<PAGE> 1
Filed Pursuant to Rule 424(b)(3)
Registration Statement No. 333-04105
2,300,000 SHARES
LOGO
COMMON STOCK
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All of the shares of common stock ("Common Stock") offered hereby are being sold
by Calypte Biomedical Corporation ("Calypte" or the "Company"). Prior to this
Offering, there has been no public market for the Common Stock, and there can be
no assurance that such a market will develop or, if one does develop, that it
will be sustained. For a discussion of the factors considered in determining the
initial public offering price, see "Underwriting." The Common Stock has been
approved for listing on the Nasdaq SmallCap Market under the symbol "CALY."
------------------------------------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 5.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
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Per Share.................... $6.00 $0.42 $5.58
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Total(3)..................... $13,800,000 $966,000 $12,834,000
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</TABLE>
(1) See "Underwriting" for indemnification arrangements with the Underwriter.
(2) Before deducting expenses payable by the Company estimated at $1,020,000.
(3) The Company has granted to the Underwriters an option, exercisable within 45
days from the date of this Prospectus, to purchase up to 345,000 additional
shares solely to cover over-allotments, if any. If the Underwriters exercise
such option in full, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $15,870,000, $1,110,900 and
$14,759,100, respectively. See "Underwriting."
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The shares of Common Stock are offered by the Underwriter, subject to prior
sale, withdrawal, cancellation or modification of the offer without notice,
delivery to and acceptance by the Underwriter, and certain other conditions. It
is expected that delivery of the shares of Common Stock, offered hereby will be
made in San Francisco, California, on or about July 31, 1996.
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PACIFIC GROWTH EQUITIES, INC.
The date of this Prospectus is July 26, 1996.
<PAGE> 2
THE CALYPTE HIV-1 URINE-BASED TEST HAS NOT BEEN APPROVED BY THE FDA FOR
MARKETING IN THE UNITED STATES. THE TEST CANNOT BE SOLD IN THE UNITED STATES
UNLESS AND UNTIL SUCH FDA APPROVAL IS OBTAINED, IF AT ALL.
[Please refer to Appendix for description of graphics.]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ SMALLCAP MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
The Company intends to furnish its stockholders with annual reports containing
consolidated financial statements audited by its independent auditors and
quarterly reports containing unaudited consolidated financial data for the first
three quarters of each fiscal year.
CalypteTM and SentinelTM are trademarks of the Company. This Prospectus also
contains trademarks and tradenames of other companies.
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<PAGE> 3
THE CALYPTE HIV-1 URINE-BASED TEST HAS NOT BEEN APPROVED BY THE FDA FOR
MARKETING IN THE UNITED STATES. THE TEST CANNOT BE SOLD IN THE UNITED STATES
UNLESS AND UNTIL SUCH FDA APPROVAL IS OBTAINED, IF AT ALL.
[Please refer to Appendix for description of gatefold graphics.]
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including the Consolidated Financial Statements and Notes thereto,
appearing elsewhere in this Prospectus.
THE COMPANY
Calypte Biomedical Corporation ("Calypte" or the "Company") believes that it is
a leader in the development of a urine-based screening test for the detection of
Human Immunodeficiency Virus Type-1 ("HIV-1"), the putative cause of Acquired
Immunodeficiency Syndrome ("AIDS"). The Company has integrated several
proprietary technologies to develop a test which, in Company-funded clinical
trials conducted by or on behalf of the Company, detected the presence of HIV
antibodies in urine with 99.33% sensitivity (as compared to blood). Specificity
of the screening test with a companion western blot confirmatory test was 100%.
Calypte believes that its proprietary urine-based test offers significant
advantages compared to existing blood-based tests, including ease-of-use, lower
costs, and significantly reduced risk of infection from collecting and handling
specimens. Urine collection is non-invasive and painless, and urine is the most
commonly collected body fluid. The Company estimates that the cost of
collecting, handling, testing and disposing of urine specimens will be
significantly less than that of blood specimens. Independent studies report that
the likelihood of finding infectious HIV virus in urine is extremely low, which
greatly reduces the risk and cost of accidental exposure to health care workers,
laboratory personnel, and patients being tested.
On March 28, 1996, the Company received a letter from the U.S. Food and Drug
Administration ("FDA") stating that the Company's HIV-1 urine screening test was
approvable pending finalization of the package insert and other labeling. The
Company's screening test, when used with the western blot confirmatory test for
urine licensed from Cambridge Biotech Corporation ("Cambridge Biotech"), will
provide the only complete urine-based HIV testing system. This western blot test
is already licensed by the FDA for use with blood, and is currently pending FDA
clearance for use with urine. On June 21, 1996, the FDA Blood Products Advisory
Committee ("BPAC") determined that the clinical data and test protocol of the
Cambridge Biotech urine western blot confirmatory test supported its use to
determine a positive HIV-1 test result. Based on the data presented, the BPAC
recommended that the Cambridge Biotech urine western blot confirmatory test not
be considered a stand-alone supplemental test and that positive reported results
in urine be subsequently verified by using a blood sample. The Company believes
that this subsequent verification will be addressed in the product labeling,
which may instruct physicians that patients receiving positive HIV-1 test
results in urine should receive proper follow-up medical care, counseling and
verification of HIV status by testing a subsequent blood sample. While any
recommendation of the BPAC is not binding on the FDA, there can be no assurance
that the FDA will grant approval of the Cambridge Biotech urine confirmatory
test or will not require additional data or clinical trials before granting such
approval. Any significant delay in obtaining approval for the Cambridge Biotech
urine confirmatory test could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company believes
that the benefits of its testing system will enable it to penetrate existing
markets and expand into new markets that are currently not served by blood-based
and oral fluid-based HIV test systems.
The Company also intends to submit a pre-market application ("PMA") to the FDA
for approval to market the Company's over-the-counter ("OTC") home urine
collection kit. The Company's home collection kit would allow consumers, in the
privacy of their homes, to take a urine sample, mail it to Calypte Biomedical
Laboratories for analysis and then anonymously obtain results and professional
counseling by telephone. On May 14, 1996, Direct Access Diagnostics, a
subsidiary of Johnson & Johnson, received FDA clearance for the first OTC home
blood collection kit for HIV. In addition, on July 22, 1996, Home Access Health
Corp. received FDA clearance for another OTC home collection kit for HIV. The
Company believes that these FDA approved OTC products will accelerate consumer
acceptance and awareness of home collection for HIV. The Company believes that
an OTC urine collection kit for HIV would have advantages compared to an OTC
blood collection kit for HIV.
HIV is the leading cause of death for persons age 25 to 44 in the United States.
Those infected with HIV are generally asymptomatic until several years after HIV
infection, and during this period most are unaware of their HIV status.
According to the World Health Organization, HIV currently infects approximately
16.9 million individuals and is forecasted to infect between 30 and 40 million
individuals by the year 2000.
It is estimated that 27 million blood bank screening tests were performed in
1993 and 23 million non-blood bank HIV screening tests are projected to be
performed in 1996 in the United States. In addition to blood banks, the largest
domestic demand for HIV testing is generated by physicians, the life insurance
industry, the military, the criminal justice system and the Immigration and
Naturalization Service. The high cost of testing blood for HIV has precluded
large HIV public health screening programs. Even in the United States, only four
million of the 14 million life insurance policies written each year currently
utilize HIV screening.
The Company's objective is to be the leader in the development and
commercialization of urine-based diagnostic tests. The Company's primary
strategy is to exploit the advantages of using urine instead of blood for HIV
testing in order to establish its diagnostic screening test as the screening
method of choice for HIV. The Company plans to build upon its expertise in
urine-based diagnostics to develop additional urine-based tests for sexually
transmitted diseases and other human conditions. Initially, the Company intends
to focus on developing and commercializing urine-based screening tests for
HIV-2, Chlamydia and H. pylori. The key components of the Company's business
strategy are to: (i) target and expand the life insurance testing market, (ii)
penetrate the United States clinical laboratory market, (iii) pursue
international markets through distributor relationships, (iv) establish Calypte
Biomedical Laboratories, (v) enter the emerging OTC market, and (vi) develop
additional urine-based diagnostics.
This Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in "Risk
Factors."
3
<PAGE> 5
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company..................... 2,300,000 shares
Common Stock to be outstanding after the offering....... 10,159,046 shares(1)
Use of proceeds......................................... Expand product development efforts and support
clinical trials; develop Calypte Biomedical
Laboratories; expand manufacturing capacity;
redeem mandatorily redeemable preferred stock;
repay certain indebtedness; and for working
capital and general corporate purposes.
Proposed Nasdaq SmallCap Market symbol.................. CALY
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTH PERIOD
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------------- ---------------------
1993 1994 1995 1995 1996
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<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenue............................................... $ -- $ -- $ -- $ -- $ --
Loss from operations.................................. (6,303) (5,462) (10,380) (1,462) (2,723)
Net loss attributable to common stockholders.......... (6,301) (5,587) (10,411) (1,428) (2,846)
Net loss per share attributable to common
stockholders(2)..................................... $ (1.35) $ (0.99) $ (1.50) $ (0.21) $ (0.41)
Weighted average shares used to compute net loss per
share attributable to common stockholders(2)........ 4,666,236 5,671,038 6,934,334 6,933,854 6,934,520
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996(1)
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ACTUAL AS ADJUSTED(3)
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CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents...................................................... $ 1,842 $ 8,889
Working capital................................................................ (3,791) 6,257
Total assets................................................................... 4,826 11,873
Mandatorily Redeemable Series A Preferred Stock................................ 1,766 --
Deficit accumulated during development stage................................... (33,217) (33,217)
Total stockholders' equity (deficit)........................................... (4,248) 7,566
</TABLE>
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(1) The actual and as adjusted information excludes, as of June 21, 1996, (i)
1,311,420 shares of Common Stock issuable upon exercise of outstanding
options granted under the Company's stock option plans at a weighted average
exercise price of $0.54 per share, (ii) 1,303,007 shares of Common Stock
available for future grant under the Company's stock option plans, (iii)
warrants to purchase 1,066,355 shares of Common Stock at prices ranging from
$5.00 to $7.50 per share and (iv) options to purchase 475,000 shares of
Common Stock at $7.50 per share. See "Capitalization" and
"Management -- Stock Option Plans" and Notes 9, 10 and 12 of Notes to
Consolidated Financial Statements and Notes 5, 6 and 7 of Notes to
Consolidated Condensed Financial Statements.
(2) See Note 2 of Notes to Consolidated Financial Statements and Note 2 of Notes
to Consolidated Condensed Financial Statements.
(3) Adjusted to give effect to (i) the receipt of the net proceeds from the sale
of 2,300,000 shares of Common Stock offered by the Company hereby at an
initial public offering price of $6.00 per share and after deducting the
underwriting discounts and commissions and estimated offering expenses
payable by the Company, (ii) the redemption by the Company of its
Mandatorily Redeemable Series A Preferred Stock including accumulated unpaid
dividends and (iii) the repayment of $2.5 million of current notes payable.
As adjusted information also reflects the repayment of $503,000 of current
notes payable which were repaid by the Company in April 1996. See "Use of
Proceeds" and "Capitalization."
---------------
Except as otherwise noted, all information in this Prospectus (i) assumes no
exercise of the Underwriter's over-allotment option, (ii) reflects the
reincorporation of the Company into Delaware effected in July 1996, and (iii)
except in the Consolidated Financial Statements reflects, (a) the conversion of
outstanding shares of Convertible Preferred Stock of the Company (except for the
Mandatorily Redeemable Series A Preferred Stock being redeemed after the
Offering) into Common Stock, which will occur automatically upon the completion
of this Offering. See "Capitalization," "Description of Capital Stock" and
"Underwriting."
RISK FACTORS
The principal risks of the offering include uncertainty of FDA approval for
the Company's urine-based HIV-1 screening test and the Cambridge Biotech urine
western blot confirmatory test, the Company's dependence on a single supplier
for a urine-based confirmatory test, which itself remains subject to FDA
approval, a limited operating history of losses and reliance on proprietary
technology. For a discussion of considerations relevant to an investment in the
Common Stock, see "Risk Factors" beginning on page 5.
4
<PAGE> 6
RISK FACTORS
This Prospectus contains forward looking statements that involve risks and
uncertainties. The following risk factors should be carefully considered by
potential investors, before purchasing the Common Stock offered hereby:
UNCERTAINTY OF REGULATORY APPROVAL FOR HIV-1 SCREENING TEST. The Company has
filed a product license application ("PLA") and an establishment licensing
application ("ELA") with the FDA relating to its urine-based HIV-1 screening
test. On March 28, 1996, the Company received a letter from the FDA stating that
the Company's HIV-1 urine screening test was approvable, pending finalization of
the package insert and other labeling. The satisfaction of these conditions is
determined solely by the FDA, and the Company cannot predict when approval of
its test may be received, if at all. There can be no assurance that the Company
will ultimately receive approval for its urine-based HIV-1 test. Failure to
obtain approval for its test would have a material adverse effect on the
Company's business, financial condition and results of operations.
DEPENDENCE ON SOLE SOURCE OF SUPPLY AND REGULATORY APPROVAL OF CONFIRMATORY
TEST. In order to minimize the possibility of false positive reports, positive
HIV screening results must be confirmed with an additional test format before
being reported to the physician or patient in the United States and in most
developed countries. The Company has entered into an agreement with Cambridge
Biotech under which both Calypte and Cambridge Biotech will market and
distribute a urine-capable western blot confirmatory test which uses technology
licensed from the Company. The western blot kit manufactured by Cambridge
Biotech has already received FDA approval for blood testing, and is the only
confirmatory test for which application has been made for FDA approval for use
with urine. On June 21, 1996, the BPAC determined that the clinical data and
test protocol of the Cambridge Biotech urine western blot confirmatory test
supported its use to determine a positive HIV-1 test result; however, the BPAC
recommended that the Cambridge Biotech urine western blot confirmatory test not
be considered a stand-alone supplemental test and that positive reported results
in urine be subsequently verified by using a blood sample. There can be no
assurance that the FDA will grant approval of the Cambridge Biotech urine
confirmatory test or will not require additional data or clinical trials before
granting such approval. Failure to obtain, or any significant delay in
obtaining, approval for the Cambridge Biotech urine confirmatory test could have
a material adverse effect on the Company's business, financial condition and
results of operations.
LIMITED OPERATING HISTORY; HISTORY OF LOSSES. The Company has a limited history
of operations, and since its inception in February 1988, the Company has been
primarily engaged in research and development. As of March 31, 1996, the Company
has generated revenues of $2.4 million primarily from research and development
contracts. The Company has experienced significant operating losses since
inception and, as of March 31, 1996, had an accumulated deficit of $33.2
million. The Company expects operating losses to continue as it initiates
marketing and sales activities and expands research and development. The Company
does not have experience in manufacturing, marketing or selling its products in
commercial quantities. There can be no assurance that the Company's products
will be successfully commercialized or that the Company will achieve significant
product revenues. In addition, there can be no assurance that the Company will
achieve or sustain profitability in the future. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
RELIANCE ON PROPRIETARY TECHNOLOGY AND KNOW-HOW; LICENSE OBLIGATIONS. The
Company's ability to compete effectively will depend in large part on its
ability to develop and maintain proprietary aspects of its technology. The
Company has the right to utilize certain patents and proprietary rights under
licensing agreements with New York University ("NYU"), Cambridge Biotech,
Repligen Corporation ("Repligen"), Texas A&M University System and Stanford
University. These license arrangements secure intellectual property rights for
the manufacture and sale of the Company's products. Pursuant to these license
agreements, the Company must pay product royalties and under certain agreements
the Company must make minimum royalty payments. In the event that the Company
does not receive approval for its urine-based HIV-1 test or develop alternate
sources of revenues, the obligation to make minimum royalty payments could have
a material adverse impact on the Company's results of operations. Failure to
make required minimum royalty payments may result in the loss of exclusivity or
termination of the license. There can be no assurance that the Company will be
able to maintain exclusivity or maintain its current license agreements.
Termination of any of these
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<PAGE> 7
licenses could have a material adverse effect on the Company's business,
financial condition and results of operations.
The HIV testing industry has been characterized by extensive litigation
regarding patents and other intellectual property rights. Litigation or
interference proceedings could result in significant diversion of efforts by the
Company's management and technical personnel. There are a number of filed and
issued patents involved with the detection of HIV antibodies. One such patent is
currently owned by Chiron Corporation. There can be no assurances that Chiron
will not assert claims relating to this patent against the Company. Patent
litigation can be costly and protracted. The expense of litigating a claim
against the Company for patent infringement could have a material adverse effect
on the Company's business, financial condition and results of operations. In the
event that the Company were found to be infringing a validly issued patent, and
the Company could not obtain a license to such patent on reasonable terms, the
Company could be forced to pay damages, obtain a license to such patent at a
significantly higher rate or, possibly, remove its urine-based HIV-1 test from
the market. Such an event would have a material adverse effect on the Company's
business, financial condition and results of operations. See
"Business -- Patents, Proprietary Rights and Licenses."
In addition, there can be no assurance that competitors, many of which have
substantial resources and have made substantial investments in competing
technologies, do not have, or will not seek to apply for and obtain, patents
that will prevent, limit or interfere with the Company's ability to make, use or
sell its products either in the U.S. or in international markets. There can be
no assurance that the Company will not be required to obtain additional cross
licenses in the future or that the Company will not in the future become subject
to patent infringement claims and litigation or interference proceedings
declared by the U.S. Patent and Trademark Office ("USPTO") to determine the
priority of inventions. The defense and prosecution of intellectual property
suits, USPTO interference proceedings and related legal and administrative
proceedings are both costly and time consuming. Litigation may be necessary to
enforce patents issued to or licensed by the Company, to protect trade secrets
or know-how owned by the Company or to determine the enforceability, scope and
validity of the proprietary rights of others.
The Company relies on trade secrets and proprietary know-how, which it seeks to
protect, in part, through appropriate confidentiality and proprietary
information agreements. These agreements generally provide that all information
developed by or made known to the individual by the Company during the course of
the individual's relationship with the Company is to be kept confidential and
not disclosed to third parties, except in specific circumstances. The agreements
generally provide that all inventions conceived by the individual in the course
of rendering services to the Company shall be the exclusive property of the
Company; however, certain of the Company's agreements with consultants, who
typically are employed on a full-time basis by academic institutions or
hospitals, do not contain assignment of invention provisions. There can be no
assurance that proprietary information or confidentiality agreements with
employees, consultants and others will not be breached, that the Company would
have adequate remedies for any breach, or that the Company's trade secrets will
not otherwise become known to or independently developed by competitors. See
"Business -- Patents, Proprietary Rights and Licenses."
UNCERTAINTY OF MARKET ACCEPTANCE; LACK OF SALES AND MARKETING EXPERIENCE. The
Company's first product represents a new method of determining the presence of
HIV antibodies in humans, and there can be no assurance that this product will
gain market acceptance even if necessary international and U.S. regulatory and
reimbursement approvals are obtained. The Company believes that recommendations
and endorsements by the medical diagnostic community will be essential for
market acceptance of this product, and there can be no assurance that any such
recommendations or endorsements will be obtained. Failure of the Company's
products to achieve market acceptance would have a material adverse effect on
the Company's business, financial condition and results of operations.
The Company has no experience marketing and selling its product either directly
or through distributors. The Company intends to establish a small direct sales
force for sales to certain U.S. laboratories. There can be no assurance that the
Company's marketing and direct sales efforts will be successful. The Company's
sales and marketing strategy relies significantly upon third party distributors
for the sale of its product. There can be no assurance that these distributors
will market the Company's product successfully or that, if such relationships
are terminated, the Company will be able to establish relationships with other
distributors on satisfactory
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terms, if at all. Any disruption in the Company's distribution, sales or
marketing network could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business -- Sales,
Marketing and Distribution."
DEPENDENCE ON A SINGLE PRODUCT. The Company's HIV-1 urine-based screening test,
if licensed for marketing by the FDA, will be the Company's only FDA-approved
product. Upon approval, there can be no assurance that the Company's marketing
efforts will be successful. Furthermore, because the screening test will
represent the Company's sole near-term product, the Company could be required to
cease operations if this product fails to achieve market acceptance or generate
significant revenue. See "Business -- Products."
DEPENDENCE UPON KEY SUPPLIERS. The Company purchases raw materials and
components used in its products from various suppliers and relies on single
sources for several of these components. Establishment of additional or
replacement suppliers for these components cannot be accomplished quickly. The
Company has a number of single-source components, and any delay or interruption
in supply of these components could significantly impair the Company's ability
to manufacture its products in commercial quantities, and therefore would have a
material adverse effect on the Company's business, financial condition and
results of operations, particularly if and when the Company scales up its
manufacturing activities in support of commercial sales. See
"Business -- Manufacturing."
LIMITED MANUFACTURING EXPERIENCE; SCALE-UP RISK. The Company has only limited
experience in manufacturing its product. The Company has primarily manufactured
its product in limited quantities for submission to the FDA for ongoing
compliance, international clinical trials and building its inventory in
anticipation of commercialization. The Company does not have experience in
manufacturing its products in commercial quantities. Manufacturers often
encounter difficulties in scaling-up production of new product, including
problems involving production yields, quality control and assurance, raw
material supply and shortages of qualified personnel. The Company's
manufacturing relies on certain rare reagents including its viral seed stock,
the loss of which would impair the Company's ability to manufacture its product.
The Company currently manufactures its product in, and is awaiting final FDA
license for, its Berkeley, California facility. The Company is completing
qualification of a larger manufacturing facility in Alameda, California, and is
preparing an amendment to its pending establishment license for this facility.
Difficulties encountered by the Company in manufacturing scale-up to meet
commercial demand, including delays in receiving FDA approval for the Alameda
facility, could have a material adverse effect on its business, financial
condition and results of operations. See "Business -- Manufacturing" and
" -- Government Regulation."
DEPENDENCE UPON INTERNATIONAL DISTRIBUTORS AND SALES. The Company intends to
market and sell its products internationally through a network of distributors,
and the Company's international sales are dependent upon the marketing efforts
of, and sales by, these distributors. The Company anticipates that a significant
portion of its revenues for the next several years will be derived from
international distributor sales. International sales and operations involve a
number of inherent risks and may be limited or disrupted by the imposition of
government controls, export license requirements, political instability, trade
restrictions, changes in tariffs, difficulties in managing international
operations and fluctuations in foreign currency exchange rates. The Company's
distribution agreement with Otsuka Pharmaceutical Co. Ltd. is terminable without
cause upon 120 days prior notice. Certain of the Company's distributors have
limited international marketing experience, and there can be no assurance that
the Company's distributors will be able to market successfully the Company's
products in any international market. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business -- Sales,
Marketing and Distribution."
INTENSE COMPETITION IN COMPANY'S MARKETS AND RAPID TECHNOLOGICAL ADVANCES BY
COMPETITORS. Competition in the emerging market for HIV testing is intense and
is expected to increase. The Company believes its principal competition will
come from existing HIV blood-based assays and from oral fluid testing assays.
Furthermore, new testing methodologies could be developed in the future that
render the Company's urine-based HIV test impractical, uneconomical, or
obsolete. Most of the Company's competitors have significantly greater
financial, manufacturing, technical, research, marketing, sales, distribution
and other resources than the Company. There can be no assurance that the
Company's competitors will not succeed in developing or marketing technologies
and products that are more effective than those developed by the Company or that
would render the Company's technologies or products obsolete or otherwise
commercially unattractive. In addition, there can be no assurance that
competitors will not succeed in obtaining regulatory approval for such
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<PAGE> 9
products, or introducing or commercializing them prior to the Company. Such
developments could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Competition."
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS. The Company expects that its
revenues and results of operations may fluctuate significantly from quarter to
quarter and will depend on a number of factors, many of which are outside the
Company's control. These factors include actions relating to regulatory matters,
the extent to which the Company's products gain market acceptance, the timing
and size of distributor purchases, introduction of alternative means for testing
for HIV, competition, the timing and cost of new product introductions, and
general economic conditions. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
EXTENSIVE GOVERNMENT REGULATION. The Company's products are subject to extensive
regulation by the FDA and, to varying degrees, by state and foreign regulatory
agencies. The manufacture and sale of diagnostic products, including the
Company's products, are subject to extensive regulation by numerous governmental
authorities in the U.S. and other countries. In the U.S., the Company's products
are regulated either as biologics, such as in the case of the Company's HIV-1
urine-based screening test, or as medical devices, as in the case of the
Company's anticipated HIV-1 urine collection kit. The process of obtaining FDA
and other required regulatory approvals is lengthy, expensive and uncertain,
frequently requiring from one to several years from the date of FDA submissions
if approval is obtained at all. Sales of diagnostic tests and products outside
of the U.S. are subject to foreign regulatory requirements that vary widely from
country to country. The time required to obtain approval for sale in foreign
countries may be longer or shorter than that required for FDA approval and the
requirements may differ. The preparation of required applications and the
subsequent foreign regulatory approval process is expensive, lengthy and
uncertain. There can be no assurance that the Company will be able to obtain
necessary regulatory approvals or clearances in a timely manner or at all, and
delays in receipt of or failure to receive such approvals or clearances, the
loss of previously received approvals or clearances, or failure to comply with
existing or future regulatory requirements would have a material adverse effect
on the Company's business, financial condition and results of operations. If the
FDA believes that a company is not in compliance with the regulations, it can
institute proceedings to detain or seize a product or prohibit marketing and
sales of the Company's products, issue a recall, and assess civil and criminal
penalties against the Company, its officers or its employees, and take other
enforcement actions.
The Company intends to file a pre-market approval application ("PMA") with the
FDA for the HIV-1 urine collection kit which constitutes an application for
approval of over-the-counter sales of this urine collection device so that
consumers could purchase the device for the collection and mailing of specimens
directly to the Company for HIV testing. The Company believes that a submission
for this device must set forth Calypte's plans for reporting results to the
consumer and for providing counseling services as well as the collection kit
itself. There can be no assurance that the FDA will approve the Company's HIV-1
urine collection device for over-the-counter distribution and sale. Furthermore,
there can be no assurance that the FDA will not request additional data or
require that the Company conduct further clinical studies causing the Company to
incur further cost and delay. In addition, there can be no assurance that the
FDA will not limit the intended use of the Company's products as a condition of
PMA approval.
In addition, the manufacture, sale or use of the Company's products are subject
to regulation by other federal entities, such as the Occupational Safety and
Health Agency, the Environmental Protection Agency, and by various state
agencies, including the California Environmental Protection Agency. Federal and
state regulations regarding the manufacture, sale or use of the Company's
products are subject to future change and these changes could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Distribution of the Company's products outside the U.S. is also subject to
extensive government regulation. In a majority of foreign countries, FDA
approval is required first in order to receive approval in that country. The
export by the Company of certain of its products which have not yet been cleared
for domestic commercial distribution may be subject to FDA export restrictions.
Failure to obtain necessary regulatory approvals, or failure to comply with
regulatory requirements, would have a material adverse effect on the Company's
business, financial condition and results of operations.
8
<PAGE> 10
The Company will be required to adhere to applicable FDA regulations regarding
current Good Manufacturing Practices ("cGMP") in the U.S. and similar
regulations in other countries, which include testing, control and documentation
requirements. Ongoing compliance with GMP and other applicable regulatory
requirements, such as reporting requirements, will be monitored through periodic
inspections by state and federal agencies, including the FDA, and by comparable
agencies in other countries. Failure to comply with applicable regulatory
requirements, including marketing products for unapproved uses, could result in,
among other things, fines, injunctions, civil penalties, recall or seizure of
products, total or partial suspension of production, refusal of the government
to grant premarket clearance or premarket approval for products, withdrawal of
approvals and criminal prosecution. In addition, changes in existing regulations
or adoption of new governmental regulations or policies could prevent or delay
regulatory approval of the Company's products or result in increased regulatory
costs. Furthermore, once approval is granted, subsequent modifications to the
approved product or manufacturing process may require a supplemental PLA and ELA
or PMA as the case may be or may require the submission of a new PMA
application, which could require substantial additional clinical data and FDA
review.
Due to the nature of its manufacturing processes, the Company is subject to
stringent federal, state and local laws, rules, regulations and policies
governing the use, generation, manufacture, storage, air emission, discharge,
handling and disposal of certain materials and wastes. There can be no assurance
that the Company will not be required to incur significant costs to comply with
land use and environmental regulations as manufacturing is scaled-up to
commercial levels, nor that the operations, business or financial condition of
the Company will not be materially and adversely affected by current or future
environmental laws, rules, regulations and policies. There can be no assurance
that the Company will be able to obtain and maintain all required permits in
connection with the operation of its manufacturing facilities. When and if the
Company begins to produce products on a commercial scale, it will be a
significant user and disposer of water. The disposal of water used in the
Company's manufacturing processes must comply with applicable federal, state and
local environmental protection laws, and compliance with these laws may be
costly and difficult. See "Business -- Manufacturing."
ESTABLISHMENT AND REGULATION OF REFERENCE LABORATORY. The Company intends to
establish a clinical reference laboratory in connection with seeking approval
for an OTC home urine collection kit for HIV-1. There are a number of risks in
establishing a reference laboratory especially for testing for HIV. The Company
must, among other actions, seek to hire and retain key laboratory personnel,
purchase necessary equipment, secure required permits, incur marketing expenses,
obtain customers, and comply with government regulations. The Company's planned
laboratory would test for HIV using the Company's urine-based HIV-1 test and, if
approvals are obtained, receive home collected urine for HIV testing. The
Company may be required to offer counseling in connection with the reporting of
results to laboratory customers. There can be no assurance that the Company can
establish or receive the necessary approval for the laboratory.
If the Company establishes a reference laboratory for the testing of urine
samples using the Company's urine-based HIV-1 screening test, the Company's
laboratory would be regulated under the Clinical Laboratory Improvement
Amendments of 1988 ("CLIA"). CLIA is intended to ensure the quality and
reliability of all medical testing in laboratories in the U.S. by requiring that
any health care facility in which testing is performed meet specified standards
in the areas of personnel qualification, administration, participation in
proficiency testing, patient test management, quality control, quality
assurance, and inspections. The regulations have established three levels of
regulatory control based on the test's complexity: "waived," "moderately
complex," and "highly complex." Calypte believes that its test will be
categorized as highly complex, which would require the Company and laboratories
using its test to meet certain quality control and personnel standards that are
more rigorous than those for moderately complex tests. Under the CLIA
regulations, all laboratories performing high or moderately complex tests are
required to obtain either a registration certificate or certifications of
accreditation from the Health Care Finance Administration ("HCFA"). There can be
no assurance that the CLIA regulations and future administrative interpretations
of CLIA will not have an adverse impact on the potential market for the
Company's products. The Company would also be subject to state laboratory
licensure standards and laws governing the disposal of infectious and/or
hazardous wastes.
PRODUCT LIABILITY AND RECALL RISK; LIMITED INSURANCE COVERAGE. The manufacture
and sale of medical diagnostic products entail significant risk of product
liability claims or product recalls. While the Company
9
<PAGE> 11
maintains product liability insurance, the Company faces the risk of litigation
in the event of false positive or false negative reports. There can be no
assurance that the Company's existing insurance coverage limits will be adequate
to protect the Company from any liabilities it might incur in connection with
the clinical trials or sales of its products. In addition, the Company may
require increased product liability coverage as its products are commercialized.
Such insurance is expensive and in the future may not be available on acceptable
terms, if at all. A successful product liability claim or series of claims
brought against the Company in excess of its insurance coverage, or a recall of
the Company's products, could have a material adverse effect on the Company's
business, financial condition and results of operations.
DEPENDENCE UPON KEY PERSONNEL. The Company is dependent upon a number of key
management and technical personnel. The Company has employment agreements with
the members of its core management team. The Company's ability to manage its
transition to commercial-scale operations, and hence its success, will depend on
the efforts of these individuals, among others. The loss of the services of one
or more key employees could have a material adverse effect on the Company. The
Company's success will also depend on its ability to attract and retain
additional highly qualified management and technical personnel. The Company
faces intense competition for qualified personnel, many of whom are often
subject to competing employment offers, and there can be no assurance that the
Company will be able to attract and retain such personnel.
William A. Boeger is the Chief Executive Officer and Chief Financial Officer of
Pepgen, a 49% owned therapeutic subsidiary of the Company, and Dr. Howard B.
Urnovitz is President and Chief Science Officer. In addition, Mr. Boeger and Dr.
Urnovitz are both officers of the Chronic Illness Research Foundation, a non-
profit organization. Accordingly, although these individuals will devote such
amount of their working hours as they reasonably deem necessary to the business
of the Company, these individuals do not devote all of their working hours to
the Company's affairs. See "Business -- Employees" and "Management."
CONTROL BY DIRECTORS, EXECUTIVE OFFICERS AND AFFILIATED ENTITIES. The Company's
directors, executive officers and entities affiliated with them will, in the
aggregate, beneficially own approximately 34.80% of the Company's outstanding
Common Stock following the completion of this Offering. Accordingly, these
stockholders, individually and as a group, would be able to effectively control
the Company on substantially all matters requiring approval by the stockholders
of the Company, including the election of directors and the approval of mergers
or other business combination transactions. See "Principal Stockholders."
NO PRIOR PUBLIC TRADING MARKET; POSSIBLE VOLATILITY OF STOCK PRICE;
DILUTION. Prior to this Offering, there has been no public market for the Common
Stock, and there can be no assurance that an active trading market will develop
or, if one does develop, that it will be maintained. The initial public offering
price, which is established by negotiations between the Company and the
Underwriters, may not be indicative of prices that will prevail in the trading
market. The stock market has from time to time experienced significant price and
volume fluctuations that are unrelated to the operating performance of
particular companies. These broad market fluctuations may adversely affect the
market price of the Company's Common Stock. In addition, the market price of the
shares of Common Stock is likely to be highly volatile. Factors such as
fluctuations in the Company's operating results, announcements of technological
innovations or new products by the Company or its competitors, FDA and
international regulatory actions, actions with respect to reimbursement matters,
developments with respect to patents or proprietary rights, public concern as to
the safety of products developed by the Company or others, changes in health
care policy in the U.S. and internationally, changes in stock market analysts'
recommendations regarding the Company, other medical products companies or the
medical product industry generally and general market conditions may have a
significant effect on the market price of the Common Stock. The initial public
offering price is substantially higher than the net tangible book value per
share of Common Stock. Investors purchasing shares of Common Stock in this
Offering will therefore incur immediate and substantial net tangible book value
dilution. See "Underwriting and Dilution."
RISK OF UNALLOCATED PROCEEDS. The Company expects that it will use a portion of
the net proceeds of this offering for general corporate purposes, including
working capital. Of the approximately $11.8 million net proceeds from the
Offering, approximately $550,000, or 4.7%, will be used for such general
corporate purposes. The Company has no specific plans as to the use of the
unallocated proceeds from this offering. Pending use, the Company plans to
invest the net proceeds in investment-grade, interest-bearing securities.
Accordingly, management will have significant flexibility in applying a portion
of the net proceeds of this offering. See "Use of Proceeds."
10
<PAGE> 12
POTENTIAL ADVERSE EFFECT ON MARKET PRICE OF SHARES ELIGIBLE FOR FUTURE
SALE. Sales of Common Stock (including shares issued upon the exercise of
outstanding options) in the public market after this Offering could materially
adversely affect the market price of the Common Stock. Such sales also might
make it more difficult for the Company to sell equity securities or
equity-related securities in the future at a time and price that the Company
deems appropriate. Upon the expiration of certain lock-up agreements entered
into by holders of Common Stock and options of the Company 180 days from the
date of this Prospectus, approximately 5,686,146 shares of Common Stock will
become eligible for immediate public resale subject to the volume limitations of
Rule 144, under Rule 144(k) or by non-affiliates holding stock issued to them
under Rule 701, while a total of 7,392,010 shares will be entitled to
registration rights with respect to such shares. See "Shares Eligible for Future
Sale," "Business -- Investment in Pepgen Corporation" and "Certain
Transactions."
ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS. Certain provisions of
Calypte's Certificate of Incorporation and Bylaws could discourage potential
acquisition proposals and could delay or prevent a change in control of Calypte.
Such provisions could diminish the opportunities for a stockholder to
participate in tender offers, including tender offers at a price above the then
current market value of the Common Stock. Such provisions may also inhibit
increases in the market price of the Common Stock that could result from
takeover attempts. In addition, the Board of Directors of Calypte, without
further stockholder approval, may issue Preferred Stock with such terms as the
Board of Directors may determine, that could have the effect of delaying or
preventing a change in control of Calypte. The issuance of Preferred Stock could
also adversely affect the voting power of the holders of Common Stock, including
the loss of voting control to others. See "Description of Capital
Stock -- Change of Control Provisions."
DIVIDENDS. The Company has accumulated unpaid dividends on its Series A
Preferred Stock, which accumulated dividends will be paid upon redemption of the
Series A Preferred Stock upon the closing of this Offering. The Company
currently intends to retain any future earnings for future growth and,
therefore, does not anticipate either declaring or paying any cash dividends in
the foreseeable future.
11
<PAGE> 13
THE COMPANY
Urnotech Calypte Biomedical Corporation was incorporated in California in
November 1989, changed its name to Calypte Biomedical Corporation in November
1992 and reincorporated in Delaware in July 1996. The Company's principal office
is located at 1440 Fourth Street, Berkeley, California 94710, and its telephone
number is (510) 526-2541.
