1
Exhibit 13.1
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarters Ended,
------------------------------------------------------------------
1996 March 31 June 30 September 30 December 31
- ---------------------------------------------------------------------------------------------------------------
Net income (loss) $ (6,235) $ (3,745) $ 2,662 $ (9,209)
Net income (loss) per common
and equivalent share $ (0.45) $ (0.26) $ 0.15 $ (0.57)
Common stock prices
High $ 31-3/4 $ 34 $ 42 $ 40-3/4
Low $ 23-1/2 $ 25-1/4 $ 28 $ 27-7/8
1995
- ---------------------------------------------------------------------------------------------------------------
Net loss $ (5,457) $ (6,413) $ (4,873) $ (6,068)
Net loss per common
and equivalent share $ (0.44) $ (0.47) $ (0.35) $ (0.43)
Common stock prices
High $ 19 $ 17-1/2 $ 24 $ 31-1/4
Low $ 13 $ 11-1/4 $ 14 $ 16-3/4
The Company's common stock is traded over-the-counter on The Nasdaq Stock
Market under the symbol "VVUS." As of December 31, 1996, there were
approximately 368 stockholders of record. The Company has not paid any
dividends since its inception and does not intend to pay any dividends in the
foreseeable future.
SELECTED FINANCIAL DATA
Years Ended December 31,
-----------------------------------------------------------------
1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------
Revenue $ 20,000 $ -- $ -- $ -- $ --
Operating expenses:
Research and development 28,279 21,313 13,916 6,814 3,102
General and administrative 11,733 4,389 2,587 1,499 626
-------- -------- -------- -------- ---------
Total operating expenses 40,012 25,702 16,503 8,313 3,728
-------- -------- -------- -------- ---------
Loss from operations (20,012) (25,702) (16,503) (8,313) (3,728)
Interest income 3,485 2,891 1,639 538 63
-------- -------- -------- -------- ---------
Net loss $(16,527) $(22,811) $(14,864) $ (7,775) $ (3,665)
======== ======== ======== ======== =========
Net loss per common and
equivalent share $ (1.11) $ (1.70) $ (1.27) $ (0.79)
Shares used in per share calculations 14,917 13,457 11,744 9,828
Financial position at year end:
Total assets $ 96,532 $ 44,049 $ 43,021 $ 24,732 $ 5,626
Accumulated deficit (66,154) (49,627) (26,816) (11,952) (4,177)
Stockholders' equity 89,780 41,181 40,307 23,435 5,096
Additional information:
Working capital $60,388 $ 19,878 $ 21,656 $ 16,010 $ 5,002
Capital expenditures $ 3,682 $ 3,148 $ 787 $ 1,007 $ 81
Common shares outstanding 16,227 13,476 11,724 2,328 2,215
Number of employees 95 38 28 15 5
2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Since its inception in April 1991, VIVUS, Inc. (the Company) has focused on the
design and development of products for the treatment of erectile dysfunction.
The Company has devoted substantially all its efforts to research and
development conducted on its own and through collaboration with clinical
institutions. The Company's primary product, MUSE(R) (alprostadil), has moved
from preclinical development to regulatory marketing clearance over the last
four years. In November 1996, the Company obtained regulatory marketing
clearance by the U.S. Food and Drug Administration (FDA) to manufacture and
market MUSE (alprostadil). The Company commenced product shipments to
wholesalers in December 1996 and commercially introduced MUSE (alprostadil) in
the United States through its direct sales force beginning in January 1997. In
addition, the Company submitted applications for approval of MUSE (alprostadil)
in the United Kingdom and Sweden in 1996, and in Norway in early 1997. These
applications will be subject to rigorous approval processes, and there can be
no assurance such approval will be granted in a timely manner, if at all.
To achieve profitability, the Company must successfully manufacture and market
MUSE (alprostadil). The Company is subject to a number of risks including its
ability to scale-up its manufacturing capabilities and secure adequate supplies
of raw materials, its ability to successfully market, distribute and sell its
product, its reliance on a single therapeutic approach to erectile dysfunction
and intense competition. There can be no assurance that the Company will be able
to achieve profitability on a sustained basis. Accordingly, there can be no
assurance of the Company's future success.
Spending increased from 1994 through 1996 largely as a result of expanded
operational activities related to the Company's Phase II and III clinical
trials, preparing the MUSE (alprostadil) New Drug Application (NDA) for the
FDA, expansion of its manufacturing capacity and development of its marketing
and sales capabilities. Spending levels will continue to increase during 1997
as the Company further expands its commercial manufacturing, marketing and
sales capabilities.
