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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 000-20985
CALYPTE BIOMEDICAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 06-1226727
(I.R.S. Employer
(State or other jurisdiction of Identification Number)
incorporation or organization)
1440 FOURTH STREET, BERKELEY, CALIFORNIA 94710
(Address of principal executive offices) (Zip Code)
(510) 526-2541
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.001 PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy of information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [_].
As of February 28, 1998, 13,376,443 shares of the registrant's common stock,
$.001 par value, were outstanding. The aggregate market value of the common
stock held by non-affiliates of the registrant (i.e., excluding shares held by
executive officers, directors, and control persons as defined in Rule 405) on
that date was $47,284,122 computed at the closing price of the common stock on
that date on the NASDAQ SmallCap Market.
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CALYPTE BIOMEDICAL CORPORATION
FORM 10-K
INDEX
PAGE NO.
PART I. --------
Item 1. Business................................................ 1
Item 2. Properties.............................................. 22
Item 3. Legal Proceedings....................................... 22
Item 4. Submission of Matters to a Vote of Security Holders..... 22
PART II.
Item 5. Market for Registrant's Common Equity and Related 23
Stockholder Matters.....................................
Item 6. Selected Consolidated Financial Data.................... 24
Item 7. Management's Discussion and Analysis of Financial 25
Condition and Results of Operations.....................
Item 7A. Quantitative and Qualitative Disclosures About Market 28
Risk....................................................
Item 8. Financial Statements and Supplementary Data............. 28
Item 9. Changes in and Disagreements with Accountants on 29
Accounting and Financial Disclosure.....................
PART III.
Item 10. Executive Officers, Directors and Significant Employees 30
of the Registrant.......................................
Item 11. Executive Compensation.................................. 33
Item 12. Security Ownership of Certain Beneficial Owners and 37
Management..............................................
Item 13. Certain Relationships and Related Transactions.......... 38
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on 39
Form 8-K................................................
Signatures............................................... 42
Except for the historical information contained in this annual report on
Form 10-K, the matters discussed herein contain forward-looking statements
that are subject to certain risks and uncertainties that could cause actual
results to differ materially from those projected. These risks and
uncertainties include, but are not limited to, the dependence on sole source
of supply and regulatory approval of confirmatory test, limited operating
history, reliance on proprietary technology and know-how, the Company's
products not achieving market acceptance, and dependence on a single product,
as well as the other risks and uncertainties described under "Risk Factors"
and elsewhere in this annual report on Form 10-K. The Company assumes no
obligation to update any forward-looking statements contained herein.
PART I
ITEM 1. 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 August 6, 1996, the Company received a product license and an
establishment license from the Food & Drug Administration ("FDA") to
manufacture and sell, in interstate and foreign commerce, the Company's urine-
based HIV-1 screening test for use in professional laboratory settings. The
Company's screening test, when used with the western blot confirmatory test
for urine licensed exclusively 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. 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.
In October 1996, the Company received notification that the FDA would
require additional data before it would approve an amendment to Cambridge
Biotech's product license application for its urine-based HIV-1 Western Blot
kit, to be used as a confirmatory test with Calypte's HIV-1 urine screening
assay. On March 17, 1997, the Company submitted to the FDA the additional data
requested by the FDA before it would approve an amendment to Cambridge
Biotech's product license application for its HIV-1 Western Blot kit.
In September 1997, the Company received official notice from the FDA that
the agency had completed its review of the Cambridge Biotech urine
confirmatory test. The "Review Complete" letter indicated that the application
is approvable pending the completion of product labeling. There can be no
assurance that the FDA will grant approval of the Cambridge Biotech urine
confirmatory test. 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, if the confirmatory
test is approved, 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 approval application ("PMA")
to the FDA for approval of 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
1
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 an OTC
urine collection kit for HIV would have advantages compared to an OTC blood
collection kit for HIV. During 1997, Direct Access Diagnostics discontinued
sales of the OTC kit for HIV.
The Company intends to develop 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 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 offers significant advantages in terms of safety, cost, convenience, and
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 a 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 Joint United Nations Programme on HIV/AIDS, HIV currently
infects approximately 30.6 million individuals worldwide and according to the
Global Aids Policy Coalition, between 60 and 70 million adults will have been
infected with HIV by the end of 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 World Health Organization reports that worldwide, 75-
85% of HIV infections have been transmitted through unprotected sexual
intercourse, with heterosexual intercourse accounting for more than 70%. 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 enzyme immunoassays ("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
were 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,
2
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 five to
six million of the approximately 14 to 15 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.
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 kit for HIV. During 1997,
Direct Access Diagnostics discontinued sales of the OTC kit.
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 that 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
3
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.
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%. Assay specificity is the ability of an assay to identify all non-
HIV infected individuals correctly. Assay sensitivity is the ability of the
assay to detect truly HIV-infected individuals.
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.
New research shows that a combination of urine and blood-based tests can
detect antibodies to HIV-1 with greater sensitivity than can be achieved by
either test alone. Results of clinical trials reported by researchers at the
Company show that some individuals who test positive for antibodies to HIV-1,
may produce such antibodies in one body fluid but not another. Moreover,
researchers from the University of Milan found that individuals demonstrating
a strong natural immune response to the HIV-1 virus produce antibodies in
urine and vaginal samples, but not in blood, thus potentially simplifying the
identification of HIV-resistant individuals.
4
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. In April
1996, Cambridge Biotech agreed to sell its retroviral diagnostic business to
bioMerieux Vitek, Inc. bioMerieux Vitek is part of bioMerieux, an
international biotechnology group based in Lyon, France, dedicated to in-vitro
diagnostics with a special focus on infectious diseases. 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 license 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. 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. In October 1996, the Company received notification
that the FDA would require additional data before it would approve an
amendment to Cambridge Biotech's product license application for its urine-
based HIV-1 Western Blot kit, to be used as a confirmatory test with Calypte's
HIV-1 urine screening assay.
On March 17, 1997, the Company submitted to the FDA the additional data
requested by the FDA before it would approve an amendment to Cambridge
Biotech's product license application for its HIV-1 Western Blot kit. In
September 1997, the Company received official notice from the FDA that the
agency had completed its review of the Cambridge Biotech urine confirmatory
test. The "Review Complete" letter indicated that the application is
approvable pending the completion of product labeling. There can be no
assurance that the FDA will grant approval of the Cambridge Biotech urine
confirmatory test. 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.
PRODUCTS UNDER DEVELOPMENT
Cambridge Biotech HIV-1 Western Blot. The Company has developed a urine
procedure for use with the FDA licensed Cambridge Biotech HIV-1 Western Blot.
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.
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
5
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 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.
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 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. On January 27, 1997, the
Company entered into a collaborative research and product development
agreement with Trinity Biotech plc of Dublin, Ireland to develop a rapid, one-
step HIV test which can be performed on urine samples.
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 laboratories serving the
life insurance, military, immigration and criminal justice markets.
International and other U.S. markets will be addressed utilizing diagnostic
product distributors. To date, the Company has received approval for the sale
of its product in Indonesia only. The Company will work collaboratively with
its distributors to obtain regulatory approval in order to market and promote
the products in their local markets.
The Company anticipates that a 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, as
described on the following page, is terminable without cause by Otsuka 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.
6
The following table summarizes the markets and geographic regions covered by
the Company and its distributors for its HIV-1 test.
COMPANY GEOGRAPHIC REGION MARKETS
------- ----------------- -------
Calypte United States 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
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 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. 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
7
and selling its products either directly or through its distributors. The
Company's marketing strategy relies upon its alliance 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. All processes are carried out under Good Manufacturing Practices
("GMP"). 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.
Calypte's manufacturing operations are located in Berkeley, California with
an estimated annual capacity of approximately 4.5 million tests. The Company
received an establishment license from the FDA for the production of its HIV-1
screening test at this facility on August 6, 1996. The Company has completed a
larger manufacturing facility in Alameda, California which is pending FDA
license for approval. The capacity of the Alameda facility is approximately 20
million tests per year.
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
8
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 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 manufacturing of rgp160. The Company
improved and upgraded the Repligen Corporation ("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
9
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.
INVESTMENT IN PEPGEN
In October 1995 Calypte purchased an equity interest in Pepgen Corporation
("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 balance was paid in
October 1996. 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 unowned portion of Pepgen at fair market value, and the
Company is entitled to elect two of the seven Board members of Pepgen. Calypte
has no further commitments to fund Pepgen.
During January 1998, the Company loaned Pepgen $250,000 at an interest rate
of prime plus 3%. The loan is secured by all intellectual property of Pepgen
and is due on March 31, 1998. In addition, the Company was granted a warrant
to purchase 500,000 shares of Pepgen common stock at $0.50 per share expiring
on March 1, 1999.
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
two U.S. patents, one pending U.S. patent application, six foreign patents,
and nine pending foreign patent applications. In addition, the Company
currently has the right to utilize certain patents and proprietary rights
under licensing agreements with New York University ("NYU"), Cambridge
Biotech, Repligen, and Texas A&M University System. The patent with Stanford
University expired on December 2, 1997. 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.
10
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 from such products and
certain royalties on net sublicensing revenue derived from sales of products
incorporating gp160. In addition, the Company is required to pay certain fixed
and royalty payments (based on pre-termination as well as post-termination
sales) for a non-transferrable, non-exclusive license from Stanford University
which expired on December 2, 1997. This patent related to recombinant DNA
processes.
In the event that the Company does not 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 certain licenses.
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.
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.
11
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 results of operations. There can be no
assurance that the Company will be able to maintain exclusivity under or
maintain its current license agreements. Termination of any of these licenses
could have a material adverse effect on the Company's business, financial
condition and results of operations.
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
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.
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, the Safe
Medical Devices Act of 1990, and the Modernization Act of 1997 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 or a product license
application ("PLA"), from being marketed for unapproved 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 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 foreign regulatory 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 establishment licensing
application ("ELA") for the Company's Berkeley, California manufacturing
facility. In August 1996, the Company received a product license and an
establishment license from the FDA to
12
manufacture and sell, in interstate and foreign commerce, the Company's urine-
based HIV-1 screening test for use in laboratory settings.
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 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 GMP 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 GMP or California
manufacturing requirements. Enforcement of the GMP 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,
the FDA will not approve an ELA or PMA if the facility is found in
noncompliance with GMPs. 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.
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 maintains
$5,000,000 of 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
13
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.
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 received approval for the
sale of its product in Indonesia only. Failure to obtain additional 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
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.
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
14
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 rapid test, which is intended for use on serum and plasma only. Although
urine capability for this test has been reported in scientific literature, the
Company is not aware of any applications for expanded sampling claims for this
assay. In addition, the SUDS assay format is not conducive to high-volume
testing. In March 1998, Murex signed a definative agreement to be acquired by
Abbott Laboratories.
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.
15
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 Direct Access Diagnostics
product has been discontinued by the manufacturer. 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. Several companies have or are
seeking FDA clearance for a urine-based diagnostic test for Chlamydia which is
based on DNA amplification or detection.
EMPLOYEES
As of December 31, 1997, the Company had 38 full time employees, nine of
whom were engaged in or directly supported the Company's research and
development activities, 19 of whom were in manufacturing, facilities and
quality assurance, two of whom were in marketing and sales and eight 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.
William A. Boeger, the CEO and President of the Company, is the CEO,
President and board member of Pepgen, a minority owned therapeutic subsidiary
of the Company and Dr. Howard B. Urnovitz, the Company's Chief Science
Officer, is the Chief Science Officer for Pepgen. 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
most 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.
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. 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).
MARIO CLERICI, M.D., Associate Professor, Department of Immunology,
University of Milan, Italy. Dr. Clerici is a medical researcher with expertise
in the field of AIDS and HIV research. He is listed in Science Magazine as one
of the top ten quoted AIDS researchers from 1993-1995, and as a co-discoverer
of individuals with natural resistance to HIV. Dr. Clerici graduated in 1985
from the University of Milan.
16
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 Part III, "Executive Officers, Directors and Significant
Employees of the Registrant."
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 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., Director of Viral Oncology, 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.
In 1998, Professor Montagnier has expanded his research efforts to the United
States by accepting an endowed professorship at Queens College, New York. He
will be in charge of the Center for Molecular and Cellular Biology whose
research efforts will be focused on HIV therapeutics and vaccines. Professor
Montagnier will also continue his research efforts in Paris at both the
Pasteur Institute and his World Foundation AIDS Research and Prevention. 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 Part III, "Executive Officers, Directors and Significant
Employees of the Registrant."
17
RISK FACTORS
The Company wishes to caution readers that the following important factors,
among others, may affect the Company's future results, events or performance
and could cause actual results, events or performance to differ materially
from those expressed in any forward-looking statements made by the Company in
this report or presented elsewhere by the Company from time to time.
Dependence on 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 Corporation (Cambridge Biotech) under which both the Company 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 September 18, 1997,
Cambridge Biotech received official notice from the FDA that the FDA had
completed its review of the HIV-1 western blot kit. Such notice indicated that
Cambridge Biotech's application was approvable pending the completion of
product labeling. There can be no assurance that the FDA will grant approval
of the Cambridge Biotech urine confirmatory test. Any significant delay in
obtaining approval for the Cambridge Biotech urine confirmatory test or the
failure to obtain such approval at all could have a material adverse effect on
the Company's business, financial condition and results of operations.
