Cypros Pharmaceutical Corporation
Form 10-K Items 14(a) (1) and (2)
Contents
Report of Ernst & Young LLP, Independent Auditors F-2
Financial Statements (Item 14(a) (1)):
Balance Sheets F-3
Statements of Operations F-4
Statements of ShareholdersO Equity F-5
Statements of Cash Flows F-6
Notes to Financial Statements F-7
Financial Statement Schedules (Item 14(a) (2)):
All financial statement schedules are omitted because the
information described therein is not applicable, not required
or is furnished in the financial statements or notes thereto.
Report of Independent Auditors
The Board of Directors and Shareholders
Cypros Pharmaceutical Corporation
We have audited the accompanying balance sheets of Cypros
Pharmaceutical Corporation as of July 31, 1996 and 1995, and
the related statements of operations, shareholders' equity,
and cash flows for each of the three years in the period ended
July 31, 1996. These financial statements are the
responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial
position of Cypros Pharmaceutical Corporation at July 31, 1996
and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended July 31, 1996 in
conformity with generally accepted accounting principles.
[ERNST & YOUNG LLP]
(Signature)
[San Diego, California]
[August 26, 1996, except for Note 4, as to which the date is
August 26, 1997.]
Cypros Pharmaceutical Corporation
Balance Sheets
July 31,
1996 1995
Assets
Current assets:
Cash and cash equivalents $8,306,752 $5,026,745
Short-term investments, held
to maturity (Notes 1 and 2) 7,690,297 8,415,250
Accounts receivable 149,626 -
Inventory 63,386 -
Prepaid expenses and other
current assets 61,409 25,910
Total current assets 16,271,470 13,467,905
Property, equipment and leasehold
improvements, net (Note 2) 608,206 411,651
Purchased technology, net of
accumulated amortization of
$438,238 at July 31, 1996
(Note 1) 2,629,427
[Deferred financing costs (Note 1) 520,011 -]
Licenses and patents, net of
accumulated amortization of
$87,277 and $61,418 at
July 31, 1996 and 1995,
repectively (Note 4) 111,231 99,591
Deposits and other assets 126,180 195,692
[Total assets $ 20,266,525 $14,174,839]
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 119,092 138,537
Accrued compensation 155,748 83,594
Other accrued liabilities 231,864 189,713
Purchased asset obligation
(Note 1) 200,000 -
Current portion of long-term
debt (Note 3) 99,282 99,282
Current portion of capital
lease obligation (Note 4) 81,035 22,517
Total current liabilities 887,021 533,643
Long-term debt (Note 3) 41,367 140,650
Capital lease obligations
(Note 4) 187,265 54,149
Deferred rent (Note 4) 120,411 80,519
Commitments (Note 4)
[Mandatorily convertible notes
(Note 4) 6,395,574 -]
Shareholders' equity: (Notes 4 and 5)
Common stock, 30,000,000 shares
authorized, 11,613,748
and 11,352,017 shares issued
and outstandingas of July 31,
1996and 1995, respectively 23,421,428 20,944,995
Deferred compensation (304,309) (186,993)
Accumulated deficit (10,482,232) (7,392,124)
Total shareholders' equity 12,634,887 13,365,878
Total liabilities and
shareholder's equity
$ 20,266,525 $14,174,839
See accompanying notes.
Cypros Pharmaceutical
Corporation
Statements of Operations
Years
ended July
31,
1996 1995 1994
Net sales $ 1,275,240 - -
Cost of sales 405,142 - -
Gross profit 870,098 - -
Operating expenses:
Sales and marketing 343,054 -
General and
administrative 2,254,000 1,583,420 1,015,666
Clinical testing and
regulatory 1,389,128 1,537,964 1,022,134
Research and development 1,002,226 788,424 526,835
Total operating expenses 4,988,408 3,909,808 2,564,635
Loss from operations (4,118,310) (3,909,808) (2,564,635)
Research grant income 270,510 250,000 -
Interest income, net (Note
3) 757,692 547,107 189,372
Net loss $ (3,090,108) $(3,112,701) $ (2,375,263)
Net loss per share $ (0.27) $ (0.32) $ (0.32)
Shares used in computing net
loss per share 11,518,169 9,859,857 7,357,960
See accompanying notes.
