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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(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, 1998
/ / 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
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CALYPTE BIOMEDICAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 06-1226727
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
1440 FOURTH STREET, BERKELEY, CALIFORNIA 94710
(Address of principal executive offices) (Zip Code)
(510) 749-5100
(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, 1999, 16,992,069 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 $39,251,901 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.
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PART I.
Item 1. Business....................................................................................... 3
Item 2. Properties..................................................................................... 19
Item 3. Legal Proceedings.............................................................................. 20
Item 4. Submission of Matters to a Vote of Security Holders............................................ 20
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.......................... 20
Item 6. Selected Consolidated Financial Data........................................................... 21
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 22
Item 7A. Quantitative and Qualitative Disclosures About Market Risk..................................... 29
Item 8. Financial Statements and Supplementary Data.................................................... 30
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........... 30
PART III.
Item 10. Executive Officers, Directors and Significant Employees of the Registrant...................... 31
Item 11. Executive Compensation......................................................................... 33
Item 12. Security Ownership of Certain Beneficial Owners and Management................................. 38
Item 13. Certain Relationships and Related Transactions................................................. 39
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................... 40
Signatures..................................................................................... II-1
2
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, UNCERTAIN MARKET ACCEPTANCE OF OUR NEW METHOD
OF DETERMINING THE PRESENCE OF HIV ANTIBODIES, LACK OF EXPERIENCE SELLING AND
MARKETING OUR HIV-1 URINE-BASED SCREENING TEST, LIMITED OPERATING HISTORY, AND
INABILITY TO OBTAIN ADDITIONAL FINANCING, 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 antibodies to the 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 recent
Company-funded clinical trials conducted by or on behalf of the Company,
detected the presence of HIV antibodies in urine with 99.7% sensitivity in
subjects known to be HIV-1 infected (as identified through blood-based screening
tests). In subjects at low risk for HIV ("low risk subjects"), the specificity
of the screening test with a companion Western Blot supplemental 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.
In August 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. In May 1998, Cambridge Biotech
Corporation also received such licenses from the FDA with respect to the urine
HIV-1 Western Blot test that confirms the presence of antibodies to HIV-1 in
urine samples. The new test is used on samples that are repeatedly reactive in
Calypte's HIV-1 urine antibody screening test. Calypte's screening test, when
used with the Western Blot supplemental test for urine, provides the only
complete FDA-approved urine-based HIV testing method.
In December 1998, Calypte acquired from Cambridge Biotech Corporation
("Cambridge Biotech") certain assets relating to Cambridge Biotech's Western
Blot product line for certain infectious diseases. The acquisition included the
urine-based and serum-based HIV-1 Western Blot products, as well as a
supplemental test for Lyme Disease and Human T-Lymphotropic Virus (HTLV).
Based upon the results of market analyses and partnership opportunities, the
Company may proceed with submitting a pre-market approval application ("PMA") to
the FDA for approval of the Company's over-the-counter ("OTC") home urine
collection kit. On May 14, 1996, Direct Access Diagnostics, a subsidiary of
Johnson & Johnson, received FDA clearance for the first OTC home blood
collection kit for HIV. In addition, on July 22, 1996, Home Access Health Corp.
received FDA clearance for another OTC home blood 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.
3
The Company intends to develop additional or improved urine- and blood-based
tests for other infectious and viral diseases.
Calypte markets 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 tests offer 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 or maintain 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 World Health Organization and the Joint United Nations
Programme on HIV/ AIDS, an estimated 42 million people have been infected with
HIV, and each day 16,000 more become infected. 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 about 1.8
million adults died of AIDS in 1997 and the annual death toll is likely to
continue to rise for years to come.
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 supplemental test. The presence of HIV antibodies,
based on the results of the supplemental test, is considered diagnostic for HIV
infection.
HIV blood testing can be expensive and poses risk of infection to health
care personnel. The typical HIV screening test requires a trained health care
worker or phlebotomist to draw and centrifuge a blood sample, which is then
tested for the presence of HIV antibodies. Blood is typically drawn at physician
offices, hospitals or blood draw stations, where trained personnel are
available, and then sent to a laboratory for HIV testing. Blood samples and
related blood-sampling equipment require careful handling if healthcare
personnel are 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.
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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 supplemental 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 initially designed 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 enzyme immunoassays ("EIAs") licensed for use with
DBS.
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 blood sampling, and invasiveness.
The human immune system typically requires a number of weeks or 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.
THE CALYPTE URINE-BASED HIV-1 SCREENING AND SUPPLEMENTAL TESTS
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 supplemental test for urine provides the only complete urine-based HIV
testing method. Laboratories using the Company's method can complete the entire
testing profile for HIV-1 antibody using a single urine specimen. The Company
believes that the benefits of its testing method 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 antibody. 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. Because it requires no special
preservatives or containers, it is also easier to collect, handle, and discard
than blood. Furthermore, the Company's test is in standard EIA format and is
designed to be used with standard laboratory equipment. Blood sampling is
invasive and, for many patients, stressful and painful. The ability to screen
non-invasively for HIV in all types of patients, including injection 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 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. Unlike oral fluid,
the collection of urine does not require specially trained personnel, nor is its
collection restricted to patients of certain ages.
LOWER OVERALL COST. The Company's urine-based screening test may lower
significantly the overall cost of testing for HIV infection 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 their 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.
Nonetheless, the total cost of deploying urine, blood or oral-based HIV
screening tests or a combination
5
thereof will vary according to the testing purpose and protocol and whether
other diagnostic tests are performed simultaneously. The ancillary costs (such
as collection method, accidental exposure to HIV, and sample disposal)
associated with blood testing are more expensive than urine testing.
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 and the urine Western Blot supplemental test,
more than 11,000 paired blood and urine specimens were tested. In recent studies
where specificity was assessed by testing specimens from a combined subset of
low risk subjects, the resulting specificity was 100% for the screening test in
conjunction with the supplemental test. Sensitivity (correlation to blood tests)
of the urine testing method was estimated by testing samples from a subset of
individuals known to be infected with HIV-1, including those with a clinical
diagnosis of AIDS, and sensitivity was 99.7%. Specificity is the ability of an
assay or method to identify all non-HIV infected individuals correctly.
