety profile in Phase II evaluations, Phase III trials are
undertaken to further evaluate clinical efficacy and to test further for safety
within an expanded patient population at multiple clinical study sites. The FDA
reviews both the clinical plans and the results of the trials and may
discontinue the trials at any time if there are significant safety issues.
The results of the preclinical tests and clinical trials are submitted
to the FDA in the form of an NDA or PLA for marketing approval. The testing and
approval process is likely to require substantial time and effort and there can
be no assurance that any approval will be granted on a timely basis, if at all.
The approval process is affected by a number of factors, including the severity
of the disease, the availability of alternative treatments and the risks and
benefits demonstrated in clinical trials. Additional animal studies or clinical
trials may be requested during the FDA review period and may delay marketing
approval. After FDA approval for the initial indications,
28.
<PAGE> 30
further clinical trials may be necessary to gain approval for the use of the
product for additional indications. The FDA mandates that adverse effects be
reported to the FDA and may also require post-marketing testing to monitor for
adverse effects, which can involve significant expense.
Among the conditions for NDA or PLA approval is the requirement that the
prospective manufacturer's quality control and manufacturing facilities are
subject to biennial FDA inspections and foreign manufacturing facilities are
subject to periodic FDA inspections or inspections by the foreign regulatory
authorities with reciprocal inspection agreements with the FDA.
The Prescription Drug Act of 1992 requires companies engaged in
pharmaceutical development, such as the Company, to pay user fees in the amount
of at least $100,000 upon submission of a PLA. The Company does not believe that
this requirement will have a material adverse effect on the Company's business.
For marketing outside the United States, the Company also is subject to
foreign regulatory requirements governing human clinical trials and marketing
approval for drugs. The requirements governing the conduct of clinical trials,
product licensing, pricing and reimbursement vary widely from country to
country.
In early 1992, the Company completed necessary pre-clinical studies and
filed in August of that year an IND to begin clinical studies of Cyplex(TM)
platelet alternative. The FDA requested additional animal data which was
provided in an amended IND filing. The FDA approved the IND in September of
1993, and clinical trials started in early 1994. In order to include an
international site in the Phase II trial, a CTX was filed and approved by the UK
Medicines Control Agency.
COMPETITION
THE PROSORBA(R) COLUMN
The PROSORBA(R) column, as well as other products which may be developed
by the Company in the future, are intended to compete with conventional methods
of treatment which generally consist of surgery, drug, or radiation therapy and
which have been accepted by the medical community as classical treatment
methods. In addition, the Company intends to compete with methods of treatment
focusing on the artificial stimulation and/or modification of the human immune
system by material or synthetic drugs or genetically engineered compounds which
are being pursued by numerous biotechnology and medical companies and research
institutions. Many of the Company's potential competitors have significantly
greater resources than the Company. The PROSORBA(R) column, represents a
different approach to the treatment of immune-related diseases inasmuch as they
focus on the removal of CIC's that are suppressive to the body's immune system.
The Company is aware of a select number of other companies which are known to be
pursuing approaches to disease treatment similar to the Company's methodology.
In addition, it is always possible that established companies and research
institutions with greater resources may develop other treatment methods for
various diseases.
The Company believes that its success will depend primarily on, among
other things, the market acceptance of its therapeutic approach, its scientific
expertise, the PROSORBA(R) column's performance measured against competing
products, adequate funding, and on its ability to develop, protect, and market
products in the future. The Company's competitive success will also depend on
its continued ability to attract and retain skilled and experienced personnel,
to develop and secure the rights to advanced proprietary technology and to
commercially exploit its technology prior to the development of competitive
products by others.
CYPLEX(TM) PLATELET ALTERNATIVE
When and if the Company receives FDA approval for Cyplex(TM) platelet
alternative, it will initially be launched for the control of bleeding in
patients who are non-responsive to platelet transfusions. There are currently no
competing therapies for such platelet-refractory patients. With respect to the
remaining platelet market, Cyplex(TM) platelet alternative advantages over
traditional platelet therapy support its usage. Cyplex(TM) platelet alternative
also has several advantages over its closest competition, CMV-free leukodepleted
single-donor platelets. Products in development to filter or virally deactivate
platelets will only address one of the five advantages of Cyplex(TM) platelet
alternative. The most important clinical advantage of Cyplex(TM) platelet
alternative is its nonimmunoginicity which
29.
<PAGE> 31
no other competitive product in development currently addresses. There can be no
assurance, however, that other parties will not develop competing therapies.
MANUFACTURING AND SUPPLY
The Company believes that raw materials and other components are
available in sufficient quantities to meet production requirements for the
PROSORBA(R) column. The Company's principal manufacturing operations for its
PROSORBA(R) column are based in Redmond, Washington.
The Company currently manufactures Cyplex(TM) platelet alternative in
its Boston, Massachusetts facility. The Company has single sources of supply for
certain components but believes it could obtain alternate sources of supplies if
its current suppliers were unable to provide the Company with adequate
quantities of such components.
PROPERTIES
The Company currently occupies approximately 17,800 square feet of
leased office and manufacturing facilities in San Diego, California, Redmond,
Washington and Boston, Massachusetts. The 2,800 square foot San Diego facility
houses the Company's executive offices, as well as its administration, research
and medical personnel. The five year lease for this facility expires in 2001.
The Boston facility is approximately 7,000 square feet, and its lease expires in
2001. It is used primarily for the manufacture of IPM(TM) and qualifies as a GMP
pilot production plant.
The Company leases 8,000 square feet for its manufacturing facility in
Redmond under a lease expiring in 2004. The facility has historically been used
to produce commercial quantities of both protein A and the chemically coated
silica matrix used in the manufacture of the PROSORBA(R) column. Assembly of the
PROSORBA(R) column has historically been performed in the Company's Seattle
facility. The Redmond facility, however, has been recently renovated so that
both raw material production and assembly of the PROSORBA(R) column can be
performed in a single facility. Although the Redmond facility has historically
complied with the FDA GMP regulations, the renovated facility must still
complete the FDA GMP re-approval process. There can be no assurance that the
renovated facility will receive GMP approval in a timely manner, if at all.
The Company leases a 14,400 square foot facility in Seattle, Washington
under a lease expiring in 2004. In conjunction with the Company's 1996
restructuring plan and corresponding reduction in facilities, this space was
subleased to another party in April 1996 for the remainder of the lease term.
The Company retained rights to use a small portion of the space through February
1997 until renovations at the Company's Redmond facility were completed, at
which time the Company vacated the Seattle Facility.
EMPLOYEES
As of January 30, 1998, the Company employed approximately 39 full-time
employees. None of the Company's employees is covered by collective bargaining
agreements, and management considers relations with its employees to be good.
LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
30.
<PAGE> 32
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company, the positions held
by them and their ages as of January 30, 1998, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Jay D. Kranzler, M.D., Ph.D(4)...... 39 Chief Executive Officer, Chief Financial
Officer, Chief Scientific Officer and Vice
Chairman of the Board of Directors
Debby Jo Blank, M.D.(4)............. 46 President, Chief Operating Officer and Director
R. Michael Gendreau................. 42 Vice President, Research and Development and
Chief Medical Officer
Richard M. Crooks, Jr.(1)(2)(3)..... 58 Chairman of the Board
Philip J. O'Reilly(1)(2)(3)......... 59 Director
Jack H. Vaughn(1)(2)................ 77 Director
</TABLE>
(1) Member of Audit Committee
(2) Member of Compensation Committee
(3) Member of Stock Option Committee
(4) Member of Non-Executive Officer Stock Option Committee
Jay D. Kranzler, M.D., Ph.D. was appointed Chief Executive Officer and
Vice Chairman of the Board of Directors of the Company in December 1995. From
January 1989 until August 1995, Dr. Kranzler served as President, Chief
Executive Officer and a director of Cytel Corporation, a publicly-held
biotechnology company. Dr. Kranzler has been an adjunct member of the Research
Institute of Scripps Clinic since January 1989. Before joining Cytel, Dr.
Kranzler was employed by McKinsey & Company, a management consulting firm, as a
consultant specializing in the pharmaceutical industry from 1985 to January
1989.
Debby Jo Blank, M.D. was appointed President, Chief Operating Officer
and Director of the Company in December 1995. Prior to joining the Company, from
1994 to December 1995, Dr. Blank was Senior Vice President, Marketing, for
Advanced Technology Laboratories, a publicly-held manufacturer and distributor
of ultrasound equipment. From 1993 to 1994, she was Vice President, U.S.
Marketing for Syntex. From 1989 to 1993, Dr. Blank held various positions at the
DuPont Company and the DuPont Merck Pharmaceutical Company ("DuPont"), including
Vice President Worldwide Marketing, Vice President, New Product Planning &
Licensing, and Vice President, Strategy and Business Development. Before joining
DuPont, she was employed by the management consulting firm Arthur D. Little,
from 1986 to 1989 as a consultant in its pharmaceutical practice.
Mr. R. Michael Gendreau, was appointed Vice President of Research and
Development and Chief Medical Officer of the Company in December 1996. Dr.
Gendreau joined the Company in 1994 and has held various positions through 1996,
including Executive Director of Scientific Affairs. From 1991 to 1994, Dr.
Gendreau was Vice President of Research and Development and Chief Medical
Officer for MicroProbe Corporation, a developer and manufacturer of DNA
probe-based diagnostic equipment.
Mr. Richard M. Crooks, Jr. has been a director of the Company since
1991. Mr. Crooks has been President of RMC Consultants, a financial advisory
services firm, since June 1990. Mr. Crooks is a director of and consultant to
Allen & Company Incorporated, a privately held investment banking firm, which is
the Company's principal stockholder. He served as a Managing Director of Allen &
Company Incorporated for more than five years prior to June 1990. Mr. Crooks is
also a director of Excalibur Technologies Corporation.
31.
<PAGE> 33
Mr. Philip J. O'Reilly was appointed as a director of the Company in
1994. Mr. O'Reilly is a partner in the law firm of O'Reilly, Marsh, Kearney &
Corteselli P.C., in Mineola, New York. He has been in private practice for more
than twenty years. Mr. O'Reilly is also a director of Excalibur Technologies
Corporation.
Mr. Jack H. Vaughn was appointed as a director of the Company in 1991.
Currently, Mr. Vaughn is Chairman of ECOTRUST, a Portland, Oregon-based
foundation promoting environmentally friendly development in the Pacific
Northwest. From 1988 to 1992, he was the U.S. Government's Senior Environmental
Advisor for Central America. Mr. Vaughn was the founding Chairman of
Conservation International, a private foundation encouraging biological
diversity. Mr. Vaughn was a director of Allegheny & Western Energy Corporation
from 1981 through 1995 and was a member of its Compensation Committee.
Each officer serves at the discretion of the Board of Directors. See
"--Employment Agreements." The Company's Bylaws permit the Board of Directors to
establish by resolution the authorized number of directors, and the Company
currently has six directors authorized. The Company's Restated Certificate of
Incorporation and Bylaws provide that the Board of Directors shall be divided
into three classes, each class consisting, as nearly as possible, of one-third
of the total number of directors, with each class having a three-year term. Each
director holds office until the annual meeting of stockholders of the Company
which coincides with the end of such director's three-year term and until such
director's successors have been elected and duly qualified. There are no family
relationships among any of the directors or officers of the Company.
BOARD COMMITTEES
The Board of Directors has an Audit Committee, a Compensation Committee
and a Stock Option Committee. In addition, the Stock Option Committee has a
Non-Executive Officer Stock Option Committee.
The Audit Committee meets with the Company's independent auditors at
least annually to review the results of the annual audit and discuss the
financial statements; recommends to the Board the independent auditors to be
retained; and receives and considers the accountants' comments (out of the
presence of management) as to controls, adequacy of staff and management
performance and procedures in connection with audit and financial controls. The
Audit Committee is composed of three directors: Messrs. Vaughn (Chairman),
Crooks and O'Reilly.
The Compensation Committee makes recommendations based on management's
inputs concerning salaries and incentive compensation, awards stock options to
employees and consultants under the Company's stock option plans and otherwise
determines compensation levels and performs such other functions regarding
compensation as the Board may delegate. The Compensation Committee is composed
of three directors: Messrs. Vaughn, Crooks and O'Reilly.
The Stock Option Committee considers and recommends to the Board of
Directors the number and terms of stock options to be granted to officers and
employees of the Company. The Stock Option Committee is composed of two
directors: Messrs. Crooks and O'Reilly.
The Non-Executive Officer Stock Option Committee was created by the
Stock Option Committee in February 1996. It has the authority to grant certain
numbers of options to employees who are not executive officers of the Company;
provided, however, that the number of options granted to employee by the
Non-Executive Officer Stock Option Committee is limited to 200,000 per each one
year period between annual Board meetings. The Non-Executive Officer Stock
Option Committee is comprised of two directors: Drs. Kranzler and Blank.
DIRECTOR COMPENSATION
Messrs. O'Reilly and Vaughn each received $12,000 in cash compensation
for service as a director during fiscal year 1997. Mr. Crooks did not receive
any cash compensation for his services as a director of the Company during 1997.
Under the Company's 1988 Nonqualified Stock Option Plan, each nonemployee
director is entitled to receive an option to purchase 10,000 shares of Common
stock of the Company upon such person's initial election to the Board. In
addition, each such person shall receive an additional option to purchase 10,000
shares of Common stock of the Company upon each annual reelection of such person
to the Board. See "--Equity Incentive Plans."
32.
<PAGE> 34
Each of Messrs. Crooks, O'Reilly and Vaughn received options to purchase 10,000
shares of Common Stock for service as a director during fiscal year 1997.
Directors who are employees of the Company do not receive any fee for their
services as directors. None of the Company's directors receive any fees for
their service on any of the Board's committees. All of the Company's directors
are reimbursed for their out-of-pocket travel and accommodation expenses
incurred in connection with their service as directors of the Company.
SCIENTIFIC ADVISORY BOARDS
The Company has established four scientific advisory boards to provide
scientific and clinical support and guidance related to the Company's products.
The areas of focus of the scientific advisory boards are immunology,
rheumatology, hematology, and platelet therapy.
The Immunology Advisory Board (the "IAB") is currently composed of
Gerald T. Nepom, M.D., Ph.D., Scientific Director of the Virginia Mason Research
Center in Seattle, Washington; Eng Tan, M.D., Director, W.M. Keck Autoimmune
Disease Center, The Scripps Clinic and Research Institute, San Diego,
California; Eric Sasso, M.D., Ph.D., Assistant Professor, Department of
Medicine, Division of Hematology, University of Washington, Harborview Medical
Center; and Gregg Silverman, M.D., Associate Professor in Residence, Department
of Medicine, Division of Rheumatology, University of California, San Diego. The
focus of the IAB will be to provide guidance to the extramural research
investigating the PROSORBA(R) column's immunologic mechanism of action.
The Rheumatology Advisory Board (the "RAB") is composed of David Felson,
M.D., M.P.H. Professor of Medicine and Public Health, Director, Boston
University Arthritis Health Services Center; Richard Panush, M.D., Professor and
Chairman, Department of Medicine, St. Barnabas Medical Center, Livingston, New
Jersey; George Ehrlich, M.D., University of Pennsylvania Medical School, Member,
Expert Advisory Panel on Chronic Degenerative Disease, World Health
Organization. The RAB will oversee and guide the Company's programs in
rheumatoid arthritis. The RAB members are all serving as advisors to the FDA in
the Drug Division which reviews New Drug Applications for rheumatology
pharmaceutical product.
The Hematology Advisory Board (the "HAB") is composed of James B.
Bussel, M.D., Associate Professor of Pediatrics, Director of ITP Program,
Division of Pediatrics Hematology/Oncology, Cornell Medical Center; John Harlan,
M.D., Professor of Medicine, Division Head, Hematology, Massachusetts General
Hospital; and David J. Kuter, M.D., D.Phil., Chairman, Department of Hematology,
Massachusetts General Hospital. The HAB will oversee and guide the Company's
programs in ITP.
The Platelet Advisory Board (the "PAB") is composed of Richard H. Aster,
M.D., former President, Blood Center of Southeast Wisconsin; Ernest Beutler,
M.D., Chairman, Department of Molecular and Experimental Medicine, The Scripps
Clinic and Research Foundation, San Diego, California; Leon W. Hoyer, M.D.,
Director, Holland Laboratories, Vice President, Research and Development,
American Red Cross; John Lawler, Ph.D., Associate Professor, Department of
Pathology, Harvard Medical School, Brigham and Women's Hospital; Ernest R.
Simon, M.D., Retired Executive Vice President, Medical Affairs, Blood Systems,
Inc.; Scott N. Swisher, M.D., Chairman, FDA Blood Products Advisory Committee;
Professor of Medicine (emeritus), University of Michigan; and Paul C. Zamecnik,
M.D., Professor of Medicine (emeritus) Harvard Medical School, Principal
Scientist, Worcester Foundation for Biomedical Research. The PAB will oversee
the Company's programs as they relate to platelet therapy.
EXECUTIVE COMPENSATION
The following table sets forth for the year ended December 31, 1997 all
compensation awarded or paid to and earned by, each person who served as Chief
Executive Officer of the Company during the fiscal year ended December 31, 1997
as well as those executive officers whose salary and bonus were in excess of
$100,000 for services rendered to the Company during the fiscal year ended
December 31, 1997 (collectively, the "Named Executive Officers"):
33.
<PAGE> 35
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION(1)
ANNUAL COMPENSATION ---------------
--------------------- SHARES ALL OTHER
NAME AND PRINCIPAL FISCAL BASE UNDERLYING COMPENSATION
POSITION YEAR SALARY($) BONUS($) OPTIONS(#) ($)
------------------ ------ --------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Jay D. Kranzler, M.D., Ph.D., 1997 $245,000 $125,000 277,440 $ 10,800(3)
Chief Executive 1996 240,000 135,000 3,025,327 10,700(4)
Officer, Chief Scientific 1995 -- 50,000 -- --
Officer, Chief Financial
Officer and Vice Chairman(2)
Debby Jo Blank, M.D., 1997 215,500 101,500 101,415 9,500(6)
President, Chief Operating 1996 210,000 135,000 1,134,497 164,236(7)
Officer and Director(5) 1995 -- 50,000 -- --
R. Michael Gendreau, M.D 1997 149,000 262 -- 4,472(6)
Vice President, Research 1996 145,000 25,000 125,000 57,805(8)
and Development and 1995 $145,000 $ -- 141,000 $ 7,537(6)
Chief Medical Officer
</TABLE>
(1) The Company's 1996 Equity Incentive Plan (the "1996 Plan"), Incentive Stock
Option and Appreciation Plan and the 1988 Non-Qualified Stock Option Plan
(collectively, the "Plans") are intended to further the interests of the
Company by providing for the grant of stock awards to directors, officers
and employees of and consultants to the Company.
(2) Dr. Kranzler was appointed Chief Executive Officer of the Company on
December 28, 1995. Amounts shown as Annual Compensation do not reflect
approximately $20,000 which Dr. Kranzler received as a consultant to the
Company during 1995.
(3) Includes $1,300 paid by the Company on behalf of Dr. Kranzler for life
insurance premiums during 1997, and $9,500 of contributions made by the
Company under its 401(k) plan.
(4) Includes $1,200 paid by the Company on behalf of Dr. Kranzler for life
insurance premium during 1996, and $9,500 of contributions made by the
Company under its 401(k) plan.
(5) Dr. Blank was appointed President and Chief Operating Officer on December
28, 1995. Amounts shown as Annual Compensation do not reflect approximately
$20,000 which Dr. Blank received as a consultant to the Company during
1995.
(6) Represents contributions made by the Company under its 401(k) plan.
(7) Includes $154,736 paid to Dr. Blank for relocation costs and related tax
gross-ups associated with Dr. Blank's relocation to San Diego, California
upon joining the Company. Also includes $9,500 of contributions made by the
Company under its 401(k) plan.