USE OF PROCEEDS
The net proceeds to the Company from the sale of 2,300,000 shares of Common
Stock offered by the Company hereby at an initial public offering price of $6.00
per share will be approximately $11.8 million ($13.7 million if the
Underwriter's over-allotment option is exercised in full). Of the net proceeds
of this Offering, the Company expects to expend approximately $3.2 million to
expand product development efforts and to support clinical trials, approximately
$2.5 million to fund the development of Calypte Biomedical Laboratories,
approximately $1.0 million to expand manufacturing capacity, approximately $2.0
million to redeem the Company's Series A Preferred Stock, approximately $1.3
million to repay a loan bearing interest at the prime rate plus 3.5% (11.75% at
July 25, 1996) due on August 5, 1996 to Silicon Valley Bank, $1.0 million to
repay the Pepgen promissory note bearing interest at 4% per annum due on October
31, 1996, and approximately $250,000 to repay a note bearing interest at 10% per
annum due on August 1, 1996 to the Purdue Frederick Corporation. The balance of
the net proceeds amounting to approximately $550,000 will be used for working
capital and general corporate purposes. A portion of the proceeds may also be
used for investments in or acquisitions of complementary businesses, products or
technologies. From time to time the Company considers and engages in discussions
with other parties regarding possible investments in or acquisitions of
complementary businesses, products or technologies, although there are currently
no agreements or understandings regarding any such investments or acquisitions.
Pending the use of the proceeds as described above, the Company intends to
invest such net proceeds in short-term, investment grade, interest-bearing
securities.
DIVIDEND POLICY
The Company has accumulated unpaid dividends on its Series A Preferred Stock,
which accumulated dividends will be paid upon redemption of the Series A
Preferred Stock upon the closing of this Offering. The Company currently intends
to retain any future earnings for future growth and, therefore, does not
anticipate either accumulating, declaring or paying any cash dividends in the
foreseeable future.
12
<PAGE> 14
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March 31,
1996 (i) on an actual basis, (ii) on a pro forma basis to reflect (a) the
automatic conversion of all outstanding shares of Convertible Preferred Stock
into Common Stock upon the closing of this Offering and (b) the repayment of
approximately $503,000 of current notes payable which were repaid by the Company
in April 1996 and (iii) on an as adjusted basis to give effect to (a) the
receipt by the Company of the net proceeds from the sale of 2,300,000 shares of
Common Stock offered hereby at an initial public offering price of $6.00 per
share after deducting the underwriting discounts and commissions and estimated
offering expenses payable by the Company, (b) the redemption by the Company of
its mandatorily redeemable Series A Preferred Stock, including accumulated
unpaid dividends and (c) the repayment of approximately $2,498,000 of current
notes payable. This table should be read in conjunction with the Consolidated
Financial Statements of the Company and the Notes thereto and the Consolidated
Condensed Financial Statements of the Company and the Notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1996
----------------------------------------
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS, EXCEPT SHARE AND PER
SHARE DATA)
<S> <C> <C> <C>
Long-term portion of capital lease obligations.......... $ 683 $ 683 $ 683
Mandatorily Redeemable Series A Preferred Stock:
100,000 shares authorized at $0.001 par value; 100,000
shares issued and outstanding, actual; 100,000
shares issued and outstanding, pro forma; no shares
issued and outstanding, as adjusted................ 1,766 1,766 --
Stockholders' equity (deficit):
Convertible Preferred Stock, $0.001 par value,
8,637,638 shares authorized; 6,832,416 shares
issued and outstanding, actual; no shares issued or
outstanding, pro forma and as adjusted............. 7 -- --
Preferred Stock, no shares authorized, actual and pro
forma; 5,000,000 shares authorized, as adjusted; no
shares issued or outstanding, actual pro forma and
as adjusted........................................ -- -- --
Common Stock, $0.001 par value; 12,000,000 shares
authorized, actual; 20,000,000 shares authorized,
pro forma and as adjusted; 574,018 shares issued
and outstanding, actual; 7,406,434 shares issued
and outstanding, pro forma; 9,706,434 shares issued
and outstanding, as adjusted (1)................... -- 7 9
Additional paid-in capital............................ 29,329 29,329 41,141
Deferred compensation................................. (367) (367) (367)
Deficit accumulated during development stage.......... $(33,217) $ (33,217) $ (33,217)
======== ======== ========
Total stockholders' equity (deficit).......... $ (4,248) $ (4,248) $ 7,566
======== ======== ========
Total capitalization.......................... $ (1,799) $ (1,799) $ 8,249
======== ======== ========
</TABLE>
- ---------------
(1) The actual, pro forma, and as adjusted information excludes, as of March 31,
1996, (i) 1,292,561 shares of Common Stock issuable upon exercise of
outstanding options granted under the Company's stock option plans at a
weighted average exercise price of $0.54 per share, (ii) 1,321,907 shares of
Common Stock available for grant under the Company's stock option plans,
(iii) warrants to purchase 1,762,101 shares of Common Stock at prices
ranging from $5.00 to $7.50 per share and options to purchase 475,000 shares
of Common Stock at $7.50 per share. See "Capitalization" and
"Management -- Stock Option Plans" and Notes 9, 10 and 12 of Notes to
Consolidated Financial Statements and Notes 5, 6 and 7 of Notes to
Consolidated Condensed Financial Statements.
13
<PAGE> 15
DILUTION
As of March 31, 1996, the Company had negative pro forma net tangible book value
of $(4,247,684) or $(0.57) per share of Common Stock. "Pro forma net tangible
book value" per share represents the amount of total pro forma tangible assets
less total pro forma liabilities and less total pro forma mandatorily redeemable
Series A Preferred Stock divided by 7,406,434, the pro forma number of shares of
Common Stock issued and outstanding after giving effect to the automatic
conversion upon consummation of the offering of net outstanding shares of
Convertible Preferred Stock at March 31, 1996 into Common Stock. Without taking
into account any other changes in the pro forma net tangible book value after
March 31, 1996, other than to give effect to the receipt by the Company of the
net proceeds from the sale of the 2,300,000 shares of Common Stock offered
hereby at an initial public offering price of $6.00 per share, the pro forma as
adjusted net tangible book value of the Company as of March 31, 1996 would have
been approximately $7,566,132 or $0.78 per share. This represents an immediate
increase in net tangible book value of $1.35 per share to existing stockholders
and an immediate dilution of net tangible book value of $5.22 per share to new
investors purchasing shares at an initial public offering price of $6.00 per
share. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share............................. $ 6.00
Pro forma net tangible book value per share before the offering... (0.57)
Increase per share attributable to new investors.................. 1.35
------
Pro forma net tangible book value per share after the offering...... 0.78
-----
Dilution per share to new investors................................. $ 5.22
=====
</TABLE>
The following table summarizes, on a pro forma basis as of March 31, 1996, the
differences between existing stockholders and purchasers of shares in the
offering (at an initial public offering price of $6.00 per share) with respect
to the number of shares of Common Stock purchased from the Company, the total
consideration paid and the average price per share paid:
<TABLE>
<CAPTION>
SHARES TOTAL
PURCHASED CONSIDERATION
-------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
-------- ------- ---------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders....... 7,406,434 76.3% $30,816,598 69.1% $4.16
New investors............... 2,300,000 23.7 13,800,000 30.9 6.00
--------- ----- ----------- -----
Total............. 9,706,434 100.0% $44,616,598 100.0%
========= ===== =========== =====
</TABLE>
The foregoing table assumes no exercise of stock options or warrants outstanding
after March 31, 1996. As of March 31, 1996, there were options outstanding to
purchase a total of 1,292,561 shares of Common Stock at a weighted average
exercise price of $0.54 per share: there were warrants outstanding to purchase
1,762,101 shares of Common Stock at prices ranging from $5.00 to $7.50 per
share; and there were options to purchase 475,000 shares of Common Stock at
$7.50 per share. To the extent that any shares of Common Stock are issued on
exercise of any of these options or warrants or additional options or warrants
granted after March 31, 1996, there will be further dilution to new investors.
See "Management -- Stock Plans" and Notes 9, 10 and 12 of Notes to Consolidated
Financial Statements and Notes 5, 6 and 7 of Notes to Consolidated Condensed
Financial Statements.
14
<PAGE> 16
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data as of and for the years ended December
31, 1991, 1992, 1993, 1994 and 1995 are derived from the audited consolidated
financial statements of the Company. The financial statements of the Company as
of December 31, 1994 and 1995 and for each of the years in three-year period
ended December 31, 1995, together with the notes thereto and the related report
of KPMG Peat Marwick LLP independent certified public accountants, are included
elsewhere in this Prospectus. The selected consolidated financial data set forth
below as of and for the three months ended March 31, 1995 and 1996, and for the
period from February 18, 1988 (inception) through March 31, 1996 were derived
from unaudited consolidated condensed financial statements, which are included
elsewhere in this Prospectus, and include, in the opinion of the Company, all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the Company's financial position at that date and results
of operations for those periods. The results for the three months ended March
31, 1996 are not necessarily indicative of the results for any future period.
The selected consolidated financial data set forth below is qualified in its
entirety by, and should be read in conjunction with, the Consolidated Financial
Statements and Notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in the
Prospectus.
<TABLE>
<CAPTION>
FEBRUARY 18,
1988
THREE MONTH PERIOD (INCEPTION)
YEAR ENDED DECEMBER 31, ENDED MARCH 31, THROUGH
--------------------------------------------------------- ---------------------- MARCH 31,
1991 1992 1993 1994 1995 1995 1996 1996
--------- --------- --------- --------- --------- --------- --------- ------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Revenue earned under research
and development contracts,
substantially from related
parties..................... $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 2,390
Operating expenses:
Research and development.... 1,205 2,604 4,519 3,644 5,018 971 1,827 22,174
Purchased in-process
research and development
costs..................... -- -- -- -- 2,500 -- -- 2,500
Selling, general and
administrative............ 1,096 1,280 1,784 1,818 2,862 491 896 11,823
--------- --------- --------- --------- --------- -------- --------- ---------
Loss from operations.......... (2,301) (3,884) (6,303) (5,462) (10,380) (1,462) (2,723) (34,107)
Interest income (expense),
net......................... (58) 45 108 (35) 78 43 (98) (131)
Other income.................. 5 38 15 31 12 21 5 76
--------- --------- --------- --------- --------- -------- --------- ---------
Loss before income taxes and
extraordinary item.......... (2,354) (3,801) (6,180) (5,466) (10,290) (1,398) (2,816) (34,162)
Income taxes.................. (51) (1) (1) (1) (1) -- -- (61)
--------- --------- --------- --------- --------- -------- --------- ---------
Loss before extraordinary
item........................ (2,405) (3,802) (6,181) (5,467) (10,291) (1,398) (2,816) (34,223)
Extraordinary gain on debt
extinguishment.............. 485...... -- -- -- -- -- -- 485
--------- --------- --------- --------- --------- -------- --------- ---------
Net loss...................... (1,920) (3,802) (6,181) (5,467) (10,291) (1,398) (2,816) (33,738)
Less dividend on mandatorily
redeemable Series A
preferred stock............. (120) (120) (120) (120) (120) (30) (30) (766)
--------- --------- --------- --------- --------- -------- --------- ---------
Net loss attributable to
common stockholders......... $ (2,040) $ (3,922) $ (6,301) $ (5,587) $ (10,411) $ (1,428) $ (2,846) $(34,504)
========= ========= ========= ========= ========= ======== ========= =========
Net loss per share
attributable to common
stockholders before
extraordinary item.......... $ (1.49) $ (1.13) $ (1.35) $ (0.99) $ (1.50) $ (0.21) $ (0.41)
Extraordinary gain on debt
extinguishment, per share... 0.29 -- -- -- -- -- --
--------- --------- --------- --------- --------- -------- ---------
Net loss per share
attributable to common
stockholders(1)............. $ (1.20) $ (1.13) $ (1.35) $ (0.99) $ (1.50) $ (0.21) $ (0.41)
========= ========= ========= ========= ========= ======== =========
Weighted average shares used
to
compute net loss per share
attributable to common
stockholders(1)............. 1,694,089 3,468,920 4,666,236 5,671,038 6,934,334 6,933,854 6,934,520
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31, 1996
-------------------------------------------------- ------------------------
1991 1992 1993 1994 1995 ACTUAL PRO FORMA(2)
------- ------- -------- -------- -------- -------- ------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents......................... $ 2,233 $ 7,254 $ 1,492 $ 4,478 $ 2,559 $ 1,842 $ 1,339
Working capital................................... 1,196 6,042 867 3,117 (2,402) (3,791) (3,791)
Total assets...................................... 2,561 7,770 2,887 5,965 5,337 4,826 4,323
Long-term portion of capital lease obligations and
notes payable................................... 471 310 462 196 543 683 683
Mandatorily redeemable Series A preferred stock... 1,256 1,376 1,496 1,616 1,736 1,766 1,766
Deficit accumulated during development stage...... (4,659) (8,461) (14,643) (20,110) (30,401) (33,217) (33,217)
Total stockholders' equity (deficit).............. (213) 4,812 (26) 2,659 (2,746) (4,248) (4,248)
</TABLE>
- ---------------
(1) See Note 2 of Notes to Consolidated Condensed Financial Statements and Note
2 of Notes to Consolidated Condensed Financial Statements.
(2) Reflects the conversion of 6,832,416 shares of Convertible Preferred Stock
into 6,832,416 shares of Common Stock as of March 31, 1996 and reflects the
repayment of $503,000 of current notes payable which were repaid by the
Company in April 1996.
15
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth under "Risk Factors" and elsewhere in this Prospectus.
OVERVIEW
Since commencement of operations in 1988, the Company has reported its results
as a development stage company, engaged in research, development and
commercialization of its products. The Company's efforts have been primarily
focused on developing and obtaining approval for its urine-based diagnostic
tests for sexually transmitted diseases. In March, 1996, the Company received a
letter from the FDA stating that the Company's urine-based HIV-1 test was
approvable pending finalization of the package insert and other labeling.
The Company has a limited history of operations and has experienced significant
operating losses since inception. As of March 31, 1996, the Company had an
accumulated deficit of $33.2 million. The Company has not begun to market its
urine-based HIV-1 test. The Company expects operating losses to continue as it
initiates marketing and sales activities and additional research and
development. The Company's marketing strategy is to use distributors, focused
direct selling and marketing partners to penetrate certain targeted domestic
markets. The Company plans to maintain a small direct sales force to sell the
Company's urine-based HIV-1 test to 12 major laboratories serving the life
insurance, military, immigration and criminal justice markets. Other U.S. and
all international markets will be penetrated utilizing diagnostic product
distributors.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1996 and 1995
Research and development expense, consisting primarily of research,
manufacturing and quality assurance personnel and materials related to the
development of the urine-based HIV-1 test, increased 88% to $1.8 million for the
three months ended March 31, 1996 from $971,000 for the three months ended March
31, 1995. The increase was principally due to additional personnel, facility and
material costs required for increased manufacturing activity.
Selling, general and administrative expenses, consisting primarily of personnel,
outside consultants, facility operating leases and related expenses, increased
82% to $896,000 for the three months ended March 31, 1996 from $491,000 for the
three months ended March 31, 1995. The increase was primarily due to personnel
additions and related expenses.
Interest income (expense) and other income, consisting primarily of interest
earned on cash and cash equivalents, interest paid on equipment lease financing
and interest paid or accrued on outstanding notes payable, decreased $157,000 to
$(93,000) for the three months ended March 31, 1996 from $64,000 for the three
months ended March 31, 1995. The decrease was primarily due to interest payments
on the Company's bank line of credit and interest accrued on the note payable to
Pepgen, and also due to lower interest income as a result of lower cash
balances.
Years Ended December 31, 1995 and 1994
Research and development expenses increased 38% to $5.0 million in 1995 from
$3.6 million for 1994. This increase was principally due to additional personnel
and material costs required for increased manufacturing activities.
Purchased in-process research and development costs of $2.5 million were
incurred in 1995; no such costs were incurred in 1994. The 1995 costs were
attributable solely to the Company's investment in Pepgen Corporation and the
resulting write-off of research and development in process acquired. Pepgen is a
research and development company engaged primarily in the development of
therapeutic compounds.
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<PAGE> 18
Selling, general and administrative expenses, increased 57% to $2.9 million in
1995 from $1.8 million in 1994. This increase was primarily due to additional
legal and consulting fees relating to general corporate matters and an increase
in marketing personnel in anticipation of product launch.
Interest income (expense) and other income, increased $94,000 to $90,000 in 1995
from ($4,000) in 1994. This increase was primarily due to interest earned on
proceeds from preferred stock offerings.
Years Ended December 31, 1994 and 1993
Research and development expenses decreased 19%, to $3.6 million in 1994 from
$4.5 million in 1993. The decrease was due primarily to approximately $1.0
million of non-recurring payments made in 1993 for patent license fees and
technology licenses.
Interest income (expense) and other income decreased $127,000 to ($4,000) for
1994 from $123,000 for 1993. This decrease related primarily to a full year of
interest payments in 1994 on equipment lease lines.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed operations from inception primarily through the private
placement of preferred stock and, to a lesser extent, from payments related to
research and development agreements, bank lines of credit, equipment lease
financings and borrowings from notes payable. Since inception through March 31,
1996, the Company has received approximately $30.3 million in net proceeds from
private placements of the Company's equity securities. In addition,
approximately $1.3 million was borrowed by the Company through equipment lease
financings, of which approximately $1.1 million was outstanding as of March 31,
1996, and $2.4 million was received from research and development agreements. In
addition, in December 1995 the Company executed a $2.0 million line of credit
with a bank which was due on March 5, 1996. In March 1996 the Company signed an
amendment to the agreement, whereby the Company agreed to repay $500,000 on the
line of credit and the due date was extended to July 5, 1996. In April, the
Company repaid the $500,000 and the line of credit was reduced to $1.5 million.
In addition, the Company has a note payable to a former related party for
$248,000 due August 1, 1996.
During the three months ended March 31, 1996 and the years ended December 31,
1995, 1994 and 1993 the Company's cash used in operations was $2.1 million, $6.6
million, $4.6 million, and $6.6 million, respectively. The cash used in
operations was primarily to fund research and development expenses related to
the urine-based HIV-1 test along with general and administrative expenses of the
Company.
The Company has entered into employment agreements with officers and other
employees of the Company, with varying terms and lengths. Included in current
liabilities at March 31, 1996 is $260,000 payable to an officer for relocation
expense.
The Company acquired equipment and leasehold improvements during the three
months ended March 31, 1996 and the years ended December 31, 1995, 1994, and
1993 of $217,000, $1.1 million, $625,000, and $813,000, respectively. Costs
incurred included the purchase of equipment relating to build-out and scale-up
of manufacturing facilities in 1996 and 1995, the build-out of the Company's
Alameda facility in 1994 and the renovation of its manufacturing facility in
Berkeley in 1994 and 1993.
During 1995, the Company acquired a 49% interest in Pepgen for $2.5 million,
comprised of $1.0 million in cash paid at closing, a note payable of $1.0
million, and options to purchase 475,000 shares of Common Stock valued at
$500,000. The note payable is due upon the earlier of (i) October 1996 or (ii)
60 days following either FDA approval of the Company's urine-based HIV-1
screening test or the closing of this Offering. Other than the payment of the
$1.0 million promissory note, Calypte does not have any ongoing commitments to
fund Pepgen.
The Company has entered into an agreement that provides for royalty payments to
former related parties based on sales of certain products conceived by the
former related parties prior to March 30, 1989.
The Company has entered into arrangements with various organizations to receive
the right to utilize certain patents and proprietary rights under licensing
agreements in exchange for the Company making certain royalty
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<PAGE> 19
payments based on sales of certain products and services. The royalty
obligations are based on a percentage of net sales of licensed products and
include minimum annual royalty payments under some agreements.
In August 1993 and as amended in 1994, the Company entered into a research
agreement that allowed for a university to perform certain research on behalf of
the Company for a seven-year period. Under the terms of the agreement, the
Company may negotiate certain license rights to the inventions made by the
university resulting from this research. The Company's annual payment under this
agreement is approximately $150,000 through 1999.
As of March 31, 1996, the Company had $1.8 million in cash and cash equivalents.
Subsequent to March 31, 1996 and as of June 21, 1996 the Company received $3.3
million in proceeds related to the exercise of warrants issued in conjunction
with the Series E Preferred Stock offering in May and June 1995. As of June 21,
1996, potential proceeds related to unexercised warrants expiring on June 23,
1996, totaled $1.0 million.
The Company expects to use a portion of the net proceeds of this Offering for
research and development and clinical studies, increase of manufacturing
capacity, repayment of a bank line of credit, redemption of the Series A
Preferred Stock, repayment of the note payable to a former related party,
repayment of the note issued to Pepgen, as well as for working capital and
general corporate purposes. A portion of the proceeds may also be used for
investments in or acquisitions of complementary businesses, products or
technologies. Although the Company believes net proceeds from this Offering,
together with current cash, will be sufficient to meet the Company's operating
expenses and capital requirements for at least the next twelve months, the
Company's future liquidity and capital requirements will depend on numerous
factors, including regulatory actions by the FDA and other international
regulatory bodies, market acceptance of its products, and intellectual property
protection. There can be no assurance that the Company will not be required to
raise additional capital or that such capital will be available on acceptable
terms, if at all.
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<PAGE> 20
BUSINESS
THE COMPANY
Calypte Biomedical Corporation ("Calypte" or the "Company") believes that it is
a leader in the development of a urine-based screening test for the detection of
Human Immunodeficiency Virus, Type-1 ("HIV-1"), the putative cause of Acquired
Immunodeficiency Syndrome ("AIDS"). The Company has integrated several
proprietary technologies to develop a test which, in Company-funded clinical
trials conducted by or on behalf of the Company, detected the presence of HIV
antibodies in urine with 99.33% sensitivity (as compared to blood). Specificity
of the screening test with a companion western blot confirmatory test was 100%.
Calypte believes that its proprietary urine-based test offers significant
advantages compared to existing blood-based tests, including ease-of-use, lower
costs, and significantly reduced risk of infection from collecting and handling
specimens. Urine collection is non-invasive and painless, and urine is the most
commonly collected body fluid. The Company estimates that the cost of
collecting, handling, testing and disposing of urine specimens will be
significantly less than that of blood specimens. Independent studies report that
the likelihood of finding infectious HIV virus in urine is extremely low, which
greatly reduces the risk and cost of accidental exposure to health care workers,
laboratory personnel, and patients being tested.
On March 28, 1996, the Company received a letter from the FDA stating that the
Company's HIV-1 urine screening test was approvable pending finalization of the
package insert and other labeling. The Company's screening test, when used with
the western blot confirmatory test for urine licensed exclusively from Cambridge
Biotech, will provide the only complete urine-based HIV testing system. This
western blot test is already licensed by the FDA for use with blood, and is
currently pending FDA clearance for use with urine. On June 21, 1996, the FDA
Blood Products Advisory Committee ("BPAC") determined that the clinical data and
test protocol of the Cambridge Biotech urine western blot confirmatory test
supported its use to determine a positive HIV-1 test result. Based on the data
presented, the BPAC recommended that the Cambridge Biotech urine western blot
confirmatory test not be considered a stand-alone supplemental test and that
positive reported results in urine be subsequently verified by using a blood
sample. The Company believes that this subsequent verification will be addressed
in the product labeling, which may instruct physicians that patients receiving
positive HIV-1 test results in urine should receive proper follow-up medical
care, counseling and verification of HIV status by testing a subsequent blood
sample. While any recommendation of the BPAC is not binding on the FDA, there
can be no assurance that the FDA will grant approval of the Cambridge Biotech
urine confirmatory test or will not require additional data or clinical trials
before granting such approval. Any significant delay in obtaining approval for
the Cambridge Biotech urine confirmatory test could have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company believes that the benefits of its testing system will enable it to
penetrate existing markets and expand into new markets that are currently not
served by blood-based and oral fluid-based HIV test systems.
The Company also intends to submit a PMA to the FDA for approval of the
Company's OTC home urine collection kit. The Company's home collection kit would
allow consumers, in the privacy of their homes, to take a urine sample, mail it
to Calypte Biomedical Laboratories for analysis and then anonymously obtain
results and professional counseling by telephone. On May 14, 1996, Direct Access
Diagnostics, a subsidiary of Johnson & Johnson, received FDA clearance for the
first OTC home blood collection kit for HIV. In addition, on July 22, 1996, Home
Access Health Corp. received FDA clearance for another OTC home collection kit
for HIV. The Company believes that these FDA approved OTC products will
accelerate consumer acceptance and awareness of home collection for HIV. The
Company believes that an OTC urine collection kit for HIV would have advantages
compared to an OTC blood collection kit for HIV.
The Company intends to develop and commercialize additional urine-based tests
for other sexually transmitted diseases and other human retroviruses and
diseases based on its enabling urine testing technologies. Initially, the
Company intends to focus on developing and commercializing urine-based screening
tests for HIV-2, Chlamydia and H. pylori.
Upon approval, the Company intends to market its urine-based HIV-1 screening
test through direct sales personnel and distributors depending upon the market
segment and the location of the market. Calypte believes that its urine-based
test will achieve market acceptance because of safety, cost, convenience, and
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<PAGE> 21
painless collection of the fluid to be tested. There can be no assurance that
the Company's products or the Company's planned products will receive FDA
clearance or approval and become commercially available.
BACKGROUND
HIV is the putative cause of AIDS, which is the leading cause of death for
persons ages 25 to 44 in the U.S. Those infected with HIV generally do not show
symptoms of AIDS until several years after HIV infection, if at all. Because
most persons infected with HIV are asymptomatic for AIDS and are unaware of
their HIV status, such persons do not avail themselves of medical treatment and
may unknowingly expose others to the risk of infection. Prior exposure to HIV
can be detected in laboratory tests even though the individual infected with HIV
is asymptomatic.
According to the World Health Organization, Human Immunodeficiency Virus ("HIV")
currently infects approximately 16.9 million individuals worldwide and will
infect between 30 and 40 million individuals worldwide by the year 2000. HIV is
spread by a transfer of bodily fluids primarily through sexual contact, blood
transfusions, sharing intravenous needles, accidental needle sticks or
transmission from infected mothers to newborns. The Rockefeller Foundation
reports that heterosexual transmission accounts for more than 70% of HIV
infection worldwide. The incidence of HIV-2 is insignificant except in certain
countries in West Africa where its incidence is more frequently reported.
The discovery in 1984 of circulating HIV antibodies in the blood led to the
development and widespread use of HIV blood screening tests. Testing by blood
banks of blood used in transfusions soon followed in an effort to maintain and
protect the integrity of the blood supply. Most HIV antibody screening tests are
EIAs. These tests operate on the principle that antibodies will react with a
known antigen; this reaction is detected by using enzymes as indicators. It is
estimated that 27 million blood bank screening tests were performed in 1993 and
23 million non-blood bank HIV screening tests are projected to be performed in
1996 in the United States. Outside of blood bank screening, the largest domestic
demand for HIV testing is generated by physicians, the life insurance industry,
the military, the criminal justice system and the Immigration and Naturalization
Service.
To minimize the risk of incorrectly reporting that an individual is infected
with HIV (a false positive result), most countries require a strict testing
protocol. The protocol is to first test a sample for the presence of HIV. Any
sample found to be reactive in the initial screen is then retested in duplicate.
If either of the retests are reactive, the same sample is tested again using a
more precise and expensive confirmatory test. The presence of HIV antibodies,
based on the results of the confirmatory test, is considered diagnostic for HIV
infection.
HIV blood testing can be expensive and poses risk of infection to health care
personnel. The typical HIV screening test requires a trained health care worker
or phlebotomist to draw and centrifuge a blood sample, which is then tested for
the presence of HIV antibodies. Blood is typically drawn at physician offices,
hospitals, or blood draw stations, where trained personnel are available, and
then sent to a laboratory for HIV testing. Blood samples and related
blood-sampling equipment require careful handling to avoid accidental exposure
to blood-borne pathogens, including HIV. In addition, the use of blood-based
tests has become increasingly costly because of the costs of disposing of
potentially infected specimens, syringes, needles and transfer tubes. The
overall cost of blood-based testing has precluded large public health screening
programs, particularly in less developed countries, many of which have
significantly higher rates of HIV infection than that of the U.S. Even in the
United States, certain populations are not routinely screened due to the high
cost of blood-based testing. For example, currently only four million of the
approximately 14 million life insurance policies written each year utilize HIV
screening.
In December 1994, the FDA approved the first non-invasive method for HIV-1
testing, an oral fluid-based screening test and collection device. Collection of
oral fluid is technique dependent, and detailed instructions on the proper use
of the oral fluid collection device need to be carefully followed. In addition,
oral fluid is not commonly collected and is rarely tested for other diagnostic
purposes. In June 1996, one manufacturer received approval from the FDA for a
western blot oral-fluid confirmatory test.
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<PAGE> 22
HIV screening can also be performed by using a dried blood spot ("DBS")
specimen. DBS sampling, which was developed in the late 1980's, is a variant of
blood sampling for the testing of newborns. The DBS sampling method involves
sticking a baby's heel or an adult's finger with a sharp lancet and collecting
five or six drops of blood onto filter paper. The laboratory punches the dried
blood spots out of the filter paper, and the non-cellular components of the
blood spot are eluted back in liquid form by soaking the punches in diluent. The
resulting fluid is then assayed by one of several traditional serum/plasma EIAs.
The DBS method, which is comparable in cost to traditional serum tests, is
susceptible to problems in sample variability, the adequacy of volume for
testing, pain on sample withdrawal, and invasiveness.
The Company believes that a large market opportunity exists for home urine
collection and remote testing for HIV infection. On May 14, 1996 and July 22,
1996, the FDA approved DBS OTC home collection kits for HIV. These collection
kits, to be marketed by Direct Access Diagnostics, a subsidiary of Johnson &
Johnson, and Home Access Health Corp., respectively, are reported to each retail
for approximately $40. ChemTrak Incorporated has also submitted an application
to the FDA for a DBS OTC home collection kits for HIV. The Company believes that
these FDA approved OTC products will accelerate consumer acceptance and
awareness of home collection for HIV.
The human immune system typically requires a number of months to begin producing
antibodies following exposure to HIV. There is no consensus in the scientific
community as to whether antibodies can first be detected in blood, urine or oral
fluid. Moreover, the Company is not aware of any conclusive data that indicates
how long before an infected individual's blood, oral fluids or urine will
indicate he or she is HIV positive.
THE CALYPTE URINE-BASED HIV-1 SCREENING TEST
Calypte's proprietary urine-based HIV-1 screening test is non-invasive, easy to
use, reliable and avoids many of the costs and risks associated with blood-based
testing. The Company's screening test, when used with the western blot
confirmatory test for urine licensed exclusively from Cambridge Biotech, will
provide the only complete urine-based HIV testing system. Laboratories using the
Company's system can complete the entire testing profile for HIV-1 using a
single urine specimen. The Company believes that the benefits of its testing
system will enable it to penetrate existing markets and expand into new markets
that are not served currently by the more expensive blood and oral fluid-based
HIV test systems. Key benefits of the Company's test include:
Ease of Use/Non-Invasive Collection. Urine is the most commonly collected bodily
fluid for laboratory testing as it is already being collected for testing
purposes other than the detection of HIV. Because it requires no special
preservatives or containers, it is also easier to collect, handle, and discard
than blood. Furthermore, the Company's test is in standard EIA format and is
designed to be used with standard laboratory equipment. Blood sampling is
invasive and, for many patients, stressful and painful. The ability to screen
non-invasively for HIV in all types of patients, including intravenous drug
users and newborns, will enhance patient comfort and may significantly increase
the voluntary testing rates in patients who might otherwise decline testing.
Moreover, unlike urine collection, obtaining an uncontaminated oral fluid
specimen is highly technique-dependent, requiring specific placement of a
sterile collection device in the mouth, rubbing the collection device along the
gum line, and holding it in place for no less than two and no more than five
minutes.
Lower Overall Cost. The Company's urine-based screening test may lower
significantly the overall cost of testing for HIV because the cost of
collecting, transporting, testing and disposing of urine specimens can be
significantly less than that of blood specimens, and less than the cost of an
oral fluid screening test. Additional cost savings may accrue as a function of
reduced needlestick incidents and associated counseling, testing and lost
productivity. With respect to oral fluid screening tests, the Company believes
that each oral fluid collection device costs between $2.00 to $4.00, while a
urine collection cup costs approximately $0.20. Moreover, since urine is often
already being collected for other testing purposes, the incremental cost of
collecting urine samples is likely to be lower than collecting oral fluids.
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<PAGE> 23
Safety. Independent studies have concluded that the likelihood of finding
infectious HIV virus in urine is extremely low. There have been no reported
cases of transmission of HIV virus through contact with urine of HIV-infected
patients. Accordingly, the risk of HIV infection to health care and laboratory
workers accidentally exposed to urine samples is negligible. Since no needles
are used in the Calypte urine sampling process, the test eliminates this route
of accidental infection. In developing countries, where the supply of sterile
needles and syringes cannot be guaranteed, the safety benefits of using urine
sampling extend to patients as well as to health care workers.
Reliability. The Company has performed clinical studies demonstrating the
effectiveness of using urine as a reliable and clinically valid sample for HIV
testing. In Company-funded clinical trials conducted by or on behalf of the
Company, for the HIV-1 urine EIA, a total of approximately 11,000 matched blood
and urine specimens were tested. In two different studies, assay specificity was
assessed by testing samples from a combined subset of low risk individuals, and
specificity of the screening test in conjunction with the confirmatory tests was
100%. Sensitivity (correlation to blood tests) of the urine screening test was
estimated by testing samples from a subset of individuals with a clinical
diagnosis of AIDS at five sites, and sensitivity was 99.33%.
In spite of the benefits of the Company's urine-based screening test, such test
represents a new method of determining the presence of HIV antibodies.
Blood-based and oral fluid based tests, which constitute competitive products,
have the advantage of already being commercially marketed and have gained
acceptance from the medical community. Furthermore, both blood-based and oral
fluid based tests have been shown to be reliable media for detection of HIV.
There can be no assurance that the Company's urine-based screening test will
gain any significant degree of market acceptance among physicians, patients or
health care payors, even if necessary regulatory and reimbursement approvals are
obtained. Moreover, even after such regulatory approvals are obtained, the
Company may recommend, whether required as a condition to approval of the
urine-based confirmatory test or otherwise, that a blood test be obtained as a
prelude to any medical care rendered for persons diagnosed with HIV.
The Company's test uses an industry standard 96 well microtiter plate to detect
antibodies to HIV-1 in urine. The HIV-1 antibodies, when present in urine, bind
to Calypte's proprietary antigen coated on prepared microtiter plates. A
subsequent enzymatic reaction produces a color change revealing the presence of
HIV-1 antibodies.
The test requires only 200 microliters of urine (approximately four drops) and
can be performed using standard laboratory equipment. Collection of the urine
can take place any time of day, and the test does not require a 24-hour voided
specimen or a midstream, clean-catch sample. Samples can be shipped and stored
at two to 30 degrees centigrade for up to 55 days before testing. The laboratory
protocol for testing urine is nearly identical to that of blood, requiring few,
if any, modifications to existing laboratory protocols.
The Company has entered into an agreement with Cambridge Biotech under which
both Calypte and Cambridge Biotech will market and distribute a urine-capable
western blot confirmatory test which uses technology licensed from the Company.
The western blot kit manufactured by Cambridge Biotech has already received FDA
approval for blood testing, and is the only confirmatory test for which
application has been made for FDA approval for use with urine. Clinical data
related to the Cambridge Biotech License Application Amendment was reviewed by
the BPAC on June 21, 1996. The BPAC provides guidance to the FDA on issues
related to product licence applications currently under review by the FDA. At
the June 21, 1996 meeting, the BPAC determined that the clinical data and test
protocol of the Cambridge Biotech urine western blot confirmatory test supported
its use to determine a positive HIV-1 test result. Based on the data presented,
the BPAC recommended that the Cambridge Biotech urine western blot confirmatory
test not be considered a stand-alone supplemental test and that positive
reported results in urine be subsequently verified by using a blood sample. The
Company believes that this subsequent verification will be addressed in the
product labeling, which may instruct physicians that patients receiving positive
HIV-1 test results in urine should receive proper follow-up medical care,
counseling and verification of HIV status by testing a subsequent blood sample.
While any recommendation of the BPAC is not binding on the FDA, there can be no
assurance that the FDA will grant approval of the Cambridge Biotech urine
confirmatory test or will not
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<PAGE> 24
require additional data or clinical trials before granting such approval. Any
significant delay in obtaining approval for the Cambridge Biotech urine
confirmatory test could have a material adverse effect on the Company's
business, financial condition and results of operations.
STRATEGY
The Company's objective is to be the leader in the development and
commercialization of urine-based diagnostic tests. The Company's primary
strategy is to exploit the advantages of using urine instead of blood for HIV
testing to establish its diagnostic screening test as the screening method of
choice for HIV. In addition, building on its expertise in urine-based
diagnostics, the Company intends to develop additional urine-based tests for
sexually transmitted diseases and other human conditions. The key components of
the Company's business strategy are to:
- -- Target and Expand Life Insurance Testing Market. Upon FDA approval, the
Company intends to market its urine-based HIV screening test kit directly to
the five major laboratories that perform the substantial majority of HIV
tests for the domestic life insurance industry. These laboratories currently
collect and test urine from most life insurance applicants for other diseases
and risks. Because of the overall lower cost and because urine is already
routinely collected, the Company believes that its test will enable life
insurance companies to increase the number of applicants tested for HIV.
- -- Penetrate U.S. Clinical Laboratory Market. The Company, through its
distributors, intends to market its tests to laboratories currently serving
physicians. Because of restrictions on the collection of blood in the
physician's office imposed by CLIA, many physicians refer their HIV "at-risk"
patients to phlebotomists at outside laboratory service centers for blood
collection. The Company's urine-based HIV test will allow physicians' offices
to collect the specimen for use with the Company's HIV test.