Sensitivity is the ability of the assay or method to detect truly HIV-infected
individuals.
In spite of the benefits of the Company's urine-based screening and
supplemental tests, such tests represent 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 the
necessary regulatory and reimbursement approvals are obtained.
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 using a modification of the Company's
approved tests, 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.
TEST METHODOLOGY. The Company's urine-based screening 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 screening test requires only 200 microliters of urine (approximately
four drops) and can be performed using standard laboratory equipment. 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, and therefore requires few, if any, modifications to existing
laboratory protocols.
The Company's urine-based supplemental test uses the same commercially
available Western Blot kit components as provided for the blood-based Cambridge
Biotech supplemental test. This urine-based supplemental test requires 1.0
milliliter of urine added directly to the standard kit diluent and is performed
with additional times of incubation for the two detection steps as the only
changes in procedure. The same laboratory equipment is used for both the blood
and urine supplemental tests.
6
The Cambridge HIV-1 Western Blot kit for use with urine is dedicated to
urine testing by virtue of the urine Western Blot controls included with the
Western Blot blood kit and a different blot interpretation criterion. For urine,
blots showing the presence of a single band, gp160, equal to or greater
intensity than the low positive urine Western Blot control are interpreted as a
positive HIV-1 result. Urine blots have a lower indeterminate rate than blood
allowing more definitive negative or positive results.
In December 1998, Calypte acquired from Cambridge Biotech certain assets
relating to the Western Blot product line for certain infectious diseases. The
acquisition included Cambridge Biotech's urine-based and serum-based HIV-1
Western Blot products, as well as a supplemental test for Lyme Disease and Human
T-Lymphotropic Virus (HTLV).
THE CAMBRIDGE BIOTECH BLOOD-BASED HIV-1 SUPPLEMENTAL TEST
As the first of the four supplemental blot tests for blood HIV-1 antibodies
to be FDA-licensed, the Cambridge Biotech HIV-1 Western Blot kit has been in
commercial distribution for more than 8 years.
PRODUCTS UNDER DEVELOPMENT
OTC. Based upon the results of market analyses and partnership
opportunities, the Company may choose to proceed with submitting a pre-market
approval application ("PMA") to the FDA for approval of the Company's
over-the-counter ("OTC") home urine collection kit. The kit would compete with
other OTC HIV screening products. On May 14, 1996, Direct Access Diagnostics, a
subsidiary of Johnson & Johnson, received FDA clearance for commercial sale of
the first OTC home blood collection kit for HIV. In addition, on July 22, 1996,
Home Access Health Corp. received FDA clearance for commercial sale of another
OTC home blood collection kit for HIV. During 1997, Direct Access Diagnostics
discontinued sales of the OTC 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. The current HIV-1 urine licensed test kit will be a part
of the entire OTC kit. At this time, the Company believes it would be premature
to issue predictions as to the product's reliability and cost.
RAPID TEST. The Company is developing a rapid urine test in response to the
reports by the Center for Disease Control and Prevention (CDC) on the value of
immediate HIV antibody test results. The high number of individuals who do not
return for test results and counseling constitutes a threat to the public
health. In addition, in emergency rooms, delivery rooms and other settings,
there is an urgent need to know the HIV status of the patient. Since AZT
treatment of pregnant mothers, even at delivery and for the newborn, has been
shown to result in a substantial decrease in HIV transmission, there appears to
be a new market for the reliable rapid test format. At this time, the Company
believes it would be premature to issue predictions as to the product's
reliability and cost.
OTHER DIAGNOSTICS. The Company intends to develop additional or improved
urine- and blood-based tests for other infectious and viral diseases. The
Company is focusing development on certain products and is no longer pursuing
other new research and development actively.
RESEARCH AND DEVELOPMENT SPENDING The Company has invested the funds in
research and development that it believes to be necessary and appropriate to
bring its innovative HIV-I urine-based screening test to the market. The Company
spent $3.9 million, $3.7 million and $5.8 million on product research and
development in 1998, 1997 and 1996, respectively.
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 market. International and other U.S. markets will be addressed
utilizing diagnostic product distributors. In late summer of 1998, the Company
began selling its combined urine-based HIV-1 test with
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the Western Blot supplemental test in the U.S. To date, the Company has received
approval for the sale of its product outside of the U.S. only in Indonesia.
Several international approvals are pending, and 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.
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 market.
Calypte............. Canada All
Alexon-Trend........ United States All but the above laboratories.
Alexon-Trend........ Europe, Latin America, Africa, Middle All
East
Otsuka.............. Asia, Australia, New Zealand All
Teva Medical Ltd.... Israel All
ALEXON-TREND In August 1998, Seradyn, a former subsidiary of Mitsubishi
Chemical Corporation was acquired by Alexon-Trend, a subsidiary of Sybron
Laboratory Products Corporation. 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 extended
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. The Company is
currently in discussions with Alexon-Trend regarding extension 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 gave 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. If the Company is
unable to meet Otsuka's manufacturing requirements,
8
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. In December 1998, Otsuka and Calypte
entered into a letter of intent pursuant to which Otsuka would withdraw as
distributor of the Company's product in all countries except Japan.
TEVA MEDICAL LTD (FORMERLY TRAVENOL LABORATORIES LTD.) In December 1994 the
Company entered into an agreement with TEVA Medical Ltd. ("TEVA"),. The
agreement gives TEVA exclusive rights to distribute the HIV-1 test and to use
the trademark "Calypte" within Israel. Under the agreement, TEVA will undertake
registration of the product in Israel with the Company paying regulatory fees.
The term of the agreement is perpetual unless terminated earlier for specified
causes. No minimum purchase levels are required.