In May 1996, the Company completed a marketing agreement with Astra AB (Astra)
where Astra will purchase the Company's products for resale in Europe, South
America, Central America, Australia and New Zealand. As consideration for
execution of the marketing agreement, Astra paid the Company $10 million in
June 1996. In September 1996, the Company received a $10 million milestone
payment from Astra upon filing an application for marketing authorization for
MUSE (alprostadil) in the United Kingdom. The Company will be paid up to an
additional $10 million in the event it achieves certain other milestones. In
January 1997, the Company signed an international marketing agreement with
Janssen Pharmaceutica International (Janssen), a subsidiary of Johnson &
Johnson. Janssen will purchase the Company's products for resale in China,
multiple Pacific Rim countries (excluding Japan), Canada, Mexico and South
Africa. The Company received a $5 million payment as a result of the execution
of the agreement and additional payments will be made in the event that certain
other milestones are achieved.
The Company began generating revenues from product sales in January 1997. The
Company has limited experience in manufacturing and selling MUSE (alprostadil)
in commercial quantities. Whether the Company can successfully manage the
transition to a large scale commercial enterprise will depend upon successful
further development of its manufacturing capability and its distribution
network, attainment of foreign regulatory approvals for MUSE (alprostadil) and
domestic and foreign approval of other potential products. Failure to make such
a transition successfully would have a material adverse effect on the Company's
business, financial condition and results of operations.
3
In April 1994, the Company successfully completed an initial public offering of
2,473,000 shares of common stock, with net proceeds to the Company of
$31,578,000. The Company completed a secondary public offering of 1,800,000
shares of common stock in April 1995. Of the total number of shares sold,
1,670,000 shares were sold by the Company and 130,000 shares were sold by a
current stockholder. Net proceeds to the Company were $22,483,000. The Company
completed a third public offering of 2,000,000 shares of common stock in June
1996. In July 1996, the underwriters for this offering exercised their option
to purchase an additional 300,000 shares to cover over-allotments. Net proceeds
to the Company were $57,468,000.
This Overview section contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1993, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Actual results could differ
materially from those projected in the forward-looking statements as a result
of the factors set forth in the above mentioned paragraphs.
Results of Operations
Years Ended December 31, 1996 and 1995
In May 1996, the Company completed a marketing agreement with Astra AB (Astra)
where Astra will purchase the Company's products for resale in Europe, South
America, Central America, Australia and New Zealand. In consideration for
execution of the marketing agreement, Astra paid the Company $10 million in June
1996. In September 1996, the Company received a $10 million milestone payment
from Astra upon filing an application for marketing authorization for MUSE
(alprostadil) in the United Kingdom. The Company recorded these receipts as
revenue in the consolidated statement of operations during 1996. The Company
began generating revenues from product sales in January 1997. No product
revenues were recorded in 1996 or 1995.
Research and development expenses in 1996 were $28,279,000 compared with
$21,313,000 in 1995, an increase of 33%. This increase resulted primarily from a
$5.8 million charge related to the issuance of 200,000 shares of common stock in
May 1996 to ALZA Corporation to maintain exclusive rights to certain patents and
patent applications beyond 1998. In addition, higher pre-launch manufacturing
costs were partially offset by lower clinical and regulatory expenses.
General and administrative expenses in 1996 were $11,733,000 compared with
$4,389,000 in 1995, an increase of 167%. This increase resulted primarily from
higher product marketing and market research expenses, hiring and training the
U.S. sales force, and additional personnel and increased facilities costs to
support the growth of the Company's operations.
Interest income in 1996 was $3,485,000 compared with $2,891,000 in 1995, an
increase of 21%. The increase resulted from higher average invested cash
balances associated with the $57,468,000 in net proceeds received from the
stock offering in June 1996.
Years Ended December 31, 1995 and 1994
No revenues were recorded in 1995 or 1994. Research and development expenses in
1995 were $21,313,000 compared with $13,916,000 in 1994, an increase of 53%.
This increase resulted primarily from the increased expenses supporting the
Company's Phase III confirmatory clinical studies and ongoing clinical study
programs for MUSE (alprostadil), costs associated with the preparation of the
NDA for MUSE (alprostadil), expansion of the Company's
4
manufacturing capability and growth in personnel to support the Company's
expanding operations. Clinical trial costs consisted largely of payments to
clinical investigators. The Company pays its clinical investigators on a per
patient basis. In clinical trials through December 31, 1995, the MUSE
transurethral system had been used by more than 1,900 men at more than 80 sites
in the United States and Europe.
General and administrative expenses in 1995 were $4,389,000 compared with
$2,587,000 in 1994, an increase of 70%. This increase resulted primarily from
hiring additional personnel to support the growth of the Company's operations,
in addition to higher market research, legal and accounting expenses, and
expenses associated with being a public company.
