<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 16, 1998
Registration No. 333-45705
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------
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
or organization) Code Number) Number)
-----------
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)
------------
JAY D. KRANZLER
CHIEF EXECUTIVE OFFICER, CHIEF FINANCIAL OFFICER AND
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
-----------
Approximate date of commencement of proposed sale to the public:
FROM TIME TO TIME AFTER THE REGISTRATION STATEMENT BECOMES EFFECTIVE.
-----------
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
<TABLE>
<CAPTION>
========================================================================================================
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
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.02 par value .. 350,000 $2.8905 $962,500 $820.72(2)
========================================================================================================
</TABLE>
- ------------------------
(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.
(2) Previously paid upon the initial filing of this Registration Statement.
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.
- --------------------------------------------------------------------------------
<PAGE> 2
SUBJECT TO COMPLETION, DATED APRIL 16, 1998
PROSPECTUS
350,000 SHARES
CYPRESS BIOSCIENCE, INC.
COMMON STOCK
----------
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."
-------------------------------------------
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 $35,000. 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 APRIL ___, 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 ("FDA") in December 1987 to distribute the Prosorba(R)
column for the treatment of idiopathic thrombocytopenic purpura ("ITP"), an
immune-mediated bleeding disorder. In May 1996, the Company terminated its
exclusive distribution arrangement with Baxter Healthcare Corporation ("Baxter")
and regained the right to sell its Prosorba(R) column directly to customers.
Although the Company's direct sales and marketing efforts have proven more
effective than those under the Baxter distribution arrangement, ITP remains a
small market. In 1996, the Company initiated a Phase IV marketing study for the
use of the Prosorba(R) column in the treatment of ITP in an effort to generate
more rigorous clinical data then has been available to date. However, due to
increased competition for patients from other ITP studies, below expected
enrollment in the Company's study, and the more promising opportunities in the
rheumatoid arthritis ("RA") market, the Company determined that continued
investment in the ITP market was not the best use of its resources and
terminated its ITP trial during the fourth quarter of 1997. Although the
termination of the study is not expected to have any negative effects on the
existing sales of the Prosorba(R) column for the treatment of ITP, lack of data
from the study will make it difficult to effect any appreciable increase in
sales above their current levels in the area of ITP.
The Company's current clinical efforts to expand the approved
indications for the Prosorba(R) column are focused primarily on RA. In June
1996, the Company commenced a prospective, randomized, multi-center, double
blind, controlled Phase II pivotal trial designed to confirm the findings of an
earlier pilot study evaluating the use of the Prosorba column in the treatment
of RA. In January 1998, the Company's Phase III clinical trial was stopped early
due to the achievement of favorable safety and statistically significant
results. Based on such results, the Company plans to file a Pre-Market Approval
("PMA") application for the Prosorba(R) column for the treatment of RA with the
FDA in mid-1998. However, there can be no assurance that the Company will be
able to file the PMA by mid-1998, or if the PMA is filed, that FDA approval or
the Prosorba(R) column for the treatment of RA will be received on a timely
basis, if at all.
The Company is also developing Cyplex, a platelet alternative,
previously known as Infusible Platelet Membranes ("IPM") as an alternative to
traditional platelet transfusions. The Company initiated a double-blinded Phase
II controlled clinical trial of Cyplex as an alternative to traditional platelet
transfusions in March 1998. The Company has experienced losses over the last
five years and, specifically, for the years ended December 31, 1996 and 1997,
the Company had losses of approximately $15.5 million and $8.9 million,
respectively.
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
<TABLE>
<S> <C>
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
</TABLE>
- ------------------
(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
2.
<PAGE> 4
publicly-traded warrants at an exercise price of $2.00 per share; (ii)
154,000 shares of Common Stock reserved for issuance upon exercise of
outstanding nonpublicly-traded warrants at an exercise price of $1.88 per
share; (iii) 425,000 shares of Common Stock reserved for issuance upon
exercise of nonpublicly-traded warrants issued to Allen & Company
Incorporated at a weighted average exercise price of $2.62 per share; (iv)
100,000 shares of Common Stock reserved for issuance upon exercise of
outstanding nonpublicly-traded warrants issued to certain consultants of the
Company at an exercise price of $2.00 per share; (v) 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; (vi) 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 (vii) 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."
3.
<PAGE> 5
SUMMARY CONSOLIDATED FINANCIAL DATA
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------
1993 1994 1995 1996 1997
------- ------- -------- ------- -------
(Restated) (Restated)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Total revenue and interest income.... $ 5,593 $ 4,990 $ 4,223 $ 2,426 $ 3,722
Total costs and expenses............. 10,514 11,141 11,363 17,966 12,608
Net loss ............................ (4,921) (6,151) (15,540) (7,140) (8,886)
Net loss per share................... $ (0.33) $ (0.40) $ (0.41) $ (0.53) $ (0.25)
Shares used in computing of net loss
per share.......................... 14,716 15,244 17,599 29,206 35,237
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1997
----------------- -----------------
(Restated)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments $ 10,936 $ 8,516
Working capital.................................. 10,161 7,916
Total assets..................................... 14,961 11,789
Accumulated deficit.............................. (59,896) (68,782)
Total stockholder's equity....................... 12,135 9,526
</TABLE>
4.
<PAGE> 6
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 develop new and complete existing research, to
fund the proposed commercial launch of the Prosorba(R) column, to fund
additional clinical trials for other indications related to the proposed use of
the Prosorba(R) column for the treatment of RA, and to further the development
and marketing of Cyplex(TM). Except in very limited circumstances, the Company
is obligated to expend no less than $4.0 million on the development of
Cyplex(TM), 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), 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 FDA regulatory
process, costs of commercialization of any approved products and 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 are 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 December 31, 1997, the Company had an accumulated deficit of approximately
$68.8 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 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) for
the treatment of platelet disorders. There can be no assurance that the Company
will successfully complete any present or future clinical trials, gain FDA
approval to begin any new clinical trials, receive FDA approval of any future
PMA applications, 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 RA was stopped early in January 1998 on
the recommendation of the independent DSMB after the achievement of favorable
safety and statistically significant results. The Company intends to file a 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 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
5.
<PAGE> 7
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) with an
additional Phase II clinical trial started 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) 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). 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 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(R) column and assembles the column at its
GMP-approved facility located in Redmond, Washington. In addition, 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. In November 1997, the Company's management decided to close
its Boston facility by mid-1998. The Company expects to have an adequate supply
of Cyplex(TM) on hand by the closure of the facility to complete its Phase II
clinical trial started in March 1998. The Company expects to resume the
production of Cyplex(TM) for trial purposes by mid-1999. However, there can be
no assurance that the Company will resume the production of Cyplex(TM) on a
timely basis or that it will have an adequate supply of Cyplex(TM) to complete
its Phase II clinical trial prior to closing the Boston facility. In addition,
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.
RECENTLY ESTABLISHED SALES FORCE
In March 1996, the Company and 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
6.
<PAGE> 8
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 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 RA or any other 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 RA, if approved, or any other 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) 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.
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.
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), 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.
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.
7.
<PAGE> 9
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 RA
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.
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 be issued 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.
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) 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
8.
<PAGE> 10
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), when and if commercialized.
PRODUCT LIABILITY
The use of the Prosorba(R) column and, when and if approved for use by
the FDA, Cyplex(TM), 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 $5.0
million 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) 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 $5.0 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 $5.0 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.
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
9.
<PAGE> 11
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.
10.
<PAGE> 12
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.
11.
<PAGE> 13
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 March 26,
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 March 26, 1998) ... $3.81 $1.28
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 March 26, 1998, the last reported sale price of the Common Stock was
$2.72 per share. As of March 26, 1998, there were approximately 1,023 holders of
record of the Common Stock of the Company.
12.
<PAGE> 14
CAPITALIZATION
The following table sets forth the capitalization of the Company at
December 31, 1997.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------
(IN THOUSANDS)
--------
<S> <C>
Long-term debt, less current portion........................... $ 408
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,
38,545,808 (1) shares issued and outstanding................. 771
Additional paid-in capital..................................... 78,041
Deferred compensation.......................................... (504)
Accumulated deficit............................................ (68,782)
--------
Total stockholders' equity................................. 9,526
--------
Total capitalization....................................... $ 9,934
========
</TABLE>
(1) Based upon the number of shares of Common Stock of the Company outstanding
as of December 31, 1997. Excludes, as of December 31, 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) 154,000 shares of Common Stock reserved for issuance upon exercise of
outstanding nonpublicly-traded warrants at an exercise price of $1.88 per share;
(iii) 425,000 shares of Common Stock reserved for issuance upon exercise of
warrants issued to Allen & Company Incorporated at a weighted average exercise
price of $2.62 per share; (iv) 100,000 shares of Common Stock reserved for
issuance upon exercise of outstanding nonpublicly-traded warrants issued to
certain consultants of the Company at an exercise price of $2.00 per share; (v)
7,598,250 shares of Common Stock reserved under the Company's various stock
option plans, of which 6,530,450 shares of Common Stock are issuable upon
exercise of outstanding stock options with a weighted average exercise price of
$1.63 per share; (vi) 952,105 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 $2.26 per share; and (vii) 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."
13.
<PAGE> 15
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, 1997 and with respect to the Company's
consolidated balance sheets at December 31, 1996 and 1997, 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 statement of operations for the year ended
December 31, 1994 and with respect to the Company's consolidated balance sheets
at December 31, 1994 and 1995 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 the period ended December 31, 1993 and with respect
to the Company's consolidated balance sheet data at December 31, 1993, are
derived from consolidated financial statements that have been audited by Coopers
& Lybrand L.L.P. which are not included herein. 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.
14.
<PAGE> 16
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
(Restated) (Restated)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Results of Operations:
Product sales $ 2,970,342 $ 1,967,976 $ 1,104,224 $ 4,918,126 $ 5,410,530
------------ ------------ ------------ ------------ ------------
Grant income 325,316 -- -- -- --
Revenue under
distribution Agreement -- -- 3,000,000 -- --
------------ ------------ ------------ ------------ ------------
3,295,658 1,967,976 4,104,224 4,918,126 5,410,530
Costs and expenses:
Production costs 1,772,681 1,482,563 2,041,422 2,571,168 1,582,986
Sales and marketing 1,292,942 794,356 819,907 3,550,037 4,758,427
Research and development 6,707,557 4,002,968 3,219,324 2,107,694 2,059,129
General and administrative 2,803,079 4,649,298 2,626,817 2,694,489 2,105,743
Acquired in-process
research and development(1) -- 5,146,943 625,000 -- --
Restructuring expense -- 493,712 644,656 -- --
Debt conversion expense -- 276,688 1,124,386 -- --
------------ ------------ ------------ ------------ ------------
12,576,259 16,846,528 11,101,512 10,923,388 10,506,285
Other income (expense):
Interest income 425,935 458,070 118,994 71,986 134,483
Interest expense (31,737) (1,119,726) (261,958) (218,036) (7,659)
------------ ------------ ------------ ------------ ------------
394,198 (661,656) (142,964) (146,050) 126,824
------------ ------------ ------------ ------------ ------------
Loss from operations (8,886,403) (15,540,208) (7,140,252) (6,151,312) (4,968,931)
Minority interest in loss -- -- -- -- 47,711
------------ ------------ ------------ ------------ ------------
Net loss $ (8,886,403) $(15,540,208) $ (7,140,252) $ (6,151,312) $ (4,921,220)
============ ============ ============ ============ ============
Net loss per share -
basic and diluted $ (0.25) $ (0.53) $ (0.41) $ (0.40) $ (0.33)
============ ============ ============ ============ ============
Weighted average number of
Shares outstanding -
basic and diluted 35,236,579 29,206,470 17,598,735 15,243,860 14,716,472
============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE
SHEET DATA:
Cash, cash equivalents
and short-Term investments $ 8,515,653 $ 10,935,668 $ 1,009,878 $ 3,670,616 $ 2,283,583
Total assets $ 11,788,766 $ 14,961,076 $ 4,563,709 $ 7,721,013 $ 7,761,598
Long term debt (net of
current portion) $ 407,735 $ 412,020 $ 1,539,722 $ 4,247,759 $ --
Total stockholder's (deficit) $ 9,525,992 $ 12,134,565 $ (524,762) $ 1,980,719 $ 4,839,725
Working capital (deficit) $ 7,916,228 $ 10,161,170 $ (688,771) $ 4,360,749 $ 3,787,412
</TABLE>
(1) Reflects the acquisition of in-process research and development associated
with the acquisition by the Company of PRP, Inc. in 1996 and the acquisition of
the minority interest in one of the Company's subsidiaries in 1995.
15.
<PAGE> 17
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.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term investments totaled $8.5 million
and $10.9 million, at December 31, 1997 and 1996 respectively. The decrease in
cash, cash equivalents and short-term investments of approximately $2.4 million
was due primarily to the Company's $8.9 million loss for the year ended December
31, 1997, which was partially offset by net proceeds of approximately $5.6
million received by the Company in the private placement of common stock
completed in October 1997. Working capital at December 31, 1997 was
approximately $7.9 million.
The Company expects to incur operating losses until it obtains marketing
approval from the FDA for additional disease indications for the Prosorba(R)
column, or until sales for the Prosorba(R) column for its existing indication of
ITP increase significantly, or until it obtains FDA approval for and
successfully commercializes Cyplex(TM). 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, increase sales in the area of ITP or obtain
FDA approval for or be able to successfully commercialize Cyplex(TM).
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 the independent 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 Company has
begun its efforts to prepare an application for PMA to be filed with the FDA's
Medical Device Division and is expected to be completed in mid-1998. The
application will request new labeling for the Prosorba(R) column to incorporate
the RA indication. However, there can be no assurance that the Company will file
its PMA application on a timely basis or that FDA approval to market the
Prosorba(R) column for disease indication other than ITP will be received on a
timely basis, if at all.
Although the Company is not obligated under any third party agreements,
capital expenditures during 1998 are expected to be approximately $450,000 and
will be used to support continued product commercialization and research and
development activities.
In the future, the Company's capital requirements will depend on
numerous factors, including the progress of the Company's research and
development activities and PMA application for RA. The Company currently
believes it has sufficient funds to support its operations through December 31,
1998. To the extent necessary, further sources of funds may include future
strategic alliances or joint venture arrangements which may provide funding to
the Company, and additional public or private offerings of debt or equity
securities, among others. There can be no assurance, however, that the Company
will be successful or that additional funds will be available on acceptable
terms, if at all.
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. The net
proceeds to the Company were approximately $5.6 million or $1.45 per share,
after total costs of approximately $203,000.
The Company will require additional financing in order to launch the
Prosorba(R) column in RA, 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, such as Cyplex(TM). There can be no assurance
that the Company will receive FDA approval for use of the Prosorba(R) column in
the treatment of RA, or if it does, that the Company will
16.
<PAGE> 18
be able to successfully market the Prosorba(R) column for use in RA. In
addition, there can be no assurance that additional financing will be available
on terms favorable to the Company, if at all.
RESULTS OF OPERATIONS
Revenues
Revenues associated with product shipments were $3.0 million, $2.0
million and $1.1 million in 1997, 1996 and 1995, respectively. The significant
increase in sales in 1997 from 1996 is a result of the Company regaining the
distribution rights to the Prosorba(R) column in May 1996 and initiating direct
sales and marketing efforts as mentioned below. 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 as mentioned below.
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. Under the Baxter distribution agreement, Baxter was obligated
to purchase from the Company minimum numbers of Prosorba(R) columns at a
predetermined price per column. In the event such minimums were not purchased,
Baxter was nevertheless obligated to pay the Company for that number of
Prosorba(R) columns that Baxter was obligated to purchase under the distribution
agreement. 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 non-refundable take-or-pay payment on March 31, 1995 for the first
sales year after the amendment 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 non-refundable $3.0
million take-or-pay payment made by Baxter in March 1995. In addition, sales and
marketing costs relative to sales decreased based on Baxter agreeing to assume
all marketing and promotional costs.
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.