(8) Includes $52,583 paid to Dr. Gendreau for relocation costs associated with
Dr. Gendreau's relocation to San Diego, California. Also includes $5,222 of
contributions made by the Company under its 401(k) plan.
34.
<PAGE> 36
STOCK OPTION GRANTS AND EXERCISES
The following table sets forth certain information regarding options
granted during the fiscal year ended December 31, 1997 to the Named Executive
Officers:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------- POTENTIAL REALIZABLE VALUE
% OF TOTAL AT ASSUMED ANNUAL RATES OF
SHARES OPTIONS STOCK APPRECIATION FOR
UNDERLYING GRANTED TO OPTION
OPTIONS EMPLOYEES IN TERM($)(2)
GRANTED FISCAL EXERCISE PRICE EXPIRATION -----------------------
NAME (#) YEAR(%)(1) PER SHARE($) DATE 5% 10%
---- ---------- ------------ -------------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Jay D. Kranzler, M.D., Ph.D 277,440(3) 33.9% $1.625 8/29/07 $283,530 $718,523
Debby Jo Blank, M.D 101,415(3) 12.4% $1.625 8/29/07 $103,641 $262,647
</TABLE>
(1) Based upon options to purchase a total of 819,522 shares of Common Stock of
the Company granted during the fiscal year 1997.
(2) The potential realizable value is based upon the assumption that the fair
market value of the Common Stock appreciates at the annual rate shown
(compounded annually) from the date of grant until the end of the option
term. Actual realizable value, if any, on stock option exercises is
dependent on the future performance of the Common Stock and overall market
conditions, as well as the option holder's continued employment through the
vesting period.
(3) Such options vest 25% on the date of grant with the remainder vesting
ratably and daily over the four-year period following the date of grant.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
The following table sets forth certain information as of December 31,
1997, regarding options held by the Named Executive Officers. None of such
individuals exercised any options during the fiscal year ended December 31,
1997. There were no stock appreciation rights outstanding at December 31, 1997.
<TABLE>
<CAPTION>
NUMBER OF SHARES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS
FY-END(#) AS OF FY-END($)(1)
--------------------------- --------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Jay D. Kranzler, M.D., Ph.D. 2,233,243 1,069,524 - -
Debby Jo Blank, M.D. 836,642 399,270 - -
R. Michael Gendreau, M.D. 158,976 107,024 - -
</TABLE>
(1) All options held by each of the Named Executive Officers as of December 31,
1997 were out-of-the-money.
35.
<PAGE> 37
EQUITY INCENTIVE PLANS
1988 Nonqualified Stock Option Plan
In 1988, the Board adopted the Company's 1988 Nonqualified Stock Option
Plan (the "1988 Plan") pursuant to which there are currently reserved 572,000
shares of the Company's Common Stock for issuance to directors, officers, and
other key employees of and consultants to the Company. As of January 30, 1998,
the Company had issued and outstanding under the 1988 Plan options to purchase
an aggregate of 460,000 shares of Common Stock.
The 1988 Plan permits the granting of stock options that do not qualify
as incentive stock options within the meaning of Section 422 of the Internal
Revenue Code of 1996, as amended (the "Code"). The 1988 Plan is administered by
the Board which, as authorized by the 1988 Plan, has delegated such
administration to the Stock Option Committee.
The terms, including exercise price and duration of options, shall be as
determined by the Stock Option Committee. Stock options granted under the 1988
Plan are transferable under certain limited circumstances and generally expire
three months after the termination of an optionee's service to the Company.
Under the 1988 Plan, each nonemployee director of the Company, upon
becoming a director of the Company, shall be granted an option to purchase
10,000 shares of Common Stock of the Company. Moreover, each nonemployee
director shall automatically receive an annual option to purchase an additional
10,000 shares of Common Stock of the Company upon the first business day
following the date of each annual stockholder meeting. The stock option exercise
price shall in all cases be equal to the fair market value of the Company'
Common Stock on the date of grant.
1996 Equity Incentive Plan
In January 1996, the Board adopted the Company's 1996 Equity Incentive
Plan (the "1996 Plan") under which there are reserved 7,000,000 shares of the
Company's Common Stock which may be issued to directors, officers and key
employees of, and consultants and certain advisors to, the Company.
The 1996 Plan permits the granting of options intended to qualify as
"incentive stock options" within the meaning of Section 422 of the Code to
employees of the Company (including officers and employee directors) and the
granting of options that do not so qualify or nonstatutory stock options. In
addition, the 1996 Plan permits the granting of stock appreciation rights
("SARs") in connection with incentive or nonstatutory stock options. The 1996
Plan also permits the granting of stock bonuses and rights to purchase
restricted stock. (All permitted grants of options, SARs, stock bonuses and
rights to purchase restricted stock are sometimes hereinafter collectively
referred to as the "Stock Awards"). Pursuant to the 1996 Plan, no person shall
be eligible to be granted Stock Awards covering more than 3,050,000 shares of
Common Stock in any 12-month period. As of January 30, 1998, the Company had
issued and outstanding under the 1996 Plan options to purchase an aggregate of
6,301,597 shares of Common Stock.
The 1996 Plan is administered by the Board, which generally has the
power to perform such acts as the Board deems necessary or expedient to promote
the best interests of the Company which are not in conflict with the provisions
of the Plan, In addition, the Board has the power to construe and interpret the
1996 Plan and, subject to the provisions of the 1996 Plan to, among other
things, determine the persons to whom and the dates on which Stock Awards will
be granted, the type of Stock Award to be granted, the number of shares to be
subject to each Stock Award, the time or times during the term of each Stock
Award within which all or a portion of such Stock Award may be exercised, the
exercise price, the type of consideration and other terms of the Stock Award. As
authorized by the 1996 Plan, the Board has delegated administration of the 1996
Plan to the Stock Option Committee of the Board. The Board may abolish the Stock
Option Committee at any time and revest in the Board the administration of the
1996 Plan. As used herein with respect to the 1996 Plan, the "Board" refers to
the Stock Option Committee as well as to the Board itself.
36.
<PAGE> 38
The maximum term of options granted under the 1996 Plan is 10 years. The
aggregate fair market value of the Common Stock with respect to which incentive
stock options are first exercisable in any calendar year may not exceed
$100,000. Stock Awards granted under the 1996 Plan are generally nontransferable
and expire three months after the termination of an optionee's service to the
Company. In general, if an optionee is permanently disabled or dies during his
or her service to the Company, such person's option may be exercised up to 12
months following such disability and up to 18 months following such death.
The exercise price of incentive stock options granted under the 1996
Plan must be equal to at least the fair market value of the Common Stock on the
date of grant. In addition, the exercise price of incentive stock options
granted to any person who at the time of grant owns stock representing more than
10% of the total combined voting power of all classes of capital stock must be
at least 110% of the fair market value of such stock on the date of grant and
the term of such incentive stock option cannot exceed five years. The exercise
price of stock options that do not so qualify as incentive stock options (i.e.,
nonstatutory stock options) must be no less than 85% of the fair market value of
the Common Stock on the date of grant.
All Stock Awards granted under the 1996 Plan shall be in such form and
contain such terms and conditions as the Board shall deem appropriate. The
purchase price under any restricted stock purchase award shall not be less than
85% of the fair market value of the Common Stock of the date of grant.
NON-PLAN OPTIONS
The Company has, at various times, granted to employees and consultants
options to purchase shares of Common Stock outside of the Company's stock option
plans. Such options generally vest over a four year period. On January 30, 1998,
the Company had issued and outstanding, outside of the Company's stock option
plans, options to purchase an aggregate of 892,105 shares of Common Stock.
401(K) PLAN
The Company has established a tax-qualified employee savings and
retirement plan (the "401(k) Plan"). The 401(k) Plan provides that each
participant may contribute up to 10% of his or her pre-tax gross compensation
(up to a statutorily prescribed annual limit of $10,000 in 1998). Employees must
be twenty-one years old to participate and are eligible on the first day of the
quarter following six months as an employee of the Company. All amounts
contributed by employee participants and earnings on these contributions are
fully vested at all times. Employee participants may elect to invest their
contributions in various established funds.
EMPLOYMENT AGREEMENTS
On December 28, 1995, the Company entered into a five year employment
agreement with Dr. Kranzler, the Company's Chief Executive Officer, Chief
Financial Officer and Chief Scientific Officer. Dr. Kranzler's annual
compensation consists of base salary of $240,000, performance based bonuses of
up to an additional twenty-five percent (25%) of annual base salary and certain
options to purchase Common Stock of the Company, as described below.
In addition to his base salary and bonus, under his employment
agreement, Dr. Kranzler was granted an option to purchase 3,025,327 shares of
Common stock of the Company (which amount represented eight percent (8%) of the
Company's Common Stock on a fully diluted basis on the date of grant) at an
exercise price equal to $1.50 per share. The options vest twenty-five percent
(25%) immediately upon grant and thereafter ratably and daily over a four (4)
year period. Dr. Kranzler's options shall fully vest upon the occurrence of any
merger, consolidation, corporate reorganization or transfer of all or
substantially all of the assets of the Company and upon the termination without
cause of Dr. Kranzler's employment with the Company. In August 1997, Dr.
Kranzler was granted an option to purchase 277,440 at an exercise price of
$1.625 per share. As of January 30, 1998, options to purchase 2,284,194 shares
of Common Stock had vested.
On December 28, 1995, the Company entered into a five year employment
agreement with Dr. Debby Jo Blank, the Company's President and Chief Operating
Officer. Dr. Blank's annual compensation consists of base
37.
<PAGE> 39
salary of $210,000, performance based bonuses of up to an additional twenty-five
percent (25%) of annual base salary and certain options to purchase Common Stock
of the Company, as described below.
In addition to her base salary and bonus, under her employment
agreement, Dr. Blank was granted an option to purchase 1,134,497 shares of
Common Stock of the Company (which amount represented three percent (3%) of the
Company's Common Stock on a fully diluted basis on the date of grant) at an
exercise price equal to $1.50 per share. The options vest twenty-five percent
(25%) immediately upon grant and thereafter ratably and daily over a four (4)
year period. Dr. Blank's options shall fully vest upon the occurrence of any
merger, consolidation, corporate reorganization or transfer of all or
substantially all of the assets of the Company and upon the termination without
cause of Dr. Blank's employment with the Company. In August 1997, Dr. Blank was
granted an option to purchase 101,415 shares of Common Stock of the Company at
an exercise price of $1.625 per share. As of January 30, 1998, options to
purchase a total of 855,708 shares had vested.
In April 1996, the Company entered into an employment agreement with Dr.
Gendreau, the Company's Vice President, Research and Development, whereby Dr.
Gendreau will receive an annual base salary of $145,000. In addition, during
1996 Dr. Gendreau received $52,583 to offset the costs of relocating from
Seattle, Washington to San Diego, California. The Company also granted Dr.
Gendreau options to purchase up to 125,000 shares of the Company's Common Stock
at an exercise price of $2.019 per share. On January 1, 1998, Dr. Gendreau was
granted an option to purchase 50,000 shares of Common Stock of the Company at an
exercise price of $1.4375 per share. As of January 30, 1997, options to purchase
a total of 163,619 shares of Common Stock had vested. In the event that Dr.
Gendreau's employment with the Company is terminated by the Company without
cause due to a corporate merger or acquisition, Dr. Gendreau will receive
severance pay equal to $72,500.
LIMITATIONS ON DIRECTORS' AND EXECUTIVE OFFICERS' LIABILITY AND INDEMNIFICATION
The Company's Amended and Restated Certificate of Incorporation (the
"Certificate of Incorporation") provides that directors of the Company will not
be personally liable to the Company or its stockholders for monetary damages for
any breach of fiduciary duty as a director, except to the extent that such
exemption from liability or limitation thereof is not permitted by the Delaware
General Corporation Law as currently in effect or as the same is subsequently
amended. Such limitation of 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.
The Company's Bylaws, as amended (the "Bylaws"), provide that the
Company will indemnify its directors and executive officers and may indemnify
its other officers, employees and agents to the fullest extent permitted by
Delaware law. The Company is also empowered under its Bylaws to enter into
indemnification contracts with its directors and officers and to purchase
insurance on behalf of any person it is required or permitted to indemnify.
Pursuant to this provision, the Company has entered into indemnification
agreements with each of its directors and executive officers.
38.
<PAGE> 40
CERTAIN TRANSACTIONS
In October 1997, the Company completed a private placement of 3,851,029
shares of its Common Stock with certain accredited investors at a purchase price
of $1.50 per share, resulting in net proceeds to the Company of approximately
$5.6 million. Merrill Weber & Co. acted as a non-exclusive placement agent for
the Company and received $76,593 as a placement agent fee. Paramount Capital
Asset Management, Inc., the Company's second largest stockholder, is the
investment manager of Aries Domestic Fund, L.P. and The Aries Trust,
stockholders that participated in the private placement and who collectively
purchased 1,333,333 shares of the Company's Common Stock and received $120,000
in placement agent fees.
Mr. Richard Crooks, Jr., a director of the Company, is a director of and
consultant to, Allen & Company Incorporated, as a principal stockholder of the
Company. As of January 30, 1998, Mr. Crooks beneficially held approximately 2.9%
of the Company's Common Stock.
Allen & Company Incorporated is compensated for investment banking
services rendered to the Company under a one year consulting agreement
specifying monthly payments of $5,000. In 1997, the Company paid Allen & Company
Incorporated a total of $40,000 under this agreement.
The Company has also entered into an employment agreement with its three
executive officers, as described under the caption "Management--Employment
Agreements." The Company has granted stock options to certain directors and
executive officers of the Company. See "Management--Executive Compensation.
The Company's Bylaws provide that the Company will indemnify its
directors and executive officers and may indemnify its other officers, employees
and other agents to the fullest extent permitted by Delaware law. The Company is
also empowered under its Bylaws to enter into indemnification contracts with its
directors and officers and to purchase insurance on behalf of any person whom it
is required or permitted to indemnify. Pursuant to this provision, the Company
has entered into indemnity agreements with each of its directors and officers
and currently maintains directors and officers insurance coverage.
39.
<PAGE> 41
PRINCIPAL STOCKHOLDERS AND SELLING SECURITYHOLDER
The following table sets forth certain information known to the Company
with respect to beneficial ownership of the Company's Common Stock as of January
30, 1998 by (i) each stockholder known by the Company to be the beneficial owner
of more than 5% of a class of the Company's Common Stock, (ii) each of the
Company's directors, (iii) each Named Executive Officer, and (iv) all executive
officers and directors as a group.
<TABLE>
<CAPTION>
PERCENTAGE BENEFICIALLY OWNED
-----------------------------
OFFICERS, DIRECTORS AND 5% SHARES BENEFICIALLY BEFORE AFTER
STOCKHOLDERS(1) OWNED(2) OFFERING(2) OFFERING(2)
-------------------------- ------------------- ----------- -----------
<S> <C> <C> <C>
Allen & Company Incorporated 5,727,809(3) 14.7% 14.7%
711 Fifth Avenue
New York, New York 10022
Paramount Capital Asset Management, Inc. 5,190,468(4) 13.4% 13.4%
787 Seventh Avenue, 44th Floor
New York, New York 10019
Jay D. Kranzler 2,616,339(5) 6.4% 6.4%
Debby Jo Blank 1,119,084(6) 2.8% 2.8%
Michael Gendreau 199,155(7) * *
Richard M. Crooks, Jr. 1,131,897(8) 2.9% 2.9%
Jack Vaughn 56,000(9) * *
Philip J. O'Reilly 84,625(10) * *
All Directors and Named Executive
Officers as a Group (8 persons) 4,667,583(11) 11.1% 11.1%
SELLING SECURITYHOLDER
Spear Leeds & Kellogg 350,000 * 0%(12)
120 Broadway
New York, NY 10271
</TABLE>
- ------------------------
* less than one percent
(1) This table is based upon information supplied by officers, directors and
principal stockholders and Schedule 13Ds filed with the Securities and
Exchange Commission (the "Commission"). Except as shown otherwise in the
table, the address of each stockholder listed is in care of the Company at
4350 Executive Drive, Suite 325, San Diego, California 92121.
(2) Except as otherwise indicated in the footnotes of this table and pursuant
to applicable community property laws, the persons named in the table have
sole voting and investment power with respect to all shares of Common
Stock. Beneficial ownership is determined in accordance with the rules of
the Commission and generally includes voting or investment power with
respect to securities. Shares of Common Stock subject to options or
warrants exercisable within 60 days of January 30, 1998 are deemed
outstanding for computing the percentage of the person or entity holding
such options or warrants but are not deemed outstanding for computing the
percentage of any other person. Percentage of beneficial ownership is
based upon 38,652,003 shares of the Company's Common Stock outstanding as
of January 30, 1998.
40.
<PAGE> 42
(3) This information was derived from information provided to the Company by
Allen & Company Incorporated. Includes warrants to purchase 356,980 shares
of Common Stock exercisable within 60 days of January 30, 1998.
(4) Dr. Lindsay A. Rosenwald is the sole shareholder of Paramount Capital
Asset Management, Inc. ("Paramount Capital"). Paramount Capital is the
general partner of Aries Domestic Fund, L.P., a limited partnership
incorporated in Delaware ("Aries Domestic") and the investment manager of
The Aries Trust, a Cayman Islands trust ("Aries Trust"). Includes warrants
to purchase 37,500 shares of Common Stock held by Aries Domestic and
warrants to purchase 87,500 shares of Common Stock held by The Aries
Trust, in each case such warrants being exercisable within 60 days of
January 30, 1998. Of the 5,190,468 shares of Common Stock (including
warrants) indicated as beneficially held, Paramount Capital shares voting
and dispositive power with the following persons or entities: Dr.
Rosenwald with respect to 5,190,468 of the shares; Aries Domestic with
respect to 1,623,617 of the shares; and The Aries Trust with respect to
3,566,851 of the shares.
(5) Includes 2,386,095 shares of Common Stock issuable pursuant to options
exercisable within 60 days of January 30, 1998. Also includes 220,244
shares of Common Stock held by the Company's 401(k) plan for which Dr.
Kranzler, as co-trustee of the 401(k) plan, has voting rights to such
shares.
(6) Includes 893,840 shares of Common Stock issuable pursuant to options
exercisable within 60 days of January 30, 1998. Also includes 220,244
shares of Common Stock held by the Company's 401(k) plan for which Dr.
Blank, as co-trustee of the 401(k) plan, has voting rights to such shares.
(7) Includes 199,155 shares of Common Stock issuable pursuant to options
exercisable within 60 days of January 30, 1998.
(8) Includes 40,000 shares of Common Stock issuable pursuant to options
exercisable within 60 days of January 30, 1998. Also includes 692,829
shares of Common Stock and presently exercisable warrants to purchase
6,667 shares of Common Stock held by Allen & Company Incorporated, in
which Mr. Crooks has a pecuniary interest pursuant to an arrangement with
Allen & Company Incorporated.
(9) Includes 55,000 shares of Common Stock issuable pursuant to options
exercisable within 60 days of January 30, 1998.
(10) Includes 40,000 shares of Common Stock issuable pursuant to options or
other rights exercisable within 60 days of January 30, 1998.
(11) Includes 3,507,276 shares of Common Stock issuable pursuant to outstanding
options and warrants exercisable within 60 days of January 30, 1998. Also
includes 220,244 shares of Common Stock held by the Company's 401(K) plan
for which certain individuals in the group exercise voting power.
(12) Assumes all of the Shares offered hereby are sold by the Selling
Securityholder.
41.
<PAGE> 43
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company is authorized to issue 60,000,000 shares of Common Stock,
$.02 par value per share, and 15,000,000 shares of undesignated Preferred Stock,
$.02 par value per share.
COMMON STOCK
As of January 30, 1998, there were issued and outstanding 38,652,003
shares of the Company's Common Stock held by approximately 1,023 persons.
