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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 COMMISSION FILE NUMBER 0-19193
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CAMBRIDGE NEUROSCIENCE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3319074
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
ONE KENDALL SQUARE, BUILDING 700, CAMBRIDGE, MA 02139
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (617) 225-0600
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of each exchange
Title of each class on which registered
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None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $.001 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of Common Stock held by non affiliates of
the Registrant as of February 15, 2000, was $20,985,143 based on the last
reported sales price of the Common Stock. As of that date, there were issued and
outstanding 18,135,964 shares of Common Stock, par value $.001 per share.
Documents incorporated by reference: Specifically identified portions
of the Registrant's Definitive Proxy Statement relating to the 2000 Annual
Meeting of Stockholders into Part III of Form 10-K.
A list of all Exhibits to this Form 10-K begins on page 36.
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PART I
ITEM 1. BUSINESS
OVERVIEW
Cambridge NeuroScience, Inc. (the "Company") is a biopharmaceutical
company engaged in the discovery and development of proprietary pharmaceuticals
to prevent or treat severe disorders of, or injuries to, the nervous system. The
Company has not been profitable since inception and expects to continue to incur
operating losses for at least the next several years. To date, the Company has
funded its operations primarily through proceeds from public and private
offerings of equity securities, from payments received pursuant to
collaborations with pharmaceutical companies and from government grants.
Research and development revenue in 1999 was earned pursuant solely to
collaboration agreements with Allergan, Inc. (Allergan) and Bayer, AG (Bayer),
both of which comprised more than 10% of total revenue. Revenue earned pursuant
to the Allergan agreement totaled 71% of revenue in 1999, 23% in 1998 and 25% in
1997. Revenue earned pursuant to the Bayer agreement totaled 29% of revenue in
1999, 37% in 1998, and 0% in 1997. See "--Strategic Alliances." The Company has
not received any revenue from the sale of products. Research and development
expenses were $4.6 million, $6.0 million and $17.7 million for the years ended
December 31, 1999, 1998 and 1997, respectively. Research and development
expenses represented 80% of total operating expenses in 1999, 80% in 1998
(excluding restructuring costs), and 87% in 1997.
The Company is concentrating its drug discovery and development efforts in
two main programs: ion-channel blockers to modify nerve cell signaling or to
prevent nerve cell death; and protein growth factors to prevent degeneration of,
or to regenerate, nerve and glial cells. The ion-channel blocker programs are
aimed at preventing or treating neuropathic pain, glaucoma, spinal cord injury,
Parkinson's disease, multiple sclerosis ("MS"), peripheral neuropathies, brain
damage resulting from stroke and other forms of brain ischemia. The growth
factor programs focus on treatments for MS and peripheral neuropathies.
A summary of the Company's research, development and operating
activities in 1999 is as follows. For further details, see "Product Candidates,"
"Drug Discovery and Development" and "Strategic Alliances."
Collaboration with Allergan, Inc. for glaucoma and other ophthalmic
disorders: The Company continued performing research, primarily chemistry and in
vitro assay screening, which is being funded by Allergan pursuant to a
collaboration agreement signed in 1996. In 1999, this collaboration was amended
to extend research funding for one year through November 2000.
Collaboration with Bayer for the development of GGF2: During 1999, the
Company substantially completed its research performance obligations with
respect to a research protocol covered by its 1998 agreement with Bayer. Such
research was funded by Bayer, and included a series of studies in animals
conducted by third parties under contract to the Company. At the time the
agreement was signed, Bayer and the Company selected MS as the primary
indication for GGF2. Currently, Bayer and the Company are in the process of
evaluating data from recent studies performed by Bayer. Based on results of
these studies, Bayer has indicated it is undertaking a comprehensive review
of all available options for further development of GGF2 before finalizing a
decision. No assurance can be given that there will not be a substantial delay
in the development of GGF2 or that Bayer will continue the development of GGF2.
See "Strategic Alliances" and "Important Factors Regarding Forward Looking
Statements."
CNS 5161 for the treatment of chronic pain: During 1999, the Company
continued exploring drug formulations suitable for chronic drug administration,
and began advancing the clinical development of CNS 5161 towards Phase II
studies in patients suffering from chronic pain.
CNS 1102 or aptiganel (formerly known as CERESTAT) for the treatment of
stroke: During 1999, the Company was unsuccessful in its efforts to obtain
public or private funds to continue the development of aptiganel in stroke
patients. The Company does not currently plan to resume clinical trials for
aptiganel without outside funding. CERESTAT is a registered trademark of
Boehringer Ingelheim International GmbH.
Collaboration with The J. David Gladstone Institutes (Gladstone) for
treatments of Alzheimer's disease: During 1999, the Company completed its
funding obligation under this collaboration, and decided not to exercise a
license for this technology.
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The Company is focusing its resources on later-stage or funded programs,
and is actively pursuing collaborations for its proprietary programs. The
Company continues to explore opportunities to maximize shareholder value,
including the possible sale or merger of the Company or sale of some or all of
its technology assets.
BACKGROUND
The central nervous system, composed of the brain and spinal cord,
controls cognitive functions, interprets incoming sensory information and
organizes body movements. The peripheral nervous system, composed of nerve
fibers leading to and from the central nervous system, carries information from
body sensory receptors and commands to muscles and glands. Two main cell types
are found throughout the nervous system: nerve cells, which generate and
transmit electrical signals, and glial cells, which provide nutrition and
support functions to nerve cells.
Nerve cells and glial cells communicate with one another through a wide
range of electrical and chemical signals to accomplish the normal development
and function of the nervous system. Disorders of the nervous system are
characterized by a change (usually a reduction) in an individual's ability to
perform normal voluntary or involuntary functions. These disorders result from
acute or chronic damage to nerve or glial cells or by abnormalities in the
electrical or chemical communication within and amongst nerve cells or glial
cells.
Ion channels are membrane-bound proteins that are responsible for
generating nerve cell electrical signals in response to chemical signals
received from other cells or to chemical or electrical changes within a single
cell. Drugs which stimulate, enhance, reduce or suppress the activity of
specific ion channels have potential as treatments for nervous system disorders
because they can eliminate potentially damaging over-stimulation of nerve cells
or correct malfunctions in the processes of generating electrical signals in the
nervous system.
Chronic degenerative disorders of the nervous system, such as MS and
peripheral neuropathies, also result from the death of nerve or glial cells.
Chronic nerve cell death does not necessarily result from ischemia but can
result from other metabolic causes, including the actions of endogenous and
exogenous toxic substances, some of which can mimic the effects of
over-stimulation of NMDA ion channels ("excitotoxins"). Chronic nerve and glial
cell death can also result from inflammatory processes in the nervous system,
including the autoimmune destruction of oligodendrocytes (a type of glial cell)
that is the hallmark of MS.
As the nervous system develops, the proliferation, differentiation and
survival of nerve and glial cells are controlled by a variety of protein growth
factors. These growth factors are produced by cells of the nervous system and by
their target cells. Growth factors also play important roles during the normal
regeneration of the nervous system following damage. Animal studies suggest that
one attractive therapeutic approach to replacing damaged nerve and glial cells
is to re-initiate the processes of early development in the nervous system
through the introduction of protein growth factors. Therefore, protein growth
factors offer significant potential as treatments for a variety of neurological
disorders.
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PRODUCT CANDIDATES
The following table summarizes the partnership status, indications,
development status and commercial rights of each of the Company's ("CNSI")
product candidates. This table is qualified in its entirety by reference to the
more detailed descriptions appearing elsewhere in this document.
<TABLE>
<CAPTION>
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DEVELOPMENT COMMERCIAL
PRODUCT CANDIDATE INDICATIONS STATUS (1) RIGHTS
----------------- ----------- ----------- ----------
<S> <C> <C> <C>
PARTNERED PROGRAMS
Sodium, NMDA, and combined Glaucoma and other ophthalmic Preclinical Allergan (2)(6)
ion-channel blockers disorders
Glial Growth Factor 2 (GGF2) Multiple sclerosis and Preclinical Bayer (3)
peripheral neuropathies
PROPRIETARY PROGRAMS
CNS 5161 (NMDA ion-channel Neuropathic pain Phase I CNSI (4)
blocker)
CNS 1102 (NMDA ion-channel Stroke Phase III trials CNSI (5)
blocker) terminated in 1997
NMDA, sodium, potassium and Brain and spinal cord injury or Research CNSI (6)
combined ion-channel ischemia; MS; Pain; Peripheral
blockers neuropathies; Parkinson's disease
Neuregulin 2 Neurodegenerative diseases Research (7)
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</TABLE>
(1) "Research" refers to scientific activities to identify a specific molecule
or to select a specific clinical indication. "Preclinical" refers to
safety and efficacy studies conducted in animals. "Phase I" refers to
smaller-scale trials in human volunteers designed to provide information
about safety and dosage. "Phase III" refers to large-scale clinical
trials designed to provide statistically valid proof of efficacy and
safety in the target population. See "Government Regulation."
(2) Allergan has the right to develop certain NMDA ion-channel blockers,
sodium ion-channel blockers and combination ion-channel blockers for the
treatment of ophthalmic disorders, including glaucoma. See "Strategic
Alliances."
(3) Pursuant to the collaboration agreement signed in December 1998, Bayer has
acquired the worldwide manufacturing and marketing rights for GGF2. See
"Strategic Alliances."
(4) The Company has completed two Phase I trials of CNS 5161. The first trial
was an escalating dose safety study. The second trial involved volunteers
who were exposed to placebo, morphine and two doses of CNS 5161 in a pain
model.
(5) Phase III clinical trials were discontinued in 1997. Upon termination of a
collaboration agreement with Boehringer Ingelheim International GmbH, in
November 1998, rights to CNS 1102 were returned to the Company, in
exchange for a royalty on future sales. See "Drug Discovery and
Development - CNS 1102."
(6) Allergan has the right to evaluate a limited number of the Company's
ion-channel blocker compounds for the treatment of chronic pain. See
"Strategic Alliances."
(7) Research is being conducted pursuant to research rights received under an
option agreement with Harvard University (Harvard), holder of the
commercial rights. Until such time that the Company and Harvard agree to a
commercial license, the Company will not have commercial rights.
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DRUG DISCOVERY AND DEVELOPMENT
PARTNERED PROGRAMS
Ion-Channel Blockers for Ophthalmic Disorders: Collaboration with Allergan, Inc.
Glaucoma is the second leading cause of preventable blindness in the
world, with almost four million patients in the United States alone. The disease
is usually associated with increased pressure within the eye that can damage the
retina and the optic nerve and eventually lead to blindness. In November 1996,
the Company entered into a research and development collaboration with Allergan,
a pharmaceutical company with interests in ophthalmology. The Company and
Allergan believe that it may be possible to treat glaucoma by blocking ion
channels and thereby protecting the retina and the optic nerve from damage. This
collaboration combines the Company's proprietary technology in the area of
ion-channel blockers and Allergan's expertise in the global marketing of
treatments for eye disease. In this collaboration, the Company's molecules that
block sodium ion channels, NMDA ion channels, or both ion channels
simultaneously are being evaluated for their ability to prevent vision loss in
animal models of retinal and optic nerve degeneration. In November 1999, the
collaboration between the two companies was extended for one year and expanded
to include pain management for a limited number of compounds on a non-exclusive
basis. See "Strategic Alliances."
Glial Growth Factor 2: Collaboration with Bayer
GGF2: Multiple Sclerosis
Multiple sclerosis (MS) is a disease of the central nervous system that is
characterized by chronic inflammation and demyelination at multiple sites in the
brain and spinal cord. Approximately 350,000 people in the United States suffer
from MS. GGF2 is a trophic factor for the glial cells that form and maintain the
myelin sheath insulating nerve axons in the central nervous system. These cells
are primary targets involved early in the pathogenesis of MS. The Company has
developed a manufacturing process for producing GGF2 and has demonstrated its
efficacy in animal models believed to be reflective of MS, including
experimental autoimmune encephalomyelitis ("EAE"). In the acute phase of this
model, GGF2 significantly reduced and delayed the clinical symptoms. In the
chronic, relapsing-remitting phase of EAE, GGF2 significantly reduced the
clinical effects of the disease as well as the number of observed relapses. In
December 1998, the Company entered into a collaborative agreement with Bayer AG
(Bayer) for the development of GGF2 for multiple sclerosis and peripheral
neuropathies. See "Strategic Alliances."
Currently, Bayer and the Company are in the process of evaluating data
from recent studies performed by Bayer. Based on results of these studies,
Bayer has indicated it is undertaking a comprehensive review of all available
options for further development of GGF2 before finalizing a decision. No
assurance can be given that there will not be a substantial delay in the
development of GGF2 or that Bayer will continue the development of GGF2. See
"Strategic Alliances" and "Important Factors Regarding Forward Looking
Statements."
GGF2: Peripheral Neuropathies
The Company believes that GGF2 may also be a potential treatment for
peripheral neuropathies as a result of its activity on peripheral glial cells.
Peripheral neuropathies comprise a collection of disorders that are
characterized by the degeneration of sensory and/or motor nerves. This
degeneration may be caused by injury, diabetes, chemotherapy, inherited
disorders and other factors. It was estimated in 1991 that in excess of one
million individuals in the United States suffered from some form of peripheral
neuropathy. The largest segments of this population are those with diabetic
neuropathies and those with chemotherapy-induced neuropathies. There are, at
present, no FDA-approved therapeutic agents for the prevention, reduction or
reversal of the degeneration and atrophy caused by these disorders and injuries.
The Company has tested GGF2 in animal models of chemotherapy-induced
peripheral neuropathy. In two different experimental paradigms
(cisplatin-induced and vincristine-induced neuropathies), GGF2 administration
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protected peripheral nerves from the effects of these chemotherapies. The
Company believes that GGF2 may also be a potential treatment of other
degenerative diseases of the peripheral nerves.
PROPRIETARY PROGRAMS
CNS 5161: Neuropathic Pain and Other Neuropathic Disorders
Despite the availability of a variety of therapeutic approaches to pain
relief, certain disorders are characterized by persistent pathological pain that
is refractory to conventional treatments. Persistent pain associated with
peripheral nerve trauma, neuropathies secondary to diabetes or acquired immune
deficiency syndrome ("AIDS"), amputations and shingles is classified as
neuropathic pain. Drug treatments for neuropathic pain represent a significant
area of unmet medical need and a growing market opportunity. Glutamate
(particularly NMDA) receptors have been implicated in the induction and
maintenance of neuropathic pain in animal models and NMDA antagonists have been
shown to be effective in animal models of persistent pain.
CNS 5161 is a blocker of the NMDA ion channel that was designed and
synthesized by the Company's chemists. Based on its method of action and its
pharmacokinetic profile in animals, CNS 5161 was advanced toward clinical
evaluation for the treatment of neuropathic pain. Studies have shown that CNS
5161 can prevent the development of a delayed pain response in an animal model,
which is thought to be related to the development of chronic neuropathic pain in
humans.
The Company has completed two Phase I studies of CNS 5161. Both studies
were conducted in male volunteers. The first demonstrated the safety and
tolerability of selected doses of CNS 5161 given intravenously. Data from the
first study were used to choose potentially effective doses that produced little
in the way of side effects in the volunteers. The second study examined the
reduction in pain experienced after placebo, morphine and two separate doses of
CNS 5161 (0.25mg and 0.5mg), administered on separate occasions to sixteen male
volunteers. CNS 5161 at 0.5mg was found to produce a statistically significant
reduction in perceived pain as compared to either morphine or placebo.
The Company is currently advancing the clinical development of CNS 5161
towards Phase II studies in patients suffering from chronic pain. The Company's
development plan includes conducting a preliminary Phase II study using an
intravenous formulation of CNS 5161, and to continue exploring drug formulations
suitable for chronic drug administration. Preliminary in vitro studies
undertaken by two leading drug delivery manufacturers have shown that CNS 5161
can be effectively administered through the skin and is suitable for
incorporation into a patch.
CNS 1102 (aptiganel): Background and Clinical Trial Status
The Company believes that aptiganel has the potential to improve outcome
for stroke victims by preventing glutamate-induced nerve cell death through the
blockade of the NMDA ion channel. Aptiganel has been the subject of Phase III
clinical trials for stroke and traumatic brain injury (TBI). The Company and a
former collaborator, Boehringer Ingelheim International GmbH, initiated Phase
III trials in both of these indications in 1996. Enrollment of patients in both
studies was stopped in 1997, prior to completion, based on the results of
scheduled interim analyses of the data in each trial. In TBI, the interim
analysis of the data showed insufficient evidence of positive clinical impact.
In stroke, the data raised concerns over the benefit-to-risk ratio of drug
treatment. In March 1998, the Company reported that further analysis of the
Phase III data indicated that aptiganel had: (i) an attractive safety profile at
relatively high doses in the TBI patient population, and (ii) a potential
therapeutic benefit in a subset of the stroke patient population.
Based on input from an independent panel of stroke experts, which convened
in October 1998, and the Company's review and analysis of the trial data, the
Company has been pursuing options for funding further development of aptiganel
in a subset of the stroke population. However, the Company has not been
successful in obtaining either private or public funds for this purpose, and
does not currently plan to resume the study of aptiganel without outside
funding.
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Other Ion-Channel Blockers for Nervous System Disorders
The Company has applied its expertise in discovering and developing NMDA
ion-channel blockers to the synthesis and testing of compounds that block other
ion channels, such as sodium and potassium ion channels, which can contribute to
nerve cell death or abnormal nerve cell electrical activity. The Company
believes that such molecules may have therapeutic utility in a number of acute
and chronic neurological disorders, including glaucoma, stroke, brain and spinal
cord injury, Parkinson's disease, MS and peripheral neuropathies.
To discover new treatments for preventing disorders of the central nervous
system which arise from brain or spinal cord ischemia and trauma, the Company
has synthesized ion-channel blockers with enhanced potency in the environment of
ischemic tissues relative to their potency in the environment of normal tissues.