Cypros Pharmaceutical Corporation
Statements of Shareholders' Equity
For each of the three years ended July 31, 1996,
1995 and 1994
*
Common stock
Shares Amount
Balance at July 31, 1993 6,083,329 $6,748,419
Exercise of warrants 1,343,750 725,625
Exercise of Class A warrants (Program I) 760,306 2,355,123
Issuance of common stock for cash and
services 35,650 83,641
Common stock repurchased (203,255) (53,205)
Deferred compensation related to grant of
stock options - 66,958
Amortization of deferred compensation - -
Net loss - -
Balance at July 31, 1994 8,019,780 9,926,561
Exercise of Class A warrants (program II) 2,605,180 8,205,215
Exercise of Unit Purchase Options and
underlying Class A warrants 543,745 1,681,266
Exercise of stock options 183,312 528,924
Deferred compensation related to grant of
stock options and warrants - 603,029
Amortization of deferred compensation - -
Net loss - -
Balance at July 31, 1995 11,352,017 20,944,995
Discount on mandatorily convertible notes - 1,582,935
Issuance of common stock, net of offering
costs 162,500 940,956
Issuance of common stock in business
acquisitions 169,231 1,032,309
Issuance of common stock for services 200,000 284,375
Common stock repurchased (280,000)(1,540,000)
Exercise of stock options 10,000 35,163
Deferred compensation related to grant of
stock options - 140,695
Amortization of deferred compensation - -
Net loss - -
Balance at July 31, 1996 11,613,748 $23,421,428
Total
Deferred Accumulate Shareholder's
Compensation Deficit Equity
[C] [C] [C]
$(266,273) $1,904,16 $4,577,986
- - 725,625
- - 2,355,123
- - 83,641
51,624 - (1,581)
(66,958) - -
110,667 - 110,667
- (2,375,263) (2,375,263)
(170,940) (4,279,423) 5,476,198
- - 8,205,215
- - 1,681,266
- - 528,924
(110,842) - 492,187
94,789 - 94,789
- (3,112,701) (3,112,701)
(186,993) (7,392,124) 13,365,878
- - 1,582,935
- - 940,956
- - 1,032,309
(284,375) - -
- - (1,540,000)
- - 35,163
(140,695) - -
307,754 - 307,754
- (3,090,108) (3,090,108)
$(304,309) $(10,482,232) $12,634,887
See accompanying notes.
Cypros Pharmaceutical Corporation
Statements of Cash Flows
1996 1995 1994
Operating activities
Net loss $(3,090,108) $(3,112,701) $(2,375,263)
adjustments to reconcile net loss to
net cash used in operating
activities:
Amortization of deferr 307,754 94,789 110,667
compensation
Expense related to warrant
issuances - 492,187 -
Depreciation and amortization 173,610 112,713 81,002
Amortization of purchased
technology 438,238 - -
Deferred rent expen se 39,892 10,889 69,630
Write off of patent - 14,000 -
Issuance of common stock for property - - 12,000
and services
Changes in operating assets and
liabilities, net of effects
from acquisitions:
Accounts receivable (149,626) - -
Inventory 18,829 - -
Prepaid expenses and other current 18,536 (41,897) (8,832)
assets
Accounts payable (19,445) (138,572) 187,254
Other accrued liabilities 114,305 233,909 2,618
Net cash flows used in operating
activities (2,148,015) (2,334,683) (1,920,924)
Investing activities
Payment for purchase of inventory in
Business acquisition (82,215) - -
Payment for purchase of acquired
businesses (1,835,356) - -
Short-term investments
724,953 (3,957,538) (828,137)
Purchase of property, equipment and
leasehold improvements (100,770) (193,689) (134,174)
Increase in licenses and patents (37,499) (10,863) (45,455)
Decrease in deposits and other assets 6,197 16,673 22,729
Net cash flows used in investing
activities (1,324,690) (4,145,417) (985,037)
Financing activities
Issuance of common stock, net 976,119 10,415,405 3,150,808
Issuance of mandatorily convertible
notes 7,458,498
Repurchase and retirement of common
stock (1,540,000)
Proceeds from long-term debt - - 267,759
Repayments of long-term debt (99,283) (99,282) (119,129)
Repayments of capital leases (42,622) (17,439) -
Net cash flows provided by financing
activities 6,752,712 10,298,684 3,299,438
Increase in cash and cash equivalents 3,280,007 3,818,584 393,477
Cash and cash equivalents at
beginning of year 5,026,745 1,208,161 814,684
Cash and cash equivalents at end of
year $8,306,752 $5,026,745 $1,208,161
Supplemental disclosures of cash flow
information:
Cash paid for interest 47,953 39,170 28,450
Noncash investing and financing
activities:
Equipment financed under capital leases 234,256 89,549 6,427
Purchased asset obligation $200,000 - -
Common stock issued for business
Acquisitions $1,032,309 - -
See accompanying notes.