Interest income in 1995 was $2,891,000 compared with $1,639,000 in 1994, an
increase of 76%. The increase resulted from higher average invested cash
balances as well as higher returns on its cash investments in 1995 due to the
favorable effects of higher average interest rates.
Liquidity and Capital Resources
Since inception, the Company has financed operations primarily from the sale of
preferred and common stock. To date, the Company has raised $147,594,000. Cash,
cash equivalents and securities totaled $84,325,000 at the end of 1996 compared
with $39,524,000 at the end of 1995. The Company maintains its current excess
cash balances in a variety of interest-bearing financial securities such as
U.S. government securities, high-grade corporate debt and certificates of
deposit. Principal preservation, liquidity and safety are the primary investment
objectives. See Note 2 of Notes to Consolidated Financial Statements.
Cash used in operations in 1996 was $10,379,000 compared with $21,539,000 in
1995. The decreased use of cash was primarily due to a lower net loss of
$16,527,000, which also included a non-cash charge of $5,821,000 to operations
related to the issuance of 200,000 shares of stock to ALZA, in 1996 compared
with a net loss of $22,811,000 in 1995.
Product inventories were recorded beginning in the fourth quarter of 1996,
consistent with the FDA marketing clearance of MUSE (alprostadil).
Interest and other receivables and prepaid and other current assets at December
31, 1996 were $1,335,000 compared with $637,000 at December 31, 1995, an
increase of $698,000. This increase resulted primarily from an increase in
interest receivables related to the Company's investment portfolio.
Current liabilities were $6,752,000 at December 31, 1996 compared with
$2,868,000 at December 31, 1995, an increase of $3,884,000. This increase was
primarily due to an increase in expenditures in 1996.
Capital expenditures in 1996 were $3,682,000 compared with $3,148,000 in 1995,
an increase of $534,000. In 1995, the Company constructed and equipped
approximately 6,000 square feet of manufacturing and testing space within Paco
Pharmaceutical Services, Inc., a contract manufacturing facility owned by The
West Company located in Lakewood, New Jersey. Capital expenditures in 1996
consisted primarily of manufacturing, quality control, laboratory and computer
equipment. Major capital expenditures over the next two years are expected to
include Company-owned manufacturing facilities in the United States and Europe,
a new corporate headquarters and research and development laboratory facility
in the United States.
5
In 1995, the Company implemented an international product distribution strategy
for its products. Implementation included the transfer of international product
manufacturing and marketing rights to VIVUS International Limited, a
wholly-owned subsidiary of the Company, in a taxable transaction. The transfer
of rights and related allocation of research and development costs resulted in
the utilization of $29,467,000 of the net operating loss carryforward.
The Company expects to incur substantial additional costs, including expenses
related to building its marketing and sales organization, a second manufacturing
plant in the United States and one in Europe, new product preclinical and
clinical costs, ongoing research and development activities and general
corporate purposes. The Company anticipates that its existing capital resources
will be sufficient to support the Company's operations through the commercial
introduction of MUSE (alprostadil) in Europe, but may not be sufficient for the
introduction of any additional future products. Accordingly, the Company
anticipates that it may be required to issue additional equity or debt
securities and may use other financing sources including, but not limited to,
corporate alliances and lease financings to fund the future development and
possible commercial launch of its future products. The sale of additional equity
securities would result in additional dilution to the Company's stockholders.
The Company's working capital and additional funding requirements will depend
upon numerous factors, including: (i) the level of resources that the Company
devotes to sales and marketing capabilities; (ii) the level of resources that
the Company devotes to expanding manufacturing capacity; (iii) the activities of
competitors; (iv) the progress of the Company's research and development
programs; (v) the timing and results of preclinical testing and clinical trials;
and (vi) technological advances.
This Liquidity and Capital Resources section contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Actual results could differ materially from those projected in the
forward-looking statements as a result of the factors set forth above in this
Liquidity and Capital Resources section and in the Overview section to this
Management's Discussion and Analysis of Financial Condition and Results of
Operations. The discussion of those factors is incorporated herein by this
reference as if said discussion was fully set forth at this point.