The Company believes that such targeted ion-channel blockers could achieve
efficacy with fewer unwanted side effects.
In addition to molecules which block NMDA ion channels, the Company has
created a library of small organic molecules which block the sodium ion channels
of nerve cells. In vitro and in vivo studies have demonstrated that sodium
ion-channel blockers can protect nerve cells from ischemic and traumatic damage
and can exert other beneficial effects, such as reducing responses to painful
stimuli and limiting the consequences of damage to nerve fiber bundles. The
Company believes that molecules which block neuronal sodium ion channels have
potential as treatments for various forms of acute and chronic disorders of the
nervous system, including stroke, brain and spinal cord injury and pain.
As an extension of its work in NMDA and sodium ion-channel blockers, the
Company has synthesized molecules which have the capacity to block both NMDA ion
channels and sodium ion channels. The Company is currently conducting in vitro
and in vivo studies to test the hypothesis that such combination compounds have
enhanced efficacy in treating neurological disorders when compared to the
efficacy of compounds which block only one of these classes of ion channels. In
addition, the Company is conducting studies with potassium channel blockers in
the area of peripheral neuropathies.
OTHER PROTEIN GROWTH FACTORS
The Company has conducted research on novel protein growth factors other
than GGF2. Growth/Differentiation Factor-1 ("GDF-1") is a
nervous-system-specific member of the Transforming Growth Factor-(beta)
("TGF-(beta)") protein family. The Company believes that GDF-1 is likely to play
a role in responses to injury, ischemia and demyelination. The Company has shown
that GDF-1 enhances the neurite outgrowth activity of another known growth
factor and also proliferated cerebellar granule cells. Several members of the
TGF-(beta) gene family have biological activities that potentially can be
employed for therapeutic effects in the nervous system, including: the promotion
of dopaminergic neuron survival, which may be applicable as a treatment for
Parkinson's disease; the promotion of motor neuron survival, which may be
applicable as a treatment for amyotrophic lateral sclerosis; and
immunosuppression, which may be applicable as a treatment for MS. In 1998, the
Company entered into a technology licensing agreement with Creative
Biomolecules, Inc., ("CBMI") whereby the Company outlicensed its rights in GDF-1
to CBMI in exchange for an upfront licensing fee and future royalties on sales.
The Company has an option to license technology related to Cerebellum
Derived Growth Factor (Neuregulin-2) from Harvard University. The Company has
applied for a National Institutes of Health research grant. If the grant is
awarded, the Company will pursue research with the proceeds of such grant and a
minimal amount of the Company's financial resources. There can be no assurance
that the Company will be able to obtain a research grant or license this
technology.
STRATEGIC ALLIANCES
The Company has formed collaborations with pharmaceutical companies to
support the development of its product candidates, provide capital for such
development, and share development risk. The Company is actively pursuing
discussions with additional companies regarding collaborations, mergers,
acquisitions or product-licensing arrangements. No assurance can be given,
however, that any collaborations, mergers, acquisitions or licensing
arrangements will be completed in the foreseeable future or on terms that would
be favorable to the Company.
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Allergan
In November 1996, the Company entered into a collaboration with Vision
Pharmaceuticals L.P., d/b/a Allergan Inc. ("Allergan") to jointly develop NMDA
ion-channel blockers, sodium ion-channel blockers and combination ion-channel
blockers, initially for the treatment of ophthalmic disorders, including
glaucoma. Upon signing the agreement, Allergan purchased 175,103 shares of
Common Stock from the Company for $3.0 million, and provided an additional $3.0
million in research funding over a three-year period through November 1999. In
December 1999, the Company and Allergan amended the collaboration agreement to
add an additional year of research funding for the period November 1999 to
November 2000. This fourth year of funding is in the amount of $1.25 million.
Additionally, the amendment expanded the treatment field to include pain
management for a limited number of compounds on a non-exclusive basis.
Pursuant to this collaboration, Allergan will be responsible for
development, manufacturing and marketing and will bear all costs associated
therewith. The Company may receive up to an additional $18.5 million upon the
achievement of certain milestones as well as royalties on any product sales.
There can be no assurance, however, as to when or if these milestones will be
met. Allergan has certain termination rights under the terms of the agreement,
and either party may, in its sole discretion, terminate the agreement upon 90
days prior written notice of a material breach by the other party.
Bayer AG
In December 1998, the Company entered into a collaborative agreement with
Bayer for the development of GGF2 for the treatment of neurodegenerative
diseases such as MS. In exchange for the exclusive worldwide manufacturing and
marketing rights to the compound, the Company received an up front licensing fee
of $1.0 million and received reimbursement for $1.0 million of the Company's
research costs for GGF2 pursuant to a protocol covered by the agreement. The
Company may receive up to $24.0 million in milestone payments, as well as
royalties on sales of GGF2 products. There can be no assurance, however, as to
when or if these milestones will be met. Bayer will provide all material needed
in the conduct of the research and development activities and shall be
responsible for all associated costs.
Currently, Bayer and the Company are in the process of evaluating data
from recent studies performed by Bayer. Based on results of these studies,
Bayer has indicated it is undertaking a comprehensive review of all available
options for further development of GGF2 before finalizing a decision. No
assurance can be given that there will not be a substantial delay in the
development of GGF2 or that Bayer will continue the development of GGF2. In the
event Bayer elects to terminate the collaboration, it is doubtful the Company
could obtain sufficient financial and technical resources to continue GGF2
development. Either party may terminate this agreement at any time for cause.
Bayer may terminate this agreement at any time, upon 120 days written notice.
See "Important Factors Regarding Forward Looking Statements."
Algos
In December 1999, the Company and Algos Pharmaceuticals Corporation
(Algos) entered into a license agreement whereby the Company was granted a
non-exclusive sub-license to certain Algos patent rights in the field of pain
management. In exchange, Algos received the non-exclusive right to negotiate
commercial licenses with respect to certain of the Company's research and
development compounds. There was no cash or equity consideration associated with
this transaction.
The J. David Gladstone Institutes
In December 1996, the Company, The J. David Gladstone Institutes
("Gladstone") and The Regents of the University of California (the "University")
entered into a three year collaboration for the development of treatments for
Alzheimer's disease and certain other neurological diseases, disorders or
injuries. The collaboration focused on novel pharmaceuticals that inhibit the
activity of a form of apolipoprotein E ("apoE"), a molecule that has been widely
linked to Alzheimer's disease. In conjunction with this agreement, in 1996 the
Company formed a subsidiary, Cambridge NeuroScience Partners, Inc. ("CNPI"), of
which the Company owned 80% of the outstanding common stock and Gladstone and
the University owned 15% and 5%, respectively.
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Pursuant to the collaboration agreement: Gladstone conducted research over
a three-year period through December 1999, for which CNPI provided funding of
$1.25 million per year; the Company provided CNPI, interest-free, all amounts
necessary to enable CNPI to make such payments; and the University granted CNPI
an exclusive three-year option to negotiate an exclusive worldwide,
royalty-bearing license for patentable rights in intellectual property covered
by or arising from the research program within the field, subject to certain
terms and conditions set forth in the option agreement.
In December 1999, the Company and CNPI completed their funding obligations
under this collaboration, and the Company decided not to exercise a license for
this technology. As a result, the Company expects to dissolve CNPI during 2000.
Creative Biomolecules, Inc.
In December 1998, the Company entered into a technology licensing
agreement with CBMI whereby CBMI acquired the exclusive rights to GDF-1 in
exchange for a cash payment and future royalties on product sales. Either party
may terminate this agreement upon a material breach which is not cured within 60
days of written notice of such breach.
Boehringer Ingelheim International GmbH
In March 1995, Cambridge NeuroScience and BI entered into agreements to
collaborate on the worldwide development and commercialization of aptiganel.
Under terms of the agreements, BI was obligated to fund 75% of the development
costs for aptiganel in the United States and Europe and all of the development
costs in Japan. The Company received $15.0 million on signing these agreements,
consisting of $5.0 million for expense reimbursement and $10.0 million for
1,250,000 shares of Common Stock. In September 1996, and in connection with the
commencement of a Phase III stroke trial by BI, the Company received a
milestone payment of $10.0 million for 1,237,624 shares of Common Stock. The
Company and BI conducted two Phase III trials of aptiganel. In the second half
of 1997, the companies announced the discontinuation of patient enrollment into
both trials after interim analyses indicated that continuation of the trials was
not justified. In November 1998, the Company and BI terminated the collaboration
and license rights were returned to the Company, subject to a royalty of 3% of
direct sales or 10% to 20% of royalties on sales by third parties. See "Drug
Discovery and Development - CNS 1102 (aptiganel): Background and Clinical Trial
Status."
MARKETING AND SALES
The Company does not currently sell any products nor does it plan to in
the foreseeable future, and therefore has no marketing, sales, or distribution
organization. The Company's strategy is to rely on its collaborative partners
for marketing, sales and distribution.
MANUFACTURING
The Company has no manufacturing facilities and plans to rely upon outside
manufacturers to produce any near- or intermediate-term products. To date, the
Company has contracted with chemical synthesis companies to produce kilogram
quantities of several of its product candidates. The Company intends to
establish and maintain its own quality-control program for each line of
products. Such program will include a set of standard operating procedures
designed not only to assure that the Company's products are manufactured in
accordance with Good Manufacturing Practices ("GMP") guidelines and other
applicable regulations, but also to maintain consistent product quality.
However, no specific arrangements have been made, and there can be no assurance
that the Company will be able to establish such capabilities. Pursuant to the
research collaboration and licensing agreement for the development of GGF2,
Bayer is responsible for the manufacture of all material needed in the
conduct of the development activities and for all associated costs. Pursuant to
the termination of the collaboration with BI, the Company has the right to
purchase 56kg of aptiganel from BI within two years from the date of termination
of the agreement.
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COMPETITION
The fields in which the Company is involved are characterized by rapid
technological progress. New developments are expected to continue at a rapid
pace in both industry and academia. There are many companies, both public and
private, including large pharmaceutical companies, chemical companies and
specialized genetic engineering companies, engaged in developing products
competitive with products under development by the Company. Many of these
companies have greater capital, human resources, research, development,
manufacturing, and marketing experience than the Company. Such companies may
succeed in developing products that are more effective or less costly than any
that may be developed by the Company and may also prove to be more successful
than the Company in production and marketing. Competition may increase further
as a result of potential advances in the commercial applicability of
biotechnology and greater availability of capital for investment in these
fields. In addition, academic, government and industry-based research is
intense, resulting in considerable competition in obtaining qualified research
personnel, submitting patent filings for protection of intellectual property
rights and establishing corporate strategic alliances. There can be no assurance
that research, discoveries and commercial developments by others will not render
any of the Company's programs or potential products noncompetitive.
The Company will, for the foreseeable future, rely on strategic partners
for certain preclinical evaluation and clinical development of its product
candidates and manufacturing and marketing of any products. In addition, the
Company relies on its strategic partners, in part, for support in its drug
discovery operations. The pharmaceutical companies with which the Company has
collaborations are in some cases attempting to develop other products to treat
diseases within the fields of the collaborations with the Company. Generally,
the Company's agreements with its strategic partners do not prohibit the
strategic partners from engaging in competitive activities with the Company.
Biotechnology and related pharmaceutical technology have undergone rapid
and significant change. The Company expects the technology associated with the
Company's research and development will continue to develop rapidly, and the
Company's future success will depend in large part on its ability to maintain a
competitive position with respect to this technology. Rapid technological
development by the Company or others may result in compounds, products or
processes becoming obsolete before the Company recovers any expenses it incurs
in connection with developing such products.
PATENTS AND PROPRIETARY TECHNOLOGY
Proprietary protection for the Company's products, technology and
processes is essential to its business. The Company's policy is to protect its
technology by, among other things, filing or causing to be filed patent
applications for technology that it considers important to the development of
its business. As of December 31, 1999, Cambridge NeuroScience had licensed or
owned rights in 54 issued U.S. patents. Research and development efforts by the
Company and its collaborators led to the issuance of four U.S. patents and the
allowance of five others in 1999. In addition, eight U.S. patent applications
were filed in 1999 on behalf of the Company and its collaborators, bringing the
total number of pending U.S. applications to 34. These U.S. filings have
corresponding patent filings in other countries as well. The Company is awaiting
action on various patent applications that have either been filed by it or by
academic institutions with which it collaborates.
The Company intends to file, or cause to be filed, additional patent
applications, where appropriate, relating to new product discoveries or
improvements. The use of patents to protect proprietary positions for synthetic
chemicals is well established within the pharmaceutical industry. While the
precedents for gaining patent protection for biologically derived or produced
products through recombinant DNA technology are not as well developed, many
patents have been issued for products of this technology. There can be no
assurance, however, that patents will provide meaningful proprietary protection
to the Company, given the uncertain and complex legal and factual questions
relating to their breadth and enforceability.
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<PAGE> 11
There are patents held by third parties that relate to the manufacture,
development and use of the Company's product candidates for which the Company
has licenses. There can be no assurance that the Company will not in the future
require licenses to additional patents or that such licenses will be available
on commercially reasonable terms, if at all. In addition, there can be no
assurance that existing or future licenses will not be terminated or that any
such termination or failure to obtain a license will not have a material adverse
effect on the Company's business, financial condition or results of operations.
The Company has licensed rights to inventions relating to GGF2, which are
covered by nine issued U.S. patents, several allowed U.S. patent applications
and other pending patent applications in the United States and foreign
countries. The Company believes that its employees and those of its licensor are
the original inventors and that the Company and its licensor are entitled to
patent protection in the United States. However, the Company is aware of a
third-party patent and pending patent applications in the United States and
corresponding patent applications pending in some foreign countries that, if
issued and valid, may be construed to cover aspects of the Company's GGF2
product candidates. There can be no assurance that the Company will not infringe
any such issued U.S. third-party patents, and that the claims of future patents
issuing from the third-party patent applications, if any, will not be infringed
by the Company's proposed manufacture, use or sale of products based on the GGF2
technology. There can be no assurance that the Company would prevail in any
legal action seeking damages or injunctive relief for infringement of the
existing third-party patent or any patent that might issue from such third-party
applications or that any license required under such patent would be available
or, if available, would be available on commercially reasonable terms. Failure
to obtain a required license or to successfully establish non-infringement of,
or the invalidity or unenforceability of, such third-party patents could
preclude the manufacture, sale and use of the Company's products based on such
GGF2 technology.
Patents granted to the Company in any areas of the Company's technology
may be subject to interference proceedings in the United States or opposition
proceedings in foreign countries brought by third parties. There can be no
assurance that the Company would prevail in any such proceedings or that such
proceedings would not result in a material adverse effect on the Company's
business, financial condition or results of operations. An unfavorable decision
in an interference or opposition proceeding may have a material adverse effect
on the business, financial condition and results of operations of the Company.
The Company also relies upon trade secrets, know-how and continuing
technological advances to develop and maintain its competitive position. To
maintain the confidentiality of trade secrets and proprietary information, the
Company maintains a policy of requiring employees, Science Advisory Board
members, consultants and collaborators to execute confidentiality and invention
assignment agreements upon commencement of a relationship with the Company.
These agreements are designed both to enable the Company to protect its
proprietary information by controlling the disclosure and use of technology to
which it has rights and to provide for ownership by the Company of proprietary
technology developed at the Company. There can be no assurance, however, that
these agreements will provide meaningful protection for the Company's trade
secrets in the event of unauthorized use or disclosure of such information. In
addition, whenever the U.S. government funds research programs, it may obtain
nonexclusive rights to patented subject matter otherwise subject to exclusive
rights.
In December 1999, the Company and Algos Pharmaceuticals Corporation
(Algos) entered into a license agreement whereby the Company was granted a
non-exclusive sub-license to certain Algos patent rights in the field of pain
management. In exchange, Algos received non-exclusive rights to negotiate
commercial licenses with respect to certain of the Company's research and
development compounds.
11
<PAGE> 12
GOVERNMENT REGULATION
The clinical development, manufacture and marketing of pharmaceutical
products in the United States require the approval of the FDA under the
Federal Food, Drug and Cosmetic Act. Similar approvals by comparable
agencies are required in most foreign countries. The FDA has established
substantial requirements on the testing, manufacture, quality control,
safety, effectiveness, labeling, storage, record keeping, approval
advertising, and promotion of pharmaceutical products. Pharmaceutical
manufacturing facilities are also subject to the regulations of state, local
and other authorities.
As an initial step in the FDA regulatory approval process, preclinical
studies are typically conducted in animal models to assess a drug's efficacy
and to identify potential safety problems. The results of these studies
must be submitted to the FDA as part of an Investigational New Drug
application ("IND"). The IND automatically becomes effective 30 days after
receipt by the FDA, unless the FDA, within the 30-day time period, raises
concerns or questions about the conduct of the planned trials. In that
case, the IND sponsor and the FDA must resolve any outstanding concerns or
questions before a trial can begin. Typically, clinical trials are
conducted in three-sequential phases that may overlap. Phase I clinical
trials are conducted with a small number of healthy human subjects and are
designed to provide information about safety, dosage tolerance, metabolism,
and distribution of the drug. Phase II clinical trials are designed to
provide efficacy of the product for a specific targeted disease, as well as
additional information on dosing and safety in a limited patient population.
Phase III clinical trials are large-scale studies designed to provide
additional information about dosage, clinical efficacy and to further test
for safety in an expanded patient population. The results of the
preclinical testing and clinical trials of a pharmaceutical product are then
submitted to the FDA in the form of a New Drug Application ("NDA"), or for a
biological product in the form of a Biologics License Application ("BLA"),
for approval to commence commercial sales. Preparing such applications
involves considerable data collection, verification, analysis, and expense.
In responding to an NDA or a BLA, the FDA may grant marketing approval,
request additional information, or deny the application if it determines
that the application does not satisfy its regulatory criteria.