The Company's products represent a new method of determining the presence of
HIV antibodies and there can be no assurance that these products will gain any
significant degree of market acceptance among physicians, patients or health
care payors, even if necessary international and U.S. regulatory and
reimbursement approvals are obtained. The Company believes that recommendations
and endorsements by the medical community will be essential for market
acceptance of the products, and there can be no assurance that any such
recommendations or endorsements will be obtained. The Company has no experience
marketing and selling its products either directly or through its distributors.
The Company's marketing strategy relies upon its 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.
In 1998, the Company's revenue from product sales totaled $951,000.
Approximately 97% of Calypte's product sales revenues arose from sales to
customers in the United States.
The Company is currently negotiating with other potential distributors of
its HIV product line. In addition, on March 11, 1999, the Chinese National
Center for AIDS Prevention and Control (NCAIDS) and the Chinese Academy of
Preventive Medicine (CAPM) signed a letter agreement with Calypte to use
Calypte's urine HIV-1 test in various HIV screening applications including: STD
clinics, pre-screening of blood bank donors, military personnel, pregnant women,
children, marriage license applications and insurance applications.
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 FDA 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 for its HIV-1 screening test 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
for which FDA license approval is pending. The capacity of the Alameda facility
is approximately 20 million tests per year. The
9
Company has filed an establishment license application for the Alameda facility.
The Company intends to continue manufacturing in its Berkeley facility until its
Alameda facility is approved by the FDA.
In December of 1998, the Company acquired the HIV-1 product line from
Cambridge Biotech Corporation, including the manufacturing facilities for such
product line in Rockville, Maryland. The Rockville facility also has an
establishment license from the FDA for the urine and blood-based Western Blots.
On November 19, 1998, the Company received a Warning Letter from the FDA
following an inspection by the FDA of the Company's manufacturing facility in
Berkeley, California. On December 11, 1998, the Company responded in writing to
each of the alleged deficiencies cited in the Warning Letter. Subsequently, the
Company received a letter from the FDA in which the FDA requested further
responses from the Company with regard to certain of such alleged deficiencies.
The Company is in the process of responding to such letter. If the FDA is not
satisfied with the Company's responses and the Company's corrective actions, it
could take regulatory actions against the Company including license suspension,
revocation, or denial, seizure of products or injunction, or civil penalties or
criminal sanctions. Any such FDA action would have a material adverse effect
upon the Company's ability to conduct operations. In addition, failure of the
Company to satisfy the FDA as to such Warning Letter could adversely affect the
Company's pending FDA license application for the Alameda facility.
Calypte purchases raw materials and components used in the manufacture of
its product from various suppliers and relies on single sources for a few of
these components. Establishment of additional or replacement suppliers for these
components cannot be accomplished quickly. The Company has some single-source
components, and any delay or interruption in supply of these components could
significantly impair the Company's ability to manufacture products in sufficient
quantities, particularly as Calypte increases manufacturing activities in
support of commercial sales.
The Company has limited experience in manufacturing its products. The
Company currently manufactures its products for sale, for submission to FDA for
ongoing compliance, clinical trials and building its inventory. Calypte may
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. Due to Calypte's limited
manufacturing experience, its estimates with regard to these and other
operational requirements may be incomplete or inaccurate and unanticipated
events and circumstances are likely to occur. The larger Alameda facility will
be needed if initial demand for the screening test exceeds the more limited
capacity of the Berkeley facility. Difficulties encountered by the Company in
manufacturing scale-up to meet demand, including delays in receiving FDA
approval for the Alameda facility, could have a material adverse effect on its
business, financial condition and results of operations.
Due to the nature of its manufacturing processes, the Company is subject to
stringent federal, state and local laws, rules, regulations and policies
governing the use, generation, manufacture, storage, air emission, discharge,
handling and disposal of certain materials and wastes. There can be no assurance
that the Company will not be required to incur significant costs to comply with
land use and environmental regulations as manufacturing is scaled-up to
commercial levels, nor that the operations, business or financial condition of
the Company will not be materially and adversely affected by current or future
environmental laws, rules, regulations and policies. There can be no assurance
that the Company will be able to obtain and maintain all required permits in
connection with the operation of its manufacturing facilities. When and if the
Company begins to produce products on a commercial scale, it will be a
significant user and disposer of water. The disposal of water used in the
Company's manufacturing processes must comply with applicable federal, state and
local environmental protection laws, and compliance with these laws may be
costly and difficult.
10
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 Berkeley, California facility.
The Company's products incorporate established immunoassay technology based
on antibody-antigen reactions. Antibodies are immune system proteins produced as
a result of an organism's immune response to substances (antigens) foreign to
the body and specifically bind to antigens and signal the immune system to
assist in eliminating them. Immunoassays are used for diagnostic applications
where the presence or absence of a specific analyte is being evaluated and allow
the detection of some analytes at levels as low as one part per billion.
Antigens include viruses, bacteria, parasites, chemical toxins and other foreign
substances and hormones.
The HIV-1 urine assay format includes a standard 96 well microtiter plate
which is compatible with standard laboratory instrumentation. The microwell
plates are coated with proprietary recombinant HIV-1 envelope protein antigen.
Patient urine and the unique specimen diluent are introduced to the microwell
simultaneously. If HIV-1 antibodies are present, they bind to the antigen coated
well and remain during the subsequent wash steps. An enzyme labeled conjugate is
added to the well. This conjugate binds specifically to human antibody which
remains from the previous step. Following another wash, substrate reagent is
added and color development occurs due to the presence of the enzyme conjugate
in the well. This color is measured spectrophotometrically on a standard
laboratory microwell plate reader. The presence of HIV antibody in the specimen
is indicated by the development of color in the microwell, and the intensity of
the color is proportional to the amount of antibody.
11
The Company's HIV-1 urine-based supplemental test uses the Cambridge Biotech
HIV-1 Western Blot kit with a procedure developed by Calypte for testing urine
specimens. The Cambridge Biotech HIV-1 Western Blot kit is based on the
combination of electrophoretic separation of complex mixtures of proteins with
the highly sensitive immunoblotting technique. This method has been highly
useful in characterizing the antigenic profile of HIV-1 and describing the
immune response to HIV-1 in exposed or infected persons.