Holders of Common Stock are entitled to one vote for each share held of record
on all matters submitted to a vote of shareholders. Holders of Common Stock are
entitled to receive ratably such dividends, if any, as may be declared by the
Board of Directors out of funds legally available for the payment of dividends.
See "Dividend Policy." In the event of a liquidation, dissolution or winding up
of the Company, holders of Common Stock are entitled to share ratably in all
assets remaining after payment of liabilities. Holders of Common Stock have no
preemptive rights or rights to convert their Common Stock into any other
securities. There are no redemption or sinking fund provisions applicable to the
Common Stock. All outstanding shares of Common Stock are validly issued, fully
paid and nonassessable
PREFERRED STOCK
The Board has the authority, without further stockholder action, to
issue up to 15,000,000 shares of Preferred Stock in one or more series of any
number of shares, provided, however, that the number of shares so issued shall
not exceed in the aggregate the number authorized. Each series of Preferred
Stock may have such designations, powers, preferences and privileges and such
qualification, limitations or restrictions as shall be designated by the Board.
The issuance of Preferred Stock by the Company could adversely affect the voting
power of holders of Common Stock and the likelihood that such holders will
receive dividend payments and payments upon liquidation, and may have the effect
of delaying, deterring or preventing a change of control of the Company, which
could have a depressive effect on the market price of the Company's Common
Stock. As of January 30, 1998 there was no Preferred Stock issued and
outstanding and the Company has no present plans to issue any shares of
Preferred Stock.
1996 WARRANTS
As of January 30, 1998 there were 2,880,399 outstanding warrants to
purchase Common Stock of the Company, which warrants have been registered under
the Securities Act (the "1996 Warrants"). The Warrants were issued in October
1996 as a part of a "Unit," consisting of two shares of Common Stock of the
Company and one Warrant to purchase one share of Common Stock of the Company.
The 1996 Warrants were issued in registered form under a Warrant Agreement,
dated as of September 18, 1996 between the Company and American Stock Transfer
and Trust Company to serve as the warrant agent for the 1996 Warrants.
Under certain circumstances, all or any portion of the 1996 Warrants are
redeemable, in whole or in part, at the option of the Company at a redemption
price of $0.10 per 1996 Warrant (the date of such redemption being the "1996
Redemption Date"). Any 1996 Warrant so called for redemption may be exercised
until the close of business on the fifth business day preceding the 1996
Redemption Date specified in such notice of redemption.
The 1996 Warrants are fully exercisable as of the date hereof and will
generally expire in October 1, 2001, unless earlier exercised.
Of the 2,880,399 1996 Warrants outstanding, 2,755,399 are listed on the
Nasdaq SmallCap Market under the symbol CYPBZ.
42.
<PAGE> 44
COMPENSATION WARRANTS
As of January 30, 1998, there were warrants outstanding to purchase
154,000 shares of Common Stock of the Company at an exercise price of $1.875 per
share, which warrants were originally issued by the Company to directors,
officers, employees of and consultants to the Company as compensation for
services rendered to the Company (the "Compensation Warrants"). The Compensation
Warrants are fully exercisable as of the date hereof and will generally expire
in June 2001, unless earlier exercised.
Holders of the Compensation Warrants generally may exercise such
warrants provided that the holder has been, from the original issue date up
through and including the time of exercise, continuously providing services as a
director, officer, employee or consultant to the Company or one of its
subsidiaries or affiliates.
The Company is obligated to register pursuant to the Securities Act the
shares of Common Stock underlying the Compensation Warrants. The Company shall
undertake to keep any such registration statement and prospectus filed with the
Commission to register the Compensation Warrants effective for the life of the
Compensation Warrants. The Company shall bear all expenses of registration of
the shares underlying the Compensation Warrants.
OTHER WARRANTS
Also, as of January 30, 1998, there were warrants outstanding to
purchase 300,000 shares of Common Stock of the Company at an exercise price of
$2.875 per share, which warrants were originally issued by the Company in April
1994 to Allen & Company Incorporated as a placement agent fee in connection with
a private placement of 7% Convertible Debentures of the Company. The warrants
are fully exercisable as of the date hereof and will expire in April 1999 unless
earlier exercised.
NASDAQ SMALLCAP MARKET LISTING
The Company's Common Stock (and its registered Warrants) are traded on
the Nasdaq SmallCap Market. The current rules of the National Association of
Securities Dealers, Inc. effectively preclude the trading or quotation through
the Nasdaq SmallCap Market of any securities of an issuer that has issued
securities or taken other corporation action that would have the effect of
nullifying, restricting or disparately reducing the per share voting rights of
holders of an outstanding class or classes of equity securities registered under
Section 12 of the Exchange Act. The Company does not intend to issue any
additional shares of any stock that would make it ineligible for inclusion on
the Nasdaq SmallCap Market. However, in the event the Company issues any
additional securities that cause it to become ineligible for continued inclusion
on the Nasdaq SmallCap Market, such ineligibility would be likely to reduce
materially the liquidity of an investment in the Common Stock of the Company and
would likely depress its market value below that which would otherwise prevail.
CHANGE OF CONTROL PROVISIONS AND DELAWARE ANTI-TAKEOVER LAW
Certain provisions of the Company's Certificate of Incorporation and
Bylaws, may have the effect of preventing, discouraging or delaying transactions
involving an actual or potential change in the control of the Company (including
transactions in which stockholders might otherwise receive a premium for their
shares over then current prices) and may maintain the incumbency of the Board of
Directors and management. 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 the Company. In addition, the Company's Bylaws, as
amended, limit the ability of stockholders of the Company to raise matters or
nominate persons to serve as members of the Company's Board of Directors at a
meeting of stockholders without giving advance notice. The Company's Board of
Director's is presently composed of five (5) members divided into two classes of
two directors each and one class consisting of one director. Each class of
directors is elected to a three-year term of office. The classification system
of electing directors may tend to discourage a third party from making a tender
offer or otherwise attempting to obtain control of the Company and may maintain
the incumbency of the Board of Directors, as the classification of the Board of
Directors generally increases the difficulty of replacing a majority of the
directors. The Company's Certificate of Incorporation also eliminates the right
of stockholders to act by written consent without a meeting. Special meetings of
the stockholders of the Company may be called only by the Chairman of the Board,
the Chief Executive Officer, or by
43.
<PAGE> 45
the Board of Directors pursuant to a resolution adopted by a majority of the
total number of authorized directors. The Certificate of Incorporation and
Bylaws do not provide for cumulative voting in the election of directors.
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law ("Section 203") regulating corporate takeovers. In
general, Section 203 prohibits certain Delaware corporations, including those
whose securities are listed on the American Stock Exchange, from engaging, under
certain circumstances, in a "business combination" (which includes a merger,
sale of more than 10% of the corporation's assets or other transactions
resulting in a financial benefit to the stockholder) with any "interested
stockholder" (a stockholder who, together with affiliates and associates, owns
(or, if an affiliate of the corporation, within the three previous years did
own) 15% or more of the corporation's voting stock without the prior approval of
the corporation's Board of Directors) for three years following the date that
such stockholder became an "interested stockholder," unless the business
combination is approved in a prescribed manner. A Delaware corporation may "opt
out" of Section 203 with an express provision in its original certificate of
incorporation or an express provision in its certificate of incorporation or
bylaws resulting from a stockholders' amendment approved by at least a majority
of the outstanding voting shares. The Company has not "opted out" of the
provisions of Section 203.
TRANSFER AGENT AND REGISTRAR
American Stock Transfer & Trust Company is the transfer agent and
registrar for the Company's Common Stock.
44.
<PAGE> 46
PLAN OF DISTRIBUTION
The Company has been advised that the Selling Securityholder or
pledgees, donees, transferees of or other successors in interest to the Selling
Securityholder may sell Shares from time to time in transactions on the Nasdaq
SmallCap Market, in privately negotiated transactions or a combination of such
methods of sale, at fixed prices which may be changed, at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices or at negotiated prices. The Selling Securityholder may effect such
transactions by selling the Shares to or through broker-dealers, and such
broker-dealers may receive compensation in the form of discounts, concessions or
commissions from the Selling Securityholder or the purchasers of the Shares for
whom such broker-dealers may act as agent or to whom they sell as principal, or
both (which compensation to a particular broker-dealer might be in excess of
customary commission).
At any time a particular offer of Shares is made, to the extent
required, a supplemental Prospectus will be distributed which will set forth the
number of Shares offered and the terms of the offering including the name or
names of any underwriters, dealers or agents, the purchase price paid by any
underwriter for the Shares purchased from the Selling Securityholder, any
discounts, commission and other items constituting compensation from the Selling
Securityholder and any discounts, concessions or commissions allowed or
reallowed or paid to dealers.
The Selling Securityholder and any broker-dealers who act in connection
with the sale of Shares hereunder may be deemed to be "underwriters" as that
term is defined in the Securities Act, and any commissions received by them and
profit on any resale of the Shares as principal might be deemed to be
underwriting discounts and commissions under the Securities Act.
Any or all of the sales or other transactions involving the Shares
described above, whether effected by the Selling Securityholder, any
broker-dealer or others, may be made pursuant to this Prospectus. In addition,
any Shares that qualify for sale pursuant to Rule 144 under the Act may be sold
under Rule 144 rather than pursuant to this Prospectus.
In order to comply with the securities laws of certain states, if
applicable, the Shares may be sold in such jurisdictions only through registered
or licensed brokers or dealers. In addition, in certain states the Shares may
not be sold unless they have been registered or qualified for sale or an
exemption from registration or qualification requirements is available and is
complied with.
Under applicable rules and regulations under the Exchange Act, any
person engaged in the distribution of the Shares may not simultaneously engage
in market making activities with respect to the Company's Common Stock for a
period of two business days prior to the commencement of such distribution. In
addition and without limiting the foregoing, the Selling Securityholder will be
subject to applicable provisions of the Exchange Act and the rules and
regulations thereunder, including without limitation, Regulation M under the
Exchange Act, which may limit the timing of purchases and sales of Shares by the
Selling Securityholder.
Notwithstanding the foregoing, broker-dealers who are qualifying
registered market makers on the National Association of Securities Dealers
Automated Quotation System (the "Nasdaq") may engage in passive market making
transactions in the Common Stock of the Company on the Nasdaq Stock Market in
accordance with Regulation M. The passive market making transactions may be
undertaken during certain prescribed time periods and must comply with
applicable price and volume limits and be identified as such. In general, a
passive market maker may display its bid at a price not in excess of the highest
independent bid for the security. If all independent bids are lowered below the
passive market maker's bid, however, such bid must then be lowered when certain
purchase limits are exceeded. Net purchases by a passive market maker on each
day are generally limited to a specified percentage of the passive market
maker's average daily trading volume in the Common Stock of the Company during a
prior period and must be discontinued when such limit is reached. Generally,
passive market making may stabilize the market price of the Common Stock of the
Company only for the purpose of preventing or retarding a decline in the market
price of the Company's Common Stock, but may not stabilize price that is the
result of activity that is fraudulent, manipulative or deceptive under the
federal securities laws or regulations promulgated thereunder.
All costs and expenses associated with registering the Shares being
offered hereunder with the Securities and Exchange Commission will be paid by
the Company. Such costs and expenses are estimated to be $28,000.
45.
<PAGE> 47
The Company and the Selling Securityholder may agree to indemnify
certain persons including broker-dealers or others, against certain liabilities
in connection with any offering of the Shares including liabilities under the
Securities Act.
LEGAL MATTERS
The validity of the issuance of the Common Stock offered hereby will be
passed upon for the Company by Cooley Godward LLP, San Diego, California.
EXPERTS
The consolidated financial statements of Cypress Bioscience, Inc. at
December 31, 1995 and 1996 and for each of the three years in the period ended
December 31, 1996 appearing in this Prospectus and Registration Statement, have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon appearing elsewhere herein, and are included in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended, and in accordance therewith files
annual and quarterly reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company may be inspected and
copied at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Room 1024, Judiciary Plaza, Washington, D.C. 20549, and at
the Commission's following Regional Offices: Chicago Regional Office, 500 West
Madison Street, Suite 1400, Northwest Atrium Center, Chicago, Illinois 60661;
and New York Regional Office, Seven World Trade Center, Suite 1300, New York,
New York 10048. Copies of such material can also be obtained at prescribed rates
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Judiciary Plaza, Washington, D.C. 20549. The Common Stock of the Company is
quoted on the Nasdaq SmallCap Market. Reports and other information concerning
the Company may be inspected at the National Association of Securities Dealers,
Inc. at 1735 K Street, N.W., Washington, D.C. 20006.
The Company has filed with the Commission a Registration Statement on
Form S-1 under the Securities Act, with respect to the Common Stock offered
hereby. As permitted by the rules and regulations of the Commission, this
Prospectus, which is a part of the Registration Statement, omits certain
information, exhibits, schedules and undertakings set forth in the Registration
Statement. For further information pertaining to the Company and the Common
Stock offered hereby, reference is made to such Registration Statement and the
exhibits and schedules thereto. Statements contained in this Prospectus as to
the contents or provisions of any contract or other document referred to herein
are not necessarily complete, and in each instance reference is made to the copy
of such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. A copy of the Registration Statement may be inspected without charge
at the office of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, and at the Commission's regional offices located at the Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and
Seven World Trade Center, 13th Floor, New York, New York 10048. Copies of all or
any part of the Registration Statement may be obtained from such offices upon
the payment of the fees prescribed by the Commission. In addition, registration
statements and certain other filings made with the Commission through its
Electronic Data Gathering, Analysis and Retrieval ("EDGAR") system are publicly
available through the Commission's web site on the Internet's World Wide Web,
located at http://www.sec.gov. The Registration Statement, including all
exhibits thereto and amendments thereof, was filed with the Commission through
EDGAR.
PROSORBA(R) Column and Cyplex(TM) are registered trademarks of the
Company. All other brand names or trademarks appearing in this Prospectus are
the property of their respective holders.
46.
<PAGE> 48
CYPRESS BIOSCIENCE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Report of Ernst & Young LLP, Independent Auditors ..................................... F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996 and as of
September 30, 1997 (unaudited)....................................................... F-3
Consolidated Statements of Operations for the Years Ended December 31, 1994,
1995 and 1996 and for the Nine Months Ended September 30, 1996 and 1997 (unaudited).. F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the
Years Ended December 31, 1994, 1995 and 1996 and for the Nine Months Ended
September 30, 1996 and 1997 (unaudited).............................................. F-5
Consolidated Statements of Cash Flows for the Years ended December 31, 1994,
1995 and 1996 and for the Nine Months Ended September 30, 1996 and 1997 (unaudited).. F-6
Notes to Consolidated Financial Statements............................................. F-7
</TABLE>
F-1.
<PAGE> 49
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
CYPRESS BIOSCIENCE, INC.
We have audited the accompanying consolidated balance sheets of Cypress
Bioscience, Inc. as of December 31, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 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 upon 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Cypress
Bioscience, Inc. as of December 31, 1996 and 1995, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
San Diego, California
January 17, 1997
F-2.
<PAGE> 50
CYPRESS BIOSCIENCE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------------------------ September 30,
1995 1996 1997
------------ ------------ -------------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,009,878 $ 8,045,508 $ 2,544,198
Short-term investments -- 2,890,160 1,923,076
Accounts receivable:
Trade, net of allowance for doubtful
accounts of $181,377 in 1995,
$200,312 in 1996, and $200,312 in
1997 (unaudited) 23,850 344,041 371,508
Other 533,989 159,954 152,631
Inventories 1,148,506 973,767 787,752
Prepaid expenses 143,755 171,231 125,270
------------ ------------ ------------
Total current assets 2,859,978 12,575,661 5,904,435
Property and equipment, net 1,425,020 2,351,928 2,106,621
Convertible debenture issuance costs, net 278,711 33,487 27,663
============ ============ ============
Total assets $ 4,563,709 $ 14,961,076 $ 8,038,719
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 892,501 $ 999,442 $ 645,913
Accrued compensation 456,939 485,751 331,744
Accrued liabilities 672,488 902,090 1,220,812
Senior convertible debentures 1,500,000 -- --
Current portion of notes payable 26,821 27,208 6,637
------------ ------------ ------------
Total current liabilities 3,548,749 2,414,491 2,205,106
Convertible debentures 1,345,000 400,000 400,000
Notes payable, net of current portion 25,972 12,020 8,843
Accrued compensation 168,750 -- --
Commitments and contingencies
Stockholders' equity:
Common stock, $.02 par value;
authorized 60,000,000 shares;
issued and outstanding, 18,693,595,
34,573,111 and 34,636,067 shares at
December 31, 1995, 1996, and
September 30, 1997 (unaudited),
respectively 373,872 691,462 692,721
Additional paid-in capital 43,143,000 70,062,301 70,205,463
Deferred compensation -- (1,313,276) (763,086)
Accumulated deficit (44,041,634) (57,305,922) (64,710,328)
------------ ------------ ------------
Total stockholders' equity (524,762) 12,134,565 5,424,770
============ ============ ============
Total liabilities and stockholders' $ 4,563,709 $ 14,961,076 $ 8,038,719
============ ============ ============
</TABLE>
See accompanying notes.
F-3.
<PAGE> 51
CYPRESS BIOSCIENCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31, Nine Months Ended September 30,
----------------------------------------------- -------------------------------
1994 1995 1996 1996 1997
------------ ------------ ------------ ------------ ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenue:
Product sales $ 4,918,126 $ 1,104,224 $ 1,967,976 $ 1,277,549 $ 2,207,631
Revenue under distribution
agreement -- 3,000,000 -- -- --
Grant revenue -- -- -- -- 179,197
------------ ------------ ------------ ------------ ------------
4,918,126 4,104,224 1,967,976 1,277,549 2,386,828
Costs and expenses:
Production costs 2,571,168 2,041,422 1,482,563 837,192 1,316,045
Sales and marketing 3,550,037 819,907 794,356 429,417 1,015,696
Research and development 2,107,694 3,219,324 4,002,968 2,140,659 5,430,987
General and administrative 2,694,489 2,626,817 3,529,378 2,641,048 2,300,604
Acquired in-process
research and development -- 625,000 5,146,943 -- --
Restructuring -- 644,656 493,712 460,090 --
Debt conversion -- 810,386 183,688 183,688 --
------------ ------------ ------------ ------------ ------------
10,923,388 10,787,512 15,633,608 6,692,094 10,063,332
Other income (expense):
Interest income 71,986 118,994 458,070 343,632 296,186
Interest expense (218,036) (261,958) (56,726) (45,835) (24,088)
------------ ------------ ------------ ------------ ------------
(146,050) (142,964) 401,344 297,797 272,098
------------ ------------ ------------ ------------ ------------
Net loss $ (6,151,312) $ (6,826,252) $(13,264,288) $ (5,116,748) $ (7,404,406)
============ ============ ============ ============ ============
Net loss per share $ (0.40) $ (0.39) $ (0.45) $ (0.19) $ (0.21)
============ ============ ============ ============ ============
Shares used in computing
net loss per share 15,243,860 17,598,735 29,206,470 27,649,052 34,592,569
============ ============ ============ ============ ============
</TABLE>
See accompanying notes.
F-4.