Once issued, the FDA may withdraw product approval if compliance with
regulatory standards is not maintained or if problems occur after the
product is on the market. In addition, the FDA may require testing and
surveillance programs to monitor the effects of approved products which have
been commercialized, and the FDA has the right to prevent or limit further
marketing based on the results of these post marketing programs. The
regulatory process can require many years and the expenditure of substantial
resources. Data obtained from preclinical testing and clinical trials are
subject to varying interpretations, which can delay, limit, or prevent FDA
approval. In addition, changes in FDA approval policies or requirements may
occur or new regulations may be promulgated that may result in delay or
failure to receive FDA approval. Similar delays or failures may be
encountered in foreign countries. Delays and costs in obtaining regulatory
approvals would have a material adverse effect on the Company's business,
financial condition and results of operations.
Among the conditions for NDA or BLA approval is the requirement that the
prospective manufacturer's quality-control and manufacturing procedures
conform on an ongoing basis with GMP. In complying with GMP, manufacturers
must continue to expend time, money, and effort in the area of production
and quality control to ensure full technical compliance. After NDA or BLA
approval, the manufacturing facility is subject to periodic inspections by
the FDA.
The requirements which the Company must satisfy to obtain regulatory
approval by governmental agencies in other countries prior to
commercialization of its products in such countries can be as rigorous and
costly as those described above.
<PAGE> 13
The Company is also subject to various laws and regulations relating to
safe working conditions, laboratory and manufacturing practices, the
experimental use of animals, and the use and disposal of hazardous or
potentially hazardous substances, including radioactive compounds and infectious
disease agents used in connection with the Company's research. Compliance with
laws and regulations relating to the protection of the environment has not had a
material effect on capital expenditures or the competitive position of the
Company. However, the extent of government regulation, which might result from
any legislative or administrative action, cannot be accurately predicted.
REIMBURSEMENT
The Company's ability to commercialize pharmaceutical products may depend
in part on the extent to which reimbursement for the costs of such products and
related treatments will be available from governmental, private health insurers,
managed care organizations and other third-party payors. Significant uncertainty
exists as to the reimbursement status of newly approved health care products,
and third-party payors are increasingly challenging the prices charged for
medical products and services. There can be no assurance that coverage by
third-party payors for any products developed by the Company will be available
to patients. Government and other third-party payors are increasingly
attempting to contain health care costs by limiting both coverage and the level
of reimbursement for new therapeutic products. In some cases, such payors are
refusing to provide coverage for uses of approved products for disease
indications for which the FDA has not granted marketing approval.
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<PAGE> 14
The Company's business may be materially adversely affected by the
continuing efforts of governmental and third-party payors to contain or reduce
the costs of health care through various means. For example, in certain foreign
markets, pricing or profitability of prescription pharmaceuticals is subject to
government control. In the United States, there have been, and the Company
expects that there will continue to be, a number of federal and state proposals
to implement similar government control. In addition, an increasing emphasis on
managed care in the United States has and will continue to put pressure on
pharmaceutical pricing. Such initiatives and proposals, if adopted, could
decrease the price that the Company receives for any products it may develop and
sell in the future and thereby have a material adverse effect on the Company's
business, financial condition and results of operations. Further, to the extent
that such proposals or initiatives have a material adverse effect on other
pharmaceutical companies that are collaborators or prospective collaborators for
certain of the Company's potential products, the Company's ability to
commercialize its potential products may be adversely affected.
EMPLOYEES
As of December 31, 1999 the Company had 17 full-time employees, of whom 13 were
engaged in research and development and 4 in administration and finance.
Doctorates or other advanced degrees are held by 10 of the Company's employees.
All of the Company's employees have signed confidentiality agreements, and none
of the employees are covered by collective bargaining agreements. The Company
considers its employee relations to be good.
ITEM 1 (a). EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company are as follows:
Name Age Position
---- --- --------
Harry W. Wilcox, III 45 President; Chief Executive Officer; Director
Robert N. McBurney 52 Senior Vice President, Research; Chief
Scientific Officer
David I. Gwynne 48 Vice President, Biotechnology and Business
Development
Laima I. Mathews 52 Vice President, Drug Development
Glenn A. Shane 37 Controller; Treasurer; Chief Accounting
Officer
HARRY W. WILCOX, III joined the Company as Senior Vice President, Finance
and Business Development and Chief Financial Officer in December 1995 and was
named President and Chief Executive Officer and Director of the Company in May
1998. Prior to joining the Company, Mr. Wilcox served as Vice President, Finance
and Chief Financial Officer of Cellcor, Inc., a biotechnology company, since
1990. While at Cellcor, Mr. Wilcox was also named Treasurer and Senior Vice
President of Business Development. From 1988 to 1990, he was a founder and
general partner and Chief Financial Officer of Highland Capital Partners, L.P.,
a venture capital firm. From 1983 to 1987, Mr. Wilcox was Controller, Vice
President of Finance and Chief Financial Officer at Charles River Ventures, Inc.
a venture capital firm. Mr. Wilcox earned an M.B.A. degree from Boston
University and a B.A. degree in Finance from the University of Arizona. Mr.
Wilcox is a Certified Public Accountant.
ROBERT N. MCBURNEY, PH.D. joined the Company as Director of
Electrophysiology and Cell Biophysics in December 1987, and served as Vice
President, Research from June 1990 through December 1993, at which time he
became Senior Vice President, Research and Chief Scientific Officer. Prior to
joining Cambridge NeuroScience, Dr. McBurney served from 1984 to 1987 as the
Assistant Director of the Medical Research Council Neuroendocrinology Unit in
Newcastle upon Tyne, England. Dr. McBurney earned B.Sc. and Ph.D. degrees in
Physiology from the University of New South Wales, and conducted postdoctoral
studies in Neurophysiology at
13
<PAGE> 15
Cambridge University and the National Institutes of Health. Dr. McBurney has had
numerous articles published on neurophysiology in various scientific journals.
DAVID I. GWYNNE, PH.D. joined the Company in 1991 as Director,
Biotechnology and became Senior Director of Biotechnology in 1996. In May 1998
he was named Vice President of Biotechnology and Business Development. Dr.
Gwynne leads the Company in the development of growth factors for the treatment
of neurological disorders. Prior to joining the Company, Dr. Gwynne served as
Director of Scientific Affairs at Allelix Biopharmaceuticals, Inc. where he led
the development effort for growth factors in the treatment of inflammatory
disorders and tissue repair. Dr. Gwynne earned a B.Sc. and an M.Sc. in biology
from the University of Toronto. He completed a Ph.D. in molecular biology at
McGill University and conducted post-doctoral studies at the University of
California, Davis in the area of regulation of gene expression.
LAIMA I. MATHEWS joined the Company in September 1992 as Director of
Regulatory Affairs and served in that capacity until March 1997, when she was
appointed Vice President of Drug Development. Prior to joining the Company, Mrs.
Mathews held various positions at G.D. Searle/The NutraSweet Company (Monsanto
Companies) from 1972 through 1992. Her experience includes all aspects of
international development and registration for ethical and consumer
pharmaceutical products, medical devices and food additives. She earned a B.A.
from Loyola University of Chicago.
GLENN A. SHANE joined the Company as Accounting Manager in April 1992 and
served in that capacity until May 1998, at which time he was appointed
Controller and Treasurer of the Company. Prior to joining the Company, Mr. Shane
was Accounting Manager at Boston Business Group from 1989 to 1991. From 1985 to
1989, Mr. Shane was employed in the audit department of Deloitte & Touche LLP,
an international accounting firm. Mr. Shane earned a Bachelors of Business
Administration from the University of Massachusetts, Amherst and is a Certified
Public Accountant.
ITEM 2. PROPERTIES
The Company's sole facility is located in Cambridge, Massachusetts, where
it leases approximately 41,000 square feet of space. In June 1998, the Company
sub-leased to a third party approximately half of its facility. The Company
currently occupies approximately 20,000 square feet of space, including
approximately 13,000 square feet of laboratory space. The description of the
lease terms is incorporated by reference from Note I to the Consolidated
Financial Statements. The current lease expires in July 2000. The Company is
currently evaluating its leasing options.
ITEM 3. LEGAL PROCEEDINGS
Neither the Company nor its subsidiary is a party to any legal proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the year ended December 31, 1999.
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<PAGE> 16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since January 1999, the Company's Common Stock, $.001 par value ("Common
Stock"), trades on the OTC Bulletin Board ("OTC") under the symbol "CNSI". From
June 1991 until January 1999, the Common Stock was listed on the Nasdaq National
Market under the symbol "CNSI". The following table sets forth the high and low
sales prices for the Company's Common Stock for the periods indicated:
High Low
------ -----
January 1 - March 31, 1998 2-5/8 1-5/8
April 1 - June 30, 1998 2-1/2 19/32
July 1 - September 30, 1998 1-3/16 13/32
October 1 - December 31, 1998 2 3/8
January 1 - March 31, 1999 29/32 21/32
April 1 - June 30, 1999 1-1/8 43/64
July 1 - September 30, 1999 1-1/32 27/32
October 1 - December 31, 1999 1-1/64 57/64
There were approximately 165 holders of record of Common Stock and
approximately 3,000 beneficial owners as of February 15, 2000. Prior to March 9,
1998, the Company had never declared nor paid any cash dividends on its capital
stock. On March 9, 1998 the Company's Board of Directors declared an
extraordinary dividend on its capital stock of $1.00 per share of outstanding
Common Stock, which was paid on April 14, 1998. Future cash dividends, if any,
will be paid at the discretion of the Company's Board of Directors and will
depend, among other things, upon the Company's future operations, capital
requirements, general financial condition and such other factors as the Board of
Directors may deem relevant.
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<PAGE> 17
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in conjunction with
the consolidated financial statements of the Company and related notes thereto
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this document.
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1999 1998 1997 1996 1995
------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA: (in thousands, except per-share amounts)
Revenues $ 1,443 $ 4,303 $ 4,035 $ 2,396 $ 8,218
Operating expenses:
Research and development 4,616 5,984 17,650 13,978 13,850
General and administrative 1,159 1,472 2,616 2,585 2,158
Restructuring costs -- 921 -- -- --
------- ------- -------- -------- -------
Total operating expenses 5,775 8,377 20,266 16,563 16,008
------- ------- -------- -------- -------
Loss from operations (4,332) (4,074) (16,231) (14,167) (7,790)
Interest income 588 1,180 2,393 1,178 736
------- ------- -------- -------- -------
Net loss $(3,744) $(2,894) $(13,838) $(12,989) $(7,054)
======= ======= ======== ======== =======
Net loss per common share $ (0.21) $ (0.16) $ (0.79) $ (0.93) $ (0.59)
Cash dividends declared per
common share -- $ 1.00 -- -- --
Weighted average common shares
outstanding 18,118 17,976 17,518 13,980 11,927
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- -------- -------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA: (in thousands)
Cash and cash equivalents $ 3,333 $ 4,863 $ 12,020 $ 26,664 $ 21,937
Marketable Securities 6,489 7,037 26,561 -- --
Working capital 9,731 13,353 33,588 18,362 17,651
Total assets 10,769 15,617 40,891 29,220 24,321
Total liabilities 753 1,887 6,568 9,573 4,793
Accumulated deficit (110,120) (106,376) (103,482) (89,644) (76,655)
Stockholders' equity 10,016 13,730 34,323 19,647 19,528
</TABLE>
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<PAGE> 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Since inception, the Company has been primarily engaged in research and
development. The Company has not received any revenue from the sale of products.
The Company has not been profitable since inception and expects to incur
substantial operating losses for at least the next several years.
The Company has financed its operations through private placements of
preferred equity securities, an initial public offering in 1991, follow-on
public offerings in 1991 and 1997, a private placement of common stock to
institutional investors in 1994 and two directed public offerings in 1995. The
Company has also received funding pursuant to its research and development
collaborations, research grants and from investment income earned on its cash
and short-term investments.
In November 1996, the Company entered into a collaboration with Allergan
for the development of NMDA ion-channel blockers, sodium ion-channel blockers
and combination ion-channel blockers for the treatment of ophthalmic disorders,
including glaucoma. Under the agreement, Allergan purchased 175,103 shares of
the Company's Common Stock for $3.0 million, and provided $1.0 million per year
in research funding through November 1999. In December 1999, the collaboration
was amended to extend the research funding for an additional year in the amount
of $1.25 million for the period November 1999 through November 2000. Allergan
will bear all of the development costs for potential products arising from the
collaboration, and the Company will be entitled to royalties on any product
sales.
In December 1998, the Company entered into a collaborative agreement with
Bayer AG ("Bayer") for the development of recombinant human Glial Growth Factor
2 ("GGF2") for the treatment of neurodegenerative diseases such as multiple
sclerosis ("MS"). In exchange for the exclusive worldwide manufacturing and
marketing rights to the compound, the Company received a $1.0 million up front
licensing fee and $1.0 million for research costs incurred pursuant to a
research protocol covered by the agreement.
In December 1996, the Company entered into a collaboration with the J.
David Gladstone Institutes ("Gladstone") and the Regents of the University of
California, for the development of treatments for Alzheimer's disease and other
neurological disorders. In connection with this collaboration, the Company
formed a subsidiary, Cambridge NeuroScience Partners, Inc. ("CNPI"). Pursuant to
the terms of the collaboration, Gladstone conducted a research program over a
three-year period, through 1999, for which CNPI provided funding of $1.25
million per year. As of December 31, 1999, CNPI and the Company have completed
their funding obligations associated with this collaboration, and do not
anticipate incurring additional research costs associated therewith.
In November 1998, the Company and Boehringer Ingelheim International GmbH
("BI") terminated their collaboration for the development of aptiganel, which
commenced in 1995, and commercial rights to aptiganel were returned to the
Company, subject to a royalty on future sales. After November 1998, this
collaboration will result in no further revenue.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999 AND 1998
Revenues
Research and development revenue decreased by $2.9 million for the year
ended December 31, 1999, compared to 1998. Revenue in 1999 consisted of $1.0
million and $420,000 in research funding from Allergan and Bayer, respectively.
In the prior year, revenue consisted of $1.0 million and $580,000 in research
funding from Allergan and Bayer, respectively; $1.5 million in upfront licensing
fees, primarily from Bayer, and $1.2 million associated with the termination in
1998 of a collaboration agreement with BI. In addition, in 1998 the Company
earned $50,000 from a government grant.
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<PAGE> 19
Operating Expenses
Operating expenses in 1999 decreased by $2.6 million compared to 1998.
This decrease represents decreases of $1.4 million in research and development
expenses and $313,000 in general and administrative expenses, and was primarily
the result of lower wage and facility costs due to a restructuring plan
implemented in 1998. Operating expenses in 1998 also included a restructuring
charge of $921,000, consisting of salaries and benefits relating to the
restructuring in 1998.
Interest Income
Interest income decreased in 1999 by $592,000. This was due primarily to
lower cash, cash equivalents and marketable securities as a result of the
payment in April 1998 of a dividend totaling $17.9 million and due to cash used
for operating purposes.
Net Loss per Share
For the year ended December 31, 1999 the Company had a net loss of $3.7
million, or ($0.21) per share, compared to a net loss of $2.9 million or ($0.16)
per share for the year ended December 31, 1998. This increase in net loss and
net loss per share reflects lower research and development revenue and interest
income in 1999, partly offset by lower operating expenses, all as described
above.
YEARS ENDED DECEMBER 31, 1998 AND 1997
Revenues
Revenue increased by $268,000 for the year ended December 31, 1998,
compared to the same period in 1997. This increase was due to the recognition of
revenue in 1998 relating to the agreements signed in December 1998 with Bayer
and Creative Biomolecules. Offsetting in part the revenue recognized in 1998
under these two new agreements, revenue earned pursuant to the BI agreement
decreased to $1.2 million, compared to $2.9 million in 1997.
In 1998, the Company earned $50,000 from a government grant which expired
in the first quarter of 1998. In 1997, the Company had $150,000 of revenue from
two government grants, which expired in 1997 and the first quarter of 1998.
Operating Expenses
Operating expenses decreased by $11.9 million to $8.4 million in 1998.
This decrease reflects the discontinuation of the clinical trials of aptiganel
in the second half of 1997 and the impact of the restructuring plan that was
implemented in March 1998. Research and development expenses decreased by $11.7
million to $6.0 million in 1998, compared to $17.7 million in 1997. General and
administrative expenses decreased by $1.1 million, to $1.5 million in 1998,
compared to $2.6 million in 1997. These decreases reflect a $7.7 million
reduction in costs associated with the discontinuation of the clinical trials of
aptiganel and a decrease of $5.1 million in other operating costs as a result of
the workforce reduction and other cost containment measures implemented in March
1998 as part of the restructuring plan. Operating expenses in 1998 also included
a one-time restructuring cost of $921,000, consisting of salaries and benefits
relating to the reduction in workforce in March 1998, which were paid in full in
1998.
Interest Income
The Company had interest income in 1998 of $1.2 million, compared to $2.4
million in 1997. Interest income decreased in 1998 due to a decrease in the
funds available for investment during the year, primarily as a result of the
payment of the dividend totaling $17.9 million in April 1998, as well as the use
of funds for operating purposes during the year, including the repayment to BI
of excess advances received of $1.5 million.
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<PAGE> 20
Net Loss per Share
For the year ended December 31, 1998, the Company had a net loss of $2.9
million, or ($0.16) per share, compared to $13.8 million or ($0.79) per share
for the year ended December 31, 1997. This decrease in net loss and net loss per
share reflects the decrease in total operating expenses in 1998, as a result of
the discontinuation of the clinical trials of aptiganel in the second half of
1997 and the restructuring plan implemented in March 1998.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, the Company had cash, cash equivalents and
investments in marketable securities of $9.8 million, compared to $11.9 million
at December 31, 1998 and $38.6 million at December 31, 1997. The decrease of
$2.1 million in 1999 was due primarily to the use of cash for operating purposes
of $2.0 million and the purchase of equipment furniture and fixtures totaling
$105,000. At January 31, 2000, the Company had cash, cash equivalents and
investments in marketable securities of $9.7 million.