The Cambridge Biotech HIV-1 Western Blot kit is used for testing both blood
and urine specimens. The manufacture of the kit involves the production of an
inactivated, partially purified HIV-1 lysate from HIV-1 propagated in an
H9/HTLV-III(B) T-lymphcyte cell line. HIV-1 proteins are separated by molecular
size using gel electrophoresis of the lysate in the presence of detergent
(sodium dodecylsulfate). These separated HIV-1 proteins are electrotransferred
from gel to a nitrocellulose membrane which is washed, blocked to minimize non-
specific immunoglobulin binding and packaged. The kit provides serum controls
and components which enable the detection and visualization of HIV-1 antibodies
present in the specimen incubated with individual nitrocellulose membrane
strips. Bands corresponding to specific location of HIV-1 proteins are used to
interpret a positive, negative or indeterminate result.
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. The first compound is an interferon product, called interferon-tau,
which early animal trials have shown to be promising both as an anti-viral and
anti-tumor agent with less toxicity than other interferons. In February 1999,
Pepgen received clearance from the FDA to commence Phase I human clinical trials
of interferon-tau for patients who have multiple sclerosis. Pepgen's second lead
compound is hybrid interferon alpha. Preliminary studies indicate that hybrid
interferon alpha shows lower levels of toxicity than currently available alpha
interferons while retaining the anti-viral and anti-tumor activity of alpha
interferon. Pepgen expects to conduct additional IN VITRO and IN VIVO
preclinical studies on hybrid interferon alpha and, if such studies are
successful, Pepgen plans to submit an investigational new drug application (IND)
to the FDA.
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 shares were immediately exercisable and the
remaining 375,000 shares 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 at fair market value the remaining portion of Pepgen that is does not
then own, and the Company is entitled to elect two of the seven Board members of
Pepgen.
During 1998, the Company loaned Pepgen a total of $768,000 at an effective
interest rate of 10%. The loan is secured by all intellectual property of Pepgen
as well as a personal guaranty from Pepgen's Founder and Chairman and a standby
guaranty from Pepgen's President in the event that the guaranty by the Founder
and Chairman proves insufficient. The entire loan plus interest is due July 1,
1999. Calypte may, but has no obligation to, provide additional funding to
Pepgen. See Item 13, "Certain Relationships and Related Transactions."
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.
12
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 Corporation,
Repligen, and Texas A&M University System. These license arrangements secure
intellectual property rights for the manufacture and sale of the Company's
products.
The Company has licensed from NYU, on an exclusive basis, a U.S. patent for
the detection of antibodies to HIV in urine. The rights under the license extend
until the expiration of the U.S. patent in 2009 provided the Company makes
certain payments. The Company has the right to make, use, sell and sublicense
products utilizing the technology described in the patent and is obligated to
make certain fixed and royalty payments to NYU to maintain exclusivity of the
license. In connection with the NYU license, the Company also funded research at
NYU, and expects to continue to do so through 1999. The Company has exclusive
worldwide license to NYU inventions that arise from the research funded by the
Company.
The Company has sublicensed from Cambridge Biotech Corporation proprietary
technology related to the HIV envelope glycoprotein. The sublicense grants to
the Company 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 Corporation 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
payments and certain 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, its obligation to make minimum royalty payments under licenses which
require such payments could have a material adverse impact on the Company's
results of operations. Failure to make required minimum royalty payments also
may result in the loss by the Company of exclusivity under, or termination of,
such 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
13
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.
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
14
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 SUPPLEMENTAL TESTS
The Company's HIV-1 screening and supplemental tests 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 manufacture and sell, in interstate and
foreign commerce, the Company's urine-based HIV-1 screening test for use in
laboratory settings.
In December 1998, Calypte acquired the assets relating to the Western Blot
product line of Cambridge Biotech Corporation for HIV-1. Both the urine and
serum-based HIV-1 Western Blot products have received a product license and an
establishment license from the FDA. In March 1999, the licenses were transferred
from Cambridge Biotech Corporation to Calypte.
OTC HOME URINE COLLECTION KIT
Based upon the results of market analyses and partnership opportunities, the
Company may choose to proceed with submitting a pre-market approval application
("PMA") to the FDA for approval of the Company's over-the-counter ("OTC") home
urine collection kit. On May 14, 1996, Direct Access Diagnostics, a subsidiary
of Johnson & Johnson, received FDA clearance for the first OTC home blood
collection kit for HIV. In addition, on July 22, 1996, Home Access Health Corp.
received FDA clearance for another OTC home blood 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 its OTC kit for HIV.
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 and the State of
Maryland for the Rockville facility where the blots are manufactured. 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
15
Company believes that it is in substantial compliance with all applicable
federal and state regulations. Nevertheless, there can be no assurance its
manufacturing facilities will satisfy GMP or California and Maryland
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. See "Manufacturing" section with
respect to a Warning Letter received by the Company from the FDA in November,
1998.
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 subject Calypte to risks of
product liability claims or product recalls, particularly in the event of false
positive or false negative reports. A product recall or a successful product
liability claim or claims which exceed our insurance coverage could have a
material adverse effect on us. We maintain a $10,000,000 claims made policy of
product liability insurance. However, product liability insurance is expensive.
In the future, we may not be able to obtain coverage on acceptable terms, if at
all. Moreover, our insurance coverage may not adequately protect us from
liability which we incur in connection with clinical trials or sales of our
products.
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, in countries which operate their own agencies for the
evaluation and registration of HIV testing kits, the Company has received
approval for the sale of its product in Indonesia only. Approval and
registration processes are underway in several other countries. 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
At this time, the Company does not intend to pursue previous plan to
establish a clinical reference laboratory in connection with an OTC home urine
collection kit for HIV-1.