Cypros Pharmaceutical Corporation
Notes to Financial Statements
July 31, 1996
1. Organization and Summary of Significant Accounting Policies
Organization and Business Activity
Cypros Pharmaceutical Corporation (the "Company") was
incorporated in San Diego, California on November 2, 1990. The
Company develops and markets acute-care, hospital-based
products. The Company is currently marketing Glofil and Inulin,
two injectable renal diagnostic products. The Company's pre-
clinical and clinical development programs focus on
cytoprotective drugs designed to reduce ischemia (low blood
flow) induced tissue damage in acute-care settings. The
Company's two clinical programs are currently in six Phase II
trials, which include four for CPC-111 (acute complications of
angioplasty, coronary artery bypass grafting surgery,
congestive heart failure and sickle cell anemia crises), and
two for CPC-211 (stroke and head injury). Through July 31,
1995, the Company was considered to be in the development
stage.
On August 9, 1995, the Company acquired two businesses,
including (i) the New Drug Application for Glofil and finished
goods inventory of Glofil on hand at the time of closing from
Iso-Tex Diagnostics, Inc., a Texas corporation, (the "Glofil
Acquisition") and (ii) the New Drug Application for Inulin and
the raw material and finished goods inventory of Inulin on hand
at the time of closing from Iso-Tex Diagnostics "B", Inc.
("ITDB"), a Texas corporation (the "Inulin Acquisition"). The
Glofil Acquisition was accomplished in an arms' length
negotiation through a purchase of assets and the Inulin
Acquisition was accomplished through a merger of ITDB with and
into the Company (the "Merger"). The total purchase price was
$3,149,880, of which $1,582,215 in cash and 169,231 newly
issued shares of restricted common stock of the Company (the
"Restricted Shares") were paid at closing. The Company used its
working capital to make the cash payments for the acquisitions
at closing. Both acquisitions were accounted for using the
purchase method and, accordingly, the financial statements
include the operations of the businesses from the date of
acquisition.
As part of the Glofil Acquisition, the Company made an
additional cash payment of $200,000 on January 15, 1996 and a
final cash payment of $200,000 on August 9, 1996. As part of
the Inulin Acquisition, the Company has agreed to register the
Restricted Shares, upon the request of the sole stockholder of
ITDB, at any time after one year from the date of closing and
if the registration statement has not become effective within
90 days of the date of the holder's request, the Company is
obligated to repurchase the Restricted Shares at their market
value based upon the closing bid price of the Company's common
stock on such date. [If the holder requests the Company to
Register the Restricted Shares, then the Company intends to and
has the ability to register them within 90 days of such
request.] As a result of the acquisitions of Glofil and
Inulin, the Company commended product sales and is therefore an
operating company.
1. Organization and Summary of Significant Accounting Policies
(continued)
Organization and Business Activity (continued)
The following unaudited pro forma data reflects the combined
results of operations of the Company and the two businesses as
if the acquisitions had occurred on August 1, 1994:
July 31,
1996 1995
Net revenue $ 1,275,240 $1,031,486
Net loss (3,090,108) (2,993,386)
Net loss per share (0.27) (0.30)
In January 1996, the Company entered into an agreement with
Syncor International ("Syncor") to distribute Glofil in unit
doses through Syncor's nationwide pharmacies. Under the
agreement, the Company ships whole vials of Glofil on
consignment to selected pharmacies which then repackage them
into unit doses and ship them to customers upon request.