Although the Company's direct sales and marketing efforts have proven
more effective than those under the Baxter distribution agreement, ITP remains a
small market. In 1996, the Company initiated a Phase IV marketing study for use
of the Prosorba(R) column in the treatment of ITP in an effort to generate more
rigorous clinical data than has been available to date. The Company believes
that such data is a prerequisite for increasing the usage of the Prosorba(R)
column in the treatment of ITP. 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 RA 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 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-1999, however, there can be no assurance that such
approval will be obtained in the time expected, if at all.
17.
<PAGE> 19
In connection with the Company's acquisition of PRP in November 1996,
the Company acquired an NIH Small Business Innovation Research (SBIR) Phase II
grant. For the year ended December 31, 1997 the Company recorded approximately
$325,000 in grant income. Revenues from the grant are recognized as grant
expenditures are incurred. The aggregate amount remaining under the grant is
approximately $371,000. Expenses related to the grant are classified as research
and development expenses. The Company does not expect grant revenue to become a
significant contribution to its operations.
Operating Expenses
Consolidated operating expenses for the years ended December 31, 1997,
1996, and 1995 were $12.6 million, $16.8 million and $11.1 million,
respectively. The decrease of $4.2 million in 1997 from 1996 reflects certain
non-recurring and primarily non-cash, charges in 1996 related to the acquisition
of PRP and the Company's restructuring and recapitalization totaling $5.9
million, which were partially offset by a significant expansion in the Company's
research and development activities. In 1997, the Company restated its
previously issued financial statements as of and for the years ended December
31, 1996 and 1995. The Company, in conjunction with discussions with its
auditors and the SEC Staff, recorded approximately $1.1 million of compensation
expense in 1996 related to certain stock options granted in 1996. The Company
also recorded $93,000 and $314,000 of debt conversion expense during the years
ended December 31, 1996 and 1995 respectively, related to deferred debt issuance
costs associated with the March 1996 and September 1995 exchange offerings to
the holders of the 7% Convertible Debentures. The increase of $5.7 million in
1996 from 1995 relates primarily to the non-recurring, and primarily non-cash,
charges for the acquisition of PRP and the Company's restructuring and
recapitalization. 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.
Production costs were approximately $1.8 million, $1.5 million and $2.0
million for the years ended December 31, 1997, 1996 and 1995, 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. However,
the increase in 1997 production costs from 1996 also reflected an increase in
columns manufactured to accommodate increases in sales and columns used in the
RA trial. 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 costs were approximately $1.3 million, $794,000 and
$820,000 for the years ended December 31, 1997, 1996 and 1995, respectively. The
increase of approximately $499,000 in 1997 from 1996 is a result of the
Company's initiation of direct sales and marketing efforts beginning in May of
1996 and the hiring of a direct sales force in August of 1996. The decrease in
1996 from 1995 is a result of the Company's March 1995 renegotiation 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 $6.7 million in 1997,
from $4.0 million and $3.2 million in 1996 and 1995, respectively. Research and
development expenses typically increase with each phase of a product's
development as such product advances to FDA approval. The Company records
research and development cost as incurred, including the costs associated with
its clinical trials. The Company enrolls patients in various clinical trial
sites and records the related cost as the work is performed by the respective
research entities. The Company accrues costs related to clinical trials until
such costs are actually paid by the Company. The significant increase in
research and development expenses of $2.7 million in 1997 from 1996 is
attributable to the
18.
<PAGE> 20
Company's efforts to establish a stronger scientific base for its products by
continuing to expend funds on clinical trials and increasing efforts in studying
the mechanism of action of the Prosorba(R) column. Approximately $1.7 million of
the increase in research and development expenses from 1996 to 1997 was directly
related to amounts expended on the further development of Cyplex(TM) in
connection with the Company's acquisition of PRP in November 1996. The remaining
increase of approximately $1.0 million in research and development expenses from
1996 to 1997 was primarily due to increase spending on the Company's controlled
clinical trial for use of the Prosorba(R) column in the treatment of RA. 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 RA. 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 commencement in March 1998 of a
Phase II efficacy trial for Cyplex(TM).
General and administrative expenses were $2.8 million, $4.6 million, and
$2.6 million for the years ended December 31, 1997, 1996 and 1995, respectively.
The decrease of approximately $1.8 million in 1997 from 1996 was 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. The significant decrease in 1997
also relates to the Company's restatement of its previously issued financial
statements as of and for the years ended December 31, 1996 and 1995. The Company
recorded approximately $1.1 million of additional compensation expense in 1996
related to certain stock options granted in 1996. The decrease was partially
offset by non-recurring bonuses paid in the third quarter of 1997 to the
Company's Chief Executive Officer and President and Chief Operating Officer in
connection with the Company achieving certain milestones, were also
non-recurring. The increase of approximately $2.0 million 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
and the Company's restatement of its previously issued financial statements
resulting in a charge of $1.1 million in compensation expense in 1996 as
mentioned above. Such expenses were partially offset by the resignation of the
Company's Chief Scientific Officer in March 1996 whose duties were assumed by
the new Chief Executive Officer. In addition, approximately $501,000 and
$741,000 was recorded as compensation expense in 1997 and 1996, respectively for
stock options granted at less than the closing sales price on the date of grant.
In 1995, the Company acquired the minority interest of CELx Corporation,
the company's former 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 on the date of the transaction.
The Company recorded a non-cash expense of approximately $277,000 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 approximately
$1.1 million 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. The above amounts reflect the Company's restatement of its
previously issued financial statements as of and for the years ended December
31, 1996 and 1995. The restatement required the Company to record an additional
$93,000 and $314,000 of debt conversion expense during the years ended December
31, 1996 and 1995 respectively, related to deferred debt issuance costs
associated with the March 1996 and September 1995 exchange offerings to the
holders of the 7% Convertible Debentures.
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
19.
<PAGE> 21
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
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. The
earn-out payments if earned will be treated as compensation expense because most
of such earn-out payments will be made to former stockholders. In addition, in
conjunction with obtaining approval from the FDA of the use of Cyplex(TM) 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. The milestone payments, if earned, will either be
expensed as acquired research and development or capitalized as purchased
technology, depending upon the evaluation of the technology to be made by the
Company at such future date.
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) as a principal product of the
Company. The only circumstances under which the Company may decrease or cease
commercialization of Cyplex(TM) prior to expending $4.0 million would be if the
Company encounters critical problems with the commercialization of Cyplex(TM),
including problems related to Cyplex(TM), safety, efficacy or economic
viability, such as would render Cyplex(TM), on a stand-alone basis, unsafe,
ineffective or incapable of generating a reasonable, positive cash flow.
Interest Expense
Interest expense for the years ended December 31, 1997, 1996 and 1995
were approximately $32,000, $1.1 million and $262,000 respectively. The decrease
in 1997 from 1996 and the increase from 1995 to 1996 is due to the restatement
of the Company's previously issued financial statements as of and for the years
ended December 31, 1996 and 1995 in 1997. In accordance with EITF D-60, which
was issued in March 1997 but which is applicable to previously issued financial
statements, the Company recorded $1,063,000 of interest expense in 1996 related
to Senior Convertible Debentures which were issued with a discounted conversion
feature.
20.
<PAGE> 22
Net Loss
Net loss for the year ended December 31, 1997 was approximately $8.9
million compared to approximately $15.5 million in 1996. The decrease of
approximately $6.7 million is a result of an increase in research and
development related to the Company's RA trial offset in part by an increase in
revenue and a decrease in general and administrative costs. For the year ended
December 31, 1996, the acquisition of PRP, and the cost of the restructuring and
recapitalization and the decrease in total revenues was only partially offset by
the decrease in recurring operating expenses thereby resulting in a net loss of
$15.5 million or $0.53 per share (basic and diluted). For the year ended
December 31, 1995, the Company reported a net loss of $7.1 million.
IMPACT OF YEAR 2000
The "Year 2000 Issue" addresses the problems created by the fact that
most computer software programs have been written using two digits, rather than
four, to represent a specific year (e.g., "97" would represent 1997). Such
date-sensitive software programs may recognize a date using "00" as the year
1900 rather than the year 2000, which might result in system failures or
miscalculations causing a disruption in operations, including among others,
temporary inability to process normal accounting transactions, send invoices or
engage in similar normal business activities. In addition, to the extent a
company distributes products containing date-sensitive computer programs, a
company may incur substantial costs and time creating or modifying existing
software programs, inventory and returned products.
The Company has completed an assessment of the impact of the Year 2000
Issue on its internal and external operations, and had determined that it will
be required to upgrade certain software programs it employs in the normal course
of business, including its accounting application software and certain other
administrative software. The total cost of the Year 2000 Issue project is
estimated to be less than $50,000 and is estimated to be completed no later than
December 31, 1998. The Company believes that the Year 2000 Issue will not have a
material adverse effect on its operations or business.
The cost of the Year 2000 Issue project and the date on which the
Company believes it will complete the Year 2000 modifications are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events, including the continued availability of certain resources and
other factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are not
limited to the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes, and similar
uncertainties.
21.
<PAGE> 23
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 ("FDA") in December 1987 to distribute the Prosorba(R)
column for the treatment of idiopathic thrombocytopenic purpura ("ITP"), an
immune-mediated bleeding disorder. In May 1996, the Company terminated its
exclusive distribution arrangement with Baxter Healthcare Corporation ("Baxter")
and regained the right to sell its Prosorba(R) column directly to customers.
Although the Company's direct sales and marketing efforts have proven more
effective than those under the Baxter distribution arrangement, ITP remains a
small market. In 1996, the Company initiated a Phase IV marketing study for the
use of the Prosorba(R) column in the treatment of ITP in an effort to generate
more rigorous clinical data then has been available to date. However, due to
increased competition for patients from other ITP studies, below expected
enrollment in the Company's study, and the more promising opportunities in the
rheumatoid arthritis ("RA") market, the Company determined that continued
investment in the ITP market was not the best use of its resources and
terminated its ITP trial during the fourth quarter of 1997. Although the
termination of the study is not expected to have any negative effects on the
existing sales of the Prosorba(R) column for the treatment of ITP, lack of data
from the study will make it difficult to effect any appreciable increase in
sales above their current levels in the area of ITP.
The Company's current clinical efforts to expand the approved
indications for the Prosorba(R) column are focused primarily on RA. In June
1996, the Company commenced a prospective, randomized, multi-center, double
blind, controlled Phase II pivotal trial designed to confirm the findings of an
earlier pilot study evaluating the use of the Prosorba column in the treatment
of RA. In January 1998, the Company's Phase III clinical trial was stopped early
due to the achievement of favorable safety and statistically significant
results. Based on such results, the Company plans to file a Pre-Market Approval
("PMA") application for the Prosorba(R) column for the treatment of RA with the
FDA in mid-1998. However, there can be no assurance that the Company will be
able to file the PMA by mid-1998, or if the PMA is filed, that FDA approval or
the Prosorba(R) column for the treatment of RA will be received on a timely
basis, if at all.
The Company is also developing Cyplex(TM), a platelet alternative,
previously known as Infusible Platelet Membranes ("IPM") as an alternative to
traditional platelet transfusions. The Company initiated a double-blinded Phase
II controlled clinical trial of Cyplex(TM) as an alternative to traditional
platelet transfusions in March 1998.
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 usually 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
22.
<PAGE> 24
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 good
manufacturing practice ("GMP") regulations for the manufacture of the product in
commercial quantities.
The Company believes that key factors in its commercial performance will
be its ability to improve Prosorba(R) column sales for its currently approved
ITP indication, as well as additional disease indications for the Prosorba(R)
column, and obtain and develop complementary technologies.
Rheumatoid Arthritis
RA is a potentially crippling autoimmune disease that in 1995 was
estimated to affect over 5.7 million people in the United States, Europe and
Japan. In RA, the body's immune system inappropriately 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 RA. 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 RA reported
by an earlier independent study published in the JOURNAL OF RHEUMATOLOGY in May
1994.
In 1996, the Company began providing financial support to several
leading research facilities in the form of grants and contractual support to
further efforts in studying the mechanism of action of the Prosorba(R) column in
the treatment of RA. For the years ended December 31, 1997 and 1996, the amounts
of financial support provided by the Company were approximately $148,000 and
$90,000, respectively.
In June 1996, the Company commenced a prospective, randomized,
multi-center, double blind, controlled Phase III pivotal trail designed to
confirm the findings of the pilot study in a larger group of patients. The
patients were randomly entered into two treatment groups with approximately half
of the patients 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 ("DSMB") recommended the early cessation of the Company's
Phase III clinical trial evaluating the use of the Prosorba(R) column in the
treatment of RA. The recommendation to end enrollment in 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 application 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.
CYPLEX(TM) (INFUSIBLE PLATELET MEMBRANES), A 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, Inc ("PRP"). PRP's primary product, Cyplex(TM) (Infusible Platelet
Membranes), a platelet alternative, which is still in the clinical research
phase, is being developed as a potential substitute for traditional
23.
<PAGE> 25
platelet transfusions. Currently, the Company is focusing most of its efforts
related to PRP on the development of Cyplex(TM), 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) is heat-treated
during processing to inactivate, below any detection levels, viruses (HIV,
hepatitis, etc.) that may be present. Preclinical and clinical trials conducted
to date have shown that Cyplex(TM) is not thrombogenic or immunogenic, and no
dose limiting toxicity has been noted in humans or animals. The lead indication
for Cyplex(TM) is as an alternative to platelet transfusions to restore control
of bleeding due to platelet deficiency in refractory patients.
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 consequence 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. In 1992, sales of platelets to hospitals for this purpose were about
$1.3 billion worldwide, including approximately $550 million in the U.S. The
company estimates that 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% to 7% since 1987, and the Company expects this growth to continue for
at least the next several years. Cyplex(TM) has the potential to replace a major
fraction of platelet transfusions for thrombocytopenia.
24.
<PAGE> 26
Platelet transfusion is generally an effective therapy, but it has a
number of significant drawbacks. Cyplex(TM)'s 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 platelet
alloimmunized* alloimmunization typing, improved outcomes
Platelets do not control Cyplex(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 greater than one Reduced loss from out-dating,
year emergency availability, improved
logistics and reduced infrastructure
Must be agitated constantly 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.
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) 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) was
effective in controlling or halting bleeding in 7 out of 12 patients, or 58% of
the time.
In February 1998, the Company entered into a collaborative agreement
with a leading Dutch manufacturer and supplier of blood derivatives, as well as
having a strong tradition of research. The collaboration is on process
development and scale-up of Cyplex(TM). The collaborative work is intended to
accelerate commercialization of Cyplex(TM) and to broaden its potential market
beyond patients who are resistant to platelet transfusions.
Potential Follow-on Indications
The Company believes that Cyplex(TM) may also be useful as an adjunct to
cardiac surgery or angioplasty. 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 within a couple of years. A key factor in the
development of restenosis is exposure of smooth muscle proliferation in the
artery walls to platelet derived growth factor ("PDGF") causing smooth muscle
proliferation. 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 become activated, release their
interior components, including PDGF and various coagulation-inducing factors. If
platelets can be prevented from adhering to these injured areas, they will not
become activated and thus not release PDGF, and, therefore, will not contribute
to restenosis. Both animal and in-vitro work at the Company have shown that
Cyplex(TM) binds to arterial lesions and thereby reduces platelet adhesion. Work
at the Company and elsewhere has shown that Cyplex(TM) can also 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) during
open heart surgery to prevent peri-operative bleeding and other complications,
the use of Cyplex(TM) to prevent or control bleeding that can result from
25.
<PAGE> 27
the use of anti-platelet agents, (in particular anti-GP IIb/IIIa agents), and
the use of Cyplex(TM) in disseminated intravascular coagulation.
Cyplex(TM) 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).
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 ITP.
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 limited journal advertising.
In the latter part of 1996, the Company launched a controlled clinical
study evaluating the efficacy of the Prosorba(R) column in ITP. This was the
first prospective and controlled study of the device in its approved indication
and was designed to confirm observations from 10 years of historical use.