Reliance on Proprietary Technology and Know-How; License Obligations
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. In addition, the
Company currently has the right to utilize certain patents and proprietary
rights under licensing agreements with New York University, Cambridge Biotech,
Repligen and Texas A&M University System. These license arrangements secure
intellectual property rights for the manufacture and sale of the Company's
products. There can be no assurance that such intellectual property rights
will be sufficient or that such patents and proprietary rights can be
adequately protected.
Uncertainty of Market Acceptance; Lack of Sales and Marketing Experience
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 alliance 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.
Dependence on a Single Product
The Company's HIV-1 urine-based screening test is the Company's only FDA-
approved product. Because the screening test is the Company's sole product,
the Company could be required to cease operations if Cambridge
18
Biotech's confirmatory test does not receive FDA approval or if the Company's
test, together with the Cambridge Biotech urine confirmatory test, fail to
achieve market acceptance or generate significant revenue.
Dependence Upon Sole Source Suppliers
The Company 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.
Limited Manufacturing Experience; Scale-Up Risk
The Company has limited experience in manufacturing its products. The
Company currently manufactures its products 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 products, including problems involving production yields,
quality control and assurance, raw material supply and shortages of qualified
personnel. The implementation of manufacturing at 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.
Dependence Upon International Distributors and Sales
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. 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.
Intense Competition in Company's Markets and Rapid Technological Advances by
Competitors
Competition in the in vitro diagnostic market is intense and is expected to
increase. Within the United States, the Company will face competition from a
number of well-established manufacturers of blood-based enzyme immunoassays,
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 may have already submitted
applications to the FDA for approval of their over-the-counter (OTC) products.
There can 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 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.
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
19
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.
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 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 United States. The
FDA prohibits a device, whether or not cleared under a 510(k) premarket
notification or approved under a pre-market application, 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 such
company's products and assess civil and criminal penalties against such
company, its officers or its employees. Furthermore, the Company plans to sell
products in certain foreign countries 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 the 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, 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.
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.
Product Liability and Recall Risk; Limited Insurance Coverage
The manufacture and sale of medical diagnostic products entail the risk of
product liability claims or product recalls. While the Company maintains
$5,000,000 of 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.
History of Operating Losses; Need for Additional Financing
The Company has incurred losses in each year since its inception and has an
accumulated deficit of approximately $48.3 million through December 31, 1997,
including a net loss of $7.9 million in the fiscal year
20
ended December 31, 1997. The Company does not expect that revenues from
product sales or other sources will be sufficient to fund operations or that
the Company will achieve profitability or positive cash flow prior to raising
additional financing. Additional financing will be required to fund the
Company's continuing operations and product and business development
activities in the form of debt or equity securities or bank financing. There
can be no assurance that such financing will be available on acceptable terms,
if at all. The unavailability of such financing could delay or prevent the
development, testing, regulatory approval, manufacturing or marketing of some
or all of the Company's products and could have a material adverse effect on
the Company's business, financial condition or results of operations.
Hazardous Materials
As with any diagnostic companies, the Company's research and development
involves the controlled use of hazardous materials. There can be no assurance
that the Company's safety procedures for handling and disposing of such
materials will comply with the standards prescribed by federal, state and
local regulations or that it will not be subject to the risk or accidental
contamination or injury from these materials. In the event of such an
accident, the Company could be held liable for any damages that result and any
such liability could materially adversely affect 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'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 the retain such personnel.
Possible Volatility of Stock Price
There can be no assurance that an active trading market will be maintained
in the Company's Common Stock. The Company's Common Stock is listed in the
NASDAQ SmallCap Market System. 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 United States 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.
Potential Adverse Effect on Market Price of Shares Eligible for Future Sale
Substantially all of the shares of the Company's outstanding Common Stock
are freely tradeable. Sales of Common Stock (including shares issued upon the
exercise of outstanding options) in the public market 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.
Anti-Takeover Effect of Certain Charter Provisions
Certain provisions of the Company's Certificate of Incorporation and Bylaws
could discourage potential acquisition proposals and could delay or prevent a
change in control of the Company. Such provisions could
21
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 the Company, 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 the
Company. 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.
Limited Public Market; Possible Removal from Nasdaq SmallCap
The public trading volume of the Company's Common Stock has been relatively
limited. There can be no assurance that a more active trading market for the
Company's Common Stock will develop or, if it develops, that it will be
sustained. In addition, in the past year the NASDAQ Stock Market has made
inquiries of the Company regarding whether the Company continues to meet the
maintenance criteria for trading on the NASDAQ SmallCap market. While the
Company currently meets the maintenance criteria, the Company's ability to
continue to do so will depend on whether the Company becomes profitable or is
able to raise additional financing. If the Company were to fail to meet the
maintenance criteria and be removed from the NASDAQ SmallCap market, the public
trading volume and the ability of stockholders to sell their shares could be
significantly impaired.
Year 2000
The Company is reviewing its internal computer systems to ensure these
systems are adequately able to address the issues expected to arise in
connection with the upcoming Year 2000.
If necessary, the Company expects to implement the systems necessary to
address Year 2000 issues and is reviewing the cost of such actions, if any. The
Company expects such modifications to its internal systems, if necessary, will
be made on a timely basis, and presently believes that, with modifications to
existing software or converting to new software, if necessary, the Year 2000
problem will not pose significant operational problems for the Company's
computer systems; however, there can be no assurance there will not be a delay
in, or increased costs associated with, the implementation of such changes, if
necessary, and the Company's inability to implement such changes could have an
adverse effect on future results of operations.
The Company has not fully determined the extent to which the Company may be
impacted by third parties' systems, which may not be Year 2000 compliant. The
Year 2000 computer issue may create risk for the Company from third parties
with whom the Company deals. There can be no assurance that the systems of
other companies which the Company deals with will be timely converted, or that
any such failure to convert by another company could not have an adverse effect
on the Company.
ITEM 2. PROPERTIES
The Company leases approximately 20,000 square feet of office, research and
manufacturing space in Berkeley, California. The existing lease expires in
December 1998, with an option to renew on a monthly basis. The Company also
leases approximately 22,000 square feet of office and manufacturing space in
Alameda, California. The existing lease expires in November 2003, with an
option to renew the lease for one five-year period. The Company believes that
existing facilities are adequate to support the Company's activities for the
foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this Annual Report on Form 10-K.
22
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock commenced trading on the NASDAQ SmallCap Market on
July 26, 1996 under the symbol "CALY." High and low sales prices reported by
NASDAQ during the periods indicated are shown below.
FISCAL YEAR QUARTER HIGH LOW
----------- ------- ----- -------
1996................................................... 3rd $ 11 $6
1996................................................... 4th 8 3/4 3 5/8
1997................................................... 1st 8 1/2 5 1/4
1997................................................... 2nd 6 3/8 3 1/2
1997................................................... 3rd 7 3/4 3 13/16
1997................................................... 4th 7 3 1/4
On February 27, 1998, there were 301 holders of record of the Common Stock,
and the closing price of the Common Stock was $4 13/16. The Company has never
paid any cash dividends, and the Board of Directors does not anticipate paying
cash dividends in the foreseeable future. The Company intends to retain any
future earnings to provide funds for the operation and expansion of its
business.
23
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Presented below is the selected consolidated financial data for the years
ended December 31, 1997, 1996, 1995, 1994, and 1993.
FEBRUARY 18,
1988
(INCEPTION)
YEAR ENDED DECEMBER 31, THROUGH
------------------------------------------------ DECEMBER 31,
1997 1996 1995 1994 1993 1997
------- -------- -------- -------- -------- ------------
CONSOLIDATED STATEMENT OF
OPERATIONS DATA: (IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues:
Product sales.......... $ 376 $ 130 $ -- $ -- $ -- $ 506
Earned under research
and development
contracts,
substantially from
related parties....... -- -- -- -- -- 2,390
------- -------- -------- -------- -------- --------
Total revenue.......... 376 130 -- -- -- 2,896
------- -------- -------- -------- -------- --------
Operating expenses:
Product costs.......... 2,305 1,085 -- -- -- 3,390
Research and
development........... 3,685 5,751 5,018 3,644 4,519 29,783
Purchased in-process
research and
development........... -- -- 2,500 -- -- 2,500
Selling, general and
administrative........ 2,317 3,333 2,862 1,818 1,784 16,577
------- -------- -------- -------- -------- --------
Total expenses......... 8,307 10,169 10,380 5,462 6,303 52,250
------- -------- -------- -------- -------- --------
Loss from operations.. (7,931) (10,039) (10,380) (5,462) (6,303) (49,354)
Interest income
(expense), net......... 139 (74) 78 (35) 108 32
Other income............ -- 15 12 31 15 86
------- -------- -------- -------- -------- --------
Loss before income
taxes and
extraordinary item... (7,792) (10,098) (10,290) (5,466) (6,180) (49,236)
Income taxes............ (2) (2) (1) (1) (1) (65)
------- -------- -------- -------- -------- --------
Loss before
extraordinary item... (7,794) (10,100) (10,291) (5,467) (6,181) (49,301)
Extraordinary gain on
debt extinguishment.... -- -- -- -- -- 485
------- -------- -------- -------- -------- --------
Net loss.............. (7,794) (10,100) (10,291) (5,467) (6,181) (48,816)
Less dividend on
mandatorily redeemable
Series A preferred
stock.................. (120) (120) (120) (120) (120) (976)
------- -------- -------- -------- -------- --------
Net loss attributable
to common
stockholders......... $(7,914) $(10,220) $(10,411) $ (5,587) $ (6,301) $(49,792)
======= ======== ======== ======== ======== ========
Net loss per share
attributable to
common stockholders.. $(0.72) $ (1.17) $ (1.53) $ (1.11) $ (1.57)
======= ======== ======== ======== ========
Weighted average
shares used to
compute net loss per
share attributable to
common stockholders.. 11,028 8,753 6,792 5,011 4,007
======= ======== ======== ======== ========
DECEMBER 31,
------------------------------------------------
1997 1996 1995 1994 1993
------- -------- -------- -------- --------
(IN THOUSANDS)
CONSOLIDATED BALANCE
SHEET DATA:
Cash and cash
equivalents............ $10,820 $ 7,924 $ 2,559 $ 4,478 $ 1,492
Working capital......... 8,917 6,067 (2,402) 3,117 867
Total assets............ 12,950 10,347 5,337 5,965 2,887
Long-term portion of
capital lease
obligations and notes
payable................ 282 764 543 196 462
Mandatorily redeemable
Series A preferred
stock.................. 1,976 1,856 1,736 1,616 1,496
Deficit accumulated
during development
stage.................. (48,295) (40,501) (30,401) (20,110) (14,643)
Total stockholders'
equity (deficit)....... 8,069 5,416 (2,746) 2,659 (26)
24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Since commencement of operations in 1988, Calypte Biomedical Corporation 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 August 1996, the
Company received a product license and an establishment license from the FDA
to manufacture and sell in interstate and foreign commerce the Company's
urine-based HIV-1 screening test for use in professional laboratory settings.
In October 1996, Calypte received notification that the FDA will require
additional data before it will approve an amendment to Cambridge Biotech
Corporation's product license application for its HIV-1 Western Blot kit to
allow use of the Western Blot kit as a confirmatory test with Calypte's HIV-1
urine screening assay. In September 1997, the Company received official notice
from the FDA that the agency had completed its review of the Cambridge Biotech
urine confirmatory test. The "Review Complete" letter indicated that the
application is approvable pending the completion of product labeling. There
can be no assurance that Calypte will have significant revenues from sales of
the HIV-1 urine screening assay or the confirmatory test, if approved.
The Company has a limited history of operations, and since its inception in
February 1988, the Company has experienced significant operating losses. As of
December 31, 1997, the Company had an accumulated deficit of $48.3 million.
The Company expects operating losses to continue as it initiates marketing and
sales activities and expands 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
laboratories serving the life insurance, military, immigration and criminal
justice markets. International and other U.S. markets will be addressed
utilizing diagnostic product distributors. 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.
RESULTS OF OPERATIONS
Years Ended December 31, 1997 and 1996
Product sales from Calypte's HIV-1 screening test increased $246,000 to
$376,000 for the year ended December 31, 1997 from $130,000 for the year ended
December 31, 1996. Product costs increased $1.2 million to $2.3 million in
1997 from $1.1 million in 1996. Product sold in 1997 and 1996 relate to sales
made primarily to laboratories for research and evaluation purposes. Sales in
1997 increased due to the Company receiving more orders from these customers.
The Company does not anticipate commencing significant sales for commercial
uses until FDA approval for the confirmatory test for Calypte's HIV-1 urine
screening test is received. Since FDA approval of Calypte's HIV-1 urine
screening test in August 1996, manufacturing costs related to the test have
been included in product costs, rather than research and development expense.
The increase in product costs in 1997 reflects the inclusion of a full year of
these costs compared to only a partial year in 1996.
Research and development expense decreased 36% to $3.7 million for the year
ended December 31, 1997 from $5.8 million for the year ended December 31,
1996. The decrease was principally due to the October 1996 reduction in
workforce, the conscious effort to reduce costs and the recognition of certain
product costs and inventory as separate financial statement items following
FDA approval of the Company's HIV-1 screening test in August 1996.
Selling, general and administrative expenses decreased 30% to $2.3 million
for the year ended December 31, 1997 from $3.3 million for the year ended
December 31, 1996. The decrease was primarily due to the October 1996
reduction in workforce and the conscious effort to reduce costs. In addition,
1996 included relocation costs which were not incurred in 1997.