In 1999, pursuant to the collaboration agreement with Bayer, the Company
received $1.0 million in upfront license fees and $1.0 million in reimbursements
for research costs incurred in 1998 and 1999 under a research protocol covered
by the agreement. Of the total $2.0 million received, $420,000 was recognized as
revenue in 1999, representing research reimbursements, and approximately $1.6
million was recognized in 1998, representing the $1.0 million upfront fee and
$580,000 in reimbursements of research costs. This $1.6 million of revenue in
1998 was included in receivables from collaboration agreements as of December
31, 1998. The $1.0 million upfront license fee represented a one time payment
for certain existing patents. The $1.0 million in reimbursement of research
expenses represented reimbursements for specific research tasks. The Company has
substantially completed its obligations with respect to this revenue, and has no
material performance or financial obligations with respect to either the upfront
fee or the research reimbursements. Bayer is responsible for all manufacturing
and development activities and associated costs. The Company may receive up to
$24.0 million in milestone payments as well as royalties on sales of GGF2
products. There can be no assurance, however, as to when or if these milestones
will be achieved.
Pursuant to a collaboration agreement with Allergan signed in 1996 and
amended in 1999, the Company received $1.0 million per year in research funding
through 1999, and will receive $1.25 million for research funding for the twelve
month period ending November 2000. Under the agreement, Allergan is responsible
for the development of potential products and will bear all associated costs.
The collaboration also provides that the Company may receive up to an additional
$18.5 million upon the achievement of certain milestones. However, there can be
no assurance as to when or if these milestones will be achieved.
Pursuant to a 1996 collaboration agreement between the Company's
subsidiary, CNPI, and Gladstone, CNPI provided Gladstone $1.25 million per year
in research funding over three years. As of December 31, 1999, CNPI and the
Company had completed their funding obligations under this agreement, and do not
anticipate incurring additional research costs related therewith. The Company
owns 80% of CNPI. The minority shareholders have not made equity investments in
the subsidiary, as such, the entire net loss from CNPI has been attributed to
the Company.
In December 1998, the Company entered into a technology licensing
agreement with CBMI whereby CBMI acquired the exclusive rights to GDF-1 in
exchange for an up front cash payment and future royalties on product sales. The
Company has no further performance or financial obligations with respect to this
agreement.
The Company believes that its cash, cash equivalents and investments
totaling $9.7 million at January 31, 2000 will be sufficient to maintain
operations through 2001. The Company anticipates that thereafter it will require
substantial additional funds from collaborative partners, public offerings or
private offerings to further its research and development programs and for other
operating activities. The Company's primary expenditures are expected to be in
the areas of research and development and general and administrative expenses.
At January 31, 2000, the Company did not have any material commitments for
capital expenditures.
Despite potential future milestones under collaborative agreements,
adequate funds for these purposes may not be available when needed on terms
acceptable to the Company. Insufficient funds may require the Company to delay,
scale back or eliminate certain of its research and product development programs
or to license to third parties the rights to commercialize products or
technologies that the Company might otherwise undertake itself. The
19
<PAGE> 21
Company is continuing to evaluate alternatives for maximizing shareholder value
including the sale or merger of the Company.
In January 1999, the Company's common stock was delisted from the Nasdaq
National Market System due to a failure to maintain a minimum price per share of
$1.00. Immediately following the delisting, the Company began trading on the
Over the Counter Bulletin Board ("OTCBB"). The delisting of the Company's stock
could have an adverse effect on the liquidity of the common stock held by
investors and on the Company's ability to raise equity.
At December 31, 1998, the Company had cash, cash equivalents and
investments in marketable securities of $11.9 million. The decrease of $26.7
million from December 31, 1997 was due primarily to the payment in April 1998 of
a dividend of $1.00 per share, totaling $17.9 million. In addition, the Company
used $8.9 million for operating purposes, including a repayment of $1.5 million
of excess advances received under a collaboration with BI.
The Company does not believe that inflation has had a material impact on
its results of operations.
YEAR 2000 READINESS
In prior years, the Company discussed the nature and progress of its plans
to become Year 2000 ready. In late 1999, the Company completed its remediation
and testing of systems. As a result of those planning and implementation
efforts, the Company experienced no significant disruptions in mission critical
information technology and non-information technology systems and believes those
systems successfully responded to the Year 2000 date change. The Company
expensed approximately $25,000 during 1999 in connection with remediating its
systems. The Company is not aware of any material problems resulting from Year
2000 issues, either with its internal systems or the products and
services of third parties. The Company will continue to monitor its mission
critical computer applications and those of its suppliers and vendors throughout
the year 2000 to ensure that any latent Year 2000 matters that may arise are
addressed promptly.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by Item 7A is not provided as the disclosure
requirements are not applicable to the Company pursuant to Item 305(e) of
Regulation S-K.
20
<PAGE> 22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CAMBRIDGE NEUROSCIENCE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Auditors 22
Consolidated Balance Sheets 23
Consolidated Statements of Operations 24
Consolidated Statements of Changes in Stockholders' Equity 25
Consolidated Statements of Cash Flows 26
Notes to Consolidated Financial Statements 27
21
<PAGE> 23
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Cambridge NeuroScience, Inc.
We have audited the accompanying consolidated balance sheets of Cambridge
NeuroScience, Inc. as of December 31, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Cambridge
NeuroScience, Inc. at December 31, 1999 and 1998, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States.
/s/ ERNST & YOUNG LLP
Boston, Massachusetts
February 2, 2000
22
<PAGE> 24
CAMBRIDGE NEUROSCIENCE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1999 1998
--------- ---------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 3,333 $ 4,863
Marketable securities 6,489 7,037
Receivables from collaboration agreements 171 2,080
Prepaid expenses and other current assets 491 1,260
--------- ---------
Total Current Assets 10,484 15,240
Equipment, furniture and fixtures, net 285 377
--------- ---------
Total Assets $ 10,769 $ 15,617
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses $ 753 $ 1,637
Research and development advances -- 250
--------- ---------
Total Current Liabilities 753 1,887
Stockholders' Equity
Preferred stock, par value $.01, 10,000
shares authorized; none issued -- --
Common stock, par value $.001, 30,000
shares authorized; 18,136 shares issued
and outstanding at December 31, 1999;
18,085 at December 31, 1998 18 18
Additional paid-in capital 120,118 120,088
Accumulated deficit (110,120) (106,376)
--------- ---------
Total Stockholders' Equity 10,016 13,730
--------- ---------
Total Liabilities and Stockholders' Equity $ 10,769 $ 15,617
========= =========
</TABLE>
See accompanying notes.
23
<PAGE> 25
CAMBRIDGE NEUROSCIENCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
------- ------- --------
<S> <C> <C> <C>
Revenues
Research and development $ 1,443 $ 4,253 $ 3,885
Government grants -- 50 150
------- ------- --------
1,443 4,303 4,035
Operating expenses
Research and development 4,616 5,984 17,650
General and administrative 1,159 1,472 2,616
Restructuring cost -- 921 --
------- ------- --------
5,775 8,377 20,266
------- ------- --------
Loss from operations (4,332) (4,074) (16,231)
Interest income 588 1,180 2,393
------- ------- --------
Net loss $(3,744) $(2,894) $(13,838)
======= ======= ========
Basic and diluted net loss per common share $ (0.21) $ (0.16) $ (0.79)
======= ======= ========
Shares used in computing basic and diluted net
loss per common share 18,118 17,976 17,518
======= ======= ========
</TABLE>
See accompanying notes.
24
<PAGE> 26
CAMBRIDGE NEUROSCIENCE, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
----------------------- PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
------- ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 15,010 $15 $ 109,276 $ (89,644) $ 19,647
Sale of common stock, net of
offering costs of $2,221 2,760 3 28,136 -- 28,139
Common stock issued pursuant to --
employee benefit plans 77 -- 321 -- 321
Exercise of stock options 11 -- 54 -- 54
Net loss -- -- -- (13,838) (13,838)
------ --- --------- --------- --------
Balance at December 31, 1997 17,858 18 137,787 (103,482) 34,323
Common stock issued pursuant to
employee benefit plans 227 -- 208 -- 208
Cash dividend ($1.00 per share) -- -- (17,907) -- (17,907)
Net loss -- -- -- (2,894) (2,894)
------ --- --------- --------- --------
Balance at December 31, 1998 18,085 18 120,088 (106,376) 13,730
Common stock issued pursuant to
employee stock purchase plan 51 -- 30 -- 30
Net loss -- -- -- (3,744) (3,744)
------ --- --------- --------- --------
Balance at December 31, 1999 18,136 $18 $ 120,118 $(110,120) $ 10,016
====== === ========= ========= ========
</TABLE>
See accompanying notes.
25
<PAGE> 27
CAMBRIDGE NEUROSCIENCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1999 1998 1997
------- -------- --------
<S> <C> <C> <C>
Operating Activities
Net loss $(3,744) $ (2,894) $(13,838)
Items not requiring cash:
Gain on sale of equipment, furniture and fixtures -- (38) --
Depreciation and amortization 197 337 851
Common stock issued pursuant to an
employee benefit plan -- 151 230
------- -------- --------
(3,547) (2,444) (12,757)
Changes in operating assets and liabilities:
Receivables from collaboration agreements 1,909 (2,080) --
Prepaid expenses and other current assets 769 315 (304)
Accounts payable and accrued expenses (884) (2,031) (121)
Research and development advances (250) (2,650) (2,884)
------- -------- --------
1,544 (6,446) (3,309)
------- -------- --------
Cash used for operating activities (2,003) (8,890) (16,066)
Investing Activities
Purchases of marketable securities (7,503) (13,670) (35,561)
Sales of marketable securities 8,051 33,194 9,000
Purchase of equipment, furniture and fixtures (105) (18) (301)
Disposals of equipment, furniture and fixtures -- 77 --
------- -------- --------
Cash provided by (used for) investing activities 443 19,583 (26,862)
Financing Activities
Dividend Paid -- (17,907) --
Sales of common stock, net of offering
costs of $2,221 in 1997 30 57 28,284
------- -------- --------
Cash provided by (used for) financing activities 30 (17,850) 28,284
Net decrease in Cash and Cash Equivalents (1,530) (7,157) (14,644)
Cash and Cash Equivalents at beginning of year 4,863 12,020 26,664
------- -------- --------
Cash and Cash Equivalents at end of year $ 3,333 $ 4,863 $ 12,020
======= ======== ========
</TABLE>
See accompanying notes.
26
<PAGE> 28
CAMBRIDGE NEUROSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BUSINESS
Cambridge NeuroScience, Inc. (the "Company") is a biopharmaceutical
company engaged in the discovery and development of pharmaceuticals to prevent
or treat severe disorders of, or injuries to, the nervous system. The Company is
focused in two areas of research and development: (i) ion-channel blockers to
prevent or treat brain damage resulting from stroke and other forms of brain
ischemia, as well as for the treatment or prevention of neuropathic pain,
glaucoma, spinal cord injury, Parkinson's disease, multiple sclerosis ("MS") and
peripheral neuropathies, and (ii) growth factors for the treatment of MS and
peripheral neuropathies. To date, the Company has funded its operations
primarily through proceeds from public and private offerings of equity
securities and from payments received pursuant to research and development
collaborations. The Company has not been profitable since inception and has not
received any revenue from the sale of products.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation. The consolidated financial statements include
the accounts of Cambridge NeuroScience, Inc. and its wholly-owned and
majority-owned subsidiaries. Minority shareholders have not made equity
investments in the majority-owned subsidiary. As a result, the entire net loss
of the majority-owned subsidiary has been attributed to the Company. All
inter-company accounts and transactions have been eliminated in consolidation.
(See Note H).
Use of Estimates. The preparation of the financial statements in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from those estimates.
Adoption of New Accounting Principles
In December 1999, the staff of the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial
Statements (SAB 101). SAB 101 summarizes certain of the staff's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. SAB 101 requires a company to follow its guidance no later
than the first quarter of its fiscal year beginning after December 15, 1999
through a cumulative effect of a change in accounting principle. The Company has
evaluated its revenue recognition policies in consideration of SAB 101, and does
not expect adoption of this standard to have a material effect on its financial
statements.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, (FAS 133) "Accounting for Derivative
Instruments and Hedging Activities", which required adoption in periods
beginning after June 15, 1999. FAS 133 was subsequently amended by FAS 137
"Accounting for Derivative Instruments and Hedging Activities--Deferral of the
Effective Date of FASB Statement No. 133" and will now be effective for fiscal
years beginning after June 15, 2000, with earlier adoption permitted. The
Company believes the adoption of this new accounting standard will not have a
significant effect on its financial statements.
Cash Equivalents. The Company's policy regarding investments is to ensure
safety, liquidity, and capital preservation while obtaining a reasonable rate of
return. The Company considers all highly liquid instruments with a maturity of
90 days or less at the date of purchase to be cash equivalents. Such monies are
invested primarily in high quality corporate bonds and commercial paper, U.S.
Government and agency obligations and repurchase agreements. At December 31,
1999 and 1998, the cost of these investments approximated fair market value.
Marketable Securities. At December 31, 1999 and 1998, the Company had $6.5
million and $7.0 million, respectively, invested in marketable securities with
original maturities between 90 days and one year, consisting of high quality
corporate bonds, commercial paper and certificates of deposit (see Note C). As
the Company intends that these investments be available for use in the Company's
current operations, these amounts are classified as "available-for-sale" and are
included in current assets. Management determines the appropriate classification
of its securities at the time of purchase and
27
<PAGE> 29
reevaluates such classification at each balance sheet date. Available-for-sale
securities are carried at amortized cost, which approximated fair market value,
based on quoted market prices, at December 31, 1999 and 1998. Unrealized gains
or losses, if material, are reported as a separate component of stockholders'
equity. As of December 31, 1999 and 1998, unrealized gains or losses were not
material. The cost of securities is adjusted for amortization of premiums and
accretion of discounts to maturity. Such amortizations, interest income and
realized gains and losses are included in interest income. The cost of
securities sold is based on specific identification. Gross realized gains or
losses for the years ended December 31, 1999, 1998 and 1997 were not material.
Equipment, Furniture and Fixtures. Equipment, furniture and fixtures are
recorded at cost. Depreciation is provided using the straight-line method over
the following estimated useful lives:
Equipment, furniture
and fixtures ................. 3 - 5 years
Leasehold improvements ......... Useful life or term of the lease,
whichever is shorter
Stock-Based Compensation. The Company accounts for its stock-based
employee compensation arrangements under the provisions of Accounting Principles
Board Opinion 25, Accounting for Stock Issued to Employees and related
interpretations (see Note G).
Revenue Recognition. Research and development revenue is earned
pursuant to licensing agreements and reimbursements of the Company's
expenditures pursuant to the terms of research and development collaborations.
Revenue from government grants is recorded as earned based on the performance
requirements of the grant. Revenue is deemed earned when all of the following
have occurred: all obligations of the Company relating to the revenue have been
met and the earnings process has been culminated; the monies received or
receivable are not refundable irrespective of research results; and there are
neither future obligations nor future milestones to be met by the Company with
respect to such revenue. Expenses relating to research and development
collaborations and government grants are recorded as research and development
expenses. Amounts received in advance of research and development performed are
designated as research and development advances and are included in current
liabilities. (See Note H).
Income Taxes. The liability method is used to account for income taxes.
Deferred tax assets and liabilities are determined based on differences between
financial reporting and income tax bases of assets and liabilities as well as
net operating loss carryforwards and are measured using the enacted tax rates
and laws that will be in effect when the differences are expected to reverse.
Deferred tax assets may be reduced by a valuation allowance to reflect the
uncertainty associated with their ultimate realization.
Significant Customers. Revenue in 1999, 1998 and 1997 consisted primarily
of revenue arising from collaborative agreements. Revenue from these sources in
1999 was earned pursuant to agreements with Allergan, Bayer and BI. Revenue
earned pursuant to the Allergan agreement totaled 71%, 23% and 25% of revenue in
1999, 1998 and 1997, respectively. Revenue earned pursuant to the Bayer
agreement totaled 29%, 37% and 0% in 1999, 1998 and 1997, respectively, and
revenue earned pursuant to the BI agreement, which was terminated in 1998,
totaled 0%, 27% and 71% in 1999, 1998 and 1997, respectively. (See Note H).
Net loss per share. Net loss per share is based on the weighted-average
number of common shares outstanding during each of the periods presented. Due to
the fact that the Company is in a net loss position, common equivalent shares
from stock options are excluded as their effect is antidilutive.
28
<PAGE> 30
CAMBRIDGE NEUROSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE C - MARKETABLE SECURITIES
Investments in marketable securities consist of the following at December 31
(in thousands):
CONTRACTUAL MATURITIES
----------------------
1999 1998
--------- ---------
Less than Less than
one year one year
--------- ---------
Corporate bonds $4,508 $6,037
Commercial paper 1,981 --
Certificates of deposit -- 1,000
------ ------
$6,489 $7,037
====== ======
NOTE D - EQUIPMENT, FURNITURE AND FIXTURES
Equipment, furniture and fixtures
consist of the following (in thousands): DECEMBER 31,
--------------------
1999 1998
------- -------
Equipment $ 4,178 $ 4,181
Furniture and fixtures 151 151
Leasehold improvements 2,264 2,264
------- -------
6,593 6,596
Less accumulated depreciation and amortization (6,308) (6,219)
------- -------
Equipment, furniture and fixtures, net $ 285 $ 377
======= =======
NOTE E - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses
consist of the following (in thousands): DECEMBER 31,
-----------------
1999 1998
---- ------
Accounts payable $100 $ 454
Accrued salaries and benefits 98 293
Accrued research and development expense 71 290
Accrued professional fees 145 150
Sublease advances 268 234
Accrued other 71 216
---- ------
$753 $1,637
==== ======
29
<PAGE> 31
NOTE F - INCOME TAXES
At December 31, 1999, the Company had a potential tax benefit of
approximately $45.7 million, resulting primarily from approximately $108.2
million in net operating loss carryforwards and $5.1 million of tax credits,
which expire through 2019. Since the Company has incurred only losses since
inception and due to the degree of uncertainty related to the ultimate
utilization of the loss and credit carryforwards, the Company has fully reserved
this tax benefit. Additionally, the future utilization of net operating loss
carryforwards may be subject to limitations under the change in stock ownership
rules of the Internal Revenue Code of 1986, as amended. During 1999, the
valuation allowance increased by approximately $1.9 million due primarily to the
increase in federal and state net operating loss carryforwards and research and
development credits, partially offset by the expiration of state net operating
loss carryforwards.