- -- Pursue International Markets Through Distributor Relationships. Upon approval
from appropriate regulatory authorities, the Company intends to market its
HIV test in international markets pursuant to existing worldwide distribution
agreements. Because of its safety, ease of collection and lower costs, the
Company believes that its urine-based test may be widely employed in certain
international markets not presently served by HIV blood tests.
- -- Enter Emerging OTC Market. The Company intends to file a PMA for FDA approval
of its OTC urine collection kit for home collection. The Company believes
that its OTC urine collection kit would be used by consumers who desire home
urine collection and anonymous HIV testing through Calypte Biomedical
Laboratories. The Company intends to collaborate with a corporate partner to
market and distribute its collection kit to retail outlets in the United
States.
- -- Establish Calypte Biomedical Laboratories. The Company intends to establish
Calypte Biomedical Laboratories -- a reference testing laboratory to perform
HIV testing of home-collected urine specimens.
- -- Develop Additional Urine-Based Diagnostics. The Company intends to develop
and commercialize additional urine-based tests for other sexually transmitted
diseases, other human retroviruses and non-sexually transmitted diseases
based on its enabling urine testing technologies. Initially, the Company
intends to focus on developing and commercializing a urine-based screening
test for HIV-2, Chlamydia and H. pylori.
PRODUCTS UNDER DEVELOPMENT
OTC. The Company believes a market opportunity exists for home urine collection
and remote testing for HIV infection. The Company intends to submit an
application for FDA approval for an OTC home urine collection device, which the
consumer would purchase at retail outlets instead of visiting a physician's
office or laboratory for HIV testing. The consumer would provide a specimen sent
in a prepaid mailer to the Company's testing laboratory, Calypte Biomedical
Laboratories. The Company would perform the test, and the consumer will obtain
the results by telephoning the Company and identifying himself or herself with a
unique code to preserve anonymity. The Company believes that the FDA will
require that the results of the tests be reported under strictly controlled
protocols, including counseling. In the event that the Company's OTC HIV home
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<PAGE> 25
urine collection kit is approved by the FDA, the Company intends to continue to
manufacture the urine-based HIV-1 test and operate the testing laboratory. The
Company plans to enter into an agreement with an OTC marketing partner to market
and distribute the collection kit.
Chlamydia. The Company received a notice of allowance for a U.S. patent for the
detection of Chlamydia antibodies in urine and is developing a urine-based
Chlamydia detection test. It has been estimated that there are 4.0 million new
cases of Chlamydia occurring annually in the United States and more than 25
million tests for Chlamydia were performed in the United States in 1990, and the
annual Chlamydia test market has been estimated to increase by 15% per year.
Existing tests for Chlamydia, because they require a urethral swab or a blood
sample, are uncomfortable for the patient. The majority of Chlamydia patients
are asymptomatic and therefore, seldom seek medical treatment. Chlamydia is
considered to be a significant cause of pelvic inflammatory disease, tubal
infertility and ectopic pregnancies.
HIV-2. The Company is also developing a test for HIV-2, the less common form of
HIV. The Company believes that such a test is important in certain export
markets where the incidence of HIV-2 is higher or where such testing is mandated
by government regulation. In addition, the Company believes that the ability to
detect HIV-2 antibodies will be of value in protecting the Company's competitive
position. The Company has the first right of negotiation with Cambridge Biotech
for certain rights for the detection of HIV-2 under the Cambridge Biotech patent
license from Sanofi Diagnostic Pasteur.
H. pylori. The Company is in discussions with Otsuka Pharmaceutical Co., Ltd.
("Otsuka") to obtain a license to distribute Otsuka's urine-based diagnostic
test for Helicobacter pylori (H. pylori), the putative cause of gastric ulcers
and other intestinal conditions. The H. pylori urine-based test is currently
under development at Otsuka.
Other Diagnostics. The Company is also planning to evaluate the development of
urine-based diagnostic tests for syphilis and herpes. Ultimately, the Company
intends to expand its diagnostic test line so that it will be possible to test
for a wide range of sexually transmitted and other diseases with a single,
non-invasively collected urine sample.
SALES, MARKETING AND DISTRIBUTION
The Company's marketing strategy is to use distributors, focused direct selling
and marketing partners to penetrate certain targeted domestic markets. The
Company plans to maintain a small direct sales force to sell the Company's HIV-1
screening test and potential future products to 12 major laboratories serving
the life insurance, military, immigration and criminal justice markets. Other
U.S. and all international markets will be penetrated utilizing diagnostic
product distributors. The Company will work collaboratively with its
distributors to market and promote the products in their local markets.
The following table summarizes the markets and geographic regions covered by the
Company and its distributors for its HIV-1 test:
<TABLE>
<CAPTION>
COMPANY GEOGRAPHIC REGION MARKETS
---------------- -------------------------------- --------------------------------
<S> <C> <C>
Calypte United States 12 laboratories serving the life
insurance, military, immigration
and criminal justice markets.
Calypte Canada All
Seradyn United States All but the above laboratories.
Seradyn Europe, Latin America, Africa, All
Middle East
Otsuka Asia, Australia, New Zealand All
Travenol Israel All
</TABLE>
Seradyn, Inc. Seradyn, Inc. ("Seradyn") a subsidiary of Mitsubishi Chemical
Corporation, is a manufacturer and distributor of clinical diagnostic and
industrial/analytical instrumentation products. In April 1995, the Company
entered into an agreement with Seradyn under which Seradyn was granted exclusive
distribution rights for the HIV-1 tests under the trade name "Seradyn Sentinel"
for all non-Calypte accounts in the United
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States, and all customers in Europe, Latin America, Africa and the Middle East
(excluding Israel). The agreement provides for certain minimum purchases by
Seradyn. If such minimum purchases are not met, the Company has the right to
terminate the agreement or render Seradyn's rights non-exclusive for the region
in which the minimum purchases were not met, provided that Seradyn will be
guaranteed the prices given to Calypte's most favored customers in the
territory. The initial term of the agreement extends through December 1998.
Seradyn has the right to extend the agreement for successive two-year terms
provided it has met minimum sales requirements. Seradyn has agreed to assist the
Company in obtaining regulatory approvals in its distribution territory at the
Company's expense. The agreement also grants Seradyn a right of first refusal on
distribution rights for certain new products which may be developed during the
term of the agreement.
Otsuka Pharmaceutical Co., Ltd. Otsuka Pharmaceutical Co., Ltd ("Otsuka") is a
Japanese integrated health care and consumer products conglomerate. In August
1994 the Company entered into a distribution agreement with Otsuka, which gives
Otsuka exclusive distribution rights for the urine-based HIV-1 test and to use
the trademark "Calypte" to market the test in 22 Asian countries, Australia and
New Zealand. To maintain exclusivity, the agreement requires that Otsuka
purchase certain annual minimums, which increase each year, and total 70 million
tests over ten years. Otsuka has agreed to use its best efforts to obtain
regulatory approvals for the product in its territory. The agreement is for a
term of ten years, and is terminable without cause by Otsuka upon 120-days
notice. The Company has committed up to one-half of its total manufacturing
capacity to Otsuka. If the Company is unable to meet Otsuka's manufacturing
requirements, Otsuka has a right to manufacture tests itself. The agreement also
grants Otsuka the right of first refusal to distribute certain new products
which may be developed during the term of the agreement.
Travenol Laboratories (Israel) Ltd. In December 1994 the Company entered into an
agreement with Travenol Laboratories (Israel) Ltd. ("Travenol"), a division of
Baxter-Travenol Laboratories. The agreement gives Travenol exclusive rights to
distribute the HIV-1 test and to use the trademark "Calypte" within Israel.
Under the agreement, Travenol will undertake registration of the product in
Israel with the Company paying regulatory fees. The term of the agreement is
perpetual unless terminated earlier for specified causes. No minimum purchase
levels are required.
The Company's products represent a new method of determining the presence of HIV
antibodies and there can be no assurance that these products will gain any
significant degree of market acceptance among physicians, patients or health
care payors, even if necessary international and U.S. regulatory and
reimbursement approvals are obtained. The Company believes that recommendations
and endorsements by the medical community will be essential for market
acceptance of the products, and there can be no assurance that any such
recommendations or endorsements will be obtained. The Company has no experience
marketing and selling its products either directly or through its distributors.
The Company's marketing strategy relies upon its alliances with third-party
distributors for the success of its products. There can be no assurance that the
Company's direct sales force will be effective, that its distributors will
market successfully the Company's products or that, if such relationships are
terminated, the Company will be able to establish relationships with other
distributors on satisfactory terms, if at all. Any disruption in the Company's
distribution, sales or marketing network, or failure of the Company's products
to achieve market acceptance, could have a material adverse effect on the
Company's business, financial condition and results of operations.
MANUFACTURING
The manufacture of the Company's urine-based HIV test involves antigen
production, plate processing and preparation of certain washes and other
reagents. Under cGMP, all steps are recorded, those requiring measurement or
calculation are checked by a second technician and all components are inspected
and/or tested at four stages by quality control technicians. Antigen production
involves cell culture, antigen expression and purification. Following
purification, the antigen is tested extensively and optimized for plate coating.
The coating of standard 96 well microtiter plates with antigen is completed
using standard plate coating equipment. Following binding of the antigen to the
plates, the plates are blocked and stabilized to prevent nonspecific binding of
the antigen. The plates are then dried and packaged in foil pouches. The washes
and reagents are produced using standard solution preparation techniques.
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Calypte's manufacturing operations are located in Berkeley, California with an
annual capacity of approximately 4.5 million tests. The Company has applied for
an establishment license from the FDA for the production of its HIV-1 screening
test at this facility. The Company has completed a larger manufacturing facility
in Alameda, California and is manufacturing pilot lots required for an amendment
to its pending FDA license for approval of this facility. The capacity of the
Alameda facility is approximately 20 million tests per year. Additionally, the
Company has entered into a manufacturing agreement with Biomira Diagnostics,
Inc., a Canadian corporation, for the production of the Company's tests for
export to certain international markets, in compliance with Company
specifications.
Calypte purchases raw materials and components used in the manufacture of its
product from various suppliers and relies on single sources for several of these
components. Establishment of additional or replacement suppliers for these
components cannot be accomplished quickly. The Company has a number of
single-source components, and any delay or interruption in supply of these
components could significantly impair the Company's ability to manufacture its
products in sufficient quantities, and therefore would have a material adverse
effect on the Company's business, financial condition and results of operations,
particularly as the Company scales up its manufacturing activities in support of
commercial sales.
The Company has limited experience in manufacturing its products. The Company
currently manufactures its products in limited quantities for submission to FDA
for ongoing compliance, international clinical trials and building its inventory
in anticipation of commercialization. The Company does not have experience in
manufacturing its products in commercial quantities. Manufacturers often
encounter difficulties in scaling-up production of new products, including
problems involving production yields, quality control and assurance, raw
material supply and shortages of qualified personnel. Such assumptions may be
incomplete or inaccurate and unanticipated events and circumstances are likely
to occur. The larger Alameda facility will be needed if initial demand exceeds
the more limited capacity of the Berkeley facility. Difficulties encountered by
the Company in manufacturing scale-up to meet demand, including delays in
receiving FDA approval for the Alameda facility, could have a material adverse
effect on its business, financial condition and results of operations.
Due to the nature of its manufacturing processes, the Company is subject to
stringent federal, state and local laws, rules, regulations and policies
governing the use, generation, manufacture, storage, air emission, discharge,
handling and disposal of certain materials and wastes. There can be no assurance
that the Company will not be required to incur significant costs to comply with
land use and environmental regulations as manufacturing is scaled-up to
commercial levels, nor that the operations, business or financial condition of
the Company will not be materially and adversely affected by current or future
environmental laws, rules, regulations and policies. There can be no assurance
that the Company will be able to obtain and maintain all required permits in
connection with the operation of its manufacturing facilities. When and if the
Company begins to produce products on a commercial scale, it will be a
significant user and disposer of water. The disposal of water used in the
Company's manufacturing processes must comply with applicable federal, state and
local environmental protection laws, and compliance with these laws may be
costly and difficult.
TECHNOLOGY
The Company's HIV-1 urine-based test is based on the finding of scientists at
the New York University Medical Center in 1988 that antibodies to HIV-1 could be
found in urine. Prior to this discovery, it was commonly held that antibodies to
systemic infections could not pass through the kidneys, and thus, could not be
found in the urine of infected individuals. The researchers showed that HIV-1
envelope antibodies were present in all urine samples from HIV-1 seropositive
subjects. Building on this discovery, the Company developed an HIV-1 urine
enzyme immunoassay ("EIA") to detect antibodies to HIV-1 in urine. There are two
proprietary features of the Company's HIV-1 urine-based EIA that result in a
format sensitive enough to detect the low levels of HIV antibodies in urine: the
antigen target and the sample buffer in the assay.
Recognizing the prominence of envelope antibodies in urine, the antigen target
in the assay is a full length, recombinant glycosylated HIV-1 envelope protein,
rgp160. Although this antigen is a recombinant glycoprotein, it is identical to
the viral envelope protein gp160 in amino acid sequence and in the presence of
carbohydrate at glycosylation sites. This kind of antigen target can efficiently
capture the full range of HIV-1
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envelope specific antibodies produced in the human polyclonal response to the
virus. The microwell assay format permits the high availability of epitopes of
the recombinant envelope glycoprotein for antibody binding. This availability of
epitopes results in the sensitivity verified in clinical trials.
The Company has non-exclusive rights to the proprietary process used to express
the recombinant HIV-1 envelope glycoprotein from Texas A&M University. This
proprietary process for manufacture of rgp160 begins with the baculovirus
expression vector system established in an insect cell culture. The consistent
and high levels of rgp160 expression in baculovirus infected insect cell culture
is a critical step in the overall manufacture of rgp160. The Company improved
and upgraded the Repligen process with a proprietary process which uses a system
in which the HIV-1 envelope protein is produced in the insect cell membrane
rather than typical tissue culture systems where the protein is secreted into
insect cell culture media. Rgp160 is an insoluble protein and requires detergent
based extraction and purification procedures which are proprietary.
The Company developed and has obtained a U.S. patent claiming a sample buffer
formulation, which is used in the HIV-1 urine test. This sample buffer acts as a
diluent for urine in the assay procedure and significantly increases test
specificity by reducing non-specific binding of immunoglobulins (non-specific
antibodies) and other substances in urine that would decrease specificity and
sensitivity of HIV-1 antibody binding. Sample buffer is manufactured in the
Company's facilities.
The Company's products incorporate classical immunoassay technology based on
antibody-antigen reactions. Antibodies are immune system proteins produced as a
result of an organism's immune response to substances (antigens) foreign to the
body and specifically bind to antigens and signal the immune system to assist in
eliminating them. Immunoassays are used for diagnostic applications where the
presence or absence of a specific analyte is being evaluated and allow the
detection of some analytes at levels as low as one part per billion. Antigens
include viruses, bacteria, parasites, chemical toxins and other foreign
substances and hormones.
The HIV-1 urine assay format includes a standard 96 well microtiter plate which
is compatible with standard laboratory instrumentation. The microwell plates are
coated with proprietary recombinant HIV-1 envelope protein antigen. Patient
urine and the unique specimen diluent are introduced to the microwell
simultaneously. If HIV-1 antibodies are present, they bind to the antigen coated
well and remain during the subsequent wash steps. An enzyme labeled conjugate is
added to the well. This conjugate binds specifically to human antibody which
remains from the previous step. Following another wash, substrate reagent is
added and color development occurs due to the presence of the enzyme conjugate
in the well. This color is measured spectrophotometrically on a standard
laboratory microwell plate reader. The presence of HIV antibody in the specimen
is indicated by the development of color in the microwell, and the intensity of
the color is proportional to the amount of antibody.
CLINICAL TRIALS
The Company has performed preclinical and clinical studies which support the use
of urine as a reliable and clinically valid sample. Four of the studies are
described below:
Metpath Laboratories, Inc. The feasibility of HIV-1 antibody detection in urine
was established in a large preclinical study at Metpath Laboratories, Inc. which
included 7,357 urine samples from a low risk population. A positive prevalence
rate for HIV-1 in urine of 0.80% agreed with the reported HIV-1 serum positive
rate. Of the 1,746 urine samples matched to serum, five urine positives agreed
with the five serum positives. For urine negatives, 1,736 out of 1,741 were
correctly identified resulting in a 99.71% correlation to serum. In addition, in
a study of 94 paired urine and serum samples from subjects previously determined
to be HIV-1 seropositive, antibodies to HIV-1 were detected in all urine by
Calypte's urine-based HIV-1 screening test.
Center for AIDS Prevention Studies and the University of California at San
Francisco. Researchers at the Center for AIDS Prevention Studies and the
University of California at San Francisco ("UCSF") carried out a large
validation study of the diagnostic accuracy of the urine-based HIV-1 screening
test for HIV envelope antibodies in urine. Matched blood and urine specimens
collected from 586 recovering alcoholics were tested by two independent
laboratories blinded to results at the other site. The matched urine samples
were tested by
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and confirmed by a urine-based western blot. The urine-based HIV-1 screening
test when confirmed by a urine western blot led to a correct diagnosis in all
samples. The authors reported that the urine EIA demonstrated a specificity of
100% and a sensitivity also estimated to be 100%.
Multicenter Trial. In clinical trials for the urine-based HIV-1 screening test
conducted at five geographic locations, approximately 11,000 matched blood and
urine specimens were tested. Assay specificity was assessed by testing paired
urine and serum samples from a combined subset of 7,074 low risk individuals.
Specificity of the screening test (prior to confirmation with western blot) was
determined to be 99.18%. In diagnosis of AIDS, sensitivity was estimated to be
99.33%. Paired urine and serum specimens from asymptomatic and symptomatic HIV-1
infected subjects and subjects at high risk for HIV-1 infection were also
tested. Urine correlation with blood for these 614 samples was 98.20%.
Japanese Ministry of Health Study. An independent study of the performance of
the urine-based HIV-1 screening test was carried out by the Japanese Ministry of
Health and reported at the 1994 International AIDS Conference in Yokohama,
Japan. Paired urine and serum samples from 200 HIV-1 infected subjects and 700
healthy subjects in a low risk population were tested using the urine-based
HIV-1 screening test, confirmed by urine western blot and compared with serum
EIA and serum western blot results. There was agreement between all 200 urine
positives and serum positives and agreement between all 700 urine negative and
serum negative results. Urine correlation with serum was 100% for all urine
samples tested.
INVESTMENT IN PEPGEN
In October 1995 Calypte purchased a 49% equity interest in Pepgen, a therapeutic
research and drug development company with two lead compounds in preclinical
evaluation. The first compound is an interferon product, called interferon-tau,
which in early animal trials has shown to be effective both as an anti-viral and
anti-tumor agent with less toxicity than other interferons. Pepgen has planned
further preclinical studies and if the preclinical studies are successful,
Pepgen anticipates seeking approval from the FDA to commence human clinical
trials. Pepgen's second lead compound is a growth factor called uteroferrin.
This compound has stimulatory effects on the growth and differentiation of blood
cells. Uteroferrin is a glycoprotein that is secreted by the uterine
endometrioepithelium. Based on animal studies, the stimulation of hematopoietic
cells by uteroferrin appears to act at an earlier stage of stem cell development
than other known hematopoietic growth factors.
Pepgen holds an exclusive worldwide license to both of these compounds from the
University of Florida. The Company purchased its equity position in Pepgen for
$2.5 million, comprised of $1.0 million paid at closing, $1.0 million payable to
Pepgen pursuant to a promissory note and options to purchase the Company's
Common Stock valued at $500,000. The $1.0 million promissory note is due and
payable upon the earlier of (i) October 1996 or (ii) 60 days following either
FDA approval of the Company's urine-based HIV-1 screening test or the closing of
this Offering. The options were granted to Pepgen shareholders for the purchase
of an aggregate of 475,000 shares of the Company's Common Stock at a price of
$7.50 per share, of which 100,000 are immediately exercisable and the remaining
375,000 are exercisable upon attainment of certain milestones. The options
expire at the earlier of September 2005 or three years after becoming
exercisable. In addition, Calypte has the right of first negotiation to purchase
the remaining 51% of Pepgen at fair market value, and the Company is entitled to
elect two of the seven Board members of Pepgen. Other than the payment of the
$1.0 million promissory note, Calypte does not have any ongoing commitments to
fund Pepgen. See "Certain Transactions" and "Use of Proceeds."
PATENTS, PROPRIETARY RIGHTS AND LICENSES
The Company believes that its future success will depend in large part on its
ability to protect its patents and proprietary rights. Accordingly, the
Company's ability to compete effectively will depend in part on its ability to
develop and maintain proprietary aspects of its technology. The Company has one
U.S. patent, four pending U.S. patent applications, and thirteen foreign
patents, and sixteen pending foreign patent applications. In addition, the
Company has the right to utilize certain patents and proprietary rights under
licensing agreements with NYU, Cambridge Biotech, Repligen, Texas A&M University
System and Stanford
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University. These license arrangements secure intellectual property rights for
the manufacture and sale of the Company's products.
The Company has licensed from NYU, on an exclusive basis, a U.S. patent for the
detection of antibodies to HIV in urine. The rights under the license extend
until the expiration of the U.S. patent in 2009 provided the Company makes
certain payments. The Company has the right to make, use, sell and sublicense
products utilizing the technology described in the patent and is obligated to
make certain fixed and royalty payments to NYU to maintain exclusivity of the
license. In connection with the NYU license, the Company also funded research at
NYU, and expects to continue to do so through 1999. The Company has exclusive
worldwide license to NYU inventions that arise from the research funded by the
Company.
The Company has sublicensed from Cambridge Biotech proprietary technology
related to the HIV envelope glycoprotein. The Company has a non-exclusive
worldwide sublicense to make, have made, use and sell products that relate to
the licensed technology. The Company is required to pay Cambridge Biotech
royalties on products incorporating the licensed technology. The license extends
until the expiration of the licensed patents in 2005, although the Company can
terminate the agreement at any time upon 30-day's written notice.
The Company has been granted a non-exclusive license from Texas A&M University
to make, have made, use and sell products based on its proprietary recombinant
expression systems. The Company is required to pay certain fixed and royalty
payments to Texas A&M University on net sales varying with the content of Texas
A&M's technology in the Company's products.
The Company licensed from Repligen HIV-1 gp160 recombinant virus seed stock. The
Company has been granted (i) an exclusive license to make, have made, use and
sell products incorporating this material for diagnostic purposes, and (ii)
non-exclusive license to make, have made, use and sell the gp160 seed stock for
research purposes. For seven years beginning on the date the Company first
realizes net sales from products incorporating gp160, the Company must pay to
Repligen certain royalties on net sales derived such from products and certain
royalties on net sublicensing revenue derived from sales of products
incorporating. In addition, the Company is required to pay certain fixed and
royalty payments for a non-transferrable, non-exclusive license from Stanford
University to a patent relating to recombinant DNA processes.
The HIV testing industry has been characterized by extensive litigation
regarding patents and other intellectual property rights. Litigation or
interference proceedings could result in significant diversion of efforts by the
Company's management and technical personnel. There are a number of filed and
issued patents involved with the detection of HIV antibodies. One such patent is
currently owned by Chiron Corporation. While the Company, based on the opinion
of its patent counsel, believes that its urine-based HIV-1 screening test does
not infringe the Chiron patent, there can be no assurances that Chiron will not
assert such claims against the Company. Patent litigation can be costly and
protracted. The expense of litigating a claim against the Company for patent
infringement could have a material adverse effect on the Company's business,
financial condition and results of operations. In the event that the Company was
found to be infringing a validly issued patent, and the Company could not obtain
a license to such patent on reasonable terms, the Company could be forced to pay
damages, obtain a license to such patent at a significantly higher rate or,
possibly, remove its urine-based HIV-1 screening test from the market. Such an
event would have a material adverse effect on the Company's business, financial
condition and results of operations.
There can be no assurance that the Company will not in the future become subject
to patent infringement claims and litigation or interference proceedings
declared by the USPTO to determine the priority of inventions.
Although patent and intellectual property disputes in the medical diagnostic
area have often been settled through licensing or similar arrangements, costs
associated with such arrangements may be substantial and could include ongoing
royalties. Furthermore, there can be no assurance that necessary licenses would
be available to the Company on satisfactory terms if at all. Adverse
determinations in a judicial or administrative proceeding or failure to obtain
necessary licenses could prevent the Company from manufacturing and selling its
products, which would have a material adverse effect on the Company's business,
financial condition and
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results of operations. There can be no assurance that the Company will be able
to maintain exclusivity under or maintain its current license agreements.
The Company relies on trade secrets and proprietary know-how, which it seeks to
protect, in part, through appropriate confidentiality and proprietary
information agreements. These agreements generally provide that all confidential
information developed or made known to the individual by the Company during the
course of the individual's relationship with the Company is to be kept
confidential and not disclosed to third parties, except in specific
circumstances. The agreements generally provide that all inventions conceived by
the individual in the course of rendering services to the Company shall be the
exclusive property of the Company; however, certain of the Company's agreement
with consultants, who typically are employed on a full-time basis by academic
institutions or hospitals, do not contain assignment of invention provisions.
There can be no assurance that proprietary information or confidentiality
agreements with employees, consultants and others will not be breached, that the
Company would have adequate remedies for any breach, or that the Company's trade
secrets will not otherwise become known to or independently developed by
competitors.
GOVERNMENT REGULATION
Overview
The Company's products are subject to extensive regulation by the FDA and, to
varying degrees, by state and foreign regulatory agencies. The Company's
products are regulated by the FDA under the Federal Food, Drug, and Cosmetic Act
(the "Act"), as amended by the Medical Device Amendments of 1976 and the Safe
Medical Devices Act of 1990, among other laws. Under the Act, the FDA regulates
the preclinical and clinical testing, manufacturing, labeling, distribution,
sale and promotion of medical devices in the U.S. The FDA prohibits a device,
whether or not cleared under a 510(k) premarket notification or approved under a
PMA, from being marketed for unapproved clinical uses. If the FDA believes that
a company is not in compliance with the regulations, it can institute
proceedings to detain or seize a product, issue a recall, prohibit marketing and
sales of the Company's products and assess civil and criminal penalties against
the Company, its officers or its employees. Furthermore, the Company plans to
sell products in certain foreign countries of which impose local regulatory
requirements. The preparation of required applications and subsequent FDA and
foreign regulatory approval process is expensive, lengthy and uncertain. Failure
to comply with FDA and similar foreign requirements could result in civil
monetary penalties or criminal sanctions, restrictions on or injunctions against
marketing of the Company's products. Additional enforcement actions may
potentially include seizure or recall of the Company's products, and other
regulatory action. There can be no assurance that the Company will be able to
obtain necessary regulatory approvals or clearances in a timely manner or at
all, and delays in receipt of or failure to receive such approvals or
clearances, the loss of previously received approvals or clearances, or failure
to comply with existing or future regulatory requirements would have a material
adverse effect on the Company's business, financial condition and results of
operations.
HIV-1 Screening and Diagnostic Tests
The Company's HIV-1 screening test is regulated by the FDA Center for Biologics
Evaluation and Research. When the test was submitted to the FDA in September
1992, the FDA required a PLA and an ELA for the Company's Berkeley, California
manufacturing facility.
OTC Home Urine Collection Kit
The Company intends to file a PMA with the FDA for the HIV-1 home urine
collection kit which would allow consumers, in the privacy of their homes to
take a urine sample, mail it to Calypte Biomedical Laboratories for analysis and
then anonymously obtain results and professional counseling by telephone. The
Company believes that a submission for FDA approval of this product must set
forth the Company's plans for the reporting of results to the consumer and
consumer counseling services. In addition, the PMA will need to include the
results of extensive clinical studies and manufacturing information and may be
reviewed by a panel of experts outside the FDA. Clinical studies need to be
conducted in accordance with FDA requirements, and
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the failure to strictly comply with such requirements could result in the FDA's
refusal to accept the data or in other sanctions.
There can be no assurance that the FDA will approve the Company's HIV-1 home
urine collection kit for OTC distribution and sale. Furthermore, there can be no
assurance that the FDA will not request additional data or require that the
Company conduct further clinical studies causing the Company to incur additional
costs and delay. In addition, there can be no assurance that the FDA will not
limit the intended use of the Company's products as a condition of PMA approval.
Failure to receive or delays in receipt of FDA approvals, or any FDA limitations
on the intended use of the Company's products, would have a material adverse
effect on the Company's business, financial condition and results of operations.
Manufacturing Facilities
The FDA requires the Company's products to be manufactured in compliance with
cGMP regulations. In addition, the Company is subject to certain additional
manufacturing regulations imposed by the State of California. These regulations
require that the Company manufacture its products and maintain related
documentation for testing and control activities. The Company's facilities and
manufacturing processes have been periodically inspected by the State of
California and other agencies and remain subject to audit from time to time. The
Company believes that it is in substantial compliance with all applicable
federal and state regulations. Nevertheless, there can be no assurance its
manufacturing facility will satisfy cGMP or California manufacturing
requirements. Enforcement of the cGMP regulations has increased significantly in
the last several years, and the FDA has publicly stated that compliance will be
more strictly enforced. In the event that the FDA determines the Company to be
out of compliance with its regulations and to the extent that the Company is
unable to convince the FDA of the adequacy of its compliance, the FDA has the
power to assert penalties, including injunctions or temporary suspension of
shipment until compliance is achieved. In addition, FDA will not approve ELA or
PMA if the facility is found in noncompliance with cGMPs. Such penalties could
have a material adverse effect on the Company's business, financial condition
and results of operations.
In addition, the manufacture, sale or use of the Company's products are subject
to regulation by other federal entities, such as the Occupational Safety and
Health Agency, the Environmental Protection Agency, and by various state
agencies, including the California Environmental Protection Agency. Federal and
state regulations regarding the manufacture, sale or use of the Company's
products are subject to future change, and these changes could have a material
adverse effect on the Company's business, financial condition and results of
operations.
International
Distribution of the Company's products outside the United States is also subject
to regulatory requirements that vary from country to country. In a number of
foreign countries, FDA approval is required prior to approval in that country.
The export by the Company of certain of its products which have not yet been
approved for domestic commercial distribution may be subject to FDA export
restrictions. To date, the Company has not received approval for the sale of its
product in any foreign country. Failure to obtain necessary regulatory approvals
or failure to comply with regulatory requirements would have a material adverse
effect on the Company's business, financial condition and results of operations.
Calypte Biomedical Laboratories
Any of Calypte's laboratory customers, using the Company's diagnostic devices
for clinical use in the United States, and the Company itself when it
establishes its own laboratory, will be regulated under CLIA. CLIA is intended
to ensure the quality and reliability of all medical testing in laboratories in
the United States by requiring that any health care facility in which testing is
performed meet specified standards in the areas of personnel qualification,
administration, participation in proficiency testing, patient test management,
quality control, quality assurance and inspections. The regulations have
established three levels of regulatory control based on complexity: "waived,"
"moderately complex," and "highly complex." Calypte believes that its test will
be categorized as highly complex tests for clinical use in the United States.
Laboratories that perform
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either moderately or highly complex tests must meet quality control and
personnel standards. Personnel requirements for highly complex tests are more
rigorous than those for moderately complex tests, requiring that personnel have
more education and experience than personnel conducting moderately complex
tests. Under the CLIA regulations, all laboratories performing high or
moderately complex tests are required to obtain either a registration
certificate or certifications of accreditation from the Health Care Financial
Administration. There can be no assurance that the CLIA regulations and future
administrative interpretations of CLIA will not have an adverse impact on the
potential market for the Company's products.
Therapeutic Products
If the Company exercises its rights to acquire a controlling interest in or
substantially all of Pepgen, Calypte will be required to obtain FDA approval for
Pepgen's therapeutic products, a process which has historically been
substantially more costly and time consuming than for diagnostic products. To
obtain such approval, the Company must conduct preclinical safety and toxicology
studies in the laboratory and Phase I, II, and III clinical studies under FDA
approved protocols. The results of the pre-clinical and clinical testing for a
new drug, together with detailed manufacturing and other information, would then
be submitted to the FDA in the form of a new drug application. In responding to
a new drug application, the FDA may refuse to accept the application for filing,
request additional information or deny the application if the FDA determines
that the application does not satisfy its regulatory approval criteria. The
process of completing clinical testing usually takes a number of years and
requires the expenditure of substantial resources. The length of the FDA review
period varies widely depending upon the amount and quality of the data in the
application and the nature and indications of the proposed product. In addition,
the FDA may require post-marketing reporting and may require surveillance
programs to monitor the usage and side effects of the drug product after product
approval. The Company has no current plans to acquire the remaining equity
ownership in Pepgen or to develop Pepgen therapeutic products.
COMPETITION
Competition in the in vitro diagnostic market is intense and expected to
increase. Within the United States, the Company will face competition from a
number of well-established manufacturers of blood-based EIAs, plus at least one
system for the detection of HIV antibodies using oral fluid samples. In
addition, the Company may face intense competition from competitors with
significantly greater financial, marketing and distribution resources than the
Company, several of whom have already submitted applications to FDA for approval
of their OTC products.
The suppliers of blood-based HIV tests in the United States include Abbott
Laboratories ("Abbott"), Organon-Teknika Corporation ("Organon-Teknika"), Sanofi
Diagnostic Pasteur ("Sanofi"), Ortho Diagnostics ("Ortho") and Cambridge
Biotech. All of these companies have many years of HIV market experience, and
they typically offer a number of different testing products. Abbott, Sanofi and
Ortho currently sell FDA-licensed blood-based HIV-1/HIV-2 combination tests on
the market in the United States, and other companies may be developing
HIV-1/HIV-2 products.
The Company believes that HIV screening tests which permit the use of oral fluid
may offer significant competition to the Company's urine-based HIV-1 screening
test. The OraSure(TM) collection device manufactured by Epitope, Inc.
("Epitope") used in conjunction with an HIV-1 EIA manufactured by Organon-
Teknika received FDA approval for marketing in the United States in December
1994. In June 1996, Epitope received approval from the FDA for a western blot
oral-fluid confirmatory test.
The Company is not aware of any competitors which have submitted urine-based HIV
screening tests to the FDA, but there can be no assurance that such tests will
not be submitted in the future for approval by the FDA. The Company is aware of
only one other manufacturer, Murex Corporation ("Murex"), which has publicly
announced urine capability for an HIV test. Murex manufactures a number of HIV
assays in microtiter format, none of which have been submitted to the FDA for
review. One such microtiter assay, "gacelisa," is intended for use on saliva and
urine samples but is marketed only outside of the U.S. primarily as a research
assay. Murex markets one HIV product in the U.S., the SUDS(TM) rapid test, which
is intended for use on serum and plasma only. Although urine capability for this
test has been reported in scientific literature,
32
<PAGE> 34
the Company is not aware of any applications for expanded sampling claims for
this assay. In addition, the SUDS(TM) assay format is not conducive to
high-volume testing.
Essentially all of the Company's competitors actively market their diagnostic
products outside of the U.S. In addition, outside of the U.S., where the
regulatory requirements for HIV screening tests are less onerous than those of
the FDA, a much wider range of competitors can be found. Manufacturers from
Japan, Canada, Europe, and Australia offer a number of HIV screening tests in
those markets including HIV-1/HIV-2 tests, rapid tests and other non-EIA format
tests, which are not approved for sale in the U.S. market. There can be no
assurances that the Company's products will compete effectively against these
products in foreign markets, or that these competing products will not achieve
FDA approval.
Three companies have submitted applications to the FDA for OTC HIV blood
testing: Direct Access Diagnostics, a subsidiary of Johnson & Johnson, Home
Access Health Corp., and ChemTrak Incorporated. The FDA has approved a home
collection kit for HIV blood testing developed by Direct Access Diagnostics and
another home collection kit for HIV blood testing developed by Home Access
Health Corp. The Company believes that an OTC HIV testing system which does not
require consumers to collect their own blood may compete favorably against DBS
systems. However, there can be no assurances that the earlier market entry of
these competitors, their substantial promotional and distribution resources, and
future introduction of HIV-1/HIV-2 products will not prevent the Company from
competing favorably. The Company's inability to compete favorably with respect
to any of these factors could have a material adverse effect on its business,
financial condition, and results of operations.
If the Company is successful in developing and introducing urine-based Chlamydia
or other STD tests, it will face competition from established diagnostic testing
companies with greater financial, marketing and distribution resources than the
Company. Some of these companies are marketing established tests in widely-used
formats. In addition, Abbott Laboratories has applied for FDA approval for a
urine-based diagnostic test for chlamydia antigen.
EMPLOYEES
As of March 31, 1996, the Company had 59 full time employees, 13 of whom were
engaged in or directly supported the Company's research and development
activities, 29 of whom were in manufacturing, facilities and quality assurance,
three of whom were in marketing and sales and 14 of whom were in administration.
The Company's employees are not represented by a union or collective bargaining
entity. The Company believes its relations with its employees are good.
FACILITIES
The Company currently leases approximately 20,000 square feet of office,
research and manufacturing space in Berkeley, California. The existing lease
expires in June 1997, with an option to renew the lease for two one-year terms.
The Company also leases approximately 22,000 square feet of office and
manufacturing space in Alameda, California. The existing lease expires in
November, 1998, with an option to renew the lease for two successive five-year
periods. The Company believes that existing facilities are adequate to support
the Company's activities for the foreseeable future.
LEGAL PROCEEDINGS
An action was brought against the Company in California Superior Court by a
former employee, alleging, in connection with the Company's termination of the
employee, gender and age discrimination, wrongful termination, breach of
contract and breach of implied covenant of good faith and fair dealing. This
former employee has requested in her complaint compensatory and punitive damages
along with attorneys fees and costs. The Company believes that the claims are
without merit and plans to vigorously defend against them.