<PAGE> 52
CYPRESS BIOSCIENCE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional
---------------------- Paid-in Deferred Accumulated
Shares Par Value Capital Compensation Deficit Total
---------- --------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1993 15,072,472 $301,449 $35,602,346 $ -- $(31,064,070) $ 4,839,725
Stock options exercised 1,000 20 2,605 -- -- 2,625
Stock warrants exercised 6,500 130 12,058 -- -- 12,188
Stock warrants issued
for services -- -- 483,000 -- -- 483,000
Stock issued to match
401(k) Contributions 70,040 1,401 159,677 -- -- 161,078
Stock issued in private
Placement 1,850,000 37,000 2,596,415 -- -- 2,633,415
Net loss -- -- -- -- (6,151,312) (6,151,312)
---------- -------- ----------- ----------- ------------ ------------
Balance December 31, 1994 17,000,012 340,000 38,856,101 -- (37,215,382) 1,980,719
Stock issued for services 61,141 1,223 86,322 -- -- 87,545
Stock issued to match
401(k) Contributions 65,125 1,303 160,036 -- -- 161,339
Stock issued for minority
Interest in CELx 312,500 6,250 618,750 -- -- 625,000
Stock issued for debt
Conversion 1,254,817 25,096 3,421,791 -- -- 3,446,887
Net loss -- -- -- -- (6,826,252) (6,826,252)
---------- -------- ----------- ----------- ------------ ------------
Balance December 31, 1995 18,693,595 373,872 43,143,000 -- (44,041,634) (524,762)
Stock options exercised 47,500 950 84,050 -- -- 85,000
Stock issued for services 31,765 635 54,365 -- -- 55,000
Stock issued for debenture
Interest 12,005 240 28,963 -- -- 29,203
Stock issued for debt
Conversion 1,435,955 28,719 2,402,713 -- -- 2,431,432
Stock issued to match
401(k) Contributions 50,791 1,016 100,910 -- -- 101,926
Stock issued in January
1996 Private placement 8,540,702 170,814 11,736,057 -- -- 11,906,871
Stock issued in October
1996 Private placement 3,468,000 69,360 6,215,554 -- -- 6,284,914
Stock issued in conjunction
with the Acquisition of
PRP, Inc. 2,292,798 45,856 4,539,740 -- -- 4,585,596
Deferred compensation -- -- 1,756,949 (1,756,949) -- --
Amortization of deferred
Compensation -- -- -- 443,673 -- 443,673
Net loss -- -- -- -- (13,264,288) (13,264,288)
---------- -------- ----------- ----------- ------------ ------------
Balance December 31, 1996 34,573,111 691,462 70,062,301 (1,313,276) (57,305,922) 12,134,565
Stock options exercised
(unaudited) 20,000 400 37,100 -- -- 37,500
Stock issued to match 401(k)
Contributions (unaudited) 42,956 859 87,738 -- -- 88,597
Deferred compensation
related to stock Options
(unaudited) -- -- 18,324 7,219 -- 25,543
Amortization of deferred
Compensation (unaudited) -- -- -- 542,971 -- 542,971
Net loss (unaudited) -- -- -- -- (7,404,406) (7,404,406)
---------- -------- ----------- ----------- ------------ ------------
Balance September 30, 1997
(unaudited) 34,636,067 $692,721 $70,205,463 $ (763,086) $(64,710,328) $ 5,424,770
========== ======== =========== =========== ============ ============
</TABLE>
See accompanying notes.
F-5.
<PAGE> 53
CYPRESS BIOSCIENCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------- -------------------------------
1994 1995 1996 1996 1997
----------- ----------- ------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(6,151,312) $(6,826,252) $(13,264,288) $ (5,116,748) $(7,404,406)
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation and amortization 325,549 373,306 182,845 132,647 352,482
Acquired in-process research and development -- 625,000 5,146,943 -- --
Amortization of deferred compensation -- -- 443,673 337,651 542,971
Common stock issued for service and expenses 161,078 248,884 186,129 87,138 88,597
Debt conversion expense -- 810,386 183,688 183,688 --
Restructuring expense -- 644,656 -- -- --
Loss (gain) on disposal of property and equipment -- 23,437 (11,110) (11,110) 1,094
Minority interest (3,436) -- -- -- --
Changes in operating assets and liabilities, net of
effects from acquisition of PRP, Inc.
Accounts receivable, net 2,228,102 394,549 (320,191) (354,402) (27,467)
Other receivables (14,634) 30,034 (111,020) (128,893) (1,677)
Inventories (159,292) 345,806 174,739 (135,462) 186,015
Prepaid expenses 174,232 64,805 39,655 (204,991) 45,961
Accounts payable and accrued expenses (1,410,290) 345,259 (94,678) (1,215,004) (163,271)
----------- ----------- ------------ ------------ -----------
Net cash used by operating activities (4,850,003) (2,920,130) (7,443,615) (6,425,486) (6,379,701)
INVESTING ACTIVITIES
Purchase of equipment (549,486) (714,947) (997,602) (842,243) (105,630)
Proceeds from sale of property and equipment -- 30,393 36,735 36,735 3,185
Purchase (sale) of short-term investments -- -- (2,890,160) -- 967,084
Acquisition of PRP, Inc., net of $83,399
cash acquired -- -- (361,029) -- --
----------- ----------- ------------ ------------ -----------
Net cash (used by) provided by operating activities (549,486) (684,554) (4,212,056) (805,508) 864,639
FINANCING ACTIVITIES
Net proceeds from issuance of common stock 2,648,228 -- 18,276,785 12,099,380 37,500
Proceeds from issuance of convertible debentures 4,245,000 1,000,000 500,000 500,000 --
Payment of capital lease obligation and
notes payable -- (22,140) (13,565) (18,706) (23,748)
Notes payable, net (12,853) (11,812) -- -- --
Debt issuance costs (93,853) (22,102) (71,919) (71,919) --
----------- ----------- ------------ ------------ -----------
Net cash provided by financing activities 6,786,522 943,946 18,691,301 12,508,755 13,752
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,387,033 (2,660,738) 7,035,630 5,277,761 (5,501,310)
Cash and cash equivalents at beginning of the period 2,283,583 3,670,616 1,009,878 1,009,878 8,045,508
=========== =========== ============ ============ ===========
Cash and cash equivalents at end of the period $ 3,670,616 $ 1,009,878 $ 8,045,508 $ 6,287,639 $ 2,544,198
=========== =========== ============ ============ ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 11,824 $ 322,968 $ 14,681 $ 10,682 $ 33,383
=========== =========== ============ ============ ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES
Stock issued for debt conversion $ -- $ 2,586,000 $ 2,351,607 $ 2,351,607 $ --
=========== =========== ============ ============ ===========
</TABLE>
See accompanying notes.
F-6.
<PAGE> 54
CYPRESS BIOSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to December 31, 1996 and pertaining to September 30,
1997 and the nine-month periods ended September 30, 1996 and 1997 is unaudited)
1. FORMATION AND BUSINESS OF THE COMPANY
Cypress Bioscience, Inc. ("Cypress" or the "Company") researches,
develops, manufactures and markets medical devices and therapeutics for the
treatment of certain types of immune disorders and is engaged in the development
of novel therapeutic agents for the treatment of blood platelet disorders. The
Company's first product, the PROSORBA(R) column, a medical device, treats a
patient's defective immune system so that it can more effectively respond to
certain diseases. Through its acquisition of PRP, Inc. in November 1996, the
Company acquired rights to Cyplex(TM) (Infusible Platelet Membranes), a platelet
alternative, which is positioned to become an alternative for traditional
platelet transfusions.
The Company commenced business activities in January 1982. The U.S. Food
and Drug Administration ("FDA") approved the PROSORBA(R) column for commercial
sale in December 1987 for the treatment of patients with idiopathic
thrombocytopenic purpura ("ITP"), an immune-related bleeding disorder. The
Company continues to devote most of its efforts to obtaining FDA marketing
approval for the use of the PROSORBA(R) column for the treatment of additional
autoimmune diseases as well as to the continued development of Cyplex(TM)
(Infusible Platelet Membranes), a platelet alternative. In January 1998 the
Company announced that its Phase III pivotal study of the PROSORBA(R) column in
the treatment of RA was stopped. The study was halted based on the
recommendation of an independent Data Safety and Monitoring Board (DSMB) after
an analysis of the available data showed that the PROSORBA(R) column had
achieved both statistically significant efficacy and favorable safety results.
Clinical trials for certain platelet disorders are being planned for 1998.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All material intercompany accounts
and transactions have been eliminated.
Interim Financial Information (Unaudited)
The financial statements at September 30, 1997 and for the nine-month
periods ended September 30, 1996 and 1997 are unaudited, but include all
adjustments (consisting only of normal recurring adjustments) which management
considers necessary for a fair statement of the financial position at such dates
and the operating results and cash flows for those periods. Results for interim
periods are not necessarily indicative of results for the entire year or any
future periods.
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 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.
Cash and Cash Equivalents
The Company considers all investments with an original maturity of three
months or less when purchased to be cash equivalents. Cash equivalents primarily
represent funds invested in a money market fund whose cost approximates market
value.
F-7.
<PAGE> 55
CYPRESS BIOSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to December 31, 1996 and pertaining to September 30,
1997 and the nine-month periods ended September 30, 1996 and 1997 is unaudited)
Inventories
Inventories are stated at weighted average cost, determined on the
first-in, first-out method, but not in excess of net realizable value.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is provided
using the straight-line method over useful lives of three to five years, and
leasehold improvements are amortized over the term of the related lease.
Convertible Debenture Issuance Costs
Convertible debenture issuance costs are comprised primarily of the
value assigned to stock warrants issued for placement agent services (see Note
8), other placement agent fees and legal expenses. Such costs are being
amortized over the life of the related debentures.
Stock and Stock Warrants Issued for Services
Common stock and common stock warrants issued for services rendered to
the Company are generally recorded at the fair market value of the stock or
stock warrant issued or the value of the services rendered, whichever is more
clearly determinable.
Revenue Recognition
The Company records sales of its product as earned revenue when the
product is shipped.
Revenue resulting from the settlement of the annual take-or-pay
provisions of the Company's distribution agreement (see Note 6) was recognized
at the end of the sales year period ended March 31, 1995.
Net Loss Per Share
The computation of net loss per share is based upon the weighted average
number of shares of common stock outstanding for each period. Options, warrants
and Convertible Debentures have not been considered in the calculation inasmuch
as they would be antidilutive.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings per Share ("SFAS
128"), which is required to be initially adopted by the Company for its
reporting period ending December 31, 1997. At that time, the Company will be
required to change the method currently used to compute net income (loss) per
share and to restate all prior periods. Under the new requirements for
calculating basic net income per share, the dilutive effect of stock options
will be excluded. The adoption of Statement No. 128 will not have any effect as
the Company has incurred losses for all previous periods to be presented.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS
130"), and Statement of Financial Accounting Standards No. 131, Segment
Information ("SFAS 131"). Both of these standards are effective for fiscal years
beginning after December 15, 1997. SFAS 130 requires that all components of
comprehensive income, including net income, be reported in the financial
statements in the period in which they are recognized. Comprehensive income is
defined as the change in equity during a period from transactions and other
events and circumstances from non-owner sources. Net income and other
comprehensive income, including foreign currency translation
F-8.
<PAGE> 56
CYPRESS BIOSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to December 31, 1996 and pertaining to September 30,
1997 and the nine-month periods ended September 30, 1996 and 1997 is unaudited)
adjustment, minimum pension accrual, and unrealized gains and losses on
investments, shall be reported, net of their related tax effect, to arrive at
comprehensive income. The Company intends to adopt SFAS 130 in 1998 and
operating results of prior periods will be reclassified. The Company does not
believe that comprehensive income or loss will be materially different than net
income or loss. Historically, the Company has operated in one business segment;
however, SFAS 131 redefines segments. The Company has not determined how
operating segments will be defined for disclosure purposes or which segments
will meet the quantitative requirements for disclosure. The adoption of SFAS 131
is not expected to have an impact on the Company's future results of operations
or financial position.
3. FINANCIAL STATEMENT DETAILS
Short-term Investments
Short-term investments at December 31, 1996 and September 30, 1997,
which were classified as "available-for-sale," consisted of U.S. Treasury Notes
with various maturity dates, all of which are due within one year of the date of
purchase. The cost of these investments at December 31, 1996 and September 30,
1997 approximate fair market value.
Inventories
Inventories are comprised of the following:
<TABLE>
<CAPTION>
December 31,
---------------------------- September 30,
1995 1996 1997
---------- ---------- -------------
<S> <C> <C> <C>
Raw materials and components $ 513,883 $ 214,632 $ 220,017
Work in progress 557,222 700,815 433,455
Finished goods 77,401 58,320 134,280
========== ========== ==========
$1,148,506 $ 973,767 $ 787,752
========== ========== ==========
</TABLE>
Property and Equipment
Property and equipment are comprised of the following:
<TABLE>
<CAPTION>
December 31,
------------------------------- September 30,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Laboratory and production equipment $ 602,152 $ 629,269 $ 1,211,647
Office equipment 281,914 537,244 446,305
Vehicles 52,097 20,924 20,924
Leasehold improvements 48,585 51,753 51,753
Construction in progress 976,671 1,787,686 1,396,763
----------- ----------- -----------
1,961,419 3,026,876 3,127,392
Accumulated depreciation and
amortization (536,399) (674,948) (1,020,771)
=========== =========== ===========
$ 1,425,020 $ 2,351,928 $ 2,106,621
=========== =========== ===========
</TABLE>
Depreciation expense for the years ended December 31, 1994, 1995 and
1996 was $268,894, $305,912, and $171,015, respectively. Depreciation expense
for the nine months ended September 30, 1996 and 1997, was $126,823 and
$346,657, respectively.
F-9.
<PAGE> 57
CYPRESS BIOSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to December 31, 1996 and pertaining to September 30,
1997 and the nine-month periods ended September 30, 1996 and 1997 is unaudited)
Accrued Liabilities
Accrued liabilities are comprised of the following:
<TABLE>
<CAPTION>
December 31,
-------------------------- September 30,
1995 1996 1997
-------- ---------- ----------
<S> <C> <C> <C>
Accrued clinical trial costs $250,858 $ 590,473 $ 909,656
Accrued convertible debenture
interest 64,200 18,718 11,737
Other 357,430 292,899 299,419
======== ========== ==========
$672,488 $ 902,090 $1,220,812
======== ========== ==========
</TABLE>
Advertising Costs
The Company incurred advertising expenses of approximately $658,000,
$77,000, and $18,000, for the years ended December 31, 1994, 1995 and 1996,
respectively. For the nine months ended September 30, 1996 and 1997, the Company
incurred advertising expenses of approximately $9,000 and $0, respectively.
4. ACQUISITIONS
PRP, Inc.
On November 1, 1996, the Company acquired all assets and assumed all
liabilities of PRP, Inc. ("PRP"), a biopharmaceutical company located in Boston,
Massachusetts engaged in the development of novel agents to treat blood and
platelet disorders. The transaction has been accounted for as a purchase.
In connection with the merger, the Company issued to certain debtholders
of PRP, in full satisfaction and settlement of such indebtedness, units (with
each unit consisting of two shares of common stock of the Company and one common
stock purchase warrant) with a total value equal to approximately $4.5 million
(based upon a price of $4.00 per unit). The Company recorded a charge to
acquired in-process research and development for approximately $5.1 million,
representing the excess of the purchase price over the net liabilities assumed.
In addition, the Company is obligated to make earn-out payments on net
sales, if any, of products developed using PRP's technology acquired by the
Company in the acquisition. In conjunction with obtaining approval from the FDA
of the use of Cyplex(TM) (Infusible Platelet Membranes), a platelet alternative
for the treatment of thrombocytopenia, the Company shall make an additional
payment of $5 million (the "Milestone Payment"), with such payment being in the
form of, at the Company's sole discretion, cash, Company common stock or a
combination of the two.
In consideration of certain investment banking advisory services
provided by EGS Securities Corp. ("EGS") to PRP in connection with the Merger,
the Company issued to EGS Units with a total value of approximately $120,000. In
addition, the Company is obligated to pay EGS an amount in cash equal to two and
one-half percent (2 1/2%) of each earn-out payment and the milestone payment
made to the former PRP stockholders, when and if such payments become due.
Pursuant to the terms of the merger agreement, subject to limited
exceptions, the Company is obligated to spend $4.0 million to commercialize and
advance Cyplex(TM) (Infusible Platelet Membranes), a platelet alternative as a
principal product of the Company. After the Company has expended $4.0 million on
the commercialization of Cyplex(TM) (Infusible Platelet Membranes), a platelet
alternative, the Company has agreed to use commercially reasonable efforts to
optimize commercialization of Cyplex(TM) (Infusible Platelet Membranes), a
platelet alternative, and other existing products of PRP.
F-10.
<PAGE> 58
CYPRESS BIOSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to December 31, 1996 and pertaining to September 30,
1997 and the nine-month periods ended September 30, 1996 and 1997 is unaudited)
The following unaudited pro forma data reflects the combined results of
operations of the Company and PRP as though the acquisition had occurred on
January 1, 1995, and assumes the charge of $5,147,000 for acquired in-process
research and development was recorded on that date.
PRO FORMA RESULTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
December 31, September 30,
-------------------------------- --------------------------------
1995 1996 1996 1997
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues $ 4,104,224 $ 2,029,773 $ 1,339,346 $ 2,386,828
Net loss $(14,448,974) $(9,853,328) $(11,809,876) $(7,404,406)
Net loss per share $ (0.73) $ (0.32) $ (0.39) $ (0.21)
</TABLE>
CELx Corporation
In 1995, the Company and CELx Corporation ("CELx"), the Company's former
majority owned subsidiary, agreed to the merger of CELx into the Company and the
exchange of shares of CELx by persons other than the Company into an aggregate
of 312,500 shares of the Company's common stock. The dissolution of CELx
resulted in a charge of $625,000 recorded as acquired in-process research and
development. The charge was based upon the fair market value of the Company's
common stock.
5. RESTRUCTURING EXPENSE
In December 1995, the Company recorded a restructuring charge
aggregating $645,000 relating to the Company's plan to consolidate its
manufacturing facilities to one location in the state of Washington and to move
all other operations to San Diego, California. This charge included
approximately $350,000 related to write-downs of equipment and leasehold
improvements for the manufacturing facility vacated in 1996, $200,000 related to
abandonment of leases in Seattle and Princeton with the remainder related to a
severance commitment with its former Executive Vice President who resigned in
December 1995.
In January 1996, the Company notified approximately twenty employees,
which was slightly greater than half of its work force, that their positions
were being terminated immediately as part of the restructuring. Such positions
were from all departments of the Company. In March 1996, the Company entered
into a termination agreement with its former Chief Scientific Officer. Costs
related to these terminations were approximately $494,000 and were recorded as a
restructuring expense in 1996. In addition, the Company incurred approximately
$300,000 in costs associated with moving the administration, research and
medical departments to San Diego, with most costs being attributable to
relocation costs of the few members of management moving to San Diego. Such
costs were recorded as general and administrative expenses in 1996. For the nine
months ended September 30, 1996 total restructuring cost was approximately
$460,000.
The Company incurred approximately $700,000 in capital expenditures for
the nine months ended September 30, 1996 in connection with the consolidation of
its two Washington facilities. For the year ended December 31, 1996,
approximately $1.3 million of capital expenditures were incurred by the Company
related to the consolidation.
The consolidation was completed in April 1997 with the Company receiving
FDA GMP approval of the facility.
F-11.
<PAGE> 59
CYPRESS BIOSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to December 31, 1996 and pertaining to September 30,
1997 and the nine-month periods ended September 30, 1996 and 1997 is unaudited)
6. DISTRIBUTION AGREEMENT
Prior to April 1994, the PROSORBA(R) column was sold by the Company's
internal sales force to physicians in the fields of immunology, hematology and
oncology. In April 1994, Baxter Healthcare Corporation ("Baxter") assumed sales
and marketing responsibilities under a 10-year exclusive agreement, granting
distribution rights of the PROSORBA(R) column in the United States and Canada
for the treatment of thrombocytopenia. Baxter, at its own expense, was to
provide sales and marketing support for the sale of the product during the term
of the agreement. The Company was to provide significant marketing and
promotional support to Baxter for the first three years of the agreement.