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
16
submitted to the FDA in the form of a new drug application. In responding to a
new drug application, the FDA may refuse to accept the application for filing,
request additional information or deny the application if the FDA determines
that the application does not satisfy its regulatory approval criteria. The
process of completing clinical testing usually takes a number of years and
requires the expenditure of substantial resources. The length of the FDA review
period varies widely depending upon the amount and quality of the data in the
application and the nature and indications of the proposed product. In addition,
the FDA may require post-marketing reporting and may require surveillance
programs to monitor the usage and side effects of the drug product after product
approval. The Company has no current plans to acquire the remaining equity
ownership in Pepgen or to develop Pepgen therapeutic products.
COMPETITION
Competition in the IN VITRO diagnostic market is intense and expected to
increase. Within the United States, the Company will face competition from a
number of well-established manufacturers of blood-based HIV tests, 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.
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 Bio-Rad
Laboratories. 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 OraSureTM 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"), now owned by
Abbott Laboratories 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 FDA-licensed 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.
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.
17
EMPLOYEES
As of December 31, 1998, the Company had 50 full time employees, six of whom
were engaged in or directly supported the Company's research and development
activities, 30 of whom were in manufacturing, facilities and quality assurance,
four of whom were in marketing and sales and 10 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, serves as President
and board member of Pepgen. In addition, Mr. Boeger and Dr. Howard B. Urnovitz,
the Company's Chief Science Officer are both officers of the Chronic Illness
Research Foundation, a non-profit organization. Accordingly, although these
individuals will devote substantially all 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.
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
18
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."
RISK FACTORS
See Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
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 1999, 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.
Calypte also subleases properties in Rockville, Maryland. The sublease of
approximately 42,000 square feet of office and manufacturing space expires
December 2000, with an option to renew for successive periods of one year. The
other sublease of approximately 1,000 square feet of manufacturing space expires
March 2000, with no option to renew. The Company believes that existing
facilities are adequate to support the Company's activities for the foreseeable
future.
19
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.
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
- -------------------------------------------------------------------- ----------- ----- ------
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
1998................................................................ 1st 5 1/4 3 3/4
1998................................................................ 2nd 7 3/16 3 13/16
1998................................................................ 3rd 4 9/16 1 3/8
1998................................................................ 4th 4 7/16 1/2
On February 26, 1999, there were 276 holders of record of the Common Stock,
and the closing price of the Common Stock was $3 5/32. 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.
SUBSEQUENT EVENT
On January 20, 1999, the Company completed a private placement of 3,102,500
shares of Common Stock to institutional investors in a private placement at
$1.00 per share. Calypte received net proceeds of approximately $2.8 million
after deducting placement agent commissions and additional expenses associated
with the private placement. The shares sold in the private placement were exempt
from registration with the Securities and Exchange Commission pursuant to Rule
506 of Regulation D of the Securities Act of 1933 as amended ("Securities Act").
Shares were sold only to accredited investors as defined in Rule 501 of the
Securities Act. The Company filed a Form S-3 Registration Statement effective on
January 19, 1999 to register the shares for resale by the accredited investors.
20
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Presented below is the selected consolidated financial data for the years
ended December 31, 1998, 1997, 1996, 1995 and 1994.
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- ---------- ---------- ---------
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Product sales........................................... $ 951 $ 376 $ 130 $ -- $ --
--------- --------- ---------- ---------- ---------
Total revenue......................................... 951 376 130 -- --
--------- --------- ---------- ---------- ---------
Operating expenses:
Product costs........................................... 1,912 2,305 1,085 -- --
Research and development................................ 3,881 3,685 5,751 5,018 3,644
Purchased in-process research and development........... -- -- -- 2,500 --
Selling, general and administrative..................... 3,925 2,317 3,333 2,862 1,818
--------- --------- ---------- ---------- ---------
Total expenses........................................ 9,718 8,307 10,169 10,380 5,462
--------- --------- ---------- ---------- ---------
Loss from operations................................ (8,767) (7,931) (10,039) (10,380) (5,462)
Interest income (expense), net............................ 308 139 (74) 78 (35)
Other income.............................................. 1 -- 15 12 31
--------- --------- ---------- ---------- ---------
Loss before income taxes and extraordinary item..... (8,458) (7,792) (10,098) (10,290) (5,466)
Income taxes.............................................. (2) (2) (2) (1) (1)
--------- --------- ---------- ---------- ---------
Net loss............................................ (8,460) (7,794) (10,100) (10,291) (5,467)
Less dividend on mandatorily redeemable Series A preferred
stock................................................... (120) (120) (120) (120) (120)
--------- --------- ---------- ---------- ---------
Net loss attributable to common stockholders........ $ (8,580) $ (7,914) $ (10,220) $ (10,411) $ (5,587)
--------- --------- ---------- ---------- ---------
--------- --------- ---------- ---------- ---------
Net loss per share attributable to common
stockholders...................................... $ (0.64) $ (0.72) $ (1.17) $ (1.53) $ (1.11)
--------- --------- ---------- ---------- ---------
--------- --------- ---------- ---------- ---------
Weighted average shares used to compute net loss per
share attributable to common stockholders......... 13,432 11,028 8,753 6,792 5,011
--------- --------- ---------- ---------- ---------
--------- --------- ---------- ---------- ---------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 3,121 $ 10,820 $ 7,924 $ 2,559 $ 4,478
Securities available for sale............................... 650 -- -- -- --
Working capital............................................. 4,444 8,917 6,067 (2,402) 3,117
Total assets................................................ 9,945 12,950 10,347 5,337 5,965
Long-term portion of capital lease obligations and notes
payable................................................... 23 282 764 543 196
Mandatorily redeemable Series A preferred stock............. 2,096 1,976 1,856 1,736 1,616
Accumulated deficit......................................... (56,755) (48,295) (40,501) (30,401) (20,110)
Total stockholders' equity (deficit)........................ 4,631 8,069 5,416 (2,746) 2,659
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Calypte's efforts are primarily focused on selling, developing and obtaining
approval for Calypte's urine-based and serum-based diagnostic tests for sexually
transmitted diseases. In August 1996, the Company received a product license and
an establishment license from the U.S. Food and Drug Administration (FDA) to
manufacture and sell Calypte's urine-based HIV-1 screening test for use in
professional laboratory settings. In June, 1998, the Company announced that the
FDA had licensed the urine HIV-1 Western Blot supplemental test that confirms
the presence of antibodies to HIV-1 in urine samples. The new test is used on
samples that are repeatedly reactive in our HIV-1 urine antibody screening test.