SCIENTIFIC ADVISORY BOARD
The Scientific Advisory Board is composed of certain of the Company's scientists
and other leading scientists who have been actively involved in pioneering HIV
research. Scientific Advisory Board members meet as a group and individually
with management and key scientific employees of the Company on a regular basis.
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<PAGE> 35
Scientific Advisory Board members have taken an active role in helping the
Company identify scientific and product development opportunities and recruiting
and evaluating the Company's scientific staff. The Company has granted options
to acquire its Common Stock to members of the Scientific Advisory Board.
The members of the Scientific Advisory Board and their experience are set forth
below:
ABUL K. ABBAS, M.D., Professor, Department of Pathology, Harvard Medical School.
Dr. Abul Abbas is an expert in the cellular interactions and cytokine regulation
of the immune response. Professor Abbas received his M.D. in India in 1968 and
interned at Harvard Medical School in 1970. He has held the position of
Professor of Pathology since 1991. Professor Abbas has also received the
Parke-Davis Award for Experimental Pathology (1987).
ALVIN FRIEDMAN-KIEN, M.D., Professor, New York University Medical Center, New
York. Since 1994, Dr. Friedman-Kien has been a Professor of Microbiology and
Dermatology at New York University Medical Center and Bellevue Hospital. Dr.
Friedman-Kien is a clinician and researcher with expertise in the field of AIDS
and AIDS related opportunistic infections. In particular, Professor
Friedman-Kien is an expert in the etiological relationship between HIV and other
human viruses. The detection of antibodies to HIV in urine was first reported by
Dr. Friedman-Kien. Dr. Friedman-Kien graduated in 1956 with a B.A. degree from
Brown University and received an M.D. degree from Yale University Medical School
in 1960.
TOBY D. GOTTFRIED, PH.D. is the Company's Director of Research and Development.
See "Management -- Directors and Executive Officers."
HOWARD JOHNSON, PH.D., Graduate Research Professor, Department of Microbiology
and Cell Science at the University of Florida in Gainesville. From 1985 to 1988
he was Professor in the Department of Comparative and Experimental Pathology at
the University of Florida. Prior to this, Dr. Johnson was also on the faculty of
the University of Texas. He was also Founder and President of PepTech, Inc., a
subsidiary of Pepgen, and holds the patent on arginine vasopressin-binding
antihypertensive peptide. He is currently a member of a National Advisory
Council for the National Institutes of Health. Dr. Johnson received his B.S. and
Ph.D. degrees from The Ohio State University.
NORMAN KLINMAN, M.D., PH.D., Member, Department of Immunology, The Scripps
Research Institute, La Jolla, California. Dr. Klinman received his M.D. in 1962
and Ph.D. in Microbiology in 1965 from the University of Pennsylvania. He served
on the faculty of the Department of Pathology and Microbiology at the University
of Pennsylvania for 10 years before accepting his current position in 1978 in
the Department of Immunology at Scripps.
DANIEL LANDERS, M.D., Director for the Division of Reproductive and Infectious
Diseases and Immunology, Department of Obstetrics, Gynecology & Reproductive
Sciences, Magee-Womens Hospital at the University of Pittsburgh. From 1992 to
1995, Dr. Landers was Associate Professor for the Department of Obstetrics,
Gynecology and Reproductive Sciences at UCSF. He is a well-known expert in
sexually transmitted diseases in women, and the recipient of numerous awards,
including the Susman Memorial Award for the Infectious Diseases Society of
America, Young Investigator Award for Infectious Disease Society for OB/GYN, an
NIH Physician-Scientist Award, and the Pediatric AIDS Foundation Scholar Award.
He received his M.D. in 1980 at UCSF.
LUC MONTAGNIER, M.D., Professor, Pasteur Institute, Paris, France. Professor
Montagnier began his career as a researcher at the Centre National de la
Recherche Scientifique. In 1972, he joined the Pasteur Institute and formed the
Division of Viral Oncology. In 1983, he discovered the HIV virus and showed its
etiologic role in AIDS. In 1985, his research team isolated the second human
AIDS virus (HIV-2) from West African patients. Among the numerous honors and
prizes received by Professor Montagnier are the Rosen Price (1971), the Gallien
Prize (1985), the Lasker Prize (1986), the Gairdner Price (1987), the Japan
Prize (1988), and the Amsterdam Prize (1994). He is also a Comandeur de l'Ordre
National merite and is a Director of the French National Center of Scientific
Research.
HOWARD B. URNOVITZ, PH.D. is the Company's Chief Science Officer and a Director.
See "Management -- Directors and Executive Officers."
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<PAGE> 36
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information with respect to the executive
officers and directors of the Company as of May 15, 1996:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------- --- ----------------------------------------------
<S> <C> <C>
William A. Boeger (1)(2)....... 46 Chairman of the Board of Directors
John P. Davis.................. 54 President, Chief Executive Officer and Member
of the Board of Directors
Howard B. Urnovitz, Ph.D....... 42 Chief Science Officer and Member of the Board
of Directors
John J. DiPietro............... 38 Vice President of Finance, Chief Financial
Officer and Secretary
Toby Gottfried, Ph.D........... 57 Director of Research and Development
Richard Van Maanen............. 36 Director of Marketing, Sales and Business
Development
Jeffrey Lang................... 45 Director of Operations
Cynthia Green.................. 49 Director of Regulatory Affairs and Quality
Assurance and Quality Control
Kuo-Yu (Frank) Chiang.......... 44 Member of the Board of Directors
David Collins (1).............. 62 Member of the Board of Directors
Julius R. Krevans, M.D. (2).... 71 Member of the Board of Directors
Mark Novitch, M.D. (1)......... 64 Member of the Board of Directors
Roger Quy, Ph.D. (2)........... 45 Member of the Board of Directors
Hideji Nonomura................ 49 Member of the Board of Directors
</TABLE>
- ---------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
WILLIAM A. BOEGER has served as the Company's Chairman of the Board since
January 1994. From January 1994 until September 1995, Mr. Boeger served as the
Company's Chairman, President and Chief Executive Officer. Mr. Boeger has been a
Director of the Company since 1991. He is a founder and Managing General Partner
of Quest Ventures, a venture capital partnership founded in August 1985. Prior
to that he was a General Partner of Continental Capital Ventures, a venture
capital partnership. Before entering the venture capital field, he worked at
Harvard Medical School and Peter Bent Brigham Hospital and served on the faculty
of the Amos Tuck Business School at Dartmouth College. Mr. Boeger also serves as
Chief Executive Officer and Chief Financial Officer of Pepgen Corporation, the
49% owned therapeutic subsidiary of Calypte. He also serves on the Board of
Directors of IRIDEX Corporation and several private life sciences companies and
non-profit corporations. Mr. Boeger received his M.B.A. from the Harvard
Business School and his B.S. from Williams College.
JOHN P. DAVIS has served as the Company's President and Chief Executive Officer
since September 1995. He joined the Company in May 1995 as President and Chief
Operating Officer. Prior to joining the Company, from 1984 until 1995, Mr. Davis
was co-founder, President and, later, Chief Executive Officer of Dianon Systems,
Inc., a medical laboratory company specializing in oncology, urology, and
anatomic pathology testing services and information systems. From 1981 until
1984, Mr. Davis was Division President of API, a diagnostic products division of
American Home Products Corporation. Mr. Davis was employed from 1966 until 1981
by Abbott Laboratories, a multinational health care corporation company, where
he held senior management positions in both the Ross Laboratories and the
Diagnostics Products Divisions, most recently as Division Vice President and
General Manager of the Diagnostic Products Business Unit. Mr. Davis also serves
as a director of Pepgen and is a member of the board of directors of Athena
Neuroscience Inc. He is a board
35
<PAGE> 37
member and Vice Chairman of the Board of Directors of Dianon Systems Inc. Mr.
Davis received a B.S. from The Ohio State University.
HOWARD B. URNOVITZ, PH.D. is the founder of the Company and serves as Chief
Science Officer. Prior to founding the Company in 1988, Dr. Urnovitz was a
Senior Scientist at the Institute of Cancer Research in San Francisco from 1985
to 1987. He was Director of Molecular and Cellular Engineering at Xoma
Corporation, a biotechnology corporation, from 1983 to 1985. Prior to this, he
was Director of the Hybridoma Laboratory at the University of Iowa. Dr. Urnovitz
received a B.S. in Microbiology and a Ph.D. in Microbiology from the University
of Michigan, and completed a post-doctoral study at Washington University.
JOHN J. DIPIETRO has served as the Company's Vice President of Finance, Chief
Financial Officer and Secretary since October 1995. Prior to joining the
Company, he was Vice President of Finance, Chief Financial Officer and Secretary
of Meris Laboratories, a full service clinical laboratory, from 1991 until 1995.
While at Meris Laboratories, Mr. DiPietro, inter alia, was a respondent in an
SEC administrative proceeding (No. 3-8484), dated September 26, 1994 in which,
without admitting or denying the SEC's findings, Mr. DiPietro consented to the
entry of an order that Mr. DiPietro cease and desist from committing or causing
any violation, and any future violations of Sections 17(a)(2) and (3) of the
Securities Act, Section 13(a) of the Exchange Act and Rules 126-20, 13a-1, and
13a-13 thereunder. From 1980 until 1983 and from 1986 until 1991, Mr. DiPietro
was a Senior Manager at Price Waterhouse. Mr. DiPietro served as Credit Manager
for Motorola, Inc., an electronics company, from 1983 until 1986. He is a
Certified Public Accountant and received his M.B.A. from the University of
Chicago, Graduate School of Business and a B.S. in accounting from Lehigh
University.
TOBY GOTTFRIED, PH.D. has served as Director of Research and Development since
joining the Company in 1988. From 1983 until 1988 she was a founding Senior
Scientist of Carcinex Corporation, a cancer therapeutic company. From 1978 until
1980, Dr. Gottfried was a scientist at the Hepatitis Research Laboratory of the
University of California, San Francisco Medical Center. Dr. Gottfried received
her Ph.D. in Biochemistry from the University of Pennsylvania and her B.S. from
Cornell University.
RICHARD VAN MAANEN has served as Director of Marketing, Sales and Business
Development since March 1993. Prior to joining Calypte, Mr. Van Maanen held
several positions from 1987 until 1993 at ADI Diagnostics Inc., a medical
manufacturing company, including Director of Sales and Marketing, Marketing
Manager, and Canadian Business Manager. From 1983 until 1987 he held sales and
marketing positions with the Diagnostics Division of Abbott Laboratories and
from 1981 until 1983 he was with Millipore Corporation, a filtration products
company. Mr. Van Maanen received a B.S. in Biology from the University of
Guelph, Ontario.
JEFFREY LANG has served as Director of Operations since June 1993. From January
1992 until May 1993 he was Director of Operations at Varian Associates, a
medical products company, supporting medical device operations. Prior to that,
from October 1983 until December 1991 Mr. Lang held several positions with Airco
Coating Technology, an engineering and glass coating company, including Vice
President of Manufacturing and Engineering, Director of Manufacturing and
Engineering, and Operations Manager. From February 1973 until October 1983, he
held several positions with Miles Laboratories, a pharmaceutical company,
including Production Manager, Senior Manufacturing Engineer, and Production
Supervisor. Mr. Lang received his B.S. in Physics from California State
University, Hayward.
CYNTHIA GREEN has served as Director of Regulatory Affairs, Quality Assurance
and Quality Control since June 1992. From July 1990 until May 1992, she was
Manager of Regulatory and Quality Assurance at CellPro Inc., a biotechnology
company. Prior to that, from March 1983 until July 1990, Ms. Green worked at
Genetic Systems, a manufacturer of HIV and hepatitis diagnostic products, as the
Quality Assurance and Quality Control Manager. Ms. Green received a B.S. in
Bacteriology and Public Health from Washington State University.
FRANK CHIANG has served on the Company's Board of Directors since March 1992.
From 1972 to the present he has been employed by the Ta Chiang Corporation,
Ltd., a Taiwanese holding corporation, where he has served in a number of
executive capacities including his most recent position as President. Mr. Chiang
also
36
<PAGE> 38
serves on the Board of Directors of the G.C.H. Company, the Ta Security Limited
Company, and the Fidelity Venture Capital Corporation.
DAVID COLLINS has served on the Company's Board of Directors since December
1995. From October 1994 to the present, Mr. Collins has served as a consultant
in the health care industry. From September 1989 until September 1994 he served
as Executive Vice President with Schering-Plough Corporation, a medical products
company, and President of the HealthCare Products division, responsible for all
OTC and consumer health care products. From February 1988 to August 1989, he was
a founding partner of Galen Partners, a venture capital firm. From July 1962 to
February 1988, he held several positions at Johnson & Johnson, including Vice
Chairman Board of Directors for Public Affairs & Planning and Vice Chairman
Executive Committee & Chairman Consumer Sector. He is also a member of the Board
of Directors of Penederm, Inc., Lander, Inc., and Claneil Enterprises, Inc., a
private company. Mr. Collins received his L.L.B. at Harvard Law School and his
B.A. at the University of Notre Dame.
JULIUS KREVANS, M.D. has served on the Company's Board of Directors since March
1995. Dr. Krevans has been Chancellor Emeritus and Director of International
Medical Care at University of California at San Francisco since 1993. From 1982
until 1993, Dr. Krevans served as Chancellor at UCSF, and was Dean of the School
of Medicine at UCSF from 1971 until 1982. Prior to this, Dr. Krevans served as
Dean for Academic Affairs at The Johns Hopkins University School of Medicine
where he also served on the faculty for 18 years and was Professor of Medicine
from 1968 until 1971. He is also a director of Neoprobe. Dr. Krevans served as a
director of Parnassus Pharmaceuticals Incorporated, which was liquidated under
Chapter 7 of the Federal Bankruptcy Code in 1995. Dr. Krevans received his M.D.
from New York University, College of Medicine and completed a residency in
Medicine at The Johns Hopkins University School of Medicine.
MARK NOVITCH, M.D. has served on the Company's Board of Directors since
September 1995. Dr. Novitch has been a Professor of Health Care Sciences at
George Washington University since October 1994. From 1993 until October 1994,
Dr. Novitch was a private consultant in the pharmaceutical industry. From 1985
until 1993, Dr. Novitch served in senior executive positions with the Upjohn
Company, a medical products company, including Vice Chairman of the Board of
Directors, Corporate Executive Vice President, Corporate Senior Vice President
for Scientific Administration and Corporate Vice President. Prior to this, for
14 years, Dr. Novitch served with the FDA where from 1983 until 1984 he was
Acting Commissioner. For seven years, Dr. Novitch was on the faculty at Harvard
Medical School. He is also a member of the Board of Directors of Osiris
Therapeutics, Inc., Neurogen Corporation, Guidant Corporation and Alteon, Inc.
Dr. Novitch received his A.B. from Yale University, and his M.D. from the New
York Medical College.
ROGER QUY, PH.D. has served on the Company's Board of Directors since November
1991. Dr. Quy has been general partner of Technology Partners, a venture capital
firm focused on early stage companies since 1989. From 1982 to 1989, Dr. Quy
held several management positions with Hewlett-Packard Corporation including
member of Directors Staff for Hewlett-Packard Labs and Research and Development
for HP Labs Europe. He serves as a Chairman or a Director of several early stage
medical companies. Dr. Quy received an M.B.A. in finance from the Haas School of
Business, University of California at Berkeley, a Ph.D. in Neuroscience and a
B.A. from the University of Keele, England.
HIDEJI NONOMURA has served on the Company's Board of Directors since December
1995. Mr. Nonomura is currently the Director of the Diagnostic Reagents Division
of Otsuka Pharmaceutical Company and has served in this capacity since April
1996. From January 1991 until March 1996, Mr. Nonomura served as the Director of
Overseas Affairs of Otsuka Pharmaceutical Company. Mr. Nonomura holds a B.S. in
Chemistry from Tokyo University of Education.
DIRECTOR COMPENSATION
The Company's directors are reimbursed for their out-of-pocket travel expenses
associated with their attendance at Board meetings. Under the Company's 1995
Director Option Plan, non-employee directors of the Company receive automatic
grants of stock options to purchase shares of Common Stock. In addition, all
outside directors receive $5,000 per year in consideration of their attendance
on the Board of Directors.
37
<PAGE> 39
1995 DIRECTOR OPTION PLAN
The Company's Director Option Plan was adopted by the Company's Board of
Directors in December 1995 and stockholders in 1996. Under the Director Option
Plan, the Company reserved 200,000 shares of Common Stock for issuance to the
directors of the Company pursuant to nonstatutory stock options. Under the
Director Option Plan directors who are also not employees or consultants of the
Company automatically receive an option to purchase 12,000 shares of Common
Stock (the "First Option") on the date on which such person first becomes a
director, whether through election by the stockholders of the Company or
appointment by the Board to fill a vacancy. Thereafter, each such person shall
receive an option to acquire 3,000 shares of the Company's Common Stock (the
"Subsequent Option") on each date of the Company's Annual Meeting of
Stockholders where such outside director is reelected. Each option granted under
the Director Option Plan shall be exercisable at 100% of the fair market value
of the Company's Common Stock on the date such option was granted. Twenty-five
percent of the First Option shall vest one year after the date of grant, with
25% vesting each anniversary thereafter. Twelve and one-half percent of the
shares subject to the Subsequent Option shall be exercisable on the first day of
each month following the date of grant. The Plan shall be in effect for a term
of ten years unless sooner terminated under the Director Option Plan.
EXECUTIVE COMPENSATION
The following table sets forth certain compensation awarded or paid by the
Company during the year ended December 31, 1995 to its Chief Executive Officer
and each of the other most highly compensated executive officers of the Company
whose salary and bonus for such fiscal year were in excess of $100,000
(collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
SECURITIES
UNDERLYING
ANNUAL COMPENSATION OPTIONS
------------------------------------- GRANTED
NAME AND PRINCIPAL POSITION SALARY BONUS OTHER (#)
- ------------------------------------------ -------- ------- ------- ------------
<S> <C> <C> <C> <C>
William A. Boeger, Chief Executive Officer
and Chairman of the Board of
Directors(1)............................ $272,500(2) $ -- $ 7,210(3) 220,000(4)
John P. Davis, President and Chief
Executive Officer(5).................... 126,602 -- 15,819(6) 320,000
Howard B. Urnovitz, Chief Science
Officer................................. 139,691 16,816 -- 180,000
Cynthia Green, Director of Regulatory
Affairs and QA/QC....................... 192,000(7) -- 9,961(3) --
</TABLE>
- ---------------
(1) Mr. Boeger served as the Company's Chairman of the Board of Directors, Chief
Executive Officer, and President until May 1995. From May 1995 to September
1995 he served as Chairman of the Board of Directors and Chief Executive
Officer. Since September 1995 he has served as Chairman of the Board of
Directors.
(2) $135,000 was paid to an affiliate of Quest Ventures, a venture capital
partnership of which Mr. Boeger is Managing General Partner, in 1995 for
services rendered by Mr. Boeger in 1994. $118,750 was paid to an affiliate
of Quest Ventures in 1995 for services rendered by Mr. Boeger in 1995.
$18,750 was paid to Pepgen Corporation, a subsidiary of the Company of which
Mr. Boeger is President and Chief Financial Officer, in 1995 for services
rendered by Mr. Boeger in 1995.
(3) Represents reimbursements for living expenses.
(4) Excludes options to purchase 67,303 shares issued to an affiliate of Quest
Ventures.
(5) Mr. Davis joined the Company in May 1995 as its President and Chief
Operating Officer. In September 1995 Mr. Davis was named President and Chief
Executive Officer.
(6) Represents reimbursements for living expenses. Excludes $75,000 which the
Company accrued for reimbursement of moving expenses. Such amount was not
paid in 1995.
(7) Ms. Green is retained by the Company as a consultant.
38
<PAGE> 40
The following table sets forth information concerning stock options granted to
the Named Executive Officers during the fiscal year ended December 31, 1995.
STOCK OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM(3)
OPTIONS EMPLOYEES IN PRICE EXPIRATION -----------------------
NAME GRANTED FISCAL YEAR(1) ($/SH)(2) DATE 5%($) 10%($)
- ---------------------------- ---------- -------------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
William A. Boeger........... 220,000(4) 22.2% $0.50 01/25/01 $1,658,926 $2,228,461
John P. Davis............... 320,000(5) 32.2% $0.50 05/31/05 $2,967,478 $4,819,986
Howard B. Urnovitz.......... 180,000(6) 18.1% $0.50 01/25/01 $1,357,303 $1,823,286
Cynthia Green............... -- -- -- -- -- --
</TABLE>
- ---------------
(1) Based on an aggregate of 992,371 options granted under the Company's
Incentive Stock Plan to employees and directors of, and consultants to, the
Company during the year ended December 31, 1995, including the Named
Executive Officers.
(2) The exercise price per share of each option was equal to the fair market
value of the Common Stock on the date of grant as determined by the Board of
Directors.
(3) The potential realizable value is calculated based on the term of the option
at its time of grant. It is calculated using the public offering price of
$6.00 per share assuming the stock price appreciates from the date of grant
at the indicated annual rate compounded annually for the entire term of the
option and the option is exercised and sold on the last day of its term for
the appreciated stock price. With respect to options granted at fair market
value, no gain to the optionee is possible unless the stock price increases
over the option term.
(4) Options granted become exercisable at the rate of 110,000 of the shares
subject to the option at January 25, 1995 and 8.34% of the remaining 110,000
shares subject to the option each month thereafter for the next 12 months.
The options expire six years from the date of grant, or earlier upon
termination of employment.
(5) Options granted become exercisable at the rate of 20% of the shares subject
to the option at May 1, 1996 and at the rate of 1.67% per month thereafter
for the next four years. The options expire ten years from the date of
grant, or earlier upon termination of employment.
(6) Options granted become exercisable at the rate of 25% of the shares subject
to the option at January 25, 1996 and at the rate of 2.08% per month
thereafter for the next three years.
39
<PAGE> 41
The following table sets forth information concerning option exercises for the
year ended December 31, 1995, with respect to each of the Named Executive
Officers.
AGGREGATED OPTION EXERCISES IN 1995
AND DECEMBER 31, 1995 OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISABLE IN-THE-MONEY
OPTIONS OPTIONS AT
SHARES AT DECEMBER 31, 1995 DECEMBER 31, 1995
ACQUIRED ON VALUE (EXERCISABLE/ (EXERCISED/
NAME EXERCISE($) REALIZED($) UNEXERCISABLE) UNEXERCISABLE)(1)
- ------------------------------ ----------- ----------- -------------------- -----------------------
<S> <C> <C> <C> <C>
William A. Boeger............. -- -- 210,831/ 9,169 $ 1,159,571/ $ 50,430
John P. Davis................. -- -- -- / 320,000 $-- / $1,760,000
Howard B. Urnovitz............ -- -- 105,000/ 180,000 $ 606,900/ $ 990,000
Cynthia Green................. -- -- 10,625/ 27,625 $ 58,588/ $ 152,038
</TABLE>
- ---------------
(1) Value realized and value of unexercised in-the-money options is based on a
value of $6.00 per share of the Company's Common Stock, the public offering
price, even though at the December 31, 1995 the fair market value of the
Common Stock was determined by the Board of Directors to be $5.00 per share.
Amounts reflected are based on the assumed value minus the exercise price
multiplied by the number of shares acquired on exercise and do not indicate
that the optionee sold such stock.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
The Compensation Committee is responsible for determining salaries, incentives
and other forms of compensation for directors, officers and other employees of
the Company and administers various incentive compensation and benefit plans.
The Compensation Committee consists of Dr. Krevans, Dr. Quy and Mr. Boeger, who
is a non-voting member.
INCENTIVE STOCK PLAN
A total of 2,740,992 shares of Common Stock have been reserved for issuance
under the Company's Incentive Stock Plan (the "Stock Plan"). As of March 31,
1996, 126,524 shares had been issued upon the exercise of stock options granted
under the Stock Plan, 1,292,561 shares were subject to outstanding options and
1,321,907 remained available for future grant. The Stock Plan is administered by
the compensation committee of the board of directors. Under the Stock Plan,
options may be granted to employees, including directors who are employees, and
consultants. Only employees may receive "incentive stock options," which are
intended to qualify for certain tax treatment; nonemployees receive
"nonstatutory stock options," which do not qualify for such treatment. In the
event of a change in control of the Company, including a merger or sale of
substantially all of the Company's assets, outstanding options may be assumed by
any successor corporation or may become exercisable. The exercise price of
incentive stock options under the Stock Plan must at least equal the fair market
value of the Common Stock on the date of grant, while the exercise price of
nonstatutory options must at least equal 85% of such market value. Options
granted under the Stock Plan generally vest on a cumulative monthly basis over
four or five years, and in the case of incentive stock options, must be
exercised within six or ten years. The Board may amend or modify the Stock Plan
at any time. The Stock Plan will terminate in 2001, unless sooner terminated by
the Board.
1995 EMPLOYEE STOCK PURCHASE PLAN
The Company's Employee Stock Purchase Plan (the "Purchase Plan") was adopted by
the Company's Board of Directors in December 1995 and stockholders in June 1996.
The Purchase Plan is intended to qualify under Section 423 of the Code. The
Company has reserved 300,000 shares of Common Stock for issuance under the
Purchase Plan. Under the Purchase Plan, an eligible employee may purchase shares
of Common Stock from the Company through payroll deductions of up to 10% of his
or her compensation, at a price per share equal to 85% of the lower of (i) the
fair market value of the Company's Common Stock on the first day of an offering
40
<PAGE> 42
period under the Purchase Plan or (ii) the fair market value of the Common Stock
on the last day of an offering period. Except for the first offering period,
each offering period will last for twenty-four months and will commence the
first day on which the national stock exchanges and The Nasdaq Stock Market are
open for trading, on or after May 1 and November 1 of each year. The first
offering period will begin upon the effective date of this Offering and will end
at the end of the twenty-fourth month after such date. Any employee who is
customarily employed for at least 20 hours per week and more than five months
per calendar year, who has been so employed for at least three consecutive
months on or before the commencement date of an offering period is eligible to
participate in the Purchase Plan.
LIMITATIONS OF LIABILITY AND INDEMNIFICATION MATTERS
The Company has recently reincorporated in Delaware, in part to take advantage
of certain provisions in Delaware's corporate law relating to limitations on
liability of corporate officers and directors. The Company believes that the
reincorporation into Delaware, the provisions of its Certificate of
Incorporation and Bylaws and the separate indemnification agreements outlined
below are necessary to attract and retain qualified persons as directors and
officers.
The Company's Certificate of Incorporation limits the liability of directors to
the maximum extent permitted by Delaware law. Delaware law provides that
directors of a company will not be personally liable for monetary damages for
breach of their fiduciary duties as directors, except for liability (i) for any
breach of their duty of loyalty to the company or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) for unlawful payments or dividends or unlawful
stock repurchases or redemptions as provided in Section 174 of Delaware General
Corporation Law or (iv) for transactions from which the director derived an
improper personal benefit.
The Company's Bylaws provide that the Company shall indemnify its officers and
directors and may indemnify its employees and other agents to the fullest extent
provided by Delaware law, including those circumstances where indemnification
would otherwise be discretionary under Delaware law. The Company believes that
indemnification under its Bylaws covers at least negligence on the part of
indemnified parties. The Bylaws authorize the use of indemnification agreements
and the Company has entered into such agreements with each of its directors and
executive officers.
The Company has obtained officer and director liability insurance with respect
to liabilities arising out of certain matters, including matters arising under
the Securities Act.
At present, there is no pending litigation or proceeding involving any director
or officer, employee or agent of the Company where indemnification will be
required or permitted. The Company is not aware of any threatened litigation or
proceeding which may result in a claim for such indemnification.
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<PAGE> 43
CERTAIN TRANSACTIONS
FORMATION OF THE COMPANY AND RELATED TRANSACTIONS
From its inception to June 21, 1996, the Company has issued or sold shares of
Common Stock at prices ranging from $0.20 to $8.10, and Series B, Series C,
Series D and Series E Preferred Stock at prices of $1.86, $3.70, $5.00 and $5.00
to $7.50 per share, respectively, to the following directors, entities
affiliated with directors, and 5% stockholders.
<TABLE>
<CAPTION>
SERIES SERIES SERIES SERIES
NAME COMMON B C D E
- ------------------------------------------------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Directors
William A. Boeger.............................. -- -- -- -- --
John P. Davis.................................. -- -- -- -- --
Howard B. Urnovitz............................. 139,000 -- -- -- --
David Collins.................................. -- -- -- -- --
Julius R. Krevans.............................. -- -- -- -- 4,000
Mark Novitch................................... -- -- -- -- --
Roger Quy...................................... -- -- -- -- --
Hideji Nonomura................................ -- -- -- -- --
Kuo-Yu (Frank) Chiang.......................... 5,662 -- 556,082 -- --
Entities Affiliated with Directors
Quest Ventures II (1).......................... 29,322 79,680 83,482 14,850 --
Quest Ventures International(1)................ 20,042 54,461 57,059 10,150 --
Otsuka Pharmaceutical Co., Ltd.(2)............. -- 268,282 164,685 260,000 600,000
Technology Partners West Fund IV(3)............ -- -- 270,270 150,000 200,000
Steven F. Urnovitz(4).......................... 1,569 -- -- -- --
Other 5% Stockholders
Suez Technology Fund........................... 30,853 134,141 209,459 50,000 66,500
H&Q HealthCare Investors....................... -- -- -- 200,000 50,400
H&Q Life Sciences Investors.................... -- -- -- 100,000 48,300
Entities Affiliated with MVP Investors,
L.P. ....................................... -- -- 216,217 242,000 --
</TABLE>
- ---------------
(1) William A. Boeger is a founder of the Company and Managing General Partner
of Quest Ventures, an affiliate of these entities.
(2) Hideji Nonomura is the Director of the Diagnostic Reagents Division of
Otsuka Pharmaceutical Co., Ltd.
(3) Roger Quy is a general partner of Technology Partners, an affiliate of
Technology Partners West Fund IV.
(4) Steven F. Urnovitz is the brother of Howard B. Urnovitz.
Upon the completion of this Offering, each outstanding share of Series B, C, D
and E Preferred Stock will be converted into one share of Common Stock.
PEPGEN CORPORATION
In October 1995, Calypte purchased a 49% equity interest in Pepgen Corporation.
Pepgen is a research and development stage company involved in the field of
human therapeutics. Calypte purchased the equity position for a total of
$2,500,000, with $1,000,000 paid in cash at closing, a promissory note in the
amount of $1,000,000 and options to purchase 475,000 shares of Common Stock
valued at $500,000. The note is due and payable the earlier of (i) October 1996
or (ii) 60 days following either the Company's approval by the FDA of its HIV-1
urine assay or the completion of a public offering of securities. In addition to
its 49% ownership, Calypte has the first right of negotiation to purchase the
remaining 51% of Pepgen at fair market value.
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<PAGE> 44
Calypte is also entitled to elect two of seven members of the Pepgen board of
directors. Other than the second installment of the equity purchase described
above, Calypte does not anticipate that it will use any of the proceeds from
this Offering for Pepgen (see "Use of Proceeds"). Pepgen expects to fund its
product development through loans, grants, collaborations, or equity investment
from corporate partners and governmental agencies. Calypte has no ongoing
obligation to provide Pepgen with any additional funds beyond its original
equity investment. The option grants by the Company in connection with its
purchase of 49% of Pepgen, were granted to the current Pepgen shareholders and
consisted of options to purchase an aggregate of 475,000 shares of Calypte
Common Stock at an exercise price of $7.50 per share. 100,000 of such shares are
exercisable immediately, with the remaining shares subject to exercise upon the
attainment of the following milestones:
<TABLE>
<CAPTION>
MILESTONE CALYPTE SHARES SUBJECT TO ADDITIONAL OPTIONS
- -------------------------------------------------------- --------------------------------------------
<S> <C>
Upon signing of a Research and Development Contract with
proceeds of $1,000,000 or more to Pepgen 100,000 shares
Upon signing of a licensing agreement with proceeds of
$5,000,000 or more to Pepgen 100,000 shares
Upon the filing of an Investigation of New Drug ("IND")
application with the FDA or with similar agencies in
Europe or Japan 25,000 shares
Upon the filing of a New Drug Application ("NDA") with
the USFDA or with similar agencies in Europe or Japan 50,000 shares
Upon first commercial sales of a Pepgen product based on
an NDA 100,000 shares
</TABLE>
EMPLOYMENT ARRANGEMENTS
On April 10, 1995, and amended as of April 22, 1996, the Company entered into an
employment agreement with John P. Davis providing for employment of Mr. Davis as
the Company's President and Chief Executive Officer for a term from May 1, 1995
through December 31, 1996. The agreement is automatically renewable each year
subject to 90 days notice prior to the end of each calender year. Mr. Davis'
salary under this agreement initially $185,000 per year, increased to $195,000
per year upon his appointment as Chief Executive Officer of the Company, which
occurred in September 1995. Mr. Davis is also eligible for a maximum $35,000
bonus in 1996. This agreement also entitles Mr. Davis to moving expenses in
connection with relocating Mr. Davis and his family from Connecticut to
California, which expenses shall not exceed $150,000 and which expenses shall be
increased sufficiently to reimburse Mr. Davis for the taxes owed on such
expenses. In addition, Mr. Davis shall be entitled to receive $1,000 per month
as reimbursement for temporary living expenses for up to nine months. The
agreement also provides that Mr. Davis shall receive a $375 car allowance and
reimbursement for all operating expenses, maintenance, licence fees, and
insurance. Mr. Davis shall also be entitled to vacation and other benefits
provided to the Company's employees generally. Mr. Davis was granted an option
to purchase 320,000 shares of Common Stock at $0.50 per share, which option Mr.
Davis can exercise as to 64,000 of the shares on May 1, 1996, and 5,333 shares
per month thereafter, or in the event of an acquisition of the Company as to all
of the shares subject to the option. In the event Mr. Davis's employment with
the Company is terminated by the Company other than for cause (i) during the
first year of employment, Mr. Davis shall receive his base salary for 12 months;
(ii) during the second year or employment, Mr. Davis shall receive his base
salary for nine months; and (iii) thereafter, he shall receive his base salary
for six months.
On January 10, 1994, the Company entered into an employment agreement with
William Boeger, the Company's Chairman of the Board and a Director, and the
Company's former Chief Executive Officer. This agreement provided that Mr.
Boeger would devote not less than one-half time to the Company, and the Company
would issue to Mr. Boeger or Quest Ventures, an investment partnership with
which Mr. Boeger served as a principal prior to joining the Company, an option
to acquire 154,276 shares of the Company at an exercise price of $0.50 per
share.
On January 25, 1995, the Company entered into an employment agreement with
Howard Urnovitz, a Founder, Director, and Chief Science Officer of the Company.
This agreement provides for annual salary of $140,000
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<PAGE> 45
plus an annual bonus not to exceed $35,000 per year. Dr. Urnovitz will also be
entitled to vacation and other benefits available to the Company's employees
generally. The agreement provides that on the date the Company's urine-based HIV
test is approved by the FDA, the Company will forgive $42,500 in principal owed
to the Company on the promissory note and reduce the collateral securing the
note by one-half, and, pay Dr. Urnovitz a one-time bonus to defray the federal
tax liability on the deemed income from the forgiveness of the note. When this
agreement was executed, all of Dr. Urnovitz's unvested stock options immediately
vested, and Dr. Urnovitz was granted an option to acquire 180,000 shares of the
Company's Common Stock at $0.50 per share, which option Dr. Urnovitz can
exercise as to 25% of the shares one year after grant and 2.08% of the shares
per month thereafter, subject to ratable 48-month vesting. If the Company
terminates Dr. Urnovitz's employment other than for cause, Dr. Urnovitz would be
entitled to six months of base salary.
In March 1992, the Company loaned Dr. Howard Urnovitz $85,000. The loan is
evidenced by the above-mentioned promissory note and secured by shares of Common
Stock of the Company owned by Dr. Urnovitz. The note, as amended, provides for
current interest payments at the rate of 7% per annum, and a lump-sum remaining
principal repayment in March 1997.
In May 1993, the Company entered into a Business Consultant Agreement with
Cynthia L. Green, the Company's Director of Regulatory Affairs and Quality
Assurance and Quality Control. The agreement is automatically renewable each
year unless cancelled by either party on 90 days notice. Ms. Green's fee for
acting as Director of Regulatory Affairs and Quality Assurance and Quality
Control for the Company was set at $16,000 per month. In addition, Ms. Green
received an option to acquire 2,500 shares of Common Stock at an exercise price
equal to the fair market value of the Common Stock on the date of grant. Such
option vests 20% one year after grant, plus 1.66667% per month thereafter. In
September 1992, Ms. Green was granted an option to purchase 2,500 shares of
Common Stock at an exercise price equal to the fair market value of the Common
Stock on the date of grant. Such option vests 20% one year after grant, plus
1.66667% per month thereafter. In January 1994, Ms. Green was issued 8,250
shares of Common Stock at a purchase price equal to the fair market value of the
Common Stock on the date of issuance. Such shares vested 11 months after
issuance. In March 1994, Ms. Green was issued an option for 25,000 shares at an
exercise price equal to the fair market value of the Common Stock on the date of
grant. Such option vests upon FDA approval of the Company's HIV-1 urine-based
test.
In October 1995, the Company entered into an employment agreement with John J.
