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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Fiscal Year ended July 31, 1999
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _______ to _______
Commission file number 0-20772
CYPROS PHARMACEUTICAL CORPORATION
(Exact name of registrant as specified in its charter)
CALIFORNIA 33-0476164
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2714 LOKER AVENUE WEST
CARLSBAD, CALIFORNIA 92008
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (760) 929-9500
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO
SECTION 12(g) OF THE ACT:
COMMON STOCK, NO PAR VALUE
(Title of class)
Indicate by mark whether the Registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act 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.
[X] YES [ ] NO
As of October 26,1999, the Registrant had 15,735,007 shares of Common Stock,
no par value, outstanding, and the aggregate market value of the shares held
by non-affiliates on that date was $16,472,162 based upon the last sales
price of the Registrant's Common Stock reported on the American Stock
Exchange.*
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 the 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. [X]
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* Excludes 3,189,567 shares of Common Stock held by directors, executive
officers and shareholders whose beneficial ownership exceeds ten percent of
the shares outstanding on October 26, 1999. Exclusion of shares held by any
person should not be construed to indicate that such person possesses the
power, direct or indirect, to direct or cause the direction of the management
or policies of the Registrant, or that such person is controlled by or under
common control with the Registrant.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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PART I.
ITEM 1. BUSINESS.
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE
FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS
AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE DISCUSSED HERE. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THE DESCRIPTION
OF THE COMPANY'S BUSINESS BELOW AND THE SECTIONS ENTITLED "LICENSES",
"MANUFACTURING", "SALES AND MARKETING", "COMPETITION", "GOVERNMENT REGULATION",
"PATENTS AND PROPRIETARY RIGHTS" AND "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS", THOSE DISCUSSED IN THE S-3
REGISTRATION STATEMENT FILE NO. 333-25661 FILED WITH U.S. SECURITIES AND
EXCHANGE COMMISSION, AS WELL AS THOSE DISCUSSED IN ANY DOCUMENTS INCORPORATED
BY REFERENCE HEREIN OR THEREIN.
BUSINESS OF CYPROS
GENERAL
Cypros is a publicly-held, specialty pharmaceutical company which
develops and markets products for the critical care market. On August 5,
1999, Cypros entered into an Agreement and Plan of Reorganization with
RiboGene, Inc., another publicly-held pharmaceutical company, to acquire all
of the outstanding shares of common and preferred stock of Ribogene for
shares of common and preferred stock of Cypros through a merger with a
newly-formed, wholly-owned subsidiary of Cypros, Cypros Acquisition
Corporation. Under the agreement, each issued and outstanding share of common
stock and preferred stock of RiboGene and each issued and outstanding option
and warrant of RiboGene will convert into approximately 1.494 shares, options
and warrants of Cypros. The actual exchange ratio will be determined as of
the close of business on November 4, 1999, based upon the average closing
price of the common stock of Cypros over the 20 trading days ending on that
date. On November 5, 1999, the shareholders of Cypros and the stockholders of
RiboGene will vote on the transaction at special meetings and, in the case of
the Cypros shareholders, to vote on other related matters, including amending
the articles of incorporation of Cypros to change its name to Questcor
Pharmaceuticals, Inc.
If the merger is approved, the administrative offices of Questcor
will reside in Hayward, California, and the QA/QC capabilities, drug
distribution facility and product development department will reside in
Carlsbad, California. The company will retain the Dermaflo-Registered
Trademark- manufacturing facility in Lee's Summit, Missouri. In addition,
Charles J. Casamento, the Chairman, President and Chief Executive Officer of
RiboGene, will retain those positions and titles in Questcor. The common
stock of both companies is listed on the American Stock Exchange, Inc. and it
is expected that the common stock of Questcor will also be listed on the
American Stock Exchange, Inc. under the symbol "QSC".
Paul J. Marangos, the Chairman, President and Chief Executive
Officer of Cypros, has entered into a voting agreement with RiboGene under
which he has agreed to vote in favor of the
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merger agreement and related transactions and has granted RiboGene an
irrevocable proxy to vote his shares of Cypros common stock in favor of the
respective proposals. Dr. Marangos will continue as a director of Questcor
following the merger.
Cypros' sales and marketing force is currently marketing three
products, Glofil and Inulin, two injectable drugs that assess kidney function
by the measurement of glomerular filtration rate, and Ethamolin-Registered
Trademark-, an injectable drug that treats bleeding esophageal varices.
Cypros is manufacturing and shipping its proprietary topical triple
antibiotic wound care product to its over-the-counter marketing partner,
NutraMax Products, Inc., incorporating Cypros' patented Dermaflo drug
delivery technology and Neosporin-Registered Trademark-. Under an agreement
entered into in November 1998, NutraMax is converting the product into
finished adhesive strips and patches and distribution to the mass merchandise
market. Assuming regulatory clearance, Cypros intends to manufacture and
launch two proprietary topical burn/ wound care products, Neoflo-TM- and
Sildaflo-TM-, in the year 2000 in other markets. Cypros' development programs
target ischemic disorders and Cypros is currently conducting a multi-center,
randomized, placebo-controlled Phase III clinical trial on Cordox-TM- in
sickle cell crisis patients. Cypros may also conduct Phase III clinical
trials of Cordox in other ischemic disorders, such as coronary artery bypass
grafting surgery and other pivotal clinical trials of Ceresine-TM- in closed
head injury patients.
ACQUISITIONS OF APPROVED PRODUCTS TO BUILD COMMERCIAL CAPABILITIES.
Cypros is building a sales, marketing and distribution capability to support
and increase the sales of niche products that it has acquired; Glofil-125 and
Inulin, which it acquired in August 1995, Ethamolin, which it acquired in
November 1996, and Dermaflo, which it acquired in November 1997. Cypros
intends to have fully operating commercial capability in advance of the
launch of Neoflo, Sildaflo and the potential launch of other products in its
pipeline.
Cypros has a multi-year, marketing and joint venture agreement with
NutraMax Products, Inc., a leading supplier of first aid and wound care
products, under which Cypros is supplying its proprietary triple antibiotic
product using the Dermaflo technology to NutraMax for conversion and sale in
the form of adhesive strips and patches, and NutraMax has the exclusive right
to sell the finished products to the retail and industrial first aid markets.
Further, the agreement calls for Cypros and NutraMax to jointly develop
several new products using the Dermaflo technology and to share the
development expense and profits from sale. Cypros began shipping product to
NutraMax in March 1999.
CORDOX AND CERESINE: ISCHEMIA THERAPIES IN DEVELOPMENT FOR SERVING
UNMET MEDICAL NEEDS. There are several million cases of ischemia-induced
disorders annually in the United States, resulting in over 700,000 deaths and
several billion dollars in annual costs for physical and mental rehabilitation
and ongoing care, and yet there are currently no FDA-approved drugs to avoid
or reverse the massive cell damage caused by ischemia, known as cytoprotective
drugs. Ischemic disorders include heart attack, stroke, surgery, trauma and
various anemias. Currently approved drugs for treating cardiovascular ischemia,
such as clot busting drugs, serve to re-establish blood flow but do not have
direct cytoprotective effects on the ischemic tissue. Cypros believes that
the drugs it is developing, Cordox and Ceresine, if approved by the FDA and
successfully marketed, may reduce the number of fatalities and the
rehabilitation and ongoing
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care costs associated with ischemic disorders.
Impairment of blood flow reduces the supply of oxygen to body cells,
interrupting normal aerobic metabolism and causing depletion of adenosine
triphosphate, or ATP, the cells' primary energy source. Ischemia-induced
depletion of ATP produces a myriad of increasingly destructive cellular
events known as the toxic ischemic cascade. Cypros believes that the
cytoprotective drugs under development by others for treatment of ischemia
are focused on treating specific elements of the toxic ischemic cascade,
leaving other elements free to cause cell, tissue and organ damage.
Cypros' approach, based on preventing or reversing the toxic
ischemic cascade, is comprehensive in nature and, Cypros believes,
potentially more effective. Cordox and Ceresine are designed to act during
and after ischemia by maintaining cellular ATP levels or accelerating their
restoration. Cordox, a natural substance, and Ceresine are more amenable to
being used early in the patient management process, which is critical in
acute care settings.
Further, Cordox and Ceresine are small molecules, easily deliverable
and inexpensive to produce. Human data, available from Cypros' own studies
and independent, physician-sponsored Investigational New Drug applications,
commonly referred to as INDs, show that to date each of these drugs is well
tolerated when administered at clinically relevant doses to healthy subjects.
The minimal side effects associated with Cordox and Ceresine should reduce
their development risk and may permit their broad, early use in acute care
settings, such as emergency rooms, where rapid access to treatment is of
utmost importance.
During the fiscal year ended July 31, 1999, Cypros commenced a
Phase III trial of Cordox in sickle cell anemia crisis patients. In addition,
Cypros also received a U.S. patent covering the use of Cordox in sickle cell
anemia crisis patients to reduce the painful occlusive ischemic episodes.
PRE-CLINICAL PROGRAMS FOCUSED ON ISCHEMIC DISORDERS. Further
implementing its overall strategy of developing drugs that protect cells from
ischemic damage, Cypros is conducting pre-clinical studies on additional
compounds intended to reduce the neurodegeneration associated with stroke and
traumatic head injury. Cypros believes that these drugs may reduce
excitotoxicity, the excess release of excitatory amino acid neurotransmitters
in the brain that stems from ischemically-caused ATP depletion in certain
brain cells. Drugs being developed in these studies include: (1) a new class
of neuronal calcium channel blockers which block excessive excitatory amino
acid neurotransmitter release; (2) a patented series of novel compounds which
augment levels of adenosine, a naturally occurring substance which inhibits
excitatory amino acid release, in ischemic tissue by inhibiting its
metabolism; and (3) a novel series of compounds which inhibit the release of
excitatory amino acid (especially glutamate) from glial cells in the brain
for which Cypros received a two-year, $750,000 federal grant during fiscal
1999. Cypros is attempting to develop lead compounds from all three of the
above pre-clinical programs to treat a variety of ischemic disorders of both
the cardiovascular and cerebrovascular systems.
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ACQUIRED PHARMACEUTICAL PRODUCTS
Cypros' strategy includes building near-term sustainability with the
cash flow from acquired pharmaceutical products with the goal of reducing its
overall cash consumption rate and building its sales, marketing and
distribution infrastructure in advance of the launch of Neoflo and Sildaflo
and the potential products in its pipeline.
GLOFIL-125 AND INULIN. Kidney disease afflicts more than two million
persons in the United States and is increasing primarily due to the growth in
diabetes and systemic lupus erythromatosis cases. Kidney disease results in
over $12 billion annually in healthcare costs in the United States. The
measurement of kidney function, glomerular filtration rate, or GFR, is
critical to the understanding of the disease state and its appropriate
therapeutic intervention. GFR has historically been estimated by the
measurement of endogenous serum creatinine and by creatinine clearance. These
diagnostic assays overestimate kidney function by as much as 100% in
patients. Cypros believes that the injection of a renal filtration marker,
such as Inulin and Glofil-125, is a more accurate and direct means of
determining GFR.
Glofil-125 and Inulin are FDA-approved products for the measurement
of GFR. Nephrologists and nuclear medicine departments at major medical
centers are the primary users of these products. During the fiscal year ended
July 31, 1999, Cypros recorded gross sales from these two products of
$797,959 and one customer using Glofil-125 accounted for 31% of these sales
and 9% of Cypros' total sales. Glofil-125 is an injectable radioactive
diagnostic drug, which provides rapid information on GFRs with great
accuracy. It is currently sold by Cypros in 4ml vials and in prefilled
syringes through the 117 nationwide radiopharmacies of Syncor International
under a distribution agreement entered into with Cypros in February 1996.
Inulin is an injectable diagnostic drug, which provides a measure of GFRs.
Inulin is currently sold in 50 ml ampules with actual patient dosing
correlated to patient weight.
Cypros believes there is opportunity for increased utilization of
Glofil-125. Present diagnostic procedures for measuring kidney function
include serum creatinine and creatinine clearance tests. These two tests are
the most commonly performed methods of measuring kidney function because of
their low cost, however both methods significantly overestimate kidney
function in the estimated 500,000 patients with severe renal disease. The use
of Glofil-125 has been established in published clinical studies as being a
more direct, true measure of kidney function yielding much more accurate
results than serum creatinine or creatinine clearance tests. This improved
accuracy can be essential to reliably monitoring disease progression and
intervention, as well as assessing renal impairment in its early and most
treatable stage, however, most patients do not require this degree of
accuracy in the estimation of renal function.
In addition, the serum creatinine test involves blood draws and an
average time of three to four hours to complete, and the creatinine clearance
test involves 24-hour urine collection, followed by an additional three to
four hours of analysis time. Cypros is currently funding a clinical study of
Glofil-125 at the University of Texas Southwest Medical Center to determine
whether the Glofil-125 test can be shortened to 45 minutes. If the study is
successful, Cypros believes that use of Glofil-125 may increase.
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The biggest impediments to the growth in the sales of Glofil-125 is
the current size of Cypros' sales and marketing organization, the loss of
reimbursement for the test or the inability of Cypros to include Glofil in
the protocols of other clinical studies of renal therapeutics.
Inulin, which is sold by Cypros, and (99m)Tc-DTPA, which is not sold
by Cypros and must be prepared onsite by the end user, are alternative agents
for GFR measurement. However, the preparation and use of these two drugs is
difficult and they do not provide the practical advantages of Glofil-125.
Cypros is aware of no new diagnostic drugs being introduced or in development
that would be a competitive threat to Glofil-125.
ETHAMOLIN. Approximately 75,000 people in the United States have or
are approaching end stage liver disease. Liver disease, known as hepatic
cirrhosis, results in approximately 25,000 deaths annually and ranks ninth
among the leading causes of death. Hepatic cirrhosis promotes the formation
of esophageal varices through development of portal hypertension. When
intravenous blood pressure rises, these varicosities may cause a life
threatening form of upper gastrointestinal hemorrhage associated with a
35-50% mortality rate. At least 50,000 patients in the United States either
have actively bleeding esophageal varices or are at imminent risk of bleeding.
Early and effective treatment of esophageal varices to achieve
hemostasis is essential to the outcome of the bleeding patient. The most
common pharmaceutical treatment protocol involves the injection of a
sclerosing agent into the varix, achieving clot formation and obliteration of
the varix. This form of hemostasis is called sclerotherapy and usually
requires multiple treatment sessions. Ethamolin is the only sclerotherapy
agent cleared by the FDA for the treatment of bleeding esophageal varices and
Cypros believes that it is the market leader in this therapeutic category.
During the fiscal year ended July 31, 1999, Cypros recorded gross sales from
this product of $1,675,091 and two wholesalers accounted for 66% of these
sales and 41% of total sales. However, there is strong competition from
another drug, Sotradecol, which is being prescribed off-label, and from band
ligation, a form of surgery.
THE DERMAFLO TECHNOLOGY AND THE NEOFLO AND SILDAFLO PRODUCTS. In
November 1997, Cypros acquired the Dermaflo technology, a patented topical
drug delivery system, from Enquay, Inc. for a combination of cash, a
promissory note and royalties on net sales. The technology is a polymer
matrix system that can store a variety of different drugs and release them at
a desired rate over an extended period of time so that optimal clinical
response is obtained. Included in the assets acquired were two FDA-approved
products, Neoflo and Sildaflo, and a substantial amount of manufacturing
equipment.
Neoflo and Sildaflo, the first two products that Cypros expects to
launch using the Dermaflo technology address consumer needs in both the
over-the-counter and acute care markets. Neoflo is a dressing that
incorporates the triple antibiotic, polymyxin B sulfate, bacitracin zinc and
neomycin sulfate (Neosporin). Cypros intends to manufacture Neoflo in various
sizes, including small sizes to address the over-the-counter market through
NutraMax, a distributor, and larger sizes for the hospital market. Sildaflo
is a dressing that incorporates silver
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sulfadiazine, the most widely-used topical antimicrobial for the treatment of
burns. Cypros intends to manufacture Sildaflo in various large sizes to
address the hospital/burn clinic market. Initially, Cypros intends to market
these products with its own sales force.
Cypros believes the extended-release nature of the technology could
result in decreased treatment-related costs, increased patient compliance and
reduced pain and discomfort, resulting in a marketing advantage for the
products sold using the Dermaflo technology. While it is difficult to
determine the market potential of Neoflo and Sildaflo, it is known that
silver sulfadiazine and the triple antibiotic in their currently marketed
non-extended release forms, have combined sales of approximately $60 million
in the United States in these forms.
Cypros is currently manufacturing the NutraMax product in temporary
space in a facility in Lee's Summit, Missouri. At the same time, it has just
completed improvements to permanent space in the same facility, has installed
large-scale equipment in that space and is validating the equipment, cleaning
methods and analytical methods. In early 2000, Cypros expects to file an
additional supplement to its New Drug Application, commonly referred to as an
NDA, for Sildaflo covering the establishment of the permanent space, which
will require a state license and trigger an FDA inspection of the facility.
If and when the permanent space is approved by the FDA, and other changes to
the Sildaflo lab are finalized, Cypros intends to manufacture Neoflo,
Sildaflo and all future products incorporating the Dermaflo technology in the
permanent space.