25
Interest income (expense) and other income increased $198,000 to $139,000
for 1997 from ($59,000) in 1996. The increase was primarily due to the Company
having interest expense on notes payable outstanding in 1996, which were
repaid in late 1996, and interest earned from Initial Public Offering and
Private Placement proceeds in 1997.
Years Ended December 31, 1996 and 1995
Product sales from Calypte's HIV-1 screening test totaled $130,000 in 1996.
The HIV-1 screening test margin was negative during the year due to the
overhead expense incurred in relation to the number of units produced.
Research and development expense increased 15% to $5.8 million for the year
ended December 31, 1996 from $5.0 million for the year ended December 31,
1995. The increase was principally due to additional personnel, facility and
material costs required for increased research and product development
activity partially offset by the recognition of certain product costs and
inventory as separate financial statement items following FDA approval of the
Company's HIV-1 screening test.
Purchased in-process research and development costs of $2.5 million were
incurred in 1995; no such costs were incurred in 1996. 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
Corporation is a research and development company engaged primarily in the
development of therapeutic compounds.
Selling, general and administrative expenses increased 16% to $3.3 million
for the year ended December 31, 1996 from $2.9 million for the year ended
December 31, 1995. The increase was primarily due to personnel additions prior
to the October 1996 reduction in workforce, relocation costs and other related
expenses.
Interest income (expense) and other income decreased $149,000 to ($59,000)
for 1996 from $90,000 in 1995. This decrease was primarily due to interest on
notes payable outstanding during 1996 partially offset by interest income
earned from Initial Public Offering (IPO) proceeds.
LIQUIDITY AND CAPITAL RESOURCES
Financing Activities
The Company has financed operations from inception primarily through the
private placement of preferred stock and common stock, the Company's Initial
Public Offering (IPO) of common stock and, to a lesser extent, from payments
related to research and development agreements, a bank line of credit,
equipment lease financings and borrowings from notes payable. Since inception
through December 31, 1997, the Company has received approximately $44.2
million in net proceeds from private placements of the Company's equity
securities and $13.2 million in net proceeds in its IPO. In addition,
approximately $1.7 million was borrowed by the Company through equipment lease
financings, of which approximately $761,000 was outstanding as of December 31,
1997, and $2.4 million was received from research and development agreements.
During 1996, the Company completed its IPO of 2,536,259 shares of its Common
Stock at $6.00 per share. After deducting underwriters' discounts and
commissions and additional expenses associated with the IPO, the Company
received net proceeds of $13.2 million. Part of the proceeds was used to pay
down a $1.25 million bank line of credit, a $248,000 note payable to a former
related party and the Pepgen note payable of $1 million. The Pepgen note
payable was paid in October 1996.
In October 1996, the Company entered into an equipment lease line of credit
for $1.0 million expiring on December 31, 1996. Lease payments under the line
of credit are based on the total delivered equipment cost multiplied by a
monthly note factor of approximately 3.3% (approximate effective interest rate
of 18%). In December 1996, there was a drawdown of $362,000 on this equipment
lease line of credit.
In April 1997, the Company entered into a line of credit agreement with a
bank to borrow up to $2.0 million at an interest rate of prime plus 2%. The
agreement required the Company to maintain certain financial covenants and
comply with certain reporting and other requirements. In addition, borrowings
under the line of credit agreement were secured by the Company's assets. In
June 1997, the Company drew down
26
$500,000 on the line of credit. Subsequently, in July 1997, the Company drew
down an additional $500,000 on the line of credit, thereby increasing the note
payable to $1.0 million. The $1.0 million was repaid in September 1997 and the
line of credit was terminated.
In October 1997, the Company completed a private placement of 2,600,999
shares of its common stock at $4.25 per share. The Company received proceeds
of approximately $10.2 million after deducting placement agent commissions and
additional expenses associated with the private placement.
Although the Company believes 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'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. 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.
Operating Activities
For the years ended December 31, 1997 and 1996, the Company's cash used in
operations was $6.6 million and $9.2 million, respectively. The cash used in
operations was primarily to fund research and development as well as
manufacturing expenses related to the urine-based HIV-1 test along with
selling, general and administrative expenses of the Company.
In October 1996, the Company implemented an expense reduction program,
including a significant reduction in its workforce. Employee termination costs
associated with the expense reduction program were not material.
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards Nos. 130 and 131, Reporting Comprehensive
Income (SFAS No. 130) and Disclosures about Segments of an Enterprise and
Related Information (SFAS No. 131), respectively (collectively, the
Statements). The Statements are effective for fiscal years beginning after
December 15, 1997. SFAS No. 130 establishes standards for reporting of
comprehensive income and its components in annual financial statements. SFAS
No. 131 established standards for reporting financial and descriptive
information about an enterprise's operating segments in its annual financial
statements and selected segment information in interim financial reports.
Reclassification or restatement of comparative financial statements or
financial information for earlier periods is required upon adoption of SFAS
No. 130 and SFAS No. 131, respectively. Application of the Statements'
disclosure requirements will have no impact on the Company's consolidated
financial position or results of operations as currently reported.
YEAR 2000
The Company is reviewing its internal computer systems to ensure these
systems are adequately able to address the issues expected to arise in
connection with the upcoming Year 2000.
If necessary, the Company expects to implement the systems necessary to
address Year 2000 issues and is reviewing the cost of such actions, if any.
The Company expects such modifications to its internal systems, if necessary,
will be made on a timely basis, and presently believes that, with
modifications to existing software or converting to new software, if
necessary, the Year 2000 problem will not pose significant operational
problems for the Company's computer systems; however, there can be no
assurance there will not be a delay in, or increased costs associated with,
the implementation of such changes, if necessary, and the Company's inability
to implement such changes could have an adverse effect on future results of
operations.
27
The Company has not fully determined the extent to which the Company may be
impacted by third parties' systems, which may not be Year 2000 compliant. The
Year 2000 computer issue may create risk for the Company from third parties
with whom the Company deals. There can be no assurance that the systems of
other companies which the Company deals with will be timely converted, or that
any such failure to convert by another company could not have an adverse
effect on the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information with respect to this Item is (i) set forth below and (ii)
contained in the Company's Consolidated Financial Statements included on pages
F-1 through F-24 of this Annual Report on Form 10-K.
The following table presents summarized historical quarterly results of
operations for each of the fiscal quarters in the Company's fiscal years ended
December 31, 1997 and 1996. These quarterly results are unaudited, but, in the
opinion of management, have been prepared on the same basis as the Company's
audited financial information and include all adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation of the
information set forth therein. The data should be read in conjunction with the
Financial Statements and related notes included on pages F-1 through F-24 of
this Annual Report on Form 10-K.
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.
28
HISTORICAL QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FIRST SECOND THIRD FOURTH
YEAR ENDED DECEMBER 31, 1997 QUARTER QUARTER QUARTER QUARTER
- ---------------------------- ------- ------- ------- -------
Product sales............................. $ 15 $ 117 $ 93 $ 151
Operating expenses........................ 2,285 2,261 1,870 1,891
Interest income (expense) and other
income................................... 31 21 (8) 95
Income taxes.............................. -- (2) -- --
Dividend on mandatorily redeemable Series
A preferred stock........................ (30) (30) (30) (30)
------- ------- ------- -------
Net loss attributable to common
stockholders............................. $(2,269) $(2,155) $(1,815) $(1,675)
------- ------- ------- -------
Net loss per share attributable to common
stockholders*............................ $ (0.22) $ (0.21) $ (0.17) $ (0.13)
------- ------- ------- -------
FIRST SECOND THIRD FOURTH
YEAR ENDED DECEMBER 31, 1996 QUARTER QUARTER QUARTER QUARTER
- ---------------------------- ------- ------- ------- -------
Product sales............................. $ -- $ -- $ 129 $ 1
Operating expenses........................ 2,724 2,563 2,737 2,145
Interest income (expense) and other
income................................... (92) (63) 32 64
Income taxes.............................. -- (2) -- --
Dividend on mandatorily redeemable Series
A preferred stock........................ (30) (30) (30) (30)
------- ------- ------- -------
Net loss attributable to common
stockholders............................. $(2,846) $(2,658) $(2,606) $(2,110)
------- ------- ------- -------
Net loss per share attributable to common
stockholders*............................ $ (0.40) $ (0.35) $ (0.27) $ (0.20)
------- ------- ------- -------
- --------
* The sum of earnings per share for the four quarters is different from the
full year amount as a result of computing the quarterly and full year
amounts on the weighted average number of common shares outstanding in the
respective periods.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
29
PART III
ITEM 10. EXECUTIVE OFFICERS, DIRECTORS AND SIGNIFICANT EMPLOYEES OF THE
REGISTRANT
The following table sets forth certain information with respect to the
executive officers and directors of the Company as of February 28, 1998:
NAME AGE POSITION
---- --- --------
William A. Boeger(1) (2)..... 48 President, Chief Executive Officer and
Chairman of the Board of Directors
Howard B. Urnovitz, Ph.D..... 44 Chief Science Officer and Member of the
Board of Directors
John J. DiPietro............. 39 Chief Operating Officer, Chief Financial
Officer, Vice President of Finance and
Secretary
Toby Gottfried, Ph.D......... 60 Director of Research and Development
Richard Van Maanen........... 39 Director of Marketing, Sales and Business
Development
Jeffrey Lang................. 48 Director of Operations
Karen Long................... 43 Director of Regulatory Affairs and Quality
Assurance and Quality
Control
David Collins (1)(2)......... 63 Vice Chairman of the Board of Directors
Paul Freiman................. 63 Member of the Board of Directors
Julius R. Krevans, M.D. (2).. 73 Member of the Board of Directors
Mark Novitch, M.D. (1)....... 65 Member of the Board of Directors
Zafar Randawa, Ph.D.......... 50 Member of the Board of Directors
(1)Member of the Audit Committee
(2)Member of the Compensation Committee
WILLIAM A. BOEGER has served as the Company's President, Chief Executive
Officer and Chairman of the Board since December 1997. From September 1995
until December 1997, he served as the Company's Chairman of the Board. 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 President and board member of Pepgen Corporation, a company in
which Calypte has a minority interest. 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 Harvard
Business School and his B.S. from Williams College.
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 also serves as President and Chief Science Officer of Pepgen
Corporation, the 49% owned therapeutic subsidiary of Calypte. 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 Chief Operating Officer, Vice
President of Finance, Chief Financial Officer and Secretary since December
1997. From October 1995 until December 1997, he served as the Vice President
of Finance, Chief Financial Officer and Secretary. Prior to joining the
Company, he was Vice
30
President of Finance, Chief Financial Officer and Secretary of Meris
Laboratories, Inc., a full service clinical laboratory, from 1991 until 1995.
In November 1997, Meris Laboratories filed a voluntary petition under Chapter
11 of the Federal Bankruptcy Code. 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
finding, 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. Mr. DiPietro also consults with
various private companies. 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.
KAREN LONG has served as Director of Regulatory Affairs, Quality Assurance
and Quality Control since March 1997. From October 1992 to March 1997, she was
Regulatory Administrator for the Diagnostic Division of Abbott Laboratories, a
multinational health care corporation. Prior to that, from 1990 to October
1992, Ms. Long served as a regulatory and quality consultant for various
hospital organizations. From 1979 to 1990, she held several positions with
Baxter Healthcare, a therapeutic drug company, including Manager of Regulatory
Affairs and Quality Assurance, Documentation and training Manager, Regulatory
Assurance/Quality Assurance Manager and Quality Assurance Technician. Ms. Long
received her B.S. in Medical Technology with a major in Chemistry from the
University of Illinois.
DAVID COLLINS has served as the Company's Vice Chairman of Board of
Directors and consultant since December 1997. He has been a member of the
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 of the
Board of Directors for Public Affairs & Planning and Vice Chairman for the
Executive Committee & Chairman of the Consumer Sector. He is a member and
Chairman of the Board of Directors of Penederm, Inc. and a member of the Board
of Directors of MGI Pharma, Inc. Mr. Collins is also
31
a member of the Board of Directors of Lander, Inc., Advanced Corneal Systems,
Inc. and Claneil Enterprises, Inc., all private companies. Mr. Collins
received his L.L.B. at Harvard Law School and his B.A. at the University of
Notre Dame.
PAUL FREIMAN has served as a member of the Company's Board of Directors and
consultant since December 1997. He has served as the President and Chief
Executive Officer of Neurobiological Technologies, Inc since May 1997. In
1994, Mr. Freiman retired from his position as Chairman and Chief Executive
Officer of Syntex Corporation, a pharmaceutical company. From 1962 until 1994,
he held several other positions at Syntex Corporation, including President and
Chief Operating Officer. Mr. Freiman is currently serving on the board of
Digital Gene Technologies, Inc., a private genomics company, and serves on the
boards of Penford Inc., LifeScience Economics, Inc., and several other
biotechnology companies. He has been chairman of the Pharmaceutical
Manufacturers Association of America (PhARMA) and has also chaired a number of
key PhARMA committees. Mr. Freiman is also an advisor to Burrill & Co., a San
Francisco merchant bank.
JULIUS R. 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 John 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 John Hopkins University School of
Medicine.
MARK NOVITCH, M.D. has served on the Company's Board of Directors since
September 1995. Dr. Novitch was a Professor of Health Care Sciences at George
Washington University from October 1994 to June 1997. He is presently an
Adjunct Professor at George Washington University Medical Center. Since 1993,
Dr. Novitch has also been a private consultant in the pharmaceutical industry.
From 1985 until 1993, he 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, Kos
Pharmaceutical, and Alteon, Inc. Dr. Novitch received his A.B. from Yale
University, and his M.D. from the New York Medical College.