DiPietro, providing for the employment of Mr. DiPietro as the Company's Vice
President, Finance and Chief Financial Officer, for a term from October 1995
through December 1996. The agreement is automatically renewable each year
subject to 90 days notice prior to the end of each calendar year. Mr. DiPietro's
salary under this agreement is initially $125,000 per year. This agreement also
provides Mr. DiPietro with reimbursement for the cost of a corporate apartment,
which expenses shall be increased sufficiently to reimburse Mr. DiPietro for the
taxes owed on such expenses. Mr. DiPietro is also eligible for a bonus under the
Company's bonus plan and shall be entitled to vacation and other benefits
provided to the Company's employees generally. Mr. DiPietro was granted an
option to purchase 35,000 shares of Common Stock at $1.00 per share, which
option Mr. DiPietro can exercise as to 20% of the shares one year after grant
and 583 shares per month thereafter, or in the event of certain defined events
or an acquisition of the Company, as to all of the shares subject to the option.
In the event Mr. DiPietro's employment with the Company is terminated by the
Company other than for cause, (i) during the first year of employment, Mr.
DiPietro shall receive his base salary for nine months; (ii) thereafter, Mr.
DiPietro shall receive his base salary for six months.
FUTURE TRANSACTIONS
All future transactions, including any loans from the Company to its officers,
directors, principal stockholders or affiliates, will be approved by a majority
of the board of directors, including a majority of the independent and
disinterested members of the board of directors or, if required by law, a
majority of disinterested stockholders, and will be on terms no less favorable
to the Company than could be obtained from unaffiliated third parties.
44
<PAGE> 46
PRINCIPAL STOCKHOLDERS
The following table sets forth information known to the Company with respect to
the beneficial ownership of its Common Stock as of May 10, 1996, and as adjusted
to reflect the sale of Common Stock offered by the Company hereby and conversion
of all outstanding shares of Preferred Stock into shares of Common Stock, for
(i) each who is known by the Company to own beneficially more than 5% of the
Common Stock, (ii) each of the Company's directors, (iii) each Named Executive
Officer and (iv) all directors and executive officers as a group.
<TABLE>
<CAPTION>
PERCENT OF TOTAL(2)
SHARES -----------------------
BENEFICIALLY BEFORE AFTER
5% STOCKHOLDERS, DIRECTORS AND OFFICERS OWNED(1) OFFERING OFFERING
- ------------------------------------------------------------------------------- ------------ -------- --------
<S> <C> <C> <C>
Otsuka Pharmaceutical Co., Ltd.(3)............................................. 1,493,147 18.99% 14.41%
463-10 Kagasuno
Kawauchi-cho
Tokoshima Japan
Hideji Nonomura(3)............................................................. 1,493,147 18.99 14.41
Entities Affiliated with Quest Ventures(4)..................................... 723,322 9.00 6.87
126 South Park
San Francisco, CA 94107
William A. Boeger(4)........................................................... 723,322 9.00 6.87
Technology Partners(5)......................................................... 620,270 8.09 6.11
1550 Tiburon Boulevard, Suite A
Belvedere, CA 94920
Roger Quy, Ph.D.(5)............................................................ 620,270 8.09 6.11
Kuo-Yu (Frank) Chiang.......................................................... 561,744 7.33 5.53
Suez Technology Fund(6)........................................................ 557,453 7.21 5.45
3000 Sand Hill Road
Bldg. 2, Suite 160
Menlo Park, CA 94028
Entities Affiliated with MVP Investors, L.P.................................... 458,217 5.98 4.51
45 Milk Street
Boston, MA 02109
Entities Affiliated with H&Q Capital Management(7)............................. 417,400 5.43 4.10
Howard B. Urnovitz, Ph.D.(8)................................................... 307,749 3.93 2.98
John P. Davis(9)............................................................... 69,333 * *
Richard Van Maanen(10)......................................................... 25,902 * *
Toby Gottfried, Ph.D.(11)...................................................... 15,462 * *
Cynthia Green(12).............................................................. 11,207 * *
Jeffrey Lang(13)............................................................... 5,083 * *
Julius R. Krevans, M.D.(14).................................................... 4,000 * *
John J. DiPietro............................................................... -- * *
David Collins.................................................................. -- * *
Mark Novitch, M.D.............................................................. -- * *
All directors and executive officers as a group
(14 persons)(3)(4)(5)(8)(9)(10)(11)(12)(13)(14).............................. 3,837,219 49.03% 34.80%
</TABLE>
- ---------------
* Represents beneficial ownership of less than 1%
(1) Based on 7,664,651 shares outstanding prior to the Offering and 10,159,046
shares outstanding after the Offering. Beneficial ownership is determined
in accordance with the rules of the Securities and Exchange Commission. In
computing the number of shares beneficially owned by a person and the
percentage ownership of that person, shares of Common Stock subject to
options held by that person that are currently exercisable or exercisable
within 60 days of May 10, 1996 are deemed outstanding. To the Company's
knowledge, except as set forth in the footnotes to this table and subject
to applicable community property laws, each person named in this table has
sole voting and investment proves with respect to the shares set forth
opposite such person's name. Except as otherwise indicated, the address of
each of the persons in this table is as follows: c/o Calypte Biomedical
Corporation, 1440 Fourth Street, Berkeley, California 94710.
(2) Assumes no exercise of the Underwriters' over allotment option to purchase
up to 345,000 additional shares of Common Stock. See "Underwriting."
(3) Includes 200,000 shares subject to warrants exercisable within 60 days. Mr.
Nonomura is a director of the Company and an affiliate of Otsuka
Pharmaceutical Co., Ltd.
(4) Includes 154,276 shares subject to options exercisable within 60 days owned
by entities affiliated with Quest Ventures. Also includes 220,000 shares
subject to options exercisable within 60 days owned by Mr. Boeger. Mr.
Boeger is a partner of Quest Ventures.
(5) Includes 620,270 shares owned by Technology Partners. Mr. Quy is a director
of the Company and an affiliate of Technology Partners.
(6) Includes 66,500 shares subject to warrants exercisable within 60 days.
(7) Includes 18,700 shares subject to warrants exercisable within 60 days.
(8) Includes 168,749 shares subject to options exercisable within 60 days.
(9) Includes 69,333 subject to options exercisable within 60 days.
(10) Includes 25,902 shares subject to options exercisable within 60 days.
(11) Includes 10,062 shares subject to options exercisable within 60 days.
(12) Includes 11,207 shares subject to options exercisable within 60 days.
(13) Includes 5,083 shares subject to options exercisable within 60 days.
(14) Includes 2,000 shares subject to warrants exercisable within 60 days.
45
<PAGE> 47
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company will consist of 20,000,000 shares of
Common Stock and 5,000,000 shares of Preferred Stock, after giving effect to the
restatement of the Company's Articles of Incorporation upon the closing of this
Offering. The following summaries of certain provisions of the Common Stock and
Preferred Stock do not purport to be complete and are subject to, and qualified
in their entirety by, the provisions of the Company's Articles of Incorporation,
which is included as an exhibit to the Registration Statement of which this
Prospectus forms a part, and by applicable law.
COMMON STOCK
As of June 21, 1996 there were 7,859,046 shares of Common Stock outstanding,
which were held of record by 245 stockholders. The holders of Common Stock are
entitled to one vote per share on all matters to be voted upon by the
stockholders. Subject to preferences that may be applicable to any outstanding
Preferred Stock, the holders of Common Stock are entitled to receive ratably
such dividends, if any, as may be declared from time to time by the board of
directors out of funds legally available for that purpose. See "Dividend
Policy." In the event of a liquidation, dissolution or winding up of the
Company, the holders of Common Stock are entitled to share ratably in all assets
remaining after payment of liabilities, subject to prior distribution rights of
Preferred Stock, if any, then outstanding. The Common Stock has no preemptive or
conversion rights or other subscription rights. There are no redemption or
sinking fund provisions applicable to the Common Stock. All outstanding shares
of Common Stock are fully paid and nonassessable, and the shares of Common Stock
to be issued upon the closing of this Offering will be fully paid and
nonassessable.
PREFERRED STOCK
The board of directors has the authority, without action by the stockholders, to
designate and issue Preferred Stock in one or more series and to designate the
rights, preferences and privileges of each series, any or all of which may be
greater than the rights of the Common Stock. It is not possible to state the
actual effect of the issuance of any shares of Preferred Stock upon the rights
of holders of the Common Stock until the board of directors determines the
specific rights of the holders of such Preferred Stock. However, the effects
might include, among other things, restricting dividends on the Common Stock,
diluting the voting power of the Common Stock, impairing the liquidation rights
of the Common Stock and delaying or preventing a change in control of the
Company without further action by the stockholders. The Company has no present
plans to issue any shares of Preferred Stock.
WARRANTS
As of June 21, 1996, the Company had outstanding warrants to purchase 1,066,355
shares of Common Stock, at a weighted average exercise price of $5.42 per share.
Such warrants expire on various dates, the latest of which is 7 years from the
effective date of the Offering. The holders of such warrants are entitled to
certain registration rights with respect to the Common Stock issued upon
exercise thereon. See "Description of Capital Stock -- Registration Rights."
CHANGE OF CONTROL PROVISIONS
Certain provisions of the Company's Certificate of Incorporation and Bylaws may
have the effect of preventing, discouraging or delaying any change in the
control of the Company and may maintain the incumbency of the Board of Directors
and management. The authorization of undesignated preferred stock makes it
possible for the Board of Directors to issue preferred stock with voting or
other rights or preferences that could impede the success of any attempt to
change control of the Company.
The Company is subject to the provisions of Section 203 of the Delaware General
Corporation Law (the "Antitakeover Law") regulating corporate takeovers. The
Antitakeover Law prevents certain Delaware corporations, including those whose
securities are listed on the Nasdaq National Market, from engaging, under
certain circumstances, in a "business combination" (which includes a merger or
sale of more than 10% of the corporation's assets) with any "interested
stockholder" (a stockholder who acquired 15% or more of the corporation's
outstanding voting stock without the prior approval of the corporation's Board
of Directors) for
46
<PAGE> 48
three years following the date that such stockholder became an "interested
stockholder." A Delaware corporation may "opt out" of the Antitakeover Law with
an express provision in its original certificate of incorporation or an express
provision in its certificate of incorporation or bylaws resulting from a
stockholders' amendment approved by at least a majority of the outstanding
voting shares. The Company has not "opted out" of the application of the
Antitakeover Law.
REGISTRATION RIGHTS OF CERTAIN HOLDERS
The holders of 7,392,010 shares of Common Stock (the "Registrable Securities")
or their transferees are entitled to certain rights with respect to the
registration of such shares under the Securities Act. These rights are provided
under the terms of an agreement between the Company and the holders of
Registrable Securities. Subject to certain limitations in the agreement, the
holders of at least 30% of the Registrable Securities may require, on two
occasions beginning after three months from the date of this Prospectus, that
the Company use its best efforts to register the Registrable Securities for
public resale. If the Company registers any of its Common Stock either for its
own account or for the account of other security holders, the holders of
Registrable Securities are entitled to include their shares of Common Stock in
the registration, subject to the ability of the underwriters to limit the number
of shares included in the offering. The holders of Registrable Securities may
also require the Company (not more than once during any 12-month period) to
register all or a portion of their Registrable Securities on Form S-3 when use
of such form becomes available to the Company, provided, among other
limitations, that the proposed aggregate selling price (net of any underwriters'
discounts or commissions) is at least $1.0 million. All registration expenses
must be borne by the Company and all selling expenses relating to Registrable
Securities must be borne by the holders of the securities being registered.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is First
Interstate Bank of California. Its telephone number is (415) 773-7801.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this Offering, there has been no market for the Common Stock of the
Company. Future sales of substantial amounts of Common Stock in the public
market could adversely affect market prices prevailing from time to time. As
described below, no shares currently outstanding will be available for sale
immediately after this Offering due to certain legal restrictions on resale.
Sales of substantial amounts of Common Stock of the Company in the public market
after the restrictions lapse could adversely affect the prevailing market price
and the ability of the Company to raise equity capital in the future.
Upon the completion of this Offering, the Company will have 10,159,046 shares of
Common Stock outstanding, assuming no exercise of options or warrants after June
21, 1996. Of these shares, the 2,300,000 shares sold in this Offering will be
freely tradable without restriction under the Securities Act, unless held by
"affiliates" of the Company, as that term is defined in Rule 144 under the
Securities Act. The remaining 7,859,046 shares of Common Stock held by existing
stockholders were issued and sold by the Company in reliance on exemptions from
the registration requirements of the Securities Act. These shares may be sold in
the public market only if registered, or pursuant to an exemption from
registration such as Rule 144, 144(k) or 701 under the Securities Act.
Stockholders who in the aggregate hold 97% of the shares of Common Stock of the
Company outstanding immediately prior to the completion of this Offering have
entered into lock-up agreements under which they have agreed not to offer, sell,
contract to sell, grant any option to purchase or otherwise dispose of, or agree
to dispose of, directly or indirectly, any shares of Common Stock, options or
warrants to acquire shares of Common Stock or securities exchangeable for or
convertible into Common Stock owned by them for a period of 180 days after the
date of this Prospectus, without the prior written consent of the
Representatives of the Underwriters. The Company has entered into a similar
agreement, except that the Company may grant options and issue stock under its
current stock option and stock purchase plans and pursuant to other currently
outstanding options.
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<PAGE> 49
As of June 21, 1996, 2,852,775 shares were subject to outstanding options and
warrants. Of these shares 75% are subject to the lock-up agreements described
above. Approximately 120 days after the date of this Prospectus, the Company
intends to file a Registration Statement on Form S-8 covering shares issuable
under the Company's 1991 Stock Plan (including shares subject to then
outstanding options), 1995 Director Option Plan and 1995 Employee Stock Purchase
Plan, thus permitting the resale of such shares in the public market without
restriction under the Securities Act after expiration of the applicable
agreements.
Upon expiration of the lock-up agreements, approximately 2,465,586 shares of
Common Stock will become eligible for immediate public resale, pursuant to Rule
144(k) or for non-affiliates in certain cases pursuant to Rule 701. An
additional 3,220,560 shares will be available for resale subject to the volume
limitations of Rule 144. 7,392,010 of the shares outstanding immediately
following the completion of this Offering will be entitled to registration
rights with respect to such shares upon the release of lock-up agreements. The
number of shares sold in the public market could increase if such rights are
exercised.
In general, under Rule 144 as currently in effect, a person (or persons whose
shares are aggregated) who has beneficially owned shares for at least two years
(including the holding period of any prior owner, except an affiliate) is
entitled to sell in "broker's transactions" or to market makers, within any
three-month period commencing 90 days after the date of this Prospectus, a
number of shares that does not exceed the greater of (i) one percent of the
number of shares of Common Stock then outstanding (approximately 101,000 shares
immediately after this Offering) or (ii) the average weekly trading volume of
the Common Stock during the four calendar weeks preceding the required filing of
a Form 144 with respect to such sale. Sales under Rule 144 are generally subject
to certain manner of sale provisions and notice requirements and to the
availability of current public information about the Company. Under Rule 144(k),
a person who is not deemed to have been an affiliate of the Company at any time
during the 90 days preceding a sale, and who has beneficially owned the shares
proposed to be sold for at least three years, is entitled to sell such shares
without having to comply with the manner of sale, public information, volume
limitation or notice provisions of Rule 144. Under Rule 701 under the Securities
Act, persons who purchase shares upon exercise of options granted prior to the
effective date of this Offering are entitled to sell such shares 90 days after
the effective date of this Offering in reliance on Rule 144, without having to
comply with the holding period requirements of Rule 144 and, in the case of
non-affiliates, without having to comply with the public information, volume
limitation or notice provisions of Rule 144.
The Securities and Exchange Commission has recently proposed reducing the
initial Rule 144 holding period to one year and the Rule 144(k) holding period
to two years. There can be no assurance as to when or whether such rule changes
will be enacted. If enacted, such modification will have a material effect on
the time when shares of the Company's Common Stock become eligible for resale.
48
<PAGE> 50
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriter named below has agreed to purchase from the Company the following
respective number of shares of Common Stock:
<TABLE>
<CAPTION>
NAME NUMBER OF SHARES
---------------------------------------------------------- ------------------
<S> <C>
Pacific Growth Equities, Inc.............................. 2,300,000
==============
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriter are
subject to certain conditions precedent, including the absence of any material
adverse change in the Company's business and the receipt of certain
certificates, opinions and letters from the Company, its counsel and independent
auditors. The nature of the Underwriter's obligation is such that they are
committed to purchase all shares of the Common Stock offered hereby if any of
such shares are purchased.
The Underwriter proposes to offer the shares of Common Stock directly to the
public at the initial public offering price set forth on the cover page of this
Prospectus. After the initial public offering of the shares, the offering price
and other selling terms may be changed by the Underwriter.
The Company has granted to the Underwriter an option, exercisable not later than
45 days after the date of this Prospectus, to purchase up to 345,000 additional
shares of Common Stock at the initial public offering price, less the
underwriting discount, set forth on the cover page of this Prospectus. To the
extent that the Underwriter exercises this option, it will have a firm
commitment to purchase the number of shares of Common Stock to be purchased by
it shown in the above table. The Company will be obligated, pursuant to the
option, to sell such shares to the Underwriter to the extent the option is
exercised. The Underwriter may exercise such option only to cover
over-allotments made in connection with the sale of shares of Common Stock
offered hereby.
The offering of the shares is made for delivery when, as and if accepted by the
Underwriter and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The Underwriter reserves the right
to reject an order for the purchase of shares in whole or in part.
The Company has agreed to indemnify the Underwriter against certain liabilities,
including liabilities under the Securities Act, and to contribute to payments
the Underwriter may be required to make in respect thereof.
Stockholders, including the executive officers and directors, who will own in
the aggregate 7,611,736 shares of Common Stock after the offering, have agreed
that they will not, without the prior written consent of Pacific Growth
Equities, Inc. offer, sell or otherwise dispose of any shares of Common Stock,
options or warrants to acquire shares of Common Stock or securities exchangeable
for or convertible into shares of Common Stock owned by them during the 180-day
period following the date of this Prospectus. The Company has agreed that it
will not, without the prior written consent of Pacific Growth Equities, Inc.
offer, sell or otherwise dispose of any shares of Common Stock, options or
warrants to acquire shares of Common Stock or securities exchangeable for or
convertible into shares of Common Stock during the 180-day period following the
date of this Prospectus, except that the Company may issue. Upon the exercise of
options granted prior to the date hereof, and may grant additional options under
its stock and employee stock purchase plans, provided that, without the prior
written consent of Pacific Growth Equities, Inc., such additional options shall
not be exercisable during such period. Sales of such shares in the future could
adversely affect the market price of the Common Stock.
The Underwriter has informed the Company that it does not intend to confirm
sales to accounts over which they exercise discretionary authority.
Prior to this Offering, there has been no public market for the Common Stock.
The initial public offering price for the Common Stock was determined by
negotiation between the Company and the Underwriter. The factors considered in
determining the initial public offering price include prevailing market and
economic conditions, revenues and earnings of the Company, market valuations of
other companies engaged in activities
49
<PAGE> 51
similar to the Company estimates of the business potential and prospects of the
Company, the present state of the Company's business operations and the
Company's management.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo
Alto, California. Certain legal matters will be passed upon for the Underwriters
by Cooley Godward Castro Huddleson & Tatum, Palo Alto, California. As of the
date of this Prospectus, Wilson Sonsini Goodrich & Rosati, Professional
Corporation beneficially owns 10,000 shares of the Company's Common Stock.
EXPERTS
The consolidated financial statements of Calypte Biomedical Corporation and
subsidiary (a development stage company) as of December 31, 1994 and 1995 and
for each of the years in the three-year period ended December 31, 1995, and for
the period from February 18, 1988 (inception) through December 31, 1995, and the
financial statements of Pepgen Corporation and subsidiary (a development stage
enterprise) as of December 31, 1993 and 1994, and for the period from July 8,
1992 (inception) through December 31, 1992 and for each of the years in the
two-year period ended December 31, 1994 and for the period from July 8, 1992
(inception) through December 31, 1994, have been included herein and in the
Registration Statement in reliance upon the reports of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
The statements in this Prospectus in paragraphs 2 and 3 under the caption "Risk
Factors -- Reliance on Proprietary Technology and Know-How" and in paragraphs 6
and 7 under the caption "Business -- Patents, Proprietary Rights and Licenses"
have been reviewed and approved by Arnold, White & Durkee, special patent
counsel for the Company, as experts in such matters, and included herein in
reliance upon such review and approval.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. a Registration Statement on Form S-1 under the
Securities Act with respect to the shares of Common Stock being offered hereby.
This Prospectus does not contain all the information set forth in the
Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and such Common Stock, reference is made
to the Registration Statement and to the exhibits and schedules filed as a part
thereof. Statements contained in this Prospectus as to the contents of any
contract or other document referred to are intended to disclose the material
elements thereof, but are not necessarily complete, and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement. A copy of the Registration Statement may
be inspected without charge at the Commission's principal office in Washington,
D.C., and copies of all or any part of the Registration Statement may be
obtained from the Public Reference Section of the Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549, upon payment of certain fees prescribed by the
Commission. In addition, the Commission maintains a Web site
(http://www.sec.gov) that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission through the Electronic Data Gathering, Analysis, and Retrieval
system.
50
<PAGE> 52
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE> 53
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE> 54
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS, CALYPTE BIOMEDICAL CORPORATION (A DEVELOPMENT STAGE
ENTERPRISE)
Independent Auditors' Report..................................................... F-2
Consolidated Balance Sheets as of December 31, 1994 and 1995..................... F-3
Consolidated Statements of Operations for the years ended December 31, 1993, 1994
and 1995 and for the period from February 18, 1988 (inception) through December
31, 1995........................................................................ F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the period from
February 18, 1988 (inception) through December 31, 1995......................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994
and 1995 and for the period from February 18, 1988 (inception) through December
31, 1995........................................................................ F-7
Notes to Consolidated Financial Statements....................................... F-8
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS, CALYPTE BIOMEDICAL CORPORATION (A
DEVELOPMENT STAGE ENTERPRISE) (UNAUDITED)
Consolidated Condensed Balance Sheets as of December 31, 1995 and March 31,
1996............................................................................ F-23
Consolidated Condensed Statements of Operations for the three-months ended March
31, 1995 and 1996 and for the period from February 18, 1988 (inception) through
March 31, 1996.................................................................. F-24
Consolidated Condensed Statements of Cash Flows for the three-months ended March
31, 1995 and 1996 and for the period from February 18, 1988 (inception) through
March 31, 1996.................................................................. F-25
Notes to Consolidated Condensed Financial Statements............................. F-26
PRO FORMA FINANCIAL INFORMATION, CALYPTE BIOMEDICAL CORPORATION (A DEVELOPMENT STAGE
ENTERPRISE) (UNAUDITED)
Pro Forma Financial Information.................................................. F-31
Pro Forma Consolidated Condensed Statement of Operations for the year ended
December 31, 1995............................................................... F-32
CONSOLIDATED FINANCIAL STATEMENTS, PEPGEN CORPORATION (A DEVELOPMENT STAGE ENTERPRISE)
Independent Auditors' Report..................................................... F-33
Consolidated Balance Sheets as of December 31, 1993 and 1994..................... F-34
Consolidated Statements of Operations for the period from July 8, 1992
(inception) through December 31, 1992, for the years ended December 31, 1993 and
1994 and the period from July 8, 1992 (inception) through December 31, 1994..... F-35
Consolidated Statements of Shareholders' Equity (Deficiency) for the period from
July 8, 1992 (inception) through December 31, 1994.............................. F-36
Consolidated Statements of Cash Flows for the period from July 8, 1992
(inception) through December 31, 1992, for the years ended December 31, 1993 and
1994 and the period from July 8, 1992 (inception) through December 31 1994...... F-37
Notes to Consolidated Financial Statements....................................... F-38
CONSOLIDATED FINANCIAL STATEMENTS, PEPGEN CORPORATION (A DEVELOPMENT STAGE ENTERPRISE)
(UNAUDITED)
Consolidated Balance Sheet as of December 31, 1995............................... F-44
Consolidated Statements of Operations for the year ended December 31, 1995 and
for the period from July 8, 1992 (inception) through December 31, 1995.......... F-45
Consolidated Statements of Shareholders' Equity (Deficiency) for the period July
8, 1992 (inception) through December 31, 1995................................... F-46
Consolidated Statements of Cash Flows for the year ended December 31, 1995 and
for the period from July 8, 1992 (inception) through December 31, 1995.......... F-47
Notes to Consolidated Financial Statements....................................... F-48
</TABLE>
F-1
<PAGE> 55
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Calypte Biomedical Corporation:
We have audited the accompanying consolidated balance sheets of Calypte
Biomedical Corporation and subsidiary (a development stage enterprise) (the
Company) as of December 31, 1994 and 1995, and the related consolidated
statements of operations, stockholders' equity (deficit), and cash flows for
each of the years in the three-year period ended December 31, 1995, and for the
period from February 18, 1988 (inception) through December 31, 1995. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Calypte Biomedical
Corporation and subsidiary (a development stage enterprise) as of December 31,
1994 and 1995, and the consolidated results of their operations and their cash
flows for each of the years in the three-year period ended December 31, 1995,
and for the period from February 18, 1988 (inception) through December 31, 1995,
in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
San Francisco, California
January 16, 1996
F-2
<PAGE> 56
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1994 1995
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents.............................................. $ 4,477,924 $ 2,558,650
Other current assets................................................... 40,956 755,572
------------ ------------
Total current assets................................................ 4,518,880 3,314,222
Property and equipment, net.............................................. 1,255,521 1,854,010
Note receivable from officer............................................. 85,000 42,500
Other assets............................................................. 105,115 126,144
------------ ------------
$ 5,964,516 $ 5,336,876
=========== ===========
LIABILITIES, MANDITORILY REDEEMABLE
PREFERRED STOCK, AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable....................................................... $ 169,429 $ 1,053,536
Accrued expenses....................................................... 365,850 643,911
Notes payable -- current portion....................................... 277,255 3,258,456
Capital lease obligations -- current portion........................... 89,519 260,214
Deferred revenue....................................................... 500,000 500,000
------------ ------------
Total current liabilities........................................... 1,402,053 5,716,117
Deferred rent obligation................................................. 91,280 87,357
Notes payable -- long-term portion....................................... 10,613 --
Capital lease obligations -- long-term portion........................... 185,232 542,725
------------ ------------
Total liabilities................................................... 1,689,178 6,346,199
Mandatorily redeemable Series A preferred stock, $0.001 par value;
100,000 shares authorized, issued, and outstanding; aggregate
redemption and liquidation value of $1,000,000 plus cumulative
dividends.............................................................. 1,616,438 1,736,438
Commitments and contingencies
Stockholders' equity (deficit):
Series B convertible preferred stock, $0.001 par value; 804,860 shares
authorized; 804,846 shares issued and outstanding as of December 31,
1994 and 1995; aggregate liquidation value of $1,500,235 as of
December 31, 1994 and 1995.......................................... 805 805
Series C convertible preferred stock, $0.001 par value; 1,702,727
shares authorized; 1,702,705 shares issued and outstanding as of
December 31, 1994 and 1995; aggregate liquidation value of
$6,300,004 as of December 31, 1994 and 1995......................... 1,703 1,703
Series D convertible preferred stock, $0.001 par value; 2,130,051
shares authorized; 2,116,999 shares issued and outstanding as of
December 31, 1994 and 1995; aggregate liquidation value of
$10,584,995 as of December 31, 1994 and 1995........................ 2,117 2,117
Series E convertible preferred stock, $0.001 par value; 4,000,000
shares authorized; 1,077,500 and 1,967,866 shares issued and
outstanding as of December 31, 1994 and 1995, respectively;
aggregate liquidation value of $5,387,500 and $9,839,330 as of
December 31, 1994 and 1995, respectively............................ 1,077 1,967
Common stock, $0.001 par value; 12,000,000 shares authorized; 569,352
and 573,899 shares issued and outstanding as of December 31, 1994
and 1995, respectively.............................................. 569 574
Additional paid-in capital............................................. 22,762,330 28,014,030
Deferred compensation.................................................. -- (365,871)
Deficit accumulated during development stage........................... (20,109,701) (30,401,086)
------------ ------------
Total stockholders' equity (deficit)................................ 2,658,900 (2,745,761)
------------ ------------
$ 5,964,516 $ 5,336,876
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 57
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 18,
1988
(INCEPTION)
YEARS ENDED DECEMBER 31, THROUGH
----------------------------------------- DECEMBER 31,
1993 1994 1995 1995
---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Revenue earned under research and
development contracts, substantially from
related parties.......................... $ -- $ -- $ -- $ 2,390,187
Operating expenses:
Research and development................. 4,518,984 3,643,781 5,017,545 20,346,564
Purchased in-process research and
development costs..................... -- -- 2,500,000 2,500,000
Selling, general and administrative...... 1,784,318 1,818,560 2,862,049 10,926,405
----------- ----------- ------------ ------------
Loss from operations............. (6,303,302) (5,462,341) (10,379,594) (31,382,782)
Interest income............................ 163,509 47,714 194,944 569,828
Interest expense........................... (55,274) (81,782) (116,842) (603,019)
Other income............................... 15,395 31,027 11,707 70,443
----------- ----------- ------------ ------------
Loss before income taxes and
extraordinary item............. (6,179,672) (5,465,382) (10,289,785) (31,345,530)
Income taxes............................... (1,600) (1,600) (1,600) (60,750)
----------- ----------- ------------ ------------
Loss before extraordinary item... (6,181,272) (5,466,982) (10,291,385) (31,406,280)
Extraordinary gain on debt
extinguishment........................... -- -- -- 485,453
----------- ----------- ------------ ------------
Net loss......................... (6,181,272) (5,466,982) (10,291,385) (30,920,827)
Less dividend on mandatorily redeemable
Series A preferred stock................. (120,000) (120,000) (120,000) (736,438)
----------- ----------- ------------ ------------
Net loss attributable to common
stockholders............................. $(6,301,272) $(5,586,982) $(10,411,385) $(31,657,265)
=========== =========== ============ ============
Net loss per share attributable to common
stockholders............................. $ (1.35) $ (0.99) $ (1.50)
=========== =========== ============
Weighted average shares used to compute net
loss per share attributable to common
stockholders............................. 4,666,236 5,671,038 6,934,334
=========== =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 58
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
PERIOD FROM FEBRUARY 18, 1988 (INCEPTION) THROUGH DECEMBER 31, 1995
<TABLE>
<CAPTION>
JOINT CONVERTIBLE PREFERRED STOCK ADDITIONAL
VENTURERS' ----------------------------------------- COMMON PAID-IN DEFERRED
CAPITAL SERIES B SERIES C SERIES D SERIES E STOCK CAPITAL COMPENSATION
----------- -------- -------- -------- -------- ------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock as of
February 18, 1988 (date of
inception).................... $ -- $ -- $ -- $ -- $ -- $75,500 $ -- $ --
Capital contributions.......... 1,610,779 -- -- -- -- -- -- --
Exchange of Calypte, Inc. stock
for 100,000 shares of common
stock and 100,000 shares of
mandatorily redeemable Series
A preferred stock of the
Company on November 11, 1989
at $0.001 per share.......... -- -- -- -- -- (75,400) -- --
Common stock of 60,035 shares
issued for cash.............. -- -- -- -- -- 60 99,837 --
Compensation paid by issuance
of 170,610 shares of common
stock........................ -- -- -- -- -- 171 33,951 --
Conversion of notes payable to
61,426 shares of common
stock........................ -- -- -- -- -- 60 12,225 --
Conversion of notes payable to
29,506 shares of Series B
convertible preferred
stock........................ -- 30 -- -- -- -- 54,970 --
Series B convertible preferred
stock of 775,340 shares
issued for cash.............. -- 775 -- -- -- -- 1,387,333 --
Series C convertible preferred
stock of 810,812 shares
issued for cash.............. -- -- 811 -- -- -- 2,946,008 --
Dividend requirements on
mandatorily redeemable Series
A preferred stock............ -- -- -- -- -- -- (90,000) --
Net loss....................... (1,610,779) -- -- -- -- -- -- --
----------- -------- -------- -------- -------- ------- ----------- ------------
Balances as of December 31,
1991......................... -- 805 811 -- -- 391 4,444,324 --
Exercise of stock options for
68,083 shares of common
stock........................ -- -- -- -- -- 68 13,128 --
Compensation paid by issuance
of 31,670 shares of common
stock........................ -- -- -- -- -- 32 5,267 --
Series C convertible preferred
stock of 891,893 shares
issued for cash.............. -- -- 892 -- -- -- 3,208,379 --
Series D convertible preferred
stock of 800,000 shares
issued for cash.............. -- -- -- 800 -- -- 5,718,631 --
Dividend requirements on
mandatorily redeemable Series
A preferred stock............ -- -- -- -- -- -- (120,000) --
Net loss....................... -- -- -- -- -- -- -- --
----------- -------- -------- -------- -------- ------- ----------- ------------
Balances as of December 31,
1992......................... $ -- $805 $1,703 $ 800 $ -- $ 491 $13,269,729 $ --
<CAPTION>
DEFICIT
ACCUMULATED TOTAL
DURING STOCKHOLDERS'
DEVELOPMENT EQUITY
STAGE (DEFICIT)
------------ -------------
<S> <C> <C>
Issuance of common stock as of
February 18, 1988 (date of
inception).................... $ -- $ 75,500
Capital contributions.......... -- 1,610,779
Exchange of Calypte, Inc. stock
for 100,000 shares of common
stock and 100,000 shares of
mandatorily redeemable Series
A preferred stock of the
Company on November 11, 1989
at $0.001 per share.......... (924,600) (1,000,000)
Common stock of 60,035 shares
issued for cash.............. -- 99,897
Compensation paid by issuance
of 170,610 shares of common
stock........................ -- 34,122
Conversion of notes payable to
61,426 shares of common
stock........................ -- 12,285
Conversion of notes payable to
29,506 shares of Series B
convertible preferred
stock........................ -- 55,000
Series B convertible preferred
stock of 775,340 shares
issued for cash.............. -- 1,388,108
Series C convertible preferred
stock of 810,812 shares
issued for cash.............. -- 2,946,819
Dividend requirements on
mandatorily redeemable Series
A preferred stock............ (166,438) (256,438)
Net loss....................... (3,567,913) (5,178,692)
------------ -------------
Balances as of December 31,
1991......................... (4,658,951) (212,620)
Exercise of stock options for
68,083 shares of common
stock........................ -- 13,196
Compensation paid by issuance
of 31,670 shares of common
stock........................ -- 5,299
Series C convertible preferred
stock of 891,893 shares
issued for cash.............. -- 3,209,271
Series D convertible preferred
stock of 800,000 shares
issued for cash.............. -- 5,719,431
Dividend requirements on
mandatorily redeemable Series
A preferred stock............ -- (120,000)
Net loss....................... (3,802,496) (3,802,496)
------------ -------------
Balances as of December 31,
1992......................... $ (8,461,447) $ 4,812,081
</TABLE>
F-5
<PAGE> 59
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
PERIOD FROM FEBRUARY 18, 1988 (INCEPTION) THROUGH DECEMBER 31, 1995
<TABLE>
<CAPTION>
JOINT CONVERTIBLE PREFERRED STOCK ADDITIONAL
VENTURERS' ----------------------------------------- COMMON PAID-IN DEFERRED
CAPITAL SERIES B SERIES C SERIES D SERIES E STOCK CAPITAL COMPENSATION
----------- -------- -------- -------- -------- ------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances as of December 31,
1992......................... $ -- $805 $1,703 $ 800 $ -- $ 491 $13,269,729 $ --
Common stock of 2,500 shares
issued for cash.............. -- -- -- -- -- 3 1,997 --
Exercise of stock options for
22,444 shares of common
stock........................ -- -- -- -- -- 23 8,640 --
Compensation paid by issuance
of 10,000 shares of common
stock........................ -- -- -- -- -- 10 7,990 --
Series D convertible preferred
stock of 199,999 shares
issued for cash.............. -- -- -- 200 -- -- 1,444,729 --
Dividends requirements on
mandatorily redeemable Series
A preferred stock............ -- -- -- -- -- -- (120,000) --
Net loss....................... -- -- -- -- -- -- -- --
---- ---- ------ ------ ------ ---- ----------- --------
Balances as of December 31,
1993......................... -- 805 1,703 1,000 -- 527 14,613,085 --
Conversion of Series D
convertible preferred stock
into 1.5 shares for each
share outstanding as of March
3, 1994; 500,000 additional
shares issued................ -- -- -- 500 -- -- (500) --
Common stock of 11,250 shares
issued for cash.............. -- -- -- -- -- 11 8,839 --
Exercise of stock options for
31,334 shares of common
stock........................ -- -- -- -- -- 31 12,034 --
Series D convertible preferred
stock of 617,000 shares
issued for cash.............. -- -- -- 617 -- -- 2,885,466 --
Series E convertible preferred
stock of 1,077,500 shares
issued for cash.............. -- -- -- -- 1,077 -- 5,363,406 --
Dividend requirements on
mandatorily redeemable Series
A preferred stock............ -- -- -- -- -- -- (120,000) --
Net loss....................... -- -- -- -- -- -- -- --
---- ---- ------ ------ ------ ---- ----------- --------
Balance as of December 31,
1994......................... -- 805 1,703 2,117 1,077 569 22,762,330 --
Series E convertible preferred
stock of 888,446 shares
issued for cash, 1,920 issued
for other than cash.......... -- -- -- -- 890 -- 4,302,278 --
Exercise of stock options for
4,547 shares of common
stock........................ -- -- -- -- -- 5 2,431 --
Dividend requirements on
mandatorily redeemable Series
A preferred stock............ -- -- -- -- -- -- (120,000) --
Options issued upon the
investment in Pepgen
Corporation.................. -- -- -- -- -- -- 500,000 --
Compensation relating to
granting of stock options.... -- -- -- -- -- -- 566,991 (566,991)
Amortization of deferred
compensation................. -- -- -- -- -- -- -- 201,120
Net loss....................... -- -- -- -- -- -- -- --
---- ---- ------ ------ ------ ---- ----------- --------
Balances as of December 31,
1995......................... $ -- $805 $1,703 $2,117 $1,967 $ 574 $28,014,030 $ (365,871)
==== ==== ====== ====== ====== ==== =========== ========
<CAPTION>
DEFICIT
ACCUMULATED TOTAL
DURING STOCKHOLDERS'
DEVELOPMENT EQUITY
STAGE (DEFICIT)
------------ -------------
<S> <C> <C>
Balances as of December 31,
1992......................... $ (8,461,447) $ 4,812,081
Common stock of 2,500 shares
issued for cash.............. -- 2,000
Exercise of stock options for
22,444 shares of common
stock........................ -- 8,663
Compensation paid by issuance
of 10,000 shares of common
stock........................ -- 8,000
Series D convertible preferred
stock of 199,999 shares
issued for cash.............. -- 1,444,929
Dividends requirements on
mandatorily redeemable Series
A preferred stock............ -- (120,000)
Net loss....................... (6,181,272) (6,181,272)
------------- -----------
Balances as of December 31,
1993......................... (14,642,719) (25,599)
Conversion of Series D
convertible preferred stock
into 1.5 shares for each
share outstanding as of March
3, 1994; 500,000 additional
shares issued................ -- --
Common stock of 11,250 shares
issued for cash.............. -- 8,850
Exercise of stock options for
31,334 shares of common
stock........................ -- 12,065
Series D convertible preferred
stock of 617,000 shares
issued for cash.............. -- 2,886,083
Series E convertible preferred
stock of 1,077,500 shares
issued for cash.............. -- 5,364,483
Dividend requirements on
mandatorily redeemable Series
A preferred stock............ -- (120,000)
Net loss....................... (5,466,982) (5,466,982)
------------- -----------
Balance as of December 31,
1994......................... (20,109,701) 2,658,900
Series E convertible preferred
stock of 888,446 shares
issued for cash, 1,920 issued
for other than cash.......... -- 4,303,168
Exercise of stock options for
4,547 shares of common
stock........................ -- 2,436
Dividend requirements on
mandatorily redeemable Series
A preferred stock............ -- (120,000)
Options issued upon the
investment in Pepgen
Corporation.................. -- 500,000
Compensation relating to
granting of stock options.... -- --
Amortization of deferred
compensation................. -- 201,120
Net loss....................... (10,291,385) (10,291,385)
------------- -----------
Balances as of December 31,
1995......................... $(30,401,086) $ (2,745,761)
============= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 60
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 18, 1988
YEARS ENDED DECEMBER 31, (INCEPTION)
---------------------------------------- THROUGH DECEMBER 31,
1993 1994 1995 1995
----------- ----------- ------------ --------------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................... $(6,181,272) $(5,466,982) $(10,291,385) $(30,920,827)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 198,445 331,760 465,585 1,817,247
Loss on sale or disposal of equipment................... 5,254 -- 73,581 115,192
Extraordinary gain on debt extinguishment............... -- -- -- (485,453)
Amortization of deferred compensation................... -- -- 201,120 201,120
Compensation paid by stock issuance..................... 8,000 -- -- 47,421
Purchased in-process research and development costs..... -- -- 2,500,000 2,500,000
Changes in operating assets and liabilities:
Other current assets................................. (235,269) 254,426 (714,616) (516,732)
Organizational costs................................. -- -- -- (123,074)
Other assets......................................... (33,537) (52,925) 21,471 (407,484)
Accounts payable and accrued expenses................ (395,206) 319,802 1,162,168 2,099,517
Deferred rent obligation............................. 33,422 57,858 (3,923) 87,350
Note payable in exchange for expenses paid on behalf
of the Company..................................... -- -- -- 191,964
----------- ----------- ------------ ------------
Net cash used in operating activities.............. (6,600,163) (4,556,061) (6,585,999) (25,393,759)
----------- ----------- ------------ ------------
Cash flows from investing activities:
Proceeds from disposition of equipment...................... -- -- -- 25,000
Purchase of equipment....................................... (504,343) (625,231) (476,299) (2,276,552)
Investment in Pepgen........................................ -- -- (1,000,000) (1,000,000)
----------- ----------- ------------ ------------
Net cash used in investing activities.............. (504,343) (625,231) (1,476,299) (3,251,552)
----------- ----------- ------------ ------------
Cash flows from financing activities:
Proceeds from the sale of stock............................. 1,510,664 8,493,415 4,444,516 28,279,403
Expenses paid related to sale of stock...................... (55,072) (221,934) (138,912) (870,006)
Prepaid license fee......................................... -- -- -- 500,000
Principal payments on notes payable......................... (188,890) (76,322) (29,412) (916,926)
Principal payments on capital lease obligations............. (5,520) (28,137) (133,168) (166,824)
Proceeds from notes payable................................. 81,860 -- 2,000,000 2,692,035
Capital contributions....................................... -- -- -- 75,500
Joint ventures' capital contributions....................... -- -- -- 1,610,779
----------- ----------- ------------ ------------
Net cash provided by financing activities.......... 1,343,042 8,167,022 6,143,024 31,203,961
----------- ----------- ------------ ------------
Net (decrease) increase in cash and cash equivalents.......... (5,761,464) 2,985,730 (1,919,274) 2,558,650
Cash and cash equivalents at beginning of period.............. 7,253,658 1,492,194 4,477,924 --
----------- ----------- ------------ ------------
Cash and cash equivalents at end of period.................... $ 1,492,194 $ 4,477,924 $ 2,558,650 $ 2,558,650
=========== =========== ============ ============
Supplemental disclosure of cash flow activities:
Cash paid for interest...................................... $ 52,975 $ 83,036 $ 104,509 $ 478,178
Cash paid for income taxes.................................. 1,600 1,600 1,600 60,100
Supplemental disclosure of noncash activities:
Acquisition of equipment through obligations under capital
leases.................................................... 308,408 -- 661,356 969,764
Accrued liabilities converted to notes payable.............. -- -- -- 363,091
Accrued liabilities converted to common stock............... -- -- -- 38,978
Notes payable converted to common stock..................... -- -- -- 458,760
Notes payable converted to Series B convertible preferred
stock..................................................... -- -- -- 50,000
Note payable issued upon investment in Pepgen Corporation... -- -- 1,000,000 1,000,000
Options issued upon investment in Pepgen Corporation........ -- -- 500,000 500,000
Dividend on mandatorily redeemable Series A preferred
stock..................................................... 120,000 120,000 120,000 736,438
Deferred compensation attributable to stock grants.......... -- -- 566,991 566,991
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 61
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993, 1994, AND 1995
(1) THE COMPANY AND BASIS OF PRESENTATION
Calpyte Biomedical Corporation (the Company) was incorporated on November 11,
1989 and is a development stage enterprise. The Company's primary activities
have been to obtain funding and to perform research and development. The Company
is in the process of applying for approvals to market and sell its product in
both domestic and foreign markets.