CYTOPROTECTION MARKET OPPORTUNITIES
Cytoprotective drugs for acute care settings that treat ischemic
injury are not currently available and the market opportunities for Cypros
may be significant, potentially totalling several million cases annually in
the United States. Cypros believes that its drugs, if approved, may reduce
the number of fatalities associated with ischemia-related disorders and also
reduce the high cost of rehabilitation and ongoing care in the United States
of these victims.
Cypros' drugs are administered intravenously which allows for faster
delivery to the ischemic tissue. In order to ensure early interventions, they
are intended to be standard components in hospital emergency rooms, operating
theater suites, endoscopy suites and radiology suites. A chemically
demonstrated lack of acute toxicity should suit them for this purpose.
CIRCULATORY SYSTEM ISCHEMIA. Cardiovascular ischemia can result in a
spectrum of clinically significant events ranging from angina (pain) to heart
attack and sudden death. In addition to the numerous trauma or disease
related causes of ischemia, there are a variety of voluntary surgical
procedures which result in ischemia to vital organ systems. Procedures such
as coronary artery bypass grafting surgery, which are performed to improve
blood flow to the heart, induce temporary ischemia which can result in tissue
damage. Cordox, if approved, may be a part of the treatment regimen for these
disorders. Some of these conditions or procedures represent potential
opportunities for use of Cypros' drugs to reduce the tissue damage known to
be associated with them.
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Cerebrovascular ischemia (stroke) can result in temporary loss of
consciousness, permanent behavioral and neurologic impairment, coma and death.
Traumatic injury to the head is caused by accidents, near drownings and similar
incidents. The resultant medical problems are, in large part, caused by ischemia
to the brain. The biochemical processes associated with stroke and head trauma
are thought to be very similar; thus, Cypros believes drugs developed for one
indication may be useful for the other.
SICKLE CELL ANEMIA. Sickle cell anemia is an autosomal recessive
genetic disease carried by about 8% of African-Americans and a lesser number of
people native to the Mediterranean region. Approximately 72,000
African-Americans suffer from the most severe form, known as homozygous, of the
disease, where the red blood cells form sickle shapes that can occlude
capillaries and result in severe and disseminated ischemia, termed
vaso-occlusive events, or VOEs. Most sickle cell patients undergo multiple VOEs
each year. Cordox has been shown pre-clinically to help reduce this sickling
process and to reduce pain in sickle cell disease patients. Cypros is evaluating
Cordox in a Phase III trial of sickle cell anemia crisis patients. The FDA has
granted orphan drug designation to Cordox in this indication.
The Pathology Of Ischemia
METABOLIC ASPECTS (ALL TISSUES). All living animal cells require
glucose and oxygen to survive, both of which are supplied to tissues by the
blood. Glucose is transformed into carbon dioxide and water with the resultant
formation of ATP. ATP is the universal fuel hich is required to keep the cell
alive. During and after ischemia, the decrease in cellular ATP levels damages
the cell and, Cypros believes, results in the toxic ischemic cascade, a myriad
of cell-damaging processes discussed below which cause further cell damage.
ATP generation occurs in two phases. The first phase, called glycolysis
or anaerobic metabolism, does not require oxygen. The second phase, called
aerobic metabolism or the Krebs cycle, requires oxygen and occurs in
mitochondria. Glycolysis is a means of producing cellular energy in ischemic
conditions, and therefore, represents the body's natural defense against
ischemic damage. For this reason, the facilitation of glycolysis is of interest
therapeutically in the prevention of ischemic damage to tissues and organs. When
pyruvic acid builds up during ischemia due to the inability of aerobic
metabolism to utilize it, an enzyme converts it to lactic acid which blocks
glycolysis. The therapeutic principle underlying Cordox and Ceresine is to
facilitate glycolysis during and after ischemia so the cell continues to produce
ATP and the toxic ischemic cascade is pre-empted or reversed. Specifically,
Cordox bypasses the lactic acid block and does not need to be energized by ATP
to be metabolized. Ceresine reduces ischemia induced lactic acid accumulation by
removing the cause of the metabolic block, and therefore, allows energy
metabolism to continue.
EXCITOTOXICITY (NERVE TISSUE). The destructive impact of ATP depletion
in nerve tissue is further complicated by the over-production in nerve cells of
various excitatory amino acids, chemicals that transmit nerve impulses from one
nerve cell to another. The over-production and release of excitatory amino
acids, predominately glutamate and aspartate, by nerve cells exposed
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to ischemia over-stimulates adjacent postsynaptic nerve cells, causing them
in time to succumb to metabolic exhaustion and cell death. This
ischemia-induced process, called delayed excitotoxicity, is associated with a
number of acute neurologic disorders, which include stroke and traumatic head
injury, and chronic neurologic disorders, which include Alzheimer's,
Parkinson's Disease and Amyotrophic Lateral Sclerosis. Controlling delayed
excitotoxicity by blocking the postsynaptic excitatory amino acid receptors
has recently attracted the attention of both academic and pharmaceutical
scientists. To date, the drugs in development that act by this mechanism have
considerable side effects and only block selected receptor subtypes,
therefore only dealing with part of the problem since all receptor subtypes
appear to cause damage.
Recent evidence has shown that specific presynaptic channels, neuronal
calcium channels, regulate the release of neurotransmitters in nerve cells.
Cypros has shown that compounds which block excessive excitatory amino acid
neurotransmitter release from nerve cells greatly reduce excitotoxicity and
post-ischemic tissue damage in animal models of stroke and head trauma. Cypros
is seeking to develop drugs that specifically block neuronal calcium channels
and therefore, if successful, would block the excitotoxic process and reduce the
resultant cell damage. These drugs are believed to have a more comprehensive
effect on excitotoxicity than the specific postsynaptic excitatory amino acid
receptor blockers, since they will reduce the stimulation of all and not just
some excitatory amino acid receptors.
Cypros has also shown in vitro that adenosine, a natural compound, has
cytoprotective properties. Cypros is seeking to develop a series of drugs,
called adenosine metabolism inhibitors, which, if successful, would augment
adenosine levels in ischemic tissue and have cytoprotective effects in both
brain and heart tissue.
Additionally, Cypros is developing a novel series of compounds which
inhibit the release of excitatory amino acid, especially glutamate, from glial
cells in the brain.
THE TOXIC ISCHEMIC CASCADE. Ischemia-induced cell damage triggers a
number of processes which cause further damage to each affected cell and its
surrounding cells. This myriad of destructive processes is facilitated by
reperfusion injury, which occurs after blood flow is re-established. A
traumatized, ATP-depleted cell enters into the toxic ischemic cascade, resulting
in the release of a host of toxic agents, including damaging reactive chemicals
called free radicals, as well as other molecules that are products of cell
membrane breakdown, all of which damage cells. Excessive intracellular calcium
buildup is also an element of the toxic ischemic cascade and also triggers a
host of other damaging processes, such as activation of proteolytic enzymes
which break down proteins and digest cells and activation of protein kinases
which regulate cell metabolism. The traumatized cell also releases agents which
stimulate the immune system, activating various blood cells, such as neutrophils
and macrophages which actually eliminate the cell affected by ischemia. Rather
than target each of these myriad events, Cypros' drugs, Cordox and Ceresine,
address ATP replenishment so that the cell can correct the ischemic cascade
naturally.
There are currently no known FDA-approved cytoprotective drugs. Those
under development are, to Cypros' knowledge, primarily aimed at specific
elements of the toxic
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ischemic cascade. Cypros believes that its approach to cytoprotective drug
development is unique in that it seeks to pre-empt or reverse the entire
cascade by decreasing the initial metabolic trauma which triggers ATP
depletion. Cypros believes that this approach is preferable to treating
specific elements of the cascade, since it more comprehensively addresses the
underlying pathology and should therefore result in more efficacious therapy.
CARDIOVASCULAR AND CEREBROVASCULAR ISCHEMIA DRUGS IN DEVELOPMENT--THE METABOLISM
PROGRAM
Cypros has started a Phase III clinical trial on Cordox in sickle cell
crisis patients and has received orphan drug designation for Cordox in this
indication. Cypros has also released substantial amounts of data from its heart
surgery trial of Cordox and its traumatic head injury trial of Ceresine and may
consider additional trials in both of these indications in the future.
CORDOX. Cordox is a small phophoryllated sugar that Cypros believes
stimulates and maintains glycolysis in cells undergoing ischemia by
circumventing the ischemia-induced blockage of this process based on extensive
pre-clinical and mechanistic data. The drug also appears to inhibit various
aspects of immune system activation which underlie reperfusion injury. Cypros
has licensed or obtained several issued U.S. patents which cover the use of
Cordox in several acute ischemic indications and a U.S. patent on a novel
formulation of Cordox.
There are numerous published U.S. and foreign clinical studies with
Cordox conducted by others, where more than 500 patients were administered the
drug, indicating that Cordox is well tolerated in humans with little or no side
effects. These studies indicate that the drug improves heart function and
recovery in various ischemic situations where the heart is injured. In addition,
317 patients have participated in the four Phase II trials of Cordox under
Cypros' IND and the drug continues to be well tolerated.
A total of 125 coronary artery bypass grafting surgery patients
participated in Cypros' double-blind, placebo-controlled Phase II trial
conducted in one hospital in the United Kingdom, and the data released
demonstrates that in patients receiving the active drug, Cordox (1) has a
cardioprotective effect on heart muscle, (2) improves key parameters of heart
function, including cardiac output, left ventricular stroke work index and
cardiac index and (3) reduces the need for inotrope support post-operatively in
the intensive care unit, or ICU, and results in shorter patient stays in the
ICU.
In October 1997, Cypros released positive data from a 47-patient
double-blind, placebo-controlled, dose-ranging Phase II clinical trial with
Cordox in sickle cell anemia crisis patients showing that the drug significantly
reduced pain during crisis using two different measures of pain, the visual
analog scale and the categorical assessment scale.
CERESINE. Ceresine is also a small non-peptide molecule which acts on
glycolysis at a different site from Cordox. Cypros has licensed or obtained two
issued U.S. patents covering the use of Ceresine in cerebral ischemia and
recently received orphan drug designation for Ceresine in this indication.
Cypros believes that Ceresine stimulates a specific enzyme which is present in
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the membrane of mitochondria that removes a precursor of lactic acid, known as
pyruvic acid, from the cytoplasm of the cell by transporting it into the
mitochondria and converting it to acetyl coA. This results in a reduction of
lactic acid in the cell. Increased post-ischemia accumulation of lactic acid is
a major causal factor in the cessation of glycolysis, the resultant decrease in
cellular ATP levels and eventual cell death. Numerous studies have shown that
Ceresine reduces post-ischemia lactic acid levels in humans subjected to various
traumatic events which would otherwise have resulted in increased lactic acid or
lactic acidosis.
Ceresine has been employed by clinical investigators in patients on an
experimental basis for the intravenous treatment of lactic acidosis. Published
clinical studies and Cypros' own Phase I data have established that Ceresine
reduces serum lactic acid and exhibited no serious side effects at the dose
levels in that study. It has also been shown in human studies to permeate the
blood-brain barrier and to reduce brain lactic acid levels in congenital lactic
acidosis patients.
Cypros' Phase II clinical trial data on Ceresine in closed head injury
patients showed that the drug crosses the blood-brain barrier at high levels and
very quickly after crossing reduces brain lactate levels substantially. This
effect lasted for at least 12 hours. Serum lactate levels were also reduced
substantially in the drug-treated group. In July 1998, the FDA granted expedited
development status to Ceresine in head injury under Subpart E of the FDA
regulations. In addition, Cypros has completed enrollment in a Phase II clinical
trial on Ceresine in stroke patients. Approximately 100 patients participated in
the Phase I and two Phase II trials of Ceresine under Cypros' IND and the drug
was well tolerated.
ISCHEMIA DRUGS IN PRE-CLINICAL RESEARCH--THE METABOLISM AND EXCITOTOXICITY
PROGRAMS
Cypros is also seeking to develop new drugs for the treatment of
ischemia related disorders involving neurological damage, such as stroke,
traumatic head injury, epilepsy and chronic neurodegenerative disorders such as
Alzheimer's and Parkinson's disease. These pre-clinical research programs are
focused on either the metabolic or the excitotoxicity aspects of ischemia
therapeutics, and involve the chemical modification of identified lead molecules
that regulate adenosine metabolism, various calcium ion channels on neuronal
cells and chloride channels on glial cells.
ADENOSINE METABOLISM INHIBITOR PROGRAM. Cypros is seeking to develop
CPC-405 and some of its derivatives, which are novel small molecules with
demonstrated potency as inhibitors of adenosine metabolism. Adenosine is a
natural cytoprotective agent which is generated in ischemic tissue and serves to
protect cells from a variety of traumatic situations. Naturally generated
adenosine is rapidly degraded by enzymes. Cypros expects that CPC-405 will
increase the level of adenosine in tissue traumatized by ischemia and increase
its cytoprotective effect. A U.S. patent has been issued on the composition of
the CPC-400 series of drugs Cypros has licensed an additional U.S. patent from
the University of Rhode Island which covers the composition of additional
CPC-400 series compounds.
NEURONAL CALCIUM CHANNEL BLOCKER PROGRAM. Cypros believes that the
therapeutic approach to excitotoxicity currently attracting the most commercial
attention involves the
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<PAGE>
development of specific excitatory amino acid receptor blockers which inhibit
the excessive postsynaptic excitatory amino acid action that is triggered by
ischemia. Although these excitatory amino acid receptor blockers have
neuroprotective properties in cell culture and animal models of ischemia,
their usefulness is hampered by toxic side effects associated with the
blockage of excitatory amino acid receptors and by the fact that there are
multiple excitatory amino acid receptor subtypes, all of which appear to
cause post-ischemic damage when they are excessively stimulated. Also, a
number of these excitatory amino acid receptor blockers have failed in
various stroke and head injury clinical trials.
Cypros is seeking to develop new classes of drugs that are designed to
remedy excitotoxicity in a potentially more complete and effective manner by
reducing excitatory amino acid release from nerve cells and reducing the
over-stimulation of all excitatory amino acid receptor subtypes. This
pre-synaptic approach to neuroprotection is viewed by Cypros as potentially more
effective than blocking receptors post-synaptically.
Specifically, Cypros is seeking to develop separate classes of
small-molecule drugs that act as neuronal calcium channel blockers, which it has
labelled as the CPC-300, CPC-800 and CPC-8000 series and has synthesized over
100 compounds in this series. If successful, these drugs would have the ability
to normalize or decrease excitatory amino acid release and comprehensively
reduce the over-stimulation of excitatory amino acid receptors. Prototype agents
such as CPC-8027 have shown the desired effect of acting at the neuronal calcium
channels, which controls excitatory amino acid release. Cypros has demonstrated
neuroprotection in several pre-clinical models with CPC-304, CPC-317, CPC-877
and CPC-8027 and intends to further modify them structurally with the goal of
improved drug delivery to the central nervous system. These modifications will
require additional pre-clinical testing.
GLIAL CHLORIDE CHANNEL BLOCKERS. Cypros has synthesized a series of
agents designated as the CPC-700 series. These agents act to inhibit glial cell
swelling in the brain which occurs after injury in disorders such as stroke and
head injury. These agents inhibit the excess release of excitatory amino acids
from glial cells and have demonstrated neuroprotective properties. Cypros is
currently filing patents on these compounds and recently received a two-year,
$750,000 federal grant to fund additional studies of these compounds.
LICENSES
The principal sources of Cypros' existing licenses are:
ANGEL K. MARKOV, M.D.-CORDOX. Cypros has obtained an exclusive license
from Dr. Markov to four U.S. patents covering the use of Cordox in a number of
ischemic indications. As part of the license, Cypros is funding clinical
development in Dr. Markov's laboratories at the University of Mississippi
Medical Center. In this regard, Cypros has undertaken development obligations
which must be met in order to maintain this license in force. In the event
Cypros breaches the license agreement, such as by not meeting specific
milestones within the specified time periods or by failing to expend specific
amounts in connection with clinical trials within specified time periods, the
license will automatically terminate and all rights under the license
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<PAGE>
and information acquired by Cypros concerning any products based on the licensed
technology will revert to Dr. Markov. In the event of termination, Cypros will
retain the rights to market products for which sales occurred within the
calendar year prior to the termination, and all other products and information
related to those products based on the licensed technology will revert to Dr.
Markov. To date, Cypros has met all milestones in the agreement.
UNIVERSITY OF CINCINNATI-CERESINE. Cypros has an exclusive license from
the University of Cincinnati to a U.S. patent covering the use of Ceresine in
cerebral ischemia. Cypros has undertaken specific development obligations which
must be met in order to maintain its rights in force. If specific milestones are
not met by Cypros within specified time periods, the University of Cincinnati
may, in its sole discretion, elect to continue the agreement, negotiate in good
faith with Cypros to modify the agreement or terminate the agreement upon 30
days' written notice in which event all rights under the license would revert to
the University of Cincinnati. To date, Cypros has met all of these milestones.
MANUFACTURING
Cypros does not currently manufacture any of its acquired products or
its products in development, except for the NutraMax product. The finished forms
of Glofil, Inulin and Ethamolin for sale and Cordox and Ceresine for clinical
trials are manufactured for Cypros under contract by established manufacturers
and alternative manufacturers have been qualified for Cordox and Ceresine. In
the case of Inulin, Cordox and Ceresine, Cypros is responsible for obtaining the
bulk drug from a third party and delivering it to the finished goods
manufacturer. In the case of Inulin and Ceresine, Cypros has qualified
alternative sources of supply for the bulk drug. There can be no assurance that
any of Cypros' bulk or finished goods contract manufacturers will continue to
meet Cypros's requirements for quality, quantity and timeliness or the FDA's
current good manufacturing practice requirements or that Cypros would be able to
find a substitute bulk manufacturer for Cordox, or a substitute finished goods
manufacturer for Inulin, Glofil and Ethamolin or any other of its products which
would meet these requirements or that lots will not have to be recalled with the
attendant financial consequences to Cypros.