In March 1995, the two companies amended the agreement whereby Baxter:
(a) made a take-or-pay payment on March 31, 1995 for the first sales year of
$3.0 million, (b) agreed to purchase $1.0 million of product during the second
quarter of 1995, (c) released the Company from its obligation to provide
marketing and promotional support for the second and third years of the
agreement, (d) gave the Company the right to co-market with Baxter, (e)
relinquished its first right to negotiate for new PROSORBA(R) column
indications, and (f) agreed under certain circumstances to provide advance
payments to the Company for Baxter's 1996 purchases. The Company agreed to
eliminate purchase minimums and the take-or-pay concept included in the original
agreement and freed Baxter to pursue competing thrombocytopenia therapies.
Effective May 1, 1996, the Company and Baxter terminated the exclusive
distribution agreement, whereby the Company regained the right to sell its
PROSORBA(R) column directly to customers who had previously purchased the
PROSORBA(R) column through Baxter as well as to any other potential customers
who wish to purchase the PROSORBA(R) column.
7. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases approximately 14,400 square feet of production,
laboratory and administrative facilities in Seattle, Washington under a lease
expiring in 1999. In connection with the restructuring (see Note 5), this space
was sub-leased to another party in April 1996 for the remainder of the lease
term.
The Company leases approximately 8,000 square feet of manufacturing
facilities in Redmond, Washington under a lease expiring in 2004. The Company
leases approximately 2,800 square feet of office space in San Diego, California
under a lease expiring in 2001. This facility houses the Company's
administrative offices. The lease for approximately 7,000 square feet of
manufacturing facilities in Boston, which expires in 2001, was assumed in
conjunction with the PRP acquisition.
The table below indicates future minimum lease payments due, and
sublease income to be received, over the remaining life of the leases, under the
agreements in place as of December 31, 1996:
<TABLE>
<CAPTION>
Payments Sublease Income
----------- ---------------
<S> <C> <C>
1997 $ 534,388 $251,289
1998 533,738 301,546
1999 470,916 238,724
2000 232,192 --
2001 122,098 --
Thereafter through 2005 288,000 --
========== ========
$2,181,332 $791,559
========== ========
</TABLE>
Total rent expense was approximately $417,000, $521,000 and $494,000,
for the years ended December 31, 1994, 1995 and 1996, respectively. For the nine
months ended September 30, 1996 and 1997 total rent expense was
F-12.
<PAGE> 60
CYPRESS BIOSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to December 31, 1996 and pertaining to September 30,
1997 and the nine-month periods ended September 30, 1996 and 1997 is unaudited)
approximately $390,000 and $437,00, respectively. Sublease income was
approximately $149,000 for the year ended December 31, 1996 and approximately
$112,000 and $117,000 for the nine months ended September 30, 1996 and 1997,
respectively.
Severance Agreements
The Company entered into a severance agreement as of December 28, 1995
with its former Chief Executive Officer. The terms of the severance agreement
were based primarily on the termination clause of the employment agreement
entered into between the former officer and the Company in September 1994. Such
terms include the payment of $225,000 in 1996 and $168,750 in 1997. The total
cost of this severance agreement of $393,750 was included in general and
administrative expense in 1995. There were no related severance expense in 1996
or 1997.
The Company entered into a severance agreement as of March 29, 1996 with
its former Chief Scientific Officer, the terms of which correlate to the
employment agreement renegotiated with the former officer as of December 28,
1995. Such terms include the payment of $244,000 in 1996 and the issuance of
non-qualified stock options to purchase 705,000 shares of common stock at $2.25
per share. These options replaced an equal number of options outstanding at the
date of termination.
Employment Agreements
The Company entered into employment agreements in December 1995 with a
new Chief Executive Officer and a new President, Chief Operating Officer. The
agreements provide for specified compensation which include salary, signing
bonuses, annual performance bonuses and a lump sum payments in the event of a
termination of employment, without cause, as defined. Signing bonuses of
approximately $100,000 were included in general and administrative expense in
1995. An additional $270,000, $100,000 and $227,000 of bonuses were earned and
included in general and administrative expenses for the year ended December 31,
1996, and for the nine months ended September 30, 1996 and 1997.
The agreements provided for the granting of an aggregate of 4,179,824
options to purchase the Company's common stock. The options were granted upon
the closing of the private placement in January 1996 (see Note 10). Options to
purchase 25% of the total amount granted vested immediately with the remainder
to vest over a four-year period. Such options will vest immediately upon a
merger of the Company or in the event of a termination of employment without
cause, as defined. The Company recorded a charge to deferred compensation
expense of $1,756,949 to reflect the difference between the grant price and the
deemed value for accounting purposes of the common stock issuable upon exercise
of such options. The deferred compensation balance will be amortized over the
service period of the options. Accordingly, the Company recorded amortization
expense of $443,673 for the year ended December 31, 1996. For the nine months
ended September 30, 1996 and 1997 related amortization of deferred compensation
was $337,651 and $542,971, respectively.
F-13.
<PAGE> 61
CYPRESS BIOSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to December 31, 1996 and pertaining to September 30,
1997 and the nine-month periods ended September 30, 1996 and 1997 is unaudited)
Defined Contribution Plan
The Company sponsors a defined contribution plan pursuant to Section
401(k) of the Internal Revenue Code of 1986. This plan covers substantially all
employees who provide more than 1,000 hours of service during the year.
The Plan provides for matching contributions whereby the Company
contributes common stock to the Plan on behalf of participants in an amount
equal to 100% of the participants' contributions during the six-month periods
ending on the last day of June and December. The Company's contributions will
vest six months after the amount of the contribution is determined if the
employee is still employed by the Company at the end of the vesting period,
except for employees who have been with the Company more than five years for
whom contributions will vest immediately. The expense recognized for shares
contributed on behalf of employees was approximately $161,000, $161,000 and
$102,000 for the years ended December 31, 1994, 1995 and 1996, respectively,
based upon the market value of the Company's common stock on the date of the
contribution. For the nine months ended September 30, 1996 and 1997, the expense
recognized for the matching contributions was 83,645 and 140,810, respectively.
8. 7% CONVERTIBLE DEBENTURES
In April 1994, the Company completed a private placement of $4,245,000
principal amount of 7% convertible debentures due March 2001 ("7% Convertible
Debentures"). Interest is payable in cash or shares of Common stock at the
option of the Company. The conversion price for the principal amount is $2.875
per share of registered Common stock, the fair market value on the date of
closing. The conversion price for the interest is the lower of $4.00 per share
of Common stock or the average closing price for the 10 days prior to the annual
April 30 interest payment date. The debentures are redeemable by the Company
after April 1998 at a redemption price of 106% of the principal amount reduced
to 104% and 102% the following two years. Allen & Company Incorporated ("Allen &
Company"), a shareholder of the Company, acted as placement agent with respect
to a majority of this private placement and received a five-year warrant valued
at $483,000 to purchase 300,000 shares of Common stock at $2.875 for its
services as placement agent. The cost of issuing the 7% Convertible Debentures,
including the cost of the warrants, has been deferred and is reported on the
accompanying balance sheet net of amortization expense which is being recorded
over the term of the 7% Convertible Debentures. Allen & Company purchased $1.0
million of the 7% Convertible Debentures.
In September 1995, the Company completed an exchange offering to holders
of the 7% Convertible Debentures. The Company offered to exchange the 7%
Convertible Debentures for restricted common stock at $2.25 per share. Of the
original $4,245,000 outstanding principal amount, $2,200,000 of the 7%
Convertible Debentures was converted. The Company recorded a non-cash expense of
$810,386, which represents the fair market value of the increased number of
shares issued under the terms of the offering compared to the original
conversion terms. In the fourth quarter of 1995 and the first quarter of 1996,
an additional $700,000 and $100,000, respectively, of 7% Convertible Debentures
was converted into common stock at the original conversion price. For
substantially all 7% Convertible Debentures that were converted, the interest
accrued up to the date of conversion was paid through the issuance of common
stock at either $2.25 per share or $2.875 per share. The Company also charged
$314,000 to additional paid-in capital in 1995 for the unamortized deferred debt
issuance costs related to the converted debentures.
In March 1996, the Company completed a second exchange offering made to
holders of its outstanding 7% Convertible Debentures. The Company offered to
exchange the 7% Convertible Debentures for common stock of the Company at a
price of $2.25 per share. Of the $1,245,000 outstanding principal amount,
$845,000 was converted into 399,252 shares of common stock of the Company (which
amount includes 23,700 shares issued as interest on the 7% Convertible
Debentures), pursuant to the exchange offering. At December 31, 1996, there was
outstanding principal of $400,000 of the 7% Convertible Debentures. In 1996, the
Company charged an additional $93,000 to additional paid-in capital for the
unamortized deferred debt issuance costs related to the debentures converted in
1996.
F-14.
<PAGE> 62
CYPRESS BIOSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to December 31, 1996 and pertaining to September 30,
1997 and the nine-month periods ended September 30, 1996 and 1997 is unaudited)
9. SENIOR CONVERTIBLE DEBENTURES
In December 1995, the Company completed a private placement of
$1,500,000 principal amount of senior convertible debentures due in July 1996
("Senior Convertible Debentures") to a group of investors, including $500,000
issued to Allen & Company. The Company received $1,000,000 in cash on 1995 and
the remaining $500,000 during the first week of January 1996.
In January 1996, the Senior Convertible Debentures, under their original
terms, were automatically converted at $1.50 per share into 1,000,000 shares of
the Company's common stock. The conversion was made simultaneously with the
closing of a private placement of common stock (see Note 10).
10. STOCKHOLDERS' EQUITY
Authorized Shares
The Company is authorized to issue up to 15,000,000 shares of "blank
check" preferred stock. Terms and rights of such preferred stock shall be
determined by the Board of Directors when such preferred stock, if any, is
issued.
Private Placements
In January 1996, the Company sold approximately 8,500,000 shares of
common stock for $1.50 per share in a private placement, resulting in net
proceeds to the Company of approximately $12,000,000. As a result of this
private placement, the Senior Convertible Debentures automatically converted
into 1,000,000 shares of common stock (see Note 9). In addition, upon closing of
the private placement, the Company issued stock options to the new Chief
Executive Officer and President aggregating 4,159,824 shares at an exercise
price of $1.50 per share.
In October 1996, the Company completed a private placement of units with
each unit consisting of two shares of common stock and one common stock purchase
warrant (the "1996 Warrants") collectively priced at $4.00 per unit. Holders of
each warrant are entitled to purchase one share of the Company's common stock at
an exercise price of $2.00 per share over a five-year period. A total of
1,734,000 units were sold resulting in net proceeds to the Company of
approximately $6.3 million.
Warrants
In 1991, the Company granted warrants to purchase 749,900 shares of
common stock to certain officers, directors and employees, which are exercisable
through June 2001 at $1.875 per share. In September 1991, the Company granted
warrants to purchase 1,850,000 shares of common stock at an exercise price of
$2.50 per share in connection with its public offering of units. The warrants
expired on April 30, 1997. In April 1994, the Company issued Allen & Company a
five-year warrant to purchase 300,000 shares of Common stock at $2.875 for its
services as a placement agent for the 7% Convertible Debentures (see Note 8). In
conjunction with the private placement completed in October 1996, as well as in
conjunction with the PRP acquisition, the Company granted warrants to purchase
2,880,399 shares of common stock. The warrants entitle the holder to purchase a
share of common stock for $2.00 per share. The warrants expire in October 2001
and are redeemable, in certain circumstances, for $0.10 per warrant, beginning
in September 1997.
Stock Options
1996 Equity Incentive Plan. In April 1996, the Company adopted the 1996
Equity Incentive Plan authorizing the issuance of both incentive and
non-qualified options to purchase the Company's common stock, as well as the
granting of stock appreciation rights, stock bonuses and rights to purchase
restricted stock. Under the
F-15.
<PAGE> 63
CYPRESS BIOSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to December 31, 1996 and pertaining to September 30,
1997 and the nine-month periods ended September 30, 1996 and 1997 is unaudited)
plan, 7,000,000 shares of the Company's common stock are reserved for issuance
to directors, officers and key employees of, and consultants and certain
advisors to, the Company.
Incentive Stock Options. In June 1985, the Company adopted an Incentive
Stock Option and Appreciation Plan. The plan authorizes options to purchase, and
appreciation rights with respect to, the Company's common stock, which may be
granted to such officers and key employees as may be selected by the Board of
Directors or a committee appointed by the Board to administer the plan. The plan
was amended in June 1992 to increase the number of shares reserved for issuance
to 750,000. The plan expired in 1995; however, options previously granted under
the plan remain effective according to their respective terms and conditions.
Non-Qualified Stock Options. The Company has reserved 572,000 shares of
common stock for issuance under its 1988 Non-qualified Stock Option Plan, as
amended in 1992 and 1995 (the "1988 Plan"). Under the 1988 Plan, directors,
officers, employees and consultants may be granted non-qualified stock options
at exercise prices and terms determined by the Board of Directors.
Stock Options-Other. The Company has, at various times, granted to
employees and others options to purchase common stock, other than from under a
formal option plan.
Options granted pursuant to each of the plans above have a term of up to
ten years and generally vest over four years.
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, when the exercise price of the Company's employee
stock options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized.
F-16.
<PAGE> 64
The following table summarizes the activity of the Company's stock
options and warrants:
<TABLE>
<CAPTION>
Number of Warrants / Options
---------------------------------------------------------------------
1996
Equity Incentive Non-Qualified
Incentive Stock Stock Other
Warrants Plan Options Options Options Options
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance December 31, 1993 2,569,700 -- 216,200 75,000 762,835
Granted 300,000 -- 100,500 810,000 110,000
Exercised (6,500) -- (1,000) -- --
Canceled (20,300) -- (5,000) -- --
Expired -- -- -- (65,000) (40,000)
------------ ------------ ------------ ------------ ------------
Balance December 31, 1994 2,842,900 -- 310,700 820,000 832,835
Granted -- -- -- 1,179,000 20,000
Canceled -- -- -- (476,500) --
Expired (23,100) -- (42,100) -- (177,000)
------------ ------------ ------------ ------------ ------------
Balance December 31, 1995 2,819,800 -- 268,600 1,522,500 675,835
Granted 2,880,399 5,607,157 -- 30,000 929,000
Exercised -- -- -- (47,500) --
Canceled (335,000) (20,000) (207,600) (533,000) (454,000)
Expired -- -- -- (500,000) --
------------ ------------ ------------ ------------ ------------
Balance December 31, 1996 5,365,199 5,587,157 61,000 472,000 1,150,835
Granted -- 691,522 -- -- --
Exercised -- (20,000) -- -- --
Canceled (166,000) (169,656) (1,000) (12,000) --
Expired (1,850,000) -- -- -- (189,230)
============ ============ ============ ============ ============
Balance September 30, 1997 3,349,199 6,089,023 60,000 460,000 961,605
============ ============ ============ ============ ============
</TABLE>
With respect to the Company's outstanding warrants at December 31, 1996
and September 30, 1997, 5,365,199 and 3,349,199 warrants were exercisable,
respectively, at exercise prices ranging from $1.85 to $2.88, respectively, and
3,349,199 shares of common stock were reserved for future issuance as of
September 30, 1997.
With respect to stock options, at December 31, 1996 and September 30,
1997, there were 1,512,843 and 1,022,977 options available for future grant and
8,783,835 and 8,593,605 shares of common stock were reserved for future
issuance, respectively.
Following is a further breakdown of the options outstanding as of
December 31, 1996:
<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Range of Remaining Weighted Exercise Price
Exercise Options Contractual Life Average Options of Options
Prices Outstanding in Years Exercise Price Exercisable Exercisable
- ------------ ------------- ---------------- --------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
$1.00-$1.50 4,417,074 8.95 $1.50 1,842,202 $1.50
$1.51-$2.25 2,589,583 6.89 $2.02 885,093 $2.07
$2.26-$3.25 168,105 4.81 $2.69 168,105 $2.69
$3.26-$3.88 96,230 3.11 $3.79 96,230 $3.79
========= =========
7,270,992 2,991,630
========= =========
</TABLE>
F-17.
<PAGE> 65
CYPRESS BIOSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to December 31, 1996 and pertaining to September 30,
1997 and the nine-month periods ended September 30, 1996 and 1997 is unaudited)
The weighted average exercise prices and fair values for 1996 are as
follows:
<TABLE>
<CAPTION>
Weighted Average
-----------------------
Exercise Price on Fair Exercise
Date of Grant Value Price
- ------------------------------- ------ --------
<S> <C> <C>
Equal to market price of stock $ 1.41 $ 2.04
Less than market price of stock $ 1.38 $ 1.51
Exceeds market price of stock $ 1.19 $ 3.43
</TABLE>
Pro forma information regarding net loss and net loss per share is
required by Statement 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 1995 and 1996: a risk-free interest rate of 6.49%; a dividend
yield of 0%; a volatility factor of the expected market price of the Company's
common stock of 65%; and an expected life of the option of 7 years.
The weighted average exercise prices for stock option activity are as
follows:
<TABLE>
<CAPTION>
Number of
Stock Weighted
Options Average
Under All Exercise
Plans Prices
-------------- ----------
<S> <C> <C>
Balance December 31, 1993 1,054,035 $2.49
Granted 1,020,500 2.50
Exercised (1,000) 2.63
Canceled (5,000) 3.00
Expired (105,000) 2.51
--------- -----
Balance December 31, 1994 1,963,535 2.49
Granted 1,199,000 2.01
Canceled (476,500) 2.05
Expired (219,100) 2.53
--------- -----
Balance December 31, 1995 2,466,935 2.34
Granted 6,566,157 1.69
Exercised (47,500) 1.79
Canceled (1,214,600) 2.46
Expired (500,000) 2.19
--------- -----
Balance December 31, 1996 7,270,992 1.74
Granted 691,522 1.70
Exercised (20,000) 1.88
Canceled (182,656) 1.97
Expired (189,230) 2.26
========= =====
Balance September 30, 1997 7,570,628 $1.72
========= =====
</TABLE>
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Pro forma net loss (in thousands) $ (7,348) $ (15,980)
Pro forma net loss per share $ (0.42) $ (0.55)
</TABLE>
F-18.
<PAGE> 66
CYPRESS BIOSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to December 31, 1996 and pertaining to September 30,
1997 and the nine-month periods ended September 30, 1996 and 1997 is unaudited)
The proforma results above for 1996 and 1995 are not likely to be
representative of the effects of applying FAS 123 on reported net income or loss
for future years as these amounts reflect the expense for only two years or one
year of vesting, respectively.
11. INCOME TAXES
Significant components of the Company's deferred income tax assets as of
December 31 are as follows:
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Net operating loss carryforwards $ 9,139,000 $ 14,639,000
Capitalized research & development -- 3,212,000
Other 741,000 1,174,000
------------ ------------
9,880,000 19,025,000
Valuation allowance (9,880,000) (19,025,000)
============ ============
$ -- $ --
============ ============
</TABLE>
As of December 31, 1996, the Company has accumulated Federal and
California net operating loss carryforwards of approximately $42,944,000 and
$2,257,000, respectively, which expire beginning in 1998. Additionally, the
Company has Federal and California research and development tax credit
carryforwards of approximately $600,000 and $10,000, respectively, which will
begin expiring in 2004 unless previously utilized.
In accordance with certain provision of the Internal Revenue Code, a
change in ownership of greater than 50% within a three-year period will place an
annual limitation on the Company's ability to utilize its existing net operating
loss and tax credit carryforwards.
As a result of the Company's sales of common stock in November 1990 and
September 1991, the utilization of net operating loss carryforwards which had
accumulated as of November 1991 will be limited to a prescribed amount in each
successive year. However, the Company believes that this limitation will not
have a material effect on the financial statements.
Within the prior three-year period, the Company underwent several
private placements and debt to common stock conversions. However, the additional
stock issuances during the prior three-year period have not triggered an
ownership change of greater than 50%.