The accompanying consolidated financial statements include the results of
operations of the Company and its wholly owned subsidiary, Calypte, Inc., and
Calypte Biomedical Company (the Joint Venture). All significant intercompany
accounts and transactions have been eliminated in consolidation.
The Company accounts for its 49% interest in Pepgen Corporation (Pepgen) under
the equity method (Note 12).
In December 1995, the Board of Directors authorized the incorporation of a
wholly owned subsidiary in the state of Delaware. After receipt of stockholder
approval and upon closing of the Company's initial public offering (IPO), the
Board of Directors intends to direct management to merge the Company into the
Delaware subsidiary, with the Delaware company becoming the surviving entity.
The Board of Directors has authorized 20 million shares of common stock in the
Delaware company.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
Cash equivalents consist primarily of fixed income securities. The Company
considers all highly liquid debt instruments with original maturities of three
months or less to be cash equivalents.
Property and Equipment
Property and equipment are stated at cost. Machinery and equipment, furniture
and fixtures, and computer equipment are depreciated using the straight-line
method over the estimated useful life of the assets, generally four to five
years. Leasehold improvements and equipment under capital leases are amortized
or depreciated over the shorter of the lease term or the useful life of the
improvement.
Fair Value of Financial Instruments
Financial assets and liabilities have carrying values which approximate their
fair values for all periods presented. The carrying amounts of cash and cash
equivalents approximate fair value because of their short-term nature and
because such accounts are invested in accounts earning market rates of interest.
The carrying values of notes payable, except for the note payable to Pepgen,
approximate fair value because the interest rates on the notes payable
approximate current market rates available to the Company. The fair market
values of the note payable to Pepgen and the note receivable from shareholder
are not readily determinable due to their related party nature.
Revenue
Revenue from product sales is recognized upon product shipment.
Deferred Revenue
Deferred revenue is accrued on payments received from customers in advance of
product shipment and will be recognized as revenue upon shipment of the related
products.
F-8
<PAGE> 62
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993, 1994, AND 1995
Income Taxes
Prior to January 1, 1993, income taxes were provided for all items included in
the accompanying consolidated statements of operations regardless of when such
items were reported for income tax purposes in accordance with the requirements
of Accounting Principles Board Opinion No. 11, Accounting for Income Taxes.
Effective January 1, 1993, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 109, Accounting for Income Taxes. SFAS No. 109 requires an
asset and liability approach for the financial reporting of income taxes. Under
SFAS No. 109, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under SFAS No. 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
Reclassifications
Certain reclassifications in the accompanying consolidated financial statements
have been made in order to conform to the December 31, 1995 consolidated
financial statement presentation.
Net Loss Per Share Attributable to Common Stockholders
Except as noted below, net loss per share attributable to common stockholders is
computed using the weighted average number of shares of common stock
outstanding. Common equivalent shares from stock options and warrants are
excluded from the computation as their effect is antidilutive, except that,
pursuant to the Securities and Exchange Commission (SEC) Staff Accounting
Bulletin No. 83, common stock issued for consideration below the assumed initial
public offering (IPO) price and warrants exercised, warrants granted and stock
options granted with exercise prices below the IPO price during the 12-month
period preceding the date of the initial filing of the Registration Statement,
even when antidilutive, have been included in the calculation of common
equivalent shares, using the treasury stock method based on the assumed IPO
price, as if they were outstanding for all periods presented.
Furthermore, common equivalent shares from convertible preferred stock that will
be converted upon the completion of the Company's IPO are included using the "as
if converted" method.
In accordance with paragraph 23 of Accounting Principles Board Opinion No. 15,
pro forma net loss per share has been presented to reflect the use of proceeds
from the Company's IPO to repay the mandatorily redeemable Series A preferred
stock and to repay certain debt obligations as of the beginning of the period
presented. The pro forma weighted average shares for the year ended December 31,
1995 were 7,640,048 and pro forma net loss was $10,174,543 which resulted in pro
forma net loss per share of $1.33 for the year ended December 31, 1995.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F-9
<PAGE> 63
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993, 1994, AND 1995
(3) OTHER CURRENT ASSETS
Other current assets as of December 31, 1994 and 1995 consisted of the
following:
<TABLE>
<CAPTION>
1994 1995
------- --------
<S> <C> <C>
Receivable under equipment lease line of credit....... $ -- $315,846
Deferred public offering costs........................ -- 200,667
Other prepaid expenses................................ 13,732 205,977
Other................................................. 27,224 33,082
------- --------
$40,956 $755,572
======= ========
</TABLE>
(4) PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 1994 and 1995 consisted of the
following:
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Computer equipment.............................. $ 133,993 $ 237,405
Machinery and equipment......................... 775,878 1,403,520
Furniture and fixtures.......................... 225,961 187,657
Leasehold improvements.......................... 1,257,605 1,415,402
----------- -----------
2,393,437 3,243,984
Accumulated depreciation and amortization....... (1,137,916) (1,389,974)
----------- -----------
Property and equipment, net..................... $ 1,255,521 $ 1,854,010
========== ==========
</TABLE>
During 1988, property was purchased from an unrelated party subject to a note
for $442,052. The note was subsequently assigned to Purdue Frederick
Diagnostics, Inc., a former related party of the Company. The Company's
remaining obligation is reflected in notes payable (Note 6). The Company
recognized depreciation expense of $178,000, $315,000 and $466,000 for the years
ended December 1993, 1994 and 1995, respectively.
(5) ACCRUED EXPENSES
Accrued expenses as of December 31, 1994 and 1995 consisted of the following:
<TABLE>
<CAPTION>
1994 1995
-------- --------
<S> <C> <C>
Accrued minimum royalty payments..................... $120,000 $160,000
Accrued management fee to shareholder................ 135,000 --
Other................................................ 110,850 483,911
-------- --------
$365,850 $643,911
======== ========
</TABLE>
F-10
<PAGE> 64
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993, 1994, AND 1995
(6) NOTES PAYABLE
Notes payable as of December 31, 1994 and 1995 consisted of the following:
<TABLE>
<CAPTION>
1994 1995
------- ----------
<S> <C> <C>
Prime plus 3.5%; 12% as of December 31, 1995; note
payable to a bank; secured by property and
equipment; due March 1996......................... $ -- $2,000,000
10% note payable to a former related party; secured
by property and equipment; due October 1995....... 247,843 247,843
12% note payable; secured by equipment; due April
1996.............................................. 40,025 10,613
4% note payable to Pepgen, due the earlier of: 60
days following either FDA approval of the
Company's urine-based HIV-1 test or completion of
an IPO; or April 23, 1996......................... -- 1,000,000
------- ----------
Notes payable.................................. 287,868 3,258,456
Less current portion................................ 277,255 3,258,456
------- ----------
Long-term portion................................... $10,613 $ --
======= =========
</TABLE>
In December 1995, the Company entered into a line of credit agreement with a
bank to borrow up to $2,000,000 at an interest rate of prime plus 3.5%. The
agreement requires the Company to maintain a balance of cash and cash
equivalents of not less than $700,000 as of the last day of each month during
the term of the agreement. In addition, borrowings under the line of credit
agreement are secured by the Company's assets. Borrowings under the line of
credit are due upon the earlier of the closing of the Company's sale of its
common stock in an IPO or March 5, 1996, at which time the line of credit
agreement will expire.
The note payable to Pepgen relates to the Company's September 1995 investment in
Pepgen (Note 12).
The Company intends to extend the note payable to a former related party.
In March 1991, the Company issued 61,426 shares of common stock in satisfaction
of notes payable of $458,760 and accrued interest of $38,978. The difference
between the fair market value of the common stock and the exchange value of
$8.103 per share resulted in an extraordinary gain on debt extinguishment of
$485,453.
(7) LEASES
Capital Leases
In 1993, and as amended in 1995, the Company obtained two equipment lease lines
of credit which aggregated $2,300,000 and were collateralized by the related
equipment acquired with the borrowings. The Company's ability to draw additional
funds on these lease lines of credit expired in December 1995. However,
drawdowns subsequent to the expiration have been allowed under one of the lease
lines. Lease payments under the lines of credit are based on the total delivered
equipment cost multiplied by a monthly rate factor of approximately 3.5%
(approximate effective interest rate of 18% per annum). In addition, as partial
consideration for obtaining the lease lines, the Company issued certain warrants
to purchase common stock of the Company (Note 9).
F-11
<PAGE> 65
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993, 1994, AND 1995
Equipment acquired under the lease lines of credit as of December 31, 1994 and
1995 consisted of the following:
<TABLE>
<CAPTION>
1994 1995
--------- ---------
<S> <C> <C>
Machinery and equipment............................ $ 226,251 $ 887,607
Leasehold improvements............................. 82,157 82,157
--------- ---------
308,408 969,764
Accumulated depreciation and amortization.......... (129,959) (250,149)
--------- ---------
$ 178,449 $ 719,615
========= =========
</TABLE>
Future minimum lease payments under capital leases as of December 31, 1995 were:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------------------------------------------
<S> <C>
1996............................................... $390,028
1997............................................... 349,063
1998............................................... 314,964
--------
1,054,055
Less amount representing interest....................... 251,116
--------
Present value of capital lease obligations.............. 802,939
Less current portion of capital lease obligations....... 260,214
--------
Capital lease obligations -- long-term portion.......... $542,725
========
</TABLE>
Operating Leases
The Company leases office and manufacturing space in Berkeley and Alameda,
California, under two noncancelable operating leases. Under the Alameda lease
agreement, the Company is required to provide a security deposit in the form of
a letter of credit in the amount of $50,000, secured by a $50,000 certificate of
deposit which is included in other assets in the accompanying consolidated
balance sheets. Total rent expense, net of income from a one-year sublease
agreement of $184,000 in 1995, under these leases was $209,627, $504,971, and
$327,056 for the years ended December 31, 1993, 1994, and 1995, respectively.
Future minimum rental payments under all noncancelable operating leases as of
December 31 were:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------------------------------------------
<S> <C>
1996.................................................. $ 559,560
1997.................................................. 472,560
1998.................................................. 314,405
1999.................................................. 11,004
2000.................................................. 7,866
----------
Total.......................................... $1,365,395
==========
</TABLE>
(8) MANDATORILY REDEEMABLE PREFERRED STOCK
In February 1988, a Joint Venture was formed between Calypte, Inc. and CBC
Diagnostics, Inc. (CBC), formerly known as Purdue Frederick Diagnostics, Inc.
When the Company was incorporated, the Company issued common stock and
mandatorily redeemable Series A preferred stock in exchange for all the common
F-12
<PAGE> 66
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993, 1994, AND 1995
stock of Calypte, Inc. and all of the interests of the venturers in the Joint
Venture. The Joint Venture's losses up to total capital contributions were
allocated to CBC, who reported the losses on its income tax return.
Holders of mandatorily redeemable Series A preferred stock shares are entitled
to a preference over holders of common stock in involuntary or voluntary
liquidation, in the amount of $10.00 per share plus all accrued but unpaid
dividends (the redemption value) at the date of liquidation. The Company has the
option to voluntarily redeem all or a portion of the mandatorily redeemable
Series A preferred stock at any time that funds are legally available. The
Company is required to redeem all shares of mandatorily redeemable Series A
preferred stock within 60 days of any fiscal year-end in which the Company
attains $3,000,000 in retained earnings, and funds are legally available. The
mandatorily redeemable Series A preferred stock is nonvoting.
Holders of mandatorily redeemable Series A preferred stock shares are entitled
to receive cumulative dividends at the rate of $1.20 per share per annum.
Through December 31, 1995, cumulative preferred dividends totaling $736,438 have
been charged to stockholders' equity to accrete for the mandatorily redeemable
Series A preferred stock redemption value with a corresponding increase in the
recorded amount of the mandatorily redeemable Series A preferred stock.
(9) STOCKHOLDERS' EQUITY
Reverse Stock Split
On November 22, 1994, the stockholders and the Board of Directors approved a
1-for-10 reverse stock split of the Company's common and preferred stock. Par
value remained at $0.001. The stock accounts have been reduced and additional
paid-in capital has been increased to reflect the change in the cumulative par
value of the stock issued. All share and per share information in the
accompanying consolidated financial statements have been adjusted to reflect
this reverse stock split.
Series B Convertible Preferred Stock
Holders of Series B convertible preferred stock are entitled to a preference
over the holders of mandatorily redeemable Series A preferred stock in
involuntary or voluntary liquidation in the amount of $1.864 per share, subject
to certain limitations.
Series C Convertible Preferred Stock
Holders of Series C convertible preferred stock are entitled to a preference
over the holders of mandatorily redeemable Series A preferred stock and the
holders of Series B convertible preferred stock in involuntary or voluntary
liquidation in the amount of $3.70 per share, subject to certain limitations.
Series D Convertible Preferred Stock
In 1992, 800,000 shares of Series D convertible preferred stock were issued at a
price of $7.50 per share.
In 1993, an additional 199,999 shares of Series D convertible preferred stock
were issued at a price of $7.50 per share.
In March 1994, in accordance with certain antidilution rights, each outstanding
share of Series D convertible preferred stock was converted into 1.5 shares of
Series D convertible preferred stock. The liquidation preference and conversion
price of the Series D convertible preferred stock was reduced to $5.00 per
share. Also, the Company issued an additional 617,000 shares of Series D
convertible preferred stock during 1994 at a price of $5.00 per share.
F-13
<PAGE> 67
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993, 1994, AND 1995
Holders of the Series D convertible preferred stock are entitled to a preference
over the holders of mandatorily redeemable Series A preferred stock and the
holders of Series B and C convertible preferred stock in involuntary or
voluntary liquidation in the amount of $5.00 per share, subject to certain
limitations.
Series E Convertible Preferred Stock
In November 1994, the Board of Directors authorized the issuance of up to
3,200,000 shares of Series E convertible preferred stock. In May 1995, the Board
of Directors increased the authorized shares of Series E convertible preferred
stock to 4,000,000. During 1994, 1,077,500 shares of Series E convertible
preferred stock along with warrants to purchase an additional 1,079,100 shares
of Series E convertible preferred stock were issued at $5.00 per share. Each
warrant gives the holder the right to purchase a share of Series E convertible
preferred stock for $5.00 per share.
During 1995, an additional 890,366 shares of Series E convertible preferred
stock were issued at a price of $5.00 per share. In connection with this
issuance, warrants to purchase an additional 885,046 shares of Series E
convertible preferred stock were issued. Each of the warrants gives its holder
the right to purchase a share of Series E convertible preferred stock for $7.50.
Holders of Series E convertible preferred stock are entitled to a preference
over the holders of mandatorily redeemable Series A preferred stock, and the
holders of Series B, C, and D convertible preferred stock in involuntary or
voluntary liquidation in the amount of $5.00 per share, subject to certain
limitations.
Rights of Convertible Preferred Stockholders
Holders of the Series B, C, D, and E convertible preferred stock are entitled to
(i) receive one vote for each share of common stock into which their shares are
convertible; (ii) elect members of the Company's Board of Directors; and (iii)
receive dividends prior and in preference to any payment of any dividend on
common stock.
Automatic Conversion of Convertible Preferred Stock
The Series B, C, D and E convertible preferred stock is convertible at any time
into common stock of the Company at the initial ratio of one share of common
stock for one share of Series B, C, D or E convertible preferred stock. The
conversion ratio is adjustable under certain circumstances. Dividends are not
cumulative and will not accrue unless declared.
Series B, C, D, and E convertible preferred stock are automatically convertible
into shares of common stock immediately upon the closing of the Company's IPO at
a per share price of not less than $7.50 and which results in aggregate cash
proceeds to the Company of at least $8,000,000.
Common Stock Warrants and Options
During 1993, the Company issued stock warrants for the purchase of 35,155 shares
of the Company's common stock at exercise prices ranging from $5.00 to $7.50 per
share as partial consideration for obtaining two lease lines of credit (Note 7).
These warrants expire upon the later of 2003 or five years after the closing of
the Company's sale of its common stock in a public offering.
During 1995, the Company made an investment in Pepgen, a development stage
enterprise. The Company's investment consisted in part, of options for the
purchase of up to 475,000 shares of the Company's common stock at an exercise
price of $7.50 per share (see Note 12).
F-14
<PAGE> 68
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993, 1994, AND 1995
Convertible Preferred Stock Warrants
In conjunction with the Series D convertible preferred stock offerings during
1993 and 1994, the Company issued a stock warrant for the purchase of 18,000
shares of the Company's Series D convertible preferred stock at an exercise
price of $5.60 per share. This warrant expires on the earlier of the warrant's
expiration date of February 1996, the date of closing of the Company's sale of
common stock at a per share price of not less than $10.00 and which results in
aggregate cash proceeds to the Company of at least $10,000,000, or upon the
occurrence of certain other events as set forth in the warrant agreement. In
addition, the Company issued stock warrants for the purchase of 2,800 shares of
the Company's Series D convertible preferred stock at an exercise price of $6.00
per share. These warrants expire in 1997.
In conjunction with the Series E convertible preferred stock offerings in
November 1994 and May, June and September 1995, the Company issued stock
warrants for the purchase of 1,079,100, 414,000, 430,046 and 41,000 shares,
respectively, of the Company's Series E convertible preferred stock. The
warrants issued in November 1994 are exercisable at $5.00 per share and expire
in November 1997. The warrants issued in May, June and September 1995 are
exercisable at $7.50 per share and expire upon the earlier of one year after the
date of issue, 60 days following receipt by the Company of FDA approval on its
urine-based HIV-1 test, or 60 days following the closing date of the Company's
IPO. As of December 31, 1995, there were 1,079,100 of the $5.00 warrants
outstanding and 885,046 of the $7.50 warrants outstanding.
Change of Control Provisions
Certain provisions of the Company's Certificate of Incorporation and Bylaws may
have the effect of preventing, discouraging or delaying any change in the
control of the Company and may maintain the incumbency of the Board of Directors
and management. The authorization of undesignated preferred stock makes it
possible for the Board of Directors to issue preferred stock with voting or
other rights or preferences that could impede the success of any attempt to
change control of the Company.
(10) INCENTIVE STOCK AND STOCK OPTION PLANS
Incentive Stock Plan
In April 1991, the Company's Board of Directors approved the adoption of the
Company's Incentive Stock Plan (the Stock Plan) which authorized the issuance of
up to 290,992 shares of the Company's common stock. In January 1992 and November
1994, 200,000 and 1,000,000 additional shares, respectively, of common stock
were authorized by the Company's Board of Directors for issuance under the Stock
Plan. In December 1995, 1,250,000 additional shares of common stock were
authorized by the Company's Board of Directors. Under the Stock Plan, employees
or consultants may be granted options that allow for the purchase of shares of
the Company's common stock.
Under the terms of the Stock Plan, nonstatutory stock options may be granted
only to employees, including directors who are employees, and consultants.
Incentive stock options may be granted only to employees.
Nonstatutory stock options may be granted under the Stock Plan at a price not
less than 85% of the fair market value of the common stock on the date the
option is granted. Incentive stock options may be granted under the Stock Plan
at a price not less than 100% of the fair market value of the common stock on
the date the option is granted. The fair value of the common stock is determined
by the Board of Directors and includes consideration of a variety of factors
including other equity transactions of the Company. Options granted under the
Stock Plan generally vest monthly over four to five years. The term of the
nonstatutory and incentive stock options granted is 10 years or less from the
date of the grant, as provided in the option agreements.
F-15
<PAGE> 69
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993, 1994, AND 1995
Incentive and nonstatutory stock options granted to employees and consultants
who, on the date of grant, own stock representing more than 10% of the voting
power of all classes of stock of the Company are granted at an exercise price
not less than 110% of the fair market value of the common stock. Any options
granted are exercisable at the time and under conditions as determined by the
Company's Board of Directors. The Board of Directors may amend or modify the
Stock Plan at any time. The Stock Plan will terminate in 2001, unless sooner
terminated by the Board of Directors.
The following table summarizes activity under the Stock Plan:
<TABLE>
<CAPTION>
OPTIONS EXERCISE PRICE
--------- --------------
<S> <C> <C>
Outstanding as of December 31, 1992................. 248,845 $ 0.20 - 0.40
Granted........................................... 62,300 0.40 - 0.50
Exercised......................................... (22,444) 0.20 - 0.40
Canceled.......................................... (6,808) 0.40 - 0.50
--------- ------------
Outstanding as of December 31, 1993................. 281,893 0.20 - 0.50
Granted........................................... 148,582 0.50 - 1.00
Exercised......................................... (31,334) 0.20 - 0.50
Canceled.......................................... (84,314) 0.20 - 1.00
--------- ------------
Outstanding as of December 31, 1994................. 314,827 0.20 - 1.00
Granted........................................... 992,371 0.50 - 5.00
Exercised......................................... (4,547) 0.50 - 1.00
Canceled.......................................... (17,237) 0.50 - 1.00
--------- ------------
Outstanding as of December 31, 1995................. 1,285,414 $ 0.20 - 5.00
========= ============
Exercisable as of December 31, 1995................. 543,799 $ 0.20 - 5.00
========= ============
</TABLE>
As of December 31, 1995, 1,329,173 shares of common stock were available for
grant under the Stock Plan.
In accordance with Staff Accounting Bulletin No. 83, the Company has recorded
deferred compensation of $567,000 for the difference between the grant price and
the deemed fair value of the stock for financial reporting purposes at the grant
date related to stock options granted within one year of a planned public
offering of the Company's common stock. This amount is being amortized over the
relevant period of benefit. For the year ended December 31, 1995, $201,000 was
amortized.
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
Accounting for Stock-Based Compensation. SFAS No. 123 applies to all
transactions in which an entity acquires goods or services by issuing equity
instruments such as common stock, except for employee stock ownership plans.
SFAS No. 123 establishes a new method of accounting for stock-based compensation
arrangements with employees which is fair value based. The statement encourages
(but does not require) employers to adopt the new method in place of the
provisions of Accounting Principles Board Opinion No. 25 (APB No. 25),
Accounting for Stock Issued to Employees. Companies may continue to apply the
accounting provisions of APB No. 25 in determining net income; however, they
must apply the disclosure requirements SFAS No. 123. If the Company were to
adopt the fair value based method of SFAS No. 123, a higher compensation cost
would result for fixed stock option plans and a different compensation cost
would result for the Company's contingent or variable stock option plans. The
recognition provisions and disclosure requirements of SFAS No. 123 are effective
for the year ending December 31, 1996. The Company has elected to continue to
use its current practice under APB No. 25.
Also see Notes 9 and 12 regarding outstanding warrants.
F-16
<PAGE> 70
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993, 1994, AND 1995
1995 Employee Stock Purchase Plan
In December 1995, the Company's Board of Director's approved the Company's
Employee Stock Purchase Plan (the Purchase Plan) subject to the closing of the
Company's IPO of its common stock. The Purchase Plan is intended to qualify
under Section 423 of the Internal Revenue Code (the Code). The Company will
reserve 300,000 shares of common stock for issuance under the Purchase Plan.
Under the Purchase Plan, an eligible employee may purchase shares of common
stock from the Company through payroll deductions of up to 10% of his or her
compensation, at a price per share equal to 85% of the lower of (i) the fair
market value of the Company's common stock on the first day of an offering
period under the Purchase Plan or (ii) the fair market value of the common stock
on the last day of an offering period. Except for the first offering period,
each offering period will last for twenty-four months and will commence the
first day on which the national stock exchanges and the Nasdaq Stock Market are
open for trading, on or after May 1 and November 1 of each year. The first
offering period will begin upon the effective date of the Company's IPO and will
end at the end of the twenty-fourth month after such date. Any employee who is
customarily employed for at least 20 hours per week and more than five months
per calendar year, who has been employed for at least three consecutive months
on or before the commencement date of an offering period is eligible to
participate in the Purchase Plan.
1995 Director Option Plan
In December 1995, the Company's Board of Director's approved the Company's
Director Option Plan (the Director Option Plan) subject to the closing of the
Company's IPO of its common stock. Under the Director Option Plan, the Company
will reserve 200,000 shares of common stock for issuance to the directors of the
Company pursuant to nonstatutory stock options. Under the Director Option Plan,
directors who are not employees or consultants of the Company automatically
receive an option to purchase 12,000 shares of common stock (the First Option)
on the date on which such person first becomes a director, whether through
election by the stockholders of the Company or appointment by the Board of
Directors to fill a vacancy. Thereafter, each person shall receive an option to
acquire 3,000 shares of the Company's common stock (the Subsequent Option) on
each date such outside director is reelected. Each option granted under the
Director Option Plan shall be exercisable at 100% of the fair market value of
the Company's common stock on the date such option was granted. Twenty-five
percent of the First Option shall vest one year after the date of grant, with
25% vesting each anniversary thereafter. Twelve and one-half percent of the
shares subject to the Subsequent Option shall be exercisable on the first day of
each month following the date of grant. The plan shall be in effect for a term
of ten years unless sooner terminated under the Director Option Plan.
(11) SECTION 401(K) PLAN
In October 1995 (effective January 1, 1995), the Company adopted a Retirement
Savings and Investment Plan (the 401(k) Plan) covering the Company's full-time
employees located in the United States. The 401(k) Plan is intended to qualify
under Section 401(k) of the Internal Revenue Code, so that contributions to the
401(k) Plan by employees or by the Company, and the investment earnings thereon,
are not taxable to employees until withdrawn from the 401(k) Plan, and so that
contributions by the Company, if any, will be deductible by the Company when
made. Pursuant to the 401(k) Plan, employees may elect to reduce their current
compensation by up to the statutorily prescribed annual limit and to have the
amount of such reduction contributed to the 401(k) Plan. The 401(k) Plan
permits, but does not require, additional matching contributions to the 401(k)
Plan by the Company on behalf of all participants in the 401(k) Plan. The
Company has not made any contributions to the 401(k) Plan.
F-17
<PAGE> 71
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993, 1994, AND 1995
(12) INVESTMENT IN PEPGEN CORPORATION
During 1995, the Company purchased a 49% equity interest in Pepgen for $1.0
million paid at closing, $1.0 million payable to Pepgen pursuant to a promissory
note (Note 6) and options to purchase the Company's common stock valued at
$500,000. The options were granted to Pepgen stockholders' for the purchase of
an aggregate of 475,000 shares of the Company's common stock at a price of $7.50
per share, of which 100,000 of such shares were immediately exercisable upon
signing of the agreement and the remaining 375,000 shares become exercisable
upon attainment of certain milestones. The Company valued the options utilizing
the Black-Scholes pricing model which considered the terms of the options, other
market assumptions consistent with those as determined by an independent
valuation appraiser, a volatility index for the biotechnology industry and
certain other factors related to the probability and timing of attaining related
milestones. The options expire in September 2005. In addition, Calypte has the
right of first negotiation to purchase the remaining 51% of Pepgen at fair
market value, and the Company is entitled to elect two of the seven Board
members of Pepgen. Other than the payment of the $1.0 million dollar promissory
note, Calypte does not have any ongoing commitments to fund Pepgen.
The Company uses the equity method to account for its investment in Pepgen. Upon
completion of this transaction, the Company wrote-off its entire investment in
Pepgen as purchased in-process research and development costs.
(13) INCOME TAXES
As discussed in Note 2, the Company adopted SFAS No. 109 effective January 1,
1993 on a prospective basis. The cumulative effect of this change in accounting
for income taxes did not have a significant effect on the consolidated financial
statements.
Income tax expense differed from the amounts computed by applying the U.S.
federal income tax rate of 34% to pretax losses as a result of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Computed "expected" tax expense..... $(2,101,600) $(1,829,600) $(3,418,300)
Meals and entertainment expenses,
and officers' life insurance not
deductible for income taxes....... 3,300 7,000 5,500
Research expenses................... 59,000 62,900 86,200
State tax expense................... 1,100 1,100 1,100
Losses and credits for which no
benefit has been recognized....... 2,089,200 1,790,100 3,334,500
Other............................... (49,400) (29,900) (7,400)
----------- ----------- -----------
$ 1,600 $ 1,600 $ 1,600
=========== =========== ===========
</TABLE>
F-18
<PAGE> 72
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993, 1994, AND 1995
The tax effect of temporary differences that give rise to significant portions
of the deferred tax assets is presented below:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1994 1995
----------- ------------
<S> <C> <C>
Deferred tax assets:
Employee benefit reserves, including accrued
vacation.................................... $ 13,000 $ 25,500
Start-up and other capitalization.............. 9,100 7,300
Fixed assets, due to differences in
depreciation................................ 224,500 298,800
Deferred rent.................................. 36,600 35,100
Net operating loss carryover................... 6,290,100 8,941,100
Research and development credit................ 600,400 920,900
Loss contingency............................... 20,100 20,100
Purchased research and development............. -- 978,400
----------- ------------
Total gross deferred tax assets........ 7,193,800 11,227,200
Less valuation allowance......................... (7,193,800) (11,227,200)
----------- ------------
Net deferred tax asset................. $ -- $ --
=========== ============
</TABLE>
The net change in the valuation allowance for the years ended December 31, 1993,
1994, and 1995 was an increase of $2,444,000, $2,142,000, and $4,033,400,
respectively. Because there is uncertainty regarding the Company's ability to
realize its deferred tax assets, a 100% valuation allowance has been
established.
As of December 31, 1995, the Company had federal tax net operating loss
carryforwards of approximately $24,107,000, which will expire in the years 2004
through 2010. The Company also has federal research and development credit
carryforwards as of December 31, 1995 of approximately $750,000, which will
expire in the years 2005 through 2010.
State tax net operating loss carryforwards were approximately $12,133,000 and
state research and development credit carryforwards were $259,000 as of December
31, 1995. The state net operating loss carryforwards will expire in the years
1997 through 2000 and the state research and development credits will expire in
the years 2005 through 2010.
The Company's ability to utilize its net operating loss and research and
development tax credit carryforwards may be limited in the future if it is
determined that the Company experienced an ownership change, as defined in
Section 382 of the Internal Revenue Code, as a result of prior transactions or
upon the completion of the IPO.
(14) ROYALTY, LICENSE, AND RESEARCH AGREEMENTS
Royalty and License Agreements
The Company has entered into an agreement that provides for royalty payments to
former related parties based on sales of certain products conceived by the
former related parties prior to March 30, 1989.
The Company has entered into arrangements with various organizations to receive
the right to utilize certain patents and proprietary rights under licensing
agreements in exchange for the Company making certain royalty payments based on
sales of certain products and services. The royalty obligations are based on a
percentage of net sales of licensed products and include minimum annual royalty
payments under some agreements. During 1993, the Company paid $1,040,000 in
product license and related legal fees as consideration for these
F-19
<PAGE> 73
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993, 1994, AND 1995
agreements, which has been recorded as research and development expense in the
accompanying consolidated statements of operations.