In addition, the Dermaflo product line is Cypros' first attempt at
in-house manufacturing of any of its products and there can be no assurance
that the Lee's Summit facility will be completed, or when completed that it
will meet the FDA's current good manufacturing practice requirements and be
approved by the FDA, or when approved will have the capacity to meet demand.
Cypros began manufacturing the NutraMax product during fiscal 1999 in
temporary space in the same complex housing its Lee's Summit facility. Cypros
also faces risks inherent in the operation of a single facility for the
manufacture of Dermaflo products, including risks of unforeseen plan
shutdowns due to personnel, equipment or other factors. Any delay in the
manufacturing of Dermaflo products could result in delays of product
shipments, which could have a material adverse effect on Cypros' business,
financial condition and results of operations. Further, Cypros is relying on
third parties to supply it with the active ingredients for the Neoflo and
Sildaflo products in bulk form, and there can be no assurance that these
third parties will not cause delays in the manufacture or shipments of these
Dermaflo products.
13
<PAGE>
Cypros' limited manufacturing experience and its dependence upon others
for the manufacture of bulk or finished forms of its products may adversely
affect the future profit margin, if any, on the sale of those products and
Cypros' ability to develop and deliver products on a timely and competitive
basis. In the event Cypros is unable to manufacture its products, directly or
indirectly through others, on commercially acceptable terms, it may not be able
to commercialize its products as planned.
SALES AND MARKETING
Cypros currently has a Vice President of Sales and Marketing, a product
manager, a marketing administrator, a customer service representative, and seven
field sales representatives for Glofil, Inulin and Ethamolin and is hiring
additional sales representatives. Cypros believes that it will be able to serve
the hospital market in North America with a 50 to 70 person sales and marketing
staff. There can be no assurance that Cypros will be able to establish sales and
distribution capabilities or be successful in gaining market acceptance for its
drugs.
COMPETITION
Cypros faces competition from specialized biotechnology companies,
pharmaceutical companies of all sizes, academic institutions, government
agencies and public and private research organizations, many of which have
extensive resources and experience in research and development, clinical
testing, manufacturing, regulatory affairs, distribution and marketing. Some of
these entities have significant research activities in areas upon which Cypros'
programs focus. Many of Cypros' competitors possess substantially greater
research and development, financial, technical, marketing and human resources
than Cypros and may be in a better position to develop, manufacture and market
drugs. These entities may discover and develop drugs competitive with or
superior to those developed by Cypros.
GOVERNMENT REGULATION
The manufacture and sale of Cypros' products are subject to extensive
regulation by United States and foreign governmental authorities prior to
commercialization. In particular, drugs are subject to rigorous preclinical and
clinical testing and other approval requirements by the FDA, state and local
authorities and comparable foreign regulatory authorities. The process for
obtaining the required regulatory approvals from the FDA and other regulatory
authorities takes many years and is very expensive. There can be no assurance
that any product developed by Cypros will prove to meet all of the applicable
standards to receive marketing approval in the United States or abroad. There
can be no assurance that these approvals will be granted on a timely basis, if
at all. Delays and costs in obtaining these approvals and the subsequent
compliance with applicable federal, state and local statutes and regulations
could materially adversely affect Cypros' ability to commercialize its products
and its ability to receive sales revenues.
The research activities required by the FDA before a drug can be
approved for marketing begin with extensive preclinical animal and laboratory
testing. The tests include laboratory
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<PAGE>
evaluation of product chemistry and animal studies for the safety and
efficacy of the drug. The results of these studies are submitted to the FDA
as part of an IND which is reviewed by the FDA prior to beginning clinical
trials, first in normal volunteers and then in patients with the disease.
Clinical trials involve the administration of the investigational new
drug to healthy volunteers or to patients, under the supervision of a qualified
physician/principal investigator. Clinical trials are conducted in accordance
with governmental statutes, regulations and guidelines and under protocols that
detail the objectives of the study, the parameters to be used to monitor safety
and the efficacy criteria to be evaluated. Each protocol must be submitted to
the FDA as part of the IND. Further, each clinical study must be evaluated by an
independent Institutional Review Board, referred to as the IRB, at the
institution at which the study will be conducted. The IRB considers, among other
things, ethical factors, the safety of human subjects and the possible liability
of the institution, and approves the informed consent to be obtained from all
subjects and patients in the clinical trials. Cypros will have to monitor the
conduct of clinical investigators in performing clinical trials and their
compliance with FDA requirements.
Clinical trials are typically conducted in three sequential phases
(Phase I, Phase II and Phase III), but these phases may overlap. There can be no
assurance that Phase I, Phase II or Phase III testing will be completed
successfully within any specified time period, if at all, with respect to any of
Cypros' drugs. Furthermore, Cypros or the FDA may suspend clinical trials at any
time if it is felt that the subjects or patients are being exposed to an
unacceptable health risk or that the investigational product lacks any
demonstrable efficacy.
The results of the pharmaceutical development, preclinical studies and
clinical studies are submitted to the FDA in the form of an NDA for approval of
the marketing and commercial shipment of the drug. The testing and approval
process is likely to require substantial time (frequently five to eight years or
more) and expense and there can be no assurance that any approval will be
granted on a timely basis, if at all. The FDA may deny an NDA if applicable
regulatory criteria are not satisfied, require additional testing or
information, or require post-marketing testing and surveillance to monitor the
safety of Cypros' drugs. Notwithstanding the submission of the NDA and any
additional testing data or information, the FDA may ultimately decide that the
application does not satisfy its regulatory criteria for approval. Finally, drug
approvals may be withdrawn if compliance with labeling and current good
manufacturing practices regulatory standards is not maintained or if unexpected
safety problems occur following initial marketing.
Among the conditions for clinical studies and NDA approval is the
requirement that the prospective manufacturer's quality control and
manufacturing procedures conform to cGMP, which must be followed at all times.
In complying with standards set forth in these regulations, manufacturers must
continue to expend time, monies and effort in the area of production and quality
control to ensure full technical compliance.
Also, the Prescription Drug Act of 1997 requires that companies engaged
in pharmaceutical development, such as Cypros, pay user fees of at least
$100,000 upon submission
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<PAGE>
of an NDA. In addition to regulations enforced by the FDA, Cypros is subject
to regulation under the Occupational Safety and Health Act, the Environmental
Protection Act, the Toxic Substances Control Act, the Resource Conservation
and Recovery Act and other present and potential future federal, state or
local regulations. For marketing outside the United States, Cypros is subject
to foreign regulatory requirements governing human clinical trials and
marketing approval for drugs. The requirements governing the conduct of
clinical trials, product licensing, pricing and reimbursement vary widely
from country to country.
PATENTS AND PROPRIETARY RIGHTS
Cypros' success may depend in large measure upon its ability to
obtain patent protection for its products, maintain confidentiality and
operate without infringing upon the proprietary rights of third parties.
Cypros currently owns or has licensed a total of 13 issued and 5 allowed U.S
and foreign patents covering Cordox and Ceresine in a variety of ischemic
disorders. It also holds an exclusive license to 5 U.S. and foreign patents
on the Dermaflo technology.
In addition to the patents issued and allowed as mentioned above,
Cypros has also filed several other patent applications in the United States and
abroad on its various products and expects to file additional applications in
the future. There can be no assurance that any of these patent applications will
be approved, except where claims have already been examined and allowed, or that
Cypros will develop additional proprietary products that are patentable. Nor can
there be any assurance that any patents issued to Cypros or its licensors will
provide Cypros with any competitive advantages or will not be challenged by
third parties or that patents issued to others will not have an adverse effect
on the ability of Cypros to conduct its business. Furthermore, because patent
applications in the United States are maintained in secrecy until issue, and
because publication of discoveries in the scientific and patent literature often
lag behind actual discoveries, Cypros cannot be certain that it was the first
chronologically to make the inventions covered by each of its pending U.S.
patent applications, or that it was the first to file patent applications for
such inventions. In the event that a third party has also filed a U.S. patent
application for any of its inventions, Cypros may have to participate in
interference proceedings declared by the United States Patent and Trademark
Office to determine priority of the invention, which could result in substantial
cost to Cypros, even if the eventual outcome is favorable to Cypros. In
addition, there can be no assurance that Cypros' U.S. patents, including those
of its licensors, would be held valid by a court of law of competent
jurisdiction. If patents are issued to other companies that contain competitive
or conflicting claims which ultimately may be determined to be valid, there can
be no assurance that Cypros would be able to obtain a license to any of these
patents.
Under Title 35 of the United States Code, as amended by the General
Agreement on Tariffs and Trade implementing the Uruguay Round Agreement Act of
1994, commonly referred to as GATT, patents that issue from patent applications
filed prior to June 8, 1995 will enjoy a 17-year period of enforceability as
measured from the date of patent issue while those that issue from applications
filed on or after June 8, 1995 will enjoy a 20-year period of enforceability as
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<PAGE>
measured from the date the patent application was filed or the first claimed
priority date, whichever is earlier. Patents that issue from applications filed
on or after June 8, 1995 may be extended under the term extension provisions of
GATT for a period up to five years to compensate for any period of
enforceability lost due to interference proceedings, government secrecy orders
or appeals to the Board of Patent Appeals or the Federal Circuit.
Under the Drug Price Competition and Patent Term Restoration Act of
1984, including amendments implemented under GATT, the period of enforceability
of a first or basic product patent or use patent covering a drug may be extended
for up to five years to compensate the patent holder for the time required for
FDA regulatory review of the product. This law also establishes a period of time
following FDA approval of certain drug applications during which the FDA may not
accept or approve applications for similar or identical drugs from other
sponsors. Any extension under the Patent Term Restoration Act and any extension
under GATT are cumulative. There can be no assurance that Cypros will be able to
take advantage of the patent term extensions or marketing exclusivity provisions
of these laws. While Cypros cannot predict the effect that such changes will
have on its business, the adoption of such changes could have a material adverse
effect on Cypros' ability to protect its proprietary information and sustain the
commercial viability of its products. Furthermore, the possibility of shorter
terms of patent protection, combined with the lengthy FDA review process and
possibility of extensive delays in such process, could effectively further
reduce the term during which a marketed product could be protected by patents.
Cypros also relies on trade secrets and proprietary know-how. Cypros
has been and will continue to be required to disclose its trade secrets and
proprietary know-how to employees and consultants, potential corporate partners,
collaborators and contract manufacturers. Although Cypros seeks to protect its
trade secrets and proprietary know-how, in part by entering into confidentiality
agreements with such persons, there can be no assurance that these agreements
will not be breached, that Cypros would have adequate remedies for any breach or
that Cypros' trade secrets will not otherwise become known or be independently
discovered by competitors.
SCIENTIFIC AND OTHER PERSONNEL
As of October 26, 1999, Cypros had 45 full-time employees, eight of
whom hold Ph.D. degrees, two of whom also hold an M.D. degree and one of whom
holds a J.D. degree. Twelve of the full-time employees are employed in finance
and general administration, nine in clinical and regulatory affairs, eight in
quality control and quality assurance, four in Dermaflo manufacturing, three in
pre-clinical research and development, and nine in sales and marketing and
customer service. Cypros believes that it maintains good relations with its
employees.
ITEM 2. PROPERTIES
Cypros leases two buildings in Carlsbad, California at a total monthly
rental of $37,651, and 7,676 square feet in a building in Lee's Summit,
Missouri. All of Cypros' operations are located in 18,339 square feet of space
located at 2714 Loker Avenue West, except for the manufacturing facility for the
Dermaflo product line, which is located in the Missouri building.
17
<PAGE>
In April 1997, Cypros subleased its other building in Carlsbad located at
2732 Loker Avenue West to another pharmaceutical company.
Cypros has leases on two floors in the 2714 Loker Avenue West property,
one of which commenced in April 1996 and has a term of 69 months, and the other
of which commenced in November 1996 and has a term of 61 months. The lease on
the 2732 Loker Avenue West property commenced in December 1993 and has a term of
81 months. Both leases have clauses providing for rent increases at various
points in time during the terms of the leases. The subtenant's lease covers the
remainder of Cypros' original lease term plus a 36-month option, and the
subtenant's rental payments to Cypros exceed Cypros' rental payments to the
landlord. In addition, the sublease provides for annual rent increases. Under
the sublease, Cypros spent approximately $200,000 on tenant improvements to the
2732 Loker Avenue West, however, the net present value of the subtenant's rental
payments over the term of the sublease exceeds Cypros' lease costs and tenant
improvement costs.
Cypros leased the space in the Missouri building in December, 1998 and
began improving the space to meet its needs for manufacturing the Dermaflo
product line. Cypros has been paying monthly operating expenses on the space
since inception and will begin paying a monthly rental of $9,316 on the space in
May 2000.
ITEM 3. LEGAL PROCEEDINGS
In July 1998, Cypros was served with a complaint in the United States
Bankruptcy Court for the Southern District of New York by the Trustee for the
Liquidation of the Business of A.R. Baron & Co., Inc. and the Trustee of The
Baron Group, Inc., the parent of A.R. Baron. The complaint alleges that A.R.
Baron and the Baron Group made preferential or fraudulent transfers of funds to
Cypros prior to the commencement of bankruptcy proceedings involving A.R. Baron
and the Baron group. The Trustee is seeking return of the funds, totalling $3.2
million. Cypros believes that the Trustee's claims are unfounded and intends to
contest the allegations in the complaint vigorously. Cypros contends that the
transfers challenged by the Trustee relate to (1) the exercise by A.R. Baron in
1995 of unit purchase options issued to it in 1992 as part of its negotiated
compensation for underwriting the Cypros' initial public offering and (2) the
repayment by the Baron group of the principal and interest (at 12% per annum)
payments and loan extension fees related to collateralized loans made to it by
Cypros in 1995 and 1996.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of Cypros' security holders during
the fourth quarter of the fiscal year ended July 31, 1999.
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PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
The Common Stock of Cypros was quoted on the Nasdaq National Market
System under the symbol "CYPR" until January 1998. In January 1998, Cypros
was listed on the American Stock Exchange, Inc. under the symbol "CYP". The
Redeemable Class B Warrants of Cypros were also quoted on the Nasdaq National
Market System under the symbol "CYPRZ" until November 3, 1997, when they
expired.
The following table sets forth for the calendar quarters indicated, the
high and low sales prices of the Common Stock on the Nasdaq National Market
System and the American Stock Exchange, Inc., as reported in published
financial sources, for the periods that the Common Stock was quoted or listed.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
High Low
---- ---
<S> <C> <C>
YEAR ENDED JULY 31, 1999
First Quarter $3.88 $2.25
Second Quarter $4.19 $2.25
Third Quarter $3.19 $2.19
Fourth Quarter $2.69 $1.18
YEAR ENDED JULY 31, 1998
First Quarter $6.12 $3.75
Second Quarter $6.00 $3.81
Third Quarter $4.75 $3.50
Fourth Quarter $5.43 $3.37
- ----------------------------------------------------------------------------
</TABLE>
The last sales price of the Common Stock on October 26, 1999 was $1.313.
According to a survey of non-objecting beneficial owners as of August 20,
1999, there were 2,362 beneficial owners of the Common Stock.
Cypros has not paid any dividends since its inception and does not intend
to pay any dividends on its Common Stock in the foreseeable future. Cypros
did not sell any securities during the fourth quarter of fiscal 1999.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth certain financial data with respect to
Cypros. The selected financial data should be read in conjunction with the
Cypros' Financial Statements (including the Notes thereto) and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
appearing elsewhere in this Report.
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
-------------------------------------------------------------------------------
1995 1996 1997 1998 1999
-------------------------------------------------------------------------------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Net sales $ - $ 1,275 $ 2,428 $ 3,446 $ 2,518
Gross profit - 870 1,890 2,675 1,747
Total operating expenses 3,910 4,988 7,466 9,139 9,255
Loss from operations (3,910) (4,118) (5,576) (6,464) (7,508)
Other income (expense), net 797 1,028 (1,099) 891 724
Net loss (3,113) (3,090) (6,675) (5,573) (6,784)
Net loss per share - basic and
diluted (0.32) (0.27) (0.54) (0.37) (0.43)
Shares used in computing
net loss per share - basic
and diluted 9,860 11,518 12,303 15,187 15,712
</TABLE>
<TABLE>
<CAPTION>
AT JULY 31,
-------------------------------------------------------------------------------
BALANCE SHEET DATA: 1995 1996 1997 1998 1999
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(in thousands)
Cash, cash equivalents and
short-term investments $ 13,442 $15,997 $14,567 $ 13,444 $5,474
Investment grade securities,
non current portion - - - - 1,789
Property, plant and equipment, net 412 608 676 1,064 1,472
Purchased technology, net - 2,629 5,061 4,163 3,266
Working capital 12,934 15,384 13,076 13,378 7,050
Total assets 14,175 20,266 21,345 19,736 13,139
Long-term debt 195 6,624 4,176 217 147
Common stock 20,945 23,421 32,345 41,328 41,497
Accumulated deficit (7,392) (10,482) (17,157) (22,730) (29,514)
Total shareholders' equity 13,366 12,635 15,026 18,511 11,914
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE FOLLOWING
DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES, INCLUDING STATEMENTS REGARDING THE PERIOD OF TIME DURING WHICH
CYPROS' EXISTING CAPITAL RESOURCES AND INCOME FROM VARIOUS SOURCES WILL BE
ADEQUATE TO SATISFY ITS CAPITAL REQUIREMENTS. CYPROS' ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN. FACTORS THAT COULD CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DISCUSSED IN THIS SECTION, AS WELL AS IN THE SECTIONS ENTITLED "BUSINESS",
"LICENSES", "MANUFACTURING", "SALES AND MARKETING", "COMPETITION",
"GOVERNMENT REGULATION", "PATENTS AND PROPRIETARY RIGHTS", THOSE DISCUSSED IN
THE S-3 REGISTRATION STATEMENT FILE NO. 333-25661 FILED WITH U.S. SECURITIES
AND EXCHANGE COMMISSION, AS WELL AS THOSE DISCUSSED IN ANY DOCUMENTS
INCORPORATED BY REFERENCE HEREIN OR THEREIN.