6
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
December 31,
-----------------------------
1996 1995
- ------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 555 $ 973
Available-for-sale securities 60,710 21,136
Interest and other receivables 748 449
Inventories 4,540 --
Prepaid expenses and other 587 188
------------ ------------
Total current assets 67,140 22,746
Property, net 6,332 3,888
Available-for-sale securities, non-current 23,060 17,415
------------ ------------
Total $ 96,532 $ 44,049
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 3,324 $ 353
Accrued and other liabilities 3,428 2,515
------------ ------------
Total current liabilities 6,752 2,868
------------ ------------
Commitments (Notes 7 and 8)
Stockholders' equity:
Preferred stock; no par value; shares authorized--
5,000,000; shares outstanding--none -- --
Common stock; $.001 par value; shares authorized--
30,000,000; shares outstanding--December 31, 1996,
16,227,170; December 31, 1995, 13,475,570 16 13
Paid in capital 156,189 91,472
Unrealized gain on securities 77 114
Deferred compensation (348) (791)
Accumulated deficit (66,154) (49,627)
------------ ------------
Total stockholders' equity 89,780 41,181
------------ ------------
Total $ 96,532 $ 44,049
============ ============
See notes to consolidated financial statements.
7
CONSOLIDATED STAEMENTS OF OPERATIONS
(In thousands, except per share data)
Years Ended December 31,
---------------------------------------------
1996 1995 1994
- -------------------------------------------------------------------------------------------------------
Revenue $ 20,000 $ -- $ --
Operating expenses:
Research and development 28,279 21,313 13,916
General and administrative 11,733 4,389 2,587
----------- ---------- ----------
Total operating expenses 40,012 25,702 16,503
----------- ---------- ----------
Loss from operations (20,012) (25,702) (16,503)
Interest income 3,485 2,891 1,639
----------- ---------- ----------
Net loss $ (16,527) $ (22,811) $ (14,864)
=========== ========== ==========
Net loss per common and
equivalent share $ (1.11) $ (1.70) $ (1.27)
=========== ========== ==========
Shares used in per share calculation 14,917 13,457 11,744
=========== ========== ==========
See notes to consolidated financial statements.
8
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except per share data)
Common Stock
Convertible and Unrealized
Preferred Stock Paid-in Capital Gain (Loss)
---------------- --------------- on Deferred Accumulated
Shares Amount Shares Amount Securities Compensation Deficit
- ----------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1993 20,641 $ 34,402 2,328 $ 1,968 $ 2 $ (984) $(11,952)
Sale of common stock at $14.00
per share for cash (net of
issuance costs of $3,037,000) 2,473 31,578
Conversion of preferred stock
into common (20,641) (34,402) 6,880 34,402
Sale of common stock through
employee stock purchase plan 5 50
Exercise of common stock options
for cash 38 18
Unrealized loss on securities (341)
Deferred compensation related to
stock option grants 682 (682)
Amortization of deferred compensation 430
Net loss (14,864)
------- --------- ------ --------- -------- -------- --------
Balances, December 31, 1994 -- -- 11,724 68,698 (339) (1,236) (26,816)
Sale of common stock at $14.50
per share for cash (net of
issuance costs of $1,732,000) 1,670 22,483
Sale of common stock through
employee stock purchase plan 16 172
Exercise of common stock options
for cash 66 132
Unrealized gain on securities 453
Amortization of deferred compensation 445
Net loss (22,811)
------- --------- ------ --------- -------- -------- --------
Balances, December 31, 1995 -- -- 13,476 91,485 114 (791) (49,627)
Issuance of common stock at $29.11
for patent rights 200 5,821
Sale of common stock at $26.75
per share for cash (net of
issuance costs of $4,057,000) 2,300 57,468
Sale of common stock through
employee stock purchase plan 10 226
Exercise of common stock options
for cash 241 1,205
Unrealized loss on securities (37)
Amortization of deferred compensation 443
Net loss (16,527)
------- --------- ------ --------- -------- -------- --------
Balances, December 31, 1996 -- $ -- 16,227 $ 156,205 $ 77 $ (348) $(66,154)
======= ========= ====== ========= ======== ======== ========
See notes to consolidated financial statements.
9
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31,
----------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $ (16,527) $ (22,811) $ (14,864)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization 1,238 708 265
Amortization of deferred compensation 443 445 430
Issuance of common stock for patent rights 5,821 -- --
Changes in assets and liabilities:
Interest and other receivables (299) (41) 118
Inventories (4,540) -- --
Prepaid expenses and other (399) 6 (10)
Accounts payable 2,971 (298) (302)
Accrued and other liabilities 913 452 1,720
------------ ------------ ------------
Net cash used for operating activities (10,379) (21,539) (12,643)
------------ ------------ ------------
Cash flows from investing activities:
Property purchases (3,682) (3,148) (787)
Investment purchases (177,074) (146,338) (116,811)
Proceeds from sale/maturity of securities 131,818 147,202 99,498
Other -- (28) 4
------------ ------------ ------------
Net cash used for investing activities (48,938) (2,312) (18,096)
------------ ------------ ------------
Cash flows from financing activities:
Sale of common stock 57,468 22,483 31,578
Exercise of common stock options 1,205 132 18
Sale of common stock through employee
stock purchase plan 226 172 50
------------ ------------ ------------
Net cash provided by financing activities 58,899 22,787 31,646
------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents (418) (1,064) 907
Cash and cash equivalents:
Beginning of period 973 2,037 1,130
------------ ------------ ------------
End of period $ 555 $ 973 $ 2,037
============ ============ ============
Non-cash investing and financing activities:
Deferred compensation recorded relating to
stock option grants $ -- $ -- $ 682
Unrealized gain (loss) on securities (37) 453 (341)
See notes to consolidated financial statements.