The new test completes the only available FDA-approved urine-based HIV test
method. There can be no assurance the Company will have significant revenues
from sales of the HIV-1 urine screening assay or the supplemental test.
In December 1998, Calypte acquired from Cambridge Biotech certain assets
relating to the Western Blot product line for certain infectious diseases. The
acquisition included the urine-based and serum-based HIV-1 Western Blot
products, as well as a supplemental test for Lyme Disease and Human
T-Lymphotropic Virus (HTLV).
The Company expects operating losses to continue as the Company continues
its marketing and sales activities for its first FDA-approved products and
conduct additional research and development for subsequent products. 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 market. International and
other U.S. markets will be addressed utilizing diagnostic product distributors.
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, 1998 AND 1997
Product sales for Calypte increased $575,000 to $951,000 for the year ended
December 31, 1998 from $376,000 for the year ended December 31, 1997. The
increase in product sales was primarily due to higher sales volume of our HIV-1
screening test in anticipation of and after FDA approval of the urine HIV-1
Western Blot test.
Product costs decreased 17% to $1.9 million for the year ended December 31,
1998 from $2.3 million for the year ended December 31, 1997. Product costs for
the year ended December 31, 1997 were higher because a greater quantity of
product produced was expensed since it was not retained as saleable inventory.
During the year ended December 31, 1998, a greater quantity of product was
valued as inventory (raw materials, work-in-process and finished goods) after
FDA approval of the supplemental test for Calypte's HIV-1 urine screening test.
Research and development expenses increased 5% to $3.9 million for the year
ended December 31, 1998 from $3.7 million in the corresponding period of the
prior year. The increase was principally due to clinical investigations
performed for the discordant study (a study of HIV-1 antibodies found in urine
when the same person tests negative for HIV-1 antibodies in blood), higher
minimum product license fees, research funding made to outside organizations and
more personnel hired to complete research and development studies.
Selling, general and administrative expenses increased $1.6 million or 69%
to $3.9 million for the year ended December 31, 1998 from $2.3 million for the
year ended December 31, 1997. The increase was
22
primarily related to the increase in the use of consultants related to various
projects and increased expenses related to the launch and marketing of our HIV-1
urine screening test and Western Blot supplemental test.
Interest income, interest expense and other income increased $170,000 to
$309,000 for the year ended December 31, 1998 from $139,000 for the year ended
December 31, 1997. The increase was primarily due to the interest earned from
proceeds of a private placement of common stock in October 1997, the decrease in
interest paid for capital leases and interest earned on loans made to officers
and employees and Pepgen Corporation.
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. 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.
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.
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.
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
23
18%). In December 1996, there was a drawdown of $362,000 on this equipment lease
line of credit. The equipment lease line of credit expired at the end of 1996.
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 $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.
In January 1999, the Company completed a private placement of 3,102,500
shares of Common Stock to institutional investors in a private placement at
$1.00 per share. Calypte received net proceeds of approximately $2.8 million
after deducting placement agent commissions and additional expenses associated
with the private placement.
In January 1999, 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 1 1/4%. The
agreement requires the Company to maintain certain financial covenants and
comply with certain reporting and other requirements. In addition, borrowings
under the line of credit agreement are secured by Calypte's assets. In January
1999, Calypte drew down $2.0 million on the line of credit.
Although the Company believes current cash will be sufficient to meet the
Company's operating expenses and capital requirements for the next six months,
the Company's future liquidity and capital requirements will depend on numerous
factors, including market acceptance of its products, regulatory actions by the
FDA and other international regulatory bodies, intellectual property protection,
and the ability to raise additional capital in a timely manner.
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. Any failure to raise additional financing will
likely place us in significant financial jeopardy. Therefore, the Company cannot
predict the adequacy of its capital resources on a long-term basis.
OPERATING ACTIVITIES
For the years ended December 31, 1998 and 1997, the Company's cash used in
operations was $7.5 million and $6.6 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.
RISK FACTORS
You should consider carefully the following risk factors, along with the
other information contained or incorporated by reference in this prospectus, in
deciding whether to invest in our shares. These factors,
24
among others, may cause actual results, events or performance to differ
materially from those expressed in any forward-looking statements made in this
Form 10-K.
UNCERTAIN MARKET ACCEPTANCE OF OUR NEW METHOD OF DETERMINING THE PRESENCE OF
HIV ANTIBODIES. Our products incorporate a new method of determining the
presence of HIV antibodies. There can be no assurance that we will obtain:
- any significant degree of market acceptance among physicians, patients or
health care payors; or
- recommendations and endorsements by the medical community which are
essential for market acceptance of the products.
We have FDA approval to market our urine HIV-1 screening and supplemental
tests in the United States and in July, 1998 we began marketing this product.
However, to date this product has only generated limited revenues and not
achieved significant market penetration. The failure of our products to obtain
market acceptance would have a material adverse effect on us.
WE HAVE LITTLE EXPERIENCE IN SELLING AND MARKETING OUR HIV-1 URINE-BASED
SCREENING TEST. We have little experience marketing and selling our products
either directly or through our distributors, since we only began such sales in
the second half of 1998. The success of our products depends upon alliances with
third-party distributors. There can no assurance that:
- our direct selling efforts will be effective;
- our distributors will market successfully our products; or
- if our relationships with distributors terminate, we will be able to
establish relationships with other distributors on satisfactory terms, if
at all.
Any disruption in our distribution, sales or marketing network could have a
material adverse effect on us.