Research Agreement
In August 1993 and as amended in 1994, the Company entered into a research
agreement that allowed for a university to perform certain research on behalf of
the Company for a seven-year period. Under the terms of the agreement, the
Company may negotiate certain license rights to the inventions made by the
university resulting from this research. The Company's annual payment under this
agreement is approximately $150,000 through 1999.
(15) DISTRIBUTION AGREEMENTS
Seradyn, Inc.
In April 1995, the Company entered into an agreement with Seradyn, Inc.
(Seradyn), under which Seradyn was granted exclusive distribution rights for the
Company's urine-based HIV-1 test under the trade name "Seradyn Sentinel" for all
non-Calypte accounts in the United States and all customers in Europe, Latin
America, Africa, and the Middle East (excluding Israel). The agreement provides
for certain minimum purchases by Seradyn. If such minimum purchases are not met,
the Company has the right to terminate the agreement or render Seradyn's rights
non-exclusive for the region in which the minimum purchases were not met
provided that Seradyn will be guaranteed the prices given to Calypte's most
favored customers in the territory. The initial term of the agreement extends
through December 1998. Seradyn has the right to extend the agreement for
successive two-year terms provided it has met minimum sales requirements.
Seradyn has agreed to assist the Company in obtaining regulatory approvals in
its distribution territory at the Company's expense. The agreement also grants
Seradyn a right of first refusal on distribution rights for certain new products
which may be developed during the term of the agreement.
Otsuka Pharmaceutical Co., Ltd.
In August 1994, the Company entered into a distribution agreement with Otsuka
Pharmaceutical Co., Ltd. (Otsuka), a drug development and distribution company
incorporated in Japan. Otsuka is also a stockholder of the Company. The
agreement gives Otsuka exclusive distribution rights for the Company's
urine-based HIV-1 test and to use the name "Calypte" to market the test in 22
Asian countries, Australia and New Zealand. To maintain exclusivity, the
agreement requires that Otsuka purchase certain annual minimums, which increase
each year, and total 70 million tests over ten years. Otsuka has agreed to use
its best efforts to obtain regulatory approvals for the product in its
territory. In 1993, Otsuka paid $500,000 to the Company to be applied against
future commercial product purchases from the Company. The Company recorded this
$500,000 payment as deferred revenue as of December 31, 1994 and 1995.
The agreement between the Company and Otsuka is for a term of ten years, and is
terminable without cause by Otsuka upon 120-days notice. The Company has
committed up to one-half of its total manufacturing capacity to Otsuka. If the
Company is unable to meet Otsuka's manufacturing requirements, Otsuka has a
right to manufacture tests itself. The agreement also grants Otsuka the right of
first refusal to distribute certain new products which may be developed during
the term of the agreement.
F-20
<PAGE> 74
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993, 1994, AND 1995
Travenol Laboratories (Israel) Ltd.
In December 1994, the Company entered into an agreement with Travenol
Laboratories (Israel) Ltd. (Travenol). The agreement gives Travenol exclusive
rights to distribute the Company's urine-based HIV-1 test under the trade name
"Calypte" within Israel. Under the agreement, Travenol will undertake
registration of the product in Israel with the Company paying regulatory fees.
The term of the agreement is perpetual unless terminated earlier for specified
causes. No minimum purchase levels are required under this agreement.
(16) CONSULTING AND EMPLOYEE AGREEMENTS
On April 10, 1995, the Company entered into an employment agreement with an
officer which is effective from May 1, 1995 through December 31, 1996. Under the
agreement the officer is receiving a salary of $195,000 per year and is eligible
for a maximum bonus in 1996 of $35,000. The agreement is automatically renewable
each year subject to three months notice prior to the end of each calendar year.
In the event the officer's employment with the Company is terminated by the
Company other than for cause, the officer may be entitled to receive his base
salary for up to 12 months. In addition, the Company agreed to pay the officer's
moving expenses in connection with his relocation to California.
On January 1, 1995, the Company entered into an employment agreement with an
officer for the year ended December 31, 1995, which provided for an annual
salary of $140,000 plus an annual bonus not to exceed $35,000 per year. The
agreement was automatically renewed for the year ending December 31, 1996 and is
automatically renewable each year subject to three months notice prior to the
end of each calendar year.
The Company has entered into other employee and consulting agreements with
varying terms, in the ordinary course of business.
(17) RELATED PARTY TRANSACTIONS
Included in revenue earned under research and development contracts is
$2,099,116 for the period from February 18, 1988 (inception) to December 31,
1995 earned from CBC or its affiliates. The founders of the Company included
entities affiliated with CBC.
In March 1992, the Company advanced $85,000 to a stockholder and officer of the
Company in exchange for a note receivable issued by the stockholder and officer.
In anticipation of the forgiveness of a portion of the note, the Company
wrote-off half of the note during 1995. The remaining $42,500 balance of the
note is due March 20, 1997 and is secured by shares in the Company's common
stock acquired by the borrower since 1989. Interest income recognized by the
Company and paid by the borrower was $6,132, $5,950, and $5,950 in 1993, 1994,
and 1995, respectively.
In January 1994, the Company entered into an agreement with a stockholder of the
Company for management services. Expense related to cash payments under this
agreement for such services was $135,000 and $137,500 for 1994 and 1995,
respectively. In addition, options to purchase 154,276 shares of the Company's
common stock at a per share price of $0.50 were granted to the stockholder.
(18) LEGAL MATTERS
The Company is subject to litigation from time to time in the ordinary course of
business. Although the amount of any liability with respect to such litigation
cannot be determined, in the opinion of management such liability, if any, will
not have a material adverse effect on the Company's financial condition or
results of operations.
F-21
<PAGE> 75
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993, 1994, AND 1995
(19) ACCOUNTING CHANGES
In connection with the Company's filing of a registration statement with the SEC
for the planned sale of common stock in an IPO and pursuant to the provisions of
APB Opinion No. 20, Accounting Changes, the Company has retroactively restated
its consolidated financial statements for all periods presented to reclassify
its mandatorily redeemable Series A preferred stock out of permanent equity and
to accrue dividends on the manditorily redeemable Series A preferred stock
regardless of their declaration by the Company's Board of Directors. The impact
of this change was to recognize dividends of $120,000 in each of the years in
the three-year period ended December 31, 1995 and $736,438 for the period
February 18, 1988 (inception) through December 31, 1995. In addition, the
Company changed its policy with regards to the date it commences depreciating
and amortizing amounts capitalized for new facilities to the date such
facilities are available for their intended use. This change resulted in an
increase in the 1994 net loss of approximately $86,000.
F-22
<PAGE> 76
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, 1996
DECEMBER 31, --------------------------------
1995 ACTUAL PRO FORMA(NOTE 2)
------------ ------------ -----------------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents........................................... $ 2,558,650 $ 1,841,696 $ 1,339,003
Other current assets................................................ 755,572 914,591 914,591
------------ ------------ ------------
Total current assets......................................... 3,314,222 2,756,287 2,253,594
Property and equipment, net........................................... 1,854,010 1,884,298 1,884,298
Note receivable from officer.......................................... 42,500 42,500 42,500
Other assets.......................................................... 126,144 143,485 143,485
------------ ------------ ------------
$ 5,336,876 $ 4,826,570 $ 4,323,877
============ ============ ============
LIABILITIES, MANDATORILY REDEEMABLE
PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses............................... $ 1,697,447 $ 2,249,153 $ 2,249,153
Notes payable -- current portion.................................... 3,258,456 3,250,536 2,747,843
Capital lease obligations -- current portion........................ 260,214 423,384 423,384
Deferred revenue.................................................... 500,000 625,000 625,000
------------ ------------ ------------
Total current liabilities.................................... 5,716,117 6,548,073 6,045,380
Deferred rent obligation.............................................. 87,357 76,876 76,876
Capital lease obligations -- long-term portion........................ 542,725 682,867 682,867
------------ ------------ ------------
Total liabilities............................................ 6,346,199 7,307,816 6,805,123
Mandatorily redeemable Series A preferred stock, $0.001 par value;
100,000 shares authorized, issued, and outstanding; aggregate
redemption and liquidation value of $1,000,000 plus cumulative
dividends........................................................... 1,736,438 1,766,438 1,766,438
Commitments and contingencies
Stockholders' equity (deficit):
Series B convertible preferred stock, $0.001 par value; 804,860
shares authorized; 804,846 shares issued and outstanding as of
December 31, 1995 and March 31, 1996 (-0- shares pro forma);
aggregate liquidation value of $1,500,235 as of March 31, 1996
($-0- pro forma).................................................. 805 805 --
Series C convertible preferred stock, $0.001 par value; 1,702,727
shares authorized; 1,702,705 shares issued and outstanding as of
December 31, 1995 and March 31, 1996 (-0- shares pro forma);
aggregate liquidation value of $6,300,004 as of March 31, 1996
($-0- pro forma).................................................. 1,703 1,703 --
Series D convertible preferred stock, $0.001 par value; 2,130,051
shares authorized; 2,116,999 shares issued and outstanding as of
December 31, 1995 and March 31, 1996 (-0- shares pro forma);
aggregate liquidation value of $10,585,000 as of March 31, 1996
($-0- pro forma).................................................. 2,117 2,117 --
Series E convertible preferred stock, $0.001 par value; 4,000,000
shares authorized; 1,967,866 and 2,207,866 shares issued and
outstanding as of December 31, 1995 and March 31, 1996,
respectively (-0- shares pro forma); aggregate liquidation value
of $11,039,330 as of March 31, 1996 ($-0- pro forma).............. 1,967 2,207 --
Common stock, $0.001 par value; 12,000,000 shares authorized
(20,000,000 shares pro forma); 573,899 and 574,018 shares issued
and outstanding as of December 31, 1995 and March 31, 1996,
respectively (7,406,434 shares pro forma)......................... 574 574 7,406
Additional paid-in capital.......................................... 28,014,030 29,329,343 29,329,343
Deferred compensation............................................... (365,871) (366,914) (366,914)
Deficit accumulated during development stage........................ (30,401,086) (33,217,519) (33,217,519)
------------ ------------ ------------
Total stockholders' equity (deficit)......................... (2,745,761) (4,247,684) (4,247,684)
============ ============ ============
$ 5,336,876 $ 4,826,570 $ 4,323,877
============ ============ ============
</TABLE>
See accompanying notes to consolidated condensed financial statements.
F-23
<PAGE> 77
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
PERIOD FROM
THREE MONTHS FEBRUARY 18, 1988
ENDED MARCH 31, (INCEPTION)
--------------------------- THROUGH MARCH 31,
1995 1996 1996
----------- ----------- -----------------
<S> <C> <C> <C>
Revenue earned under research and development
contracts, substantially from related
parties........................................ $ -- $ -- $ 2,390,187
Operating expenses:
Research and development....................... 970,811 1,827,559 22,174,123
Purchased in-process research and development
costs....................................... -- -- 2,500,000
Selling, general and administrative............ 491,527 896,185 11,822,590
----------- ----------- ------------
Loss from operations................... (1,462,338) (2,723,744) (34,106,526)
Interest income.................................. 60,761 36,939 606,767
Interest expense................................. (17,749) (134,845) (737,864)
Other income..................................... 21,066 5,217 75,660
----------- ----------- ------------
Loss before income taxes and
extraordinary item................... (1,398,260) (2,816,433) (34,161,963)
Income taxes..................................... -- -- (60,750)
----------- ----------- ------------
Loss before extraordinary item......... (1,398,260) (2,816,433) (34,222,713)
Extraordinary gain on debt extinguishment........ -- -- 485,453
----------- ----------- ------------
Net loss............................... (1,398,260) (2,816,433) (33,737,260)
Less dividend on mandatorily redeemable Series A
preferred stock................................ (30,000) (30,000) (766,438)
----------- ----------- ------------
Net loss attributable to common stockholders..... $(1,428,260) $(2,846,433) $ (34,503,698)
=========== =========== ============
Net loss per share attributable to common
stockholders................................... $ (0.21) $ (0.41)
=========== ===========
Weighted average shares used to compute net loss
per share attributable to common
stockholders................................... 6,933,854 6,934,520
=========== ===========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
F-24
<PAGE> 78
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
PERIOD FROM
THREE MONTHS FEBRUARY 18, 1988
ENDED MARCH 31, (INCEPTION)
----------------------- THROUGH MARCH 31,
1995 1996 1996
---------- ---------- -----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss........................................... $(1,398,260) $(2,816,433) $(33,737,260)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization................... 104,354 187,070 2,004,317
Loss on sale or disposal of equipment........... 61,718 -- 115,192
Extraordinary gain on debt extinguishment....... -- -- (485,453)
Amortization of deferred compensation........... -- 44,391 245,505
Compensation paid by stock issuance............. 22,000 -- 47,421
Purchased in-process research and development
costs......................................... -- -- 2,500,000
Changes in operating assets and liabilities:
Other current assets.......................... (7,176) (159,019) (675,752)
Organizational costs.......................... -- -- (123,074)
Other assets.................................. (300) (17,341) (424,825)
Accounts payable, accrued expenses and
deferred revenue........................... (192,909) 676,706 2,776,222
Deferred rent obligation...................... (981) (10,481) 76,876
Note payable in exchange for expenses paid on
behalf of the Company...................... -- -- 191,964
----------- ----------- ------------
Net cash used in operating activities...... (1,411,554) (2,095,107) (27,488,867)
----------- ----------- ------------
Cash flows from investing activities:
Proceeds from disposition of equipment............. -- -- 25,000
Purchase of equipment.............................. (106,550) -- (2,276,552)
Investment in Pepgen Corporation................... -- -- (1,000,000)
----------- ----------- ------------
Net cash used in investing activities...... (106,550) -- (3,251,552)
----------- ----------- ------------
Cash flows from financing activities:
Proceeds from the sale of stock.................... 18,900 1,300,119 29,579,524
Expenses paid related to sale of stock............. (779) -- (870,006)
Prepaid license fee................................ -- -- 500,000
Principal payments on notes payable................ (7,026) (7,920) (924,846)
Principal payments on capital lease obligations.... (21,000) (66,688) (233,513)
Proceeds from notes payable........................ -- -- 2,692,035
Capital contributions.............................. -- -- 75,500
Joint ventures' capital contributions.............. -- -- 1,610,779
Proceeds from capital lease obligations............ -- 152,642 152,642
----------- ----------- ------------
Net cash (used in) provided by financing
activities............................... (9,905) 1,378,153 32,582,115
----------- ----------- ------------
Net (decrease) increase in cash and cash
equivalents........................................ (1,528,009) (716,954) 1,841,696
Cash and cash equivalents at beginning of period..... 4,477,924 2,558,650 --
----------- ----------- ------------
Cash and cash equivalents at end of period........... $2,949,915 $1,841,696 $ 1,841,696
=========== =========== ============
Supplemental disclosure of cash flow activities:
Cash paid for interest............................. $ 17,749 $ 95,822 $ 574,000
Cash paid for income taxes......................... -- -- 60,100
Supplemental disclosure of noncash activities:
Acquisition of equipment through obligations under
capital leases.................................. -- 217,358 1,187,122
Accrued liabilities converted to notes payable..... -- -- 363,091
Accrued liabilities converted to common stock...... -- -- 38,978
Notes payable converted to common stock............ -- -- 458,760
Notes payable converted to Series B convertible
preferred stock................................. -- -- 50,000
Note payable issued upon investment in Pepgen
Corporation..................................... -- -- 1,000,000
Options issued upon investment in Pepgen
Corporation..................................... -- -- 500,000
Dividend on mandatorily redeemable Series A
preferred stock................................. 30,000 30,000 766,438
Deferred compensation attributable to stock
grants.......................................... -- 45,425 612,416
</TABLE>
See accompanying notes to consolidated condensed financial statements.
F-25
<PAGE> 79
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1995 AND 1996
The accompanying unaudited consolidated condensed financial statements have been
prepared by the Company, pursuant to the rules and regulations of the Securities
and Exchange Commission, and reflect all adjustments which, in the opinion of
management, are necessary for a fair statement of the results for the interim
periods presented. Operating results for the three months ended March 31, 1996,
are not necessarily indicative of the results to be expected for the year.
Certain information in footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
has been condensed or omitted pursuant to such rules and regulations. These
consolidated condensed financial statements should be read in conjunction with
the consolidated financial statements and the notes thereto for the year ended
December 31, 1995.
(1) THE COMPANY AND BASIS OF PRESENTATION
Calypte Biomedical Corporation (the Company) was incorporated on November 11,
1989 and is a development stage enterprise. The Company's primary activities
have been to obtain funding and to perform research and development. The Company
is in the process of applying for approvals to market and sell its product in
both domestic and foreign markets.
The accompanying consolidated condensed financial statements include the results
of operations of the Company and its wholly owned subsidiary, Calypte, Inc., and
Calypte Biomedical Company (the Joint Venture). All significant intercompany
accounts and transactions have been eliminated in consolidation.
The Company accounts for its 49% interest in Pepgen Corporation (Pepgen) under
the equity method (Note 7).
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Pro Forma Financial Information
Pro forma stockholders' equity (deficit) of the Company as of March 31, 1996
gives effect to the conversion of 6,832,416 shares of Series B, C, D, and E
convertible preferred stock into 6,832,416 shares of common stock and gives
effect to the reincorporation of the Company into a Delaware company and
authorization for the Company to issue up to 20 million shares of common stock.
Pro forma financial information also gives effect, as of March 31, 1996, to
repayment of $502,693 of current notes payable which were repaid in April 1996.
Net Loss Per Share Attributable to Common Stockholders
Except as noted below, net loss per share attributable to common stockholders is
computed using the weighted average number of shares of common stock
outstanding. Common equivalent shares from stock options and warrants are
excluded from the computation as their effect is antidilutive, except that,
pursuant to the Securities and Exchange Commission (SEC) Staff Accounting
Bulletin No. 83, common stock issued for consideration below the assumed IPO
price and warrants exercised, warrants granted and stock options granted with
exercise prices below the IPO price during the 12-month period preceding the
date of the initial
F-26
<PAGE> 80
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
MARCH 31, 1995 AND 1996
filing of the registration statement, even when antidilutive, have been included
in the calculation of common equivalent shares, using the treasury stock method
based on the assumed IPO price, as if they were outstanding for all periods
presented.
Furthermore, common equivalent shares from convertible preferred stock that will
be converted upon the completion of the Company's IPO are included using the "as
if converted" method.
In accordance with paragraph 23 of Accounting Principles Board Opinion No. 15,
pro forma net loss per share has been presented to reflect the use of proceeds
from the Company's IPO to repay the mandatorily redeemable Series A preferred
stock and to repay certain debt obligations as of the beginning of the period
presented. The pro forma weighted average shares for the three months ended
March 31, 1996 were 7,645,234 and pro forma net loss was $2,681,587 which
resulted in pro forma net loss per share of $0.35 for the three months ended
March 31, 1996.
(3) NOTES PAYABLE -- CURRENT PORTION
Notes payable consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ ----------
<S> <C> <C>
Prime plus 3.5%; 11.75% as of March 31, 1996; note
payable to a bank; secured by property and
equipment; due July 5, 1996...................... $2,000,000 $2,000,000
10% note payable to a former related party; secured
by property and equipment; due August 1, 1996.... 247,843 247,843
12% note payable; secured by equipment; due April
1996............................................. 10,613 2,693
4% note payable to Pepgen, due the earlier of: 60
days following either FDA approval of the
Company's urine-based HIV-1 test or completion of
an IPO; or April 23, 1996 (extended to October
31, 1996 in May 1996)............................ 1,000,000 1,000,000
---------- ----------
Notes payable -- current portion......... $3,258,456 $3,250,536
========== ==========
</TABLE>
In December 1995, the Company entered into a line of credit agreement with a
bank to borrow up to $2,000,000 at an interest rate of prime plus 3.5%. The
agreement requires the Company to maintain a balance of cash and cash
equivalents of not less than $700,000 as of the last day of each month during
the term of the agreement. In addition, borrowings under the line of credit
agreement are secured by the Company's assets. In March 1996, the Company
extended the due date of the line of credit such that the line of credit is due
July 5, 1996. In connection with the extension, the Company made a $500,000
principal payment in April 1996 and the available line of credit was reduced to
$1,500,000. Also, see note 9.
The note payable to Pepgen Corporation (Pepgen) relates to the Company's
September 1995 investment in Pepgen.
(4) LEASE COMMITMENTS
In 1993, and as amended in 1995, the Company obtained two equipment lease lines
of credit which aggregated $2,300,000 and were collateralized by the related
equipment acquired with the borrowings. The Company's ability to draw additional
funds on these lines of credit expired in December 1995. However, drawdowns
subsequent to the expiration have been allowed under one of these lease lines.
Lease payments under the lines of credit are based on the total delivered
equipment cost multiplied by a monthly rate factor of approximately
F-27
<PAGE> 81
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
MARCH 31, 1995 AND 1996
3.5% (approximate effective interest rate of 18% per annum). Through March 31,
1996, total borrowings under these equipment lease lines of credit were
approximately $1,340,000 to be repaid through 1998.
(5) STOCKHOLDERS' EQUITY
Automatic Conversion of Convertible Preferred Stock
Series B, C, D, and E convertible preferred stock are automatically convertible
into shares of common stock immediately upon the closing of the Company's IPO at
a per share price of not less than $7.50 and which results in aggregate cash
proceeds to the Company of at least $8,000,000.
Convertible Preferred Stock Warrants
On February 6, 1996, 18,000 warrants issued in conjunction with the Series D
convertible preferred stock offerings during 1993 and 1994 expired unexercised.
Warrants to purchase 2,800 shares of the Company's Series D convertible
preferred stock at an exercise price of $6.00 per share remain outstanding and
unexercised as of March 31, 1996. These warrants expire in 1997.
In conjunction with the Series E convertible preferred stock offerings in
November 1994 and in May, June and September 1995, the Company issued stock
warrants for the purchase of 1,079,100, 414,000, 430,046 and 41,000 shares,
respectively, of the Company's Series E convertible preferred stock. The
warrants issued in November 1994 are exercisable at $5.00 per share and expire
in November 1997. The warrants issued in May, June and September 1995 are
exercisable at $7.50 per share and expire upon the earlier of one year after the
date of issue, 60 days following receipt by the Company of FDA approval on its
urine-based HIV-1 test, or 60 days following the closing date of the Company's
IPO.
During the three months ended March 31, 1996, the Company received proceeds of
$1,000,000 and $300,000 from the exercise of 200,000 of the $5.00 warrants and
40,000 of the $7.50 warrants, respectively. As of March 31, 1996, there were
879,100 of the $5.00 warrants outstanding and 845,046 of the $7.50 warrants
outstanding.
(6) INCENTIVE STOCK PLAN
Under the Company's Incentive Stock Plan (the Stock Plan), 1,490,992 shares are
authorized for issuance and in December 1995, 1,250,000 additional shares of
common stock were authorized by the Company's Board of Directors for issuance
under the Stock Plan. Under the Stock Plan, employees or consultants may be
granted options that allow for the purchase of shares of the Company's common
stock.
The following table summarizes activity under the Stock Plan for the three
months ended March 31, 1996:
<TABLE>
<CAPTION>
OPTIONS EXERCISE PRICE
--------- --------------
<S> <C> <C>
Outstanding as of December 31, 1995................. 1,285,414 $ 0.20 - 5.00
Granted........................................... 7,400 1.00
Exercised......................................... (119) 1.00
Canceled.......................................... (134) 1.00
---------
Outstanding as of March 31, 1996.................... 1,292,561 0.20 - 5.00
========
Exercisable as of March 31, 1996.................... 630,780 0.20 - 5.00
========
</TABLE>
As of March 31, 1996, 1,321,907 shares of common stock were available for grant
under the Stock Plan.
F-28
<PAGE> 82
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
MARCH 31, 1995 AND 1996
(7) INVESTMENT IN PEPGEN CORPORATION
During 1995, the Company purchased a 49% equity interest in Pepgen for $1.0
million paid at closing, $1.0 million payable to Pepgen pursuant to a promissory
note (Note 3) and options to purchase the Company's common stock valued at
$500,000. The options were granted to Pepgen stockholders for the purchase of an
aggregate of 475,000 shares of the Company's common stock at a price of $7.50
per share, of which 100,000 of such shares were immediately exercisable upon
signing of the agreement and the remaining 375,000 shares become exercisable
upon attainment of certain milestones. The options expire in 2005. In addition,
Calypte has the right of first negotiation to purchase the remaining 51% of
Pepgen at fair market value, and the Company is entitled to elect two of the
seven Board members of Pepgen. Other than the payment of the $1.0 million dollar
promissory note, Calypte does not have any ongoing commitments to fund Pepgen.
The Company uses the equity method to account for its investment in Pepgen. Upon
completion of this transaction, the Company wrote-off its entire investment in
Pepgen as purchased in-process research and development costs.
(8) LEGAL MATTERS
The Company is subject to litigation from time to time in the ordinary course of
business. Although the amount of any liability with respect to such litigation
cannot be determined, in the opinion of management such liability, if any, will
not have a material adverse effect on the Company's financial condition or
results of operations.
(9) SUBSEQUENT EVENTS
Series E Stock Warrants
From March 31, 1996 to May 10, 1996, the Company received an additional $131,000
and $1,740,000 from the exercise of an additional 26,200 of the $5.00 warrants
and 231,976 of the $7.50 warrants, respectively. As of May 10, 1996, there were
852,900 of the $5.00 warrants and 613,070 of the $7.50 warrants outstanding.
Royalty and License Agreement
In April 1996, the Company signed an agreement with a corporation for the joint
development of a diagnostic product. As part of the agreement, the Company
granted a license to the corporation to make, use and sell the product. The
Company will receive royalty payments from the corporation based on a percentage
of net sales of the licensed product.
Authorization of Initial Public Offering
On May 16, 1996, the Board of Directors authorized the Company's management to
file a registration statement with the SEC permitting the Company to sell shares
of its common stock to the public.
Extension of Line of Credit
On July 5, 1996, the Company extended the due date of the line of credit with
the bank such that the line of credit is due August 5, 1996. In connection with
the extension, the Company made a $250,000 principal payment in July 1996 and
the available line of credit was reduced to $1,250.000.
F-29
<PAGE> 83
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
MARCH 31, 1995 AND 1996
Automatic Conversion of Convertible Preferred Stock
In July 1996, the Company's Certificate of Incorporation was amended to provide
that the Series B, C, D, and E convertible preferred stock are automatically
convertible into shares of common stock immediately upon the closing of the
Company's initial public offering. The previous provisions which required a
minimum per share price of $7.50 and minimum aggregate cash proceeds to the
Company of $8,000,000 were eliminated from the Company's Certificate of
Incorporation.
F-30
<PAGE> 84
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
PRO FORMA FINANCIAL INFORMATION
During 1995, the Company acquired a 49% interest in Pepgen Corporation (Pepgen)
for $2.5 million. The $2.5 million was comprised of $1.0 million cash, a $1.0
million note payable and options granted to Pepgen shareholders to purchase
475,000 shares of the Company's common stock valued at $500,000. Other than the
payment of the $1.0 million note payable, Calypte does not have any ongoing
commitments to fund Pepgen. The Company uses the equity method to account for
its investment in Pepgen. Upon completion of the investment, the Company wrote
off its entire investment in Pepgen as purchased in-process research and
development costs.
The following Unaudited Pro Forma Consolidated Condensed Statement of Operations
gives the effect to the investment as if it had occurred on January 1, 1995. No
other unaudited pro forma consolidated condensed financial information is
presented since the transaction is already included in the audited Consolidated
Balance Sheet of the Company as of December 31, 1995 and in the unaudited
Consolidated Condensed Statement of Operations of the Company for the
three-month period ended March 31, 1996.
The Unaudited Pro Forma Consolidated Condensed Statement of Operations does not
purport to present the results of operations of Calypte Biomedical Corporation
had the transaction assumed therein occurred on the date specified, nor is it
indicative of the results of operations that may be achieved in the future.
The Unaudited Pro Forma Consolidated Condensed Statement of Operations is based
on certain assumptions and the adjustment described in Note(1) to the Unaudited
Pro Forma Consolidated Condensed Statement of Operations included herein and
should be read in conjunction with Management's Discussion and Analysis of
Financial Conditions and Results of Operations and the Consolidated Financial
Statements of the Company and the related Notes thereto and the Financial
Statements of Pepgen and the related Notes thereto included herein.
F-31
<PAGE> 85
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
CALYPTE PRO FORMA CALYPTE
HISTORICAL ADJUSTMENT PRO FORMA
----------- ---------- -----------
<S> <C> <C> <C>
Revenue earned under research and development
contracts, substantially from related parties..... $ -- $ -- $ --
Operating expenses:
Research and development.......................... 5,017,545 -- 5,017,545
Purchased in-process research and development
costs.......................................... 2,500,000 -- 2,500,000
Selling, general and administrative............... 2,862,049 -- 2,862,049
------------- -------- -------------
Loss from operations...................... (10,379,594) -- (10,379,594)
Interest income..................................... 194,944 -- 194,944
Interest expense.................................... (116,842) (30,000)(1) (146,842)
Other income........................................ 11,707 -- 11,707
------------- -------- -------------
Loss before income taxes.................. (10,289,785) (30,000) (10,319,785)
Income taxes........................................ (1,600) -- (1,600)
------------- -------- -------------
Net loss.................................. (10,291,385) (30,000) (10,321,385)
Less dividend on mandatorily redeemable Series A
preferred stock................................... (120,000) -- (120,000)
------------- -------- -------------
Net loss attributable to common stockholders........ $(10,411,385) $(30,000) $(10,441,385)
============= ======== =============
Net loss per share attributable to common
stockholders...................................... $ (1.50) $ (1.51)
============= =============
Weighted average shares used to compute net loss per
share attributable to common stockholders......... 6,934,334 6,934,334
============= =============
</TABLE>
- ---------------
(1) For purposes of the accompanying unaudited pro forma financial statement,
additional interest expense has been provided on the $1 million Pepgen note
payable at the rate of 4% for the period January 1 through September 30,
1995, the assumed transaction date for purposes of the pro forma financial
statement.
F-32
<PAGE> 86
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Pepgen Corporation:
We have audited the consolidated balance sheets of Pepgen Corporation and
subsidiary (a development stage enterprise) (the Company) as of December 31,
1993 and 1994, and the related consolidated statements of operations,
shareholders' equity (deficiency) and cash flows for the period from July 8,
1992 (inception) through December 31, 1992, for each of the years in the
two-year period ended December 31, 1994, and for the period from July 8, 1992
(inception) through December 31, 1994. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Pepgen Corporation
and subsidiary (a development stage enterprise) as of December 31, 1993 and
1994, and the results of their operations and their cash flows for the period
from July 8, 1992 (inception) through December 31, 1992, for each of the years
in the two-year period ended December 31, 1994, and for the period from July 8,
1992 (inception) through December 31, 1994, in conformity with generally
accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in note 1 to the
consolidated financial statements, the Company's losses from operations and
accumulated deficit during the development stage raise substantial doubt about
the Company's ability to continue as a going concern. Management's plans in
regard to these matters are also described in note 1 to the consolidated
financial statements. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
KPMG Peat Marwick LLP
San Francisco, California
November 15, 1995
F-33
<PAGE> 87
PEPGEN CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1993 1994
--------- ---------
<S> <C> <C>
Current assets:
Cash............................................................... $ 11,691 $ 1,905
Other current assets............................................... 12,794 1,711
--------- ---------
Total current assets....................................... 24,485 3,616
Intangible assets, net of accumulated amortization of $1,573 in 1993
and $17,024 in 1994................................................ 105,716 113,758
Organization costs, net of accumulated amortization of $6,576 in 1993
and $12,822 in 1994................................................ 24,648 18,402
--------- ---------
$ 154,849 $ 135,776
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable................................................... $ 28,552 $ 24,816
Accrued salary..................................................... 8,030 105,000
Accrued consulting fees............................................ 3,000 24,700
Convertible notes payable to shareholder........................... -- 80,000
--------- ---------
Total current liabilities.................................. 39,582 234,516
Convertible notes payable to shareholder............................. 55,000 --
--------- ---------
Total liabilities.......................................... 94,582 234,516
--------- ---------
Commitments and subsequent events
Shareholders' equity (deficiency):
Convertible preferred stock, no par value, 20,000,000 shares
authorized, 763,300 shares issued and outstanding in 1993 and
1994, aggregate liquidation value of $381,650................... 381,650 381,650
Common stock, no par value, 40,000,000 shares authorized, 3,960,000
shares issued and outstanding in 1993 and 1994.................. 4,500 4,500
Deficit accumulated during the development stage................... (325,883) (484,890)
--------- ---------
Total shareholders' equity (deficiency).................... 60,267 (98,740)
--------- ---------
$ 154,849 $ 135,776
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-34
<PAGE> 88
PEPGEN CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
JULY 8, 1992 JULY 8, 1992
(INCEPTION) YEARS ENDED DECEMBER (INCEPTION)
THROUGH 31, THROUGH
DECEMBER 31, ----------------------- DECEMBER 31,
1992 1993 1994 1994
------------ --------- --------- ------------
<S> <C> <C> <C> <C>
Revenue earned under research,
development and licensing agreements... $ -- $ -- $ 100,000 $ 100,000
Operating expenses:
Research and development............... 9,000 110,375 91,728 211,103
General and administrative............. 62,434 142,474 166,479 371,387
--------- --------- ---------
Total operating expenses....... 71,434 252,849 258,407 582,490
Loss before income taxes....... (71,434) (252,849) (158,207) (482,490)
Provision for income taxes............... 800 800 800 2,400
--------- --------- ---------
Net loss....................... $(72,234) $(253,649) $(159,007) $ (484,890)
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-35
<PAGE> 89
PEPGEN CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
PERIOD FROM JULY 8, 1992 (INCEPTION) THROUGH DECEMBER 31, 1994
<TABLE>
<CAPTION>
DEFICIT
CONVERTIBLE ACCUMULATED
PREFERRED STOCK COMMON STOCK DURING THE
------------------ ------------------ DEVELOPMENT
SHARES AMOUNT SHARES AMOUNT STAGE TOTAL
------- -------- --------- ------ ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Net loss for the period from July 8,
1992 (inception) through December
31, 1992.......................... -- $ -- -- $ -- $ (72,234) $(72,234)
------- -------- --------- ------ -------- --------
Balances as of December 31, 1992.... -- -- -- -- (72,234) (72,234)
Issuance of common shares for
cash.............................. -- -- 3,900,000 3,900 -- 3,900
Issuance of convertible preferred
shares for cash................... 700,000 350,000 -- -- -- 350,000
Issuance of common shares on
conversion of note payable and
accrued interest.................. -- -- 60,000 600 -- 600
Issuance of convertible preferred
shares on conversion of note
payable and accrued interest...... 63,300 31,650 -- -- -- 31,650
Net loss............................ -- -- -- -- (253,649) (253,649)
------- -------- --------- ------ -------- --------
Balances as of December 31, 1993.... 763,300 381,650 3,960,000 4,500 (325,883) 60,267
Net loss............................ -- -- -- -- (159,007) (159,007)
------- -------- --------- ------ -------- --------
Balances as of December 31, 1994.... 763,300 $381,650 3,960,000 $4,500 $(484,890) $(98,740)
======= ======== ========= ====== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-36
<PAGE> 90
PEPGEN CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
JULY 8, 1992 JULY 8, 1992
(INCEPTION) (INCEPTION)
THROUGH YEARS ENDED DECEMBER 31 THROUGH
DECEMBER 31, ----------------------- DECEMBER 31,
1992 1993 1994 1994
------------ --------- --------- ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................. $(72,234) $(253,649) $(159,007) $ (484,890)
Adjustments to reconcile net loss to net
cash used in operating activities:
Amortization........................... 2,582 7,817 21,697 32,096
Purchased research and development
cost................................. -- 49,315 -- 49,315
(Increase) decrease in other current
assets............................... -- (12,794) 11,083 (1,711)
Increase in intangible assets.......... (50,453) (56,836) (23,493) (130,782)
Increase in organization costs......... (3,989) (27,235) -- (31,224)
Increase (decrease) in accounts payable
and accrued liabilities.............. 63,568 (23,986) 114,934 154,516
--------- ---------- ---------- ----------
Net cash used in operating
activities...................... (60,526) (317,368) (34,786) (412,680)
--------- ---------- ---------- ----------
Cash flows used in investing activities --
loans to and acquisition of PepTech....... -- (49,315) -- (49,315)
--------- ---------- ---------- ----------
Cash flows from financing activities:
Proceeds from issuance of notes payable to
shareholder............................ 55,000 55,000 80,000 190,000
Principal repayments on notes payable to
shareholder............................ -- (25,000) (55,000) (80,000)
Proceeds from issuance of common stock.... -- 3,900 -- 3,900
Proceeds from issuance of convertible
preferred stock........................ -- 350,000 -- 350,000
Change in bank overdraft.................. 5,526 (5,526) -- --
--------- ---------- ---------- ----------
Net cash provided by financing activities... 60,526 378,374 25,000 463,900
--------- ---------- ---------- ----------
Net (decrease) increase in cash............. -- 11,691 (9,768) 1,905
Cash at beginning of period................. -- -- 11,691 --
--------- ---------- ---------- ----------
Cash at end of period....................... $ -- $ 11,691 $ 1,905 $ 1,905
========= ========== ========== ==========
Supplemental disclosure of cash flow
information:
Cash paid during the year for income
taxes.................................. $ 800 $ 800 $ 800 $ 2,400
Supplemental disclosure of noncash financing
activities:
Conversion of note payable and accrued
interest to shareholder to common and
convertible preferred stock............ -- 32,250 -- 32,250
</TABLE>
See accompanying notes to consolidated financial statements.