ZAFAR RANDAWA, PH.D. has served on the Company's Board of Directors since
December 1996. Dr. Randawa is currently the Director of the New Technology
Acquisition Division of Otsuka America Pharmaceutical, Inc. and has served in
this capacity since September 1995. From 1989 until September 1995, Dr.
Randawa served as a Chief Scientist at Otsuka America Pharmaceutical, Inc. Dr.
Randawa received his Ph.D. in Biochemistry at Oregon Health Sciences
University, his Master of Science degree in Biochemistry at Karachi University
in Karachi, Pakistan, his B.S. in Biochemistry from Karachi University and his
B.S. in Chemistry from Panjab University in Lahore, Pakistan.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers, directors, and persons who own more than 10% of a
registered class of the Company's equity securities, to file report of
ownership on Form 3 and changes in ownership on Form 4 or 5 with the
Securities and Exchange Commission and the National Association of Securities
Dealers. Such officers, directors and ten percent stockholders are also
required by the Securities and Exchange Commission rules to furnish the
Company with copies of all Section 16(a) forms that they file.
32
The Company believes that during fiscal year 1997, all the Reporting Persons
complied with all applicable filing requirements subject to the following
exceptions: Dr. Gottfried had one late filing of report on Form 4 with respect
to a stock option exercise and Dr. Urnovitz had one late filing of report on
Form 4 with respect to a stock option grant.
ITEM 11. EXECUTIVE COMPENSATION
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 membership on the Board of Directors.
In December 1997, the Company entered into a consulting agreement with David
Collins, a Board member, effective from December 1997 to December 1998. Under
the agreement, Mr. Collins is receiving compensation of $6,000 per month and
was granted 50,000 stock options which vest over the period of the agreement.
In addition, he shall be granted an additional 50,000 stock options should
certain milestones be successfully achieved.
In December 1997, the Company entered into a consulting agreement with Paul
Freiman, a Board member, effective from January 1998 through December 1998.
Under the agreement, Mr. Freiman is receiving compensation of $30,000 per year
and was granted 50,000 stock options which vest over a 36 month period with
the possibility of immediate vesting under certain conditions. The agreement
is automatically renewable each year subject to three months notice prior to
the end of each calendar year.
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 has 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.
There were 21,000 Common Stock options granted in 1997 under the Director
Option Plan.
33
EXECUTIVE COMPENSATION
The following table sets forth certain compensation awarded or paid by the
Company during the years ended December 31, 1997, 1996 and 1995 to its Chief
Executive Officer and the other four most highly compensated executive
officers of the Company (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
SECURITIES
UNDERLYING
OPTIONS ALL OTHER
NAME AND PRINCIPAL YEAR SALARY ($) BONUS ($) GRANTED (#) COMPENSATION ($)
POSITION ---- ---------- --------- ------------ ----------------
John P. Davis (1)...... 1997 195,000 0 0 5,600(2)
President and Chief 1996 195,000 0 0 322,810(3)
Executive Officer 1995 126,602 0 320,000 15,819(4)
William A. Boeger (5).. 1997 50,000(6) 5,385(7) 195,000 15,470(8)
President, Chief 1996 83,334(9) 0 0 11,560(4)
Executive Officer 1995 272,500(10) 0 220,000 7,210(4)
and Chairman of the
Board of Directors
Howard B. Urnovitz..... 1997 87,692 0 150,000 4,200(2)
Chief Science Officer 1996 132,231 61,552(11) 0 85,000(12)
1995 139,961 16,816 180,000 0
John J. DiPietro (13).. 1997 131,250 0 80,000 36,073(4)
Chief Operating 1996 126,346 0 10,000 32,201(4)
Officer, Chief 1995 27,885 0 35,000 5,541(4)
Financial Officer,
Vice President of
Finance and
Secretary
- --------
(1) 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. In December 1997, Mr. Davis resigned from his
position as President and Chief Executive Officer.
(2) Represents car allowance.
(3) Represents $5,469 for living expenses and $317,341 for reimbursement of
relocation expenses (which includes the reimbursement for taxes owed on
such expenses).
(4) Represents living expenses.
(5) Mr. Boeger served as the Company's Chairman of the Board of Directors,
Chief Executive Officer, and President from January 1994 until May 1995.
From May 1995 to September 1995, he served as Chairman of the Board of
Directors and Chief Executive Officer. From September 1995 to December
1997, he served as Chairman of the Board of Directors. Since December
1997, Mr Boeger has served as Chairman of the Board of Directors, Chief
Executive Officer and President.
(6) Represents amounts paid to an affiliate of Quest Ventures, a venture
capital partnership of which Mr. Boeger is Managing General Partner.
(7) Represents non-cash bonus related to forgiveness of a portion of a
$70,000 note receivable including interest from Mr. Boeger.
(8) Represents $10,595 for living expenses and $4,875 for car allowance.
(9) $12,500 was paid in 1996 to an affiliate of Quest Ventures, a venture
capital partnership of which Mr. Boeger is Managing General Partner, for
services rendered by Mr. Boeger in 1995. $70,834 was paid to an affiliate
of Quest Ventures in 1996 for services rendered by Mr. Boeger in 1996.
(10) $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.
(11) Represents a one-time bonus to defray the tax liability on the deemed
income from the forgiveness of the note receivable from Dr. Urnovitz.
(12) Represents forgiveness of an $85,000 note receivable from Dr. Urnovitz.
(13) Mr. DiPietro joined the Company in October 1995 as Chief Financial
Officer and Vice President of Finance. In December 1997, Mr. DiPietro was
named Chief Operating Officer, Chief Financial Officer and Vice President
of Finance.
34
The following table sets forth information concerning stock options granted
to the Named Executive Officers during the fiscal year ended December 31,
1997:
STOCK OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
POTENTIAL
REALIZABLE VALUE
AT ASSUMED ANNUAL
PERCENT OF RATES OF STOCK
NUMBER OF TOTAL OPTIONS PRICE
SECURITIES GRANTED TO APPRECIATION FOR
UNDERLYING EMPLOYEES IN EXERCISE OPTION TERM (3)
OPTIONS FISCAL YEAR PRICE EXPIRATION -----------------
NAME GRANTED (1) ($/SH) (2) DATE 5%($) 10%($)
- ---- ---------- ------------- ---------- ---------- ----- ---------
John P. Davis........... -- -- -- -- -- --
William A. Boeger....... 195,000(4) 27.87% 3.75 12/18/07 420,175 1,102,202
Howard B. Urnovitz...... 150,000(5) 21.44% 4.50 6/30/07 424,504 1,075,776
John J. DiPietro........ 80,000(6) 11.44% 3.63 12/18/07 182,379 462,185
(1) Based on aggregate of 699,599 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, 1997, including the Named
Executive Officers.
(2) The exercise price was based on the closing price of the stock on the date
of grant on the NASDAQ Smallcap Market.
(3) The assumed 5% and 10% compound rates of annual stock appreciation are
mandated by the rules of the Securities and Exchange Commission and do not
represent the Company's estimate or projection of future common stock
prices. Assuming a ten-year option term, annual compounding results in
total appreciation of 62.9% (at 5% per year) and 159.4% (at 10% per year).
(4) Options granted to Mr. Boeger become exercisable at the rate of 7.69% of
the shares subject to the option at January 18, 1998 and at the rate of
7.69% per month thereafter. The options expire ten years from the date of
grant, or earlier upon termination of employment.
(5) Options granted to Dr. Urnovitz were fully exercisable on the date of
grant. The options expire ten years from the date of grant or earlier upon
termination of employment.
(6) Options granted to Mr. DiPietro become exercisable at the rate of 2.08% of
the shares subject to the option at January 18, 1998 and at the rate of
2.08% each month thereafter. The options expire ten years from the date of
grant or earlier upon termination of employment.
The following table sets forth information concerning option exercises for
the year ended December 31, 1997, with respect to each of the Named Executive
Officers.
AGGREGATED OPTION EXERCISES IN 1997
AND DECEMBER 31, 1997 OPTION VALUES
NUMBER OF SECURITIES
SHARES UNDERLYING UNEXERCISABLE VALUE OF UNEXERCISED IN-THE-
ACQUIRED ON OPTIONS AT FISCAL MONEY OPTIONS AT FISCAL
EXERCISE VALUE YEAR END (#) YEAR END ($)
NAME (#) REALIZED ($) (EXERCISABLE/UNEXERCISABLE) (EXERCISABLE/UNEXERCISABLE)(1)
- ---- ----------- ------------ -------------------------- ------------------------------
John P. Davis....... -- -- 165,329 / 154,671 712,981 / 667,019
William A. Boeger... 30,000 121,875 190,000 / 195,000 819,375 / 207,188
Howard B. Urnovitz.. 34,000 195,500 296,000 / -- 676,500 / --
John J. DiPietro.... -- -- 45,000 / 80,000 133,438 / 95,000
(1) Value realized and value of unexercised in-the-money options is based on a
value of $4.8125 per share of the Company's Common Stock, the closing
price on December 31, 1997 as quoted on the NASDAQ Smallcap Market.
Amounts reflect such fair market value minus the exercise price multiplied
by the number of shares to be acquired on exercise and do not indicate
that the optionee actually sold such stock.
35
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
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 and a current executive officer of the
Company.
EMPLOYMENT AGREEMENTS
In January 1995, the Company entered into an employment agreement with Dr.
Howard B. Urnovitz, as the Founder, Director and Chief Science Officer of the
Company 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 is automatically renewable each year subject to three months notice
prior to the end of the calendar year and has been renewed for the 1998
calendar year. In the event Dr. Urnovitz's employment is terminated by the
Company other than for cause, he is entitled to receive his base salary for
six months.
In December 1997, the Company entered into an employment agreement with
William A. Boeger as President and Chief Executive Officer of the Company
effective from December 1997 through December 1998. Under the terms of the
agreement, Mr. Boeger is receiving a salary of $195,000 per year. In addition,
he was granted 195,000 stock options which vest over the period of the
agreement. Mr. Boeger is not entitled to a cash bonus during the initial term
of the agreement; in lieu of a cash bonus, the Company shall forgive his
indebtedness to the Company in the amount of $70,000 plus accrued interest
ratably over the term of the agreement. The loan was originally made to Mr.
Boeger in May 1997. The agreement is automatically renewable each year subject
to three months notice prior to the end of each calendar year. Mr. Boeger is
also entitled to temporary housing and travel between his home and the
Company.
In December 1997, the Company entered into an employment agreement with John
DiPietro as Chief Operating Officer, Chief Financial Officer and Vice
President of Finance of the Company for a term of three years, which provided
for an annual salary of $150,000. In addition, he was granted 80,000 stock
options which vest over 48 months. Mr. DiPietro is also entitled to a bonus
under the Company's bonus plan, reimbursement for the cost of a corporate
apartment, which expenses shall be increased sufficiently to reimburse for
taxes owed on such expenses, and certain change in control provisions. In the
event his employment is terminated by the Company other than for cause, Mr.
DiPietro will receive his base salary for six months and all stock options
that would have vested during the term of this agreement shall become fully
vested.
36
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information known to the Company with respect
to the beneficial ownership of its Common Stock as of February 28, 1998 for
(i) all persons's known by the Company to own beneficially more than 5% of its
outstanding Common Stock, (ii) each of the Company's directors, (iii) each
Named Executive Officer and (iv) all directors and executive officers of the
Company as a group.
SHARES
BENEFICIALLY % OF
5% STOCKHOLDERS, DIRECTORS AND OFFICERS (1) OWNED TOTAL
- ------------------------------------------- ------------ -----
Otsuka Pharmaceutical Co., Ltd. (2)
463-10 Kagsuno
Kawauchi-cho
Tokoshima Japan .......................................... 1,293,147 9.67%
Zafar Randawa, Ph.D. (2)................................... 1,293,147 9.67%
H&Q Healthcare Investors
50 Rowes Wharf-4th Floor
Boston, MA 02110.......................................... 833,993 6.23%
William A. Boeger (3)...................................... 783,322 5.68%
Entities Affiliated with Austin W. Marxe and David M.
Greenhouse
153 East 53rd Street-51st Floor
New York, NY 10022........................................ 706,000 5.28%
Howard B. Urnovitz, Ph.D. (4).............................. 436,200 3.19%
John P. Davis.............................................. 164,662 1.23%
John DiPietro (5).......................................... 57,789 *
David Collins (6).......................................... 39,416 *
Mark Novitch, M.D. (7)..................................... 26,750 *
Julius Krevans, M.D. (8)................................... 14,250 *
Paul Freiman (9)........................................... 5,555 *
All directors and executive officers as a group (9 persons)
.......................................................... 2,821,091 19.89%
- --------
* Represents beneficial ownership of less than 1%.
(1) 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 power 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) Dr. Randawa is a director of the Company and an affiliate of Otsuka
Pharmaceutical Co., Ltd.
(3) Includes 154,276 shares subject to options exercisable within 60 days
owned by entities affiliated with Quest Ventures of which Mr. Boeger is a
partner. Also includes 250,000 shares subject to options exercisable
within 60 days owned by Mr. Boeger.
(4) Includes 296,000 shares subject to warrants exercisable within 60 days.
(5) Includes 51,666 shares subject to options exercisable within 60 days.
(6) Includes 24,416 shares subject to options exercisable within 60 days.
(7) Includes 22,750 shares subject to options exercisable within 60 days.
(8) Includes 5,250 shares subject to options exercisable within 60 days.