Syncor is also responsible for billing, collections and
disposal of expired unused vials.
Cash, Cash Equivalents and Short-term Investments
The Company considers highly liquid investments with remaining
maturities of three months or less when acquired, primarily
money market funds, to be cash equivalents. Short-term
investments consist of certificates of deposit, U.S. government
securities and investment grade corporate obligations. The
Company has established guidelines relative to diversification
and maturities that maintain safety and liquidity. The Company
has not experienced any losses on its cash equivalents or short-
term investments. Management believes the credit risk
associated with these investments is limited due to the nature
of the investments.
Management determines the appropriate classification of debt
securities at the time of purchase and reevaluates such
designations as of each balance sheet date. Debt securities
are classifed as held-to-maturity when the Company has the
positive intent and the ability to hold the securities to
maturity. Heldto-maturity securities are carried at cost,
adjusted for amortization of premiums and accretion of
discounts. Interest,
dividends and amortization on the securities classified as held
to-maturity are included in interest income.
Concentration of Credit Risk
The Company extends credit to its customers, primarily
hospitals and large pharmaceutical companies conducting
clinical research, in connection with its product sales. The
Company has not experienced significant credit losses on its
customer accounts. Two customers individually accounted for 39%
and 15% of current year sales.
1. Organization and Summary of Significant Accounting Policies
(continued)
Inventory
Inventory is stated at the lower of cost (first-in, first-out
method) or market and is comprised of raw materials of $3,437
and finished goods of $59,949.
Depreciation and Amortization
Property and equipment are stated at cost and depreciated
over the estimated useful lives of the assets (generally 5
years) using the straight-line method. Leasehold
improvements are amortized over the lesser of the estimated
useful lives (7 years) or the remaining term of the lease,
whichever is less.
Purchased Technology
Purchased technology associated with the acquisitions of
Glofil and Inulin is stated at cost and amortized on a
straight-line basis over the period estimated to be
benefited (7 years). Effective August 1, 1996, the Company
will adopt Statement of Financial Accounting Standards No.
121 ("FAS 121"), Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of. The
Company does not believe the adoption of FAS 121 will have a
material effect on the its financial position or results of
operations.
[Deferred Financing Costs
The Company has capitalized banking, legal and accounting
fees associated with the issuance of $8 million in principal
amount of mandatorily convertible notes in 1996. These costs
are amortized to expense over the term of the notes, which
is three years, using the straight-line method commencing at
the closing of the transactions.]
License and Patent Costs
The Company capitalizes certain costs related to license
rights and patent applications. Accumulated costs are
amortized over the estimated economic lives of the license
rights and patents (generally 6 years) using the straight-
line method commencing at the time the license rights are
granted or the patents are issued.
Revenue Recognition
Revenues from product sales of whole vials of Glofil and
Inulin are recognized upon shipment. Revenues from Glofil
sales under the Syncor agreement are recognized upon receipt
by the Company of monthly sales reports from Syncor on unit
dose sales by its pharmacies. The Company is not obligated
to accept returns of products sold that have reached their
expiration date.
Net Loss Per Share
Net loss per share is computed using the weighted average number
of common shares outstanding during the periods.
1. Organization and Summary of Significant Accounting Policies
(continued)
Reclassifications
Certain previously reported amounts have been reclassified to
conform with the 1996 presentation.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported
in the financial statements and disclosures made in the
accompanying notes to the financial statements. Actual results
could differ from those estimates.
Accounting and Disclosure of Stock Based Compensation
Effective August 1, 1996, the Company will adopt Statement of
Financial Accounting Standards No. 123 ("FAS 123"), Accounting
and Disclosure of Stock-Based Compensation. As allowed under FAS
123, the Company will elect to continue to account for stock
option grants in accordance with Accounting Principles Board
Opinion No. 25 ("APB 25"), Accounting for Stock Issued to
Employees and related interpretations. Accordingly, when the
Company grants stock options with an exercise price equal to the
fair market value of the shares on the date of grant, no
compensation expense is recorded. The Company does not believe
the adoption of FAS 123 will have a material effect on its
financial position or results of operations.