F-37
<PAGE> 91
PEPGEN CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993 AND 1994
(1) THE COMPANY
Pepgen Corporation (the Company) was incorporated in California on July 8, 1992
as a biopharmaceutical company and is currently conducting research.
The Company is in the development stage and has experienced losses since
inception; the Company's accumulated deficit during the development stage, (July
8, 1992 (inception) through December 31, 1994) was $484,890, including a loss of
$159,007 for the year ended December 31, 1994. Cash flows used in operations
were $34,786 in 1994. The Company's ability to continue as a going concern is
dependent upon management's ability to raise additional equity capital or obtain
debt financing to fund future operations. Management is actively seeking
additional financing and, during 1995, entered into an agreement with another
development stage enterprise to obtain such financing (Note 9).
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern and, accordingly, do not give
effect to adjustments that would be necessary should the Company be required to
realize its assets and satisfy its liabilities in other than the normal course
of business.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary, PepTech, Inc. (PepTech). All intercompany
transactions and balances have been eliminated in consolidation.
Organization Costs
Organization costs are stated at cost and are being amortized over five years
using the straight-line method.
Research and Development
Research and development costs are expensed as incurred (Note 3).
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted rates expected to
apply to taxable income in years in which those temporary differences are
expected to be recovered or settled. Valuation allowances are established when
it is more likely than not that deferred tax assets will not be realized.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities, at the date of financial statements, and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
F-38
<PAGE> 92
PEPGEN CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993 AND 1994
Intangible Assets
Intangible assets consist of license fees and patent support costs. Such fees
and costs are capitalized and amortized over their estimated useful life of ten
years using the straight-line method. Amortization commences once final approval
of the related patent has been obtained. Such fees and costs are charged to
operations when it is determined that the patent will not be obtained or when
the Company determines that it will not pursue research or development of the
subject technology.
(3) ACQUISITION OF PEPTECH
On July 16, 1993, the Company acquired all of the outstanding capital stock of
PepTech for $25,000 cash, the cancellation of notes receivable from PepTech
totaling $20,000, and other expenses of $4,315. The acquisition was accounted
for as a purchase.
The sole shareholder and employee of PepTech is the principal researcher with
respect to certain technology and compounds pursuant to which the Company has
obtained license rights. PepTech has obtained a research grant, and has applied
for additional grants related to such technology and compounds. At the date of
acquisition, PepTech had no tangible assets or liabilities. Accordingly, the
entire purchase price was charged to operations at acquisition as purchased
research and development expense.
(4) NOTES PAYABLE TO SHAREHOLDER
Notes payable to shareholder (President) consist of the following at December
31:
<TABLE>
<CAPTION>
1993 1994
------- --------
<S> <C> <C>
Promissory notes to shareholder, uncollateralized, due
December 31, 1995..................................... $55,000 $ 80,000
Less current portion.................................... -- (80,000)
-------- -------
Long term portion....................................... $55,000 $ --
======== =======
</TABLE>
During 1994, the Company issued convertible promissory notes totaling $80,000 to
a shareholder and officer, payable on December 31, 1995. Of the total, $60,000
of these notes bear interest at 10% per annum while $20,000 are non-interest
bearing. These notes, including accrued interest, are convertible at the option
of the holder, in whole or in part, into shares of fully-paid and nonassessable
convertible preferred stock of the Company upon issuance of preferred stock by
the Company for proceeds of not less than $1,000,000 (the New Preferred Stock),
at a rate per share equal to the then fair market value. Shares issued upon
conversion would have the same rights, preferences and privileges, and be
subject to all of the same restrictions, as the New Preferred Stock. In
connection with the issuance of the convertible promissory notes, the noteholder
obtained an option to purchase up to 160,000 shares of common stock for the
price of $.01 per share at the time of issuance of the New Preferred Stock. The
Company must provide the holder notice of at least 20 days prior to the issuance
of the New Preferred Stock. Should the noteholder not give the Company notice of
his election to convert, the conversion feature and common stock option will
expire on the earlier of the issuance of New Preferred Stock or December 31,
1995.
Subsequent to December 31, 1994 the Company issued to the President and another
shareholder additional convertible promissory notes in the amount of $127,000.
These notes have the same terms as those issued in 1994, including the option to
purchase up to 254,000 shares of common stock at a price of $.01 per share.
Also, during 1995 the $20,000 non-interest bearing notes existing at December
31, 1994 and $100,000 of the notes issued in 1995 were repaid with all related
conversion and stock option features (for the purchase of 240,000
F-39
<PAGE> 93
PEPGEN CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993 AND 1994
shares) expiring unexercised. The remaining balance of notes payable, including
accrued interest, all to the President, were converted into a new note payable
on November 15, 1995 which bears interest at 6.25% per annum. All conversion and
stock option features related to the notes expired unexercised.
During 1994, the Company issued convertible promissory notes totaling $55,000 to
a shareholder and officer with the same terms as the notes issued in 1993. The
1993 notes were prepaid in 1994 and the conversion feature and related option
expired.
(5) SHAREHOLDERS' EQUITY (DEFICIENCY)
The Company has two classes of stock: convertible preferred stock and common
stock. As of December 31, 1994, preferred stock consists of only Series A, for
which the Company has designated 8,000,000 of the 20,000,000 authorized shares.
The preferences, privileges, and restrictions granted or imposed on the
preferred stock are:
Dividend Rights
Holders of Series A preferred stock are entitled to dividends at an
annual rate of 8% per annum of the original $.50 per share price
(Original Purchase Price), if declared, prior to the payment of any
dividend on common stock. The right to such dividends is not
cumulative. No shares of common stock shall receive any dividend at a
rate which is greater than the rate at which the dividends are
simultaneously paid in respect of the preferred stock. No dividends
have been declared through December 31, 1994.
Conversion Rights
Each share of Series A preferred stock is, at any time, at the option
of the holder, convertible into shares of fully-paid and nonassessable
common stock. Each share of preferred stock is convertible into the
number of shares of common stock that results from dividing the
conversion price of preferred stock in effect at the time of
conversion into the Original Purchase Price for each share of
preferred stock being converted. The conversion price is subject to
adjustment from time to time.
Automatic Conversion
Upon either the voluntary conversion of at least 70% of the originally
issued shares of Series A preferred stock or the completion of a
qualified initial public offering in which the Company receives
proceeds of at least $5,000,000 at a price of at least $3.00 per
share, subject to adjustment, each share of preferred stock shall
automatically be converted into shares of common stock at the
conversion price for preferred stock then in effect.
Liquidation Rights
In the event of any liquidation, dissolution, or winding up of the
Company, the holders of Series A preferred stock shall be entitled to
an amount equal to the Original Purchase Price per share, plus all
declared but unpaid dividends, if any. If insufficient funds are
available to pay the full preference amount, then the amount available
shall be distributed ratably among the holders of the Series A
preferred stock. After payment of the liquidation preference to all
preferred shareholders, remaining assets of the Company shall be
distributed ratably to all common shareholders.
F-40
<PAGE> 94
PEPGEN CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993 AND 1994
Voting Rights
Holders of Series A preferred stock are entitled to the number of
votes per share that would be equivalent to the number of shares of
common stock into which the shares of Series A preferred stock is
convertible.
Stock Options
During 1993, the Board of Directors of the Company approved the 1993 Flexible
Stock Incentive Plan (the Plan). Under the Plan, the Company may grant
nonqualified and incentive stock options to directors, officers, employees and
consultants of the Company to acquire up to 2,300,000 common shares of the
Company, which the Company has reserved. The exercise price of the options shall
equal the fair market value of the stock at the date of grant. The term of any
stock option may not exceed ten years from the date of grant. All options are
nonassignable.
In 1994, the Company granted to its President and founding shareholder options
to purchase of 100,000 shares of common stock at $.001 per share, the common
stock's then fair market value. Subsequent to December 31, 1994, the Company
granted additional options to its President and founding shareholder to purchase
another 100,000 common shares of stock at $.001 per share, the then fair market
value of the common stock. During 1995 all of these outstanding options were
exercised.
In 1995 the Board of Directors of the Company approved the 1995 Stock Option
Plan (the 1995 Plan). Under the 1995 Plan, the Company may grant nonqualified
and incentive stock options to directors, officers, employees and consultants of
the Company to acquire up to 30% of the fully diluted number of common shares of
the Company. The exercise price of the option shall equal the fair market value
of the stock at the date of grant. The term of any stock option may not exceed
ten years from the date of grant. All options are nonassignable.
(6) RESEARCH, DEVELOPMENT AND LICENSING AGREEMENTS
In 1992, the Company entered into a licensing agreement with a university to
obtain the right to utilize certain patents in exchange for a $57,000 cash
payment, future milestone payments of up to $250,000 and future royalty payments
or sales on products covered by the technology under license.
In 1992, the Company entered into an agreement with a university to perform
certain research and development work. Under this agreement, the Company paid
eight quarterly cash installments of $9,000 over the research period, which
expired in October 1994.
In 1993, the Company entered into an agreement with an independent research
group to perform certain research and development work. Under this agreement,
the Company paid quarterly cash installments of $8,000 over the research period,
which expired in May 1995. As of December 31, 1994, $13,300 was accrued under
this agreement.
During 1993, the Company entered into a licensing agreement with an independent
research group to obtain the right to utilize certain patents and proprietary
rights in exchange for a $15,000 cash payment, future milestone payments of up
to $125,000 and future royalty payments on sales of products covered by the
technology under license.
During 1994, the Company entered into an agreement with a pharmaceutical company
whereby consideration, totaling $100,000, was received by the Company in
exchange for the rights to evaluate the Company's material over a defined period
of time which is dependent on the achievement of certain technical milestones
and to enter into a worldwide, exclusive licensing agreement with the Company
for the acquisition of the related
F-41
<PAGE> 95
PEPGEN CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993 AND 1994
patent, should it be obtained. The agreement was extended for an additional
month for an additional $25,000 in 1995.
In 1995, the Company entered into a research and development agreement with an
international company for the right to evaluate certain of the Company's
research, and an exclusive right to negotiate a license for patent rights in
certain countries. The Company received a $400,000 nonrefundable payment, and
will receive another $600,000 over the term of the agreement which expires in
1996. In connection with the agreement, the Company paid an $80,000 finders fee
to another party.
(7) COMMITMENTS
Consulting Agreement
In August 1993, the Company entered into a consulting agreement with one of its
founding shareholders. This agreement was terminated in August 1994. The total
amount earned and accrued as of December 31, 1994 was $24,700.
Employment Agreement
In July 1992, the Company entered into a five-year employment agreement with its
President, Chief Executive Officer and one of its founding shareholders. The
total amount earned in 1994 and 1993 was $108,000 and $95,000, respectively, of
which $116,000 was accrued at December 31, 1994.
(8) INCOME TAXES
The provision for income taxes for all periods presented in the accompanying
consolidated statements of operations represent minimum California franchise
taxes.
The significant tax effected components of temporary differences and
carryforwards of December 31, 1993 and 1994 are as follows:
<TABLE>
<CAPTION>
1993 1994
--------- ---------
<S> <C> <C>
Deferred tax assets:
Capitalized research and development............... $ 10,300 $ 17,000
Accrued expenses................................... 15,800 62,000
Net operating loss carryforwards................... 84,200 94,000
Depreciation and amortization...................... 38,000 40,800
Other.............................................. 2,800 8,000
--------- --------
Total deferred tax assets.................. 151,100 221,800
Valuation allowance................................ (151,100) (221,800)
--------- --------
Net deferred tax asset..................... $ -- $ --
========= ========
</TABLE>
The Company has established a valuation allowance to offset all deferred tax
assets at December 31, 1993 and 1994 as it is considered more likely than not
that the Company will not receive future benefit.
The Company had a net operating loss carryforward as of December 31, 1994
available to offset future taxable income for federal tax purposes of
approximately $268,200, which expires from 2002 to 2009. The Company's
utilization of its net operating loss and credit carryforwards to offset taxable
income will be subject to annual limitations pursuant to Section 382 of the
Internal Revenue Code due to cumulative changes in stock ownership.
F-42
<PAGE> 96
PEPGEN CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993 AND 1994
(9) SUBSEQUENT EVENT
Subsequent to December 31, 1994, the Company and its shareholders entered into a
Master Stock Purchase Agreement (the Agreement) with Calypte Biomedical
Corporation, a development stage enterprise (Calypte), that provided for the
issuance of 3,041,406 of new shares of convertible preferred stock to Calypte in
exchange for cash of $45,875 and a note receivable in the amount of $1,000,000.
The Agreement also provided for the acquisition by Calypte of all 763,300
outstanding shares of the Company's convertible preferred stock from the
existing preferred shareholders for $954,125 in cash and for the issuance of
options for the purchase of Calypte common stock to the existing common
shareholders of the Company. After completion of the above transaction, Calypte
owned 49% of the Company's outstanding stock.
The convertible preferred stock acquired by Calypte is convertible into common
stock of the Company, at the option of the holder, at any time, at an initial
ratio of one share of common stock for one share of convertible preferred stock
and carries other conversion, voting, and dividend rights similar to those held
by the previous convertible preferred stock shareholders. The convertible
preferred stock has a liquidation preference aggregating $2,000,000 in the event
of an involuntary or voluntary liquidation.
Concurrent with the above transaction, the Company issued warrants to Calypte
that provide Calypte with the right to purchase up to 5,435,294 shares of the
Company's convertible preferred stock at a price of $0.01 per share. The
warrants may be exercised only to the extent that currently outstanding or new
options issued under the Company's 1995 Stock Option Plan are exercised for the
purchase of the Company's common stock or as a result of the Company granting
stock awards to any management employee of the Company for no consideration at a
ratio of 99.5% of the newly issued common shares.
The $1,000,000 note receivable from Calypte bears interest at 4% per annum and
is payable at the earlier of (a) six months from the date of issuance or (b) 60
days following either Calypte receiving FDA approval on its HIV-1 urine testing
product or the closing of the sale of Calypte's common stock in a public
offering.
Other terms of the Agreement provide Calypte with certain rights with regard to
the appointment of directors and the right of first negotiation to purchase the
remaining 51% of the Company at fair market value.
Also, concurrent with the Agreement, the Company entered into a separate
agreement that provides for payments to the former convertible preferred
shareholders and to the current common shareholders upon the receipt of
licensing fees from certain prospects identified as of the date of the
Agreement. The aggregate obligation to these current and former shareholders
consists of 20% of the net licensing fees, as defined, received prior to October
1996 from any of the prospects identified in the Agreement.
F-43
<PAGE> 97
PEPGEN CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
DECEMBER
31, 1995
-----------
<S> <C>
Current assets -- Cash and cash equivalents................................... $ 193,320
Intangible assets, net of accumulated amortization of $20,808................. 209,778
Organization costs, net of accumulated amortization of $19,067................ 12,157
---------
$ 415,255
=========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable and accrued liabilities.................................... $ 210,565
Note payable to shareholder................................................. 98,523
---------
Total liabilities................................................... 309,088
---------
Shareholders' equity:
Convertible preferred stock, no par value, 20,000,000 shares authorized,
3,804,706 shares issued and outstanding.................................. 1,427,525
Common stock, no par value, 40,000,000 shares authorized, 4,160,000 shares
issued and outstanding................................................... 4,700
Amounts due from shareholder................................................ (1,011,667)
Deficit accumulated during the development stage............................ (314,391)
---------
Total shareholders' equity.......................................... 106,167
---------
$ 415,255
=========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-44
<PAGE> 98
PEPGEN CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
PERIOD FROM
JULY 8, 1992
(INCEPTION)
YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31,
1995 1995
------------ ------------
<S> <C> <C>
Revenue earned under research, development and licensing
agreements and grants....................................... $ 481,385 $ 581,385
Operating expenses:
Research and development.................................... 36,868 247,971
General and administrative.................................. 256,225 627,612
--------- ---------
Total operating expenses............................ 293,093 875,583
--------- ---------
Income (loss) from operations....................... 188,292 (294,198)
Other income (expense):
Interest income............................................. 12,598 12,598
Interest expense............................................ (17,351) (17,351)
--------- ---------
Income (loss) before income taxes................... 183,539 (298,951)
Provision for income taxes.................................... 13,040 15,440
--------- ---------
Net income (loss)................................... $ 170,499 $ (314,391)
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-45
<PAGE> 99
PEPGEN CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
(UNAUDITED)
PERIOD FROM JULY 8, 1992 (INCEPTION) THROUGH DECEMBER 31, 1995
<TABLE>
<CAPTION>
DEFICIT
CONVERTIBLE ACCUMULATED
PREFERRED STOCK COMMON STOCK AMOUNTS DUE DURING THE
---------------------- ------------------ FROM DEVELOPMENT
SHARES AMOUNT SHARES AMOUNT SHAREHOLDER STAGE TOTAL
--------- ---------- --------- ------ ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Net loss for the period from July 8,
1992 (inception) through December 31,
1992................................. -- $ -- -- $ -- $ -- $ (72,234) $ (72,234)
-------
-----
--------- ---------- ---------- ---------- -------- --------
Balances as of December 31, 1992....... -- -- -- -- -- (72,234) (72,234)
Issuance of common shares for cash..... -- -- 3,900,000 $3,900 -- -- 3,900
Issuance of convertible preferred
shares for cash...................... 700,000 350,000 -- -- -- -- 350,000
Issuance of common shares on conversion
of note payable and accrued
interest............................. -- -- 60,000 600 -- -- 600
Issuance of convertible preferred
shares on conversion of note payable
and accrued interest................. 63,300 31,650 -- -- -- -- 31,650
Net loss............................... -- -- -- -- -- (253,649) (253,649)
-------
-----
--------- ---------- ---------- ---------- -------- --------
Balances as of December 31, 1993....... 763,300 381,650 3,960,000 4,500 -- (325,883) 60,267
Net loss............................... -- -- -- -- -- (159,007) (159,007)
-------
-----
--------- ---------- ---------- ---------- -------- --------
Balances as of December 31, 1994....... 763,300 381,650 3,960,000 4,500 -- (484,890) (98,740)
Exercise of stock options.............. -- -- 200,000 200 -- -- 200
Issuance of convertible preferred
shares for cash and promissory
note................................. 3,041,406 1,045,875 -- -- (1,000,000 ) -- 45,875
Interest earned on promissory note..... -- -- -- -- (11,667 ) -- (11,667)
Net income............................. -- -- -- -- -- (170,499) (170,499)
-------
-----
--------- ---------- ---------- ---------- -------- --------
Balances as of December 31, 1995....... 3,804,706 $1,427,525 4,160,000 $4,700 $(1,011,667) $(314,391) $ 106,167
========= ========== ========== ============ ========== ======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-46
<PAGE> 100
PEPGEN CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
PERIOD FROM
JULY 8, 1992
(INCEPTION)
YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31,
1995 1995
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)................................................ $ 170,499 $ (314,391)
--------- ---------
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Noncash interest on shareholder note payable.................. 11,523 11,523
Amortization.................................................. 10,029 39,875
Purchased research and development cost....................... -- 49,315
(Increase) decrease in other current assets................... (9,956) (11,667)
Increase in intangible assets................................. (99,805) (230,587)
Increase in organization costs................................ -- (31,225)
Increase in accounts payable and accrued liabilities.......... 56,050 212,817
--------- ---------
Net cash provided by (used in) operating activities......... 138,340 (274,340)
--------- ---------
Cash used in investing activities -- acquisition of PepTech:....... -- (49,315)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of notes payable to shareholders.......... 127,000 317,000
Principal repayments of notes payable to shareholders............ (120,000) (200,000)
Proceeds from exercise of stock options.......................... 200 200
Proceeds from issuance of common stock........................... -- 3,900
Proceeds from issuance of convertible preferred stock............ 45,875 395,875
--------- ---------
Net cash provided by financing activities..................... 53,075 516,975
--------- ---------
Net increase in cash.......................................... 191,415 193,320
Cash and cash equivalents, beginning of period..................... 1,905 --
--------- ---------
Cash and cash equivalents, end of period........................... $ 193,320 $ 193,320
========= =========
Supplemental disclosure of noncash financing activities:
Promissory note due from shareholder received in exchange for
preferred stock............................................... $1,000,000 $1,000,000
Interest earned on promissory note due from shareholder.......... 11,667 11,667
Interest expense on shareholder note payable converted to new
shareholder note payable...................................... 11,523 11,523
Refinance of shareholder notes payable........................... 87,000 87,000
Conversion of note payable and accrued interest to common and
preferred stock............................................... -- 32,250
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Income taxes.................................................. 800 3,200
Interest...................................................... 5,828 5,828
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-47
<PAGE> 101
PEPGEN CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
DECEMBER 31, 1995
(1) THE COMPANY
Pepgen Corporation (the "Company") was incorporated in California on July 8,
1992 as a biopharmaceutical company.
The Company is in the development stage, has a working capital deficit and has
an accumulated deficit during the development stage of $314,391 at December 31,
1995. Moreover, the recoverability of the carrying value of the Company's assets
is entirely dependent upon the Company's ability to develop products related to
its patents, obtain regulatory approvals and successfully market its products.
Revenues to date have been primarily from research and development agreements in
an effort to develop the Company's products. The Company's planned principal
operations have not yet commenced. The Company is actively seeking additional
funding; however, the outcome of these activities is uncertain. These matters
raise a substantial doubt about the Company's ability to continue as a going
concern.
The accompanying consolidated financial statements have been prepared on a basis
of accounting principles applicable to a going concern and, accordingly, they do
not give effect to adjustments that would be necessary should the Company be
required to realize its assets and satisfy its liabilities in other than the
normal course of business.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary, PepTech, Inc. (PepTech). All intercompany
transactions have been eliminated in consolidation.
Intangible Assets
Intangible assets consist of license fees and patent support costs. Such fees
and costs are capitalized and amortized over their estimated useful life of ten
years using the straight-line method. Amortization commences once final approval
of the related patent has been obtained. Such fees and costs are charged to
operations when it is determined that the patent will not be obtained or when
the Company determines that it will not pursue research or development of the
subject technology.
Organization Costs
Organization costs are stated at cost and are being amortized over their
estimated useful lives of five years using the straight-line method.
Research and Development
Research and development costs are expensed as incurred.
Income Taxes
Deferred income taxes are recognized for temporary differences between financial
statement and income tax bases of assets and liabilities using enacted rates in
effect for the years in which the differences are expected to reverse. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amount expected to be realized. The provision for income taxes represents the
tax payable for the period and the change during the period in deferred tax
assets and liabilities.
F-48
<PAGE> 102
PEPGEN CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
DECEMBER 31, 1995
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, and amounts on deposit with
financial institutions that are readily convertible into cash with an acquired
maturity date of 90 days or less.
Fair Value of Financial Instruments
Financial assets and liabilities have carrying values which approximate their
fair values for all periods presented.
(3) ACQUISITION OF PEPTECH
On July 16, 1993, the Company acquired all of the outstanding capital stock of
PepTech for $25,000 cash, the cancellation of notes receivable from PepTech
totaling $20,000, and other expenses of $4,315.
The sole shareholder and employee of PepTech is the principal researcher with
respect to certain technology and compounds pursuant to which the Company has
obtained license rights. Moreover, PepTech has obtained a research grant, and
has applied for additional grants, related to such technology and compounds. At
the date of acquisition, PepTech had no tangible assets or liabilities.
Accordingly, the entire purchase price was charged to operations as purchased
research and development expenses.
(4) NOTE PAYABLE TO SHAREHOLDER
Note payable to shareholder consists of the following at December 31, 1995:
<TABLE>
<S> <C>
Promissory note to shareholder, uncollateralized, interest
payable at 6.25% per annum, no stated repayment date.......... $ 98,523
Less current portion............................................ (98,523)
--------
$ --
========
</TABLE>
(5) EQUITY
In 1995, the Company entered into a Master Stock Purchase Agreement (the
"Agreement") with a biomedical firm whereby, upon the completion of the events
contemplated by the Agreement, as described below, the biomedical firm would
acquire 49% of the fully-diluted common stock of the Company.
Under the terms of the Agreement, the biomedical firm purchased all of the
outstanding preferred shares from the existing shareholders for cash and certain
options to purchase common stock in the biomedical firm, and an additional
3,041,406 preferred shares from the Company for total consideration to the
Company of $1,045,875. Cash of $45,875 was paid at the closing and a promissory
note in the amount of $1,000,000 was issued. This promissory note bears interest
at 4% per annum and is payable at the earlier of: (a) October 1996 or (b) sixty
days following either FDA approval of the biomedical firm's major product or
completion of an initial public offering of the biomedical firm's common stock.
The Company also issued warrants to purchase an additional 5,435,294 shares of
the Company's preferred stock at $.001 per share. These warrants may be
exercised only to the extent that currently outstanding or new options issued
under the Company's 1995 Stock Option Plan are exercised for the purchase of the
Company's common stock or as a result of the Company granting stock awards to
any management employee of the Company for no consideration at a ratio of 99.5%
of the newly issued common shares.
F-49
<PAGE> 103
PEPGEN CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
DECEMBER 31, 1995
If payment of the promissory note is not made in accordance with its terms, the
Company may repurchase or redeem the 3,041,406 shares of preferred stock for
$45,875, and the warrants to purchase the additional shares of preferred stock
shall expire.
Preferred Stock
The Company has authorized 20,000,000 shares of preferred stock of which
10,000,000 shares are designated as Series A Preferred Stock ("Series A
preferred"). The other 10,000,000 shares are currently undesignated.
Holders of Series A preferred stock are entitled to annual dividends at the rate
of 8%, payable quarterly. The dividends are not cumulative and are only payable
if declared by the Company's Board of Directors. Interest shall not be paid on
any undeclared or unpaid dividends. No dividends may be paid to common stock
shareholders until full annual dividends are declared and paid to the preferred
shareholders. No dividends have been declared as of December 31, 1995.
In the event of any liquidation, dissolution or wind up of the Company, either
voluntary or involuntary, the Series A preferred holders are entitled to an
aggregate liquidation value of $2,000,000.
The Series A preferred shares are convertible, at the holder's option, at any
time into an equal number of shares of the Company's common stock. The preferred
shares will automatically convert into common shares upon the earlier of: (a)
the closing of a firm commitment initial public offering with a price per common
share of no less than $3.00 and aggregate gross proceeds of no less than
$5,000,000, or (b) the voluntary conversion into common shares of at least 70%
of the issued and outstanding Series A preferred shares.
Series A preferred shareholders have voting rights in their equivalent number of
common shares, as if converted. Under the terms of the Agreement, the biomedical
firm is entitled to 49% of the voting interest in the Company at all times prior
to the conversion of Series A preferred shares to common shares.
(6) STOCK OPTIONS
During 1995, the Company approved the 1995 Incentive and Non-Statutory Stock
Option Plan (the Plan). This Plan replaced the 1993 Flexible Stock Incentive
Plan. Under the Plan, the Company may grant nonqualified and incentive stock
options to officers, employees and consultants of the Company to acquire up to
5,657,143 common shares of the Company. As of December 31, 1995, there were
1,885,695 options granted and outstanding under the Plan to the Company's Chief
Executive Officer, Chairman and founding shareholder as part of his employment
agreement (Note 7). These options are fully vested, are exercisable, and have an
exercise price of $.02 per share, the estimated fair market value of the
Company's common stock at the grant date.
During 1995, the Company approved a resolution with respect to compensation of
outside directors. Each outside director will be granted options to acquire
20,000 shares of common stock to be vested over four years, at the rate of 5,000
per year, at an exercise price of $.02 per share. As of December 31, 1995, no
options had been granted to outside directors.
In 1994, the Company granted options to acquire 100,000 shares of common stock
to its President and founding shareholder at $.001 per share, the estimated fair
market value of the Company's common stock at the grant date. In March 1995, the
Company granted an additional 100,000 common stock options to its President at
$.001 per share, the estimated fair market value of the Company's common stock
at the grant
F-50
<PAGE> 104
PEPGEN CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
DECEMBER 31, 1995
date. The options to acquire 200,000 shares of common stock were exercised in
November 1995 for cash proceeds of $200.
(7) COMMITMENTS AND CONTINGENCIES
Research and Development Agreements
In 1993, the Company entered into an agreement with an independent research
group to perform certain research and development work. Under this agreement,
the Company paid quarterly cash installments over the research period, which
expired in May 1995. The amount paid under this agreement in 1995 was
approximately $11,000.
During 1994, the Company entered into an agreement with a major pharmaceutical
company whereby consideration, totaling $100,000, was received by the Company in
exchange for the rights to evaluate the Company's material over a defined period
of time and to enter into a worldwide, exclusive licensing agreement with the
Company for the acquisition of the related patent, should it be obtained. The
agreement was extended for one additional month during 1995 for an additional
$25,000. The agreement was mutually terminated subsequent to this one month
extension.
During 1995, the Company entered into an agreement with a major Japanese
research firm whereby a non-refundable cash payment of $400,000 was received by
the Company in 1995 for the right to use the Company's material in a research
and development program over a defined period of time. The agreement provides
for total consideration of $1,000,000 with the remainder to be paid upon the
attainment of certain milestones by the research program. Upon completion of the
research program, the Japanese firm has the option to pay the Company an
additional $3,000,000 for the right to negotiate an exclusive licensing
arrangement for the product in Japan and Korea. The negotiation period would be
over three months and the option payment would be non-refundable regardless of
the outcome of the negotiations.
Federal Research Grant
The Company is a recipient of a federal research grant amounting to $75,002. As
of December 31, 1995, the Company received $56,385 of this grant. The grant
expires on March 1, 1996.
Employment Agreement
In November 1995, the Company entered into an employment agreement with its
Chief Executive Officer, Chairman and one of its founding shareholders. The
agreement, which replaced a previous employment agreement, provides for minimum
annual salary and benefits. In the event of involuntary termination, as defined,
the Company is liable for twelve months of salary. The Company also granted the
executive fully vested options to acquire 1,885,695 shares of common stock (Note
6). The agreement expires on December 31, 1996, unless renewed. The total amount
earned by this executive in 1995 under employment agreements was $120,000.
Corporate Partnership Agreement
In March 1995, the Company entered into a twelve-month corporate partnership
agreement with an agent whereby the Company would pay the agent a defined
percentage of revenues or license fees received as a result of the agent
locating a corporate partner in Japan or Korea. During the year ended December
31, 1995, the Company paid the agent $80,000 for services performed.
F-51
<PAGE> 105
PEPGEN CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
DECEMBER 31, 1995
Net Licensing Fee Agreements
In September 1995, the Company entered into net licensing agreements, whereby
for a period of one year, the Company will pay ten percent of any net licensing
fee, as defined, received by the Company to the common shareholders and an
additional ten percent of any net licensing fee, as defined, to the previous
holders of preferred stock (prior to the investment by the biomedical firm --
see Note 5). No amounts were earned or paid under these net licensing fee
agreements for the year ended December 31, 1995.
(8) INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED JULY 8, 1992
DECEMBER 31, (INCEPTION) THROUGH
1995 DECEMBER 31, 1995
------------ -------------------
<S> <C> <C>
Current:
Federal...................................... $ -- $ --
State........................................ 13,040 15,440
------- -------
$ 13,040 $15,440
======= =======
</TABLE>
The Company's effective tax rate differs from the U.S. federal statutory rate
due primarily to losses incurred for which benefits have not been realized, the
change in the valuation allowance and the effect of state income tax.
The tax effected amounts of temporary differences as of December 31, 1995 are as
follows:
<TABLE>
<S> <C>
Deferred tax assets:
Capitalized research and development...................... $ 20,647
State income taxes........................................ 4,434
Accrued expenses.......................................... 85,875
Net operating loss carryforwards.......................... 17,014
Other..................................................... 5,291
---------
Total deferred tax assets......................... 133,261
Valuation allowance....................................... (133,261)
---------
Net deferred tax asset............................ $ --
=========
</TABLE>
The Company has a net operating loss carryforward as of December 31, 1995
available to offset future taxable income for federal tax purposes of
approximately $50,000, which begins to expire in 2001.
In general, Section 382 of the Internal Revenue Code includes provisions which
limit the amount of net operating loss carryforwards and other tax attributes
that may be used annually in the event that a 50% ownership change (as defined)
takes place in any three-year period. The Company is currently evaluating
whether any adjustments are required as a result of Section 382.
(9) CONCENTRATION OF CREDIT RISK
The Company maintains its cash accounts in a commercial bank. At December 31,
1995, cash on deposit was in excess of the federally insured limit of $100,000
by approximately $84,000.
F-52
<PAGE> 106
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE> 107
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE> 108
THE CALYPTE HIV-1 URINE-BASED TEST HAS NOT BEEN APPROVED BY THE FDA FOR
MARKETING IN THE UNITED STATES. THE TEST CANNOT BE SOLD IN THE UNITED STATES
UNLESS AND UNTIL SUCH FDA APPROVAL IS OBTAINED, IF AT ALL.
[Please refer to Appendix for description of graphics.]
<PAGE> 109
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD
BE UNLAWFUL OR TO ANY PERSON TO WHOM IT IS UNLAWFUL. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE OF THIS PROSPECTUS.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary..................... 3
Risk Factors........................... 5
The Company............................ 12
Use of Proceeds........................ 12
Dividend Policy........................ 12
Capitalization......................... 13
Dilution............................... 14
Selected Consolidated Financial Data... 15
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 16
Business............................... 19
Management............................. 35
Certain Transactions................... 42
Principal Stockholders................. 45
Description of Capital Stock........... 46
Shares Eligible for Future Sale........ 47
Underwriting........................... 49
Legal Matters.......................... 50
Experts................................ 50
Additional Information................. 50
Index to Consolidated Financial
Statements........................... F-1
</TABLE>
------------------
UNTIL AUGUST 20, 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
2,300,000 SHARES
LOGO
COMMON STOCK
--------------------
PROSPECTUS
--------------------
PACIFIC GROWTH EQUITIES, INC.
July 26, 1996
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 110
APPENDIX--(DESCRIPTION OF GRAPHICS)
INSIDE FRONT COVER
Page Caption: The Calypte HIV-1 urine-based test has not been approved by the
FDA for marketing in the United States. The test cannot be sold in the United
States unless and until such FDA approval is obtained, if at all.
[Graphic: The HIV-1 Urine EIA Test Kit. This graphic depicts the Company's test
kit, including various bottles of reagents and packages of tests.]
Graphic Caption: The Calypte FDA HIV-1 Urine EIA Test Kit. When used with the
western blot confirmatory test Calypte will provide the only complete
urine-based HIV testing system.
GATEFOLD FOLLOWING INSIDE FRONT COVER
[Graphic: The HIV-1 Virus and Calypte urine test. This graphic depicts in one
panel the HIV-1 virus envelope structure and seven panels depicting the
operation of the Company's urine HIV-1 test for a positive and a negative test.]
Graphic Caption: Panel 1: The complex structure of HIV-1, the virus highly
associated with AIDS. Gp 160 is a glyco-protein from the envelope region of the
HIV-1 virus. The same protein is manufactured in a recombinant form (rgp 160)
for use in the Calypte HIV-1 urine assay.
Graphic Caption: Panel 2: How the test works. Positive urine. Urine from HIV-1
positive subject which contains HIV-1 anti-bodies is added to a test well.
Graphic Caption: Panel 3: Human HIV-1 antibodies in urine bind to the rgp 160
in the well.
<PAGE> 111
Graphic Caption: Panel 4: Conjugate containing an enzyme is added to the well.
The conjugate will bind only to the human HIV-1 antibody. After the well is
washed, substrate reagent is added and color development occurs indicating the
presence of human HIV-1 antibody in the well.
Graphic Caption: Panel 5: The microwell plate coated with proprietary
recombinant HIV-1 rgp 160 antigen being filled with urine.
Graphic Caption: Panel 6: Negative Urine. Urine from HIV-1 negative subject
which contains no HIV-1 antibodies is added to a test well.
Graphic Caption: Panel 7: No antibodies are present in urine to bind to the rgp
160 in the well.
Graphic Caption: Panel 8: Conjugate containing an enzyme is added to the well.
The conjugate will not bind since the human HIV-1 antibody is not present.
After the well is washed, substrate reagent is added and color development will
not occur since no antibody is present and therefore no conjugate is present
in the well.
Page Caption: The Calypte HIV-1 urine-based test has not been approved by the
FDA for marketing in the United States. The test cannot be sold in the United
States unless and until such FDA approval is obtained, if at all.
INSIDE BACK COVER
[Graphic: The Manufacturing Process. This four panel graphic depicts the
Registrant's manufacturing process. The first panel depicts a laboratory staff
member holding a roller bottle containing a liquid. This person is standing in
front of an incubator containing roller bottles.]
Graphic Caption: Antigen production begins with the growth of proprietary cell
lines. Cells are grown in complex media, rotated in roller-bottles, and
incubated under controlled conditions.
[Graphic: Second panel. The second panel depicts a laboratory staff member
sitting in front of a laboratory hood under which are placed roller bottles.
The person is sitting in front of the hood dipping a pipette into one of the
roller bottles under the hood.]
Graphic Caption: Cells are infected with a vector carrying the genetic
information for the expression of HIV-1 envelope protein (rgp 160). Infected
cells containing rgp 160 are harvested, frozen and used for antigen puri-
fication.
[Graphic: Third panel. The third panel depicts certain laboratory equipment.]
Graphic Caption: Rgp 160 is purified in a sequential bioprocess incorporating
proprietary manufacturing techniques.
[Graphic: Fourth panel. This panel depicts the Company's test wells being
coated with antigen.]
Graphic Caption: Microwell plates are produced by automated filling of wells
with diluted rgp 160, incubation, blocking and packaging with dessicant.
Page Caption: The Calpyte HIV-1 urine-based test has not been approved by the
FDA for marketing in the United States. The test cannot be sold in the United
States unless and until such FDA approval is obtained, if at all.