Increased competition for patients from other ITP studies caused enrollment to
be below expectations. The increased competition and low enrollment caused the
Company to re-evaluate its ability to complete the study in a timely and cost
effective manner. In light of more promising opportunities in the RA market, the
Company determined that continued investment in the ITP market was not the best
use of its resources.
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 5% 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, 1997 and 1996, respectively. For the years
ended December 31, 1995 and 1994, sales to Baxter represented approximately 91%
and 70%, 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
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
26.
<PAGE> 28
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 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. In
addition, the Company owns patents covering the use of the Prosorba(R) column in
the treatment of ITP and RA. Certain U.S. and international applications are
pending.
CYPLEX(TM) (INFUSIBLE PLATELET MEMBRANES), A 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 be issued 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.
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 RA. The Company paid $70,000 upon settling
the patent infringement claim and accrued an additional $70,000 to be paid to
Dr. Strahilevitz in April 1998. In addition, the Company granted to Dr.
Strahilevitz an option to purchase up to 26,667 shares of Common Stock of the
Company at an exercise price of $1.50 per share.
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 three 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 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
27.
<PAGE> 29
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.
Whether regulated by the FDA as a medical device or biologic, or
otherwise by any state or foreign authorities, the approval process for any of
the Company's products is expensive and time consuming and no assurance can be
given that any regulatory agency will grant its approval. There is no assurance
that the Company will have sufficient resources to complete the required testing
and regulatory review processes. Furthermore, the Company is unable to predict
the extent of adverse governmental regulation, which might arise from future
United States, or foreign legislative or administrative action.
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 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, 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 required to. Assuming the advisory
panel recommends approval of the PMA, the FDA may approve the application and
the product may then be commercially distributed. The FDA approval process is
lengthy and expensive and there can be no assurance that FDA approval will be
received for any particular product on a timely basis, if at all.
28.
<PAGE> 30
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 GMP regulations. Failure to comply with the GMP regulations or with 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 for use in the
treatment of ITP 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 completed and
received approval for a supplement to the PMA with the FDA for the consolidation
of its manufacturing facilities into one site in April 1997. There can be no
assurance that any future supplements will be approved by the FDA.
CYPLEX(TM) (INFUSIBLE PLATELET MEMBRANES), A PLATELET ALTERNATIVE
Cyplex(TM) 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 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 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 a 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
29.
<PAGE> 31
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, 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.
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 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) (INFUSIBLE PLATELET MEMBRANES), A PLATELET ALTERNATIVE
When and if the Company receives FDA approval for Cyplex(TM), 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)'s advantages over traditional platelet therapy
support its usage. Cyplex(TM) 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). The most important clinical advantage of
Cyplex(TM) is its nonimmunogeinicity, which, the Company believes, no other
competitive product in development currently addresses. There can be no
assurance, however, that other parties will not develop competing therapies.
30.
<PAGE> 32
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) in its Boston,
Massachusetts facility. In November 1997 the Company's management decided to
close its Boston facility by mid-1998. The Company expects to have adequate
amounts of Cyplex(TM) on hand by the closure of the facility to complete its
Phase II clinical trial, which was initiated in March 1998. The Company expects
to resume the production of Cyplex(TM) for trial purposes by mid-1999. 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. There can be
no assurance that the Company will resume the production of Cyplex(TM) on a
timely basis, or that it will have an adequate supply of Cyplex(TM) to complete
its Phase II clinical trial the Company commenced prior to closing the Boston
facility.
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. In
November 1997, the Company's management decided to close its Boston facility by
mid-1998. The Boston facility is approximately 7,000 square feet, and is used
primarily for the manufacture of clinical-grade Cyplex(TM). The Company expects
to have adequate amounts of Cyplex(TM) on hand by the closure of the facility to
complete its Phase II clinical trial started in March 1998. The Company expects
to resume the production of Cyplex(TM) for trial purpose by mid-1999 in one if
its existing facilities, a new facility or under agreement with a third party.
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 had historically been performed in the Company's Seattle
facility. The Redmond facility, however, has been renovated so that both raw
material production and assembly of the Prosorba(R) column can be performed in a
single facility. The Redmond facility received FDA GMP approval in April 1997
and recently passed a subsequent GMP inspection in March 1998.
The Company leased 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, and was subsequently released from any
obligations by the owner of the property in August 1997.
The Company believes that its property and equipment are generally well
maintained and in good operating condition. The Company believes that its
production plant in Redmond, Washington, which is currently operating at
approximately 30% of capacity, is adequate and will allow the Company to meet
its production needs for sales and clinical use of the Prosorba(R) column in
1998. The Company's existing facilities are in compliance with appropriate
regulatory standards.
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.
31.
<PAGE> 33
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.(1)(2) 40 Chief Executive Officer, Chief
Scientific Officer, Chief Financial
Officer and Vice Chairman of the Board
of Directors
Debby Jo Blank, M.D.(1)(2) 46 President, Chief Operating Officer and
Director
R. Michael Gendreau, M.D. 42 Vice President, Research & Development
and Chief Medical Officer
Richard M. Crooks, Jr.(3)(4)(5) 58 Chairman of the Board of Directors
Philip J. O'Reilly(3)(4)(5) 59 Director
Jack H. Vaughn(3)(5) 77 Director
Samuel D. Anderson 62 Director
David W. Golde, M.D. 57 Director
</TABLE>
- -------------------------
(1)Member of the 401(k) Plan Committee
(2)Member of the Non-Executive Officer Stock Option Committee
(3)Member of Audit Committee
(4)Member of Stock Option Committee
(5)Member of Compensation Committee
JAY D. KRANZLER, M.D., PH.D., was appointed Chief Executive Officer and
Vice Chairman of the Company in December 1995. In April 1996, Dr. Kranzler also
assumed the position of Chief Scientific Officer of the Company, and in November
1997, also assumed the position of Chief Financial Officer. 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, from 1985 to January 1989 as a
consultant specializing in the pharmaceutical industry.
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 through the end of 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.
R. MICHAEL GENDREAU, M.D., 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 held various positions from 1994 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. He 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
32.
<PAGE> 34
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
Excaliber Technologies Corporation.
MR. PHILIP J. O'REILLY, has been a director of the Company since 1994.
He is a partner in the law firm of O'Reilly, Marsh, Kearney & Corteselli P.C.,
in Garden City, New York. He has been in private practice for more than twenty
years. Mr. O'Reilly also serves as a director of Excalibur Technologies
Corporation.
MR. JACK H. VAUGHN, has served as a director of the Company since 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. Prior to that, Mr. Vaughn had been 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.
MR. SAMUEL D. ANDERSON, was elected by the Board to serve as a director
of the Company in April 1998. Currently, Mr. Anderson is an independent
consultant. From 1990 to 1991, he was the President and Chief Executive Officer
of Trancel Corporation, a biotechnology company. From 1984 to 1989 Mr. Anderson
was the Chief Executive Officer of Alpha Therapeutics Corporation, a blood
plasma fractionator, and between 1989 and 1990 served as its Chairman of the
Board.
MR. DAVID GOLDE, was elected by the Board to serve as a director of the
Company in April 1998. Mr. Golde has been the Physician-in-Chief of Memorial
Sloan-Kettering Cancer Center since 1991. He has been a Professor of Medicine at
Cornell University Medical College since 1991 and at UCLA School of Medicine
since 1979. Mr. Golde is a consultant to numerous medical and research
institutions.
Each officer serves at the discretion of the Board of Directors. 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
33.
<PAGE> 35
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." 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 (appointed July 1996), M.D., Ph.D., Scientific Director of the
Virginia Mason Research Center in Seattle, Washington; Eng Tan (appointed June
1996), M.D., Director, W.M. Keck Autoimmune Disease Center, The Scripps Clinic
and Research Institute, San Diego, California. 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
(appointed June 1996), M.D., M.P.H. Professor of Medicine and Public Health,
Director, Boston University Arthritis Health Services Center; Richard Panush
(appointed June 1996), M.D., Professor and Chairman, Department of Medicine, St.
Barnabas Medical Center, Livingston, New Jersey; George Ehrlich (appointed June
1996), 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 RA. 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
(appointed May 1996), M.D., Associate Professor of Pediatrics, Director of ITP
Program, Division of Pediatrics Hematology/Oncology, Cornell Medical Center;
John Harlan (appointed May 1996), M.D., Professor of Medicine, Division Head,
Hematology, Massachusetts General Hospital; and David J. Kuter (appointed June
1996), 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
(appointed November 1996), M.D., former President, Blood Center of Southeast
Wisconsin; Ernest Beutler (appointed June 1997), M.D., Chairman, Department of
Molecular and Experimental Medicine, The Scripps Clinic and Research Foundation,
San Diego, California; Leon W. Hoyer (appointed November 1996), M.D., Director,
Holland Laboratories, Vice President, Research and Development, American Red
Cross; John Lawler (appointed November 1996), Ph.D., Associate Professor,
Department of Pathology, Harvard Medical School, Brigham and Women's Hospital;
Ernest R. Simon (appointed June 1997), M.D., Retired Executive Vice President,
Medical Affairs, Blood Systems, Inc.; Scott N. Swisher (appointed November
1997), M.D., Chairman, FDA Blood Products Advisory Committee; Professor of
Medicine (emeritus), University of Michigan; Paul C. Zamecnik (appointed
November 1996), M.D., Professor of Medicine (emeritus) Harvard Medical School,
Principal Scientist, Hybridon; Sherrill Slichter (appointed October
34.
<PAGE> 36
1997), M.D., Pugetsound Blood Center. The PAB will oversee the Company's
programs as they relate to platelet therapy.
There are no material consulting or other agreements between the Company
and any member of the Company's various scientific advisory boards.
EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded or paid to and
earned by, each person who served as Chief Executive Officer of the Company
during the fiscal years ended December 31, 1997, 1996 and 1995 as well as those
executive officers whose salary and bonus were in excess of $100,000 for
services rendered to the Company during the fiscal year ended December 31, 1997
(collectively, the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSA-
ANNUAL COMPENSATION TION(1)
------------------- ---------
SHARES ALL OTHER
NAME AND PRINCIPAL FISCAL BASE UNDERLYING COMPENSATION
POSITION YEAR SALARY($) 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 Officer, 1996 240,000 135,000 3,025,327 10,700(4)
Chief Scientific Officer, 1995 -- 50,000 -- --
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.
35.
<PAGE> 37
(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 $5,222 of
contributions made by the Company under its 401(k) plan.
36.
<PAGE> 38
STOCK OPTION GRANTS AND EXERCISES
The following table sets forth certain information regarding options granted
during the fiscal year ended December 31, 1997 to the Named Executive Officers:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------
% OF TOTAL POTENTIAL REALIZABLE VALUE
SHARES OPTIONS AT ASSUMED ANNUAL RATES OF
UNDERLYING GRANTED TO STOCK APPRECIATION FOR
OPTIONS EMPLOYEES IN OPTION TERM($)(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.
37.
<PAGE> 39
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.
38.
<PAGE> 40
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. Jay Kranzler, the Company's Chief Executive Officer, Chief
Financial Officer and Chief Scientific Officer. Dr. Kranzler's annual
compensation consists of base
39.
<PAGE> 41
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 (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 shares of the Company's
common stock at an exercise price of $1.625 per share. As of March 15, 1998,
options to purchase 2,358,921 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 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 (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 the Company's common stock at an exercise
price of $1.625 per share. As of March 15, 1998, options to purchase 883,671
shares of common stock had vested.
In April 1996, the Company entered into an employment agreement with Dr.
R. Michael Gendreau, the Company's Vice President, Research and Development and
Chief Medical Officer, 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 March 15,
1998, options to purchase a total of 198,278 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.
40.
<PAGE> 42
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.
41.
<PAGE> 43
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) * *
Samuel D. Anderson (12) 0 0% 0%
David Golde (13) 0 0% 0%
All Directors and Named Executive
Officers as a Group (8 persons) 5,207,100 12.3% 12.3%
SELLING SECURITYHOLDER
Spear Leeds & Kellogg 350,000 * 0%(14)
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
42.
<PAGE> 44
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.
(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 3,614,090 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) Mr. Samuel D. Anderson was elected to the Company's Board effective March
9, 1998. Mr. Anderson did not beneficially own securities of the Company as
of January 30, 1998.
(13) Mr. David Golde was elected to the Company's Board effective March 31,
1998. Mr. Golde did not beneficially own securities of the Company as of
January 30, 1998.
(14) Assumes all of the Shares offered hereby are sold by the Selling
Securityholder.
43.
<PAGE> 45
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 warrants outstanding to purchase up to
2,755,399 shares of Common Stock of the Company at an exercise price of $2.00
per share, which warrants have been registered under the Securities Act (the
"1996 Warrants"). The 1996 Warrants were issued in October and November 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 on October 1, 2001, unless earlier exercised.
The 1996 Warrants are listed on the Nasdaq SmallCap Market under the
symbol CYPBZ.
44.
<PAGE> 46
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
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. Such warrants are
fully exercisable as of the date hereof and will expire in April 1999 unless
earlier exercised. In addition, as of January 30, 1998, Allen & Company
Incorporated held an additional warrant to purchase 125,000 shares of Common
Stock of the Company at an exercise price of $2.00 per share. Such warrants,
which were acquired by Allen & Company Incorporated in connection with the
Company's October 1996 private placement of Units, are fully exercisable as of
the date hereof and generally expire October 2001, unless earlier exercised.
As of January 30, 1998, there were outstanding warrants to purchase
100,000 shares of the Company's Common Stock at an exercise price of $2.00 per
share. The warrants were issued in November 1996 to certain consultants of the
Company in exchange for consulting services. Such warrants are exercisable as of
the date hereof and expire November 2001, 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
45.
<PAGE> 47
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 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.
46.
<PAGE> 48
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 only 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 the price that is the
result of activity that is fraudulent, manipulative or deceptive under the
federal securities laws or regulations promulgated thereunder.
47.
<PAGE> 49
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 $35,000.
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, 1996 and 1997 and for each of the three years in the period ended
December 31, 1997 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.
The consolidated financial statements of PRP, Inc. as of January 31,
1995 and 1996 and the related statements of operations, stockholders'
investment (deficit) and cash flows for each of the three years in the period
ended January 31, 1996 appearing in this Prospectus and Registration Statement,
have been audited by Arthur Andersen LLP, independent public accountants, 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.
48.
<PAGE> 50
CYPRESS BIOSCIENCE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors......................................F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997...........................F-3
Consolidated Statements of Operations for the Years ended December 31, 1995,
1996 and 1997........................................................................F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the Years ended
December 31, 1995, 1996 and 1997.....................................................F-5
Consolidated Statements of Cash Flows for the Years ended December 31, 1995,
1996 and 1997........................................................................F-6
Notes to Consolidated Financial Statements.............................................F-7
Report of Arthur Andersen LLP, Independent Public Accountants.........................F-19
Balance Sheets of PRP, Inc. as of January 31, 1995 and 1996...........................F-20
Statements of Operations of PRP, Inc. for the Years ended January 31, 1994, 1995
and 1996 and for the Period from February 27, 1984 to January 31, 1996..............F-22
Statements of Stockholders' Equity (Deficit) for the Years ended January 31,
1995 and 1996 and for the Period from February 27, 1984 to January 31, 1996.........F-23
Statements of Cash Flows for the Years ended January 31, 1994, 1995 and 1996
and for the Period from February 27, 1984 to January 31, 1996.......................F-24
Notes to Financial Statements.........................................................F-25
Pro Forma Condensed Consolidated Balance Sheet as of September 30, 1996...............F-31
Pro Forma Condensed Consolidated Statement of Operations for the Nine Months
ended September 30, 1996............................................................F-32
Pro Forma Condensed Consolidated Statement of Operations for the Year ended
December 31, 1995...................................................................F-33
Notes to Pro Forma Condensed Consolidated Financial Statements........................F-34
PRP, Inc. Interim Financial Statements - Balance Sheets as of January 31, 1996
and October 31, 1996................................................................F-35
PRP, Inc. Interim Financial Statements -- Statements of Operations for each of the
Nine Month Periods ended October 31, 1995 and 1996 and for the Period
from February 27, 1984 to October 31, 1996..........................................F-36
PRP, Inc. Interim Financial Statements - Statements of Cash Flows for each of the
Nine Month Periods ended October 31, 1995 and 1996 and for the Period
from February 27, 1984 to October 31, 1996..........................................F-37
Notes to PRP, Inc. Interim Financial Statements.......................................F-38
</TABLE>
F-1.