12. SUBSEQUENT EVENTS (UNAUDITED)
Private Placement
In October 1997, the Company sold approximately 3,851,000 shares of
common stock for $1.50 per share in a private placement. The net proceeds to the
Company were approximately $5,550,000, or $1.44 per share, after total costs of
approximately $227,000.
Phase III RA Trial
In January 1998 the Company announced that its Phase III pivotal study
of the PROSORBA(R) column in the treatment of RA was stopped. The study was
halted based on the recommendation of an independent Data Safety
F-19.
<PAGE> 67
CYPRESS BIOSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to December 31, 1996 and pertaining to September 30,
1997 and the nine-month periods ended September 30, 1996 and 1997 is unaudited)
and Monitoring Board (DSMB) after an analysis of the available data showed that
the PROSORBA(R) column had achieved both statistically significant efficacy and
favorable safety results.
The study, which was designed to use group sequential analysis, began in
the summer of 1996, and anticipated enrolling up to 268 patients with completion
by late 1999. The first interim analysis occurred in July 1997 at which point 60
patients were available for analysis. The second interim analysis was performed
in January 1998 on 91 patients, at which point the trial was stopped by the
independent DSMB, having achieved statistical significance on the primary
endpoint.
The Company has begun its efforts to prepare an application for
Pre-Market Approval (PMA) to the FDA's Medical Device Division. This application
will request new labeling for the PROSORBA(R) column to incorporate the RA
indication. The PROSORBA(R) column is currently sold by the Company for the
treatment of idiopathic thrombocytopenic purpura (ITP), for which it was granted
FDA approval in 1987. The Company expects to file the PMA by mid-1998 and,
assuming FDA approval, anticipates selling the PROSORBA(R) column for RA in
1999.
Closing of Boston Facility
In November 1997 the Company's management decided to close its Boston
facility. The facility operates as a manufacturer of Cyplex(TM) (Infusible
Platelet Membranes), a platelet alternative and qualifies as a GMP pilot
production plant.
In December 1997 the Company notified its ten (10) Boston employees of
its intent to close the facility by mid-1998, and to move the Cyplex(TM)
manufacturing process to Redmond, Washington. Certain employees have been
offered a position with the Company at its Redmond location. The Company expects
to have adequate Cyplex(TM) (Infusible Platelet Membranes), a platelet
alternative on hand by the closure of the facility to complete its Phase II
clinical trial currently scheduled to start in March 1998.
The Company expects to begin manufacturing Cyplex(TM) (Infusible
Platelet Membranes), a platelet alternative in its Redmond facility by mid-1999.
Costs related to the closing of the Boston facility are not expected to be
material to the Company's financial position.
F-20.
<PAGE> 68
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THE OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION AND
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT
RELATES. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR
SOLICITATION IS UNLAWFUL.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary ...................................................... 2
Risk Factors ............................................................ 4
Use of Proceeds ......................................................... 10
Dividend Policy ......................................................... 10
Price Range of Common Stock ............................................. 11
Capitalization .......................................................... 12
Selected Consolidated Financial Data .................................... 13
Management's Discussion and Analysis of Financial Condition and
Results of Operations ................................................. 15
Business ................................................................ 21
Management .............................................................. 31
Certain Transactions .................................................... 39
Principal Stockholders and Selling Securityholder ....................... 40
Description of Capital Stock ............................................ 42
Plan of Distribution .................................................... 45
Legal Matters ........................................................... 46
Experts ................................................................. 46
Available Information ................................................... 46
Index to Consolidated Financial Statements .............................. F-1
</TABLE>
- --------------------------------------------------------------------------------
350,000 SHARES
COMMON STOCK
-------------------
PROSPECTUS
-------------------
February ___, 1998
<PAGE> 69
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all expenses payable by the Registrant in
connection with the sale of the Common Stock being registered. All of the
amounts shown are estimates, except for the SEC registration fee.
<TABLE>
<S> <C>
SEC registration fee ............................................... $ 284
Legal fees and expenses ............................................ 10,000
Blue sky qualification fees and expenses ........................... 1,000
Accounting fees and expenses ....................................... 5,000
Printing and engraving expenses .................................... 1,000
Miscellaneous ...................................................... 2,716
Total ...................................................... $20,000
=======
</TABLE>
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Under Section 145 of the Delaware General Corporation Law (the "DGCL"),
the Registrant has broad powers to indemnify its directors and officers against
liabilities they may incur in such capacities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act").
The Registrant's Amended and Restated Certificate of Incorporation and
By-laws, as amended, include provisions to (i) eliminate the personal liability
of its directors for monetary damages resulting from breaches of their fiduciary
duty to the extent permitted by Section 102(b)(7) of the DGCL and (ii) require
the Registrant to indemnify its directors and officers to the fullest extent
permitted by applicable law, including circumstances in which indemnification is
otherwise discretionary. Pursuant to Section 145 of the DGCL, a corporation
generally has the power to indemnify its present and former directors, officers,
employees and agents against expenses incurred by them in connection with any
suit to which they are or are threatened to be made, a party by reason of their
serving in such positions so long as they acted in good faith and in a manner
they reasonably believed to be in or not opposed to, the best interests of the
corporation and with respect to any criminal action, they had no reasonable
cause to believe their conduct was unlawful. The Registrant believes that these
provisions are necessary to attract and retain qualified persons as directors
and officers. These provisions do not eliminate the directors' or officers' duty
of care, and, in appropriate circumstances, equitable remedies such as
injunctive or other forms of non-monetary relief will remain available under the
DGCL. In addition, each director will continue to be subject to liability
pursuant to Section 174 of the DGCL, for breach of the director's duty of
loyalty to the Registrant, for acts or omissions not in good faith or involving
intentional misconduct, for knowing violations of law, for acts or omissions
that the director believes to be contrary to the best interests of the
Registrant or its stockholders, for any transaction from which the director
derived an improper personal benefit, for acts or omissions involving a reckless
disregard for the director's duty to the Registrant or its stockholders when the
director was aware or should have been aware of a risk of serious injury to the
Registrant or its stockholders, for acts or omission that constitute an
unexcused pattern of inattention that amounts to an abdication of the director's
duty to the Registrant or its stockholders, for improper transactions between
the director and the Registrant and for improper loans to directors and
officers. The provision also does not affect a director's responsibilities under
any other law, such as the federal securities law or state or federal
environmental laws.
The Registrant has entered into indemnification agreements with its
directors and executive officers providing for the indemnification by the
Company of such persons against expenses, damages, judgments fines and amounts
paid in settlement that such persons become legally obligated to pay as a result
of any threatened, pending
II-1.
<PAGE> 70
or completed civil, criminal or other claims made against such persons by reason
of the fact that such persons are or were a director or officer of the Company
or any of its affiliated entities; provided, however, that such persons conduct
was not, among other things, knowingly fraudulent, deliberately dishonest or
constituted willful misconduct or a breach of such person's duty of loyalty or
resulted in any personal profit to such person to which such person was not
legally entitled. The indemnification agreements also provide that the Company
advance to its directors and executive officers all expenses incurred by such
persons prior to the final disposition of any proceeding upon receipt of an
undertaking by any such person requesting advance payment that such person will
repay the Company for all such advances in the event it is ultimately determined
that such person is not entitled to indemnification under the provisions of the
indemnity agreement, the Company's bylaws, the DGCL or otherwise.
The Registrant has an insurance policy covering the officers and
directors of the Registrant with respect to certain liabilities, including
liabilities arising under the Securities Act or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since February 2, 1995, the Registrant has sold and issued the following
unregistered securities:
1. Between February 1, 1995 and February 1, 1998, the Company granted to
employees, directors and consultants of the Company options to purchase
8,006,679 shares of Common Stock at a weighted average exercise price of
approximately $1.69. During that same period, options to purchase 173,695 shares
of Common Stock were exercised for an aggregate purchase price of $297,418.
2. In January 1996, the Company completed a private placement of
8,540,702 shares of the Company's Common Stock (the "Private Placement") with
certain accredited investors at a per share sales price of $1.50, for an
aggregate offering price of $12,811,053. Allen & Company acted as a
non-exclusive placement agent for the Company with respect to the Private
Placement and received a placement fee of $225,000, or 6% of the gross proceeds
attributable to securities actually placed by Allen & Company in the Private
Placement.
3. In March 1996, the Registrant issued to holders of certain 7%
Convertible Debentures (the "Convertible Debentures") of the Registrant, 399,252
shares of Common Stock of the Registrant in connection with an offer by the
Registrant to exchange one share of its Common Stock for each $2.25 of
outstanding principal amount, including accrued and unpaid interest, of the
Registrant's 7% Debentures (the "Exchange Offer").
4. On April 30, 1996, the Registrant issued to various holders of
Convertible Debentures an aggregate of 12,005 shares of Common Stock of the
Registrant with respect to accrued interest on the outstanding principal balance
of the Registrant's Convertible Debentures.
5. In October 1996, the Company completed a private placement of Units
(with each Unit consisting of two shares of Common Stock and one warrant)
collectively priced at $4.00 per Unit. Holders of each five-year warrant are
entitled to purchase one share of the Company's Common Stock at an exercise
price of $2.00 per share. A total of 1,734,000 units were sold resulting in net
proceeds of approximately $6.3 million.
6. In October 1997, the Company completed a private placement of
3,851,025 shares of the Company's Common Stock at a price of $1.50 per share,
resulting in net proceeds (after deducting placement fees of approximately
$196,593) to the Company of approximately $5,579,951.
With respect to the grant of stock options described in paragraph 1
above exemption from registration under the Securities Act was unnecessary in
that none of such transactions involved a "sale" of securities as such term is
used in Section 2(3) of the Securities Act.
The sales and issuances of securities in the transactions described in
paragraphs 2, 4, 5 and 6 above were deemed to be exempt from registration under
the Securities Act by virtue of Section 4(2) of the Securities Act and/or
Regulation D promulgated thereunder. The recipients of the securities
represented their intention to acquire the securities for investment purposes
only and not with a view to the distribution thereof.
II-2.
<PAGE> 71
The sales and issuances of securities in the transaction described in
paragraph 3 above were deemed to be exempt from registration under the
Securities Act by virtue of Section 3(a)9 of the Securities Act. The recipients
of the securities were existing holders of securities of the Registrant and no
commissions were directly or indirectly paid or given in connection with the
Exchange Offer.
The purchasers in each case represented their intention to acquire the
securities for investment only and not with a view to the distribution thereof.
Appropriate legends are affixed to the stock certificates issued in such
transactions. Similar legends were imposed in connection with any subsequent
sales of any such securities. All recipients either received adequate
information about the Registrant or had access, through employment or other
relationships, to such information.
There were no underwritten offerings employed in connection with any of
the transactions set forth on Item 15.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
Exhibit No. Description Incorporated by Reference to
----------- -------------------------------------------------- -------------------------------------------------
<S> <C> <C>
3.1 Amended and Restated Certificate of Incorporation Exhibit 3.1 to Form 10-Q for the quarter ended
March 30, 1996
3.2 By-Laws, as amended Exhibit 3.2 to1995 Form 10-K
4.1 Form of Stock Certificate Exhibit 4.1 to Form S-1 Registration Statement
No. 33-41225
4.2 Warrant Certificate Exhibit 4.2 to Form 8-K filed November 1, 1996
5.1 Opinion of Cooley Godward LLP
10.1 Form of Common Stock Purchase Warrant Exhibit 3.1 to Form S-1 Registration Statement
No. 33-41225
10.2 Form of Employee Stock Warrant Exhibit 10.13 of Form S-1 Registration Statement
No. 33-41225
10.3 Agreement and Plan of Merger and Reorganization Exhibit 2.1 to Form 10-Q for quarter ended
dated October 10, 1996, by and among Registrant, September 30, 1996
Cypress Acquisition Sub, Inc. and PRP, Inc.
10.4 Warrant Agreement dated September 18, 1996, Exhibit 4.1 to Form 10-Q for quarter ended
between Registrant and American Stock Transfer & September 30, 1996
Trust Company
10.5 Exchange of Bridge Debt and Warrant Termination Exhibit 4.2 to Form 10-Q for quarter ended
Agreement between Registrant and certain holders September 30, 1996
of indebtedness of PRP, Inc.
10.6 Incentive Stock Option Exhibit 28.2 to Form S-8 Registration Statement
No. 33-20188
10.7 Form of Nonqualified Stock Option Exhibit 4.5 to Form 10-K for the year ended
December 31, 1993
10.8 Form of 7% Convertible Debentures Exhibit 10.1 to Form 10-Q for the quarter ended
March 31, 1994
</TABLE>
II-3.
<PAGE> 72
<TABLE>
<S> <C> <C>
10.9 Warrant Agreement dated as of April 22, 1994 Exhibit 10.3 to Form 10-Q for the quarter ended
between IMRE Corporation and Allen & Company March 31, 1994
Incorporated
10.10 Form 7% Convertible Debenture Purchase Agreement Exhibit 10.4 to Form 10-Q for the quarter ended
March 31, 1994
10.11 Form of Senior Convertible Debenture Exhibit 4.10 to 1995 From 10-K
10.12 Form of Senior Convertible Debenture Purchase Exhibit 4.11 to 1995 Form 10-K
Agreement
10.13 Form of Stock Purchase Agreement for January 1996 Exhibit 4.12 to 1995 Form 10-K
Private Placement
10.14 Form of Warrant to Purchase Common Stock Exhibit 99.1 to Form S-8 Registration Statement
No. 333-19465
10.15 1996 Equity Incentive Plan (the "1996 Plan") Exhibit 99.1 to Form S-8 Registration Statement
No. 333-06771
10.16 Sub-Lease Agreement dated April 15, 1996, between Exhibit 3.1 to Form 10-Q for the quarter ended
the Company and Bristol-Myers Squibb Company March 30, 1996
10.17 Common Stock Purchase Warrant dated June 10, 1991 Exhibit 99.1 to Form S-8 Registration Statement
No. 333-06765
10.18 Warrant Agreement dated as of August 29, 1991 Exhibit 99.1 to Form S-3 Post Effective Amendment
between IMRE Corporation and Manufacturers of to Registration Statement No. 33-71278
Hanover Trust Company of California (now know as
Chemical Trust Company of California)
10.19 Successor Warrant Agent Agreement date July 23, Exhibit 99.2 to Form S-3 Post Effective Amendment
1996 between the Registrant and American Stock to Registration Statement No. 33-71278
Transfer & Trust Company
10.20 Form of Incentive Stock Option Agreement under the Exhibit 3.1 to Form 10-Q for the quarter ended
1996 Plan March 30, 1996
10.21 1996 Equity Incentive Plan Form of Non-Statutory Exhibit 3.1 to Form 10-Q for the quarter ended
Stock Option Agreement March 30, 1996
10.22 Incentive Stock Option and Appreciation Plan, as Exhibit 99.4 to Form S-8 Registration Statement
amended June 29, 1992 No. 333-06771
10.23 Form of Incentive Stock Option Agreement under the Exhibit 99.5 to Form S-8 Registration Statement
ISO Plan No. 333-06771
10.24 Amended and Restated 1988 Nonqualified Stock Exhibit 99.6 to Form S-8 Registration Statement
Option Plan No. 333-06771
10.25 Form of Nonqualified Stock Option Agreement under Exhibit 99.7 to Form S-8 Registration Statement
the 1988 Plan No. 333-06771
10.26 Form of Stock Option Agreement for issuances of Exhibit 99.8 to Form S-8 Registration Statement
all non-plan options No. 333-06771
10.27 Form of Nonstatutory Stock Option Exhibit 99.3 to Form S-8 Registration Statement
Agreement under the 1996 Plan
10.28 Stock Option and Stock Appreciation Plan Exhibit 28.1 to Form S-8 Registration Statement
No. 333-06771
</TABLE>
II-4.
<PAGE> 73
<TABLE>
<S> <C> <C>
10.29 Warrant Agreement dated September 19, 1996 between Exhibit 10.1 to Form S-3 Registration Statement
the Registrant and American Stock Transfer & Trust No. 333-15483
company
10.30 1988 Nonqualified Stock Option Plan Exhibit 28.3 to Form S-8 Registration Statement
No. 333-06771
10.31 Sub-lease Agreement dated October 11, 1991 Exhibit 10.3 to 1993 Form 10-K
10.32 Lease Agreement dated April 26, 1994 Exhibit 10.4 to 1994 Form 10-K
10.33 Warrant Agreement dated as of August 29, 1991 Exhibit 99.1 to Form S-3 Registration Statement
between IMRE Corporation and Manufacturers Hanover No. 33-71278
Trust Company of California (now known as Chemical
Trust Company of California)
10.34 Form of Exchange of Bridge Debt and Warrant Exhibit 10.1 to Form S-3 Registration Statement
Termination Agreement No. 333-15483
10.35 Employment Agreement with Jay D. Kranzler Exhibit 10.8 to 1995 Form 10-K
10.36 Employment Agreement with Debby Jo Blank Exhibit 10.9 to 1995 Form 10-K
10.37 Spear, Leeds & Kellogg Stock Purchase Agreement
11.1 Statement regarding computation of per share loss Item 8 of 1995 Form 10-K
23.1 Consent of Ernst & Young LLP Independent Auditors
23.2 Consent of Cooley Godward LLP Reference is made to Exhibit 5.1
24.1 Power of Attorney Reference is made to page II-7
27.1 Financial Data Schedule
</TABLE>
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to provisions described in Item 15 or otherwise, the
Registrant has been advised that, in the opinion of the 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 such
director, officer or controlling person in connection with the securities being
registered, 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.
II-5.
<PAGE> 74
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the Registration Statement;
(iii) To include any material information with respect to the plan of
distribution nor previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement;
(2) That, for the purpose of determining any liability under the Securities Act
of 1933, each such post-effective amendment 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; and
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
II-6.
<PAGE> 75
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 San Diego,
State of California, on February 5, 1998.
CYPRESS BIOSCIENCE, INC.
By: /s/ Jay D. Kranzler, M.D., Ph.D.
----------------------------------
Jay D. Kranzler, M.D., Ph.D.
Chief Executive Officer and
Chief Scientific Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Jay D. Kranzler, M.D., Ph.D. and Debby Jo
Blank, and each of them, as his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement and to file
the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming that all said attorneys-in-fact
and agents, or any of them or their or his substitute or substituted may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, 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/ JAY D. KRANZLER, M.D., PH.D. Chief Executive Officer, Chief Scientific February 5, 1998
- ------------------------------------- Officer, Chief Financial Officer and Vice
Jay D. Kranzler, M.D., Ph.D. Chairman of the Board (Principal Executive
Officer and Principal Financial and
Accounting Officer)
/s/ DEBBY JO BLANK, M.D. President, Chief Operating Officer and February 5, 1998
- ------------------------------------- Director
Debby Jo Blank, M.D.
/s/ RICHARD M. CROOKS, JR. Chairman of the Board February 5, 1998
- -------------------------------------
Richard M. Crooks, Jr.
/s/ PHILIP J. O'REILLY Director February 5, 1998
- -------------------------------------
Philip J. O'Reilly
/s/ JACK H. VAUGHN Director February 5, 1998
- -------------------------------------
Jack H. Vaughn
</TABLE>
II-7.
<PAGE> 76
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description Incorporated by Reference to
----------- -------------------------------------------------- -------------------------------------------------
<S> <C> <C>
3.1 Amended and Restated Certificate of Incorporation Exhibit 3.1 to Form 10-Q for the quarter ended
March 30, 1996
3.2 By-Laws, as amended Exhibit 3.2 to1995 Form 10-K
4.1 Form of Stock Certificate Exhibit 4.1 to Form S-1 Registration Statement
No. 33-41225
4.2 Warrant Certificate Exhibit 4.2 to Form 8-K filed November 1, 1996
5.1 Opinion of Cooley Godward LLP
10.1 Form of Common Stock Purchase Warrant Exhibit 3.1 to Form S-1 Registration Statement
No. 33-41225
10.2 Form of Employee Stock Warrant Exhibit 10.13 of Form S-1 Registration Statement
No. 33-41225
10.3 Agreement and Plan of Merger and Reorganization Exhibit 2.1 to Form 10-Q for quarter ended
dated October 10, 1996, by and among Registrant, September 30, 1996
Cypress Acquisition Sub, Inc. and PRP, Inc.