2. Financial Statement Details
Short-Term Investments
All short-term investments of the Company are classified as held
to-maturity. The following is a summary of held-to-maturity
investments at amortized cost as of July 31:
1996 1995
Corporate Debt Securities $ 6,902,848 $ 5,210,665
U.S. Government Obligations 749,780 2,778,223
Certificates of Deposit 37,669 426,362
$ 7,690,297 $ 8,415,250
As of July 31, 1996, the difference between cost and estimated
fair value of the held-to-maturity investments was not
significant. Of the above-referenced 1996 investments,
$6,715,067 will mature at various dates through July 31, 1997 and
$975,230 will mature at various dates after July 31, 1997 through
July 31, 1998.
2. Financial Statement Details (continued)
Property, Equipment and Leasehold Improvements
Property, equipment and leasehold improvements consist of
the following as of July 31:
1996 1995
Laboratory equipment $ 570,865 $337,622
Office equipment, furniture and fixtures 224,932 124,553
Leasehold improvements 89,517 88,113
885,314 550,288
Less accumulated depreciation and (277,108) (138,637)
amortization
$ 608,206 $ 411,651
Depreciation expense was $138,471, $83,313 and $44,252 for the
years ended July 31, 1996, 1995 and 1994, respectively.
Other Accrued Liabilities
At July 31, 1996 and 1995, other accrued liabilities consist
primarily of clinical costs related to the Phase II clinical
trials of CPC-111.
3. Long-Term Debt
As of July 31, 1996, the Company had an installment note payable
to a financial institution of $140,649, of which $99,282 was
classified as current. The outstanding balance was
collateralized by $242,000 of the Company's short-term
investments as of July 31, 1996. The installment note bears
interest at the prime rate plus 1.6% (or 9.85% at July 31, 1996)
and is being repaid in monthly installments through December
1997. Interest expense incurred on the installment note was
$19,897, $29,947 and $25,971 for the years ended July 31, 1996,
1995 and 1994, respectively.
4. Commitments
Leases
The Company leases its office and research facilities under
operating lease agreements and certain equipment under capital
lease agreements. A security deposit of $85,714 under one of the
facilities lease agreements is included in deposits and other
assets.
4. Commitments (continued)
Leases (continued)
Minimum future obligations under both
operating and capital leases as of July 31,
1996 are as follows:
Operating Capital
Leases Leases
1997 $ 355,780 $111,236
1998 378,040 106,832
1999 397,550 70,134
2000 421,561 35,231
2001 310,573 -
Thereafter 102,749
- -
$1,966,253 $323,433
Less amounts representing interest 55,133
Present value of net minimum lease payments 268,300
Current portion of obligations under
capital leases 81,035
Long-term obligations under capital leases 187,265
Rent expense totaled $193,880, $107,952 and $80,127 for the
years ended July 31, 1996, 1995 and 1994, respectively.
Equipment acquired under capital leases totaled $277,669 and
$82,614 (net of accumulated amortization of $52,564 and $13,362)
as of July 31, 1996 and 1995, respectively.
[Mandatorily Convertible Notes
During the year ended July 31, 1996, the Company issued $8
million in principal amount of non-interest bearing, mandatorily
convertible notes to institutional investors in private
placements under the provisions of the Securities and Exchange
Commission ("SEC") Regulation D. The notes are convertible at
the option of the investors into shares of the Company's Common
Stock at various dates from January 31, 1997 through July 31,
1999 at a discount to the market price of the stock immediately
preceding conversion, ranging from 15% to 25%, with the actual
discount depending on the length of time each investor has held
the note being converted. The notes must be converted at various
dates through July 31, 1999. The Company is required to register
with the SEC the shares of Common Stock issuable upon conversion
of the notes on or prior to the expiration of the allowable
conversion periods. The notes were originally classified
as a component of shareholders' equity for several reasons,
including the fact that they are non-interest-bearing and
convertible only into Common Stock of the Company, absent
unusual circumstances. However, on August 26, 1997, in
conjunction with an SEC review of a registration statement
filed by the Company and in consideration of certain positions
formally adopted by the SEC in March 1997, the Company
reclassified the notes to long-term debt. The notes are recorded
net of the $1,582,935 discount available upon conversion
(assuming full conversion at the earliest possible date(s),
and the discount represents an effective interest rate of 33%.