<PAGE> 51
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, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1997. 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 principals used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide 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, 1997 and 1996, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
San Diego, California ERNST & YOUNG LLP
February 13, 1998
F-2.
<PAGE> 52
CYPRESS BIOSCIENCE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
------------ ------------
(Restated)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,541,320 $ 8,045,508
Short-term investments 974,333 2,890,160
Accounts receivable:
Trade, net of allowance for doubtful accounts of 372,741 344,041
$178,719 in 1997 and $200,312 in 1996
Other 140,487 150,954
Inventories 628,004 973,767
Prepaid expenses 114,382 171,231
------------ ------------
Total current assets 9,771,267 12,575,661
Property and equipment, net 1,991,777 2,351,928
Convertible debenture issuance costs, net 25,722 33,487
============ ============
Total assets $ 11,788,766 $ 14,961,076
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 530,132 $ 999,442
Accrued compensation 175,929 485,751
Accrued liabilities 1,144,692 902,090
Current portion of capital leases 4,286 27,208
------------ ------------
Total current liabilities 1,855,039 2,414,491
Convertible debentures 400,000 400,000
Capital leases, net of current portion 7,735 12,020
Commitments and contingencies (Note 7)
Stockholders' equity:
Common stock, $.02 par value; authorized 60,000,000
shares; issued and outstanding, 38,545,808 and
34,573,111 shares at December 31, 1997 and 1996,
respectively 770,916 691,462
Additional paid-in capital 78,041,636 72,354,683
Deferred compensation (504,315) (1,015,738)
Accumulated deficit (68,782,245) (59,895,842)
------------ ------------
Total stockholders' equity 9,525,992 12,134,565
------------ ------------
Total liabilities and stockholders' equity $ 11,788,766 $ 14,961,076
============ ============
</TABLE>
See accompanying notes.
F-3.
<PAGE> 53
CYPRESS BIOSCIENCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1997 1996 1995
------------ ------------ ------------
(Restated) (Restated)
<S> <C> <C> <C>
Product sales $ 2,970,342 $ 1,967,976 $ 1,104,224
Grant income 325,316 -- --
Revenue under distribution agreement -- -- 3,000,000
------------ ------------ ------------
3,295,658 1,967,976 4,104,224
Costs and expenses:
Production costs 1,772,681 1,482,563 2,041,422
Sales and marketing 1,292,942 794,356 819,907
Research and development 6,707,557 4,002,968 3,219,324
General and administrative 2,803,079 4,649,298 2,626,817
Acquired in-process research and
development -- 5,146,943 625,000
Restructuring expense -- 493,712 644,656
Debt conversion expense -- 276,688 1,124,386
------------ ------------ ------------
12,576,259 16,846,528 11,101,512
Other income (expense):
Interest income 425,935 458,070 118,994
Interest expense (31,737) (1,119,726) (261,958)
------------ ------------ ------------
394,198 (661,656) (142,964)
------------ ------------ ------------
Net loss $ (8,886,403) $(15,540,208) $ (7,140,252)
============ ============ ============
Net loss per share-basic and diluted $ (0.25) $ (0.53) $ (0.41)
============ ============ ============
Shares used in computing net loss
per share-basic and diluted 35,236,579 29,206,470 17,598,735
============ ============ ============
</TABLE>
See accompanying notes.
F-4.
<PAGE> 54
CYPRESS BIOSCIENCE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
COMMON STOCK
------------------------- ADDITIONAL DEFERRED ACCUMULATED
SHARES PAR VALUE AID-IN CAPITAL COMPENSATION DEFICIT TOTAL
---------- ------------ -------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
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 (restated) 1,254,817 25,096 3,735,791 -- -- 3,760,887
Net loss (restated) -- -- -- -- (7,140,252) (7,140,252)
---------- ------------ ------------ ------------ ------------ ------------
Balance December 31, 1995
(restated) 18,693,595 373,872 43,457,000 -- (44,355,634) (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 (restated) 1,435,955 28,719 2,495,713 -- -- 2,524,432
Debt discount related to
Senior Convertible
Debentures (restated) -- -- 1,063,000 -- -- 1,063,000
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 related
to stock options -- -- 1,756,949 (1,756,949) -- --
Compensation related to stock
options (restated) -- -- 822,382 -- -- 822,382
Amortization of deferred
compensation (restated) -- -- -- 741,211 -- 741,211
Net loss (restated) -- -- -- -- (15,540,208) (15,540,208)
---------- ------------ ------------ ------------ ------------ ------------
Balance December 31, 1996
(restated) 34,573,111 691,462 72,354,683 (1,015,738) (59,895,842) 12,134,565
Stock options exercised 20,000 400 37,100 -- -- 37,500
Deferred compensation
related to stock options -- -- (10,284) 10,284 -- --
Stock issued to match
401(k) contributions 101,668 2,033 163,623 -- -- 165,656
Stock issued in October 1997
private placement 3,851,029 77,021 5,496,514 -- -- 5,573,535
Amortization of deferred
compensation -- -- -- 501,139 -- 501,139
Net loss -- -- -- -- (8,886,403) (8,886,403)
---------- ------------ ------------ ------------ ------------ ------------
Balance December 31, 1997 38,545,808 $ 770,916 $ 78,041,636 $ (504,315) $(68,782,245) $ 9,525,992
========== ============ ============ ============ ============ ============
</TABLE>
See accompanying notes.
F-5.
<PAGE> 55
CYPRESS BIOSCIENCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1997 1996 1995
------------ ------------ ------------
(Restated) (Restated)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (8,886,403) $(15,540,208) $ (7,140,252)
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation and amortization 481,567 182,845 373,306
Acquired in-process research and development -- 5,146,943 625,000
Amortization of deferred compensation 501,139 741,211 --
Compensation related to stock options 822,382
Common stock issued for services and expenses 165,656 186,129 248,884
Debt conversion expense -- 276,688 1,124,386
Restructuring expense -- -- 644,656
(Gain) loss on disposal of property and equipment (3,298) (11,110) 23,437
Debt discount related to Senior Convertible Debentures -- 1,063,000 --
Changes in operating assets and liabilities, net of
effects from acquisition of PRP, Inc.:
Accounts receivable, net (28,700) (320,191) 394,549
Other receivables 10,467 (111,020) 30,034
Inventories 345,763 174,739 345,806
Prepaid expenses 56,849 39,655 64,805
Accounts payable and accrued liabilities (536,530) (94,678) 345,259
------------ ------------ ------------
Net cash used by operating activities (7,893,490) (7,443,615) (2,920,130)
INVESTING ACTIVITIES
Purchase of property and equipment (118,038) (997,602) (714,947)
Proceeds from sale of property and equipment 7,685 36,735 30,393
Purchase of short-term investments (2,006,773) (2,890,160) --
Maturities from sale of short-term investments 3,922,600 -- --
Acquisition of PRP, Inc., net of $83,399 cash acquired -- (361,029) --
------------ ------------ ------------
Net cash provided by (used in) investing activities 1,805,474 (4,212,056) (684,554)
FINANCING ACTIVITIES
Net proceeds from issuance of common stock 5,573,535 18,276,785 --
Net proceeds from exercises of stock options 37,500 -- --
Proceeds from issuance of convertible debentures -- 500,000 1,000,000
Payment of capital lease obligation and notes payable (27,207) (13,565) (22,140)
Notes payable, net -- -- (11,812)
Debt issuance and conversion costs -- (71,919) (22,102)
------------ ------------ ------------
Net cash provided by financing activities 5,583,828 18,691,301 943,946
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (504,188) 7,035,630 (2,660,738)
Cash and cash equivalents at beginning of the year 8,045,508 1,009,878 3,670,616
------------ ------------ ------------
Cash and cash equivalents at end of the year $ 7,541,320 $ 8,045,508 $ 1,009,878
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 31,661 $ 14,681 $ 322,968
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES
Stock issued for debt conversion $ -- $ 2,351,607 $ 2,586,000
============ ============ ============
</TABLE>
See accompanying notes
F-6.
<PAGE> 56
CYPRESS BIOSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. FORMATION AND BUSINESS OF 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 ("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 Cyplex(TM), a
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 ("RA"). In January 1998, the Company's Phase III clinical trial
evaluating the use of the Prosorba(R) column in the treatment of RA was stopped
early due to the achievement of favorable safety and statistically significant
results. Based on such results, the Company plans to file a Pre-Market Approval
("PMA") application for the Prosorba(R) column for the treatment of RA with the
FDA in mid-1998.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Restatement of Prior Period Financial Statements
In 1997, the Company restated its previously issued financial statements
as of and for the years ended December 31, 1996 and 1995. In accordance with
EITF D-60, which was issued in March 1997 but which is applicable to previously
issued financial statements, the Company recorded $1,063,000 of interest expense
related to the Senior Convertible Debentures which were issued with a discounted
conversion feature. In addition, the Company recorded $1,119,920 of additional
compensation expense in 1996 related to certain stock options granted in 1996.
The Company also recorded $93,000 and $314,000 of debt conversion expense during
the years ended December 31, 1996 and 1995, respectively, related to deferred
debt issuance costs associated with the March 1996 and September 1995 exchange
offerings to the holders of the 7% Convertible Debentures.
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.
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, Cash Equivalents and Short-term Investments
The Company considers all investments with an original maturity of three
months or less when purchased to be cash equivalents. Management determines the
appropriate classification of its cash equivalents and investment securities at
the time of purchase and reevaluates such determination as of each balance sheet
date. Management has classified the Company's cash equivalents and investment
securities as available-for-sale securities in the accompanying financial
statements. Available-for-sale securities are carried at fair value, with
unrealized gains and losses reported in a separate component of stockholders'
equity. The cost of debt securities classified as available-for-sale is adjusted
for amortization of premiums and accretion of discounts to maturity. Such
amortization and
F-7.
<PAGE> 57
accretion, as well as interest and dividends, are included in interest income.
Realized gains and losses are also included in interest income. The cost of
securities sold is based on the specific identification method.
The Company invests its excess cash in U.S. Government agency
securities, and money market funds with strong credit ratings. The Company has
established guidelines regarding diversification of its investments and their
maturities, which should maintain safety and liquidity.
Inventories
Inventories are stated at the lower of cost (using the weighted average
method based on the first-in, first-out method) or market.
Property and Equipment
Property and equipment including assets acquired under capital leases,
are recorded at cost and depreciated or amortized over the estimated useful
lives of the assets (three to five years) or the lease term using the
straight-line method. The Company does not depreciate assets classified as
construction in progress assets until the assets are placed in operations.
Accrued Clinical Trial Costs
The Company enrolls patients in various clinical trial sites which are
conducted in the United States. The Company records the cost of such studies as
the clinical work is performed by the respective research entities. The Company
accrues costs related to clinical trials at the time of patient enrollment.
Convertible Debenture Issuance Costs
Convertible debenture issuance 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 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
Revenue from product sales is recognized when products are shipped.
Revenues from government grants are recognized based on performance requirements
of the grant or as the grant expenditures are incurred. Research and development
expenses are recognized as incurred.
Net Loss Per Share
The computation of net loss per share is based upon the weighted average
number of shares of common stock issued and outstanding for each period. Common
stock equivalents related to options, warrants and Convertible Debentures are
excluded from the computation, as their effect is antidilutive.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings per Share ("SFAS
128"), which has been adopted by the Company for the year ended December 31,
1997. Under the new requirements for calculating basic net income per share, the
dilutive effect of stock options will be excluded. The adoption of SFAS 128 had
no effect as the Company has incurred losses for all periods presented.
F-8.
<PAGE> 58
Long-Lived Assets
In 1996, the Company adopted Statement of Financial Accounting Standards
No. 121, Accounting for Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of ("SFAS 121"). SFAS 121 requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. SFAS 121 also addresses the
accounting for long-lived assets that are expected to be disposed of. Since the
adoption, the Company has not identified any indicators of impairment or
recorded any impairments of long-lived assets.
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 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 as previously reported does
not believe that comprehensive income or loss will be materially different than
net income or loss as previously reported. 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
A summary of the estimated fair value of cash equivalent and short-term
investment securities is shown below as of December 31:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Money market funds $ 996,075 $ 6,202,938
U.S. government agency securities 6,947,133 3,880,180
------------ ------------
Total debt securities 7,943,208 10,083,118
Less amounts classified as cash equivalents (6,968,875) (7,192,958)
------------ ------------
Total short-term investment securities $ 974,333 $ 2,890,160
============ ============
</TABLE>
The estimated fair value of each cash equivalent and short-term
investment security approximates cost and no unrealized gains or losses were
reported as of December 31, 1997 or 1996. Realized gains or losses on sales of
available-for-sale securities in 1997 and 1996 were not significant. The
investments at December 31, 1997 mature by March 1998.
Inventories
Inventories are comprised of the following as of December 31:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Raw materials and components $166,714 $214,632
Work in progress 354,010 700,815
Finished goods 107,280 58,320
-------- --------
$628,004 $973,767
======== ========
</TABLE>
F-9.
<PAGE> 59
Property and Equipment
Property and equipment are comprised of the following as of December 31:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Laboratory and production equipment $ 2,610,417 $ 629,269
Office equipment 456,343 537,244
Vehicles 20,924 20,924
Leasehold improvements 51,753 51,753
Construction in progress -- 1,787,686
----------- -----------
3,139,437 3,026,876
Accumulated depreciation and
amortization (1,147,660) (674,948)
----------- -----------
$ 1,991,777 $ 2,351,928
=========== ===========
</TABLE>
Depreciation expense for the years ended December 31, 1997, 1996 and
1995 was $473,802, $171,015 and $305,912, respectively.
At December 31, 1996, construction in progress included approximately
$1.3 million related to the Company's consolidation of its two manufacturing
facilities into one location in the State of Washington. The remainder of the
balance of construction in progress relates to manufacturing machinery under
construction. Such construction was completed in 1997.
Accrued Liabilities
Accrued liabilities are comprised of the following as of December 31:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Accrued clinical trial costs $ 834,815 $ 590,473
Other 309,877 311,617
---------- ----------
$1,144,692 $ 902,090
========== ==========
</TABLE>
Advertising Costs
The Company incurred advertising expenses of approximately $0, $18,000,
and $77,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
4. ACQUISITIONS
PRP, Inc.
On November 1, 1996, the Company acquired all of the assets and assumed
the liabilities of PRP, Inc. ("PRP") in a transaction accounted for as a
purchase. The Company recorded a non-recurring charge of approximately $5.1
million in the fourth quarter of 1996 as acquired in-process research and
development as the feasibility of the acquired technology had not been
established nor had alternative future uses been identified at the time of the
purchase.
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 an approximate total fair value of $4.5 million, based
upon a price of $4.00 per Unit, which was the price identical units were sold
for in a private placement in October 1996 (see Note 10). Each Unit was
comprised of two shares of the Company's common stock and one common stock
purchase warrant).
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
F-10.
<PAGE> 60
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
Cyplex(TM), a platelet alternative for the treatment of thrombocytopenia, the
Company shall make a payment of $5.0 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. The
earn-out payments, if earned, will be treated as compensation expense because
most of such earn-out payments will be made to former stockholders of PRP and
the milestone payments, if earned, will be treated as additional purchase price
and will either be expensed as acquired in-process research and development or
capitalized as purchased technology, depending upon the evaluation of the
technology to be made by the Company at such future date.
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 Cyplex(TM). The only circumstances under which the
Company may decrease or cease commercialization of Cyplex(TM) prior to expending
$4.0 million would be if the Company encounters critical problems with the
commercialization of Cyplex(TM), including problems related to efficacy or
economic viability, such as would render Cyplex(TM), on a stand-alone basis,
unsafe, ineffective or incapable of generating a reasonable, positive cash flow.