(9) Includes 5,555 shares subject to options exercisable within 60 days.
37
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 1997, in recognition of a Technology Rights Agreement entered into
between the Company and Dr. Urnovitz, the Company funded the expenses of a
research foundation started by Dr. Urnovitz. The Company has entered into a
loan agreement with Dr. Urnovitz to repay such funding to the company and to
limit the funding to a maximum of $165,000. The loan is evidenced by a
promissory note and is secured by Dr. Urnovitz's stock options to purchase
common stock with a market value of 200% of the outstanding loan balance. The
interest on the outstanding principal balance of the loan is a variable rate
of the prime rate plus 1%. The principal amount and all accrued interest was
originally due on December 1, 1997. On October 13, 1997, the due date was
extended to March 1, 1998 and on December 18, 1997, the due date was further
extended to December 1, 1998. In January 1998, the loan was increased from
$90,000 to $165,000 subject to the same terms of the initial loan agreement.
The Technology Rights Agreement gives the Company the first right of refusal
of an exclusive, worldwide license to practice, make or have made, use, sell,
distribute and license to other any invention or discovery made by Dr.
Urnovitz in exchange for a one-time cash payment and the payment of royalties.
In January 1998, the Company entered into an agreement with Quest Management
Company ("Quest") for management services of William Boeger as the Company's
Chairman of the Board. Under the terms of the agreement, the Company will pay
Quest $50,000 per year payable in monthly installments. The agreement is
automatically renewable each year subject to three months notice prior to the
end of the calendar year.
In 1997, the Company paid Pepgen, a minority-owned subsidiary of the Company
$72,000 for an exclusive license to all technology that relates to urine-based
diagnostics developed by Pepgen.
During January 1998, the Company loaned Pepgen $250,000 at an interest rate
of prime plus 3%. The loan is secured by all intellectual property of Pepgen
and is due on March 31, 1998. In addition, the Company was granted a warrant
to purchase 500,000 shares of Pepgen common stock at $0.50 per share expiring
on March 1, 1999.
38
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Certain Documents Filed as Part of the Form 10-K
1. Financial Statements
2. Financial Statement Schedules
Schedules not listed have been omitted because the information required
to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
3. Exhibits
3.3* Bylaws of the Registrant, as currently in effect.
3.4** Restated Certificate of Incorporation of Calypte Biomedical
Corporation, a Delaware corporation, filed July 31, 1996.
10.1* Form of Indemnification Agreement between the Company and each of its
directors and officers.
10.2* Incentive Stock Plan.
10.3* 1995 Director Option Plan.
10.4* 1995 Employee Stock Purchase Plan.
10.5* Lease Agreement between the Registrant and Charles A. Grant and Mark
Greenberg, dated as of November 30, 1990.
10.6* Second Lease Extension Agreement between Registrant and Charles A.
Grant and Mark Greenberg, dated as of May 14, 1991.
10.7* Lease Extension Agreement between Registrant and Charles A. Grant and
Mark Greenberg, dated as of February 5, 1992.
10.8* Lease Extension Agreement between Registrant and Charles A. Grant and
Mark Greenberg, dated as of April 15, 1993.
10.9* Standard Form Lease 1255-1275 Harbor Bay Parkway Harbor Bay Business
Park between Commercial Center Bank and the Registrant, dated as of
August 22, 1992.
10.10* Employment Agreement between the Registrant and John P. Davis, dated
as of April 10, 1995 as amended.
10.11* Amendment No. 1 to Employment Agreement between the Registrant and
John P. Davis, dated as of April 22, 1996.
10.12* Employment Agreement between the Registrant and Howard B. Urnovitz,
dated as of January 25, 1995.
10.14* Business Consultant Agreement between the Registrant and Cynthia
Green, dated as of May 1, 1993.
10.15+* License Agreement between the Registrant and New York University,
dated as of August 13, 1993.
10.16* First Amendment to License Agreement between the Registrant and New
York University, dated as of January 11, 1995.
10.17* Second Amendment to License Agreement between the Registrant and New
York University, dated as of October 15, 1995.
10.18+* Third Amendment to License Agreement between the Registrant and New
York University, dated as of January 31, 1996.
10.19+* Research Agreement between the Registrant and New York University,
dated August 12, 1993.
10.20+* First Amendment to Research Agreement between the Registrant and New
York University, dated as of January 11, 1995.
10.21+* Sublicense Agreement between the Registrant and Cambridge Biotech
Corporation, dated as of March 31, 1992.
10.22+* Master Agreement between the Registrant and Cambridge Biotech
Corporation, dated as of April 12, 1996.
39
10.23+* Sub-License Agreement between the Registrant and Cambridge Biotech
Corporation, dated as of April 12, 1996.
10.24+* Agreement between the Registrant and Repligen Corporation, dated as
of March 8, 1993.
10.25+* Non-Exclusive License Agreement between the Registrant and The Texas
A&M University System, dated as of September 12, 1993.
10.26+* Non-Exclusive License Agreement between the Registrant and The Board
of Trustees of the Leland Stanford Junior University, dated as of
March 1, 1993.
10.27+* Distribution Agreement between the Registrant and Otsuka
Pharmaceutical Co., Ltd., dated as of August 7, 1994.
10.28+* Distribution Agreement between the Registrant and Seradyn, Inc.,
dated as of April 10, 1995.
10.29+* Distribution Agreement between the Registrant and Travenol
Laboratories (Israel), Ltd., dated as of December 31, 1994.
10.30+* Manufacturing/Packing Agreement between the Registrant and Biomira
(formerly ADI) Diagnostics Inc., dated as of September 27, 1994.
10.31* Loan and Bridge Security Agreement between the Registrant and Silicon
Valley Bank, dated as of December 8, 1995.
10.32* First Amendment to Loan and Security Agreement between the Registrant
and Silicon Valley Bank, dated as of March 5, 1996.
10.33* Form of Option Agreement for Stockholders of Pepgen Corporation,
dated as of October 12, 1995.
$1.0 Million Promissory Note delivered to Pepgen Corporation, dated
10.34* as of October 12, 1995.
10.35* Equipment Lease Agreement between the Registrant and Phoenix Leasing,
dated as of August 20, 1993.
10.36* Equipment Lease Agreement between the Registrant and Meier
Mitchell/GATX, dated as of August 20, 1993.
10.37** Lease Extension Agreement between the Registrant and Charles A. Grant
and Mark Greenberg, dated as of February 3, 1997.
10.38** Employment Agreement between the Registrant and John J. DiPietro,
dated as of October 1, 1995.
10.39** Equipment Lease Agreement between the Registrant and MMC/GATX, dated
September 30, 1996.
10.40+** Joint Venture Agreement between the Registrant and Trinity Biotech
plc
10.41 Second Addendum to Lease between the Registrant and Commercial Center
Bank dated as of July 21, 1997.
10.42 Lease extension agreement between the Registrant and Charles A. Grant
and Mark Greenberg, dated December 9, 1997.
10.43 Employment Agreement between the Registrant and William A. Boeger
dated as of December 1, 1997.
10.44 Employment Agreement between the Registrant and John J. DiPietro
dated as of December 17, 1997.
21.1* Subsidiaries of the Registrant.
23.1 Consent of KPMG Peat Marwick LLP, Independent Auditors.
24.1 Power of Attorney (see page 42).
27.1 Financial Data Schedule.
- --------
* Incorporated by reference from exhibits filed with the Company's
Registration Statement on Form S-1 (File No. 333-04105) filed on May 20,
1996, as amended to June 25, 1996, July 15, 1996 and July 26, 1996.
+ Confidential treatment has been granted as to certain portions of this
exhibit.
** Incorporated by reference from exhibits filed with the Company's Report on
Form 10-K dated March 28, 1997.
40
(b) Reports on Form 8-K
The Registrant filed a report on Form 8-K dated October 21, 1997 on November
26, 1997. The Registrant filed the report at the request of Nasdaq to
demonstrate that the Company maintains capital and surplus of at least
$1,000,000 in compliance with the requirements for continued listing on the
Nasdaq Small Cap Market. Included in the report on Form 8-K was the October
31, 1997 unaudited balance sheet.
41
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED.
Calypte Biomedical Corporation
(Registrant)
Date: March 25, 1998
/s/ William A. Boeger
By: _________________________________
WILLIAM A. BOEGER PRESIDENT, CHIEF
EXECUTIVE OFFICER AND CHAIRMAN OF
THE BOARD OF DIRECTORS
and
/s/ John J. DiPietro
By: _________________________________
JOHN J. DIPIETROCHIEF OPERATING
OFFICER, VICE PRESIDENT--FINANCE,
CHIEF FINANCIAL OFFICER AND
SECRETARY (PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
POWER OF ATTORNEY
Each Director of the Registrant whose signature appears below, hereby
appoints William A. Boeger and John J. DiPietro, and each of them individually
as his attorney-in-fact to sign in his name and on his behalf as a Director of
the Registrant, and to file with the Commission any and all Amendments to this
report on Form 10-K to the same extent and with the same effect as if done
personally.
PURSUANT TO THE REQUIREMENT OF THE SECURITIES AND EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW, BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES INDICATED.
SIGNATURE TITLE DATE
/s/ William A. Boeger President, Chief March 25, 1998
- ------------------------------------- Executive Officer
WILLIAM A. BOEGER and Chairman of the
Board of Directors
(Principal
Executive Officer)
/s/ Howard B. Urnovitz, Ph.D. Chief Science March 25, 1998
- ------------------------------------- Officer and
HOWARD B. URNOVITZ, PH.D. Director
42
SIGNATURE TITLE DATE
/s/ John J. DiPietro Chief Operating March 25, 1998
- ------------------------------------ Officer,
JOHN J. DIPIETRO Vice President of
Finance,
Chief Financial
Officer and
Secretary
(Principal
Financial and
Accounting
Officer)
/s/ David Collins Vice Chairman of March 25, 1998
- ------------------------------------ the Board of
DAVID COLLINS Directors
/s/ Paul Freiman Director March 25, 1998
- ------------------------------------
PAUL FREIMAN
/s/ Julius R. Krevans, M.D. Director March 25, 1998
- ------------------------------------
JULIUS R. KREVANS, M.D.
/s/ Mark Novitch, M.D. Director March 25, 1998
- ------------------------------------
MARK NOVITCH, M.D.
/s/ Zafar I. Randawa, Ph.D. Director March 25, 1998
- ------------------------------------
ZAFAR I. RANDAWA, PH.D.
43
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report............................................... F-2
Consolidated Balance Sheets................................................ F-3
Consolidated Statements of Operations...................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit).................. F-5
Consolidated Statements of Cash Flows...................................... F-9
Notes to Consolidated Financial Statements................................. F-10
F-1
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, 1997 and 1996, 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, 1997, and for
the period from February 18, 1988 (inception) through December 31, 1997. 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, 1997 and 1996, and the consolidated results of their operations
and their cash flows for each of the years in the three-year period ended
December 31, 1997, and for the period from February 18, 1988 (inception)
through December 31, 1997, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
San Francisco, California
February 20, 1998
F-2
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31,
------------------
1997 1996
ASSETS -------- --------
Current assets:
Cash and cash equivalents................................ $ 10,820 $ 7,924
Accounts receivable...................................... 133 24
Inventory................................................ 161 205
Notes receivable-officers and employees.................. 239 --
Prepaid expenses......................................... 111 151
Other current assets..................................... 39 19
-------- --------
Total current assets................................... 11,503 8,323
Property and equipment, net................................ 1,219 1,761
Other assets............................................... 228 263
-------- --------
$ 12,950 $ 10,347
======== ========
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................... $ 610 $ 418
Accrued expenses......................................... 912 768
Capital lease obligations--current portion............... 479 443
Deferred revenue......................................... 585 627
-------- --------
Total current liabilities.............................. 2,586 2,256
Deferred rent obligation................................... 37 55
Capital lease obligations--long-term portion............... 282 764
-------- --------
Total liabilities...................................... 2,905 3,075
Mandatorily redeemable Series A preferred stock, $0.001 par
value; no shares authorized at December 31, 1997 and 1996;
100,000 shares issued and outstanding at December 31, 1997
and 1996; aggregate redemption and liquidation value of
$1,000 plus cumulative dividends.......................... 1,976 1,856
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.001 par value; 5,000,000 shares
authorized; no shares issued or outstanding............. -- --
Common stock, $0.001 par value; 20,000,000 shares
authorized at December 31, 1997 and 1996; 13,198,781 and
10,459,501 shares issued and outstanding as of December
31, 1997 and 1996, respectively......................... 13 10
Additional paid-in capital............................... 56,847 46,270
Deferred compensation.................................... (496) (363)
Deficit accumulated during development stage............. (48,295) (40,501)
-------- --------
Total stockholders' equity............................. 8,069 5,416
-------- --------
$ 12,950 $ 10,347
======== ========
See accompanying notes to consolidated financial statements.