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Business
VIVUS, Inc. was incorporated in California in 1991 to develop products for the
treatment of erectile dysfunction. The Company was reincorporated in Delaware
in 1996. The classification of the capital accounts reflects the effect of the
reincorporation for all periods presented.
The Company has devoted substantial effort towards product research and
development, clinical trials, securing adequate product supply and
manufacturing capabilities, and raising capital. As of December 31, 1996, the
Company is no longer considered a development stage company. The Company
obtained clearance from the U.S. Food and Drug Administration ("FDA") to
manufacture and market MUSE (alprostadil) in November 1996 and is currently
seeking marketing clearance in other countries. The Company commenced product
shipments to wholesalers in December 1996 and commercially introduced MUSE
(alprostadil) in the United States through its direct sales force beginning
January 1997.
The Company is subject to a number of risks including its ability to scale-up
its manufacturing capabilities and secure an adequate supply of raw materials,
its ability to successfully market, distribute and sell its product, its
reliance on a single therapeutic approach for the treatment of erectile
dysfunction, and intense competition. Accordingly, there can be no assurance of
the Company's future success.
Revenue Recognition
The Company recognized revenue of $20 million in the year ended December 31,
1996 as a result of achieving certain milestones under its marketing agreement
with Astra AB. The amount recognized is not refundable and does not involve any
significant future performance obligations.
While there were product shipments in December 1996, the Company has not
recognized revenue, nor the associated cost of sales on these shipments because
of extended rights-of-return privileges granted to customers during this initial
selling period. Assuming return privileges are not exercised, revenue will be
recognized during the first quarter of 1997 when the return period has elapsed.
For shipments after January 1, 1997, extended rights-of-return will not be
offered and revenue will be recognized as shipments are made.
Principles of Consolidation
The consolidated financial statements include VIVUS, Inc., VIVUS International
Limited, a wholly-owned subsidiary, and VIVUS UK Limited and VIVUS BV Limited,
wholly-owned subsidiaries of VIVUS International Limited. All significant
intercompany transactions and balances have been eliminated.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with an
original maturity of 90 days or less to be cash equivalents.
Inventories
Inventories are stated at the lower of cost (first-in, first-out basis) or
market. Cost includes material and conversion costs. Pending FDA marketing
clearance, which was obtained in November 1996, the Company expensed to
research and development in 1996 and prior years all raw material purchases
prior to October 1, 1996. Certain of these expensed raw material costs
(approximately $10 million) will have the benefit of reducing future cost of
sales.
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Available-for-Sale Securities
The Company accounts for available-for-sale securities in accordance with
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Available-for-sale securities
represent debt securities that are stated at fair value. The difference between
amortized cost (cost adjusted for amortization of premiums and accretion of
discounts which are recognized as adjustments to interest income) and fair
value, representing unrealized holding gains or losses, are recorded as a
separate component of stockholders' equity until realized. The Company's policy
is to record debt securities as available-for-sale because the sale of such
securities may be required prior to maturity. Any gains and losses on the sale
of debt securities are determined on a specific identification basis.
Property
Property is stated at cost. Depreciation and amortization are computed using
the straight-line method over estimated useful lives of three to seven years.
Income Taxes
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," which requires an
asset and liability approach for financial reporting of income taxes.
License Agreements
The Company has obtained rights to patented technologies related to its initial
product under several licensing agreements. These agreements generally require
payments during the development period and royalties on product sales. Payments
prior to commercial availability of the product have been reported as research
and development expense.
Research and Development
Research and development costs are expensed as incurred.
Net Loss Per Common and Equivalent Share
Net loss per common and equivalent share is based on the weighted average
number of common and common equivalent shares outstanding during the periods.
Common equivalent shares, which represent shares issuable upon the exercise of
outstanding stock options, were excluded from the calculation of loss per share
because the effect of including such shares in the calculation would be
anti-dilutive.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosures 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.
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. AVAILABLE-FOR-SALE SECURITIES
The fair value and the amortized cost of available-for-sale securities at
December 31, 1996 and 1995 are presented in the table that follows. Fair
values are based on quoted market prices obtained from an independent broker.
For each category of investment securities the table presents gross unrealized
holding gains and losses.