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
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
------------ ------------
(Restated) (Restated)
<S> <C> <C>
Revenues $ 2,029,773 $ 4,104,224
Net loss $(12,111,248) $(14,762,974)
Net loss per share - basic and diluted $ (0.39) $ (0.74)
</TABLE>
CELx Corporation
In 1995, the Company acquired the minority interest of CELx Corporation
("CELx"), the Company's former majority owned subsidiary, in exchange for an
aggregate of 312,500 shares of the Company's common stock valued at $625,000.
The transaction was accounted for as a purchase. The Company recorded a
non-recurring charge of $625,000 as in-process research and development as the
technological feasibility of the acquired technology had not been established
nor had alternative future uses been identified at the time of the purchase.
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.
F-11.
<PAGE> 61
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 which
included the issuance of non-qualified stock options to purchase 705,000 shares
of common stock (see Note 7). 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.
The Company has also incurred approximately $1.4 million of capital
expenditures related to the purchase of manufacturing and lab equipment through
December 31, 1997 in connection with the consolidation of its two Washington
manufacturing facilities. The consolidation was completed in April 1997 with the
Company receiving FDA good manufacturing practice ("GMP") approval of the
facility. The Company does not expect to incur any additional capital
expenditures directly related to the consolidation of these facilities.
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 ITP. Under the Baxter distribution agreement, Baxter was
obligated to purchase from the Company minimum numbers of Prosorba(R) columns at
a predetermined price per column. In the event such minimums were not purchased,
Baxter was nevertheless obligated to pay the Company for that number of
Prosorba(R) columns that Baxter was obligated to purchase under the distribution
agreement. 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 non-refundable take-or-pay payment on March 31, 1995 for the first
sales year after the amendment 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. In 1995, the Company recorded the $3 million payment as revenue since
it represented a non-refundable up-front payment with no future performance
obligation.
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 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. In
November 1997, the Company's management decided to close its Boston facility by
mid-1998. The Boston facility is approximately 7,000 square feet, and is used
primarily for the manufacture of clinical-grade Cyplex(TM).
F-12.
<PAGE> 62
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 had historically been performed in the Company's Seattle
facility. The Redmond facility, however, has been renovated so that both raw
material production and assembly of the Prosorba(R) column can be performed in a
single facility.
The Company leased 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, and the Company was subsequently
released from any obligations by the owner of the property in August 1997.
The table below indicates future minimum lease payments due, over the
remaining life of the leases, under the agreements in place as of December 31,
1997:
<TABLE>
<CAPTION>
<S> <C>
1998 $ 253,196
1999 165,376
2000 165,376
2001 165,376
2002 139,280
Thereafter through 2004 226,368
----------
$1,114,972
==========
</TABLE>
Total rent expense was approximately $501,000, $494,000 and $521,000 for
the years ended December 31, 1997, 1996 and 1995, respectively. Sublease income
was approximately $117,000 and $149,000 for the years ended December 31, 1997
and 1996, respectively. No sublease income is expected to be received in 1998.
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.
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 and warrants
outstanding at the date of termination. During the year ended December 31, 1996,
the Company valued these options using the Black Scholes model and recorded
compensation expense totaling approximately $822,000.
Employment Agreements
The Company entered into employment agreements in December 1995 with a
new Chief Executive Officer and a new President, Chief Operating Officer each
for a term of five years. 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. Bonuses of $270,000 and $225,000 were earned and
included in general and administrative expenses in the years ended 1997 and
1996, respectively.
The agreements provided for the granting of an aggregate of 4,159,824
options to purchase the Company's common stock. On the date the options were
granted, the closing bid price of the Company's stock was $1.875 per share. The
exercise price of the options was $1.50 per share, reflecting the price per
share of stock sold in the private placement of approximately 8,500,000 shares
on the same date (see Note 10). The Company recorded
F-13.
<PAGE> 63
$1,559,934 of deferred compensation expense on such date, reflecting the
difference between the closing bid price of the Company's common stock on the
date of issuance and the option exercise price. Options to purchase 25% of the
total amount granted vested immediately with the remainder to vest over a four
year period. The deferred compensation balance is being amortized 25%
immediately with the remainder over the four year vesting 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.
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 $166,000, $102,000 and
$161,000 for the years ended December 31, 1997, 1996 and 1995, respectively,
based upon the market value of the Company's common stock on the date of the
contribution.
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 $2.88
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 30th 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 $2.88 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 at the
time the fair market value of the Company's common stock was $3.81. 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 in 1995, 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. The weighted
average fair market value of the Company's common stock during the fourth
quarter 1995 conversion was $3.13, and the fair market value during the first
quarter 1996 conversion was $2.25. 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 $2.88 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 at the time the fair market
value of the Company's common stock was $2.25. 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
F-14.
<PAGE> 64
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. The Company recorded a non-cash expense of $183,688 in 1995, which
represents the fair market value of the increased number of shares issued under
the terms of the offering memorandum compared to the original conversion terms.
In 1996, the Company charged an additional $93,000 to debt conversion expense
for the unamortized deferred debt issuance costs related to the debentures
converted in 1996.
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 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. The debt was convertible into common stock at the price of
the Company's next equity financing round.
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 simultaneously with the closing of a private
placement of common stock (see Note 10). The Company recorded approximately $1.1
million of interest expense in January 1996 for the difference between the fair
market value of the Company's common stock on the conversion date and the
conversion price of $1.50.
10. STOCKHOLDERS' EQUITY
Authorized Shares
The Company is authorized to issue up to 15,000,000 shares of "blank
check" preferred stock.
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.
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 $5.6 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, and are now redeemable by the Company at $0.75 each.
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, Inc. 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.
F-15.
<PAGE> 65
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 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 outstanding 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"). The plan expired February 10, 1998.
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.
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>
1997 1996
-------- --------
(Restated)
<S> <C> <C>
Pro forma net loss (in thousands) $(11,302) $(18,452)
Pro forma net loss per share - basic and diluted $ (0.32) $ (0.63)
</TABLE>
The proforma results above for 1997 and 1996 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 less than four years
of vesting.
F-16.
<PAGE> 66
The following table summarizes the activity of the Company's stock
options and warrants:
<TABLE>
<CAPTION>
NUMBER OF WARRANTS / OPTIONS
------------------------------------------------------------------------------
1996
EQUITY INCENTIVE
INCENTIVE STOCK NON-QUALIFIED OTHER
WARRANTS PLAN OPTIONS OPTIONS STOCK OPTIONS OPTIONS
---------- ------------ ---------- ------------- ----------
<S> <C> <C> <C> <C> <C>
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 -- 789,522 -- 30,000 --
Exercised -- (20,000) -- -- --
Canceled (180,800) (322,479) (33,250) (32,000) (6,000)
Expired (1,850,000) -- (1,500) -- (192,730)
---------- ---------- ---------- ---------- ----------
Balance December 31, 1997 3,334,399 6,034,200 26,250 470,000 952,105
========== ========== ========== ========== ==========
</TABLE>
All warrants are exercisable at December 31, 1997 at exercise prices
ranging from $1.85 to $2.88, and 3,334,399 shares of common stock were reserved
for future issuance.
With respect to stock options, at December 31, 1997 there were 1,067,800
options available for future grant and 8,550,355 shares of common stock were
reserved for future issuance.
Following is a further breakdown of the options outstanding as of
December 31, 1997:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE AVERAGE
REMAINING WEIGHTED EXERCISE
RANGE OF CONTRACTUAL AVERAGE PRICE OF
EXERCISE OPTIONS LIFE IN EXERCISE OPTIONS OPTIONS
PRICES OUTSTANDING YEARS PRICE EXERCISABLE EXERCISABLE
------------- ----------- ----------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$1.00 - $1.50 4,497,686 8.0 $1.50 3,145,821 $1.50
$1.51 - $2.25 2,758,764 6.6 $1.96 1,756,531 $2.04
$2.26 - $3.25 177,105 4.3 $2.66 157,105 $2.67
$3.26 - $3.88 49,000 2.5 $3.77 49,000 $3.77
--------- ---------
7,482,555 5,108,457
========= =========
</TABLE>
The weighted average exercise prices and fair values for options granted
in 1997 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 $1.37 $1.72
Less than market price of stock -- --
Exceeds market price of stock -- --
</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
F-17.
<PAGE> 67
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 a life of
the option of 7 years.
The weighted average exercise prices for stock option activity are as
follows:
<TABLE>
<CAPTION>
NUMBER OF STOCK
OPTIONS UNDER ALL WEIGHTED AVERAGE
PLANS EXERCISE PRICES
----------------- ----------------
<S> <C> <C>
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 819,522 $1.72
Exercised (20,000) $1.88
Canceled (393,729) $2.08
Expired (194,230) $2.26
----------
Balance December 31, 1997 7,482,555 $1.71
==========
</TABLE>
11. INCOME TAXES
Significant components of the Company's deferred income tax assets as of
December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
(Restated)
<S> <C> <C>
Net operating loss carryforwards $ 18,686,000 $ 14,346,000
Capitalized research & development 4,756,000 3,212,000
Other 1,829,000 1,467,000
------------ ------------
25,271,000 19,025,000
Valuation allowance (25,271,000) (19,025,000)
============ ============
$ -- $ --
============ ============
</TABLE>
As of December 31, 1997, the Company has accumulated Federal and
California net operating loss carryforwards of approximately $53,561,000 and
$2,435,000, respectively, which expire beginning in 1998. Additionally, the
Company has Federal and California research and development tax credit
carryforwards of approximately $749,000 and $20,000, 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.
F-18.
<PAGE> 68
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of PRP, Inc.:
We have audited the accompanying balance sheets of PRP, Inc. (a Delaware
corporation in the development stage) as of January 31, 1995 and 1996, and the
related statements of operations, stockholders' investment (deficit) and cash
flows for each of the three years in the period ended January 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of PRP, Inc. as of January 31,
1995 and 1996, and the results of its operations and its cash flows for each of
the three years in the period ended January 31, 1996, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company is a development stage company, has suffered
significant losses from operations and has a net capital deficiency that raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are described in Note 1. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Boston, Massachusetts /s/ Arthur Andersen LLP
May 10, 1996
F-19.
<PAGE> 69
PRP, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 31,
------------------------------
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 77,665 $ 1,345,386
Prepaid expenses and other assets 57,125 115,816
------------ ------------
Total current assets 134,790 1,461,202
------------ ------------
Property and equipment, at cost (Note 1)
Office equipment 54,460 54,233
Laboratory equipment 775,882 771,778
Leasehold improvements 40,458 40,458
------------ ------------
870,800 866,469
Less-Accumulated depreciation and amortization 645,266 495,851
------------ ------------
370,618
225,534
------------ ------------
Other assets 20,150 46,150
------------ ------------
Total assets $ 380,474 $ 1,877,970
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Notes payable to related parties $ 2,866,280 $ --
Accounts payable 12,851 154,068
Accrued expenses 340,559 222,602
------------ ------------
Total current liabilities $ 3,219,690 376,670
------------ ------------
Notes Payable to Related Parties (Note 4) -- 2,000,000
Commitments (Note 5)
Stockholders' deficit (Note 6):
Series A convertible preferred stock, $.01 par value-
Authorized - 220,000 shares
Issued and outstanding - 220,000 shares in 1996
and 1995 liquidation preference of $1,100,000 2,200 2,200
Series B convertible preferred stock, $.01 par value-
Authorized - 80,000 shares
Issued and outstanding - 51,635 shares in 1996
and 1995 liquidation preference of $335,628 516 516
Series C convertible preferred stock, $.01 par value-
Authorized - 2,000,000 shares
Issued and outstanding - 637,003 shares in 1996
and 1995 liquidation preference of $4,892,736 6,370 6,370
</TABLE>
F-20.
<PAGE> 70
<TABLE>
<CAPTION>
JANUARY 31,
------------------------------
1996 1995
------------ ------------
<S> <C> <C>
Nonvoting convertible preferred stock, $.01 par value-
Authorized - 500,000 shares
Issued and outstanding - 190,682 shares and
188,765 in 1996 and 1995, respectively, liquidation
preference of $953,410 $ 1,907 $ 1,888
Common stock, $.01 par value-
Authorized - 10,000,000 shares
Issued and outstanding - 1,429,778 shares in 1996
and 1995 14,298 14,298
Additional paid-in capital 8,824,470 8,689,226
Deficit accumulated during the development stage (11,688,977) (9,213,198)
------------ ------------
Total stockholders' deficit (2,839,216) (498,700)
------------ ------------
Total Liabilities and Shareholder Deficit $ 380,474 $ 1,877,970
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21.
<PAGE> 71
PRP, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
CUMULATIVE
FROM
INCEPTION
FEBRUARY 27,
FOR THE YEARS ENDED JANUARY 31, 1984 TO
---------------------------------------------- JANUARY 31,
1996 1995 1994 1996
------------ ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C>
General and Administrative Expenses $ (726,960) $ (692,941) $ (904,993) $ (4,147,940)
Research and Development Expenses (1,550,656) (2,586,566) (2,592,312) (9,819,854)
------------ ------------ ------------ ------------
Loss from Operations (2,277,616) (3,279,507) (3,497,305) (13,967,794)
Interest Expense, Net (198,163) (7,954) 14,581 (51,242)
Loss on Abandonment of Facility (Note 8) -- (162,128) -- (162,128)
Officer's Life Insurance Proceeds -- -- 2,492,187 2,492,187
------------ ------------ ------------ ------------
Net Loss $ (2,475,779) $ (3,449,589) $ (990,537) $(11,688,977)
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22.
<PAGE> 72
PRP, INC.