WE HAVE SUSTAINED LOSSES IN THE PAST AND WE EXPECT TO SUSTAIN LOSSES IN THE
FUTURE. We have incurred losses in each year since our inception. Our net loss
for the year ended December 31, 1998 was $8.5 million and our accumulated
deficit as of December 31, 1998 was $56.8 million. We expect operating losses to
continue as we continue our marketing and sales activities for our FDA-approved
products and conduct additional research and development for subsequent
products.
OUR QUARTERLY RESULTS MAY FLUCTUATE DUE TO CERTAIN REGULATORY, MARKETING AND
COMPETITIVE FACTORS OVER WHICH WE HAVE LITTLE OR NO CONTROL. The factors listed
below, some of which we cannot control, may cause our revenues and results of
operations to fluctuate significantly:
- actions taken by the FDA or foreign regulatory bodies relating to our
products;
- the extent to which our products gain market acceptance;
- the timing and size of distributor purchases; and
- introductions by competitors of alternative means for testing for HIV.
WE MAY NOT BE ABLE TO OBTAIN ADDITIONAL FINANCING THAT WE WILL NEED IN THE
NEXT SIX MONTHS. We believe that we will need to raise more money in the next
six months to continue to finance our operations. We may not be able to obtain
additional financing on acceptable terms, or at all. Any failure to raise
additional financing will likely place us in significant financial jeopardy.
WE DEPEND UPON THE VIABILITY OF THREE PRODUCTS--OUR HIV-1 URINE-BASED
SCREENING TEST AND OUR URINE AND BLOOD BASED SUPPLEMENTAL TESTS. Our HIV-1
urine-base screening test and urine and blood-based supplemental tests are our
only products. Accordingly, we may have to cease operations if our tests fail to
achieve market acceptance or generate significant revenues.
25
OUR PRODUCTS DEPEND UPON RIGHTS TO TECHNOLOGY THAT WE HAVE LICENSED FROM
THIRD PARTY PATENT HOLDERS AND THERE CAN BE NO ASSURANCE THAT THE RIGHTS WE HAVE
UNDER THESE LICENSING AGREEMENTS ARE SUFFICIENT OR THAT WE CAN ADEQUATELY
PROTECT THOSE RIGHTS. We currently have the right to use patent and proprietary
rights which are material to the manufacture and sale of our HIV-1 urine-based
screening test under licensing agreements with New York University, Cambridge
Biotech Corporation, Repligen, and the Texas A&M University System.
WE RELY ON SOLE SOURCE SUPPLIERS THAT WE CANNOT QUICKLY REPLACE FOR CERTAIN
COMPONENTS CRITICAL TO THE MANUFACTURE OF OUR PRODUCTS. Any delay or
interruption in the supply of these components could have a material adverse
effect on us by significantly impairing our ability to manufacture products in
sufficient quantities, particularly as we increase our manufacturing activities
in support of commercial sales.
WE HAVE LIMITED EXPERIENCE IN MANUFACTURING OUR PRODUCTS AND LITTLE
EXPERIENCE IN MANUFACTURING OUR PRODUCTS IN COMMERCIAL QUANTITIES. We may
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 SUCCESS OF OUR PLANS TO ENTER INTERNATIONAL MARKETS MAY BE LIMITED OR
DISRUPTED DUE TO RISKS RELATED TO INTERNATIONAL TRADE AND MARKETING AND THE
CAPABILITIES OF OUR DISTRIBUTORS. We anticipate that international distributor
sales will generate a portion of our revenues for the next several years. We
believe that our urine-based test can provide significant benefits in countries
that do not have the facilities or personnel to safely and effectively collect
and test blood samples. The following risks may limit or disrupt our
international sales;
- 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 exchanges rates.
Some of our distributors have limited international marketing experience.
There can be no assurance that these distributors will be able to market
successfully our products in foreign markets.
WE FACE INTENSE COMPETITION IN THE MEDICAL DIAGNOSTIC PRODUCTS MARKET AND
RAPID TECHNOLOGICAL ADVANCES BY COMPETITORS. Competition in our diagnostic
market is intense and we expect it to increase. Within the United States, our
competitors include a number of well-established manufacturers of HIV tests
using blood samples, plus at least one system for the detection of HIV
antibodies using oral fluid samples. Many of our competitors have significantly
greater financial, marketing and distribution resources than we do. Our
competitors may succeed in developing or marketing technologies and products
that are more effective than ours.
These developments could render our technologies or products obsolete or
noncompetitive or otherwise have a material adverse effect on us.
26
OUR ABILITY TO MARKET OUR PRODUCTS DEPENDS UPON OBTAINING AND MAINTAINING
FDA AND FOREIGN REGULATORY APPROVALS. Numerous governmental authorities in the
United States and other countries regulate our products. The FDA regulates our
products under federal statutes and regulations related to pre-clinical and
clinical testing, manufacturing, labeling, distribution, sale and promotion of
medical devices in the United States.
If we fail to comply with FDA regulations, or the FDA believes that we are
not in compliance with such regulations, the FDA can:
- detain or seize our products;
- issue a recall of our products;
- prohibit marketing and sales of our products; and
- assess civil and criminal penalties against us, our officers or our
employees.
We also plan to sell our products in certain foreign countries where they
may be subject to similar local regulatory requirements. The imposition of any
of the sanctions described above could have a material adverse effect on us.
The regulatory approval process in the United States and other countries is
expensive, lengthy and uncertain. We may not obtain necessary regulatory
approvals or clearances in a timely manner, if at all. We may lose previously
obtained approvals or clearances or fail to comply with regulatory requirements.
The occurrence of any of these events would have a material adverse effect on
Calypte.
Before we begin to manufacture our product at the Alameda facility, we must
obtain FDA approval for that facility. Delays in receiving the FDA's approval or
other difficulties which we encounter in scaling-up our manufacturing capacity
to meet demand could have a material adverse effect on us.
WE HAVE RECEIVED A WARNING LETTER FROM THE FDA REGARDING THE SUFFICIENCY OF
OUR MANUFACTURING RECORDS AND PRODUCTION PROCEDURES AND WE MUST SATISFY THE
FDA'S CONCERNS IN ORDER TO AVOID REGULATORY ACTION AGAINST US. See
"Manufacturing" section with respect to this Warning Letter.