OVERVIEW
Cypros was founded in 1990, commenced its research and development
activities in 1991, completed an initial public offering in November 1992,
commenced clinical trials in December 1994, acquired two FDA-cleared
products, Glofil and Inulin in August 1995, acquired a third FDA-cleared
product, Ethamolin, in November 1996, and acquired the Dermaflo technology in
November 1997. Cypros has sustained an accumulated deficit of $29,514,000
from inception through July 31, 1999. As Cypros does not expect not have
positive net operating cash flow for at least the next few years and its
research and development, clinical testing and regulatory, sales and
marketing and general and administrative expenses during these years will be
substantial and increasing, Cypros expects to incur increasing losses for the
foreseeable future.
RESULTS OF OPERATIONS
YEAR ENDED JULY 31, 1999 COMPARED TO YEAR ENDED JULY 31, 1998
During the fiscal year ended July 31, 1999, Cypros sustained a loss of
$6,784,000 (or $.43 per share, basic and diluted) compared to a loss of
$5,573,000 (or $.37 per share, basic and diluted) for the prior fiscal year.
Gross profit for fiscal 1999 of $1,747,000 on sales of Glofil, Inulin and
Ethamolin, plus other income of $724,000, resulting from interest, grant, and
rental income, were offset by $9,255,000 in expenses for sales and marketing,
general and administrative, clinical testing and regulatory, pre-clinical
research and development and depreciation. During the prior fiscal year, the
gross profit of $2,676,000 on sales of Ethamolin, Glofil and Inulin and other
income of $891,000 (principally interest income) was offset by $9,139,000 in
expenses for sales and marketing, general and administrative, clinical
testing and regulatory, and pre-clinical research and development as well as
depreciation and amortization.
Net sales declined during the fiscal year ended July 31, 1999,
principally due to increasing competition in the market served by Ethamolin
and the expected decline in Glofil sales volume due to the termination in the
third quarter of fiscal 1998 of a customer's two clinical
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<PAGE>
trials which required Glofil to be used as part of their protocols. The sales
decline also contributed to the 35% decrease in gross profit on sales, in
light of the significant level of fixed costs associated with the
manufacturing, release and stability testing of Inulin and Glofil.
In addition, during the fourth quarter of fiscal 1999, Cypros commenced
shipments of the topical triple antibiotic wound care product, incorporating
the Dermaflo technology, to its marketing partner, NutraMax Products, Inc.,
and thus, began introducing the related costs to the cost of sales. Cypros
expects that the sales to NutraMax will grow and be meaningful to Cypros'
revenues, but the gross margin on these sales will be minimal. Therefore,
until the capacity in Cypros' plant in Lee's Summit, Missouri is increased
and higher margin products, such as Neoflo and Sildaflo are launched, Cypros'
gross profit margin on sales and its gross profit margin as a percentage of
sales will be lower than historically reported for Ethamolin, Glofil and
Inulin.
Sales and marketing expense increased by 30% to $1,703,000 in fiscal 1999
from $1,310,000 in the prior fiscal year, principally due to the recruiting
cost of hiring additional personnel, additional costs associated with
promotional items and advertising, the cost of a clinical study of Glofil to
prove the viability of a 45-minute test, and regulatory consulting expense
related to these studies.
Pre-clinical research and development expense decreased by 33% to
$548,000 in fiscal 1999 from $822,000 in the prior fiscal year, principally
due to a decrease in staffing and the completion of specific contract studies.
Grant income declined 70% during fiscal 1999 to $51,000 from $170,000 in
fiscal 1998, as there was only one grant in process for much of fiscal 1999,
versus two during the prior fiscal year. During the last month of fiscal
1999, Cypros received a two-year, $750,000 federal grant or its glial
chloride channel blocker program.
Interest and other income decreased by 27% to $590,000 in fiscal 1999
from $809,000 in the prior fiscal year, principally because Cypros had a
larger investment portfolio during the prior fiscal year.
Rental income net of related expenses decreased by 52% to $83,000 in
fiscal 1999 from $171,000 in the prior fiscal year, principally due to the
increases in rent expense and amortization of tenant improvement expense in
fiscal 1999.
The amortization of the discount and costs on Cypros' mandatorily
convertible notes was completed in fiscal 1999, and therefore, Cypros did not
have these expenses in fiscal 1999.
YEAR ENDED JULY 31, 1998 COMPARED TO YEAR ENDED JULY 31, 1997
During the fiscal year ended July 31, 1998, Cypros sustained a loss of
$5,573,000 (or $.37 per share, basic and diluted) compared to a loss of
$6,675,000 (or $.54 per share, basic and diluted) for the prior fiscal year.
Gross profit for fiscal 1998 of $2,676,000 on sales of Glofil, Inulin and
Ethamolin, plus other income of $1,150,000, resulting from interest, grant, and
rental
22
<PAGE>
income, were offset by $9,139,000 in expenses for sales and marketing,
general and administrative, clinical testing and regulatory, pre-clinical
research and development and depreciation and amortization and $259,000 in
amortization of discount and costs on its mandatorily convertible notes.
During the prior fiscal year, the gross profit of $1,890,000 on sales of
Glofil and Inulin and other income of $761,000, principally interest income,
was offset by $7,465,000 in expenses for sales and marketing, general and
administrative, clinical testing and regulatory, and pre-clinical research
and development as well as depreciation and amortization and $1,860,000 in
amortization of discount and costs on the notes.
During the third quarter of fiscal 1998, Cypros announced that its
largest Glofil customer had informed Cypros that it would be terminating two
clinical trials which require Glofil to be used as part of their protocols.
Those trials have terminated and as stated previously in the third quarter,
Cypros expects the loss of sales to this customer to adversely affect Cypros'
sales going forward.
Sales and marketing expense increased by 31.8% to $1,310,000 in fiscal
1998 from $994,000 in the prior fiscal year, principally as a result of
additional promotional costs for Glofil and increased payroll expense from
pay raises and the hiring of additional personnel.
General and administrative expense increased by 35.5% to $3,247,000 in
fiscal 1998 from $2,396,000 in the prior fiscal year. Approximately 52% of
the increase was due to the expenditures related to acquiring the Dermaflo
technology and scaling up the manufacturing of the Dermaflo products. The
remainder of the increase reflected increased legal fees.
Clinical testing and regulatory expense increased by 28.2% to $2,521,000
in fiscal 1998 from $1,967,000 in the prior fiscal year, principally as the
result of increased staffing in the quality assurance/ quality control
department, increased use of data input and management, statistical and other
consultants to accelerate, finish and report on Cypros' various clinical
trials and certain toxicology studies performed during the period.
Pre-clinical research and development expense decreased by 20.4% to
$822,000 in fiscal 1998 from $1,032,000 in the prior fiscal year, principally
due to a decrease in staffing and the completion of specific contract studies.
Depreciation and amortization expense increased by 15.3% to $1,239,000 in
fiscal 1998 from $1,075,000 in the prior fiscal year, principally as a result
of the acquisition of Ethamolin during the prior year and the related
amortization of that purchased technology.
Sublease income increased from $0 to $171,062 in fiscal 1998 due to the
sublease of Cypros' former corporate headquarters. Interest and other income
increased by 22.2% to $809,000 in fiscal 1998 from $662,000 in the prior
fiscal year, principally due to the additional interest earned on the
proceeds from the exercise of Cypros' Redeemable Class B Warrants in November
1997. Research and grant income increased 71.7% to $170,000 in fiscal 1998
from $99,000 in the prior fiscal year, principally due to the receipt of two
additional federal grants during fiscal 1998 versus the receipt of one in the
prior fiscal year. The amortization of discount
23
<PAGE>
and costs on the notes decreased 86.1% to $259,000 in fiscal 1998 from
$1,860,000 in the prior fiscal year. The majority of the principal amount of
the notes was converted in the prior year, and thus, a larger amount of
amortization expense occurred. The remaining principal balance of the notes
was converted in fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
Cypros has principally funded its activities to date through various
issuances of equity securities, which have raised total net proceeds of $35.0
million, as well as product sales.
At July 31, 1999, Cypros had cash, cash equivalents and short-term
investments of $5,474,000 compared to $13,444,000, at July 31, 1998. At July
31, 1999, working capital was $5,262,000, compared to $13,378,000 at July 31,
1998. The decrease in both balance sheet items was principally due to cash
spent on operations for the year. In addition, working capital decreased $1.8
million due to the classification of some held-to-maturity investments as
non-current in fiscal 1999.
Cypros/Questcor expects that its cash needs will increase significantly
in future periods due to increased clinical testing activity and the growth
of sales and marketing expenses due to sales force expansion and the launch
of the Dermaflo product line. Assuming that the merger with RiboGene is
approved by the shareholders of both companies and is closed soon thereafter,
management believes that Cypros/Questcor's working capital will be sufficient
to fund operations for approximately 12 months dependent, in large part, on
(1) the total costs of the merger, (2) the resulting cost structure of the
combined companies, (3) the pace of patient enrollment in Cypros' sickle cell
anemia trial of Cordox, (4) the timing of the commencement of the Phase III
trial of RiboGene's compound, Emitasol, and the pace of patient enrollment,
(5) the results of clinical tests, (6) competing technological and market
developments, (7) the time and costs involved in obtaining regulatory
approvals and in obtaining, maintaining and enforcing patents, (8) the cost
of completing and validating the Dermaflo facility and the timing of Dermaflo
product launches and (9) the cost of future product acquisitions and their
resulting cash flows.
Cypros/Questcor expects to seek additional funds through public or private
equity financings, collaborations or from other sources. There can be no
assurance that funds can be obtained on desirable terms or at all.
Cypros/Questcor may seek to raise additional capital whenever conditions in
the financial markets are favorable, even if it does not have an
immediate need for additional cash at that time.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 problem is the result of computer applications being
written using two digits rather than four digits to define the applicable
year. Any of Cypros' computer applications and computer applications used by
any of Cypros' customers, collaborators and manufacturers that have
time-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in system failures or
miscalculations causing disruption of operations.
Cypros has modified or replaced portions of its software so that its
computer systems will
24
<PAGE>
function properly with respect to dates in the year 2000 and beyond. The
costs associated with these modifications totaled approximately $30,000,
which was funded from operations. Cypros believes that, with these
modifications to existing software and conversions to new software, the Year
2000 problem will not pose significant operational problems for its computer
systems. However, because of the many uncertainties associated with Year 2000
compliance issues, and because Cypros' assessment is necessarily based on
information from third-party customers, collaborators and manufacturers,
there can be no assurance that Cypros' assessment is correct or as to the
materiality or effect of any failure of the assessment to be correct.
Cypros has initiated a program to determine whether the computer
applications of its significant customers, collaborators and manufacturers
will be upgraded in a timely manner. Cypros has not completed its review and
it is unknown whether the computer applications of its customers,
collaborators and manufacturers will be Year 2000 compliant. Cypros has not
determined the extent to which any disruption in the computer applications of
third parties caused by the Year 2000 issues will affect Cypros' operations.
However, any disruptions in payments by customers or in the manufacture of
Cypros' products could have a material adverse effect upon Cypros' business,
financial condition and results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
Cypros invests its excess cash in interest-bearing investment-grade
securities. Cypros holds all the securities for their remaining term.
Therefore, Cypros believes that it is not subject to material interest rate
risks on its investments, other than the creditworthiness of the issuer of
the securities. In addition, Cypros does not utilize market risk sensitive
instruments, positions or transactions in any material fashion and does not
believe it maintains any material exposure to market risk sensitivities.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Financial Statements of Cypros and Report of Ernst & Young LLP,
Independent Auditors are filed as exhibits hereto, listed under Item 14 of
this Report and incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
25
<PAGE>
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Set forth below is certain information with respect to the directors and
executive officers of Cypros at October 26, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Paul J. Marangos, Ph.D. 52 Chairman of the Board, President and Chief
Executive Officer
Robert F. Allnutt 64 Director
Digby W. Barrios 62 Director
Virgil D. Thompson, J.D. 59 Director
Robert A. Vukovich, Ph.D. 56 Director
Zofia E. Dziewanowska, 59 Senior Vice President, Drug Development and
Ph.D, M.D. Regulatory Affairs
David W. Nassif, J.D. 45 Senior Vice President, Chief Financial Officer and
Secretary
John E. Lee 50 Vice President of Sales and Marketing
Brian W. Sullivan, Ph.D. 40 Vice President of Product Development
</TABLE>
Paul J. Marangos, Ph.D., has been President and Chairman of the
Board since he founded Cypros in November 1990. In February 1993, he became
Chief Executive Officer. From April 1988 to November 1990, he was Senior
Director of Research at Gensia Pharmaceuticals, Inc., a biotechnology
company. From 1980 to 1988, he was Chief of Neurochemistry in the Biological
Psychiatry Branch, National Institute of Mental Health. Dr. Marangos obtained
his doctorate in biochemistry from the University of Rhode Island and did his
post-doctoral work at the Roche Institute of Molecular Biology. He has
published 250 research papers and four books in the field of biochemistry and
pharmacology, the most recent of which is entitled EMERGING STRATEGIES IN
NEUROPROTECTION. He is a member of the Society for Neuroscience and the
American Academy for the Advancement of Science. Dr. Marangos is the founding
editor of the JOURNAL OF MOLECULAR NEUROSCIENCE published by Humana Press.
Robert F. Allnutt has been a director of Cypros since November 1996.
He has been a management consultant since February 1995. Mr. Allnutt served
as Executive Vice President of the Pharmaceutical Manufacturers Association
from May 1985 until February 1995. Mr. Allnutt is also a director of CORTEX
Pharmaceuticals, Inc., a biopharmaceutical company, and in February 1999 he
was appointed Chairman of the board of that company. Mr. Allnutt holds a
B.S. degree in Industrial Engineering from Virginia Polytechnic Institute and
a Juris Doctorate and L.L.M. degrees from George Washington University School
of Law.
26
<PAGE>
Digby W. Barrios has been a director of Cypros since February 1993.
He has been a management consultant since June 1992. Mr. Barrios held various
management positions at Boehringer Ingelheim Corporation, a manufacturer of
pharmaceuticals and fine chemicals, from January 1983 to June 1992, the last
five years of which he was President and Chief Executive Officer. He is also
a director of the following publicly-held companies: RiboGene, Inc., a
pharmaceutical company; Roberts Pharmaceutical Corporation, an international
pharmaceutical company which licenses, acquires, develops and commercializes
post-discovery drugs in selected therapeutical categories; Sepracor, Inc., a
developer of enhanced forms of existing, widely-sold pharmaceuticals; and
Sheffield Pharmaceuticals, Inc., an early-stage company involved in the
development of therapies, delivery systems and medical devices.
Virgil D. Thompson has been a director of Cypros since January 1996.
Mr. Thompson has been a member of the board of directors of Biotechnology
General Corporation, a publicly-held developer, manufacturer and marketer of
genetically-engineered and other products for human health care, since 1994,
and in May 1999 became President and Chief Operating Officer. He served as
the President and Chief Executive Officer and a member of the board of
directors of Cytel Corporation from January 1996 to May 1999. He was the
President and Chief Executive Officer of CIBUS Pharmaceutical, Inc. from
July 1994 to January 1996. Mr. Thompson was the President of Syntex
Laboratories, Inc. from August 1991 to August 1993 and an Executive Vice
President of Syntex from March 1986 to August 1991. Mr. Thompson is also a
director of Aradigm Corporation, a publicly-held developer of non-invasive
pulmonary drug delivery products.
Robert A. Vukovich, Ph.D., has been a director of Cypros since
August 1992. Dr. Vukovich has been the Chairman of the board of directors of
Roberts Pharmaceutical Corporation since 1983, and from 1983 until 1998, he
was also the President and Chief Executive Officer of Roberts Pharmaceutical
Corporation. Dr. Vukovich was the Director of the Division of Developmental
Therapeutics for Revlon Health Care Group from 1979 to 1983. Dr. Vukovich is
also a director of InKine Pharmaceuticals Company, Inc., a publicly-held
developer and acquirer of drugs to diagnose and treat cancer and autoimmune
diseases. Dr. Vukovich received a doctorate in pharmacology and pathology
from Jefferson Medical College, Philadelphia.