(A Development Stage Company)
Statements of Stockholder's Investment (Deficit)
FOR THE YEARS ENDED JANUARY 31, 1995 AND 1996
FOR PERIOD FROM INCEPTION (FEBRUARY 27, 1984) TO JANUARY 31, 1996
<TABLE>
<CAPTION>
Series A Convertible Series B Convertible
Preferred Stock Preferred Stock
Number $.01 Par Number $.01 Par
of Shares Value of Shares Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
SALE OF COMMON STOCK SINCE INCEPTION -- $ -- -- $ --
Issuance of common stock for property and preferred -- -- -- --
Issuance of common stock for services render -- -- -- --
Sale of nonvoting convertible preferred stock, net of issuance
costs -- -- -- --
Issuance of nonvoting convertible preferred stock for services
rendered -- -- -- --
Sale of Series A convertible preferred stock, net of issuance
costs 220,000 2,200 -- --
Sale of Series B convertible preferred stock, net of issuance
costs -- -- 51,616 516
Sale of Series C convertible preferred stock, net of issuance
costs -- -- -- --
Net Loss from inception to January 31, 1993 -- -- -- --
------------ ------------ ------------ ------------
BALANCE, JANUARY 31, 1993 220,000 2,200 51,616 516
Issuance of common stock for services rendered -- -- -- --
Issuance of nonvoting convertible preferred stock for services
rendered and property and equipment -- -- -- --
Sale of Series B convertible preferred stock, net of issuance
costs -- -- 742 7
Sale of Series C convertible preferred stock, net of issuance
costs -- -- -- --
Stock options granted for rent expense -- -- -- --
Net loss -- -- -- --
------------ ------------ ------------ ------------
BALANCE, JANUARY 31, 1994 220,000 2,200 52,358 523
Issuance of nonvoting convertible preferred stock for services
rendered -- -- -- --
Exercise of stock options -- -- -- --
Repurchase of preferred stock -- -- (723) (7)
Net loss -- -- -- --
------------ ------------ ------------ ------------
BALANCE, JANUARY 31, 1995 220,000 2,200 51,635 516
Issuance of nonvoting convertible preferred stock for services
rendered -- -- -- --
Stock options granted for rent expense -- -- -- --
Net loss -- -- -- --
------------ ------------ ------------ ------------
BALANCE, JANUARY 31, 1996 220,000 $ 2,200 51,635 $ 516
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Series C Convertible Nonvoting Convertible
Preferred Stock Preferred Stock
Number $.01 Par Number $.01 Par
of Shares Value of Shares Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
SALE OF COMMON STOCK SINCE INCEPTION -- $ -- -- $ --
Issuance of common stock for property and equipment -- -- -- --
Issuance of common stock for services render -- -- -- --
Sale of nonvoting convertible preferred stock, net of issuance
costs -- -- 149,859 1,498
Issuance of nonvoting convertible preferred stock for services
rendered -- -- 27,388 274
Sale of Series A convertible preferred stock, net of issuance
costs -- -- -- --
Sale of Series B convertible preferred stock, net of issuance
costs -- -- -- --
Sale of Series C convertible preferred stock, net of issuance
costs 572,463 5,725 -- --
Net Loss from inception to January 31, 1993 -- -- -- --
------------ ------------ ------------ ------------
BALANCE, JANUARY 31, 1993 572,463 5,725 177,247 1,772
Issuance of common stock for services rendered -- -- -- --
Issuance of nonvoting convertible preferred stock for services
rendered and property and equipment -- -- 23,670 237
Sale of Series B convertible preferred stock, net of issuance
costs -- -- -- --
Sale of Series C convertible preferred stock, net of issuance
costs 70,485 705 -- --
Stock options granted for rent expense -- -- -- --
Net loss -- -- -- --
------------ ------------ ------------ ------------
BALANCE, JANUARY 31, 1994 642,948 6,430 200,917 2,009
Issuance of nonvoting convertible preferred stock for services
rendered -- -- 7,848 79
Exercise of stock options -- -- -- --
Repurchase of preferred stock (5,945) (60) (20,000) (200)
Net loss -- -- -- --
------------ ------------ ------------ ------------
BALANCE, JANUARY 31, 1995 637,003 6,370 188,765 1,888
Issuance of nonvoting convertible preferred stock for services
rendered -- -- 1,917 19
Stock options granted for rent expense -- -- -- --
Net loss -- -- -- --
------------ ------------ ------------ ------------
BALANCE, JANUARY 31, 1996 637,003 $ 6,370 190,682 $ 1,907
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional during the
Number $.01 Par Paid-in Development
of Shares Value Capital Stage
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
SALE OF COMMON STOCK SINCE INCEPTION 1,412,247 $ 14,122 $ 1,032,016 $ --
Issuance of common stock for property and equipment 5,250 53 10,447 --
Issuance of common stock for services render 4,281 43 13,875 --
Sale of nonvoting convertible preferred stock, net of issuance
costs -- -- 743,126 --
Issuance of nonvoting convertible preferred stock for services
rendered -- -- 173,380 --
Sale of Series A convertible preferred stock, net of issuance
costs -- -- 1,066,970 --
Sale of Series B convertible preferred stock, net of issuance
costs -- -- 320,988 --
Sale of Series C convertible preferred stock, net of issuance
costs -- -- 4,336,946 --
Net Loss from inception to January 31, 1993 -- -- -- (4,773,072)
------------ ------------ ------------ ------------
BALANCE, JANUARY 31, 1993 1,421,778 14,218 7,697,748 (4,773,072)
Issuance of common stock for services rendered 6,600 66 22,374 --
Issuance of nonvoting convertible preferred stock for services
rendered and property and equipment -- -- 184,695 --
Sale of Series B convertible preferred stock, net of issuance
costs -- -- 4,816 --
Sale of Series C convertible preferred stock, net of issuance
costs -- -- 586,493 --
Stock options granted for rent expense -- -- 149,040 --
Net loss -- -- -- (990,537)
------------ ------------ ------------ ------------
BALANCE, JANUARY 31, 1994 1,428,378 14,284 8,645,166 (5,763,609)
Issuance of nonvoting convertible preferred stock for services
rendered -- -- 45,074 --
Exercise of stock options 1,400 14 1,386 --
Repurchase of preferred stock -- -- (2,400) --
Net loss -- -- -- (3,449,589)
------------ ------------ ------------ ------------
BALANCE, JANUARY 31, 1995 1,429,778 14,298 8,689,226 (9,213,198)
Issuance of nonvoting convertible preferred stock for services
rendered -- -- 8,075 --
Stock options granted for rent expense -- -- 127,169 --
Net loss -- -- -- (2,475,779)
------------ ------------ ------------ ------------
BALANCE, JANUARY 31, 1996 1,429,778 $ 14,298 $ 8,824,470 ($11,688,977)
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<TABLE>
<CAPTION>
Total
Stockholders
Investment
(Deficit)
------------
<S> <C>
SALE OF COMMON STOCK SINCE INCEPTION $ 1,046,138
Issuance of common stock for property and equipment 10,500
Issuance of common stock for services render 13,918
Sale of nonvoting convertible preferred stock, net of issuance
costs 744,624
Issuance of nonvoting convertible preferred stock for services
rendered 173,654
Sale of Series A convertible preferred stock, net of issuance
costs 1,069,170
Sale of Series B convertible preferred stock, net of issuance
costs 321,504
Sale of Series C convertible preferred stock, net of issuance
costs 4,342,671
Net Loss from inception to January 31, 1993 (4,773,072)
------------
BALANCE, JANUARY 31, 1993 2,949,107
Issuance of common stock for services rendered 22,440
Issuance of nonvoting convertible preferred stock for services
rendered and property and equipment 184,932
Sale of Series B convertible preferred stock, net of issuance
costs 4,823
Sale of Series C convertible preferred stock, net of issuance
costs 587,198
Stock options granted for rent expense 149,040
Net loss (990,537)
------------
BALANCE, JANUARY 31, 1994 2,907,003
Issuance of nonvoting convertible preferred stock for services
rendered 45,153
Exercise of stock options 1,400
Repurchase of preferred stock (2,667)
Net loss (3,449,589)
------------
BALANCE, JANUARY 31, 1995 (498,700)
Issuance of nonvoting convertible preferred stock for services
rendered 8,094
Stock options granted for rent expense 127,169
Net loss (2,475,779)
------------
BALANCE, JANUARY 31, 1996 $(2,839,216)
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23.
<PAGE> 73
PRP, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
CUMULATIVE
FROM INCEPTION
FOR THE YEARS ENDED JANUARY 31, FEBRUARY 27, 1984
---------------------------------------------- TO JANUARY 31,
1996 1995 1994 1996
------------ ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,475,779) $ (3,449,589) $ (990,537) $(11,688,977)
Adjustments to reconcile net loss to net cash used
in operating activities
Issuance of debt for services 516,280 -- -- 516,280
Issuance of stock for services 8,094 45,153 75,360 316,160
Issuance of stock options for rent expense 105,994 62,100 86,940 255,034
Depreciation and amortization 149,415 161,811 149,844 670,662
Write-off of fixed assets related to the loss on abandonment of
facility -- 151,263 -- 151,263
Changes in assets and liabilities
Prepaid expenses and other current assets 79,885 (25,671) (9,041) (35,931)
Life insurance proceeds receivable -- 2,500,000 (2,500,000) --
Accounts payable (141,217) 76,488 (211,017) 12,851
Accrued expenses 117,938 (128,994) 101,155 340,559
------------ ------------ ------------ ------------
Net cash used in operating activities (1,639,390) (607,439) (3,297,296) (9,462,099)
------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (4,331) (25,317) (172,253) (904,947)
Decrease (increase) in other assets 26,000 4,865 68,932 (20,150)
------------ ------------ ------------ ------------
Net cash (used in) provided by investing activities 21,669 (20,452) (103,321) (925,097)
------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable to related parties 350,000 2,000,000 -- 2,350,000
Repayment of note payable to stockholder -- (1,000,000) 1,000,000 --
Proceeds from sale of common stock -- -- -- 1,046,138
Proceeds from exercise of stock options -- 1,400 -- 1,400
Proceeds from sale of preferred stock -- -- 592,021 7,069,990
Repurchase of preferred stock -- (2,667) -- (2,667)
------------ ------------ ------------ ------------
Net cash provided by financing activities 350,000 998,733 1,592,021 10,464,861
------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,267,721) 370,842 (1,808,596) 77,665
Cash and cash equivalents, beginning of period 1,345,386 974,544 2,783,140 --
------------ ------------ ------------ ------------
Cash and cash equivalents, end of period $ 77,665 $ 1,345,386 $ 974,544 77,665
============ ============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ -- $ 51,291 $ -- $ 51,291
============ ============ ============ ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Issuance of stock for property and equipment $ -- $ -- $ 132,012 $ 145,512
============ ============ ============ ============
Decrease (increase) in prepaid expenses relating to
deferred rent expense $ 21,194 $ (62,100) $ 62,100 $ 21,194
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24.
<PAGE> 74
PRP, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 1996
1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
PRP, Inc. (the Company) was incorporated in the State of Delaware on February
27, 1984. The Company was organized to develop, produce and distribute blood
platelet-based health care products.
The Company is in the development stage and is devoting substantially all of its
efforts toward product research and development and raising capital. The Company
is subject to a number of risks similar to those of other development stage
companies, including dependence on key individuals, competition from substitute
products and larger companies, the development of commercially usable products
and the need to obtain adequate additional financing necessary to fund the
development of its products. These factors raise certain doubt about the
Company's ability to continue as a going concern. The accompanying financial
statements do not include any adjustments that might result from that
uncertainty. The accompanying financial statements reflect the application of
certain significant accounting policies as described in this note and elsewhere
in the accompanying notes to financial statements.
Cash Equivalents
The Company considers all highly liquid investments with original maturities of
90 days or less to be cash equivalents.
Depreciation and Amortization
The Company provides for depreciation and amortization using the straight-line
method by charges to operations in amounts that allocate the cost of property
and equipment over their estimated useful lives, as follows:
<TABLE>
<CAPTION>
ESTIMATED
ASSET CLASSIFICATION USEFUL LIFE
<S> <C>
Office equipment 5 years
Laboratory equipment 5 years
Leasehold improvements 5-8 years
</TABLE>
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
2. INCOME TAXES
The Company provides for income taxes in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109, Accounting for Income Taxes.
At January 31, 1996, the Company had available net operating loss and research
and development tax credit carryforwards of approximately $10,000,000 and
$227,000, respectively. These carryforwards may be used to offset future taxable
income or tax, if any, and expire at various dates from 1999 through 2011. The
Internal Revenue Code contains provisions that may limit the Company's use of
the carryforwards in the event of certain changes in the ownership of the
Company. The Company has recorded a full valuation allowance against its
deferred tax asset
F-25.
<PAGE> 75
of approximately $5,800,000 due to the uncertainty surrounding the relizability
of this asset. Principal components of the deferred tax asset are net operating
loss, research and development tax credit carryforwards and start-up
expenditures that have been capitalized for income tax purposes.
3. LIFE INSURANCE PROCEEDS
In January 1994, an officer/stockholder of the Company passed away. The Company
had a $2,500,000 face value life insurance policy in place on this
officer/stockholder. In March 1994, the Company received approximately
$1,500,000 from the insurance company. The remaining $1,000,000 was paid
directly to a stockholder in full satisfaction of a note payable to a
stockholder.
4. NOTES PAYABLE TO RELATED PARTIES
At January 31, 1995, the Company had term notes payable to a limited partnership
and certain shareholders of the Company for $2,000,000. This balance was
increased to $2,866,280 as of January 31, 1996. The Company has received
$2,350,000 in cash funding and $516,280 of professional services and accrued
interest in exchange for the notes. The notes bear interest at 9% per annum, and
principal and interest are due on December 31, 1996. The notes are secured by
substantially all of the Company's assets, including all patents. The carrying
value of the notes approximates its market value.
In addition, the noteholders were issued warrants that gave them the right to
purchase Series C convertible preferred stock equal to the amount of the
outstanding loan balance plus any accrued interest divided by $4.20. Each
warrant has an exercise price of $ 4.20 per share. These warrants expire the
later of 30 days after the termination of the loan commitment or repayment of
the notes. As of January 31, 1996, 749,338 warrants have been issued in
conjunction with these notes.
On February 13, 1996, the Company entered into a $700,000 working capital loan
agreement with certain shareholders and consultants of the Company. Under the
terms of the agreement, the Company received approximately $350,000 in February
and the remaining $350,000 in May 1996. The loan carries the same terms as
described above except for the warrant provision. Under the new debt agreement,
debtholders were issued two warrants that gave them the right to purchase two
share of Series C convertible preferred stock for each dollar outstanding loan
balance, plus any accrued interest exercisable at $1.50 per share. This warrant
expires five years after the termination of the loan commitment or repayment of
the notes payable; it may be accelerated by certain events.
5. COMMITMENTS
The Company leases office and laboratory facilities under various operating
leases that expire through January 2001. Annual commitments under operating
leases as of January 31, 1996 are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR AMOUNT
<S> <C>
1997 $105,000
1998 105,000
1999 105,000
2000 105,000
2001 96,000
--------
$516,000
========
</TABLE>
In February 1993, the Board of Directors authorized the grant of an option to
purchase 32,400 shares of common stock of the Company at an exercise price of
$1.00 per share to the Company's landlord in lieu of certain cash payments under
a facility operating lease. In March 1995, the Board of Directors authorized the
grant of an additional option to purchase 39,740 shares of common stock of the
Company at an exercise price of $1.00 per share to the Company's landlord in
lieu of cash payment of rent from April 1, 1995 to March 31, 1996; the total
value of the options is $127,168. The value of the rent from April 1, 1995 to
March 31, 1996 has been included in stockholders' deficit at January 31 ,1996.
During fiscal 1994, 1995 and 1996, the Company recorded $133,000,
F-26.
<PAGE> 76
$151,000 and $114,000, respectively, of rent expense, of which approximately
$87,000, $62,000 and $106,000, respectively, was noncash rent expense. The
noncash rent expense was related to stock options granted to the Company's
landlord at an amount that represented the fair market value of the rent. During
fiscal 1995, the Company terminated a lease for a portion of its laboratory
space and recorded a loss on abandonment of the facility as discussed in Note 8.
6. STOCKHOLDERS' DEFICIT
Common Stock
As of January 31, 1996, 10,000,000 shares of common stock (Common Stock) were
authorized, of which 1,099,320 shares were reserved for the conversion of the
outstanding preferred stock, 798,000 shares were reserved for the exercise of
stock options and 749,338 shares were reserved for the exercise warrants.
During fiscal 1994, the Company issued 6,600 shares of Common stock to
consultants for services rendered, which resulted in a charge to operations of
$22,440. The Company has charged operations for this issuance based on the fair
value of the stock, as determined by the Board of Directors.
Preferred Stock
The Company's Board of Directors has authorized the issuance of up to 5,000,000
shares of preferred stock (Preferred Stock), $.01 par value, of which 500,000
shares have been designated as nonvoting preferred stock (Nonvoting Preferred),
220,000 shares have been designated as Series A preferred stock (Series A
Preferred), 80,000 shares have been designated as Series B preferred stock
(Series B Preferred), 2,000,000 shares have been designated as Series C
preferred stock (Series C Preferred) and 2,200,000 shares remain authorized but
undesignated and unissued.
During fiscal 1994, 1995 and 1996, the Company issued 6,300, 7,848 shares and
1,917 shares, respectively, of Nonvoting Preferred to certain stockholders/
directors and consultants for services rendered, which resulted in charges to
operations of approximately $52,920, $45,000 and $8,100, respectively. The
Company has charged operations for these issuances based on the fair value of
the stock, as determined by the Board of Directors. In fiscal 1994, the Company
executed an operating lease for additional laboratory facilities. Under the
terms of this agreement, the Company issued a total of 17,370 share of Nonvoting
Preferred for certain leasehold improvements and consulting services. The
Company capitalized $132,012 as leasehold improvements relating to this
Nonvoting Preferred issuance. This lease has since been terminated (Note 8). In
addition, the Company sold 51,616 shares and 742 shares of Series B Preferred at
a price of $6.50 per share in fiscal 1993 and 1994, respectively. In fiscal
1993, the Company sold 572,463 shares of Series C Preferred at a price of $7.60
per share. In fiscal 1994, the Company also sold 6,094 shares and 64,391 shares
of Series C Preferred at a price of $7.60 and $8.40 per share, respectively.