As of December 31, 1996:
Amortized Fair Market Unrealized Unrealized
(In thousands) Cost Value Holding Gains Holding Losses
- -------------------------------------------------------------------------------------------------------------
U.S. government securities $ 55,441 $ 55,488 $ 84 $ (37)
Corporate debt 28,252 28,282 32 (2)
------------ ------------ ------------ -----------
Total $ 83,693 $ 83,770 $ 116 $ (39)
============ ============ ============ ===========
As of December 31, 1995:
Amortized Fair Market Unrealized Unrealized
(In thousands) Cost Value Holding Gains Holding Losses
- -------------------------------------------------------------------------------------------------------------
U.S. government securities $ 35,937 $ 36,050 $ 113 $ --
Corporate debt 2,500 2,501 1 --
------------ ------------ ------------ -----------
Total $ 38,437 $ 38,551 $ 114 $ --
============ ============ ============ ===========
The contractual maturities of these securities as of December 31, 1996 are as
follows:
Amortized Fair Market
(In thousands) Cost Value
- -------------------------------------------------------------------------------------------------------------
Less than 1 year $ 60,650 $ 60,710
From 1 to 2 years 13,684 13,673
From 2 to 3 years 9,359 9,387
------------ ------------
Total $ 83,693 $ 83,770
============ ============
NOTE 3. INVENTORIES
Inventories as of December 31 consist of:
(In thousands) 1996 1995
- -------------------------------------------------------------------------------------------------------------
Raw materials $ 1,893 $ --
Work in process 344 --
Finished goods 2,303 --
------------ ------------
Inventories, net $ 4,540 $ --
============ ============
NOTE 4. PROPERTY
Property as of December 31 consists of:
(In thousands) 1996 1995
- -------------------------------------------------------------------------------------------------------------
Machinery and equipment $ 4,763 $ 3,578
Computers and software 1,859 872
Furniture and fixtures 535 404
Construction in progress 1,554 175
------------ ------------
8,711 5,029
Accumulated depreciation and amortization (2,379) (1,141)
------------ ------------
Property, net $ 6,332 $ 3,888
============ ============
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. ACCRUED AND OTHER LIABILITIES
Accrued and other liabilities as of December 31 consist of:
(In thousands) 1996 1995
- ------------------------------------------------------------------------------------------------------------
Clinical trial expenses $ 347 $ 906
Manufacturing expenses 1,086 496
Marketing expenses 711 76
Employee benefits 392 182
Other 892 855
------------ ------------
Accrued and other liabilities $ 3,428 $ 2,515
============ ============
NOTE 6. STOCKHOLDERS' EQUITY
In April 1994, the Company completed an initial public offering of 2,473,000
shares of common stock. Net proceeds to the Company were $31,578,000. The
Company effected a one-for-three common stock split and a corresponding change
in the preferred stock conversion ratios in connection with the initial public
offering. Additionally, all preferred stock was converted to common stock. All
common stock data in the accompanying consolidated financial statements for all
years presented have been retroactively adjusted to reflect the stock split.
The Company completed a secondary stock offering of 1,800,000 shares of common
stock in April 1995. Of the total number of shares sold, 1,670,000 shares were
sold by the Company and 130,000 shares were sold by a current stockholder. Net
proceeds to the Company were $22,483,000.
The Company completed a third stock offering of 2,000,000 shares of common stock
in June 1996. In July 1996, the underwriters for this offering exercised their
option to purchase an additional 300,000 shares to cover over-allotments. Net
proceeds to the Company were $57,468,000.
Preferred Stock
The Company is authorized to issue 5,000,000 shares of undesignated preferred
stock. Such shares of preferred stock may be issued by the Company in the
future, without stockholder approval, upon such terms as the Company's Board of
Directors may determine.
Stock Warrants
In connection with the issuance of convertible preferred stock in 1993, the
Company issued warrants currently exercisable for up to 264,000 shares of
common stock at an exercise price of $8.63 per share. The warrants expire in
1999.
Stock Purchase and Option Plans
Under the 1991 Incentive Stock Plan (the Plan), the Company may grant incentive
or nonstatutory stock options or stock purchase rights (SPRs). Up to 3,100,000
shares of common stock have been authorized for issuance under the Plan. The
Plan allows the Company to grant incentive stock options (ISOs) and
nonstatutory stock options (NSOs) to key employees, directors and consultants
at not less than the fair market value (for an ISO) of the stock at the date of
grant (110% of fair market value for individuals who control more than 10% of
the Company stock; otherwise, not less than 85% of fair market value for an
NSO), as determined by the Board of Directors. Under the Plan, 25% of the
options generally become exercisable after one year and 2.0833% per month
thereafter. The term of the option is determined by the Board of Directors on
the date of grant but shall not be longer than ten years. The Plan allows the
Company to grant SPRs to key employees and consultants at not less than 85% of
the fair market value of the stock at the date of grant, as determined by the
Board of Directors. Sales of stock under SPRs are made pursuant to restricted
stock purchase agreements containing provisions established
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
by the Board of Directors. The Company has a right to repurchase the shares at
the original sale price, which expires at a rate to be determined by the Board
of Directors. As of December 31, 1996, no SPRs have been granted under the
Plan.