Zofia E. Dziewanowska, Ph.D., M.D., joined Cypros in October 1997 as
the Senior Vice President of Drug Development and Regulatory Affairs. From
May 1994 to October 1997, she was the Senior Vice President, Global Clinical
Affairs, of Genta Incorporated ("Genta"), a publicly-traded pharmaceutical
company principally engaged in developing a proprietary drug delivery
technology to develop oral controlled-release formulations. Prior to joining
Genta, Dr. Dziewanowska spent 17 years at Hoffman-La Roche in various
research and development positions, including Vice President and Director
of International Therapeutic Research and Medical Affairs Advisor.
Dr. Dziewanowska currently holds a faculty appointment at the Cornell
University Medical School. She also has held various positions in the
Pharmaceutical Research and Manufacturers Association of America, the most
recent being a Vice-Chairman of the Medical Section Steering Committee,
American Association of Pharmaceutical Physicians and the International
Federation of Pharmaceutical Medicine. Dr. Dziewanowska received an M.D. degree
27
<PAGE>
from the University of Warsaw Medical School and a Ph.D. in physiology from
the Institute of Immunology and Experimental Therapeutics, Polish Academy of
Science.
David W. Nassif, J.D., joined the Company in August 1993 as Vice
President, Chief Financial Officer and Secretary, and was promoted to Senior
Vice President in September 1997. From January 1993 to August 1993, he was a
consultant to various public and private companies in the areas of capital
raising, mergers and acquisitions, investor relations and securities law
compliance. From July 1992 to January 1993, he was the Vice President, Chief
Financial Officer and Assistant Secretary of 999, Inc., a diversified
manufacturing and environmental services company. From December 1987 to July
1992, he was the Vice President and Assistant Secretary of Showscan
Corporation, a technology company. Mr. Nassif holds honors finance,
management information systems and law degrees from the University of
Virginia.
John E. Lee joined Cypros in March 1999 as Vice President of Sales
and Marketing. From January 1998 to March 1999, Mr. Lee was a consultant to
various public and private pharmaceutical and diagnostic companies in the
areas of product assessment and acquisition, capital raising and organizational
design. From July 1996 to January 1998 he was employed as Vice President of
Commercial Development at Unimed Pharmaceutical, a developer and marketer of
niche based pharmaceutical products for AIDS/HIV, Hematology, Oncology, and
Infectious Disease. Mr. Lee was a principal with The Alexander Group, Inc., a
healthcare consulting firm from September 1992 through January 1996. From
March 1975 through September 1992, Mr. Lee held numerous positions of
increasing responsibility with G. D. Searle, division of Monsanto, including
field sales management, product management, sales director, and most
recently, Senior Director U.S. Operations. Mr. Lee holds a B.A. in Banking
and Finance from the University of North Texas.
Brian W. Sullivan, Ph.D., joined the Company in April 1994 as
Associate Director, Chemistry, was promoted to Director of Pharmaceutical
Chemistry in November 1995 and to Vice President of Product Development in
September 1998. From 1985 to April 1994, Dr. Sullivan was employed at
Hybritech, Inc., a developer, manufacturer and marketer of in vitro
diagnostic products; first as Research Scientist from 1985 to 1991 and then
as a Scientific Investigator from 1991 to 1994. Dr. Sullivan holds a B.A. in
Chemistry and a Ph.D. in Marine Natural Products Chemistry from the
University of California, San Diego.
28
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The following table provides the compensation paid by Cypros to its
Chief Executive Officer and each of the other most highly compensated current
executive officers of Cypros who earned more than $100,000 in the fiscal year
ended July 31, 1999 for services rendered to Cypros for the fiscal years
ended July 31, 1999, 1998 and 1997:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation
Name and Principal Position Year Salary Bonus
--------------------------- ---- ------ -----
<S> <C> <C> <C>
Paul J. Marangos................................ 1999 $241,501 -----
Chairman of the Board, President and 1998 $224,827 -----
Chief Executive Officer 1997 $214,019 -----
Zofia E. Dziewanowska (1)....................... 1999 $191,346 -----
Senior Vice President of Drug Development 1998 $120,962
And Regulatory Affairs
David W. Nassif................................. 1999 $178,154 -----
Senior Vice President, Chief Financial 1998 $164,515 -----
Officer and Secretary 1997 $144,554 -----
Larry A. Risen (2) ............................. 1999 $116,781 -----
Vice President of Commercial Development 1998 $102,269 $12,073
Brian W. Sullivan(3)............................ 1999 $87,218 -----
Vice President of Product Development 1998 $102,354 -----
</TABLE>
- ----------
(1) Dr. Dziewanowska joined Cypros in December 1997 at a salary of $185,000 per
year. Her salary was subsequently increased to $196,000 in January 1999.
(2) Mr. Risen became an executive officer subsequent to the end of fiscal 1998.
He left Cypros in June 1999 to pursue other interests.
(3) Dr. Sullivan became an executive officer subsequent to the end of fiscal
1998. His salary in fiscal 1999 would have exceeded $100,000, except that
Dr. Sullivan took a leave of absence due to illness.
STOCK OPTION GRANTS AND EXERCISES
Cypros grants incentive stock options to its executive officers
under the 1992 Stock Option Plan. As of July 31, 1999, 2,766,288 shares of
Common Stock were authorized under the 1992 Plan, options to purchase a total
of 2,007,186 shares were outstanding under the 1992 Plan and options to
purchase 759,102 shares remained available for grant thereunder.
29
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table presents information with respect to stock
option grants made during the fiscal year ended July 31, 1999 under the 1992
Plan to the named executive officers in the summary compensation table above.
OPTION GRANTS IN 1999 FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT
----------------- ASSUMED ANNUAL RATES
NUMBER OF % OF TOTAL OF STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO OPTION TERMS(3)
OPTIONS EMPLOYEES EXERCISE EXPIRATION --------------------
NAME GRANTED(1) IN 1999(2) PRICE DATE 5% 10%
---- ---------- ---------- -------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Paul J. Marangos........ 50,000 11% $2.438 09/03/2008 $76,662 $194,277
Zofia E. Dziewanowska... 26,250 6% $2.438 09/03/2008 $40,248 $101,996
David W. Nassif......... 40,000 9% $2.438 09/03/2008 $61,330 $155,422
Larry A. Risen.......... 20,000 4% $2.438 09/03/2008 $30,665 $77,711
Brian W. Sullivan....... 20,000 4% $2.438 09/03/2008 $30,665 $77,711
</TABLE>
- ----------
(1) Options become exercisable over a four-year period with 1/48th of the shares
vesting monthly. The term of the options is ten years.
(2) Based on options to purchase 453,050 shares granted to employees in fiscal
1999 including the Chief Executive Officer and the named executive officers
in the summary compensation table above.
(3) The potential realizable value is calculated based on the term of the option
at its time of grant (ten years). It is calculated assuming that the stock
price on the date of grant appreciates at the indicated annual rate,
compounded annually for the entire term of the option and that the option is
exercised and sold on the last day of its term for the appreciated stock
price. These amounts represent assumed rates of appreciation only, in
accordance with the rules of the SEC, and do not reflect Cypros' estimate or
projection of future stock price performance. Actual gains, if any, depend
on overall market conditions and the actual future performance of Cypros and
its Common Stock and no gain to the optionee is possible unless the stock
price increases over the option term, which will benefit all shareholders.
30
<PAGE>
OPTION EXERCISES AND YEAR-END VALUE TABLE
There were no option exercises by any of the named executive officers
during the fiscal year ended July 31, 1999. The following table presents
information with respect to the value at July 31, 1999 of unexercised options
held by each of the named executive officers. The value of unexercised options
reflects the increase in market value of Cypros' Common Stock from the date of
grant through July 31, 1999 (the last trade in Cypros' Common Stock on that date
was executed at $2.125 per share). The value actually realized upon future
option exercises by the named executive officers will depend on the value of
Cypros' Common Stock at the time of exercise.
1999 FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING OPTIONS AS OF IN-THE-MONEY OPTIONS AT
FY-END(#)(1) FY-END($)(2)
-------------------------- --------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Paul J. Marangos......... 28,124 46,876 ----- -----
Zofia E. Dziewanowska.... 82,030 119,220 ----- -----
David W. Nassif.......... 161,458 58,542 ----- -----
Larry A. Risen........... 44,373 24,377 ----- -----
Brian W. Sullivan........ 44,791 23,959 ----- -----
</TABLE>
- ----------
(1) Includes both in-the-money and out-of-the-money options. In-the-money
options are options with exercise prices below the market price of Cypros'
Common Stock.
(2) Based on the fair market value of the underlying shares on the last day of
the fiscal year less the exercise or base price. Excludes out-of-the-money
options.
EMPLOYMENT CONTRACTS
Dr. Marangos has an employment agreement with Cypros effective until
August 31, 1999 under which he was employed as Chairman of the Board of
Directors, President and Chief Executive Officer of Cypros at an annual salary
of $241,500 per year. Dr. Marangos' employment agreement contains certain
provisions concerning maintenance of confidential information of Cypros and
assignment of inventions by Cypros. In the event that Cypros terminates Dr.
Marangos' employment with or without cause in accordance with the agreement, Dr.
Marangos is entitled to continue to receive base salary and benefits for a
period of 12 months following termination.
Dr. Dziewanowska entered into an employment agreement with Cypros on
December 6, 1997 which is effective until December 5, 2000, under which she is
employed as the Senior Vice President, Drug Development and Regulatory Affairs
of Cypros at an annual salary of $185,000 per year, which was increased in
January 1999 to $196,000. Dr. Dziewanowska's employment agreement contains
provisions concerning maintenance of confidential information of Cypros,
non-competition and assignment of inventions by Cypros. The agreement provides
for
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<PAGE>
discretionary bonuses to Dr. Dziewanowska and also a grant of 26,250 stock
options under the 1992 Plan upon the commencement of a Phase III trial in either
of Cypros's clinical development programs. Dr. Dziewanowska earned the stock
option bonus during the fiscal year ended July 31, 1998. In the event that
Cypros terminates Dr. Dziewanowska's employment without cause in accordance with
the agreement, Dr. Dziewanowska is entitled to continue to receive base salary
and benefits for a period of six months following termination.
Dr. Sullivan entered into an employment agreement with Cypros on
January 19, 1999 which is effective until January 18, 2003, under which he is
employed as the Vice President of Product Development of Cypros at an annual
salary of $120,000 per year. Dr. Sullivan's employment agreement contains
certain provisions concerning maintenance of confidential information of Cypros,
non-competition and assignment of inventions by Cypros. The agreement provides
for discretionary bonuses to Dr. Sullivan. In the event that Cypros terminates
Dr. Sullivan's employment without cause in accordance with the agreement, Dr.
Sullivan is entitled to continue to receive base salary and benefits for a
period of six months following termination.
COMPENSATION ARRANGEMENTS RELATING TO THE MERGER
MARANGOS AGREEMENTS. In connection with the proposed merger with
RiboGene, Cypros and Paul J. Marangos entered into a Severance Benefits
Agreement to provide severance benefits upon termination of his employment
relationship with Cypros and agreed upon the form of a Separation and Consulting
Agreement to provide for further severance benefits and an ongoing consulting
relationship following the completion of the merger. The severance agreement
provides Dr. Marangos, among other things, with a payment of two years' annual
salary, the acceleration of the vesting of his stock options and the extension
of the exercise period to two years, the continuation of his medical, dental and
disability benefits for two years and a cash bonus of $25,000. The consulting
agreement provides for Dr. Marangos to continue serving on the board of Cypros
and to consult for Cypros as requested for one year following his separation
date at an annual fee of $125,000. In addition, in exchange for payment of
$25,000 and the consulting agreement, Mr. Marangos agreed to execute a release,
and in exchange for an additional $50,000, Dr. Marangos agreed to execute a
covenant not to compete to run concurrently with the term of the consulting
agreement.
NASSIF AND SULLIVAN AGREEMENTS. Also, in connection with the proposed
merger, Cypros and David W. Nassif, Senior Vice President, Chief Financial
Officer and Secretary, entered into a Severance Benefits Agreement to provide
severance benefits upon termination of his employment relationship with Cypros.
Mr. Nassif's severance agreement provides Mr. Nassif, among other things, with a
payment of one year's annual salary, the acceleration of the vesting of his
stock options and the extension of the exercise period to two years, and the
continuation of his medical, dental and disability benefits for one year. In
addition, Mr. Nassif and Dr. Brian Sullivan, Vice President of Product
Development, each entered into a Retention Bonus Agreement with Cypros which
provides for cash bonuses for remaining with Cypros (1) through the closing of
the merger and (2) if needed, for 90 days after the merger to assist in the
integration of the two companies. Each retention agreement also provides for a
bonus of 100% of Mr. Nassif's or Mr. Sullivan's prorated salary for the
period(s) that he stays, however, it is in the discretion of Cypros to let him
32
<PAGE>
stay to or through those periods. Mr. Nassif is also entitled to a cash bonus of
$30,000 for the completion of the merger.
CYPROS SEVERANCE BENEFIT PLAN. On August 4, 1999, Cypros adopted and
approved the Cypros Severance Benefits Plan. The Cypros severance benefits plan
provides that each full time employee of Cypros (with the exception of the Chief
Executive Officer and Chief Financial Officer) who is employed at the time of a
change of control of Cypros is eligible to receive benefits under the plan. The
merger will be a change of control under the plan. If an eligible employee is
terminated at any time within 60 days before or within 12 months after the
change of control, and the termination or removal is not voluntary or for cause,
then the employee will be entitled to receive a lump sum severance payment under
the plan. If the terminated employee holds the position of Vice President, the
employee will receive a severance benefit equal to the greater of one month of
base salary for each year of service with Cypros or nine months of base salary.
If the terminated employee holds the position of director, the employee will
receive a severance benefit equal to the greater of one month of base salary for
each year of service with Cypros or six months of base salary. If the terminated
employee does not hold the position of either Vice President or Director, the
employee will receive a severance benefit equal to the greater of one month of
base salary for each year of service with Cypros or three months of base salary
under the plan. The Cypros severance benefits plan also provides terminated
employees with continued health insurance benefits and the immediate vesting of
all stock options held by the terminated employee. However, an employee of
Cypros will cease to be an eligible employee under the plan if the employee
enters into an employment agreement with Cypros providing for the payment of
compensation to the employee following termination if the employment agreement
provides for severance benefits to the employee that are equal to or greater
than the severance benefits to be provided under the terms of the plan. As a
condition to receiving benefits of the Cypros severance benefits plan, an
employee of Cypros must agree in writing to waive any rights under any prior
change of control agreements and execute a release of claims against Cypros.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION(1)
COMPENSATION PHILOSOPHY
Cypros' executive compensation programs are designed to attract and
retain executives capable of leading Cypros to meet its business objectives and
to motivate them to enhance long-term shareholder value. Cypros' compensation of
executive officers generally has been comprised of a cash salary and stock
option grants under the 1992 Plan.
BASE SALARY
- --------------
(1) The material in this report is not soliciting material, is not deemed filed
with the SEC and is not incorporated by reference in any filing of Cypros
under the Securities Act of 1933 or the Securities Exchange Act of 1934,
whether made before or after the date of this Form 10-K and irrespective
of any general incorporation language in such filing.
33
<PAGE>
The Compensation Committee uses a number of factors in setting the base
salary of a new executive officer, including the officer's credentials and
previous compensation package and the average salary for that position as
reported in various industry group surveys that the Compensation Committee uses.
The surveys that the Compensation Committee uses generally include companies
that are in the development stage with no more than 50 employees, a narrower
group of companies than those in the Nasdaq Pharmaceutical Stocks group shown on
Cypros' Stock Price Performance Graph. Subsequent salary increases are based
upon reviews of each officer's performance in helping Cypros to achieve its
business objectives, including the advancement of its clinical and research
programs, product acquisitions, sales growth, capital raising and cost
containment, and ultimately, the performance of Cypros' stock price. Cypros'
financial position is also a factor that is considered by the Compensation
Committee.
STOCK OPTION GRANTS
Each incoming executive officer is given a stock option grant under the
1992 Plan at the time of employment in order to provide a long-term incentive
and align executive officer and shareholder long-term interests by creating a
direct link between executive compensation and shareholder return. Stock options
are granted at an exercise price equal to the fair market value of Cypros'
Common Stock on the date of the grant. In order to facilitate long-term
incentives through the option grants, options are generally subject to monthly
vesting over a 48-month period and are exercisable for 10 years.
The initial grant and any subsequent grants to an executive officer is
determined by the Compensation Committee in much the same way that the officer's
base salary is determined.
CHIEF EXECUTIVE OFFICER
The salary of Dr. Marangos is reviewed periodically by the Compensation
Committee in light of his accomplishments in furthering the growth of Cypros and
the salaries paid to chief executive officers of comparable companies. The
employment agreement for him allows for the payment of an annual bonus in the
sole discretion of the Compensation Committee, based upon the annual performance
evaluation for such officer. While Cypros and Dr. Marangos met most of their
goals and objectives for the 1999 fiscal year, the Compensation Committee
determined that Cypros was not in a position to pay Dr. Marangos a cash bonus.
Cypros has also instituted a plan for certain of Cypros' other executive
officers whereby they would receive cash bonuses or additional stock option
grants upon the achievement of certain milestone events .
SECTION 162(m) OF THE INTERNAL REVENUE CODE
Section 162(m) of the Code limits Cypros to a deduction for federal
income tax purposes of no more than $1 million of compensation paid to the named
executive officers in a taxable year. Compensation above $1 million may be
deducted if it is "performance-based compensation" within the meaning of the
Code.