The rights, preferences and privileges of the Preferred Stock are detailed
below.
TRANSFER RESTRICTIONS
All shares of Preferred Stock are subject to certain transfer restrictions,
including the Company's right to repurchase any shares offered for sale and the
right of the holders of Preferred Stock, and such holders of Common Stock as the
Company deems appropriate, to purchase the offered shares if the Company refuses
to do so.
CONVERSION
Each class of Preferred Stock is convertible (as described below) into Common
Stock at the rate of one share of Common Stock for each share of Preferred
Stock, adjustable for certain dilutive events.
F-27.
<PAGE> 77
6. STOCKHOLDERS' DEFICIT (CONTINUED)
Preferred Stock (Continued)
The Series A and C Preferred are convertible upon the occurrence of certain
events at the option of the holder, as defined. The Nonvoting Preferred and
Series B Preferred may not be converted at the option of the holders. All of the
Preferred Stock is convertible into shares of Common Stock at the option of the
Company in the event of the closing of a public offering resulting in at least
$5,000,000 of gross proceeds to the Company at various per share prices.
DIVIDENDS
Each share of Preferred Stock is entitled to participate in any dividend or
distribution declared or paid on the Common Stock on the basis of the number of
shares of Common Stock into which it is then convertible. Preferred Stockholders
will be entitled to receive their dividends before any dividends are paid to
Common Stockholders.
LIQUIDATION PREFERENCES
In the event of a liquidation, dissolution or winding up of the Company,
1. the holders of Series A Preferred are entitled to receive,
subsequent to any distribution to holders of Nonvoting Preferred
but before holder of any other class of Preferred Stock or Common
Stock, $5.00 per share plus any accrued but unpaid dividends;
2. the holders of Series B Preferred are entitled to receive,
subsequent to any distribution to the holders of Nonvoting
Preferred and Series A Preferred, but before holders of any other
class of Preferred Stock or Common Stock, $6.50 per share plus any
accrued but unpaid dividends;
3. the holders of Series C Preferred are entitled to receive,
subsequent to any distribution to holders of Nonvoting Preferred,
Series A Preferred and Series B Preferred, but before holders of
any other class of Preferred Stock or Common Stock, the amount
paid per share (572,612 shares at $7.60 per share and 64,391
shares at $8.40 per share) plus any accrued but unpaid dividends;
and
4. the holders of Nonvoting Preferred are entitled to receive, $5.00
per share plus any accrued but unpaid dividends prior to the
distribution of any proceeds to holders of any other class of
Preferred Stock or holders of Common Stock.
VOTING
Holders of Nonvoting Preferred are not entitled to vote, except as required
under Delaware law. Holders of all other classes of Preferred Stock are entitled
to one vote for each whole share of Common Stock into which the shares of
Preferred Stock held are then convertible. Holders of Common Stock vote with the
holders of Series A Preferred, Series B Preferred and Series C Preferred as a
single class.
Stock Option Plan
The Company has a stock option plan (the Plan), pursuant to which up to 800,00
shares of Common Stock may be issued over a 10-year period. Under the Plan, the
Company may grant both incentive stock options and nonqualified stock options,
as well as award or sell shares to employees. All option grants, prices and
vesting periods are determined by the Board of Directors. Incentive stock
options may be granted at a price not less than the fair market value on the
date of grant, as determined by the Board of Directors. Unless otherwise
modified by the Board of Directors, incentive stock options vest at 20% per
annum, and nonqualified stock options vest immediately.
F-28.
<PAGE> 78
A summary of stock option activity is as follows:
<TABLE>
<CAPTION>
NUMBER OPTION PRICE
OF OPTIONS PER SHARE
---------- ------------
<S> <C> <C>
Outstanding, January 31, 1993 388,530 $ 1.00
Granted 152,891 1.00
Terminated 45,000 1.00
Outstanding, January 31, 1994 496,421 1.00
Granted 190,467 1.00
Exercised (1,400) 1.00
Terminated (47,600) 1.00
------- ------
Outstanding, January 31, 1995 637,888 1.00
Granted 163,534 1.00
Terminated (1,000) 1.00
------- ------
Outstanding, January 31, 1996 800,422 $ 1.00
======= ======
Exercisable, January 31, 1996 759,627 $ 1.00
======= ======
</TABLE>
A number of the Board of Director members and consultants receive stock options
as compensation. At January 31, 1996, there were 6,950 stock options earned but
not yet granted by the Company. As discussed in Note 5, the Company has granted
options in connection with the amendment of a facility operating lease. The
Company has also authorized the grant of preferred stock or stock options for
common stock to certain consultants, at the discretion of the Company, for
compensation, as defined in the agreement. All shares relating to this agreement
were granted before year-end.
7. SIMPLIFIED EMPLOYEE PLAN
On November 1, 1989, the Company set up a simplified employee plan under the
Individual Retirement Account provisions (SEP IRA). There was no Company
contribution to the SEP IRA during the fiscal years ended January 31, 1994, 1995
and 1996.
8. LOSS ON ABANDONMENT OF FACILITY
In April 1994, in an attempt to conserve cash, the Company abandoned part of its
leased facility, consisting of laboratory and office space. In conjunction with
the lease termination, the Company agreed to relinquish its right to the
leasehold improvements and some of its equipment. As a result, the Company
incurred a loss of approximately $151,000 related to the write-off of property
and equipment. In addition, the Company forfeited its security deposit and one
month's rent, which totaled approximately $11,00. The Company was released from
its lease obligation, and the lease was terminated effective June 30, 1994. The
total loss of $162,000 has been shown as a loss on abandonment of facility in
the accompanying statement of operations for the year ended January 31, 1995.
F-29.
<PAGE> 79
CYPRESS BIOSCIENCE, INC.
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The pro forma information is based on the historical financial statements of
Cypress Bioscience, Inc. and PRP, Inc. giving effect to the assumptions and
adjustments described in the notes to the pro forma financial statements. The
pro forma condensed consolidated balance sheet is presented as if the
transaction had occurred on September 30, 1996. The pro forma condensed
consolidated statements of operations present the combined results of operations
as if the acquisition had occurred on January 1, 1995. These statements include
only preliminary adjustments relating to the purchase price allocation to the
accounts of PRP, Inc.; final adjustments will be determined at a later date and
may, therefore, differ from those reflected in the unaudited pro forma condensed
consolidated balance sheet and statements of operations. In the opinion of
management of Cypress Bioscience, Inc., the estimates used in the preparation of
the unaudited pro forma condensed consolidated balance sheet are reasonable
under the circumstances and the final purchase accounting adjustments are not
expected to have a material impact on the financial statements of Cypress
Bioscience, Inc.
The unaudited pro forma condensed consolidated balance sheet and statement of
operations may not be indicative of the results that actually would have
occurred if the acquisition had been in effect on the dates indicated or which
may be obtained in the future. The unaudited pro forma condensed consolidated
balance sheet and statement of operations should be read in conjunction with the
historical financial statements of Cypress Bioscience, Inc., from the Company's
Annual Report (Form 10-K/A), and of PRP, Inc. included elsewhere herein.
The unaudited pro forma condensed statements of operations have combined the
following periods: for Cypress Bioscience, Inc. the twelve months ended December
31, 1995 and the nine months ended September 30, 1996; for PRP, Inc., the twelve
months ended January 31, 1996 and the nine months ended October 31, 1996.
F-30.
<PAGE> 80
CYPRESS BIOSCIENCE, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
CYPRESS PRO FORMA PRO FORMA
BIOSCIENCE, INC. PRP, INC. ADJUSTMENTS COMBINED
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,287,639 $ 83,399 $ (555,027)(a) $ 5,816,011
2,329,120 (c) 2,329,120
Inventories 1,283,968 -- -- 1,283,968
Other current assets 908,590 37,926 25,000 971,516
------------ ------------ ------------ ------------
Total current assets 8,480,197 121,325 1,799,093 10,400,615
Property and equipment, net 2,141,107 120,407 -- 2,261,514
Other assets 35,429 10,150 -- 45,579
------------ ------------ ------------ ------------
Total assets $ 10,656,733 $ 251,882 $ 1,799,093 $ 12,707,708
============ ============ ============ ============
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities $ 837,052 $ 134,485 $ -- $ 971,537
Convertible debentures 400,000 -- -- 400,000
Notes Payable -- 3,926,836 (3,926,836)(a) --
Other liabilities 183,099 575,762 (546,964)(a) 211,897
Stockholders' equity:
Common stock 575,557 14,300 45,856 (a) 690,773
(14,300)(a)
69,360(c)
Preferred stock -- 10,993 (10,993)(a) --
Additional paid-in capital 59,238,705 8,824,668 4,109,713 (a) 69,608,178
(8,824,668)(a)
6,259,760(c)
Deferred compensation (1,419,298) -- -- (1,419,298)
Accumulated deficit (49,158,382) (13,235,162) 13,235,162 (a) (57,755,379)
(4,596,997)(a)
(4,000,000)(c)
------------ ------------ ------------ ------------
Total stockholders'equity
(deficit) 9,236,582 (4,385,201) 6,272,893 11,124,274
------------ ------------ ------------ ------------
Total liabilities and
stockholders' equity (deficit) $ 10,656,733 $ 251,882 $ 1,799,093 $ 12,707,708
============ ============ ============ ============
</TABLE>
F-31.
<PAGE> 81
CYPRESS BIOSCIENCE, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
CYPRESS PRO FORMA PRO FORMA
BIOSCIENCE, INC. PRP, INC. ADJUSTMENTS COMBINED
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue $ 1,277,549 $ -- $ -- $ 1,277,549
Grant income -- 61,797 -- 61,797
Interest income 343,632 -- -- 343,632
------------ ------------ ------------ ------------
1,621,181 61,797 -- 1,682,978
Costs and expenses:
Production costs 837,192 -- -- 837,192
Sales and marketing 429,417 -- -- 429,417
Research and development 2,140,659 825,044 1,500,000(c) 4,465,703
General and administrative 2,641,048 522,963 -- 3,164,011
Purchased in process research -- -- -- --
and development
Interest expense 45,835 259,975 -- 305,810
Restructuring expense 460,090 -- -- 460,090
Debt conversion expense 183,688 -- -- 183,688
------------ ------------ ------------ ------------
6,737,929 1,607,982 1,500,000 9,845,911
------------ ------------ ------------ ------------
Net loss $ (5,116,748) $ (1,546,185) $ (1,500,000) $ (8,162,933)
============ ============ ============ ============
Net loss per share $ (0.19) $ (0.69) $ (0.24)(b)
============ ============ ============
Shares used in computing net
loss per share 27,649,052 2,250,930 33,409,850 (b)
============ ============ ============
</TABLE>
*Note: The above Pro Forma Condensed Consolidated Statement of Operations does
not include a $4,596,997 charge for the estimated fair value of acquired
in-process research and development of PRP, Inc. as it is a nonrecurring charge.
This amount is only an estimate and may change upon completion of the valuation
process.
F-32.
<PAGE> 82
CYPRESS BIOSCIENCE, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
CYPRESS PRO FORMA PRO FORMA
BIOSCIENCE, INC. PRP, INC. ADJUSTMENTS COMBINED
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue $ 4,104,224 $ -- $ -- $ 4,104,224
Grant income -- -- -- --
Interest income 118,994 -- -- 118,994
------------ ------------ ------------ ------------
4,223,218 -- -- 4,223,218
Costs and expenses:
Production costs 2,041,422 -- -- 2,041,422
Sales and marketing 819,907 -- -- 819,907
Research and development 3,219,324 2,586,566 2,500,000(c) 8,305,890
General and administrative 2,626,817 692,941 -- 3,319,758
Purchased in process 625,000 -- -- 625,000
research and development
Interest expense 261,958 7,954 -- 269,912
Loss on abandonment -- 162,128 -- 162,128
Restructuring 644,656 -- -- 644,656
Debt conversion expense 810,386 -- -- 810,386
------------ ------------ ------------ ------------
11,049,470 3,449,589 2,500,000 16,999,059
------------ ------------ ------------ ------------
Net loss $ (6,826,252) $ (3,449,589) $ (2,500,000) $(12,775,841)
============ ============ ============ ============
Net loss per share $ (0.39) $ (1.58) $ (0.55)(b)
============ ============ ============
Shares used in computing net
loss per share 17,598,735 2,189,405 23,359,533 (b)
============ ============ ============
</TABLE>
*Note: The above Pro Forma Condensed Consolidated Statement of Operations does
not include a $4,596,997 charge for the estimated fair value of acquired
in-process research and development of PRP, Inc. as it is a nonrecurring charge.
This amount is only an estimate and may change upon completion of the valuation
process.
F-33.
<PAGE> 83
CYPRESS BIOSCIENCE, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(a) On November 1, 1996, Cypress Bioscience, Inc., entered into an agreement to
acquire PRP, Inc. The transaction will be accounted for under the purchase
method of accounting. The total estimated purchase price of approximately
$5,000,000, including transaction costs of $400,000, has been allocated to
in-process research and development and the fair value of assets acquired and
liabilities assumed pursuant to Accounting Principles Board Opinion Number 16.
The acquired in-process research and development expense will be charged to
expense in the quarter ending December 31, 1996. The pro forma condensed
consolidated balance sheet is presented as if the transaction had occurred on
September 30, 1996. The pro forma condensed consolidated statement of operations
are presented as if the acquisition had occurred on January 1, 1995.
(b) The net loss per share and shares used in computing the per share amounts
for the year ended December 31, 1995, and the nine months ended September 30,
1996, have been calculated assuming that the acquisition occurred on January 1,
1995. Accordingly, the 2,292,798 common shares issued have been treated as
outstanding for the full period.
(c) In connection with the acquisition of PRP, Inc., the Company completed a
private placement in which it raised net proceeds of approximately $6.3 million.
Pursuant to the terms of the merger agreement, the Company is obligated to spend
at least $4 million of the funds raised to commercialize and advance IPM as a
principal product of the Company.
F-34.
<PAGE> 84
PRP, INC.
(A DEVELOPMENT STAGE COMPANY)
INTERIM FINANCIAL STATEMENTS
BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
OCTOBER 31, JANUARY 31,
1996 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 83,399 $ 77,665
Other current assets 37,926 57,125
------------ ------------
Total current assets 121,325 134,790
Property and equipment, net 120,407 225,534
Other assets 10,150 20,150
------------ ------------
Total assets $ 251,882 $ 380,474
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities $ 134,485 $ 3,219,690
Notes Payable 3,926,836 --
Other liabilities 575,762 --
Stockholders' equity:
Common stock 14,300 14,298
Preferred stock 10,993 10,993
Additional paid-in capital 8,824,668 8,824,470
Accumulated deficit (13,235,162) (11,688,977)
------------ ------------
Total stockholders' deficit (4,385,201) (2,839,216)
------------ ------------
Total liabilities and stockholders' deficit $ 251,882 $ 380,474
============ ============
</TABLE>
See accompanying notes.
F-35.
<PAGE> 85
PRP, INC.
(A DEVELOPMENT STAGE COMPANY)
INTERIM FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
CUMULATIVE
FROM INCEPTION
FEBRUARY 27,
NINE MONTHS ENDED OCTOBER 31, 1984 TO
1996 1995 OCTOBER 31, 1996
------------ ------------ ----------------
<S> <C> <C> <C>
Grant income $ 61,797 $ 113,389 $ 61,797
------------ ------------ ------------
61,797 113,389 61,797
Costs and expenses:
Research and development 825,044 1,306,694 10,644,898
General and administrative 522,963 525,199 4,670,903
------------ ------------ ------------
Loss From Operations (1,286,210) (1,718,504) (15,254,004)
Loss on Abandonment of Facility -- -- (162,128)
Officer's Life Insurance Proceeds -- -- 2,492,187
Interest expense, net (259,975) (134,003) (311,217)
Net loss $ (1,546,185) $ (1,852,507) $(13,235,162)
============ ============ ============
</TABLE>
See accompanying notes.
F-36.
<PAGE> 86
PRP, INC.