In February 1994, the Board of Directors authorized the adoption of the 1994
Director Stock Option Plan (the Director Option Plan). Under the Director
Option Plan, the Company reserved 100,000 shares of common stock for issuance
to nonemployee directors of the Company pursuant to nonstatutory stock options
issued at the fair market value of the Company's common stock at the date of
grant. Under the Director Option Plan, nonemployee directors will receive an
option to purchase 12,500 shares of common stock when they join the Board of
Directors. These options vest 25% after one year and 25% annually thereafter.
Thereafter, each director shall receive an option to purchase 2,500 shares of
the Company's common stock annually upon their reelection. These options are
fully exercisable ratably over eight months.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions used for
grants: risk-free rates ranging from 5-7% and corresponding to government
securities with original maturities similar to the vesting periods; expected
dividend yield of 0%; expected lives of .64 years beyond vest dates; and
expected volatility of 55%.
Details of option activity under these plans are as follows:
Exercise Prices
-------------------------------------
Number Weighted
of Shares Range Average
- ---------------------------------------------------------------------------------------------------------------
Outstanding, December 31, 1994 1,092,384 $ .18 - $ 15.75 $ 5.79
Granted 627,025 11.25 - 27.00 16.24
Exercised (66,385) .18 - 7.50 2.00
Canceled (20,708) .48 - 14.50 13.45
---------
Outstanding, December 31, 1995 1,632,316 .18 - 27.00 9.86
Granted 722,373 28.25 - 39.94 32.80
Exercised (242,898) .18 - 19.75 4.95
Canceled (12,866) .48 - 23.75 20.49
---------
Outstanding, December 31, 1996 2,098,925 $ .18 - $ 39.94 $ 18.26
=========
Options Outstanding Options Exercisable
- ------------------------------------- -------------------------------------------------------------------------
Number Number
Outstanding at Weighted-Average Exercisable
Range of December 31, Remaining Weighted-Average December 31, Weighted-Average
Exercise Prices 1996 Contractual life Exercise Price 1996 Exercise Price
-------------- -------------------------------------------------------------------------
$ 0.18 to $ 7.50 523,117 6.60 years $ 2.85 402,349 $ 2.51
$11.25 to $13.50 525,535 8.15 years 13.12 241,987 13.16
$14.00 to $30.00 574,275 8.80 years 23.67 136,870 18.30
$30.25 to $36.50 422,999 4.85 years 33.87 0 0
$38.00 to $39.94 52,999 9.41 years 38.09 0 0
--------- ---------
$ 0.18 to $39.94 2,098,925 7.31 years $ 18.26 781,206 $ 8.58
========= =========
At December 31, 1996, 737,109 shares remain authorized and unissued and options
to purchase 781,206 shares were exercisable under these plans. The weighted
average of fair values of options granted during the year under these plans was
$13.49.
During 1993, options to purchase 589,875 shares of common stock were granted at
exercise prices ranging from $.48 to $3.00. Deferred compensation of $1,093,000
was recorded in 1993. In January and February 1994, options to purchase 189,166
shares of common stock were granted at exercise prices ranging from $6.00 to
$7.50. Deferred compensation of $682,000 was recorded in the first quarter of
1994.
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company accounts for these plans under APB Opinion No. 25. Except for
deferred compensation discussed in the preceding paragraph, no compensation cost
has been recognized because the exercise price equals the market value of stock
on the date of grant. Options under these plans vest over four years, and all
options expire after ten years.
Had compensation cost for these plans been determined consistent with FASB
Statement No. 123 (FASB 123), "Accounting for Stock-based Compensation", the
Company's net loss and net loss per common and equivalent share would have
reflected the following pro forma amounts:
1996 1995
- ------------------------------------------------------------------------------------------------------------
Net loss (in thousands)
As reported $ (16,527) $ (22,811)
Pro forma $ (20,039) $ (23,941)
Net loss per common and equivalent share
As reported $ (1.11) $ (1.70)
Pro forma $ (1.34) $ (1.78)
Because the FASB 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
In June 1994, the Company implemented an employee stock purchase plan under
which eligible employees may authorize payroll deductions of up to 10% of their
base compensation (as defined) to purchase common stock at a price equal to 85%
of the lower of the fair market value as of the beginning or the end of the
offering period. A total of 200,000 shares were reserved for issuance under the
employee stock purchase plan. As of December 31, 1996, 30,525 shares have been
issued to employees. During 1996, the weighted average fair market value of
shares issued under the employee stock purchase plan was $31.69 per share.