Significant components of the Company's deferred tax assets are as follows
(in thousands):
DECEMBER 31,
----------------------
1999 1998
-------- --------
Deferred tax assets
Net operating loss carryforwards $ 40,605 $ 39,600
Tax credits 5,089 4,175
-------- --------
Total deferred tax assets 45,694 43,775
Valuation allowance (45,694) (43,775)
-------- --------
Net deferred tax assets $ -- $ --
======== ========
NOTE G - STOCKHOLDERS' EQUITY
Preferred Stock. The Board of Directors is authorized to fix designations,
relative rights, preferences and limitations on the preferred stock at the time
of issuance.
Equity Incentive Plans. The Company has a 1991 Equity Incentive Plan (the
"Plan"), which provides for the granting of options to purchase 2,100,000 shares
of the Company's Common Stock. The Plan provides for the issuance or award of
incentive stock options at no less than the fair market value at the date of the
grant, non-qualified stock options, stock appreciation rights, performance
shares, restricted Common Stock, and stock units at prices to be determined by
the Board of Directors. All employees and, in the case of awards other than
incentive stock options, consultants to the Company are eligible for awards
under the Plan. At December 31, 1999, options to purchase 1,305,930 shares were
outstanding under the plan, of which 821,421 were exercisable.
In addition, the Company has a 1992 Director Stock Option Plan (the
"Director Plan"), pursuant to which non-qualified stock options to purchase
20,000 shares of the Company's Common Stock are automatically granted to outside
directors at fair market value upon their initial election to the Board of
Directors. Additional grants of options may be made to eligible directors at the
discretion of the Board of Directors. The Director Plan has reserved an
aggregate of 100,000 shares for this purpose. At December 31, 1999, options to
purchase 98,000 were outstanding under the plan, of which 68,375 were
exercisable.
The term of all stock options granted may not exceed ten years, and
vesting generally is over a four-year period.
30
<PAGE> 32
CAMBRIDGE NEUROSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table presents the combined activity of the two option
plans for the years ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
---------------------- ---------------------- -------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 1,183,256 $5.20 1,662,727 $7.71 1,493,953 $ 6.92
Granted 262,750 0.71 432,000 0.84 293,450 11.56
Exercised -- -- -- -- (10,684) 5.03
Canceled (42,076) 4.28 (911,471) 7.72 (113,992) 7.51
--------- ----- --------- ----- ---------- ------
Outstanding at year end 1,403,930 $4.39 1,183,256 $5.20 1,662,727 $ 7.71
========= ===== ========= ===== ========== ======
Exercisable at year end 889,796 $6.02 686,204 $6.87 1,079,048 $ 7.09
========= ===== ========= ===== ========== ======
Weighted average grant date fair
value per share of options
granted during the year $0.59 $0.66 $ 8.15
===== ===== ======
</TABLE>
The following table presents weighted average price and life
information about significant option groups outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------- --------------------------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Prices Outstanding Life (years) Exercise price Exercisable Exercise Price
- ---------------- ----------- ------------ -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.69 - 1.00 669,750 8.7 $ 0.79 198,375 $ 0.81
3.13 - 6.13 235,750 4.3 5.36 233,562 5.38
6.50 - 8.00 226,680 4.6 7.27 210,879 7.21
8.13 - 9.75 171,500 3.8 8.70 171,500 8.70
11.25 - 13.00 100,250 6.1 12.25 75,480 12.22
--------- -------
1,403,930 889,796
========= =======
</TABLE>
Employee Stock Purchase Plan. The 1993 Employee Stock Purchase Plan
(the "ESPP") provides for the grant of rights to eligible employees to purchase
shares of the Company's Common Stock at the lesser of 85% of the fair market
value at the beginning or the end of an established offering period. 250,000
shares have been authorized for issuance under this plan, of which 143,956 have
been issued as of December 31, 1999. During 1999, 14,313 shares were issued at
$.50 per share and 36,180 were issued at $.64 per share. During 1998, 23,065
shares were issued at $1.67 per share and 37,222 were issued at $0.50 per share.
During 1997, 6,570 shares were issued at $6.59 per share and 13,762 were issued
at $3.51 per share.
FAS 123 Disclosures. The Company has adopted the disclosure provisions
of Statement of Financial Accounting Standards No. 123, Accounting for
Stock-based Compensation ("FAS 123"), and accounts for its stock option plans in
accordance with the provisions of APB 25, Accounting for Stock Issued to
Employees. The exercise price of grant awards made under the Company's stock
option plans is equal to the fair market value at the date of grant.
31
<PAGE> 33
Pursuant to APB 25, the Company applies the intrinsic value method to
grant awards. Accordingly, no compensation cost has been recognized in relation
to the stock option plans or the ESPP.
Pursuant to the requirements of FAS 123, the following are the pro forma
net loss and net loss per share for 1999, 1998 and 1997, as if the compensation
cost for the option plans and the ESPP had been determined based on the fair
value at the grant date for grants in 1999, 1998 and 1997, consistent with the
provisions of FAS 123:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------ ------------------------ -------------------------
As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma
----------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net loss (in thousands) $(3,744) $(4,102) $(2,894) $(2,777) $(13,838) $(15,583)
Net loss per share $ (0.21) $ (0.23) $ (0.16) $ (0.16) $ (0.79) $ (0.89)
</TABLE>
The grant-date fair values of options granted and shares issued pursuant
to the ESPP were estimated using the Black-Scholes model with the following
(table below) weighted average assumptions. The Black-Scholes model was
developed for use in estimating the fair value of traded options, which have no
vesting restrictions and are fully transferable. This model requires the use of
subjective assumptions, including expected stock price volatility. In
management's opinion, such valuation models do not necessarily provide a
reliable single measure of the fair value of its employee stock options.:
<TABLE>
<CAPTION>
Options ESPP
--------------------------------- ---------------------------------
1999 1998 1997 1999 1998 1997
----- ---- ---- ----- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Expected life (years) 6.5 6.5 5.2 .5 .5 .5
Interest rate 4.9% 5.6% 6.3% 5.1% 5.4% 5.5%
Volatility 103.0% 90.0% 83.0% 110.0% 92.0% 83.0%
</TABLE>
In April 1998, the Company paid a $1.00 per share dividend representing a
return of capital to shareholders. Prior thereto and since then, the Company has
not declared nor paid dividends on any of its common stock. Future cash
dividends will be paid at the discretion of the Board of Directors and will
depend, among other things, upon the Company's future operations, capital
requirements, general financial condition and such other factors as the Board of
Directors may deem relevant. For the purposes of calculating fair value pursuant
to FAS 123, the Company has assumed that no dividends will be paid.
The pro forma adjustments to net loss under FAS 123 in 1999, 1998 and
1997 were an increase in net loss of $358,000, decrease in net loss of $117,000,
and an increase in net loss of $1.7 million, respectively. The pro forma
adjustments for those years varied from year to year as a result of differences
each year in the factors affecting the calculation of the pro forma adjustment.
Those factors are: the number of options granted and cancelled; expected life of
options; interest rate; and volatility. In 1998, the pro forma decrease in net
loss resulted primarily from the cancellation of a substantial number of options
which had been held by employees who were terminated in 1998 as part of a
reduction of the Company's workforce. The pro forma effect of FAS 123 in future
years may fluctuate based on the factors described above.
Benefit Plan. The Company has an employee savings plan that qualifies
under Section 401(k) of the Internal Revenue Code of 1986, as amended, in which
all eligible employees may participate. For the plan years ended December 31,
1998 and 1997, the Company matched 100% of all qualified employee contributions
with Company Common Stock. 330,000 shares were authorized and available for
issuance under the 401(k) plan. Through December 31, 1998, 329,115 shares had
been issued. Effective in 1999, the Company no longer utilizes Company stock in
its 401(k) plan, and instead has a cash match of 50% of all qualified employee
contributions. 401(k) match expense totaled $40,616, $151,329 and $229,269 for
the years ended December 31, 1999, 1998 and 1997, respectively.
The aggregate number of shares of Common Stock available for issuance
under all stock plans was 753,240 at December 31, 1999.
32
<PAGE> 34
NOTE H - COLLABORATIVE AGREEMENTS
The Company has collaborative agreements with certain strategic partners.
These arrangements are as follows:
Allergan. In November 1996, the Company entered into a collaboration
agreement with Allergan Inc. ("Allergan") to develop certain of the Company's
NMDA ion-channel blockers, sodium ion-channel blockers and combination
ion-channel blockers for the treatment of ophthalmic disorders, including
glaucoma. Upon signing the agreement, Allergan purchased 175,103 shares of the
Company's Common Stock for $3.0 million, and Allergan provided an additional
$3.0 million in research funding through November 1999. The agreement with
Allergan was amended in December 1999 to extend research funding for an
additional year and to expand the potential indications to include pain
treatment. Pursuant to the amendment, the Company will receive research funding
for the period November 1999 to November 2000 in the amount of $1.25 million.
Allergan is responsible for developing and marketing potential products
and will bear all such costs. The Company may receive up to an additional $18.5
million in cash upon the achievement of certain milestones and will receive a
royalty on product sales. There can be no assurance as to when or if these
milestones will be achieved. Allergan has certain termination rights, including
the right, which is shared by the Company, to terminate the agreement upon 90
days' prior written notice of an uncured material breach by the other party.
Pursuant to the funding agreement, Allergan has provided $3.1 million to the
Company as of December 31, 1999, of which $1.0 million was included in research
and development revenue in 1999, 1998 and 1997. The Company is not obligated to
meet future milestones to earn this revenue and the monies received are not
refundable in the event research efforts are not successful.
Bayer AG. In December 1998, the Company entered into a collaborative
agreement with Bayer AG ("Bayer") for the development of recombinant Glial
Growth Factor 2 ("GGF2") for the treatment of neurodegenerative diseases such as
multiple sclerosis ("MS"). In exchange for exclusive worldwide manufacturing and
marketing rights to the compound, the Company received an up front licensing fee
of $1.0 million and $1.0 million in reimbursements for research costs relating
to a research protocol covered by the agreement. Of this total $2.0 million
received, $420,000 and $1.6 million were recognized as revenue in 1999 and 1998,
respectively. The Company has substantially completed its research
responsibilities with respect to this agreement, and therefore does not
anticipate receiving any additional research funding from Bayer. Bayer is
responsible for development and marketing and all costs related thereto. The
Company may receive up to $24.0 million in milestone payments, and may receive
royalties on sales of GGF2 products. There can be no assurance, however, as to
when or if any milestones will be achieved or whether GGF2 will become a
marketed product. Either party may terminate this agreement at any time for
cause, and Bayer may terminate without cause by providing 120 days written
notice.
Boehringer Ingelheim International, GmbH. In March 1995, the Company
entered into license and stock purchase agreements with Boehringer Ingelheim
International GmbH ("BI") to collaborate on the development and
commercialization of the Company's product candidate, aptiganel. The Company and
BI collaborated on two Phase III trials of aptiganel. In the second half of
1997, the Company announced the discontinuation of patient enrollment into both
trials after interim analyses indicated that continuation of the trials was not
justified. In November, 1998, the Company and BI terminated the collaboration
and licensing agreements for aptiganel and commercial rights were returned to
the Company, subject to a royalty on future sales.
Under terms of the agreement, BI was responsible for generally 75% of all
costs incurred in the development of aptiganel. Revenue earned pursuant to this
agreement represented BI's reimbursement of the Company's research and
development expenditures in excess of the Company's 25% obligation. The
agreement provided that BI would advance cash to the Company in the event the
Company's expenditures were expected to exceed its contractual obligation. Such
advances were received by the Company in 1995 and 1996. Pursuant to the
termination of the collaboration in 1998, the Company and BI finalized their
accountings of research and development expenses incurred pursuant to the
agreement. As a result of the final accounting, the Company repaid to BI $1.5
million in excess advances received in prior years. The Company recognized $1.2
million in revenue in 1998, representing the remainder of excess advances
received in prior periods. Revenue recognized in 1997 pursuant to this agreement
totaled $2.9 million. The Company will recognize no further revenue pursuant to
this collaboration.
Cambridge NeuroScience Partners, Inc. In December 1996, the Company
entered into a collaboration agreement
33
<PAGE> 35
with The J. David Gladstone Institutes ("Gladstone") and The Regents of the
University of California (the "University") for the development of treatments
for Alzheimer's disease and other neurological diseases, disorders or injuries.
In connection with the collaboration, the Company formed a subsidiary, Cambridge
NeuroScience Partners, Inc. ("CNPI"). Cambridge NeuroScience made a $1.25
million equity investment in CNPI upon the consummation of the collaboration and
owns 80% of the outstanding common stock of CNPI, with Gladstone and the
University owning 15% and 5%, respectively, of the remaining outstanding shares
of CNPI common stock.
Pursuant to the terms of the collaboration, Gladstone conducted a research
program over a three-year period through December 1999, for which CNPI provided
funding of $1.25 million per year. Pursuant to the agreement, Cambridge
NeuroScience provided CNPI, interest-free, all amounts necessary for CNPI to
make such payments. CNPI had a three-year option to acquire an exclusive
royalty-bearing license to intellectual property developed in the field of
research under the collaboration. Expenses relating to this agreement included
in research and development expense totaled $1.3 million in 1999 and $1.4
million in 1998 and 1997. As of December 31, 1999, the Company and CNPI had
completed their funding obligation pursuant to this agreement and decided not
to exercise a license to the intellectual property. As such, the Company does
not anticipate incurring additional research costs for this program.
Creative Biomolecules, Inc. On December 31, 1998, the Company entered into
a technology licensing agreement with Creative Biomolecules, Inc. ("CBMI")
whereby CBMI has acquired the exclusive rights to GDF-1 in exchange for an up
front cash payment and future royalties on product sales. Either party may
terminate this agreement upon a material breach which is not cured within 60
days of written notice of such breach. The Company has no future obligations
with respect to this agreement.
NOTE I - COMMITMENTS
The Company leases its office and research facilities under the terms
of an agreement, which expires in July 2000. Under terms of this lease, the
Company pays property taxes, insurance, maintenance, and expenses related to the
leased property. Rent expense relating to this lease was approximately $1.6
million in the year ended December 31, 1999, $1.3 million in 1998 and $1.1
million in 1997. The Company's lease expires in July 2000. In anticipation of
this expiration, the Company is evaluating a number of potential facility lease
opportunities, and expects to lease approximately 10,000 square feet of space.
The Company cannot currently estimate the amounts of minimum rental commitments
for future years with respect to such potential lease.
In June 1998, the Company sub-leased approximately half of its office and
laboratory facilities to a third party. Under terms of the sublease agreement,
which expires in July 2000, the sub-lessee pays a base rent amount and a
pro-rata share of insurance, maintenance, utilities and other operating expenses
relating to the facility. In 1999 and 1998, the Company received $864,000 and
$392,000, respectively, in minimum sub-lease rentals pursuant to this agreement.
Minimum future obligations and rentals under the terms of the facilities lease
and sub-lease agreement are (in thousands):
Future Future
Minimum Lease Minimum
Obligations Rentals
------------- -------
2000 $645 $504
---- ----
Total $645 $504
==== ====
The Company has no material, non-cancelable commitments as of December 31,
1999.
NOTE J - RESTRUCTURING
In March 1998, the Company implemented a restructuring plan that included
a reduction in staff by 34 employees, consisting of 22 research, four drug
development and eight administrative and support employees. Included in
operating expenses for the year ended December 31, 1998 was a one-time cost of
$921,000 associated with this reduction in staff, consisting primarily of
severance and related benefits, which were paid in full in 1998. Following the
reduction in headcount, in June 1998, the Company sub-leased approximately half
of its office and laboratories facilities to a third party thereby reducing
facilities related operating expenses. (See Note I)
34
<PAGE> 36
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The response to this item is contained in part under the caption
"Executive Officers of the Company" in Part I, Item 1(a) hereof, and the
remainder is incorporated herein by reference from the discussion responsive
thereto under the caption "Election of Directors" in the Company's definitive
Proxy Statement relating to the 2000 Annual Meeting of Stockholders (the "2000
Proxy Statement"), to be filed with the Securities and Exchange Commission not
later than April 30, 2000.
ITEM 11. EXECUTIVE COMPENSATION
The response to this item is incorporated herein by reference from the
discussion responsive thereto under the caption "Executive Compensation" in the
2000 Proxy Statement.
35
<PAGE> 37
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The response to this item is incorporated herein by reference from the
discussion responsive thereto under the caption "Principal Stockholders" in the
2000 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The response to this item is incorporated by reference from the
discussion responsive thereto under the captions "Employment Agreements" and
"Compensatory Arrangements" in the 2000 Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS
The following Financial Statements of the Company are included in
response to Item 8 of this report:
PAGE
----
Index to Consolidated Financial Statements 21
Report of Independent Auditors 22
Consolidated Balance Sheets 23
Consolidated Statements of Operations 24
Consolidated Statements of Changes in Stockholders' Equity 25
Consolidated Statements of Cash Flows 26
Notes to Consolidated Financial Statements 27
(a)(2) FINANCIAL STATEMENT SCHEDULES
No financial statement schedules are included since they are either
not required, not applicable, or the information is otherwise included.