The Compensation Committee has determined that stock options granted
under the 1992
34
<PAGE>
Plan with an exercise price at least equal to the fair market value of Cypros'
Common Stock on the date of grant shall be treated as "performance-based
compensation."
Compensation Committee
Virgil D. Thompson
Robert A. Vukovich
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No interlocking relationship exists between the Cypros Board or
Compensation Committee and the board of directors or compensation committee of
any other company, nor has any interlocking relationship existed in the past.
DIRECTOR COMPENSATION
Cypros compensates its non-employee directors for their service on the
Board with an initial grant of 25,000 options under the 1993 Non-Employee Equity
Incentive Plan and an annual grant of 10,000 stock options under the Plan upon
reappointment by the shareholders as a director. Options granted under the 1993
Plan have an exercise price equal to 85% of the fair market value of Cypros
Common Stock on the date of the grant and vest in 48 equal monthly installments
commencing on the date of the grant, provided the non-employee director serves
continuously on the Board during the month.
In addition, Cypros pays a bonus award of $2,000 in common stock to
non-employee directors for each Board of Director meeting attended. The number
of shares of common stock issued with each bonus is equal to $2,000 divided by
the ten-day average of the closing sales price for the common stock as quoted on
the American Stock Exchange, Inc. for the ten trading days immediately preceding
the date of the board meeting at which the bonus is earned. The stock bonuses
are 100% vested on the date of the grant.
Cypros also reimburse its directors who are not employees for their
reasonable expenses incurred in attending meetings. No additional fees are paid
for participation in committee meetings. Directors who are officers of the
Cypros receive no additional compensation for Board service.
STOCK PRICE PERFORMANCE PRESENTATION
Set forth below is a line graph comparing the cumulative total
shareholder return on Cypros' Common Stock, based on its market price and
assuming reinvestment of dividends, with the cumulative total return of
companies on the Amex Market Value Index and the Nasdaq Pharmaceutical Stocks
group for the period beginning November 30, 1992 (the end of the month in which
Cypros' Common Stock first began trading) through Cypros' fiscal year ended July
31, 1999. Cypros' Common Stock was initially offered to the public and subject
to securities registration on November 3, 1992. This graph assumes that the
value of the investment in Cypros'
35
<PAGE>
Common Stock and each of the comparison groups was $100 on November 30, 1992
and that all dividends were reinvested at the time they were paid.
<TABLE>
<CAPTION>
- ------------------------ ---------- --------- --------- --------- --------- --------- --------- ---------
11/30/92 7/30/93 7/29/94 7/30/95 7/30/96 7/31/97 7/31/98 7/30/99
- ------------------------ ---------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cypros 100 64 131 231 115 109 87 54
- ------------------------ ---------- --------- --------- --------- --------- --------- --------- ---------
Amex Market Value Index 100 113 113 137 142 173 189 212
- ------------------------ ---------- --------- --------- --------- --------- --------- --------- ---------
Nasdaq Pharmaceuticals 100 73 65 91 110 129 129 200
- ------------------------ ---------- --------- --------- --------- --------- --------- --------- ---------
</TABLE>
36
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table provides information regarding the beneficial
ownership of Cypros common stock as of September 20, 1999 by (1) all persons
known by Cypros to own beneficially 5% or more of the outstanding shares of
Cypros common stock, (2) each director of Cypros, (3) the Chief Executive
Officer of Cypros and Cypros' other named executive officers, and (4) all
executive officers and directors of Cypros as a group. Except as otherwise
indicated, Cypros believes that the beneficial owners of Cypros common stock
listed below, based on information furnished by the owners, have sole investment
and voting power with respect to the shares, subject to community property laws
where applicable.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE OF
NAME AND ADDRESS BENEFICIALLY OWNED TOTAL
- ---------------- ------------------ -------------
<S> <C> <C>
President and Fellows of Harvard College
c/o Harvard Management Company, Inc.
600 Atlantic Avenue
Boston, MA 02210............................................... 1,637,500 10.4%
Paul J. Marangos(1)
2714 Loker Avenue West
Carlsbad, California 92008..................................... 1,555,874 9.9%
Bernard B. Levine
P.O. Box 2635
La Jolla, CA 92038-2635........................................ 1,273,082 8.1%
Wentworth, Hauser & Violich
333 Sacramento Street
San Francisco, California 94111............................... 957,705 6.1%
David W. Nassif(2)............................................. 172,353 1.1%
Robert A. Vukovich(3).......................................... 139,810 *
Digby W. Barrios(4)............................................ 104,810 *
Zofia E. Dziewanowska(5)....................................... 102,994 *
Larry A. Risen(6).............................................. 48,176 *
Brian W. Sullivan(7)........................................... 48,697 *
Virgil D. Thompson(8).......................................... 45,229 *
37
<PAGE>
Robert F. Allnutt(9)........................................... 33,417 *
All officers and directors, as a group (11 persons)(10)........ 2,270,110 13.8%
</TABLE>
- -----------
* Less than one percent.
(1) Includes 3,126 shares issuable upon options becoming exercisable within
60 days.
(2) Includes 3,958 shares issuable upon options becoming exercisable within
60 days.
(3) Includes 1,373 shares issuable upon options becoming exercisable within
60 days.
(4) Includes 1,373 shares issuable upon options becoming exercisable within
60 days.
(5) Includes 8,385 shares issuable upon options becoming exercisable within
60 days.
(6) Includes 1,563 shares issuable upon options becoming exercisable within
60 days.
(7) Includes 1,563 shares issuable upon options becoming exercisable within
60 days.
(8) Includes 2,415 shares issuable upon options becoming exercisable within
60 days.
(9) Includes 1,873 shares issuable upon options becoming exercisable within
60 days.
(10) Includes 29,796 shares issuable upon options becoming exercisable
within 60 days.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Neither Cypros, nor any of its directors, nominees, officers or
beneficial owners of more than 5% of Cypros' outstanding Common Stock are
parties to any relationships or transactions described in Item 404 of Regulation
S-K promulgated by the SEC other than as a result of the proposed.
In connection with the proposed merger, various of the executive
officers of Cypros are receiving a consulting arrangement, a bonus for closing
the merger, a retention bonus and/or a severance payment, which are described
above in Item 11.
Also in connection with the proposed merger, the Cypros Board approved
an amendment to the Cypros non-employee directors' equity incentive plan to
provide for acceleration of vesting of all options outstanding under the plan
upon a transaction in which any person or group acquires beneficial ownership of
40% of the voting power to elect directors. The merger is expected to result in
the RiboGene stockholders acquiring beneficial ownership of over 40% of
38
<PAGE>
the voting power of Cypros. As a result, the vesting of all of the options
outstanding under the plan will likely be accelerated upon completion of the
merger.
Roberts Pharmaceutical Corporation, the owner of 1,528,428 shares of
RiboGene Series A preferred stock, will receive all of the Cypros Series A
preferred stock being issued in the proposed merger. Dr. Vukovich, a member of
Cypros' board of directors, is the Chairman of Roberts Pharmaceutical
Corporation and Mr. Barrios, a member of the board of both Cypros and RiboGene,
is a member of the board of directors of Roberts Pharmaceutical Corporation.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) (1)(2) Financial Statements and Schedules.
The financial statements are incorporated herein by reference from
Exhibit 99.1, which begins with the Table of Contents on Page F- 1.
(a) (3) Exhibits.
See Exhibit Index on page 32.
The following management compensation plans and arrangements are required to be
filed as exhibits pursuant to Item 14(c) of this report.
Exhibit
Number Description
- ------ -----------
10.1 Forms of Incentive Stock Option and Nonstatutory Stock Option. (1)
10.2 Amended 1992 Stock Option Plan, as amended. (2)
10.3 Employment Agreement, dated July 10, 1991 as amended and restated
September 1, 1992, between the Registrant and Paul J. Marangos, Ph.D.(1)
10.4 Amendment No. 1 to Employment Agreement, dated May 9, 1994, between the
Registrant and Paul J. Marangos, Ph.D. (3)
10.5 Amendment No. 2 to Employment Agreement, dated March 9, 1995, between
the Registrant and Paul J. Marangos, Ph.D. (4)
10.6 Amendment No. 3 to Employment Agreement, dated October 1, 1996, between
the Registrant and Paul J. Marangos, Ph.D. (5)
10.7 Amendment No. 4 to Employment Agreement, dated December 7, 1998, between
the Registrant and Paul J. Marangos, Ph.D. (6)
10.8 Employment Agreement, dated January 18, 1999, between the Registrant and
Brian W. Sullivan, Ph.D. (6)
10.9 1993 Non-Employee Directors Equity Incentive Plan, as amended, and
related form of Nonstatutory Stock Option. (6)
10.10 Employment Agreement dated December 6, 1997 between the Registrant and
Zofia E. Dziewanowska, M.D., Ph.D. (7)
10.11 Form of Severance Benefits Agreement between the Registrant and Paul J.
Marangos. (6)
39
<PAGE>
10.12 Form of Separation and Consulting Agreement between the Registrant and
Paul J. Marangos. (6)
10.13 Form of Severance Benefits Agreement between the Registrant and David W.
Nassif. (6)
10.14 Form of Retention Bonus Agreement between the Registrant and David W.
Nassif and between the Registrant and Brian W. Sullivan. (6)
10.15 Employment Agreement dated as of August 4, 1999 between the Registrant
and Charles J. Casamento. (6)
- ------------
(1) Filed as an exhibit to the Registrant's Registration Statement on Form
S-1, Registration No. 33-51682, and incorporated herein by reference.
(2) Filed as an exhibit to the Registrant's Form 8-K dated November 4, 1996
and incorporated herein by reference.
(3) Filed as an exhibit to the Registrant's Form 10-K for the fiscal year
ended July 31, 1994.
(4) Filed as an exhibit to the Registrant's Form 10-K for the fiscal year
ended July 31, 1993.
(5) Filed as an exhibit to the Registrant's Form 10-K for the fiscal year
ended July 31, 1996.
(6) Filed as an exhibit to Registrant's Registration Statement on Form S-4,
Registration Statement No. 333-87611, and incorporated herein by
reference.
(7) Filed as an exhibit to the Registrant's Form 10-Q for the period ended
October 31, 1997.
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed during the fourth quarter of
1999.
(c) Exhibits.
The exhibits required by this Item are listed under Item 14 (a) (3).
(d) Financial Statement Schedules.
No financial statement schedules are required.
40
<PAGE>
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, in the City and County
of San Diego, State of California, on the 26th day of October, 1999.
CYPROS PHARMACEUTICAL CORPORATION
By Paul J. Marangos
----------------
Paul J. Marangos
Chairman of the Board,
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Paul J. Marangos, and David W. Nassif,
and each of them, his attorney-in-fact, each with the power of substitution, for
him in any and all capacities, to sign any amendments to this report, 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, or his substitute or
substitutes, may 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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
Paul J. Marangos Chairman of the Board, President and October 26, 1999
---------------- Chief Executive Officer and Director
Paul J. Marangos (Principal Executive Officer)
David W. Nassif Senior Vice President, Chief Financial Officer October 26, 1999
--------------- and Secretary
David W. Nassif (Principal Financial and Accounting Officer)
Robert F. Allnutt Director October 26, 1999
-----------------
Robert F. Allnutt
Digby W. Barrios Director October 26, 1999
----------------
Digby W. Barrios
Virgil Thompson Director October 26, 1999
---------------
Virgil Thompson
Robert A. Vukovich Director October 26, 1999
------------------
Robert A. Vukovich
</TABLE>
41
<PAGE>
INDEX TO FINANCIAL STATEMENTS
CYPROS PHARMACEUTICAL CORPORATION
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
Report of Ernst & Young LLP, Independent Auditors......................................................... F-2
Balance Sheets as of July 31, 1999 and 1998............................................................... F-3
Statements of Operations for the years ended July 31, 1999, 1998 and 1997................................. F-4
Statements of Shareholders' Equity for the years ended July 31, 1999, 1998 and 1997....................... F-5
Statements of Cash Flows for the years ended July 31, 1999, 1998 and 1997................................. F-6
Notes to Financial Statements............................................................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Cypros Pharmaceutical Corporation
We have audited the accompanying balance sheets of Cypros Pharmaceutical
Corporation as of July 31, 1999 and 1998, and the related statements of
operations, shareholders' equity, and cash flows for each of the three years in
the period ended July 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Cypros Pharmaceutical
Corporation at July 31, 1999 and 1998, and the results of its operations and its
cash flows for each of the three years in the period ended July 31, 1999, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
San Diego, California
August 23, 1999
F-2
<PAGE>
CYPROS PHARMACEUTICAL CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
JULY 31,
-----------------------------
ASSETS 1999 1998
------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents (NOTES 1 AND 3)........................ $ 2,509,386 $ 3,015,890
Short-term investments, held to maturity (NOTES 1 AND 3)......... 2,964,689 10,428,580
Accounts receivable, less allowances of $15,000 at July 31, 1999
and $0 at July 31, 1998........................................ 391,888 516,886
Inventories (NOTE 3)............................................. 205,207 83,078
Prepaid expenses and other current assets........................ 112,540 214,765
------------- -------------
Total current assets........................................... 6,183,710 14,259,199
Investment grade securities, non-current portion (NOTES 1 AND 3)... 1,788,749 --
Property, equipment and leasehold improvements, net (NOTES 3 AND
4)............................................................... 1,471,565 1,063,566
Purchased technology, net of accumulated amortization of $3,015,613
and $2,118,226 at July 31, 1999 and 1998 (NOTE 2)................ 3,266,100 4,163,487
Licenses and patents, net of accumulated amortization of $193,082
and $160,212 at July 31, 1999 and 1998, respectively (NOTE 1).... 158,215 176,927
Other assets....................................................... 270,525 72,461
------------- -------------
Total assets................................................... $ 13,138,864 $ 19,735,640
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................. $ 497,985 $ 551,191
Accrued compensation............................................. 201,024 125,434
Other accrued liabilities........................................ 63,565 15,641
Current portion of long-term debt (NOTE 4)....................... 53,616 97,477
Current portion of capital lease obligations (NOTE 5)............ 105,892 91,740
------------- -------------
Total current liabilities...................................... 922,082 881,483
Long-term debt, less current portion (NOTE 4)...................... 6,541 59,408
Capital lease obligations, less current portion (NOTE 5)........... 140,380 157,656
Deferred rent...................................................... 155,854 125,761
Shareholders' equity: (NOTE 6)
Common stock, 30,000,000 shares authorized, 15,711,877 shares
issued and outstanding as of July 31, 1999 and 1998,
respectively................................................... 41,497,174 41,328,470
Deferred compensation............................................ (69,441) (87,334)
Accumulated deficit.............................................. (29,513,726) (22,729,804)
------------- -------------
Total shareholders' equity..................................... 11,914,007 18,511,332
------------- -------------
Total liabilities and shareholders' equity..................... $ 13,138,864 $ 19,735,640
------------- -------------
------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-3
<PAGE>
CYPROS PHARMACEUTICAL CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
-------------------------------------------
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Net sales............................................................ $ 2,518,181 $ 3,445,955 $ 2,428,348
Cost of sales........................................................ 771,099 770,437 538,725
------------- ------------- -------------
Gross profit......................................................... 1,747,082 2,675,518 1,889,623
Operating expenses:
Sales and marketing................................................ 1,702,754 1,309,963 993,765
General and administrative......................................... 3,326,891 3,246,619 2,396,465
Clinical testing and regulatory.................................... 2,438,285 2,521,386 1,967,334
Research and development........................................... 547,836 822,225 1,032,486
Depreciation and amortization...................................... 1,238,872 1,239,217 1,075,431
------------- ------------- -------------
Total operating expenses............................................. 9,254,638 9,139,410 7,465,481
------------- ------------- -------------
Loss from operations................................................. (7,507,556) (6,463,892) (5,575,858)
Research grant income................................................ 51,178 169,834 98,785
Interest and other income, net....................................... 589,739 809,254 662,421
Rental income, net................................................... 82,717 171,062 --
Amortization of discount and costs on mandatorily
convertible notes.................................................. -- (259,127) (1,860,051)
------------- ------------- -------------
Net loss............................................................. $ (6,783,922) $ (5,572,869) $ (6,674,703)
------------- ------------- -------------
------------- ------------- -------------
Net loss per share:
Basic and diluted.................................................... $ (0.43) $ (0.37) $ (0.54)
------------- ------------- -------------
------------- ------------- -------------
Weighted average shares outstanding:
Basic and diluted.................................................... 15,711,877 15,186,984 12,303,274
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
CYPROS PHARMACEUTICAL CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JULY 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
--------------------------- DEFERRED ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT COMPENSATION DEFICIT EQUITY
------------ ------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE AT JULY 31, 1996............. 11,613,748 $ 23,421,428 $ (304,309) $ (10,482,232) $ 12,634,887
Conversion of mandatorily
convertible notes................ 953,907 3,972,538 -- -- 3,972,538
Issuance of common stock, net of
offering costs................... 1,075,000 4,714,507 -- -- 4,714,507
Exercise of stock options.......... 7,750 21,963 -- -- 21,963
Forfeitures of stock options....... -- (52,568) 52,568 -- --
Deferred compensation related to
grant of stock options........... -- 266,925 (266,925) -- --
Amortization of deferred
compensation..................... -- -- 356,716 -- 356,716
Net loss........................... -- -- -- (6,674,703) (6,674,703)
------------ ------------- ------------- -------------- -------------
BALANCE AT JULY 31, 1997............. 13,650,405 32,344,793 (161,950) (17,156,935) 15,025,908
Conversion of mandatorily
convertible notes................ 1,205,446 4,025,588 -- -- 4,025,588
Issuance of B Warrants............. 856,026 4,707,576 -- -- 4,707,576
Deferred compensation related to
grant of stock options........... -- 250,513 (250,513) -- --
Amortization of deferred
compensation..................... -- -- 325,129 -- 325,129
Net loss........................... -- -- -- (5,572,869) (5,572,869)
------------ ------------- ------------- -------------- -------------
BALANCE AT JULY 31, 1998............. 15,711,877 41,328,470 (87,334) (22,729,804) 18,511,332
Deferred compensation related to
grant of stock options........... -- 168,704 (168,704) -- --
Amortization of deferred