NOTE 7. LICENSE AGREEMENTS
The Company has entered into several agreements to license patented
technologies that are essential to the development and production of the
Company's product. In connection with these agreements, upon meeting certain
milestones (as defined) and contingent on the issuance of patents in certain
countries, the Company is obligated to (1) pay license fees of $2,575,000 (of
which $1,750,000 has been paid); (2) issue 448,246 shares of the Company's
common stock (all of which has been issued); and (3) pay royalties on product
sales covered by the license agreements (4% of U.S. and Canadian product sales
and 3% of sales elsewhere in the world). In 1996, the Company issued an
additional 200,000 shares of common stock to maintain exclusive rights to
certain patents and patent applications beyond 1998. In connection with this
issuance, the Company recorded a charge of $5,821,000 to the consolidated
statements of operations.
NOTE 8. LEASE COMMITMENTS
The Company leases its principal administrative facility under a noncancelable
operating lease expiring December 1997. The Company also leases additional
office space and a development facility under noncancelable operating leases
expiring September 1999.
Subsequent to year end, the Company executed a five year lease for two
buildings totalling 90,000 square feet that will be built out to support
expansion of the Company's manufacturing capabilities. Additionally, the
Company signed a fifteen year noncancelable lease (expected to commence in
December 1997) for its new principal administrative and research and
development laboratory facility. Under the terms of this lease, the Company is
required to post a $2 million letter of credit to secure tenant improvements
and a $1.75 million letter of credit to secure ongoing performance under the
lease.
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Future minimum lease payments under operating leases for the years ended
December 31, 1997, 1998 and 1999, including the leases entered into subsequent
to year end described above, are $1,067,000, $1,675,000 and $1,671,000,
respectively.
Rent expense under operating leases totaled $560,000, $342,000, and $206,000
for years ended December 31, 1996, 1995, and 1994, respectively.
NOTE 9. INCOME TAXES
Deferred income taxes result from differences in the recognition of expenses
for tax and financial reporting purposes, as well as operating loss and tax
credit carryforwards. Significant components of the Company's deferred income
tax assets as of December 31 are as follows:
(In thousands) 1996 1995
- ------------------------------------------------------------------------------------------------------------
Deferred tax assets:
Net operating loss carryforwards $ 7,870 $ 4,834
Research and development credit carryforwards 2,715 2,292
Capitalized research and development expenses 3,695 2,642
Inventory reserve 4,237 --
Amortization -- 329
Accruals and other 709 247
Notes receivable from subsidiaries -- (1,700)
Deferred gain (1,760) --
Depreciation 487 91
------------ ------------
17,953 8,735
Valuation allowance (17,953) (8,735)
------------ ------------
Total $ -- $ --
============ ============
For federal and state income tax reporting purposes, net operating loss
carryforwards of approximately $22,231,000 and $956,000 are available to reduce
future taxable income, if any. These carryforwards begin to expire in 2007.
Additionally, at December 31, 1996, the Company has research and development
credit carryforwards available to reduce future federal and state income taxes
through 2011 of approximately $1,537,000 and $1,178,000, respectively. In 1995,
the Company implemented an international product distribution strategy for its
products. Implementation included the transfer of international product
manufacturing and marketing rights to VIVUS International Limited in a taxable
transaction. The transfer of rights and related allocation of research and
development costs resulted in the current utilization of $29,467,000 of the net
operating loss carryforward. Should significant changes in the Company's
ownership occur, the annual amount of tax loss and credit carryforwards
available for future use would be limited.
NOTE 10. SUBSEQUENT EVENT
In January 1997, the Company signed an international marketing agreement with
Janssen Pharmaceutica International (Janssen), a subsidiary of Johnson &
Johnson. Janssen will purchase the Company's products for resale in China,
multiple Pacific Rim countries (excluding Japan), Canada, Mexico and South
Africa. The Company received a $5,000,000 payment as a result of the execution
of the agreement and additional payments will be made in the event that certain
milestones are achieved.
17
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF VIVUS, INC.:
We have audited the accompanying consolidated balance sheets of VIVUS, Inc. (a
Delaware corporation) and subsidiaries as of December 31, 1996 and 1995, and
the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of VIVUS, Inc. and subsidiaries
at December 31, 1996 and 1995, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1996,
in conformity with generally accepted accounting principles.
Arthur Andersen LLP
San Jose, California
January 27, 1997