F-3
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
PERIOD FROM
FEBRUARY 18,
1988
(INCEPTION)
YEAR ENDED DECEMBER 31, THROUGH
--------------------------- DECEMBER 31,
1997 1996 1995 1997
------- -------- -------- ------------
Revenues:
Product sales..................... $ 376 $ 130 $ -- $ 506
Earned under research and
development contracts,
substantially from related
parties.......................... -- -- -- 2,390
------- -------- -------- --------
Total revenue................... 376 130 -- 2,896
------- -------- -------- --------
Operating expenses:
Product costs..................... 2,305 1,085 -- 3,390
Research and development.......... 3,685 5,751 5,018 29,783
Purchased in-process research and
development...................... -- -- 2,500 2,500
Selling, general and
administrative................... 2,317 3,333 2,862 16,577
------- -------- -------- --------
Total expenses.................. 8,307 10,169 10,380 52,250
------- -------- -------- --------
Loss from operations.......... (7,931) (10,039) (10,380) (49,354)
Interest income..................... 350 266 195 1,186
Interest expense.................... (211) (340) (117) (1,154)
Other income........................ -- 15 12 86
------- -------- -------- --------
Loss before income taxes and
extraordinary item........... (7,792) (10,098) (10,290) (49,236)
Income taxes........................ (2) (2) (1) (65)
------- -------- -------- --------
Loss before extraordinary
item......................... (7,794) (10,100) (10,291) (49,301)
Extraordinary gain on debt
extinguishment..................... -- -- -- 485
------- -------- -------- --------
Net loss...................... (7,794) (10,100) (10,291) (48,816)
Less dividend on mandatorily
redeemable Series A preferred
stock.............................. (120) (120) (120) (976)
------- -------- -------- --------
Net loss attributable to common
stockholders....................... $(7,914) $(10,220) $(10,411) $(49,792)
------- -------- -------- ========
Net loss per share attributable to
common stockholders................ $ (0.72) $ (1.17) $ (1.53)
======= ======== ========
Weighted average shares used to
compute net loss per share
attributable to common
stockholders....................... 11,028 8,753 6,792
======= ======== ========
See accompanying notes to consolidated financial statements.
F-4
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
PERIOD FROM FEBRUARY 18, 1988 (INCEPTION) THROUGH DECEMBER 31, 1997
(IN THOUSANDS EXCEPT SHARE DATA)
DEFICIT
ACCUMULATED TOTAL
JOINT CONVERTIBLE PREFERRED STOCK ADDITIONAL DURING STOCKHOLDERS'
VENTURERS' ----------------------------------- COMMON PAID-IN DEFERRED DEVELOPMENT EQUITY
CAPITAL SERIES B SERIES C SERIES D SERIES E STOCK CAPITAL COMPENSATION STAGE (DEFICIT)
---------- -------- -------- -------- -------- ------ ---------- ------------ ----------- -------------
Issuance of
common stock as
of February 18,
1988 (date of
inception)..... $ -- $-- $-- $-- $-- $75 $ -- $-- $ -- $ 75
Capital
Contributions.. 1,611 -- -- -- -- -- -- -- -- 1,611
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 $.001
per share...... -- -- -- -- -- (75) -- -- (925) (1,000)
Common stock of
60,035 shares
issued for
cash........... -- -- -- -- -- -- 100 -- -- 100
Compensation
paid by
issuance of
170,610 shares
of common
stock.......... -- -- -- -- -- -- 34 -- -- 34
Conversion of
notes payable
to 61,426
shares of
common stock... -- -- -- -- -- -- 12 -- -- 12
Conversion of
notes payable
to 29,506
shares of
Series B
convertible
preferred
stock.......... -- -- -- -- -- -- 55 -- -- 55
Series B
convertible
preferred stock
of 775,340
shares issued
for cash....... -- 1 -- -- -- -- 1,387 -- -- 1,388
Series C
convertible
preferred stock
of 810,812
shares issued
for cash....... -- -- 1 -- -- -- 2,946 -- -- 2,947
Dividend
requirements on
mandatorily
redeemable
Series A
preferred
stock.......... -- -- -- -- -- -- (90) -- (166) (256)
Net loss........ (1,611) -- -- -- -- -- -- -- (3,568) (5,179)
------- ---- ---- ---- ---- --- ------ ---- ------ ------
Balances as of
December 31,
1991........... -- 1 1 -- -- -- 4,444 -- (4,659) (213)
Exercise of
stock options
for 68,083
shares of
common stock... -- -- -- -- -- -- 13 -- -- 13
Compensation
paid by
issuance of
31,670 shares
of common
stock.......... -- -- -- -- -- -- 5 -- -- 5
Series C
convertible
preferred stock
of 891,893
shares issued
for cash....... -- -- 1 -- -- -- 3,209 -- -- 3,210
Series D
convertible
preferred stock
of 800,000
shares issued
for cash....... -- -- -- 1 -- -- 5,718 -- -- 5,719
Dividend
requirements on
mandatorily
redeemable
Series A
preferred
stock.......... -- -- -- -- -- -- (120) -- -- (120)
Net loss........ -- -- -- -- -- -- -- -- (3,802) (3,802)
------- ---- ---- ---- ---- --- ------ ---- ------ ------
Balances as of
December 31,
1992........... -- 1 2 1 -- -- 13,269 -- (8,461) 4,812
See accompanying notes to consolidated financial statements.
F-5
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, 1997
(IN THOUSANDS EXCEPT SHARE DATA)
DEFICIT
ACCUMULATED TOTAL
JOINT CONVERTIBLE PREFERRED STOCK ADDITIONAL DURING STOCKHOLDERS'
VENTURERS' ----------------------------------- COMMON PAID-IN DEFERRED DEVELOPMENT EQUITY
CAPITAL SERIES B SERIES C SERIES D SERIES E STOCK CAPITAL COMPENSATION STAGE (DEFICIT)
---------- -------- -------- -------- -------- ------ ---------- ------------ ----------- -------------
Balances as of
December 31,
1992........... $-- $ 1 $ 2 $ 1 $-- $-- $13,269 $-- $ (8,461) $ 4,812
Common stock of
2,500 shares
issued for
cash........... -- -- -- -- -- -- 2 -- -- 2
Exercise of
stock options
for 22,444
shares of
common stock... -- -- -- -- -- -- 9 -- -- 9
Compensation
paid by
issuance of
10,000 shares
of common
stock.......... -- -- -- -- -- 1 7 -- -- 8
Series D
convertible
preferred stock
of 199,999
shares issued
for cash....... -- -- -- -- -- -- 1,445 -- -- 1,445
Dividend
requirements on
mandatorily
redeemable
Series A
preferred
stock.......... -- -- -- -- -- -- (120) -- -- (120)
Net loss........ -- -- -- -- -- -- -- -- (6,182) (6,182)
---- --- --- --- ---- ---- ------- ---- -------- -------
Balances as of
December 31,
1993........... -- 1 2 1 -- 1 14,612 -- (14,643) (26)
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........... -- -- -- -- -- -- 9 -- -- 9
Exercise of
stock options
for 31,334
shares of
common stock... -- -- -- -- -- -- 12 -- -- 12
Series D
convertible
preferred stock
of 617,000
shares issued
for cash....... -- -- -- 1 -- -- 2,885 -- -- 2,886
Series E
convertible
preferred stock
of 1,077,500
shares issued
for cash....... -- -- -- -- 1 -- 5,364 -- -- 5,365
Dividend
requirements on
mandatorily
redeemable
Series A
preferred
stock.......... -- -- -- -- -- -- (120) -- -- (120)
Net loss........ -- -- -- -- -- -- -- -- (5,467) (5,467)
---- --- --- --- ---- ---- ------- ---- -------- -------
Balances as of
December 31,
1994........... -- 1 2 2 1 1 22,762 -- (20,110) 2,659
Series E
convertible
preferred stock
of 888,446
shares issued
for cash, 1,920
issued for
other than
cash........... -- -- -- -- 1 -- 4,302 -- -- 4,303
Exercise of
stock options
for 4,547
shares of
common stock... -- -- -- -- -- -- 2 -- -- 2
Dividend
requirements on
mandatorily
redeemable
Series A
preferred
stock.......... -- -- -- -- -- -- (120) -- -- (120)
Options issued
upon the
investment in
Pepgen
Corporation.... -- -- -- -- -- -- 500 -- -- 500
Compensation
relating to
granting of
stock options.. -- -- -- -- -- -- 567 (567) -- --
Amortization of
deferred
compensation... -- -- -- -- -- -- -- 201 -- 201
Net loss........ -- -- -- -- -- -- -- -- (10,291) (10,291)
---- --- --- --- ---- ---- ------- ---- -------- -------
Balances as of
December 31,
1995........... -- 1 2 2 2 1 28,013 (366) (30,401) (2,746)
See accompanying notes to consolidated financial statements.
F-6
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, 1997
(IN THOUSANDS EXCEPT SHARE DATA)
DEFICIT
ACCUMULATED TOTAL
JOINT CONVERTIBLE PREFERRED STOCK ADDITIONAL DURING STOCKHOLDERS'
VENTURERS' ----------------------------------- COMMON PAID-IN DEFERRED DEVELOPMENT EQUITY
CAPITAL SERIES B SERIES C SERIES D SERIES E STOCK CAPITAL COMPENSATION STAGE (DEFICIT)
---------- -------- -------- -------- -------- ------ ---------- ------------ ----------- -------------
Balances as of
December 31,
1995........... $-- $ 1 $ 2 $ 2 $ 2 $ 1 $28,013 $(366) $(30,401) $ (2,746)
Exercise of
Series E
convertible
warrants for
732,571 shares
of Series E
convertible
preferred
stock.......... -- -- -- -- -- -- 4,924 -- -- 4,924
Cost of issuance
of Series E
preferred
stock.......... -- -- -- -- -- -- (129) -- -- (129)
Exercise of
stock options
for 13,577
shares of
common stock... -- -- -- -- -- -- 11 -- -- 11
Issuance of
2,300,000
shares of
common stock
through an
Initial Public
Offering....... -- -- -- -- -- 2 13,798 -- -- 13,800
Conversion of
Series B, C, D
and E
convertible
preferred stock
to common
stock.......... -- (1) (2) (2) (2) 7 -- -- -- --
Exercise of
underwriters'
overallotment
of 236,259
shares of
common stock... -- -- -- -- -- -- 1,417 -- -- 1,417
Cost of issuance
of common stock
for initial
public offering
(including
underwriters'
fees).......... -- -- -- -- -- -- (1,995) -- -- (1,995)
Exercise of
warrants for
7,136 shares of
common stock... -- -- -- -- -- -- 37 -- -- 37
Common stock of
3,643 shares
issued under
the Employee
Stock Purchase
Plan........... -- -- -- -- -- -- 15 -- -- 15
Dividend
requirements of
mandatorily
redeemable
Series A
preferred
stock.......... -- -- -- -- -- -- (120) -- -- (120)
Compensation
relating to
granting of
stock options.. -- -- -- -- -- -- 299 (299) -- --
Amortization of
deferred
compensation... -- -- -- -- -- -- -- 302 -- 302
Net loss........ -- -- -- -- -- -- -- -- (10,100) (10,100)
---- --- --- --- --- --- ------- ----- -------- --------
Balances at
December 31,
1996........... -- -- -- -- -- 10 46,270 (363) (40,501) 5,416
See accompanying notes to consolidated financial statements.
F-7
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
PERIOD FROM FEBRUARY 18, 1988 (INCEPTION) THROUGH DECEMBER 31, 1997
(IN THOUSANDS EXCEPT SHARE DATA)
DEFICIT
ACCUMULATED TOTAL
JOINT CONVERTIBLE PREFERRED STOCK ADDITIONAL DURING STOCKHOLDERS'
VENTURERS' ----------------------------------- COMMON PAID-IN DEFERRED DEVELOPMENT EQUITY
CAPITAL SERIES B SERIES C SERIES D SERIES E STOCK CAPITAL COMPENSATION STAGE (DEFICIT)
---------- -------- -------- -------- -------- ------ ---------- ------------ ----------- -------------
Balances as of
December 31,
1996........... $-- $-- $-- $-- $-- $10 $46,270 $(363) $(40,501) $ 5,416
Exercise of
stock options
for 117,437
shares of
common stock... -- -- -- -- -- -- 60 -- -- 60
Net exercise of
Series E
convertible
warrants for
12,755 shares
of common
stock.......... -- -- -- -- -- -- -- -- -- --
Issuance of
2,600,999
shares of
common stock
through a
Private
Placement...... -- -- -- -- -- 3 11,052 -- -- 11,055
Cost of issuance
of common stock
for Private
Placement
(including
underwriters'
fees).......... -- -- -- -- -- -- (824) -- -- (824)
Common stock of
8,089 shares
issued under
the Employee
Stock Purchase
Plan........... -- -- -- -- -- -- 37 -- -- 37
Dividend
requirements of
mandatorily
redeemable
Series A
preferred
stock.......... -- -- -- -- -- -- (120) -- -- (120)
Compensation
relating to
granting of
stock options.. -- -- -- -- -- -- 407 (407) -- --
Amortization of
deferred
compensation... -- -- -- -- -- -- -- 239 -- 239
Deferred
compensation
reversed for
terminated
personnel...... -- -- -- -- -- -- (35) 35 -- --
Net loss........ -- -- -- -- -- -- -- -- (7,794) (7,794)
---- ---- ---- ---- ---- --- ------- ----- -------- -------
Balances at
December 31,
1997........... $-- $-- $-- $-- $-- $13 $56,847 $(496) $(48,295) $ 8,069
==== ==== ==== ==== ==== === ======= ===== ======== =======
See accompanying notes to consolidated financial statements.