The discount has been added to Common Stock and will be amortized
to expense in fiscal 1997.]
[License Agreements
The Company has licenses to various patents for CPC-111 and CPC
211, its two clinical development programs, for the remaining
term of the patents. The license agreements require payments of
cash, warrants or the issuance of stock options to the licensors
upon the accomplishment of various development milestones and the
payment of royalties to the licensors upon the commercial sale of
products incorporating the licensed compound. Under the
agreement for CPC-211, the Company issued a warrant to the
licensor in fiscal 1995 exercisable into 43,750 shares of the
Company's Common Stock at an exercise price of $1.60 per
share, as a result of the completion of the Phase I trials
of that compound. The only remaining significant development
milestone under these agreements is the requirement that the
Company pay the licensor of CPC-111 $250,000 upon the filing
of a New Drug Application with the Food and Drug
Administration (the "FDA") for the approval to market that
compound. In the event milestone or royalty payments to the
licensor of CPC-111 are not made by the Company within
specified time periods, that licensor may elect to terminate
the license agreement and all rights thereunder. Such a
termination could have a significant adverse impact upon the
Company.]
5. Shareholders' Equity
Preferred Stock
The Company has authorized 1,000,000 shares of
convertible preferred stock. As of July 31, 1996, no such
shares were issued or outstanding.
5. Shareholders' Equity (continued)
Common Stock
During the year ended July 31, 1996, the Company purchased
and retired 280,000 shares of its outstanding Common Stock at
$5.50 per share in a privately negotiated transaction.
*
Warrants
In connection with the Company's initial public offering in
1992 (the "Offering"), the Company issued 2,875,000 Redeemable
Class A and Class B Warrants. During fiscal years 1994 and
1995, the Company initiated special programs designed to
encourage holders of Redeemable Class A Warrants to
exercise their warrants immediately (the "Special Class A
Warrant Programs"). Under the Special Class A Warrant
Programs, the Company received net proceeds of $10,497,005
from the exercise of 2,847,037 Redeemable Class A Warrants and
the concurrent issuance of 3,345,236 shares of Common Stock and
1,423,512 Redeemable Class B Warrants.
Subsequent to the end of the Special Class A Warrant
Programs, the Company issued a notice of mandatory
redemption to the remaining holders of Class A Warrants.
The holders of 20,250 Class A Warrants exercised their
warrants upon their original terms, resulting in $63,787
proceeds to the Company and the issuance of 20,250
shares of Common Stock. The Company repurchased all of
the unexercised Class A Warrants outstanding at the end of
the 30-day mandatory redemption period for $0.02 per warrant.
As of July 31, 1996, there were no Redeemable Class A Warrants
outstanding.
During the course of the Special Class A Warrant Programs, all
of the 250,000 Unit Purchase Options issued to the
underwriter of the Offering were exercised at $3.02 per
option, and the 250,000 Redeemable Class A Warrants within
such units were immediately exercised resulting in aggregate
net proceeds of $1,681,266 and the concurrent issuance of
543,745 shares of Common Stock and 375,000 Redeemable Class B
Warrants.
5. Shareholders' Equity (continued)
Warrants (continued)
The Company issued an additional warrant in 1995 exercisable
into 312,500 shares of the Company's Common Stock at a purchase
price of $5 per share to a firm as consideration for financial
advisory services. In January 1996, the Company cancelled the
warrant and issued 200,000 shares of Common Stock at $3.39 in
lieu of the cancelled warrant.
As of July 31, 1996, 4,673,512 Redeemable Class B Warrants
were outstanding. Warrant holders are entitled to purchase one
share of Common Stock at $5.50 per share for each
warrant until November 3, 1997. The Company is entitled to
redeem the warrants on not less than than 30 days written
notice at $0.02 per warrant when the average closing bid
price of the Common Stock exceeds $9.60 per share over a
period of 20 consecutive trading days, ending within 15 days
of the date of notice of redemption.