(a)(3) EXHIBITS
3.1 Restated Certificate of Incorporation of Registrant. Filed as Exhibit
4.1 to Registration Statement on Form S-8, File No. 33-42933, and
incorporated herein by reference.
3.2 Amended and Restated By-laws of Registrant. Filed as Exhibit 3.1 to
Quarterly Report on Form 10-Q for the quarter ended June 30, 1999, as
filed with the Commission August 11, 1999, and incorporated herein by
reference.
4.1 Specimen Stock Certificate for Common Stock, $.001 par value. Filed as
Exhibit 4.1 to Registration Statement on Form S-1, File No. 33-40078,
and incorporated herein by reference.
10.1 Stockholders' Agreement dated December 29, 1988 among the Company and
certain investors, as amended by Waiver and Consent dated as of
February 5, 1991. Filed as Exhibit 10.3 to Registration Statement on
Form S-1, File No. 33-40078, and incorporated herein by reference.
36
<PAGE> 38
10.2 Scientific Advisor Agreement dated September 10, 1986 and amendment
dated December 6, 1986 between the Company and Dr. Joseph Martin.
Filed as Exhibit 10.5 to Registration Statement on Form S-1, File No.
33-40078, and incorporated herein by reference.
10.3 Form of Stockholders' Agreement dated March 19, 1987 among the Company
and certain stockholders. Filed as Exhibit 10.6 to Registration
Statement on Form S-1, File No. 33-40078, and incorporated herein by
reference.
10.4 Form of Restricted Stock Purchase Agreement with a certain Director
and executive officers. Filed as Exhibit 10.8 to Registration
Statement on Form S-1, File No. 33-40078, and incorporated herein by
reference.
10.5 Common Stock Purchase Warrant dated February 15, 1991 with Aeneas
Venture Corporation. Filed as Exhibit 10.9 to Registration Statement
on Form S-1, File No. 33-40078, and incorporated herein by reference.
10.6 Form of Waiver, Consent and Agreement dated as of April 22, 1991
between the Company and certain investors. Filed as Exhibit 10.10 to
Registration Statement on Form S-1, File No. 33-40078, and
incorporated herein by reference.
10.9* Letter Agreement dated June 5, 1990 between the Company and Elkan R.
Gamzu, Ph.D. Filed as Exhibit 10.13 to Registration Statement on Form
S-1, File No. 33-40078, and incorporated herein by reference.
10.11* 1991 Equity Incentive Plan, as amended. Filed as Exhibit 99.1 to the
Registration Statement on Form S-8, File No. 333-05431, as filed with
the Commission on June 7, 1996, and incorporated herein by reference.
10.12* 1992 Director Stock Option Plan, as amended. Filed as exhibit 10.12 to
the Annual Report on Form 10-K for the period ended December 31, 1997,
as filed with the Commission on March 30, 1998, and incorporated
herein by reference.
10.13 Lease for One Kendall Square dated July 16, 1992 between the Company
and the Trustees of Old Kendall Realty Trust and addendum dated as of
September 22, 1992 (the "Lease"). Filed as Exhibit 10.13 to the Annual
Report on Form 10-K for the period ended December 31, 1992, as filed
with the Commission on March 28, 1993, and incorporated herein by
reference. Addendum dated September 22, 1993, filed as Exhibit 10.13
to the Annual Report on Form 10-K for the period ended December 31,
1993, as filed with the Commission on February 14, 1994, and
incorporated herein by reference. Addendum dated March 11, 1996, as
filed with the Commission on March 24, 1997, and incorporated herein
by reference. Addendum dated June 17, 1997, filed as Exhibit 10.13 to
the Annual Report on Form 10-K for the period ended December 31, 1997,
as filed with the Commission on March 30, 1998 and incorporated herein
by reference.
10.15* Form of Indemnification agreement between the Company and Directors
and executive officers. Filed as Exhibit 10.15 to the Annual Report on
Form 10-K for the period ended December 31, 1992, as filed with the
Commission on March 28, 1993, and incorporated herein by reference.
10.16+ Stock Purchase Agreement dated as of March 21, 1995 between the
Company and Boehringer Ingelheim International GmbH. Filed as Exhibit
10.16 to the Annual Report on Form 10-K for the period ended December
31, 1994, as filed with the Commission on March 31, 1995, and
incorporated herein by reference.
10.17+ License Agreement dated as of March 21, 1995 between the Company and
Boehringer Ingelheim International GmbH. Filed as Exhibit 10.17 to the
Annual Report on Form 10-K for the period ended December 31, 1994, as
filed with the Commission on March 31, 1995, and incorporated herein
by reference.
37
<PAGE> 39
10.18+ Amendment to Stock Purchase Agreement and License Agreement between
the Company and Boehringer Ingelheim International GmbH dated as of
August 19, 1996. Filed as Exhibit 99.4 to Amendment No. 1 to the
Current Report on Form 8-K/A dated August 19, 1996, as filed with the
Commission on January 29, 1997, and incorporated herein by reference.
10.19+ Collaborative Research, Development and Marketing Agreement dated as
of November 20, 1996 between the Company and Vision Pharmaceuticals
L.P., d/b/a Allergan, Inc. Filed as Exhibit 99.1 to Amendment No. 1 to
the Current Report on Form 8-K/A dated August 19, 1996, as filed with
the Commission on January 29, 1997, and incorporated herein by
reference.
10.20+ Stock Purchase Agreement dated as of November 20, 1996 between the
Company and Vision Pharmaceuticals L.P., d/b/a Allergan, Inc. Filed as
Exhibit 99.2 to Amendment No. 1 to the Current Report on Form 8-K/A
dated August 19, 1996, as filed with the Commission on January 29,
1997, and incorporated herein by reference.
10.21+ Credit Agreement dated as of November 20, 1996 between the Company and
Vision Pharmaceuticals L.P, d/b/a Allergan, Inc. Filed as Exhibit 99.3
to Amendment No. 1 to the Current Report on Form 8-K/A dated August
19, 1996, as filed with the Commission on January 29, 1997, and
incorporated herein by reference.
10.22+ Sponsored Research and Collaborative Agreement dated as of December
23, 1996 between Cambridge NeuroScience Partners, Inc. and The J.
David Gladstone Institutes. Filed as Exhibit 99.1 to Amendment No. 1
to the Current Report on Form 8-K/A dated December 23, 1996, as filed
with the Commission on January 29, 1997, and incorporated herein by
reference.
10.23+ Option Agreement dated as of December 23, 1996 by and among The
Regents of the University of California, Cambridge NeuroScience
Partners, Inc., and the Company. Filed as Exhibit 99.2 to Amendment
No. 1 to the Current Report on Form 8-K/A dated December 23, 1996, as
filed with the Commission on January 29, 1997, and incorporated herein
by reference.
10.24+ Stockholders' Rights Agreement dated as of December 23, 1996 by and
among the Company, Cambridge NeuroScience Partners, Inc., The J. David
Gladstone Institutes and The Regents of the University of California.
Filed as Exhibit 99.3 to Amendment No. 1 to the Current Report on Form
8-K/A dated December 23, 1996, as filed with the Commission on January
29, 1997, and incorporated herein by reference.
10.25* Compensatory arrangement with certain executive officers and other
members of management. Filed as Exhibit 10.25 to the Annual Report on
Form 10-K for the period ended December 31, 1997, filed with the
Commission on March 30, 1998 and incorporated herein by reference.
10.26 Termination agreement dated November 4, 1998, between the Company and
Boehringer Ingelheim International, GmbH. Filed as exhibit 10.28 to
the Quarterly Report on Form 10-Q for the quarter ended September 30,
1998, as filed with the Commission on November 12, 1998, and
incorporated herein by reference.
10.27+ Research Collaboration and License Agreement dated as of December 23,
1998 between the Company and Bayer AG. Filed as exhibit 10.27 to the
Annual Report on Form 10-K for the period ended December 31, 1998,
filed with the Commission on March 31, 1999, and incorporated herein
by reference.
10.28# Amendment to Collaborative Research, Development and Marketing
Agreement dated December 1999, between the Company and Vision
Pharmaceuticals L.P, d/b/a Allergan, Inc.
21.1# Subsidiaries of the Company. Filed herewith.
38
<PAGE> 40
23.1# Consent of Ernst & Young LLP, independent auditors. Filed herewith.
24.1 Powers of Attorney. Contained on signature page hereto.
27.1# Financial Data Schedule for the year ended December 31, 1999.
99.1 Important Factors Regarding Forward-Looking Statements. Filed
herewith.
- ------------------
* Identifies a management contract or compensatory plan or agreement in
which an executive officer or Director of the Company participates.
+ Confidential information contained in this Exhibit has been omitted and
filed separately with the Securities and Exchange Commission.
# Filed electronically in connection with the Annual Report on Form 10-K
for the year ended December 31, 1999.
(b) REPORTS ON FORM 8-K
None.
39
<PAGE> 41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: March 8, 2000 CAMBRIDGE NEUROSCIENCE, INC.
By: /s/ Harry W. Wilcox
-------------------------------------
Harry W. Wilcox, III
President and Chief Executive Officer
By: /s/ Glenn A. Shane
-------------------------------------
Glenn A. Shane
Controller and Treasure
POWER OF ATTORNEY
We, the undersigned Directors of Cambridge NeuroScience, Inc., hereby
severally constitute and appoint Robert N. McBurney, Harry W. Wilcox, III and
William T. Whelan and each of them singly, our true and lawful
attorneys-in-fact, with full power to them and each of them to sign for us, in
our names and in the capacity indicated below, the Annual Report on Form 10-K of
Cambridge NeuroScience, Inc., for fiscal year 1999, and any and all amendments
thereto, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission hereby
ratifying and confirming all that each of said attorneys-in-fact may lawfully do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
WITNESS our hands on the dates set forth below:
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Harry W. Wilcox President, Chief March 8, 2000
- ------------------------- Executive Officer and Director
Harry W. Wilcox, III (Principal Financial Officer)
/s/ Nancy S. Amer Director March 8, 2000
- -------------------------
Nancy S. Amer
/s/ Burkhard Blank Director March 8, 2000
- -------------------------
Burkhard Blank
/s/ Ira A. Jackson Director March 8, 2000
- -------------------------
Ira A. Jackson
/s/ Joseph B. Martin Director March 8, 2000
- -------------------------
Joseph B. Martin
/s/ Paul C. O'Brien Director March 8, 2000
- -------------------------
Paul C. O'Brien
40
<PAGE> 42
EXHIBIT INDEX
NUMBER DESCRIPTION
- ------ -----------
3.1 Restated Certificate of Incorporation of Registrant. Filed as Exhibit
4.1 to Registration Statement on Form S-8, File No. 33-42933, and
incorporated herein by reference.
3.2 Amended and Restated By-Laws of Registrant. Filed as Exhibit 3.1 to
Quarterly Report on Form 10-Q for the quarter ended June 30, 1999 as
filed with the Commission August 11, 1999, and incorporated herein by
reference.
4.1 Specimen Stock Certificate for Common Stock, $.001 par value. Filed
as Exhibit 4.1 to Registration Statement on Form S-1, File No.
33-40078, and incorporated herein by reference.
10.1 Stockholders' Agreement dated December 29, 1988 among the Company and
certain investors, as amended by Waiver and Consent dated as of
February 5, 1991. Filed as Exhibit 10.3 to Registration Statement on
Form S-1, File No. 33-40078, and incorporated herein by reference.
10.2 Scientific Advisor Agreement dated September 10, 1986 and amendment
dated December 6, 1986 between the Company and Dr. Joseph Martin.
Filed as Exhibit 10.5 to Registration Statement on Form S-1, File No.
33-40078, and incorporated herein by reference.
10.3 Form of Stockholders' Agreement dated March 19, 1987 among the
Company and certain stockholders. Filed as Exhibit 10.6 to
Registration Statement on Form S-1, File No. 33-40078, and
incorporated herein by reference.
10.4 Form of Restricted Stock Purchase Agreement with a certain Director
and executive officers. Filed as Exhibit 10.8 to Registration
Statement on Form S-1, File No. 33-40078, and incorporated herein by
reference.
10.5 Common Stock Purchase Warrant dated February 15, 1991 with Aeneas
Venture Corporation. Filed as Exhibit 10.9 to Registration Statement
on Form S-1, File No. 33-40078, and incorporated herein by reference.
10.6 Form of Waiver, Consent and Agreement dated as of April 22, 1991
between the Company and certain investors. Filed as Exhibit 10.10 to
Registration Statement on Form S-1, File No. 33-40078, and
incorporated herein by reference.
10.9* Letter Agreement dated June 5, 1990 between the Company and Elkan R.
Gamzu, Ph.D. Filed as Exhibit 10.13 to Registration Statement on Form
S-1, File No. 33-40078, and incorporated herein by reference.
10.11* 1991 Equity Incentive Plan, as amended. Filed as Exhibit 99.1 to the
Registration Statement on Form S-8, File No. 333-05431, as filed with
the Commission on June 7, 1996, and incorporated herein by reference.
10.12* 1992 Director Stock Option Plan, as amended. Filed as exhibit 10.12
to the Annual Report on Form 10-K for the period ended December 31,
1997, as filed with the Commission on March 30, 1998, and
incorporated herein by reference.
10.13 Lease for One Kendall Square dated July 16, 1992 between the Company
and the Trustees of Old Kendall Realty Trust and addendum dated as of
September 22, 1992 (the "Lease"). Filed as Exhibit 10.13 to the
Annual Report on Form 10-K for the period ended December 31, 1992, as
filed with the Commission on March 28, 1993, and incorporated herein
by reference. Addendum dated September 22, 1993, filed as Exhibit
10.13 to the Annual Report on Form 10-K for the period ended December
31, 1993, as filed with the Commission on February 14, 1994, and
incorporated herein by reference. Addendum dated March 11, 1996, as
filed with the Commission on March 24, 1997, and incorporated herein
by reference. Addendum dated June 17, 1997, filed as Exhibit 10.13 to
the Annual Report on Form 10-K for the period ended
41
<PAGE> 43
December 31, 1997, as filed with the Commission on March 30, 1998 and
incorporated herein by reference.
10.15* Form of Indemnification agreement between the Company and Directors
and executive officers. Filed as Exhibit 10.15 to the Annual Report
on Form 10-K for the period ended December 31, 1992, as filed with
the Commission on March 28, 1993, and incorporated herein by
reference.
10.16+ Stock Purchase Agreement dated as of March 21, 1995 between the
Company and Boehringer Ingelheim International GmbH. Filed as Exhibit
10.16 to the Annual Report on Form 10-K for the period ended December
31, 1994, as filed with the Commission on March 31, 1995, and
incorporated herein by reference.
10.17+ License Agreement dated as of March 21, 1995 between the Company and
Boehringer Ingelheim International GmbH. Filed as Exhibit 10.17 to
the Annual Report on Form 10-K for the period ended December 31,
1994, as filed with the Commission on March 31, 1995, and
incorporated herein by reference.
10.18+ Amendment to Stock Purchase Agreement and License Agreement between
the Company and Boehringer Ingelheim International GmbH dated as of
August 19, 1996. Filed as Exhibit 99.4 to Amendment No. 1 to the
Current Report on Form 8-K/A dated August 19, 1996, as filed with the
Commission on January 29, 1997, and incorporated herein by reference.
10.19+ Collaborative Research, Development and Marketing Agreement dated as
of November 20, 1996 between the Company and Vision Pharmaceuticals
L.P., d/b/a Allergan, Inc. Filed as Exhibit 99.1 to Amendment No. 1
to the Current Report on Form 8-K/A dated August 19, 1996, as filed
with the Commission on January 29, 1997, and incorporated herein by
reference.
10.20+ Stock Purchase Agreement dated as of November 20, 1996 between the
Company and Vision Pharmaceuticals L.P., d/b/a Allergan, Inc. Filed
as Exhibit 99.2 to Amendment No. 1 to the Current Report on Form
8-K/A dated August 19, 1996, as filed with the Commission on January
29, 1997, and incorporated herein by reference.
10.21+ Credit Agreement dated as of November 20, 1996 between the Company
and Vision Pharmaceuticals L.P., d/b/a Allergan, Inc. Filed as
Exhibit 99.3 to Amendment No. 1 to the Current Report on Form 8-K/A
dated August 19, 1996, as filed with the Commission on January 29,
1997, and incorporated herein by reference.
10.22+ Sponsored Research and Collaborative Agreement dated as of December
23, 1996 between Cambridge NeuroScience Partners, Inc. and The J.
David Gladstone Institutes. Filed as Exhibit 99.1 to Amendment No. 1
to the Current Report on Form 8-K/A dated December 23, 1996, as filed
with the Commission on January 29, 1997, and incorporated herein by
reference.
10.23+ Option Agreement dated as of December 23, 1996 by and among The
Regents of the University of California, Cambridge NeuroScience
Partners, Inc., and the Company. Filed as Exhibit 99.2 to Amendment
No. 1 to the Current Report on Form 8-K/A dated December 23, 1996, as
filed with the Commission on January 29, 1997, and incorporated
herein by reference.
10.24+ Stockholders' Rights Agreement dated as of December 23, 1996 by and
among the Company, Cambridge NeuroScience Partners, Inc., The J.
David Gladstone Institutes and The Regents of the University of
California. Filed as Exhibit 99.3 to Amendment No. 1 to the Current
Report on Form 8-K/A dated December 23, 1996, as filed with the
Commission on January 29, 1997, and incorporated herein by reference.