F-8
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
PERIOD FROM
FEBRUARY 18,
1988
(INCEPTION)
YEAR ENDED DECEMBER 31, THROUGH
--------------------------- DECEMBER 31,
1997 1996 1995 1997
------- -------- -------- ------------
Cash flows from operating activities:
Net loss............................ $(7,794) $(10,100) $(10,291) $(48,816)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation and amortization....... 637 797 465 3,251
Loss on sale or disposal of
equipment.......................... -- -- 73 115
Extraordinary gain on debt
extinguishment..................... -- -- -- (485)
Amortization of deferred
compensation....................... 239 302 201 742
Compensation paid by stock
issuance........................... -- -- -- 47
Forgiveness of note receivable from
officer............................ 5 43 42 90
Purchased in-process research and
development costs.................. -- -- 2,500 2,500
Changes in operating assets and
liabilities:
Accounts receivable................ (109) (24) -- (133)
Inventory.......................... 44 (205) -- (161)
Other current assets and prepaid
expenses.......................... 20 585 (714) 89
Organizational costs............... -- -- -- (123)
Other assets....................... 35 (137) (21) (551)
Accounts payable, accrued expenses
and deferred revenue.............. 294 (385) 1,162 2,009
Deferred rent obligation........... (18) (33) (4) 36
Note payable in exchange for
expenses paid on behalf of the
Company........................... -- -- -- 192
------- -------- -------- --------
Net cash used in operating
activities....................... (6,647) (9,157) (6,587) (41,198)
------- -------- -------- --------
Cash flows from investing activities:
Proceeds from disposition of
equipment.......................... -- -- -- 25
Purchase of equipment, net.......... (95) 29 (476) (2,342)
Notes receivable from officers and
employees.......................... (244) -- -- (244)
Investment in Pepgen Corporation.... -- -- (1,000) (1,000)
------- -------- -------- --------
Net cash provided by (used in)
investing activities............. (339) 29 (1,476) (3,561)
------- -------- -------- --------
Cash flows from financing activities:
Proceeds from sale of stock......... 11,152 20,204 4,445 59,635
Expenses paid related to sale of
stock.............................. (824) (2,124) (139) (3,818)
Prepaid license fee................. -- -- -- 500
Principal payments on notes
payable............................ (1,000) (3,258) (29) (5,174)
Principal payments on capital lease
obligations........................ (446) (329) (133) (942)
Proceeds from notes payable......... 1,000 -- 2,000 3,692
Capital contributions............... -- -- -- 75
Joint ventures' capital
contributions...................... -- -- -- 1,611
------- -------- -------- --------
Net cash provided by financing
activities....................... 9,882 14,493 6,144 55,579
------- -------- -------- --------
Net increase (decrease) in cash and
cash equivalents.................... 2,896 5,365 (1,919) 10,820
Cash and cash equivalents at
beginning of period................. 7,924 2,559 4,478 --
------- -------- -------- --------
Cash and cash equivalents at end of
period.............................. $10,820 $ 7,924 $ 2,559 $ 10,820
======= ======== ======== ========
Supplemental disclosure of cash flow
activities:
Cash paid for interest.............. $ 211 $ 359 $ 105 $ 1,048
Cash paid for income taxes.......... 2 2 1 64
Supplemental disclosure of noncash
activities:
Acquisition of equipment through
obligations under capital leases... -- 733 661 1,703
Accrued liabilities converted to
notes payable...................... -- -- -- 363
Accrued liabilities converted to
common stock....................... -- -- -- 39
Notes payable converted to common
stock.............................. -- -- -- 459
Notes payable converted to Series B
convertible preferred stock........ -- -- -- 50
Notes payable issued upon investment
in Pepgen Corporation.............. -- -- 1,000 1,000
Options issued upon investment in
Pepgen Corporation................. -- -- 500 500
Dividend on mandatorily redeemable
Series A preferred stock........... 120 120 120 976
Deferred compensation attributable
to stock grants.................... 372 299 567 1,238
See accompanying notes to consolidated financial statements.
F-9
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
(1) THE COMPANY
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, to perform research and development
and to obtain approval for its urine-based diagnostic tests.
The Company has developed 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's screening test, when used with
the western blot confimatory test for urine licensed exclusively from
Cambridge Biotech Corporation, will provide the only complete urine-based HIV
testing system. This western blot test is already licensed by the Food and
Drug Administration (FDA) for use with blood, and is currently pending FDA
clearance for use with urine.
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 laboratories serving the
life insurance, military, immigration and criminal justice markets.
International and other U.S. markets will be addressed utilizing diagnostic
product distributors. To date, the Company has received approval for the sale
of its product in Indonesia only. The Company will work collaboratively with
its distributors to obtain regulatory approval in order to market and promote
the products in their local markets.
(2) SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
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 interest in Pepgen Corporation (Pepgen) under
the equity method (Note 11).
Cash and Cash Equivalents
Cash equivalents consist primarily of investments in money market accounts
and commercial paper with original maturities of three months or less.
Inventories
Inventories are stated at the lower of cost or market with cost determined
using the first-in, first-out method.
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 lives of the assets, generally
four to five years. Leasehold improvements and equipment under capital leases
are amortized or depreciated over the shorter of the remaining lease term or
the useful life of the improvement.
F-10
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996, AND 1995
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 amounts are invested in accounts earning market rates of
interest. The fair market values of the notes receivable from officers and
employees are not readily determinable due to their related party nature. The
carrying amounts of all other financial instruments approximate fair value
because of their short-term maturity.
Revenue Recognition
Revenue from product sales is recognized upon shipment to customers.
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.
Income Taxes
The Company accounts for income taxes under the 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.
Stock-Based Compensation
Prior to January 1, 1996, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations.
As such, compensation expense would be recorded on the date of grant only if
the current market price of the underlying stock exceeded the exercise price.
On January 1, 1996, the Company adopted SFAS No. 123, Accounting for Stock-
Based Compensation, which permits entities to recognize as expense over the
vesting period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net loss and pro forma
net loss per share disclosures for employee stock option grants made in 1995
and future years as if the fair-value-based method defined in SFAS No. 123 had
been applied. The Company has elected to continue to apply the provisions of
APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS
No. 123.
Net Loss Per Share Attributable to Common Stockholders
Net loss per share attributed to common stockholders has been computed using
the weighted average number of common shares outstanding during each period
presented. In 1997, the Company adopted the provisions of Statement of
Financial Accounting Standard No. 128, Earnings Per Share (SFAS No. 128). SFAS
F-11
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996, AND 1995
No. 128 requires companies with complex capital structures to present basic
earnings per share (EPS) and diluted EPS, instead of the primary and fully
diluted EPS previously required. The new standard requires additional
informational disclosures, and also makes certain modifications to the
currently applicable EPS calculation defined in Accounting Principles Board
No. 15. All net loss per share amounts have been retroactively restated to
reflect adoption of this statement.
Common equivalent shares include convertible preferred stock that were
converted upon completion of the Company's IPO using the as if converted
method.
Concentrations of Credit Risk
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of cash and cash
equivalents and trade accounts receivable. The Company has investment policies
that limit investments to short-term low-risk investments. Concentration of
credit risk with respect to trade accounts receivable are limited due to the
fact that the Company sells its products primarily to established distributors
and laboratories.
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.
Risks and Uncertainties
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.
(3) INVENTORIES
Inventories as of December 31, 1997 and 1996 consisted of the following:
1997 1996
-------------- --------------
(IN THOUSANDS) (IN THOUSANDS)
Raw materials.............................. $ 53 $ 80
Work-in-process............................ 103 108
Finished goods............................. 5 17
---- ----
Total inventory.......................... $161 $205
==== ====
F-12
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996, AND 1995
(4) PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 1997 and 1996 consisted of the
following:
1997 1996
-------------- --------------
(IN THOUSANDS) (IN THOUSANDS)
Computer equipment............................ $ 364 $ 349
Machinery and equipment....................... 1,975 1,903
Furniture and fixtures........................ 238 236
Leasehold improvements........................ 1,466 1,460
------- -------
4,043 3,948
Accumulated depreciation and amortization..... (2,824) (2,187)
------- -------
Property and equipment, net................... $ 1,219 $ 1,761
======= =======
During 1988, property was purchased from an unrelated party subject to a
note for $442,000. The note was subsequently assigned to Purdue Frederick
Diagnostics, Inc., a former related party of the Company. The Company paid the
remaining portion of the obligation during 1996 with proceeds from the Initial
Public Offering. The Company recognized depreciation expense of $637,000,
$797,000, and $446,000 for the years ended December 1997, 1996, and 1995,
respectively.
(5) ACCRUED EXPENSES
Accrued expenses as of December 31, 1997 and 1996 consisted of the
following:
1997 1996
-------------- --------------
(IN THOUSANDS) (IN THOUSANDS)
Accrued royalty payments..................... $290 $221
Accrued bonus................................ 200 --
Other........................................ 422 547
---- ----
Total accrued expenses..................... $912 $768
==== ====
(6) LEASE COMMITMENTS
Capital Leases
To date, the Company has obtained three equipment lease lines of credit
which aggregated $3.3 million 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 have expired. Lease payments under the lines of
credit are based on the total delivered equipment cost multiplied by a monthly
rate factor of approximately 3.3%-3.5% (approximate effective interest rate of
18% per annum).
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. These warrants expire in 2003.
F-13
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996, AND 1995
Equipment acquired under the lease lines of credit and included in property
and equipment as of December 31, 1997 and 1996 consisted of the following:
1997 1996
-------------- --------------
(IN THOUSANDS) (IN THOUSANDS)
Machinery and equipment....................... $ 1,598 $1,598
Other......................................... 105 105
------- ------
1,703 1,703
Accumulated depreciation and amortization..... (1,000) (628)
------- ------
$ 703 $1,075
======= ======
Future minimum lease payments under capital leases as of December 31, 1997
were:
YEAR ENDED DECEMBER 31, (IN THOUSANDS)
----------------------- --------------
1998.......................................................... $ 582
1999.......................................................... 312
-----
894
Amount representing interest.................................. (133)
-----
Present value of capital lease obligations.................... 761
Current portion of capital lease obligations.................. (479)
-----
Capital lease obligations--long-term portion.................. $ 282
=====
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 $541,000,
$517,000, and $327,000 for the years ended December 1997, 1996, and 1995,
respectively. Future minimum rental payments under all noncancelable operating
leases as of December 31, 1997 were:
YEAR ENDED DECEMBER 31, (IN THOUSANDS)
----------------------- --------------
1998...................................................... $ 583
1999...................................................... 361
2000...................................................... 358
2001...................................................... 367
2002...................................................... 366
Thereafter................................................ 320
------
Total..................................................... $2,355
======
F-14
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996, AND 1995
(7) 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
stock of Calypte, Inc. and all 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.
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, 1997, cumulative preferred dividends totaling
$976,000 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.
In anticipation of using a portion of the proceeds from its Initial Public
Offering to redeem the Series A preferred stock, the Company eliminated the
Series A preferred stock from its articles of incorporation upon
reincorporation of the Company in Delaware in July 1996. However, management
subsequently chose not to redeem the Series A preferred stock and as of
December 31, 1997 it remains outstanding. The holders of such shares maintain
the same rights as held before the reincorporation.
(8) 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.
Initial Public Offering
During 1996, the Company completed an IPO of 2,536,259 shares of its common
stock at $6.00 per share. The Company received proceeds of $13.2 million after
deducting underwriters' discounts and commissions and additional expenses
associated with the IPO.
On August 8, 1996, the underwriters exercised an over-allotment option to
purchase an additional 236,259 shares of the Company's common stock at $6.00
per share. Proceeds of approximately $1,318,000 after deducting underwriters'
discounts and commissions were received on August 13, 1996.
Upon the closing of the Company's Initial Public Offering in July 1996, a
total of 7,324,987 shares of convertible preferred stock were automatically
converted into an equal number of shares of common stock.
F-15
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996, AND 1995
Private Placement
On October 21, 1997, the Company completed a private placement of 2,600,999
shares of its common stock at $4.25 per share. The Company received proceeds
of $10.2 million after deducting placement agent commissions and additional
expenses associated with the private placement.
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.
(9) INCENTIVE STOCK AND STOCK OPTIONS PLANS
In April 1991, the Company's Board of Directors approved the adoption of the
Company's Incentive Stock Plan (the Stock Plan). A total of 2,740,992 shares
of common stock have been reserved for issuance under the Stock Plan.
Under the terms of the Stock Plan, nonstatutory stock options may be granted
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. Prior to the IPO, the fair value of the common
stock was determined by the Board of Directors and included consideration of a
variety of factors including other equity transactions of the Company.
Subsequent to the IPO, the fair value of common stock is determined by the
closing market price on the date of grant. 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.
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.
Deferred compensation is recorded to recognize compensation cost related to
options granted below fair market value or options granted to consultants
after January 1, 1996. For the years ended December 31, 1997, 1996 and 1995,
the Company has recorded deferred compensation of $407,000, $299,000 and
$567,000, respectively, for certain of the Company's common stock options
granted under the Stock Plan. This amount is being amortized over the relevant
period of benefits. For the years ended December 31, 1997, 1996 and 1995,
$239,000, $302,000 and $201,000, respectively, was amortized.