10.4 Warrant Agreement dated September 18, 1996, Exhibit 4.1 to Form 10-Q for quarter ended
between Registrant and American Stock Transfer & September 30, 1996
Trust Company
10.5 Exchange of Bridge Debt and Warrant Termination Exhibit 4.2 to Form 10-Q for quarter ended
Agreement between Registrant and certain holders September 30, 1996
of indebtedness of PRP, Inc.
10.6 Incentive Stock Option Exhibit 28.2 to Form S-8 Registration Statement
No. 33-20188
10.7 Form of Nonqualified Stock Option Exhibit 4.5 to Form 10-K for the year ended
December 31, 1993
10.8 Form of 7% Convertible Debentures Exhibit 10.1 to Form 10-Q for the quarter ended
March 31, 1994
10.9 Warrant Agreement dated as of April 22, 1994 Exhibit 10.3 to Form 10-Q for the quarter ended
between IMRE Corporation and Allen & Company March 31, 1994
Incorporated
10.10 Form 7% Convertible Debenture Purchase Agreement Exhibit 10.4 to Form 10-Q for the quarter ended
March 31, 1994
10.11 Form of Senior Convertible Debenture Exhibit 4.10 to 1995 From 10-K
10.12 Form of Senior Convertible Debenture Purchase Exhibit 4.11 to 1995 Form 10-K
Agreement
10.13 Form of Stock Purchase Agreement for January 1996 Exhibit 4.12 to 1995 Form 10-K
Private Placement
10.14 Form of Warrant to Purchase Common Stock Exhibit 99.1 to Form S-8 Registration Statement
No. 333-19465
10.15 1996 Equity Incentive Plan (the "1996 Plan") Exhibit 99.1 to Form S-8 Registration Statement
No. 333-06771
10.16 Sub-Lease Agreement dated April 15, 1996, between Exhibit 3.1 to Form 10-Q for the quarter ended
the Company and Bristol-Myers Squibb Company March 30, 1996
</TABLE>
<PAGE> 77
<TABLE>
<S> <C> <C>
10.17 Common Stock Purchase Warrant dated June 10, 1991 Exhibit 99.1 to Form S-8 Registration Statement
No. 333-06765
10.18 Warrant Agreement dated as of August 29, 1991 Exhibit 99.1 to Form S-3 Post Effective Amendment
between IMRE Corporation and Manufacturers of to Registration Statement No. 33-71278
Hanover Trust Company of California (now know as
Chemical Trust Company of California)
10.19 Successor Warrant Agent Agreement date July 23, Exhibit 99.2 to Form S-3 Post Effective Amendment
1996 between the Registrant and American Stock to Registration Statement No. 33-71278
Transfer & Trust Company
10.20 Form of Incentive Stock Option Agreement under the Exhibit 3.1 to Form 10-Q for the quarter ended
1996 Plan March 30, 1996
10.21 1996 Equity Incentive Plan Form of Non-Statutory Exhibit 3.1 to Form 10-Q for the quarter ended
Stock Option Agreement March 30, 1996
10.22 Incentive Stock Option and Appreciation Plan, as Exhibit 99.4 to Form S-8 Registration Statement
amended June 29, 1992 No. 333-06771
10.23 Form of Incentive Stock Option Agreement under the Exhibit 99.5 to Form S-8 Registration Statement
ISO Plan No. 333-06771
10.24 Amended and Restated 1988 Nonqualified Stock Exhibit 99.6 to Form S-8 Registration Statement
Option Plan No. 333-06771
10.25 Form of Nonqualified Stock Option Agreement under Exhibit 99.7 to Form S-8 Registration Statement
the 1988 Plan No. 333-06771
10.26 Form of Stock Option Agreement for issuances of Exhibit 99.8 to Form S-8 Registration Statement
all non-plan options No. 333-06771
10.27 Form of Nonstatutory Stock Option Exhibit 99.3 to Form S-8 Registration Statement
Agreement under the 1996 Plan
10.28 Stock Option and Stock Appreciation Plan Exhibit 28.1 to Form S-8 Registration Statement
No. 333-06771
10.29 Warrant Agreement dated September 19, 1996 between Exhibit 10.1 to Form S-3 Registration Statement
the Registrant and American Stock Transfer & Trust No. 333-15483
company
10.30 1988 Nonqualified Stock Option Plan Exhibit 28.3 to Form S-8 Registration Statement
No. 333-06771
10.31 Sub-lease Agreement dated October 11, 1991 Exhibit 10.3 to 1993 Form 10-K
10.32 Lease Agreement dated April 26, 1994 Exhibit 10.4 to 1994 Form 10-K
10.33 Warrant Agreement dated as of August 29, 1991 Exhibit 99.1 to Form S-3 Registration Statement
between IMRE Corporation and Manufacturers Hanover No. 33-71278
Trust Company of California (now known as Chemical
Trust Company of California)
10.34 Form of Exchange of Bridge Debt and Warrant Exhibit 10.1 to Form S-3 Registration Statement
Termination Agreement No. 333-15483
10.35 Employment Agreement with Jay D. Kranzler Exhibit 10.8 to 1995 Form 10-K
10.36 Employment Agreement with Debby Jo Blank Exhibit 10.9 to 1995 Form 10-K
10.37 Spear, Leeds & Kellogg Stock Purchase Agreement
11.1 Statement regarding computation of per share loss Item 8 of 1995 Form 10-K
23.1 Consent of Ernst & Young LLP Independent Auditors
23.2 Consent of Cooley Godward LLP Reference is made to Exhibit 5.1
24.1 Power of Attorney Reference is made to page II-7
27.1 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 5.1
[COOLEY GODWARD LLP LETTERHEAD]
February 5, 1998
Cypress Bioscience, Inc.
4350 Executive Drive, Suite 325
San Diego, CA 92121
Gentlemen:
You have requested our opinion with respect to certain matters in connection
with the filing by Cypress Bioscience, Inc. (the "Company") of a Registration
Statement on Form S-1 (the "Registration Statement") with the Securities and
Exchange Commission, including a related prospectus filed with the Registration
Statement (the "Prospectus"), covering the offering of 350,000 shares of the
Company's Common Stock, $.02 par value, to be sold by Spear, Leeds & Kellogg
(the "Common Stock").
In connection with this opinion, we have examined and relied upon the
Registration Statement and related Prospectus, the Company's Certificate of
Incorporation and Bylaws, both as amended, and the originals or copies
certified to our satisfaction of such records, documents, certificates,
memoranda and other instruments as in our judgment are necessary or appropriate
to enable us to render the opinion expressed below. In rendering this opinion
we have assumed: the genuineness and authenticity of all signatures on original
documents; the authenticity of all documents submitted to us as originals; the
conformity to originals of all documents submitted to us as copies; the
accuracy, completeness and authenticity of certificates of public officials;
and the due authorization, execution and delivery of all documents where
authorization, execution and delivery are prerequisites to the effectiveness of
such documents. We have also assumed that all individuals executing and
delivering documents had the legal capacity to so execute and deliver.
On the basis of the foregoing, and in reliance thereon, we are of the opinion
that the Common Stock is validly issued, fully paid, and nonassessable.
We consent to the reference to our firm under the caption "Legal Matters" in
the Prospectus included in the Registration Statement and to the filing of this
opinion as an exhibit to the Registration Statement.
Very truly yours,
COOLEY GODWARD LLP
By: /s/ FREDERICK T. MUTO
---------------------------
Frederick T. Muto
<PAGE> 1
EXHIBIT 10.37
CYPRESS BIOSCIENCE, INC.
STOCK PURCHASE AGREEMENT
<PAGE> 2
TABLE OF CONTENTS
1. AUTHORIZATION OF SALE OF THE SHARES....................................1
2. AGREEMENT TO SELL AND PURCHASE THE SHARES..............................1
3. DELIVERY OF THE SHARES AT THE CLOSING..................................1
4. REPRESENTATIONS, WARRANTIES AND COVENANTS..............................2
4.1 Organization and Qualification...................................2
4.2 Due Execution, Delivery and Performance of the
Agreements.......................................................2
4.3 Issuance, Sale and Delivery of the Shares........................2
4.4 Additional Information...........................................3
4.5 No Material Change...............................................3
5. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE PURCHASER.............3
6. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS.................4
7. REGISTRATION OF THE SHARES; COMPLIANCE WITH THE SECURITIES ACT.........4
7.1 Resale S-3 Registration Rights...................................4
7.2 Transfer of Shares After Registration............................5
7.3 Expenses of Registration.........................................5
7.4 Indemnification..................................................6
7.5 Rule 144 Reporting...............................................8
8. BROKER'S FEE...........................................................8
9. NOTICES................................................................8
10. CHANGES................................................................9
11. HEADINGS...............................................................9
12. SEVERABILITY...........................................................9
13. GOVERNING LAW..........................................................9
14. COUNTERPARTS...........................................................9
15. REMEDIES...............................................................9
<PAGE> 3
STOCK PURCHASE AGREEMENT
This STOCK PURCHASE AGREEMENT (the "Agreement") is made as of October __,
1997 between CYPRESS BIOSCIENCE, INC., a Delaware corporation with its principal
place of business at 4350 Executive Drive, Suite 325, San Diego, California
92121 (the "Company"), and the purchaser whose name and address is set forth on
the signature page hereof (the "Purchaser").
IN CONSIDERATION of the mutual covenants contained in this Agreement, and
for other good and valuable consideration, the receipt and sufficiency of which
is hereby acknowledged, the Company and the Purchaser agree as follows:
1. AUTHORIZATION OF SALE OF THE SHARES. Subject to the terms and conditions of
this Agreement, the Company has authorized the sale of up to three million five
hundred thousand (3,500,000) shares of Common Stock of the Company (the
"Shares") at a sales price of $1.50 per Share.
2. AGREEMENT TO SELL AND PURCHASE THE SHARES. At the Closing (as defined in
Section 3), the Company will sell to the Purchaser, and the Purchaser will buy
from the Company, upon the terms and conditions hereinafter set forth, the
number of Shares for the aggregate purchase price set forth below:
AGGREGATE
<TABLE>
<CAPTION>
NUMBER OF SHARES PURCHASE PRICE PURCHASE
PURCHASED PER SHARE PRICE
---------------- -------------- -----------
<S> <C> <C>
350,000 $1.50 $525,000.00
</TABLE>
3. DELIVERY OF THE SHARES AT THE CLOSING. The completion of the purchase and
sale of the Shares to be issued pursuant to this Agreement (the "Closing") shall
occur upon (i) receipt by the Company of (A) a signed copy of this Agreement,
(B) a completed Stock Certificate and Funds Transfer Questionnaire, the form of
which is attached hereto as Exhibit A, (C) a signed and dated Investor
Qualification Questionnaire, a form of which is attached hereto as Exhibit B,
and (D) the aggregate purchase price for the Shares, or (ii) on such other date
as may be agreed to by the Company and the Purchaser. At the Closing, the
Company shall deliver to the Purchaser or the Purchaser's custodian bank, in
accordance with the Purchaser's delivery instructions, one or more stock
certificates registered in the name of the Purchaser, or in such nominee name(s)
as designated by the Purchaser, representing the number of Shares set forth in
Section 2 above. The name(s) in which the stock certificates are to be issued
are set forth in the Stock Certificate and Funds Transfer Questionnaire attached
hereto as part of Exhibit A. The Company's obligation to complete the purchase
and sale of the Shares and deliver such stock certificate(s) to the Purchaser at
the Closing shall be subject to the following conditions, any one or more of
which may be waived by the Company: (a) subject to delivery of the share
certificates to the Purchaser or Purchaser's custodian bank, receipt by the
Company of immediately available funds, by check or wire transfer, in the full
amount of the purchase price for the Shares being purchased hereunder;
<PAGE> 4
(b) receipt by the Company of a signed and dated Investor Qualification
Questionnaire attached as Exhibit B hereto; (c) the accuracy of the
representations and warranties made by the Purchaser herein as of the Closing;
and (d) the fulfillment of those undertakings of the Purchaser to be fulfilled
prior to the Closing. The Purchaser's obligation to accept delivery of such
stock certificate(s) and to pay for the Shares evidenced thereby shall be
subject to the following conditions: (i) the accuracy of the representations and
warranties made by the Company herein as of the Closing; and (ii) the
fulfillment in all material respects of those undertakings of the Company to be
fulfilled prior to the Closing. Upon receipt by the Purchaser's custodian bank
of certificates evidencing the number of Shares being purchased hereunder, the
Purchaser shall cause its custodian bank to remit the full amount of the
aggregate purchase price to the Company in immediately available funds, by check
or wire transfer. The Purchaser's obligations hereunder are expressly not
conditioned on the purchase of any or all of the Shares by any other person or
entity.
4. REPRESENTATIONS, WARRANTIES AND COVENANTS. The Company hereby represents and
warrants to, and covenants with, the Purchaser as follows:
4.1 ORGANIZATION AND QUALIFICATION. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware and has all requisite corporate power and authority to conduct its
business as currently conducted.
4.2 DUE EXECUTION, DELIVERY AND PERFORMANCE OF THE AGREEMENTS. The
Company's execution, delivery and performance of this Agreement (a) has been
duly authorized by all requisite corporate action by the Company, and (b) will
not violate the Certificate of Incorporation or Bylaws of the Company or violate
or result in a breach of or constitute a default under, any provision of any
material indenture, mortgage, agreement, contract or other material instrument
to which the Company or any subsidiary is a party or by which the Company or any
subsidiary or any of their respective properties or assets is bound as of the
date hereof. Upon the execution and delivery, and assuming the valid execution
thereof by the Purchaser, this Agreement will constitute a valid and binding
obligation of the Company, enforceable in accordance with its terms, except as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors' and contracting
parties' rights generally and except as enforceability may be subject to general
principles of equity (regardless of whether such enforceability is considered in
a proceeding in equity or at law) and except as the indemnification agreements
of the Company in Section 7.5 hereof may be legally unenforceable.
4.3 ISSUANCE, SALE AND DELIVERY OF THE SHARES. The authorized capital
stock of the Company consists of sixty million (60,000,000) shares of Common
Stock and fifteen million (15,000,000) shares of Preferred Stock, $0.02 par
value per share. As of September 25, 1997, there were issued and outstanding
34,636,067 shares of the Company's Common Stock, which shares are duly
authorized, validly issued, fully paid and nonassessable. When issued, delivered
to Purchaser or Purchaser's custodian bank and paid for by Purchaser in
accordance with the terms and conditions of this Agreement, the Shares to be
sold hereunder by the Company will be validly issued, fully paid and
nonassessable and will be delivered to Purchaser free and clear of all liens,
pledges, claims, encumbrances, security interests or other restrictions, except
for
2.
<PAGE> 5
restrictions on transfer imposed to ensure compliance with the Securities Act of
1993, as amended (the "Securities Act").
4.4 ADDITIONAL INFORMATION. The Company represents and warrants that the
information contained in the following documents, which the Company has
furnished to the Purchaser, is true and correct in all material respects as of
their respective final dates:
(a) the Company's Annual Report on Form 10-K for the year ended
December 31, 1996 (without exhibits);
(b) the Company's Quarterly Reports on Form 10-Q for the periods
ended March 31 and June 30, 1997 (the "Form 10-Qs");
(c) the Company's Current Report on Form 8-K dated as of January 17,
1997;
(d) the Company's Proxy Statement dated September 2, 1997 for the
Company's 1997 Annual Meeting of Stockholders;
(e) the Company's Press Releases dated June 30, 1997 and July 28,
1997 (collectively, the "Press Releases"); and
(f) the Company's Private Placement Memorandum dated September 8,
1997 prepared in connection with the issuance of the Shares, as amended by that
certain First Supplement to Private Placement Memorandum dated September 30,
1997 (the "Memorandum").
4.5 NO MATERIAL CHANGE. As of the date hereof, except as may be reflected
in the Form 10-Qs, the Memorandum or the Press Releases, there has been no
material adverse change in the financial condition or results of operations of
the Company since June 30, 1997.
5. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE PURCHASER.
The Purchaser represents, warrants and covenants with the Company as
follows:
5.1 The Purchaser represents and warrants to, and covenants with, the
Company that: (i) the Purchaser, taking into account the personnel and resources
it can practically bring to bear on the purchase of the Shares contemplated
hereby, is knowledgeable, sophisticated and experienced in making, and is
qualified to make, decisions with respect to investments in shares presenting an
investment decision like that involved in the purchase of the Shares, including
investments in securities issued by the Company, and has requested, received,
reviewed and considered all information it deems relevant in making an informed
decision to purchase the Shares; (ii) the Purchaser is acquiring the number of
Shares set forth in Section 2 above for its own account for investment only and
with no present intention of distributing any of such Shares or any arrangement
or understanding with any other persons regarding the distribution of such
Shares; (iii) the Purchaser will not, directly or indirectly, offer, sell,
pledge, transfer or otherwise dispose of (or solicit any offers to buy, purchase
or otherwise acquire or take a pledge of) any of the Shares except in compliance
with the Securities Act and the rules and regulations
3.
<PAGE> 6
promulgated thereunder; (iv) the Purchaser has completed or caused to be
completed the Stock Certificate and Funds Transfer Questionnaire, attached
hereto as Exhibit A and the answers thereto are true and correct to the best
knowledge of the Purchaser as of the date hereof; (v) the Purchaser has, in
connection with its decision to purchase the number of Shares set forth in
Section 2 above, relied solely upon the information delivered to the Purchaser
as described in Section 4.4 above and the representations and warranties of the
Company contained herein; and (vi) the Purchaser is an "accredited investor"
within the meaning of Rule 501 of Regulation D promulgated under the Securities
Act and has completed or caused to be completed the relevant Investor
Qualification Questionnaire attached hereto as Exhibit B.
5.2 The Purchaser further represents and warrants to, and covenants with,
the Company that (i) the Purchaser has full right, power, authority and capacity
to enter into this Agreement and to consummate the transactions contemplated
hereby and has taken all necessary action to authorize the execution, delivery
and performance of this Agreement, and (ii) upon the execution and delivery of
this Agreement, this Agreement shall constitute a valid and binding obligation
of the Purchaser enforceable in accordance with its terms, except as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors' and contracting
parties' rights generally and except as enforceability may be subject to general
principles of equity (regardless of whether such enforceability is considered in
a proceeding in equity or at law) and except as the indemnification agreements
of the Purchaser in Section 7.5 hereof may be legally unenforceable.
5.3 Purchaser acknowledges and agrees that the Shares acquired by
Purchaser must be held indefinitely unless they are subsequently registered
under the Securities Act or an exemption from such registration is available.
Purchaser has been advised or is aware of the provisions of Rule 144 promulgated
under the Securities Act, which permits limited resale of securities in a
private placement subject to the satisfaction of certain conditions, including,
among other things: the availability of certain current public information about
the Company, the resale occurring not less than one year after a party has
purchased and paid for the security to be sold, the sale being made through an
unsolicited "broker's transaction" or in transactions directly with a market
maker (as said term is defined under the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) and the number of shares being sold during any
three-month period not exceeding specified limitations.
6. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. Notwithstanding any
investigation made by any party to this Agreement, all covenants, agreements,
representations and warranties made by the Company and the Purchaser herein and
in the certificates for the Shares delivered pursuant hereto shall survive the
execution of this Agreement, the delivery to the Purchaser of the Shares being
purchased and the payment therefor.
4.