42
<PAGE> 44
10.25* Compensatory arrangement with certain executive officers and other
members of management. Filed as Exhibit 10.25 to the Annual Report on
Form 10-K for the period ended December 31, 1997, filed with the
Commission on March 30, 1998 and incorporated herein by reference.
10.26 Termination agreement, dated November 4, 1998, between the Company
and Boehringer Ingelheim International, GmbH. Filed as exhibit 10.28
to the Quarterly Report on Form 10-Q for the quarter ended September
30, 1998, as filed with the Commission on November 12, 1998, and
incorporated herein by reference.
10.27+ Research Collaboration and License Agreement dated as of December 23,
1998 between the Company and Bayer AG. Filed as Exhibit 10.27 to the
Annual Report on Form 10-K for the period ended December 31, 1998,
filed with the Commission on March 31, 1999, and incorporated herein
by reference.
10.28 Amendment to Collaborative Research, Development and Marketing
Agreement dated December 1, 1999 between the Company and Vision
Pharmaceuticals L.P., d/b/a Allergan, Inc. Filed herewith.
21.1 Subsidiaries of the Company. Filed herewith.
23.1 Consent of Ernst & Young LLP, independent auditors. Filed herewith.
24.1 Powers of Attorney. Contained on signature page hereto.
27.1 Financial Data Schedule for the year ended December 31, 1999. Filed
herewith.
99.1 Important Factors Regarding Forward-Looking Statements. Filed
herewith.
- ------------------------
* Identifies a management contract or compensatory plan or agreement in
which an executive officer or Director of the Company participates.
+ Confidential information contained in this Exhibit has been omitted and
filed separately with the Securities and Exchange Commission.
43
<PAGE> 1
Exhibit 10.28
December 1, 1999
Cambridge NeuroScience, Inc.
One Kendall Square, Building 700
Cambridge, MA 02139
Re: Collaborative Research, Development and Marketing Agreement
dated as November 20, 1996 (the "Agreement")
-----------------------------------------------------------
Ladies and Gentlemen:
This letter is to document our mutual understanding regarding amending
and supplementing the Agreement. Capitalized terms herein shall have the meaning
set forth in the Agreement. In consideration of our mutual obligations in this
Amendment and Supplement Letter, CNSI and Allergan hereby agree as follows:
1. EXTENSION OF RESEARCH PHASE. The Research Phase as described
in Section 1.31 of the Agreement shall be amended to have a term of four (4)
years, commencing November 20, 1996, and ending November 20, 2000. The Research
Phase will be subject to earlier termination as provided in the Agreement.
Attached to this Amendment and Supplement Letter as ANNEX A is the current
Research Plan. In consideration of CNSI's performance of its obligations for the
additional year of the Research Phase, Allergan will pay CNSI One Million Two
Hundred Fifty Thousand Dollars ($1,250,000), as supported by a Research Plan and
budget. The amount shall be payable as set forth in Section 9.1.1 of the
Agreement. In the event that Allergan terminates the Agreement pursuant to
Section 14.1 or 14.2, Allergan shall be obligated to pay, the unpaid portion, if
any, of such One Million Two Hundred and Fifty Thousand Dollars ($1,250,000), in
accordance with the payment schedule in Section 9.1.1 of the Agreement.
2. CHANGE IN AVAILABILITY PERIOD. Section 5.3 of the Agreement is
amended to change the definition of "Availability Period." From the date hereof,
Availability Period shall mean the period ending on the later of twelve (12)
months following the date of designation of an Active Compound as a
Collaboration Compound or May 20, 2000. In conformity with Section 5.3, CNSI
agrees that it will not grant any license or other rights to a Third Party under
its interest in any Collaboration Compound during the Availability Period. In
addition, the Availability Period may be extended pursuant to Section 5.3.
3. EXPANSION OF FIELD. For purposes of the research license in
Section 8.1.1 of the Agreement, the definition of Field shall be expanded to
mean research, development and commercialization activity with respect to
compounds which block one or more than one
<PAGE> 2
subclass of the glutamate-activated ion channels, including NMDA channels,
and/or one or more subclass of sodium channels, for the treatment of pain, in
addition to ophthalmic disease and disorders, provided however, that such
research license shall be nonexclusive outside the Field as originally defined
in the Agreement. The commercial license for any Development Compound and its
Back-Up Compounds selected by Allergan under Section 5.4, shall be exclusive in
the Field as expanded hereby. However, if Allergan designates a Collaboration
Compound as a Development Compound pursuant to Section 5.4 of the Agreement for
pain, and at that time Allergan has not designated that Collaboration Compound,
or another Collaboration Compound, as a Development Compound for the treatment
of ophthalmic diseases and disorders, then Allergan shall no longer have the
right to select a Development Compound for the treatment of ophthalmic diseases
and disorders.
4. MILESTONE PAYMENTS. The milestone payments set forth in
Section 9.4.1 of the Agreement shall be applicable only one time with respect to
each Development Compound (or its Back-Up Compounds) even if Allergan ultimately
reaches one or more of such milestones for more than one indication.
5. UPDATED LIST OF EXCLUDED COMPOUNDS. Prior to execution of this
Amendment and Supplement Letter, CNSI shall provide to Allergan an updated list
of Excluded Compounds as described in Section 5.7 of the Agreement. Such updated
list shall be attached to this amendment and supplement letter as ANNEX B.
6. PATENT PROSECUTION. The parties agree that, notwithstanding
anything in Section 10.2 of the Agreement to the contrary, patent applications
with respect to Joint Inventions or Joint Patent Rights, which have applications
with respect to a Development Compound whether inside the Field as originally
provided in the Agreement or as expanded under Section 3 of this Amendment and
Supplement Letter, shall be filed by Allergan in such countries as reasonably
determined by Allergan, after consultation with CNSI. Allergan shall consult
with CNSI as to the preparation and filing (if time permits), prosecution and
maintenance of such patent applications and patents, and shall furnish to CNSI
copies of documents relevant to such preparation, filing, prosecution or
maintenance sufficiently prior to filing such document or making any payment due
thereunder to allow for review and comment by CNSI and Allergan shall seriously
consider all such comments. In the event that Allergan does not file, prosecute
and maintain any such patent application or patent as set forth above, it shall
give CNSI forty-five (45) days' notice before any relevant deadline and transmit
all information reasonable and appropriate relating to such patent application
or patent, and CNSI shall have the right to pursue, at its own expense, filing,
prosecution and maintenance thereof, in which event Allergan shall assign all
its rights therein to CNSI.
7. UPDATED REPRESENTATIONS AND WARRANTIES. Each party hereby
confirms to the other that as of the date hereof the representations and
warranties of such party in Article 12 of the Agreement are true and correct as
if made on the date hereof.
8. MODIFICATION OF TERMINATION PROVISION. Section 14.4.4 of the
Agreement entitled "Failure to Select a Development Compound" is hereby amended
to read "By either Party if Allergan has failed to select a Development Compound
pursuant to Section 5.4 by the fifth (5th) anniversary of the Effective Date."
<PAGE> 3
9. EFFECT OF TERMINATION. Section 14.2.3. of the Agreement,
entitled "Effect of Termination of Development Phase," is hereby amended to read
"In the event that Allergan delivers notice to CNSI pursuant to Section 14.2.1,
then (i) CNSI shall be free to grant a license to a Third Party for the use,
manufacture, distribution for sale and sale of such Development Compound or
Back-Up Compound for any indication, other than the treatment of (a) ophthalmic
diseases and disorders, and (b) pain, and (ii) the effects of termination set
forth under Section 14.6 hereof shall apply to such Development Compound or
Back-Up Compound."
Except for the modifications and amendments set forth above, the
Agreement shall remain in full force and effect in accordance with its terms.
In order to evidence your agreement with the foregoing, please sign
this letter where indicated below and return it to us.
Very truly yours,
ALLERGAN SALES, INC.
/s/ George M. Lasezkay
Corporate Vice President, Corporate Development
Agreed to and acknowledged this 20th day of November, 1999.
CAMBRIDGE NEUROSCIENCE, INC.
/s/ Harry W. Wilcox
President and Chief Executive Officer
<PAGE> 1
EXHIBIT 21.1
CAMBRIDGE NEUROSCIENCE, INC.
SUBSIDIARIES
Jurisdiction of
Name Incorporation or Organization
---- -----------------------------
1. Cambridge NeuroScience Partners, Inc. Delaware
<PAGE> 1
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statements
(Forms S-8 No. 33-42933, 33-76408 and 333-05431) pertaining to the 1991 Equity
Incentive Plan, (Form S-8 No. 33-76410) pertaining to the 1993 employee Stock
Purchase Plan, and (Form S-8 No. 33-76412) pertaining to the 1992 Director Stock
Option Plan of Cambridge NeuroScience, Inc. of our report dated February 2,
2000, with respect to the consolidated financial statements of Cambridge
NeuroScience, Inc. included in the Annual Report (Form 10-K) for the year ended
December 31, 1999.
/s/ Ernst & Young LLP
Boston, Massachusetts
March 13, 2000
<PAGE> 1
EXHIBIT 99.1
IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS
From time to time, Cambridge NeuroScience, Inc. ("Cambridge NeuroScience"
or the "Company"), through its management, may make forward-looking public
statements, such as statements concerning then expected future revenues or
earnings or concerning projected plans, performance, product development and
commercialization, as well as other statements relating to future operations.
There are certain key factors that could cause future results to differ
materially from those anticipated by management, including, but not limited to,
the following:
UNCERTAINTIES RELATED TO FURTHER DEVELOPMENT OF THE COMPANY'S PRODUCT CANDIDATES
Before obtaining regulatory approvals for the commercial sale of any of
its products under development, the Company must demonstrate through preclinical
studies and clinical trials that the product is safe and effective for use in
each target indication. The results from preclinical studies and early clinical
trials may not be predictive of results that will be obtained in large-scale
clinical trials. There can be no assurance that clinical trials of the Company's
product candidates will demonstrate sufficient safety and efficacy to obtain the
requisite regulatory approvals or will result in marketable products. Clinical
trials are often conducted with patients that are critically ill. During the
course of treatment, these patients can die or suffer other adverse medical
effects for reasons that may not be related to the pharmaceutical agent being
tested but which can nevertheless affect clinical trial results. A number of
companies in the pharmaceutical industry have suffered significant setbacks in
advanced clinical trials, even after promising results in earlier trials.
The completion of clinical trials of the Company's product candidates may
be delayed by many factors and there can be no assurance that delays or
terminations will not occur. One such factor is the rate of enrollment of
patients, which generally varies throughout the course of a clinical trial and
which depends on the size of the patient population, the number of clinical
trial sites, the proximity of patients to clinical trial sites, the eligibility
criteria for the trial and the existence of competitive clinical trials. The
Company cannot control the rate at which patients present themselves for
enrollment. There can be no assurance that the rate of patient enrollment will
be consistent with the Company's expectations or be sufficient to enable
clinical trials of the Company's product candidates to be completed in a timely
manner. Any significant delays in, or termination of, clinical trials of the
Company's product candidates would have a material adverse effect on the
Company's business, financial condition and results of operations.
UNCERTAINTIES RELATED TO EARLY STAGE OF DEVELOPMENT; TECHNOLOGICAL UNCERTAINTIES
All of the Company's product candidates are in the research or development
stage, and all revenues to date have been generated from collaborative research
agreements, government grants and financing activities, or from interest income
earned on these funds. No revenues have been generated from product sales. There
can be no assurance that product revenues can be realized on a timely basis, if
ever.
The development of new pharmaceutical products is highly uncertain and
subject to a number of significant risks. Potential products that appear to be
promising at early stages of development may not reach the market for a number
of reasons. Potential products may be found to be ineffective or cause harmful
side effects during preclinical testing or clinical trials, fail to receive
necessary regulatory approvals, be difficult to manufacture on a large scale, be
uneconomical, fail to achieve market acceptance or be precluded from
commercialization by proprietary rights of third parties.
Cambridge NeuroScience has not yet requested or received regulatory
approval for any product from the FDA or any other regulatory authority. There
can be no assurance that Cambridge NeuroScience or its strategic partners will
succeed in the development, regulatory approval and marketing of any therapeutic
product. To achieve profitable operations, the Company must, alone or with
others, successfully identify, develop, obtain approval for, introduce and
market proprietary products. If potential products are identified, they will
require significant additional investment, development, preclinical testing and
clinical trials prior to potential regulatory approval and commercialization.
<PAGE> 2
At the time the agreement with Bayer for the development of GGF2 was
signed, Bayer and the Company selected MS as the primary indication of GGF2.
Currently, Bayer and the Company are in the process of evaluating data from
recent studies performed by Bayer. Based on results of these studies, Bayer has
indicated it is undertaking a comprehensive review of all available options for
further development of GGF2 before finalizing a decision. No assurance can be
given that there will not be a substantial delay in the development of GGF2 or
that Bayer will continue the development of GGF2. In the event Bayer elects to
terminate the collaboration, it is doubtful the Company could obtain sufficient
financial and technical resources to continue GGF2 development. Either party
may terminate this agreement at any time for cause. Bayer may terminate this
agreement at any time, upon 120 days written notice.
There can be no assurance that the Company's product development efforts
will be successfully completed, that the Company will obtain the required
regulatory approvals or that any products, if introduced, will be successfully
marketed or achieve customer acceptance. Commercial availability of any
Cambridge NeuroScience products is not expected for a number of years, if at
all. See "-- Uncertainties Related to Further Development of the Company's
Product Candidates."
GOVERNMENT REGULATION; NO ASSURANCE OF REGULATORY APPROVAL
Prior to marketing, any product developed by the Company must undergo an
extensive regulatory approval process. This regulatory process, which includes
preclinical testing and clinical trials, and may include post-marketing
surveillance of each compound to establish its safety and efficacy, can take
many years and can require the expenditure of substantial resources. Data
obtained from preclinical and clinical activities are susceptible to varying
interpretations that could delay, limit or prevent regulatory approval. In
addition, delays or rejections may be encountered based upon changes in FDA
policy for drug approval during the period of product development and FDA
regulatory review of each submitted NDA. Similar delays may also be encountered
in foreign countries. There can be no assurance that regulatory approval will be
obtained for any products developed by the Company.
Moreover, regulatory approval may entail limitations on the indicated uses
of the drug. Further, even if regulatory approval is obtained, a marketed
product and its manufacturer are subject to continuing review. Discovery of
previously unknown problems with a product or manufacturer may have a material
adverse effect on the Company's business, financial condition and results of
operations, including withdrawal of the product from the market. Violations of
regulatory requirements at any stage of the regulatory process may result in
various adverse consequences, including the FDA's delay in approving or its
refusal to approve a product, withdrawal of an approved product from the market
and the imposition of criminal penalties against the manufacturer and New Drug
Application ("NDA")-holder. The Company has not had any product approved for
commercialization in the United States or elsewhere. No assurance can be given
that the Company will be able to obtain FDA approval for any products. Failure
to obtain requisite regulatory approvals or failure to obtain approvals of the
scope requested will delay or preclude the Company or its licensees or strategic
partners from marketing the Company's products or limit the commercial use of
the products and will have a material adverse effect on the Company's business,
financial condition and results of operations.
HISTORY OF LOSSES; UNCERTAINTY OF CONTINUED OPERATIONS AND FUTURE PROFITABILITY
As of December 31, 1999, the Company had an accumulated deficit of $110.1
million. The Company has not been profitable from inception and expects to
continue to incur operating losses for at least the next several years.
The Company believes that cash, cash equivalents and investments in
marketable securities of $9.7 million at January 31, 2000 will be sufficient to
maintain operations through 2001. The Company anticipates that it will require
substantial additional funds to further its research and product development
programs and for other operating activities and expects to continue to incur
losses for at least the next several years. There can be no assurance that the
Company's product candidates will be successfully developed or that its
products, if successfully developed, will generate revenues sufficient to enable
the Company to earn a profit. The Company's ability to further the development
of its research and development programs and achieve profitability depends on
the ability of the Company to enter into agreements for the development and
commercialization of the Company's products. There can be no assurance that the
Company will be successful in its efforts to obtain third party funding for its
research and development programs. In addition, there can be no assurance that
Cambridge NeuroScience or its strategic partners will obtain the required
regulatory approvals and successfully identify, test, manufacture and market any
product candidates. Cambridge NeuroScience does not expect to generate revenues
from the sale of products, if any, for several years.
-2-
<PAGE> 3
DEPENDENCE ON STRATEGIC ALLIANCES; POTENTIAL CONFLICTS OF INTEREST
The Company's strategy for research, development and commercialization of
its product candidates includes the establishment of various corporate
collaborations, licensing agreements and other arrangements with third parties.
In some cases, the Company will be dependent upon these outside parties to
conduct preclinical testing and clinical trials and to provide adequate funding
for the Company's development programs. The Company currently has an ongoing
collaborative arrangement with Allergan for the development of NMDA ion-channel
blockers, sodium ion-channel blockers and combination ion-channel blockers for
the treatment of ophthalmic diseases, including glaucoma, and with Bayer for the
development of GGF2 for MS and other neurodegenerative diseases. A substantial
portion of the payments to be received by the Company from Allergan and Bayer
are dependent on the subject compounds achieving certain program development
milestones. The Company is dependent on the collaborator making progress with
the development of the subject compounds to achieve these milestone events.
There can be no assurance that such milestones will be achieved on a timely
basis, if ever. There can be no assurance that the Company will be able to
maintain existing collaboration agreements, negotiate collaborative arrangements
in the future on acceptable terms, if at all, or that any such collaborative
arrangements will be successful.
To the extent that the Company is not able to maintain or establish such
arrangements, the Company would be required to undertake product development and
commercialization activities at its own expense, which would increase the
Company's capital requirements or require the Company to limit the scope of its
development and commercialization activities. In addition, the Company may
encounter significant delays in introducing its products into certain markets or
find that the development, manufacture or sale of its products in such markets
is adversely affected by the absence of such collaborative agreements. While the
Company believes that Allergan, Bayer and other potential strategic partners
will have an economic motivation to succeed in performing their obligations
under collaboration arrangements with the Company, the amount and timing of
funds and other resources to be devoted under such arrangements will be
controlled by such other parties and would be subject to financial or other
difficulties that may befall such other parties.