F-16
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996, AND 1995
The following table summarizes activity under the Stock Plan:
WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
--------- ----------------
Outstanding as of December 31, 1994.............. 314,827 $0.42
Granted........................................ 992,371 0.57
Exercised...................................... (4,547) 0.50
Canceled....................................... (17,237) 0.55
--------- -----
Outstanding as of December 31, 1995.............. 1,285,414 0.54
Granted........................................ 110,700 4.91
Exercised...................................... (13,577) 0.78
Canceled....................................... (7,072) 0.93
--------- -----
Outstanding as of December 31, 1996.............. 1,375,465 0.88
Granted........................................ 699,599 4.05
Exercised...................................... (117,437) 0.51
Canceled....................................... (128,051) 0.63
--------- -----
Outstanding as of December 31, 1997.............. 1,829,576 $2.13
--------- -----
Exercisable as of December 31, 1995.............. 543,799 $0.45
========= =====
Exercisable as of December 31, 1996.............. 841,478 $0.63
========= =====
Exercisable as of December 31, 1997.............. 1,019,933 $1.39
========= =====
As of December 31, 1997, 653,998 shares of common stock were available for
grant under the Stock Plan. The per share weighted-average fair value of stock
options granted during 1997, 1996 and 1995 was $3.36, $5.02 and $0.91 on the
date of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions: 1997--expected dividend yield 0.0%, risk free
interest rate of 6.0%, volatility of 80%, and an expected life of 9 years;
1996--expected dividend yield 0.0%, risk free interest rate of 6.2%,
volatility of 50%, and an expected life of 7 years; 1995--expected dividend
yield of 0.0%, risk-free interest rate of 6.2%, volatility of 50%, and
expected life of 6 years.
The following table summarizes information about stock options outstanding
under the Stock Plan at December 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ --------------------------
NUMBER WEIGHTED-AVG NUMBER
OUTSTANDING REMAINING YEARS WEIGHTED-AVG EXERCISABLE WEIGHTED-AVG
RANGE OF EXERCISE PRICES AT 12/31/97 TO EXPIRATION EXERCISE PRICE AT 12/31/97 EXERCISE PRICE
- ------------------------ ----------- --------------- -------------- ----------- --------------
$0.40--$0.50............ 941,971 3.08 $0.50 755,516 $0.50
$1.00................... 105,956 4.77 $1.00 66,708 $1.00
$3.63--$5.00............ 663,700 9.84 $3.93 156,750 $4.52
$5.95--$7.00............ 117,949 9.07 $6.09 40,959 $6.35
--------- ---------
$0.40--$7.00............ 1,829,576 6.01 $2.13 1,019,933 $1.39
========= =========
F-17
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996, AND 1995
1995 Director Option Plan
In December 1995, the Company's Board of Directors 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
has 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 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.
The Company has not recorded any deferred compensation for the Company's
common stock options granted under the Director Option Plan.
The following table summarizes activity under the Director Option Plan:
WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
------- ----------------
Outstanding as of December 31, 1995................ -- $ --
Granted.......................................... 40,000 7.00
Exercised........................................ -- --
Canceled......................................... -- --
------- -----
Outstanding as of December 31, 1996................ 40,000 7.00
Granted.......................................... 21,000 4.72
Exercised........................................ -- --
Canceled......................................... (24,000) 7.00
------- -----
Outstanding as of December 31, 1997................ 37,000 5.71
======= =====
Exercisable as of December 31, 1996................ -- $ --
======= =====
Exercisable as of December 31, 1997................ 6,250 $6.53
======= =====
As of December 31, 1997, 163,000 shares of common stock were available for
grant under the Director Option Plan. The per share weighted-average fair
value of stock options granted during 1997 and 1996 were $4.01 and $3.91 on
the date of grant using the Black-Scholes option-pricing model with the
following assumptions: 1997--expected dividend yield 0.0%, risk free interest
rate 5.9%, volatility of 80%, and an expected life of 10 years; 1996--expected
dividend yield 0.0%, risk free interest rate of 6.2%, volatility of 50%, and
an expected life of 6 years.
F-18
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996, AND 1995
The following table summarizes information about stock options outstanding
under the Director Option Plan at December 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ --------------------------
NUMBER WEIGHTED-AVG NUMBER
OUTSTANDING REMAINING YEARS WEIGHTED-AVG EXERCISABLE WEIGHTED-AVG
RANGE OF EXERCISE PRICES AT 12/31/97 TO EXPIRATION EXERCISE PRICE AT 12/31/97 EXERCISE PRICE
- ------------------------ ----------- --------------- -------------- ----------- --------------
$4.00--
$7.00.. 37,000 9.49 $5.71 6,250 $6.53
1995 Employee Stock Purchase Plan
In December 1995, the Company's Board of Directors 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 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
period under the Purchase Plan or (ii) the fair market value of the common
stock on the last day of the six month purchase period during the offering
period. Except for the first offering period, each offering period will last
for twenty-four months; stock purchases take place every 6 months (April 30
and October 31 of each year). The first period commenced on the first day of
trading, July 26, 1996. 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. As
of December 31, 1997 and 1996, 11,732 and 3,643 shares, respectively, had been
purchased under the Purchase Plan.
Under SFAS No. 123, compensation cost is recognized for the fair value of
the employees' purchase rights. No purchase rights were granted in 1997. The
per share weighted-average fair value of those purchase rights granted in 1996
was $2.50 on the date of grant using the Black-Scholes option-pricing model
with the following assumptions: expected dividend yield 0.0%, risk free
interest rate of 5.5%, volatility of 50%, and an expected life of 1.25 years.
Pro Forma Disclosure
Had the Company determined compensation cost based on the fair value at the
grant date for its stock options under SFAS No. 123, the Company's net loss
would have been increased to the pro forma amounts indicated below for the
years ended December 31:
1997 1996 1995
-------------- -------------- --------------
(IN THOUSANDS) (IN THOUSANDS) (IN THOUSANDS)
Net loss attributable to
common stockholders
As reported................. $(7,914) $(10,220) $(10,411)
Pro forma................... (8,851) (10,297) (10,736)
Net loss per share
attributable to common
stockholders
As reported................. $ (0.72) $ (1.17) $ (1.53)
Pro forma................... (0.80) (1.18) (1.58)
F-19
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996, AND 1995
Pro forma net loss reflects only options granted in 1997, 1996 and 1995 as
well as purchase rights granted in 1996. Therefore, the full impact of
calculating compensation cost for stock options under SFAS No. 123 is not
reflected in the pro forma net loss amounts presented above because
compensation cost is reflected over the options' vesting period and
compensation cost for options granted prior to January 1, 1995 is not
considered.
(10) SECTION 401(K) PLAN
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 contribution 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.
(11) 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 and options to purchase the Company's common stock valued at
$500,000. The options were granted to Pepgen's 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 option-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 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 portion
of Pepgen at fair market value, and the Company is entitled to elect two of
the seven Board members of Pepgen. The Company paid the $1.0 million
promissory note during 1996. The Company has no further commitments to provide
funds to Pepgen.
During 1996, the Company entered into an agreement with Pepgen to pay
$72,000 for an exclusive license to all technology that relates to urine-based
diagnostics developed by Pepgen. This agreement was renewed in 1997 for
$60,000. The Company did not renew this license in 1998.
During January 1998, the Company loaned Pepgen $250,000 at an interest rate
of prime plus 3%. The loan is secured by all intellectual property of Pepgen
and is due on March 31, 1998. In addition, the Company was granted a warrant
to purchase 500,000 shares of Pepgen common stock at $0.50 per share expiring
on March 1, 1999.
F-20
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996, AND 1995
(12) INCOME TAXES
The provision for income taxes for all periods presented in the accompanying
consolidated statements of operations represents minimum California franchise
taxes. 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:
DECEMBER 31,
-------------------------
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
Computed "expected" tax expense.................. $(2,649) $(3,413) $(3,418)
Meals and entertainment expenses, and officer's
life insurance
not deductible for income taxes................. 5 8 5
Research expenses................................ 50 32 86
State tax expense................................ 1 1 1
Losses and credits for which no benefits have
been recognized................................. 2,595 3,466 3,334
Change in the beginning of year valuation
allowance due to
change in state tax rate........................ -- (38) --
Other............................................ -- (54) (7)
------- ------- -------
$ 2 $ 2 $ 1
======= ======= =======
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets is presented below:
DECEMBER 31,
------------------
1997 1996
-------- --------
(IN THOUSANDS)
Deferred tax assets:
Employee benefit reserves, including accrued
vacation............................................ $ 88 $ 37
Start-up and other capitalization.................... 390 6
Fixed assets, due to differences in depreciation..... 372 341
Deferred rent........................................ 214 221
Net operating loss carryover......................... 15,611 12,011
Research and development credit...................... 1,034 832
Loss contingency..................................... -- 60
Purchased research and development................... 772 871
Other operating reserves............................. 275 410
Other................................................ 162 223
-------- --------
Total gross deferred tax assets.................... 18,918 15,012
Valuation allowance.................................... (18,918) (15,012)
-------- --------
Net deferred tax asset............................. $ -- $ --
======== ========
The net change in the valuation allowance for the years ended December 1997,
1996 and 1995 was an increase of $3,906,000, $3,785,000, and $4,033,000,
respectively. Because there is uncertainty regarding the Company's ability to
realize its deferred tax assets, a 100% valuation allowance has been
established. When realized, approximately $126,000 of deferred tax assets will
be creditable to paid-in capital.
As of December 31, 1997, the Company had federal tax net operating loss
carryforwards of approximately $41,203,000, which will expire in the years
2004 through 2012. The Company also has federal research and
F-21
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996, AND 1995
development credit carryforwards as of December 31, 1997 of approximately
$796,000, which will expire in the years 2005 through 2012.
State tax net operating loss carryforwards were approximately $27,456,000
and state research and development credit carryforwards were $360,000 as of
December 31, 1997. The state net operating loss carryforwards will expire in
the years 1998 through 2002 and the state research and development credits
will expire in the years 2005 through 2012.
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.
(13) 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.
Research Agreement
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.
(14) DISTRIBUTION AGREEMENTS
Seradyn, Inc.
In April 1995, the Company entered into an agreement of 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.
F-22
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996, AND 1995
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, 1997 and
1996.
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.
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.
(15) CONSULTING AND EMPLOYEE AGREEMENTS
In January 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 is automatically renewable each year subject to three months notice
prior to the end of the calendar year and has been renewed for the 1998
calendar year. In the event the officer's employment is terminated by the
Company other than for cause, the officer is entitled to receive his base
salary for six months.
In December 1997, the Company entered into an employment agreement with an
officer effective from December 1997 through December 1998. Under the terms of
the agreement, the officer is receiving a salary of $195,000 per year. In
addition, the officer was granted 195,000 stock options which vest over the
period of the agreement. The officer is not entitled to a cash bonus during
the initial term of the agreement; in lieu of a cash bonus, the Company shall
forgive the officer's indebtedness to the Company in the amount of $70,000
plus accrued interest ratably over the term of the agreement. The loan was
originally made to the officer in May 1997. The agreement is automatically
renewable each year subject to three months notice prior to the end of each
calendar year. The officer is also entitled to temporary housing and travel
between his home and the Company.
In December 1997, the Company entered into an employment agreement with an
officer for a term of three years, which provided for an annual salary of
$150,000. In addition, the officer was granted 80,000 stock options which vest
over 48 months. The officer is also entitled to a bonus under the Company's
bonus plan, reimbursement for the cost of a corporate apartment, which
expenses shall be increased sufficiently to reimburse
F-23
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996, AND 1995
for taxes owed on such expenses, and certain change in control provisions. In
the event the officer's employment is terminated by the Company other than for
cause, the officer will receive his base salary for six months and all stock
options that would have vested during the term of this agreement shall become
fully vested.
In December 1997, the Company entered into a consulting agreement with a
Board member effective from December 1997 to December 1998. Under the
agreement, the consultant is receiving compensation of $6,000 per month and
was granted 50,000 stock options which vest over the period of the agreement.
In addition, the consultant shall be granted an additional 50,000 stock
options should certain milestones be successfully achieved.
In December 1997, the Company entered into a consulting agreement with a
Board member effective from January 1998 through December 1998. Under the
agreement, the consultant is receiving compensation of $30,000 per year and
was granted 50,000 stock options which vest over a 36 month period with the
possibility of immediate vesting under certain conditions. The agreement 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.
(16) RELATED PARTIES
Included in revenue earned under research and development contracts is
$2,099,000 for the period from February 18, 1988 (inception) to December 31,
1997 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 entire note was forgiven
during 1997. Interest income recognized by the Company and paid by the
borrower was $4,000 and $6,000 in 1996 and 1995, respectively.
During 1997, in recognition of a Technology Rights Agreement entered into
between the Company and an officer, the Company funded the expenses of a
research foundation started by the officer. The officer has entered into a
loan agreement with the Company to repay such funding to the Company and to
limit the funding to a maximum of $165,000. The loan is evidenced by a
promissory note and is secured by the officer's stock options to purchase
common stock with a market value of 200% of the outstanding loan balance. The
interest on the outstanding principal balance of the loan is a variable rate
of the prime rate plus 1%. The principal amount and all accrued interest was
originally due on December 1, 1997. On October 13, 1997, the due date was
extended to March 1, 1998 and on December 18, 1997, the due date was further
extended to December 1, 1998. In January 1998, the loan was increased from
$90,000 to $165,000 subject to the same terms of the initial loan agreement.
The Technology Rights Agreement gives the Company the first right of refusal
of an exclusive, worldwide license to practice, make or have made, use, sell,
distribute and license to other any invention or discovery made by the officer
in exchange for a one-time cash payment and the payment of royalties.
In January 1998, the Company entered into an agreement with a venture
capital firm, of which the Chairman of the Board of Directors, President and
CEO of the Company is a general partner, for the services of the Chairman of
the Board. The venture capital firm is also a stockholder of the Company.
Under the terms of the agreement, the Company will pay the stockholder $50,000
per year payable in monthly installments. The agreement is automatically
renewable each year subject to three months notice prior to the end of the
calendar year.
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