Stock Option Plans
As of July 31, 1996, 2,274,038 shares of Common Stock
were reserved for issuance under the 1992 Stock Option Plan
(the "1992 Plan"). The 1992 Plan provides for the grant of
incentive and nonstatutory stock options with various
vesting periods, generally four years, to employees,
directors and consultants. The exercise price of incentive
stock options must equal at least the fair market value on
the date of grant, and the exercise price of nonstatutory
stock options may be no less than 85% of the fair market
value on the date of grant. The maximum term of options
granted under the Plan is ten years.
In June 1993, the Company adopted the 1993 Non-
Employee Directors' Stock Option Plan (the "1993 Plan"), under
which 250,000 shares of Common Stock were reserved for
issuance. The 1993 Plan provides for the granting of 25,000
options to purchase Common Stock upon appointment as a non-
employee director and an additional 3,000 options each
January thereafter, beginning January 1, 1994. Options
vest over four years. The exercise price of the options is
85% of the fair market value on the date of grant.
5. Shareholders' Equity (continued)
Stock Option Plans (continued)
The following table summarizes stock option activity
under the 1992 and 1993 Plans:
Options Exercise Price
Outstanding per Share
Balance at July 31, 661,750 $1.44 - $4.05
1993
Granted 358,125 $3.06 - $4.70
Exercised (32,650) $1.44 - $2.90
Canceled (40,600) $1.58 - $2.90
Balance at July 31, 946,625 $1.44 - $4.70
1994
Granted 292,500 $4.25 - $6.40
Exercised (183,312) $1.44 - $4.60
Canceled (37,813) $3.87 - $4.60
Balance at July 31, 1,018,000 $1.44 - $6.40
1995
Granted 360,000 $3.08 - $8.50
Exercised (10,000) $3.44 - $4.60
Canceled (12,188) $5.40
Balance at July 31, 1,355,812 $1.44 - $8.50
1996
At July 31, 1996, options to purchase 789,011 shares of Common
Stock were exercisable and there were 1,168,226 shares available
for grant under the Plans.
Deferred Compensation
The Company has recorded deferred compensation for the difference
between the price of certain stock sold and options granted and
the fair value of the Company's Common Stock. Deferred
compensation is amortized to expense during the vesting period of
the related stock or options.
6. Income Taxes
The Company accounts for income taxes using the liability method
under Financial Accounting Standards Board Statement No. 109,
Accounting for Income Taxes. Deferred income taxes reflect the
net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
6. Income Taxes (continued)
Significant components of the Company's deferred tax assets and
liabilities as of July 31, 1996 and 1995 are as follows:
1996 1995
Deferred tax assets:
Net operating loss carryforwards $3,358,000 $ 2,366,000
Capitalized research and
development costs 404,000 264,000
Research and development tax
credit carryforwards 378,000 355,000
Other 231,000 168,000
Total deferred tax assets 4,371,000 3,153,000
Deferred tax liabilities:
Other (19,000) (16,000)
4,352,000 3,137,000
Valuation allowance (4,352,000) (3,137,000)
Net deferred tax assets $ - $ -
As of July 31, 1996, the Company has federal and California tax
net operating loss carryforwards of approximately $9,305,000 and
$1,676,000, respectively. The federal and California tax loss
carryforwards will begin expiring in 2007 and 1997, respectively,
unless previously utilized. The Company also has federal and
California research and development tax credit carryforwards of
$288,000 and $138,000, respectively, which will begin expiring in
2007 unless previously utilized. The above carryforwards were
determined as if the Company were filing a tax return at July 31,
1996; however, for tax return purposes the Company uses a
calendar year end.
Use of the Company's net operating loss and credit carryforwards
will be limited because of the Offering which resulted in a
cumulative change in ownership of more than 50%. However, the
Company does not believe such change will have a material impact
upon the Company's ability to utilize these carryforwards.
The valuation allowance increased $1,215,000 from July 31, 1995
to July 31, 1996 due principally to the increase in deferred tax
assets resulting from the increase in tax net operating loss
carryforwards. Realization of deferred tax assets is dependent
on future earnings, the timing and amount of which will be
dependent on scientific success, results of clinical trials and
regulatory approval of the Company's products currently under
development. Accordingly, the full valuation reserve has been
established to