(A DEVELOPMENT STAGE COMPANY)
INTERIM FINANCIAL STATEMENTS
STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
CUMULATIVE
FROM INCEPTION
NINE MONTHS ENDED OCTOBER 31, FEBRUARY 27,
1984 TO
1996 1995 OCTOBER 31, 1996
------------ ------------ ----------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (1,546,185) $ (1,852,507) $(13,235,162)
Adjustments to reconcile net loss to net cash used
by operating activities
Issuance of debt for services -- -- 516,280
Issuance of stock for services -- -- 316,160
Issuance of stock options for rent expense -- -- 255,034
Depreciation and amortization 105,127 112,294 775,789
Write-off of fixed assets related to the loss on
abandonment of facility 151,263
Changes in assets and liabilities, net (170,928) (285,660) 146,551
------------ ------------ ------------
Net cash used by operating activities (1,611,986) (2,025,873) (11,074,085)
------------ ------------ ------------
INVESTING ACTIVITIES
Purchase of property and equipment -- (3,331) (904,947)
Decrease (increase) in other assets 10,000 21,000 (10,150)
------------ ------------ ------------
Net cash (used in) provided by investing activities 10,000 17,669 (915,097)
------------ ------------ ------------
FINANCING ACTIVITIES:
Proceeds from notes payable to related parties 1,607,520 890,740 3,957,520
Repayment of note payable to stockholder -- -- --
Proceeds from sale of common stock 200 135,263 1,046,338
Proceeds from exercise of stock options -- -- 1,400
Proceeds from sale of preferred stock -- -- 7,069,990
Repurchase of preferred stock -- -- (2,667)
------------ ------------ ------------
Net cash provided by financing activities 1,607,720 1,026,003 12,072,581
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,734 (982,201) 83,399
Cash and cash equivalents at beginning of period 77,665 1,345,386
------------ ------------ ------------
Cash and cash equivalents at end of period $ 83,399 $ 363,185 $ 83,399
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ -- $ -- $ 51,291
============ ============ ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Issuance of stock for property and equipment $ -- $ -- $ 145,512
============ ============ ============
Decrease (increase) in prepaid expenses relating to
deferred rent expense $ -- $ 15,895 $ 21,194
============ ============ ============
</TABLE>
See accompanying notes.
F-37.
<PAGE> 87
PRP, INC.
(A DEVELOPMENT STAGE COMPANY)
INTERIM FINANCIAL STATEMENTS
NOTES TO FINANCIAL STATEMENTS
1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements have been prepared by PRP, Inc. (the
"Company") without audit. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules and
regulations of the SEC. In the opinion of the Company's management, all
adjustments necessary for a fair presentation of the accompanying unaudited
financial statements are reflected herein. All such adjustments are normal and
recurring in nature. Interim results are not necessarily indicative of results
for the full year. For more complete financial information, these financial
statements should be read in conjunction with the Company's audited financial
statements.
PRP, Inc. (the Company) was incorporated in the State of Delaware on February
27, 1984. The Company was organized to develop, produce and distribute blood
platelet-based health care products.
The Company is in the development stage and is devoting substantially all of its
efforts toward product research and development and raising capital. The Company
is subject to a number of risks similar to those of other development stage
companies, including dependence on key individuals, competition from substitute
products and larger companies, the development of commercially usable products
and the need to obtain adequate additional financing necessary to fund the
development of its products. These factors raise substantial doubt about the
Company's ability to continue as a going concern. The accompanying financial
statements do not include any adjustments that might result from the
uncertainty. The accompanying financial statements reflect the application of
certain significant accounting policies as described in this note and elsewhere
in the accompanying notes to financial statements.
2. SUBSEQUENT EVENT
On November 1, 1996, the Company was acquired by Cypress Bioscience, Inc. As a
result of the merger, Cypress Bioscience, Inc. assumed all of the assets and
liabilities of PRP. The transaction will be accounted for as a purchase.
In connection with the merger, Cypress Bioscience, Inc. issued to certain
debt-holders of PRP, in full satisfaction and settlement of such indebtedness,
Cypress Bioscience equity with a total value of approximately $4.5 million.
In addition, the holders of PRP equity securities (including holders of options
and warrants of PRP) (the "Equity Holders") will 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 Cypress Bioscience, Inc. in the merger. In
addition, in conjunction with obtaining approval from the FDA for the use of
Infusible Platelet Membranes ("IPM") for the treatment of thrombocytopenia,
Cypress Bioscience, Inc. shall make a payment of $5,000,000 to the Equity
Holders, with such payment being in the form of, at Cypress Bioscience's
discretion, cash, Company Common Stock or a combination of the two.
F-38.
<PAGE> 88
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 ........................................................... 5
Use of Proceeds ........................................................ 11
Dividend Policy ........................................................ 11
Price Range of Common Stock ............................................ 12
Capitalization ......................................................... 13
Selected Consolidated Financial Data ................................... 14
Management's Discussion and Analysis of
Financial Condition and Results of Operations ......................... 16
Business ............................................................... 22
Management ............................................................. 32
Certain Transactions ................................................... 41
Principal Stockholders and Selling
Securityholder ......................................................... 42
Description of Capital Stock ........................................... 44
Plan of Distribution ................................................... 47
Legal Matters .......................................................... 48
Experts ................................................................ 48
Additional Information ................................................. 48
Index to Consolidated Financial Statements ............................. F-1
</TABLE>
----------
350,000 SHARES
COMMON STOCK
----------
PROSPECTUS
----------
April ___, 1998
<PAGE> 89
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.......................... 23,000
Blue sky qualification fees and expenses ........ 1,000
Accounting fees and expenses..................... 7,000
Printing and engraving expenses.................. 1,000
Miscellaneous.................................... 2,716
-------
Total.................................... $35,000
=======
</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> 90
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 (the "1996 Shares") shares of the Company's Common Stock (the "January
1996 Private Placement") at a per share sales price of $1.50, for an aggregate
offering price of $12,811,053. The 1996 Shares were sold by the Company to
certain persons and entities either previously known to the Company to be
investors in the Company's Common Stock (the "Existing Shareholder Class") or
introduced to the Company by the placement agents retained by the Company to
assist it in the January 1996 Private Placement (the "Agents' Shareholder
Class"). Each of the persons or entities comprising the Existing Shareholder
Class and the Agents' Shareholder Class were "accredited investors" within the
meaning of Rule 501(a) promulgated under the Securities Act. 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
1,734,000 Units (with each Unit consisting of two shares of Common Stock and one
warrant) (the "October 1996 Units") priced at $4.00 per Unit for an aggregate
offering price of $6,936,000. The October 1996 Units were sold by the Company to
persons and entities comprising the Existing Shareholder Class or the Agents'
Shareholder Class. Each of the purchasers of the October 1996 Units were
"accredited investors" within the meaning of Rule 501(a) promulgated under the
Securities Act. 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.
6. In November 1996, the Company completed a private placement of
1,146,399 Units (the "November 1996 Units") in connection with the Company's
acquisition of PRP, Inc. The Units were issued, in part, to holders of
$4,473,752 of outstanding indebtedness of PRP, Inc. (the "Debt Holder Class") in
exchange for the cancellation of such indebtedness and, in part, to satisfy
certain obligations of PRP, Inc. owed to a consultant, EGS Securities, Corp.
("EGS"). Each of the persons and entities comprising the Debt Holder Class and
EGS were "accredited investors" within the meaning of Rule 501(a) promulgated
under the Securities Act.
II-2.
<PAGE> 91
7. In October 1997, the Company completed a private placement of
3,851,025 shares (the "October 1997 Shares") of the Company's Common Stock at a
price of $1.50 per share for an aggregate offering price of $5,776,538. Net
proceeds (after deducting placement fees of approximately $196,593) to the
Company were $5,579,945. The October 1997 Shares were sold by the Company to
persons and entities comprising the Existing Shareholder Class or the Agents'
Shareholder Class. Each of the purchasers of the October 1997 Shares were
"accredited investors" within the meaning of Rule 501(a) promulgated under the
Securities Act.
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, 6 and 7 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.
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 in 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 Exhibit 3.1 to Form 10-Q for the
of Incorporation quarter ended March 30, 1996
3.2 By-Laws, as amended Exhibit 3.2 to 1995 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 Exhibit 3.1 to Form S-1 Registration
Warrant 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 Exhibit 2.1 to Form 10-Q for quarter
Reorganization dated October 10, ended September 30, 1996
1996, by and among Registrant,
Cypress Acquisition Sub, Inc.
and PRP, Inc.
</TABLE>
II-3.
<PAGE> 92
<TABLE>
<CAPTION>
<S> <C> <C>
10.4 Warrant Agreement dated Exhibit 4.1 to Form 10-Q for quarter
September 18, 1996, between ended September 30, 1996
Registrant and American Stock
Transfer & Trust Company
10.5 Exchange of Bridge Debt and Exhibit 4.2 to Form 10-Q for quarter
Warrant Termination Agreement ended September 30, 1996
between Registrant and certain
holders 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 Exhibit 10.3 to Form 10-Q for the
April 22, 1994 between IMRE quarter ended March 31, 1994
Corporation and Allen & Company
Incorporated
10.10 Form 7% Convertible Debenture Exhibit 10.4 to Form 10-Q for the
Purchase Agreement quarter ended March 31, 1994
10.11 Form of Senior Convertible Exhibit 4.10 to 1995 From 10-K
Debenture
10.12 Form of Senior Convertible Exhibit 4.11 to 1995 Form 10-K
Debenture Purchase Agreement
10.13 Form of Stock Purchase Agreement Exhibit 4.12 to 1995 Form 10-K
for January 1996 Private
Placement
10.14 Form of Warrant to Purchase Exhibit 99.1 to Form S-8
Common Stock Registration Statement No. 333-19465
10.15 1996 Equity Incentive Plan (the Exhibit 99.1 to Form S-8
"1996 Plan") Registration Statement No. 333-06771
10.16 Sub-Lease Agreement dated April Exhibit 3.1 to Form 10-Q for the
15, 1996, between the Company quarter ended March 30, 1996
and Bristol-Myers Squibb Company
10.17 Common Stock Purchase Warrant Exhibit 99.1 to Form S-8
dated June 10, 1991 Registration Statement No. 333-06765
10.18 Warrant Agreement dated as of Exhibit 99.1 to Form S-3 Post
August 29, 1991 between IMRE Effective Amendment to Registration
Corporation and Manufacturers of Statement No. 33-71278
Hanover Trust Company of
California (now know as Chemical
Trust Company of California)
10.19 Successor Warrant Agent Exhibit 99.2 to Form S-3 Post
Agreement date July 23, 1996 Effective Amendment to Registration
between the Registrant and Statement No. 33-71278
American Stock Transfer & Trust
Company
10.20 Form of Incentive Stock Option Exhibit 3.1 to Form 10-Q for the
Agreement under the 1996 Plan quarter ended March 30, 1996
10.21 1996 Equity Incentive Plan Form Exhibit 3.1 to Form 10-Q for the
of Non-Statutory Stock Option quarter ended March 30, 1996
Agreement
10.22 Incentive Stock Option and Exhibit 99.4 to Form S-8
Appreciation Plan, as amended Registration Statement No. 333-06771
June 29, 1992
</TABLE>
II-4.
<PAGE> 93
<TABLE>
<CAPTION>
<S> <C> <C>
10.23 Form of Incentive Stock Option Exhibit 99.5 to Form S-8
Agreement under the ISO Plan Registration Statement No. 333-06771
10.24 Amended and Restated 1988 Exhibit 99.6 to Form S-8
Nonqualified Stock Option Plan Registration Statement No. 333-06771
10.25 Form of Nonqualified Stock Exhibit 99.7 to Form S-8
Option Agreement under the 1988 Registration Statement No. 333-06771
Plan
10.26 Form of Stock Option Agreement Exhibit 99.8 to Form S-8
for issuances of all non-plan Registration Statement No. 333-06771
options
10.27 Form of Nonstatutory Stock Exhibit 99.3 to Form S-8
Option Agreement under the 1996 Registration Statement No. 333-06771
Plan
10.28 Stock Option and Stock Exhibit 28.1 to Form S-8
Appreciation Plan Registration Statement No. 333-06771
10.29 Warrant Agreement dated Exhibit 10.1 to Form S-3
September 19, 1996 between the Registration Statement No. 333-15483
Registrant and American Stock
Transfer & Trust company
10.30 1988 Nonqualified Stock Option Exhibit 28.3 to Form S-8
Plan Registration Statement No. 333-06771
10.31 Sub-lease Agreement dated Exhibit 10.3 to 1993 Form 10-K
October 11, 1991
10.32 Lease Agreement dated April 26, Exhibit 10.4 to 1994 Form 10-K
1994
10.33 Warrant Agreement dated as of Exhibit 99.1 to Form S-3
August 29, 1991 between IMRE Registration Statement No. 33-71278
Corporation and Manufacturers
Hanover Trust Company of
California (now known as
Chemical Trust Company of
California)
10.34 Form of Exchange of Bridge Debt Exhibit 10.1 to Form S-3
and Warrant Termination Agreement Registration Statement No. 333-15483
10.35 Employment Agreement with Jay D. Exhibit 10.8 to 1995 Form 10-K
Kranzler
10.36 Employment Agreement with Debby Exhibit 10.9 to 1995 Form 10-K
Jo Blank
10.37 Spear, Leeds & Kellogg Stock
Purchase Agreement
11.1 Statement regarding computation Item 8 of 1995 Form 10-K
of per share loss
23.1 Consent of Ernst & Young LLP
Independent Auditors
23.2 Consent of Arthur Andersen LLP,
Independent Public Accountants
23.3 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
II-5.
<PAGE> 94
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.
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> 95
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant has duly caused this Amendment No. 1 to Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of San Diego, State of California, on April 15, 1998.
CYPRESS BIOSCIENCE, INC.
By: /s/ JAY D. KRANZLER, M.D., PH.D.
------------------------------------
Jay D. Kranzler, M.D., Ph.D.
Chief Executive Officer,
Chief Financial Officer and
Chief Scientific Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 1
to 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 April 15, 1998
- --------------------------------- Scientific Officer, Chief
Jay D. Kranzler, M.D., Ph.D. Financial Officer and
Chairman of the Board (Principal
Executive Officer and Principal
Financial and Accounting Officer)
* President, Chief Operating April 15, 1998
- --------------------------------- Officer and Director
Debby Jo Blank, M.D.
* Director April 15, 1998
- -------------------------------
Richard M. Crooks, Jr.
* Director April 15, 1998
- -------------------------------
Philip J. O'Reilly
* Director April 15, 1998
- -------------------------------
Jack H. Vaughn
/s/ SAMUEL D. ANDERSON
- ------------------------------- Director April 15, 1998
Samuel D. Anderson
/s/ DAVID GOLDE
- ------------------------------- Director April 15, 1998
David Golde
*/s/ JAY D. KRANZLER, M.D., PH.D. April 15, 1998
- --------------------------------
Jay D. Kranzler, M.D., Ph.D.
Attorney-in-Fact
</TABLE>
II-7.
<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 February 13, 1998, in the Registration Statement
(Amendment No. 1 to 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
April 14, 1998
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
on the PRP, Inc. financial statements as of and for the three years in the
period ended January 31, 1996 included in or made part of this Registration
Statement.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
April 13, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 2,544
<SECURITIES> 1,923
<RECEIVABLES> 725
<ALLOWANCES> 200
<INVENTORY> 788
<CURRENT-ASSETS> 5,905
<PP&E> 3,127
<DEPRECIATION> 1,021
<TOTAL-ASSETS> 8,039
<CURRENT-LIABILITIES> 2,205
<BONDS> 400
0
0
<COMMON> 69,813
<OTHER-SE> 322
<TOTAL-LIABILITY-AND-EQUITY> 8,039
<SALES> 2,208
<TOTAL-REVENUES> 2,683
<CGS> 1,316
<TOTAL-COSTS> 8,747
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24
<INCOME-PRETAX> (7,404)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,404)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,404)
<EPS-PRIMARY> (0.21)
<EPS-DILUTED> (0.21)
</TABLE>