compensation..................... -- -- 186,597 -- 186,597
Net loss........................... -- -- -- (6,783,922) (6,783,922)
------------ ------------- ------------- -------------- -------------
BALANCE AT JULY 31, 1999............. 15,711,877 $ 41,497,174 $ (69,441) $ (29,513,726) $ 11,914,007
------------ ------------- ------------- -------------- -------------
------------ ------------- ------------- -------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-5
<PAGE>
CYPROS PHARMACEUTICAL CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
----------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss.................................................................... $ (6,783,922) $ (5,572,869) $ (6,674,703)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of deferred compensation..................................... 186,597 325,129 356,716
Depreciation and amortization............................................. 1,272,509 1,239,217 1,075,431
Amortization of discount and costs on mandatorily convertible notes....... -- 259,127 1,860,051
Deferred rent expense..................................................... 30,093 (3,404) (16,215)
Gain on the sale of equipment............................................. (5,752) -- --
Write off of patent....................................................... -- 41,311 --
Changes in operating assets and liabilities, net of effects from
acquisitions:
Accounts receivable................................................... 124,998 (161,461) (205,799)
Inventory............................................................. (122,129) 10,099 (29,791)
Prepaid expenses and other current assets............................. 102,225 (139,727) (13,629)
Accounts payable...................................................... (53,206) 185,805 246,294
Other accrued liabilities............................................. 123,514 (87,361) (56,948)
------------ ------------ ------------
Net cash flows used in operating activities................................. (5,125,073) (3,904,134) (3,458,593)
INVESTING ACTIVITIES
Purchase of short-term investments.......................................... (1,147,531) (12,481,352) (18,980,414)
Proceeds from the maturity of short-term investments........................ 6,822,673 11,518,333 16,443,288
Investment in purchased technology.......................................... -- -- (2,014,048)
Installment payment for purchased technology................................ -- (1,272,000) (200,000)
Purchase of property, equipment and leasehold improvements.................. (651,468) (587,265) (239,941)
Proceeds from the sale of equipment......................................... 11,000 -- --
Increase in licenses and patents............................................ (14,159) (97,482) (82,460)
(Increase) decrease in deposits and other assets............................ (198,064) 23,064 21,375
------------ ------------ ------------
Net cash flows provided by (used in) investing activities................... 4,822,451 (2,896,702) (5,052,200)
FINANCING ACTIVITIES
Issuance of common stock, net............................................... -- 4,707,576 4,736,470
Cash paid for repurchase of mandatorily convertible notes................... -- (1,873) --
Issuance of long-term debt.................................................. -- 209,406 --
Repayment of long-term debt................................................. (96,728) (93,888) (99,282)
Repayments of capital leases obligations.................................... (107,154) (106,205) (93,299)
------------ ------------ ------------
Net cash flows (used in) provided by financing activities................... (203,882) 4,715,016 4,543,889
------------ ------------ ------------
Decrease in cash and cash equivalents....................................... (506,504) (2,085,820) (3,966,904)
Cash and cash equivalents at beginning of year.............................. 3,015,890 5,101,710 9,068,614
------------ ------------ ------------
Cash and cash equivalents at end of year.................................... $ 2,509,386 $ 3,015,890 $ 5,101,710
------------ ------------ ------------
------------ ------------ ------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest...................................................... $ 47,441 $ 132,269 $ 123,997
------------ ------------ ------------
------------ ------------ ------------
NONCASH INVESTING AND FINANCING ACTIVITIES:
Mandatorily convertible notes............................................... $ -- $ 4,025,588 $ 3,972,538
------------ ------------ ------------
------------ ------------ ------------
Equipment financed under capital leases..................................... $ 104,030 $ 100,608 $ 79,992
------------ ------------ ------------
------------ ------------ ------------
Purchased asset obligation.................................................. $ -- $ -- $ 1,200,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-6
<PAGE>
CYPROS PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
JULY 31, 1999
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS ACTIVITY
Cypros Pharmaceutical Corporation (the "Company") was incorporated in San
Diego, California on November 2, 1990. The Company develops and markets
acute-care, hospital-based products. The Company is currently marketing three
products, Ethamolin-Registered Trademark-, Glofil and Inulin, will be launching
two burn/wound care products and is developing two drugs, Cordox-TM- and
Ceresine-TM-. In addition, the Company is manufacturing and selling to NutraMax
Products, Inc. ("NutraMax") its topical triple antibiotic wound product in
rolled stock for conversion by NutraMax into finished adhesive strips and
patches and distribution by NutraMax into the over-the-counter market. The
Company's pre-clinical and clinical development programs focus on cytoprotective
drugs designed to reduce ischemia (low blood flow) induced tissue damage in
acute-care settings and Cordox-TM- is in late-stage clinical trial in sickle
cell crisis.
CASH, CASH EQUIVALENTS AND INVESTMENTS
The Company considers highly liquid investments with original maturities of
three months or less when acquired to be cash equivalents. Investments consist
of certificates of deposit, money market funds, U.S. government obligations and
investment grade corporate debt securities. The Company has established
guidelines relative to diversification and maturities that maintain safety and
liquidity. The Company has not experienced any losses on its cash equivalents or
investments. Management believes the credit risk associated with these
investments is limited due to the nature of the investments.
Management determines the appropriate classification of debt securities at
the time of purchase. Debt securities are classified as held-to-maturity when
the Company has the positive intent and the ability to hold the securities to
maturity. Held-to-maturity securities are carried at cost, adjusted for
amortization of premiums and accretion of discounts. Interest, dividends and
amortization on the securities classified as held-to-maturity are included in
interest income.
CONCENTRATION OF CREDIT RISK
The Company extends credit to its customers, primarily hospitals and large
pharmaceutical companies conducting clinical research, in connection with its
product sales.
The Company has not experienced significant credit losses on its customer
accounts. Two customers individually accounted for 21% and 20% of current year
sales.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market value.
DEPRECIATION AND AMORTIZATION
Property and equipment are stated at cost and depreciated over the estimated
useful lives of the assets (generally five years) using the straight-line
method. Leasehold improvements are amortized over the lesser of the estimated
useful lives (seven years) or the remaining term of the lease.
F-7
<PAGE>
CYPROS PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 1999
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PURCHASED TECHNOLOGY
Purchased technology associated with the acquisitions of Glofil, Inulin and
Ethamolin is stated at cost and amortized over the period estimated to be
benefited (seven years).
LICENSE AND PATENT COSTS
The Company capitalizes certain costs related to license rights and patent
applications. Capitalized costs are amortized over the estimated economic lives
of the license rights and patents (generally six years) commencing at the time
the license rights are granted or the patents are issued.
ACCOUNTING STANDARD ON IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED OF, the Company regularly evaluates its long-lived assets
for indicators of possible impairment. To date, no such indicators have been
identified.
REVENUE RECOGNITION
Revenues from product sales of Ethamolin and whole vials of Glofil and
Inulin are recognized upon shipment. Revenues from Glofil unit dose sales are
recognized upon receipt by the Company of monthly sales reports from its
third-party distributor. The Company is not obligated to accept returns of
products sold that have reached their expiration date.
Revenues from Nutra Max Products are recorded at the time of shipment of
product to NutraMax. The Company is obligated to accept a return of the triple
antibiotic wound product in rolled stock within forty-eight hours of shipment.
NET LOSS PER SHARE
Under SFAS No. 128, EARNINGS PER SHARE, basic and diluted loss per share is
based on net loss for the relevant period, divided by the weighted average
number of common shares outstanding during the period. Diluted earnings per
share gives effect to all potential dilutive common shares outstanding during
the period such as options, warrants, and convertible securities, and
contingently issuable shares. All potential dilutive common stock equivalents
have been excluded from the calculation of diluted loss per share as their
inclusion would have been antidilutive.
STOCK OPTIONS
The Company has elected to follow Accounting Principles Board Opinion No.
25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB 25") and related
interpretations in accounting for its employee stock options because the
alternative fair value accounting provided for under SFAS No. 123, ACCOUNTING
FOR STOCK-BASED COMPENSATION requires use of option valuation models that were
not developed for use in valuing employee stock options. Under APB 25, when the
exercise price of the Company's employee stock options equals or exceeds the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.
F-8
<PAGE>
CYPROS PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 1999
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENTLY ISSUED ACCOUNTING STANDARDS
COMPREHENSIVE INCOME
Effective August 1, 1998, the Company adopted SFAS No. 130, REPORTING
COMPREHENSIVE INCOME." SFAS 130 requires that all components of comprehensive
income, including net income, be reported in the financial statements in the
period in which they are recognized.
"Comprehensive income" is defined as the change in equity during the period
from transactions and other events and circumstances from non-owner sources. Net
income and other comprehensive income, including unrealized gains and losses on
investments, shall be reported, net of their related tax effect, to arrive at
comprehensive income. The Company's comprehensive net loss and net loss are the
same, and therefore, the adoption of SFAS 130 did not have an impact on the
Company's financial statements.
SEGMENT INFORMATION
Effective August 1, 1998, the Company adopted SFAS No. 131, DISCLOSURES
ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. SFAS 131 redefines
segments and requires companies to report financial and descriptive information
about their operating segments. The Company has determined that it operates in
one business segment and therefore the adoption of SFAS 131 does not affect the
Company's financial statements.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
disclosures made in the accompanying notes to the financial statements. Actual
results could differ from those estimates.
2. ACQUISITION
On November 4, 1996, the Company acquired the New Drug Application, the U.S.
trademark for Ethamolin Injection and the finished goods inventory on hand at
closing from Schwarz Pharma, Inc., a Delaware corporation. The total purchase
price was $3,286,642, of which the Company paid $2,086,642 in cash from its
working capital and issued a $1,200,000 8% note which was paid in full during
fiscal year 1998.
The acquisition was accounted for using the purchase method and,
accordingly, the financial statements include the operations of the acquired
business from the date of acquisition. The following
F-9
<PAGE>
CYPROS PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 1999
2. ACQUISITION (CONTINUED)
unaudited pro forma data reflects the combined results of operations of the
Company as if the Ethamolin acquisition had occurred on August 1, 1996:
<TABLE>
<CAPTION>
YEAR ENDED
JULY 31, 1997
-------------
<S> <C>
Net sales...................................................................... $ 2,752,691
Net loss....................................................................... (6,394,987)
Net loss per share............................................................. (0.52)
</TABLE>
3. FINANCIAL STATEMENT DETAILS
SHORT-TERM INVESTMENTS
All short-term investments of the Company are classified as
held-to-maturity. The following is a summary of held-to-maturity investments at
amortized cost at July 31:
<TABLE>
<CAPTION>
1999 1998
------------ -------------
<S> <C> <C>
Corporate debt securities............................................................ $ 4,753,438 $ 9,933,424
Money market funds................................................................... 2,284,314 2,656,423
U.S. government obligations.......................................................... -- 495,156
------------ -------------
7,037,752 13,085,003
Less amounts classified as cash equivalents.......................................... (2,284,314) (2,656,423)
Less investment grade securities, non-current........................................ (1,788,749) --
------------ -------------
Short-term investments............................................................... $ 2,964,689 $ 10,428,580
------------ -------------
------------ -------------
</TABLE>
As of July 31, 1999 and 1998, the difference between cost and estimated fair
value of the held-to-maturity investments was not significant. Of the
above-referenced 1999 investments, $2,964,689 mature at various dates through
July 31, 2000 and $1,788,749 will mature at various dates after July 31, 2000
through August 6, 2001.
INVENTORIES
Inventories consist of the following at July 31:
<TABLE>
<CAPTION>
1999 1998
---------- ---------
<S> <C> <C>
Raw materials.............................................................................. $ 68,808 $ 2,087
Finished goods............................................................................. 156,399 80,991
Less reserves.............................................................................. (20,000) --
---------- ---------
$ 205,207 $ 83,078
---------- ---------
---------- ---------
</TABLE>
F-10
<PAGE>
CYPROS PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 1999
3. FINANCIAL STATEMENT DETAILS (CONTINUED)
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements consist of the following at
July 31:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Laboratory equipment.................................................................. $ 1,003,534 $ 756,525
Office equipment, furniture and fixtures.............................................. 753,501 783,446
Leasehold improvements................................................................ 869,093 353,149
------------ ------------
2,626,128 1,893,120
Less accumulated depreciation and amortization........................................ (1,154,563) (829,554)
------------ ------------
$ 1,471,565 $ 1,063,566
------------ ------------
------------ ------------
</TABLE>
Depreciation and amortization expense totaled $325,009, $299,993 and
$252,453 for the years ended July 31, 1999, 1998 and 1997, respectively.
4. LONG-TERM DEBT
Long-term debt consists of the following at July 31:
<TABLE>
<CAPTION>
1999 1998
--------- ----------
<S> <C> <C>
Note payable to a pharmaceutical company due November 1999, collateralized by certain
purchased assets totaling $234,000, bearing interest at 8% until November 1998 and 4%
thereafter, payable in three semiannual installments, starting November 1998, of $39,300,
$46,200 and $48,500, plus interest....................................................... $ 49,250 $ 142,025
Note payable to a leasing company due November 2001, collateralized by real property,
bearing interest at 10%, payable in 53 monthly installments of $438 including interest... 10,907 14,860
--------- ----------
60,157 156,885
Less current portion....................................................................... (53,616) (97,477)
--------- ----------
Total...................................................................................... $ 6,541 $ 59,408
--------- ----------
--------- ----------
</TABLE>
5. COMMITMENTS
LEASES
The Company leases its office and research facilities under operating lease
agreements and certain equipment under capital lease agreements.
F-11
<PAGE>
CYPROS PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 1999
5. COMMITMENTS (CONTINUED)
Minimum future obligations under both operating and capital leases as of
July 31, 1999 are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
------------ -----------
<S> <C> <C>
2000................................................................................... $ 537,369 $ 122,940
2001................................................................................... 655,982 68,255
2002................................................................................... 411,091 60,207
2003................................................................................... 282,760 26,307
2004................................................................................... 149,293 --
Thereafter............................................................................. 91,440 --
------------ -----------
$ 2,127,935 277,709
------------
------------
Less amounts representing interest..................................................... (31,437)
-----------
Present value of net minimum lease payments............................................ 246,272
Current portion of capital lease obligations........................................... (105,892)
-----------
Long-term capital lease obligations.................................................... $ 140,380
-----------
-----------
</TABLE>
Rent expense totaled $509,188, $445,095 and $420,697 for the years ended
July 31, 1999, 1998 and 1997, respectively. The net book value of the equipment
acquired under capital leases totaled $215,140 and $224,601 (net of accumulated
amortization of $402,223 and $288,732) at July 31, 1999 and 1998, respectively.
Rent expense comprises the cost associated with three buildings leased by
the Company: its current headquarters located at 2714 Loker Avenue West in
Carlsbad, California, its former headquarters located at 2732 Loker Avenue West
and a production facility located at 777 Northwest Blue Parkway in Lee's Summit,
Missouri. In April 1996, the Company subleased its former headquarters for the
remainder of the original lease term plus an additional 36 month option. Net
sublease income totaled $82,717, $171,062 and $62,870 for the years ended July
31, 1999, 1998 and 1997, respectively. Scheduled aggregate future sublease
income at July 31, 1999 is approximately $912,472.
MANDATORILY CONVERTIBLE NOTES
During 1996, the Company issued $8 million in principal amount of
non-interest bearing mandatorily convertible notes. The Notes were convertible
at the option of the investors into shares of the Company's common stock at
various dates from January 31, 1997 through July 31, 1999. The Notes were all
converted at various dates through July 31, 1998, except for $1,873 which was
paid in cash.
LICENSE AGREEMENTS
The Company has licenses to various patents for Cordox and Ceresine, its two
clinical development programs, for the remaining term of the patents. The
license agreements require payments of cash, warrants or the issuance of stock
options to the licensors upon accomplishment of various milestones and the
payment of royalties to the licensors upon the commercial sale of products
incorporating the licensed compound. The only remaining significant development
milestone under
F-12
<PAGE>
CYPROS PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 1999
5. COMMITMENTS (CONTINUED)
these agreements is the requirement that the Company pay the licensor of Cordox
$250,000 upon the filing of a New Drug Application with the Food and Drug
Administration for the approval to market that compound. In the event milestone
or royalty payments to the licensor of Cordox are not made by the Company within
specified time periods, that licensor may elect to terminate the license
agreement and all rights thereunder. Such a termination could have a significant
adverse impact upon the Company.
6. SHAREHOLDERS' EQUITY
PREFERRED STOCK
The Company has authorized 1,000,000 shares of convertible preferred stock.