<PAGE> 7
7. REGISTRATION OF THE SHARES; COMPLIANCE WITH THE SECURITIES ACT.
7.1 RESALE REGISTRATION RIGHTS.
(A) The Company shall within thirty (30) days following receipt by
the Company of a written request by the Purchaser, prepare and file with the
Securities and Exchange Commission (the "Commission") a registration statement
(the "Registration Statement") in order to register the Shares with the
Commission for resale by Purchaser from time to time through underwriters,
agents or otherwise, in negotiated or market transactions or through the
automated quotation system of the Nasdaq or the facilities of any national
securities exchange on which the Company's Common Stock is then traded or in
privately negotiated transactions;
(B) use its best efforts, subject to the receipt of necessary
information from the Purchaser, to cause the Registration Statement to become
effective within sixty (60) days after the Registration Statement is filed by
the Company;
(C) prepare and file with the Commission such amendments and
supplements to the Registration Statement and the prospectus used in connection
therewith as may be necessary to keep the Registration Statement effective for a
period of sixty (60) days after it is declared effective by the Commission or,
if earlier, until Purchaser has sold all of the Shares covered by such
Registration Statement (provided that the Company shall not be deemed to have
used its best efforts to keep the Registration Statement effective if it
voluntarily takes any action that would result in Purchaser not being able to
sell any of its Shares pursuant to the Registration Statement unless (i) such
action is required under applicable law or taken by the Company in good faith
and for valid business reasons, including without limitation the acquisition or
divestiture of assets and (ii) the Company promptly complies with the
requirements of this Section 7.1, if applicable);
(D) furnish to Purchaser with respect to the Shares registered under
the Registration Statement such number of copies of prospectuses and preliminary
prospectuses in conformity with the requirements of the Securities Act, in order
to facilitate the public sale or other disposition of all or any of the Shares
by Purchaser; provided, however, that the obligation of the Company to deliver
copies of prospectuses or preliminary prospectuses to Purchaser shall be subject
to the receipt by the Company of reasonable assurances from Purchaser that
Purchaser will comply with the applicable provisions of the Securities Act and
of such other securities or blue sky laws as may be applicable in connection
with any use of such prospectuses or preliminary prospectuses; and
(E) file documents required of the Company for normal blue sky
clearance in states specified in writing by Purchaser; provided, however, that
the Company shall not be required to qualify to do business or consent to
service of process in any jurisdiction in which it is not now so qualified or
has not so consented.
7.2 TRANSFER OF SHARES AFTER REGISTRATION. Purchaser agrees that it will
not effect any disposition of the Shares that would constitute a sale within the
meaning of the Securities Act except as contemplated in Section 7.1 and that it
will promptly notify the Company of any
5.
<PAGE> 8
changes in the information set forth in the Registration Statement regarding
Purchaser or its plan of distribution.
7.3 EXPENSES OF REGISTRATION. All expenses incurred by the Company in
complying with Section 7.1, including without limitation, all registration and
filing fees, printing expenses, fees and disbursements of counsel and
independent public accountants for the Company and blue sky fees and expenses
(but excluding underwriting and/or selling commissions incurred with respect to
the resale of the Shares) shall be borne by the Company.
7.4 TERMINATION OF REGISTRATION RIGHTS. All registration rights granted
under this Section 7 shall terminate and be of no further force and effect one
(1) year after the date of the Closing.
7.5 INDEMNIFICATION.
(a) For the purposes of this Section 7.5, the following terms shall
have the following meanings:
(i) "Registration Statement" shall include any final
prospectus, exhibit supplement or amendment included in or relating to any
registration statement referred to in this Section 7; and
(ii) "untrue statement" shall include any untrue statement or
alleged untrue statement, or any omission or alleged omission to state in the
Registration Statement a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading.
(b) The Company agrees to indemnify and hold harmless each Holder
from and against any losses, claims, damages or liabilities to which such
Purchaser may become subject (under the Securities Act or otherwise), insofar as
such losses, claims, damages or liabilities (or actions or proceedings in
respect thereof) arise out of, or are based upon, any untrue statement of a
material fact contained in the Registration Statement on the effective date of
such Registration Statement, or arise out of any failure by the Company to
fulfill any undertaking included in the Registration Statement, and the Company
will reimburse such Purchaser for any reasonable legal or other expenses
reasonably incurred in investigating, defending or preparing to defend any such
action, proceeding or claim; provided, however, that the Company shall not be
liable in any such case to the extent that such loss, claim, damage or liability
arises out of, or is based upon, an untrue statement made in such Registration
Statement in reliance upon and in conformity with written information furnished
to the Company by or on behalf of such Purchaser specifically for use in
preparation of the Registration Statement, or the failure of such Purchaser to
comply with the covenants and agreements contained in Sections 5.1 and 7.2
hereof respecting the sale of the Shares or any statement or omission in any
prospectus that is corrected in any subsequent prospectus that was delivered to
Purchaser prior to the pertinent sale or sales by Purchaser.
6.
<PAGE> 9
(c) Purchaser agrees to indemnify and hold harmless the Company (and
each person, if any, who controls the Company within the meaning of Section 15
of the Securities Act, each officer of the Company who signs the Registration
Statement and each director of the Company) from and against any losses, claims,
damages or liabilities to which the Company (or any such officer, director or
controlling person) may become subject (under the Securities Act or otherwise),
insofar as such losses, claims, damages or liabilities (or actions or
proceedings in respect thereof) arise out of, or are based upon, any failure to
comply with the covenants and agreements contained in Sections 5.1 and 7.2
hereof respecting the sale of the Shares, or any untrue statement of a material
fact contained in the Registration Statement on the effective date of such
Registration Statement if such untrue statement was made in reliance upon and in
conformity with written information furnished by or on behalf of Purchaser
specifically for use in preparation of the Registration Statement, and Purchaser
will reimburse the Company (or such officer, director or controlling person, as
the case may be) for any legal or other expenses reasonably incurred in
investigating, defending or preparing to defend any such action, proceeding or
claim. In no event shall the liability of Purchaser hereunder be greater in
amount than the dollar amount of the proceeds received by Purchaser upon the
sale of Shares giving rise to such indemnification obligation.
(d) Promptly after receipt by an indemnified party under this
Section 7.5 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect thereof
is to be made against any indemnifying party under this Section 7.5, deliver to
the indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party shall
have the right to retain its own counsel, with the fees and expenses to be paid
by the indemnifying party, if representation of such indemnified party by the
counsel retained by the indemnifying party would be inappropriate due to actual
or potential differing interests between such indemnified party and any other
party represented by such counsel in such proceeding. The failure to deliver
written notice to the indemnifying party within a reasonable time of the
commencement of any such action, if materially prejudicial to its ability to
defend such action, shall relieve such indemnifying party of any liability to
the indemnified party under this Section 7.5, but the omission so to deliver
written notice to the indemnifying party will not relieve it of any liability
that it may have to any indemnified party otherwise than under this Section 7.5.
(e) If the indemnification provided for in this Section 7.5 is held
by a court of competent jurisdiction to be unavailable to an indemnified party
with respect to any losses, claims, damages or liabilities referred to herein,
the indemnifying party, in lieu of indemnifying such indemnified party
thereunder, shall to the extent permitted by applicable law contribute to the
amount paid or payable by such indemnified party as a result of such loss,
claim, damage or liability in such proportion as is appropriate to reflect the
relative fault of the indemnifying party on the one hand and of the indemnified
party on the other in connection with the violation(s) that resulted in such
loss, claim, damage or liability, as well as any other relevant equitable
considerations. The relative fault of the indemnifying party and of the
indemnified party shall be determined by a court of law by reference to, among
other things, whether the untrue or alleged
7.
<PAGE> 10
untrue statement of a material fact or the omission to state a material fact
relates to information supplied by the indemnifying party or by the indemnified
party and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission; provided, that in
no event shall any contribution by a Purchaser hereunder exceed the proceeds
from the offering received by such Purchaser.
(f) The obligations of the Company and Purchasers under this Section
7.5 shall survive completion of any offering of Shares in a Registration
Statement and the termination of this Agreement. No indemnifying party, in the
defense of any such claim or litigation, shall, except with the consent of each
indemnified party, consent to entry of any judgment or enter into any settlement
which does not include as an unconditional term thereof the giving by the
claimant or plaintiff to such indemnified party of a release from all liability
in respect to such claim or litigation.
7.6 RULE 144 REPORTING. With a view to making available to Purchasers the
benefits of certain rules and regulations of the SEC which may permit the sale
of the Shares to the public without registration, the Company agrees to use its
best efforts to:
(a) Make and keep public information available, as those terms are
understood and defined in Commission Rule 144 or any similar or analogous rule
promulgated under the Securities Act; and
(b) File with the Commission, in a timely manner, all reports and
other documents required of the Company under the Exchange Act.
8. BROKER'S FEE.
(a) Each of the parties hereto hereby represents that, except as
provided in Section 8(b), on the basis of any actions and agreements by it,
there are no brokers or finders entitled to compensation in connection with the
sale of Shares to the Purchaser.
(b) The Company has agreed to pay to certain persons or entities who
have been retained by the Company to assist it with the sale of Shares being
offered hereby a fee in an amount equal to six percent (6%) of the total sales
price of any Shares sold by any such person or entity.
8.
<PAGE> 11
9. NOTICES. All notices, requests, consents and other communications hereunder
shall be in writing, shall be sent by facsimile or mailed by first class
registered or certified airmail, or nationally recognized overnight express
courier postage prepaid, and shall be deemed given when so sent by facsimile or
mailed and shall be delivered as follows:
(a) if to the Company, to:
Cypress Bioscience, Inc.
4350 Executive Drive
Suite 325
San Diego, CA 92121
Attention: Director of Finance
with a copy so mailed to:
Cooley Godward LLP
4365 Executive Drive
Suite 1100
San Diego, California 92121
Attention: Frederick T. Muto, Esq.
or to such other person at such other place as the Company shall designate to
the Purchaser in writing; and
(b) if to the Purchaser, at its address as set forth at the end of
this Agreement, or at such other address or addresses as may have been furnished
to the Company in writing.
10. CHANGES. This Agreement may not be modified or amended except pursuant to an
instrument in writing signed by the Company and the Purchaser.
11. HEADINGS. The headings of the various sections of this Agreement have been
inserted for convenience of reference only and shall not be deemed to be part of
this Agreement.
12. SEVERABILITY. In case any provision contained in this Agreement should be
invalid, illegal or unenforceable in any respect, the validity, legality and
enforceability of the remaining provisions contained herein shall not in any way
be affected or impaired thereby.
13. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware as applied to contracts
entered into and performed entirely in Delaware by Delaware residents.
14. COUNTERPARTS. This Agreement may be executed in two or more counterparts,
each of which shall constitute an original, but all of which, when taken
together, shall constitute but one instrument.
15. REMEDIES. In addition to being entitled to exercise all rights and remedies
provided herein or granted by law for any breach by the Company hereunder, the
Purchaser will be entitled
9.
<PAGE> 12
to specific performance of its rights under this Agreement. In that regard, the
Company acknowledges and agrees that monetary damages would not be adequate
compensation for any loss incurred by reason of a breach by it of the provisions
of this Agreement and hereby agrees to waive the defense in any action for
specific performance that a remedy at law would be adequate.
10.
<PAGE> 13
IN WITNESS WHEREOF, the parties hereto have caused this Stock Purchase
Agreement to be executed by their duly authorized representatives as of the day
and year first above written.
CYPRESS BIOSCIENCE, INC. PURCHASER
SPEAR, LEEDS & KELLOGG
By: /s/ Susan E. Feiner By: /s/ Carl H. Hewitt
-------------------------------- --------------------------------
Name: Susan E. Feiner Name: Carl. H. Hewitt
Title: Director of Finance Title: Managing Director
Address: 120 Broadway
New York, NY 10271
Telephone: (212) 433-7000
Telecopier: (212) 433-7294
11.
<PAGE> 14
SUMMARY INSTRUCTION SHEET FOR PURCHASER
(TO BE READ IN CONJUNCTION WITH THE ENTIRE
STOCK PURCHASE AGREEMENT WHICH FOLLOWS)
A. Complete the following items on the Purchase Agreement:
1. Page 11 - Signature:
(I) Name of Purchaser (Individual or Institution)
(II) Name of Individual representing Purchaser (if an Institution)
(III) Title of Individual representing Purchaser (if an Institution)
(IV) Signature of Individual Purchaser or Individual representing
Purchaser
2. Exhibit A - Stock Certificate and Funds Transfer Questionnaire:
Provide the information requested by the Stock Certificate and
Funds Transfer Questionnaire.
3. Exhibit B - Investor Qualification Questionnaire:
Two forms of Investor Qualification Questionnaires have been
included as Exhibit B, one to be completed by individual
purchasers and one to be completed by entity purchasers (e.g.,
corporation, trust, partnership). Please complete, sign and
return the appropriate Investor Qualification Questionnaire.
4. Return the properly completed and signed Stock Purchase Agreement
including properly completed Exhibit A and Exhibit B and, if paying
by check, a check for the full purchase price, to:
Cypress Bioscience, Inc.
4350 Executive Drive, Suite 325
San Diego, CA 92121
Attn: Susan E. Feiner
T: (619) 452-2323
F: (619) 452-1222
PLEASE RETURN THE FOREGOING DOCUMENTS BY FEDEX.
<PAGE> 15
EXHIBIT A
CYPRESS BIOSCIENCE, INC.
STOCK CERTIFICATE AND FUNDS TRANSFER QUESTIONNAIRE
Pursuant to Section 3 of the Stock Purchase Agreement, please provide us
with the following information:
1. The exact name that your Shares
are to be registered in (this is ------------------------------
the name that will appear on your
stock certificate(s)). You may
use a nominee name if
appropriate:
2. The relationship between the
Purchaser of the Shares and the ------------------------------
Registered Holder listed in
response to item 1 above:
3. The mailing address of the
Registered Holder listed in ------------------------------
response to item 1 above:
4. The Social Security Number or Tax
Identification Number of the ------------------------------
Registered Holder listed in the
response to item 1 above:
5. Whether you will be making Check [ ]
payment for the Shares with a
check or wire transfer (check Wire Transfer [ ]
appropriate box). If you will be
sending a wire transfer, please Name of your bank
provide the name of your bank and -------------
the proposed initiation date of
the wire: ------------------------------
------------------------------
Date of initiation
------------
------------------------------
2.
<PAGE> 16
EXHIBIT B
CYPRESS BIOSCIENCE, INC.
INVESTOR QUALIFICATION QUESTIONNAIRE
[INDIVIDUALS]
In connection with a proposed offer to the undersigned of securities of
Cypress Bioscience, Inc., a Delaware corporation (the "Company"), the
undersigned makes the following representations on which the Company shall be
entitled to rely:
1. The undersigned makes on the following representations regarding his or
her net worth and/or income, and has checked the applicable representation:
( ) a. The undersigned has a net worth, either individually or upon a
joint basis with the undersigned's spouse, of at least
$1,000,000.
( ) b. The undersigned has had an individual income in excess of
$200,000 for each of the two most recent years, or joint
income with the undersigned's spouse in excess of $300,000 in
each of those years, and has a reasonable expectation of
reaching the same income level in the current year.
( ) c. The undersigned is a director or executive officer of the
Company.
( ) d. The undersigned cannot make any of the representations set
forth above.
In addition, the undersigned represents as follows:
2. My full name and primary business address and phone number are
3. I am a resident of the state of
4. I am acquiring the securities solely for my own account and not
directly or indirectly for the account of any other person whatsoever, for
investment and not with a view to, or for sale in connection with, any
distribution of the securities. I do not have any contract, undertaking or
arrangement with any person to sell, transfer or grant a participation to any
person with respect to the securities.
------------------------------
(Signature)
------------------------------
(Date)
<PAGE> 17
EXHIBIT B
CYPRESS BIOSCIENCE, INC.
INVESTOR QUALIFICATION QUESTIONNAIRE
[PARTNERSHIP, TRUST OR OTHER ENTITY]
In connection with a proposed offer to the undersigned of securities of
Cypress Bioscience, Inc., a Delaware corporation (the "Company"), the
undersigned makes the following representations on which the Company shall be
entitled to rely:
1. The undersigned makes one of the following representations regarding
its net worth and certain related matters, and has checked the applicable
representation:
( ) a. The undersigned is a trust with total assets in excess of
$5,000,000, whose purchase is directed by a person with such
knowledge and experience in financial and business matters
that he is capable of evaluating the merits and risks of the
prospective investment.
( ) b. The undersigned represents that it is a bank, insurance
company, investment company registered under the Investment
Company Act of 1940, a business development company, Small
Business Investment Company licensed by the U.S. Small
Business Administration, or a private business development
company.
( ) c. If the undersigned is an employee benefit plan, the
undersigned represents either that all investment decisions
are made by a bank, insurance company, or registered
investment advisor, or that the undersigned has total assets
in excess of $5,000,000.
( ) d. If the undersigned is a corporation, partnership or business
trust, the undersigned represents that it has total assets in
excess of $5,000,000.
( ) e. If the undersigned is not an entity described in paragraphs
"a" through "d", the undersigned represents that each of its
equity owners is either (i) an entity described in paragraphs
"b" through "d"; or (ii) an individual who (A) has an
individual net worth, or a joint net worth with such
individual's spouse, in excess of $1,000,000, or (B) has had
an individual income in excess of $200,000 in each of the two
most recent years and reasonably expects an income in excess
of $200,000 in the current year, or (C) is a director or
executive officer of the Company.
( ) f. The undersigned cannot make any of the representations set
forth in paragraphs "a" through "e" above.
In addition, the undersigned represents as follows:
<PAGE> 18
2. Its full name and primary business address and phone number are:
3. Its form, state and date of organization are (i.e., partnership,
corporation or trust, state where organized, date of organization):
4. The entity has sufficient profits and net assets that it does not
contemplate disposing of any investment in the Company to satisfy other
undertakings or indebtedness. It has made other investments in early stage
privately-held companies and the person(s) making the investment decision on its
behalf understand the risks attendant with such investments. The knowledge and
experience in financial and business matters of the person(s) making the
investment decision on its behalf are such that he/she/they are capable of
evaluating the merits and risks of an investment in the Company. It is able to
bear the economic risk of an investment in the Company as well as the
restriction on its ability to sell or transfer the investment for an indefinite
period of time. It has had access to such information concerning the Company and
the securities as it considered necessary to make an informed decision
concerning the proposed investment.
5. It was not formed for the specific purpose of making an investment in
the Company.
6. It is acquiring the securities solely for its own account and not
directly or indirectly for the account of any other person whatsoever, for
investment and not with a view to, or for sale in connection with, any
distribution of the securities. It does not have any contract, undertaking or
arrangement with any person to sell, transfer or grant a participation to any
person with respect to the securities.
Name of Entity:
By:
--------------------------------
(Signature)
-----------------------------------
(Name)
-----------------------------------
(Title)
-----------------------------------
(Date)
<PAGE> 19
EXHIBIT C
Attention:
CERTIFICATE OF SUBSEQUENT SALE
The undersigned, an officer of, or other person duly authorized by
-----------------------------------------------------------------
[fill in official name of individual or institution]
hereby certifies that he/she sold the shares evidenced by the attached
certificate on ________ in accordance with registration statement
number [date]
____________________________________________ and the requirement of
[fill in the number of or otherwise identify registration statement]
delivering a current prospectus has been complied with in connection
with such sale.
Print or Type:
Name (Individual or Institution):
-----------------------------------
Name of Individual representing
Institution
(if applicable)
-----------------------------------
Title of Individual representing
Institution
(if applicable):
-----------------------------------
Signature by:
Individual Purchaser or Individual
representing Institution:
-----------------------------------
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated January 17, 1997, in the Registration Statement (Form
S-1) and related Prospectus of Cypress Bioscience, Inc. for the registration of
shares of its common stock.
ERNST & YOUNG LLP
San Diego, California
February 3, 1998
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0
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