The Company cannot control the amount and timing of resources which its
strategic partners devote to the Company's programs or potential products, which
may vary because of factors unrelated to the potential products. If any of the
Company's strategic partners breach or terminate their agreements with the
Company or otherwise fail to conduct their collaborative activities in a timely
manner, the preclinical or clinical development or commercialization of product
candidates or research programs may be delayed, and the Company will be required
to devote additional resources to product development and commercialization or
terminate certain development programs. Allergan may terminate its agreement
with the Company for breach and under certain other circumstances. Bayer may
terminate its agreement with the Company at any time, upon 120 days written
notice. Either the Company or Bayer may terminate such agreement at any time for
cause.
The termination of the Allergan or Bayer agreements or of other
collaborative arrangements which the Company may enter into in the future would
have a material adverse effect on the Company's business, financial condition
and results of operations. There can be no assurance that disputes will not
arise in the future with respect to the ownership of rights to any technology
developed with third parties. These and other possible disagreements between
collaborators and the Company could lead to delays in the collaborative
research, development or commercialization of certain product candidates or
could require or result in litigation or arbitration, which would be
time-consuming and expensive, and would have a material adverse effect on the
Company's business, financial condition and results of operations.
Cambridge NeuroScience's strategic partners may develop, either alone or
with others, products that compete with the development and marketing of the
Company's products. Competing products, either developed by the strategic
partners or to which the strategic partners have rights, may result in the
Company's partners withdrawing research, development or marketing support with
respect to all or a portion of the Company's technology, which would have a
material adverse effect on the Company's business, financial condition and
results of operation.
NEED FOR FUTURE FUNDING; UNCERTAINTY OF ACCESS TO CAPITAL
The Company is currently evaluating alternatives for maximizing
shareholder value, which may include the sale of some or all of the Company's
technology assets, or sale or merger of the Company. If the Company continues to
engage in ongoing operations, it will
-3-
<PAGE> 4
require substantial additional funding in order to continue research, product
development, preclinical testing and clinical trials of its product candidates.
The Company will also require additional funding for operating expenses, for the
pursuit of regulatory approvals for its product candidates and to establish
marketing and sales capabilities. The Company's future capital requirements will
depend on many factors, including continued scientific progress in its research
and development programs, the size and complexity of these programs, progress
with preclinical testing and clinical trials, the time and costs involved in
obtaining regulatory approvals, the costs involved in filing, prosecuting and
enforcing patent claims, competing technological and market developments, the
establishment of additional collaborative arrangements, the cost of
manufacturing arrangements, commercialization activities and the cost of product
in-licensing and strategic acquisitions, if any. There can be no assurance that
the Company's cash reserves and other liquid assets and funding that may be
received from the Company's strategic partners and interest income earned
thereon, will be adequate to satisfy its capital and operating requirements.
To the extent the Company requires substantial additional funding, it may
seek such funding through arrangements with strategic collaborators and through
public or private sales of the Company's securities, including equity
securities. There can be no assurance, however, that additional funding will be
available on reasonable terms, if at all. Any additional equity financings would
be dilutive to the Company's stockholders. If adequate funds are not available,
Cambridge NeuroScience may be required to curtail significantly or terminate one
or more of its research and development programs and/or obtain funds through
arrangements with collaborative partners or others that may require Cambridge
NeuroScience to relinquish rights to certain of its technologies or product
candidates.
INTENSE COMPETITION AND RISK OF TECHNOLOGICAL CHANGE
The fields in which Cambridge NeuroScience is involved are characterized
by rapid technological progress. New developments are expected to continue at a
rapid pace in both industry and academia. There are many companies, both public
and private, including large pharmaceutical companies, chemical companies and
specialized genetic engineering companies, engaged in developing products
competitive with products under development by the Company. Many of these
companies have greater capital, human resources and research and development,
manufacturing and marketing experience than Cambridge NeuroScience. Such
companies may succeed in developing products that are more effective or less
costly than any that may be developed by Cambridge NeuroScience and may also
prove to be more successful than Cambridge NeuroScience in marketing.
Competition may increase further as a result of potential advances in the
commercial applicability of biotechnology and greater availability of capital
for investment in these fields. In addition, academic, government and
industry-based research is intense, resulting in considerable competition in
obtaining qualified research personnel, submitting patent filings for protection
of intellectual property rights and establishing corporate strategic alliances.
There can be no assurance that research, discoveries and commercial developments
by others will not render any of the Company's programs or potential products
noncompetitive.
The Company will, for the foreseeable future, rely on its strategic
partners for certain preclinical evaluation and clinical development of its
product candidates and manufacturing and marketing of any products. In addition,
the Company relies on its strategic partners, in part, for support in its drug
discovery operations. Generally, the Company's agreements with its strategic
partners do not prohibit the strategic partners from engaging in competitive
activities with the Company. The pharmaceutical companies with which the Company
has collaborations are in some cases attempting to develop other products to
treat diseases within the fields of the collaborations with the Company. Any
product candidate of the Company, therefore, may be subject to competition with
a potential product under development by the pharmaceutical company with which
the Company is collaborating in connection with such product candidate.
Biotechnology and related pharmaceutical technology have undergone rapid
and significant change. The Company expects the technology associated with the
Company's research and development will continue to develop rapidly, and the
Company's future success will depend in large part on its ability to maintain a
competitive position with respect to this technology. Rapid technological
development by the Company or others may result in compounds, products or
processes becoming obsolete before the Company recovers any expenses it incurs
in connection with developing such products.
-4-
<PAGE> 5
PATENT AND LICENSE UNCERTAINTIES
Proprietary rights relating to the Company's products will be protected
from unauthorized use by third parties only to the extent that they are covered
by valid and enforceable patents or are maintained as trade secrets, and to the
extent that the Company diligently enforces its rights against infringement of
its patent rights and against misappropriation of its trade secrets and
proprietary information. The biotechnology and pharmaceutical industries place
considerable importance on obtaining patent and trade secret protection for new
technologies, products and processes, and the Company's success will depend, in
part, on its ability to obtain patent protection for its products and
manufacturing processes, preserve its trade secrets and operate without
infringing the proprietary rights of third parties. Some of the technology that
may be used in the Company's products may not be covered by any patent or patent
application. In instances where the Company's products are not covered by valid
and enforceable patents, there can be no assurance that third parties will not
be able to market similar or related products, nor can there be any assurance
that patent or other proprietary rights held by the Company with respect to
these products will afford commercially significant protection. In addition,
there can be no assurance that confidentiality arrangements to which the Company
is a party will be effective in protecting the Company's confidential
information or trade secrets.
There can be no assurance that any patent applications relating to the
Company's products will be filed in the future or that any currently pending
applications will issue on a timely basis, if ever. Since patent applications in
the United States are maintained in secrecy until patents issue and since
publication of discoveries in the scientific or patent literature often lag
behind actual discoveries, the Company cannot be certain that it was the first
to make the inventions covered by each of its pending patent applications or
that it was the first to file patent applications for such inventions. Even if
patents are issued, the degree of protection afforded by such patents will
depend upon the scope, validity, enforceability of the claims obtained in such
patents and the Company's willingness and financial ability to enforce and/or
defend them. The patent position of biotechnology and pharmaceutical firms is
often highly uncertain and usually involves complex legal and factual questions.
Moreover, no consistent policy has emerged in the United States and in many
other countries regarding the breadth of claims allowed in biotechnology
patents. The Company could incur substantial costs in defending itself in suits
brought against it by others or in suits in which the Company may assert its
patents against others. If the outcome of any such litigation is adverse to the
Company, the Company's business, financial condition and results of operations
could be adversely affected. If competitors of the Company prepare and file
patent applications in the United States that claim technology also claimed by
the Company, the Company may be required to participate in interference
proceedings declared by the United States Patent and Trademark Office to
determine priority of invention, which could result in substantial cost to the
Company. Patents granted to the Company in certain foreign countries may be
subject to opposition proceedings brought by third parties. The Company may
incur substantial costs defending such proceedings. There can be no assurance
that the Company would prevail in any such proceedings or that such proceedings
would not result in a material adverse effect on the Company's business,
financial condition or results of operations. In addition, patents blocking the
Company's manufacture, use or sale of its products could be issued to third
parties in the United States or foreign countries. The issuance of blocking
patents or an adverse outcome in an interference or opposition proceeding could
subject the Company to significant liabilities to third parties and require the
Company to license disputed rights from third parties or cease using the
technology. There can be no assurance that such license would be available on
commercially acceptable terms, if at all.
There are patents held by third parties that relate to the manufacture,
development and use of the Company's product candidates for which the Company
has licenses. There can be no assurance that the Company will not in the future
require licenses to additional patents, that such licenses will be available on
commercially reasonable terms, if at all, that existing or future licenses will
not be terminated or that any such termination or failure to obtain a license
will not have a material adverse effect on the Company's business, financial
condition or results of operations.
The Company is also aware of third-party patent and pending patent
applications in the United States and corresponding patent applications pending
in some foreign countries that, if issued and valid, may be construed to cover
aspects of the Company's GGF2 product candidates. There can be no assurance that
the Company will not infringe any such issued U.S. third-party patents, and that
claims of future patents issuing from the patent applications, if any, will not
be infringed by the Company's proposed manufacture, use or sale of products
based on the GGF2 technology. Furthermore, there can be no assurance that
Cambridge NeuroScience would prevail in any legal action seeking damages or
injunctive relief for infringement of the existing patent or any patent that
might issue from such applications
-5-
<PAGE> 6
or that any license required under any such patent would be available or, if
available, would be available on commercially reasonable terms. Failure to
obtain a required license or to successfully establish non-infringement of, or
the invalidity or unenforceability of, such third-party patents could preclude
the manufacture, marketing, sale and use of the Company's products based on such
GGF2 technology.
NO MANUFACTURING EXPERIENCE; RELIANCE ON THIRD-PARTY MANUFACTURING
The Company has no experience in manufacturing products for commercial
purposes and does not have manufacturing facilities. Consequently, the Company
is dependent on contract manufacturers for the production of products for
development and commercial purposes. In the event that the Company is unable to
obtain or retain third-party manufacturing arrangements, it will not be able to
commercialize its products as planned which would have a material adverse effect
on the Company's business, financial condition and results of operations. The
manufacture of the Company's products for clinical trials and commercial
purposes is subject to current Good Manufacturing Practices ("GMP") regulations
promulgated by the FDA. There can be no assurance that the Company will be able
to enter into agreements for the manufacture of future products with
manufacturers whose facilities and procedures comply with GMP and other
regulatory requirements. The Company does not intend to develop or acquire
facilities for the manufacture of drug products for clinical trials or
commercial purposes, and has been, and will remain, dependent on its strategic
partners or third parties for the manufacture of product candidates for
preclinical, clinical and commercial purposes.
UNCERTAINTIES RELATED TO MARKETING AND SALES
Cambridge NeuroScience currently has no experience in marketing or selling
pharmaceutical products. In order to achieve commercial success for any approved
product, Cambridge NeuroScience must either develop a marketing and sales force
or, where appropriate or permissible, enter into arrangements with third parties
to market and sell its products. There can be no assurance that Cambridge
NeuroScience will successfully develop marketing and sales experience or that it
will be able to enter into marketing and sales agreements with others on
acceptable terms, if at all. If the Company develops its own marketing and sales
capability, it will compete with other companies that currently have experienced
and well funded marketing and sales operations. To the extent that the Company
enters into co-promotion or other sales and marketing arrangements with other
companies, any revenues to be received by Cambridge NeuroScience will be
dependent on the efforts of others and there can be no assurance that their
efforts will be successful.
UNCERTAINTY OF PHARMACEUTICAL PRICING AND REIMBURSEMENT
The Company's successful commercialization of its pharmaceutical products
will depend in part on the extent to which reimbursement for the costs of such
products and related treatments will be available from government health
administration authorities, private health insurers and other third-party
payors. Significant uncertainty exists as to the reimbursement status of newly
approved health care products, and third-party payors are increasingly
challenging the prices charged for medical products and services. There can be
no assurance that any third-party insurance coverage will be available to
patients for any products developed by the Company. Government and other
third-party payors are increasingly attempting to contain health care costs by
limiting both coverage and the level of reimbursement for new therapeutic
products, and by refusing, in some cases, to provide coverage for uses of
approved products for disease indications for which the FDA has not granted
marketing approval. If adequate coverage and reimbursement levels are not
provided by government and third-party payors for the Company's products, the
market acceptance of these products would be adversely affected, which would
have a material adverse effect on the Company's business, financial condition
and results of operations.
The Company's business may be materially adversely affected by the
continuing efforts of governmental and third-party payors to contain or reduce
the costs of health care through various means. For example, in certain foreign
markets, pricing or profitability of prescription pharmaceuticals is subject to
government control. In the United States, there have been, and the Company
expects that there will continue to be, a number of federal and state proposals
to implement similar government control. In addition, an increasing emphasis on
managed care in the United States has and will continue to put pressure on
pharmaceutical pricing. Such initiatives and proposals, if adopted, could
decrease
-6-
<PAGE> 7
the price that the Company receives for any products it may develop and sell in
the future and thereby have a material adverse effect on the Company's business,
financial condition and results of operations. Further, to the extent that such
proposals or initiatives have a material adverse effect on other pharmaceutical
companies that are collaborators or prospective collaborators for certain of the
Company's potential products, the Company's ability to commercialize its
potential products may be adversely affected.
POTENTIAL PRODUCT LIABILITY; UNCERTAINTIES RELATED TO INSURANCE
The use of any of the Company's potential products in clinical trials and
the sale of any approved products may expose the Company to liability claims
resulting from the use of products or product candidates. These claims might be
made directly by consumers, pharmaceutical companies or others. The Company
maintains product liability insurance coverage for claims arising from the use
of its products in clinical trials in the amount of $5.0 million per occurrence
and $5.0 million in aggregate. No assurance can be given that the Company will
be able to maintain insurance at a reasonable cost or in sufficient amounts to
protect the Company against losses due to liability that could have a material
adverse effect on the Company's business, financial condition and results of
operations. There can be no assurance that the Company will be able to obtain
commercially reasonable product liability insurance for any product approved for
marketing in the future or that insurance coverage and the resources of the
Company would be sufficient to satisfy any liability resulting from product
liability claims. A successful product liability claim or series of claims
brought against the Company would have a material adverse effect on its
business, financial condition and results of operations.
VOLATILITY OF COMMON STOCK PRICE
The market prices for securities of biotechnology and pharmaceutical
companies, including Cambridge NeuroScience, have historically been highly
volatile, and the market has from time to time experienced significant price and
volume fluctuations that are unrelated to the operating performance of
particular companies. Factors such as fluctuations in the Company's operating
results, announcements of technological innovations or new therapeutic products
by the Company or others, clinical trial results, developments concerning
agreements with collaborators, governmental regulation, developments in patent
or other proprietary rights, public concern as to the safety of products
developed by the Company or others, future sales of substantial amounts of the
Company's common stock by existing stockholders and general market conditions
can have an adverse effect on the market price of the Common Stock. The
realization of any of the risks described in these "Risk Factors" could have a
dramatic and adverse impact on market price.
In January 1999, the Company's common stock was delisted from the Nasdaq
National Market System due to a failure to maintain a minimum bid price per
share of $1.00. Immediately following the delisting, the Company began trading
on the Over the Counter Bulletin Board ("OTCBB"). The delisting of the Company's
common stock could have an adverse effect on the liquidity of the common stock
held by investors and on the Company's ability to raise equity in the future.
DEPENDENCE ON QUALIFIED PERSONNEL
Because of the specialized scientific nature of the Company's business,
Cambridge NeuroScience is highly dependent upon its ability to continue to
attract and retain qualified scientific and technical personnel. There is
intense competition for qualified personnel in the areas of the Company's
activities and there can be no assurance that Cambridge NeuroScience will be
able to continue to attract and retain the qualified personnel necessary for the
development of its business. Loss of the services of, or failure to recruit, key
scientific and technical personnel would be significantly detrimental to the
Company's product development programs, and could have a material adverse effect
on the Company's business, financial condition and results of operations. See
"-- History of Losses; Uncertainty of Continued Operations and Future
Profitability."
-7-
<PAGE> 8
ANTITAKEOVER PROVISIONS
The Company's Restated Certificate of Incorporation authorizes the Board
of Directors to issue, without stockholder approval, up to 10,000,000 shares of
preferred stock with voting, conversion and other rights and preferences that
could adversely affect the voting power or other rights of the holders of the
Company's common stock. The issuance of preferred stock or rights to purchase
preferred stock could be used to discourage an unsolicited acquisition proposal.
In addition, the possible issuance of preferred stock could discourage a proxy
contest, make more difficult the acquisition of a substantial block of the
Company's common stock or limit the price that investors might be willing to pay
for shares of the Company's common stock. In addition, certain provisions of the
Delaware corporate law may have the effect of deterring hostile takeovers or
delaying or preventing changes in the control or management of the Company,
including transactions in which stockholders might otherwise receive a premium
for their shares over the then current market prices.
ABSENCE OF DIVIDENDS
Prior to March 9, 1998, the Company had never declared nor paid cash
dividends on any of its common stock. On March 9, 1998 the Company's Board of
Directors declared an extraordinary dividend on its capital stock of $1.00 per
share of outstanding common stock, or $17.9 million, which was paid on April 14,
1998. Future cash dividends, if any, will be paid at the discretion of the
Company's Board of Directors and will depend, among other things, upon the
Company's future operations, capital requirements, general financial condition
and such other factors as the Board of Directors may deem relevant. The Company
does not anticipate paying dividends in the foreseeable future.
-8-
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