As of July 31, 1999 and 1998, no such shares were issued or outstanding.
WARRANTS
As of July 31, 1997, 4,673,512 Redeemable Class B Warrants were outstanding.
In November 1997, the Company received net proceeds of $4,707,576 from the
exercise of 856,026 Redeemable Class B Warrants and the concurrent issuance of
856,026 shares of common stock. During fiscal year 1998, all Redeemable Class B
Warrants expired and none are outstanding at July 31, 1999.
STOCK OPTION PLANS
Pro forma information regarding net loss and loss per share is required by
SFAS 123, and has been determined as if the Company has accounted for its
employee stock options under the fair value method set forth in SFAS 123. The
fair value of these options was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions for 1999, 1998 and 1997: risk-free interest rates of 6.0%; dividend
yields of 0%; volatility factors of the expected market price of the Company's
common stock of 85% for 1999 and 79% for 1998 and 84% for 1997; and the
weighted-average life of the options of eight years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a single reliable
measure of the fair value of its employee stock options. For purposes of pro
forma disclosures, the estimated fair value of the options is amortized to
expense over the options' vesting period. The Company's pro forma net loss for
the years ended July 31, 1999, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Pro forma net loss................................................... $ (10,477,490) $ (6,844,607) $ (7,658,837)
------------- ------------- -------------
------------- ------------- -------------
Pro forma net loss per share, basic and diluted...................... $ (0.67) $ (0.45) $ (0.62)
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
F-13
<PAGE>
CYPROS PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 1999
6. SHAREHOLDERS' EQUITY (CONTINUED)
As of July 31, 1999, 2,766,288 shares of common stock were reserved for
issuance under the stock option plan (the "1992 Plan"). The 1992 Plan provides
for the grant of incentive and nonstatutory stock options with various vesting
periods, generally four years, to employees, directors and consultants. The
exercise price of incentive stock options must equal at least the fair market
value on the date of grant, and the exercise price of nonstatutory stock options
may be no less than 85% of the fair market value on the date of grant. The
maximum term of options granted under the 1992 Plan is ten years.
As of July 31, 1999, 350,000 shares of common stock were reserved for
issuance under the directors' equity incentive plan (the "1993 Plan"). The 1993
Plan provides for the granting of 25,000 options to purchase common stock upon
appointment as a non-employee director, an additional 10,000 options each
January thereafter upon reappointment, and a bonus award of $2,000 in common
stock (the "Stock Bonus") for each board meeting attended. Options vest over
four years. The exercise price of the options is 85% of the fair market value on
the date of grant. The maximum term of options granted under the 1993 Plan is
ten years.
The number of shares of common stock issued with each Stock Bonus is equal
to $2,000 divided by the ten-day average of the closing sales price for the
common stock as quoted on the American Stock Exchange, Inc. for the ten trading
days immediately preceding the date of the board meeting at which the Stock
Bonus is earned. Stock Bonuses are 100% vested on the date of the grant.
The following table summarizes stock option activity under the 1992 and 1993
Plans:
<TABLE>
<CAPTION>
OPTIONS WEIGHTED AVERAGE
OUTSTANDING EXERCISE PRICE
----------- -----------------
<S> <C> <C>
Balance at July 31, 1996.......................................................... 1,355,812 $ 4.21
Granted......................................................................... 309,499 $ 4.33
Exercised....................................................................... (7,750) $ 2.83
Canceled........................................................................ (219,125) $ 4.47
-----------
Balance at July 31, 1997.......................................................... 1,438,436 $ 4.25
Granted......................................................................... 749,700 $ 4.85
Canceled........................................................................ (295,647) $ 5.08
-----------
Balance at July 31, 1998.......................................................... 1,892,489 $ 4.36
Granted......................................................................... 570,550 $ 2.78
Canceled........................................................................ (194,353) $ 3.44
-----------
Balance at July 31, 1999.......................................................... 2,268,686 $ 3.94
-----------
-----------
</TABLE>
At July 31, 1999, options to purchase 1,427,110 shares of common stock were
exercisable and there were 847,602 shares available for future grant.
The weighted average grant-date fair value for the options granted during
1999, 1998 and 1997 were $2.14, $3.74 and $3.40, respectively.
F-14
<PAGE>
CYPROS PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 1999
6. SHAREHOLDERS' EQUITY (CONTINUED)
Exercise prices and weighted average remaining contractual life for the
options outstanding as of July 31, 1999 are as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
- --------------------------------------------------------------------------- OPTIONS EXERCISABLE
RANGE OF WEIGHTED AVERAGE -----------------------------
EXERCISE REMAINING WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
PRICE NUMBER OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- -------------- ------------------- ------------------- ----------------- ---------- -----------------
<S> <C> <C> <C> <C> <C>
$1.44 97,500 3.05 $ 1.44 97,500 $ 1.44
$2.20--$2.46 302,050 7.63 $ 2.36 130,614 $ 2.28
$2.50--$2.88 193,000 9.30 $ 2.69 21,373 $ 2.74
$3.00--$4.06 710,229 6.15 $ 3.58 523,626 $ 3.58
$4.12--$4.93 202,200 5.99 $ 4.53 185,353 $ 4.53
$5.00--$5.62 689,750 6.77 $ 5.27 394,792 $ 5.27
$6.00--$6.80 42,499 3.38 $ 6.36 42,290 $ 6.23
$7.86--$7.88 31,458 6.07 $ 7.87 31,562 $ 7.87
------------------- ----------
2,268,686 $ 3.94 1,427,110
------------------- ----------
------------------- ----------
</TABLE>
The Company has recorded deferred compensation for the difference between
the price of options granted and the fair value of the Company's common stock.
Deferred compensation is amortized to expense during the vesting period of the
related stock or options.
7. INCOME TAXES
The Company accounts for income taxes using the liability method under
Financial Accounting Standards Board Statement No. 109, Accounting for Income
Taxes. Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets and liabilities
as of July 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
-------------- -------------
<S> <C> <C>
Deferred tax liabilities:
Purchased technology............................................................. $ 54,000 $ 267,000
-------------- -------------
Total deferred tax liabilities..................................................... 54,000 267,000
-------------- -------------
Deferred tax assets:
Net operating loss carryforwards................................................. 8,351,000 6,439,000
Capitalized research and development costs....................................... 735,000 569,000
Research and development tax credit carryforwards................................ 1,115,000 836,000
Other--net....................................................................... 93,000 53,000
-------------- -------------
Total deferred tax assets.......................................................... 10,294,000 7,897,000
Valuation allowance................................................................ (10,240,000) (7,630,000)
-------------- -------------
Net deferred tax assets............................................................ $ -- $ --
-------------- -------------
-------------- -------------
</TABLE>
F-15
<PAGE>
CYPROS PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 1999
7. INCOME TAXES (CONTINUED)
At July 31, 1999, the Company has federal and California tax net operating
loss carryforwards of approximately $23,052,000 and $4,926,000, respectively.
The federal tax loss carryforwards will begin to expire in 2007, unless
previously utilized. The California tax loss carryforwards will continue to
expire in 2000, unless previously utilized (approximately $591,000 expired in
1999). The Company also has federal and California research and development tax
credit carryforwards of approximately $901,000 and $329,000, respectively, which
will begin expiring in 2007 unless previously utilized. The above carryforwards
were determined as if the Company were filing a tax return at July 31, 1999;
however, for tax return purposes the Company uses a calendar year end.
In accordance with the Internal Revenue Code, the use of the Company's net
operating loss and credit carryforwards may be limited upon cumulative changes
in ownership of more than 50%.
The valuation allowance increased $2,610,000 from July 31, 1998 to July 31,
1999 due principally to the increase in deferred tax assets resulting from the
increase in tax net operating loss carryforwards. Realization of deferred tax
assets is dependent on future earnings, the timing and amount of which will be
dependent on scientific success, results of clinical trials and regulatory
approval of the Company's products currently under development. Accordingly, the
full valuation reserve has been established to reflect these uncertainties.
8. LEGAL PROCEEDINGS
In July 1998, the Company was served with a complaint in the United States
Bankruptcy Court for the Southern District of New York by the Trustee for the
liquidation of the business of A. R. Baron & Co., Inc. ("A. R. Baron") and the
Trustee of The Baron Group, Inc. (the "Baron Group"), the parent of A. R. Baron.
The complaint alleges that A. R. Baron and the Baron Group made certain
preferential or fraudulent transfers of funds to the Company prior to the
commencement of bankruptcy proceedings involving A. R. Baron and the Baron
Group. The Trustee is seeking return of the funds totaling $3.2 million. The
Company believes that the Trustee's claims are unfounded and is contesting the
allegations in the complaint vigorously. The Company contends that the transfers
challenged by the Trustee related to (i) the exercise by A. R. Baron in 1995 of
unit purchase options issued to it in 1992 as part of its negotiated
compensation for underwriting the Company's initial public offering and (ii) the
repayment by the Baron Group of the principal and interest (at 12% per annum)
payments and certain loan extension fees related to certain collateralized loans
made to it by the Company in 1995 and 1996.
9. SUBSEQUENT EVENT
On August 4, 1999,the Company announced that it had entered into a
definitive agreement to acquire all of the shares of RiboGene, Inc. in a
stock-for-stock transaction. The agreement was approved by the Board of
Directors of both companies. The consummation of the merger is expected to occur
sometime during the fall of 1999, and is subject to various conditions,
including, but not limited to approval by the stockholders of both companies.
The acquisition is structured to be a tax-free reorganization and will be
accounted for under the purchase method, whereby purchase price will be
allocated to the underlying assets and liabilities based upon their estimated
fair values.
F-16
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
2.1 Agreement and Plan of Merger and Reorganization dated as of August 4,
1999, among the Registrant, RiboGene, Inc. and Cypros Acquisition
Corporation. (2)
2.2 Pharmaceutical Products Purchase and Distribution Support Agreement as
of August 9, 1995 by and among Iso-Tex Diagnostics, Inc., Cypros
Pharmaceutical Corporation and Thomas J. Maloney. (3)(4)
2.3 Glofil Contract Manufacturing and Royalty Agreement as of August 9,
1995 by and among Iso-Tex Diagnostics, Inc., Cypros Pharmaceutical
Corporation and Thomas J. Maloney.(3)(4)
2.4 Merger Agreement as of August 9, 1995 among Cypros Pharmaceutical
Corporation, Iso-Tex Diagnostics "B", Inc. and Jean and Thomas Maloney.
(3)(4)
2.5 Asset Purchase Agreement by and among Cypros Pharmaceutical Corporation
and Schwarz Pharma, Inc. dated as of October 31, 1996. (5)
3.1 Restated Articles of Incorporation of Registrant. (6)
3.2 Amendment to Restated Articles of Incorporation of Registrant. (7)
3.3 Certificate of Incorporation of Cypros Acquisition Corporation. (1)
3.4 Bylaws of Cypros Acquisition Corporation. (1)
4.1 Form of Registrant's Common Stock Certificate. (6)
10.1 Forms of Incentive Stock Option and Nonstatutory Stock Option. (6)
10.2 Amended 1992 Stock Option Plan, as amended. (5)
10.3 Employment Agreement, dated July 10, 1991 as amended and restated
September 1, 1992, between the Registrant and Paul J. Marangos,
Ph.D. (6)
10.4 Amendment No. 1 to Employment Agreement, dated May 9, 1994, between the
Registrant and Paul J. Marangos, Ph.D. (8)
10.5 Amendment No. 2 to Employment Agreement, dated March 9, 1995, between
the Registrant and Paul J. Marangos, Ph.D. (9)
10.6 Amendment No. 3 to Employment Agreement, dated October 1, 1996, between
the Registrant and Paul J. Marangos, Ph.D. (10)
10.7 Amendment No. 4 to Employment Agreement, dated December 7, 1998,
between the Registrant and Paul J. Marangos, Ph.D. (1)
10.8 Employment Agreement, dated January 18, 1999, between the Registrant
and Brian W. Sullivan, Ph.D. (1)
10.9 1993 Non-Employee Directors Equity Incentive Plan, as amended, and
related form of Nonstatutory Stock Option. (1)
10.10 License Agreement, dated as of August 20, 1992, between the Registrant
and Angel K. Markov, M.D. (with certain confidential information in
brackets deleted). (6) (9)
10.11 License Agreement, dated as of August 27, 1992, among the Registrant,
the University of Cincinnati and University E.M., Inc. (with certain
confidential information in brackets deleted). (6) (9)
10.12 Assignment of and Amendment to License Agreement among University E.M.,
Inc., University of Cincinnati and the Registrant. (9)
<PAGE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
10.13 License and Support Agreement, dated as of February 18, 1993, between
the Registrant and Elie Abushanab, Ph.D. (with certain confidential
information in brackets deleted). (5) (12)
10.14 Employment Agreement dated December 6, 1997 between the Registrant and
Zofia E. Dziewanowska, M.D., Ph.D. (13)
10.15 Form of Affiliate Agreement between the Registrant and affiliates of
RiboGene, Inc. (1)
10.16 Form of Indemnification Agreement entered into between the Registrant
and its directors and officers. (1)
10.17 Form of Severance Benefits Agreement between the Registrant and Paul J.
Marangos. (1)
10.18 Form of Separation and Consulting Agreement between the Registrant and
Paul J. Marangos. (1)
10.19 Form of Severance Benefits Agreement between the Registrant and David
W. Nassif and between the Registrant and Brian W. Sullivan, Ph.D. (1)
10.20 Form of Retention Bonus Agreement between the Registrant and certain of
its executive officers. (1)
10.21 Employment Agreement dated as of August 4, 1999 between the Registrant
and Charles J. Casamento. (1)
10.22 Form of Severance Benefits Plan covering the employees of the
Registrant. (1)
21.1 Subsidiaries of Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney. Reference is made to page 41.
27.1 Financial Data Schedule. (Exhibit 27 is submitted as an exhibit only in
the electronic format of this Annual Report on Form 10-K submitted
to the Securities and Exchange Commission.)
</TABLE>
- --------------------------------------------------------------------------------
(1) Filed as an exhibit to Registrant's Registration Statement on Form S-4,
Registration Statement No. 333-87611, and incorporated herein by
reference.
(2) Filed as an exhibit to the Schedule 13D filed by Registrant on August 16,
1999, and incorporated herein by reference.
(3) Filed as an exhibit to the Registrant's Form 8-K dated August 10, 1995 and
incorporated herein by reference.
(4) Certain confidential portions deleted pursuant to an application for Order
Granting Confidential Treatment Under the Securities Exchange Act of 1934
and Rule 24b-2 Thereunder filed concurrently with the Form 8-K.
(5) Filed as an exhibit to the Registrant's Form 8-K dated November 4, 1996
and incorporated herein by reference.
(6) Filed as an exhibit to the Registrant's Registration Statement on Form
S-1, Registration No. 33-51682, and incorporated herein by reference.
(7) Filed as an exhibit to the Registrant's Form 10-Q for the period ended
January 31, 1995, and incorporated herein by reference.
<PAGE>
(8) Filed as an exhibit to the Registrant's Form 10-K for the fiscal year
ended July 31, 1994.
(9) Filed as an exhibit to the Registrant's Form 10-K for the fiscal year
ended July 31, 1993.
(10) Filed as an exhibit to the Registrant's Form 10-K for the fiscal year
ended July 31, 1996.
(11) Certain confidential portions deleted pursuant to Order Granting
Application Under the Securities Act of 1933 and Rule 406 Thereunder
Respecting Confidential Treatment, dated November 3, 1992.
(12) Certain confidential portions deleted pursuant to Order Granting
Application Pursuant to Rule 24B-2 Under the Securities Exchange Act of
1934 Respecting Confidential Treatment, dated December 20, 1993.
(13) Filed as an exhibit to the Registrant's Form 10-Q for the period ended
October 31, 1997.
<PAGE>
EXHIBIT 21.1
Subsidiaries of Registrant
--------------------------
Cypros Acquisition Corporation
<PAGE>
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statement (Form S-8 No. 33-81243) pertaining to the 1992 Stock Option PLan
and the 1993 Non-Employee Directors' Equity Incentive Plan of Cypros
Pharmaceutical Corporation of our report dated August 23, 1999, with respect
to the consolidated financial statements of Cypros Pharmaceutical Corporation
in the Annual Report (Form 10-K) for the year ended July 31, 1999.
ERNST & YOUNG LLP
San Diego, California
October 26, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-Q FOR THE PERIOD ENDED JULY 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-END> JUL-31-1999
<CASH> 2,509,386
<SECURITIES> 2,964,689
<RECEIVABLES> 391,888
<ALLOWANCES> 0
<INVENTORY> 205,207
<CURRENT-ASSETS> 112,540
<PP&E> 2,626,128
<DEPRECIATION> (1,154,563)
<TOTAL-ASSETS> 13,138,864
<CURRENT-LIABILITIES> 922,082
<BONDS> 146,921
0
0
<COMMON> 41,497,174
<OTHER-SE> (29,582,167)
<TOTAL-LIABILITY-AND-EQUITY> 13,138,864
<SALES> 2,518,181
<TOTAL-REVENUES> 2,518,181
<CGS> 771,099
<TOTAL-COSTS> 9,254,638
<OTHER-EXPENSES> 132,839
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 40,166
<INCOME-PRETAX> (6,783,922)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,783,922)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,783,922)
<EPS-BASIC> (0.43)
<EPS-DILUTED> (0.43)
</TABLE>