AS A SMALL MANUFACTURER OF MEDICAL DIAGNOSTIC PRODUCTS, WE ARE EXPOSED TO
PRODUCT LIABILITY AND RECALL RISKS FOR WHICH INSURANCE COVERAGE IS EXPENSIVE,
LIMITED AND POTENTIALLY INADEQUATE. We manufacture medical diagnostic products
which subject us to risks of product liability claims or product recalls,
particularly in the event of false positive or false negative reports. A product
recall or a successful product liability claim or claims which exceed our
insurance coverage could have a material adverse effect on us. We maintain a
$10,000,000 claims made policy of product liability insurance. However, product
liability insurance is expensive. In the future we may not be able to obtain
coverage on acceptable terms, if at all. Moreover, our insurance coverage may
not adequately protect us from liability which we incur in connection with
clinical trials or sales of our products.
OUR CHARTER DOCUMENTS MAY INHIBIT A TAKEOVER. Certain provisions of our
Certificate of Incorporation and Bylaws could:
- discourage potential acquisition proposals;
- delay or prevent a change in control of Calypte;
- diminish stockholders' opportunities to participate in tender offers for
our common stock, including tender offers at prices above the then current
market price; or
- inhibit increases in the market price of our common stock that could
results from takeover attempts.
WE HAVE ADOPTED A SHAREHOLDER RIGHTS PLAN THAT HAVE CERTAIN ANTI-TAKEOVER
EFFECTS. On December 15, 1998, the Board of Directors of Calypte declared a
dividend distribution of one preferred share purchase
27
right ("Right") for each outstanding share of Common Stock of the Company. The
dividend is payable to the stockholders of record on January 5, 1999 with
respect to share of Common Stock issued thereafter until a subsequent
"distribution date" defined in a Rights Agreement and, in certain circumstances,
with respect to shares of Common Stock issued after the Distribution Date. The
description and terms of the Rights are set forth in a Rights Agreement between
the Company and ChaseMellon Shareholder Services, L.L.C., as Rights Agent, dated
as of December 15, 1998.
The Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire the Company
without conditioning the offer on the Rights being redeemed or a substantial
number of Rights being acquired. However, the Rights should not interfere with
any tender offer, or merger, which is approved by the Company because the Rights
do not become exercisable in the event of a permitted offer or other acquisition
exempted by the Board.
AN INVESTOR'S ABILITY TO TRADE OUR COMMON STOCK MAY BE LIMITED BY TRADING
VOLUME. The trading volume in our common shares has been relatively limited. A
consistently active trading market for our common stock may not develop.
WE MAY BE REMOVED FROM THE NASDAQ SMALLCAP MARKET IF WE FAIL TO MEET CERTAIN
MAINTENANCE CRITERIA. The Nasdaq Stock Market inquired on one occasion whether
we continue to meet the net capital surplus maintenance criterion for trading on
the Nasdaq SmallCap Market. We currently meet the capital surplus requirement
but our ability to continue to do so will depend on whether we are able to
maintain a net capital surplus of at least $1,000,000. The public trading volume
of our common stock and the ability of our stockholders to sell their shares
could be significantly impaired if we fail to meet the maintenance criteria and
are removed from the Nasdaq SmallCap Market. In that case, our common stock
would trade on either the OTC bulletin board, a regional exchange or in the pink
sheets, which would likely results in an even more limited trading volume.
THE PRICE OF CALYPTE'S COMMON STOCK HAS BEEN HIGHLY VOLATILE DUE TO SEVERAL
FACTORS WHICH WILL CONTINUE TO EFFECT THE PRICE OF OUR STOCK. Our common stock
has traded as low as $0.50 and as high as $4.43 between mid-October 1998 and the
end of February 1999. Some of the factors leading to the volatility include:
- price and volume fluctuations in the stock market at large which do not
relate to our operating performance;
- fluctuations in our operating results;
- announcements of technological innovations or new products which we or our
competitors make;
- FDA and international regulatory actions;
- availability of reimbursement for use of our products from private health
insurers, governmental health administration authorities and other
third-party payors;
- developments with respect to patents or proprietary rights;
- public concern as to the safety of products that we or others develop;
- changes in health care policy in the United States or abroad; and
- changes in stock market analysts' recommendations regarding Calypte, other
medical products companies or the medical product industry generally.
CALYPTE AND THE PRICE OF CALYPTE SHARES MAY BE ADVERSELY EFFECTED BY THE
PUBLIC SALE OF A SIGNIFICANT NUMBER OF THE SHARES ELIGIBLE FOR FUTURE SALE.
Nearly all outstanding shares of our common stock are freely tradable. Sales of
common stock in the public market could materially adversely affect the market
price of our common stock. Such sales also may inhibit our ability to obtain
future equity or equity-related financing on acceptable terms.
28
OUR RESEARCH AND DEVELOPMENT OF HIV URINE TEST INVOLVES THE CONTROLLED USE
OF HAZARDOUS MATERIALS. There can be no assurance that our safety procedures for
handling and disposing of hazardous materials such as azide will comply with
applicable regulations. In addition, we cannot eliminate the risk of accidental
contamination or injury from these materials. We may be held liable for damages
from such an accident and that liability could have a material adverse effect on
us.
WE MAY NOT BE ABLE TO RETAIN OUR KEY EXECUTIVES AND RESEARCH AND DEVELOPMENT
PERSONNEL. As a small company with only 50 employees, our success depends on the
services of key employees in executive and research and development positions.
The loss of the services of one or more of such employees could have a material
adverse effect on us.
WE HAVE NOT COMPLETED OUR YEAR 2000 COMPLIANCE PROGRAM SO THE POTENTIAL
COSTS AND COMPLICATIONS ASSOCIATED WITH YEAR 2000 COMPLIANCE CANNOT BE
DETERMINED AT THIS TIME. Calypte has a formal Year 2000 Program focusing on five
key readiness areas: 1) hardware; addressing information technology; 2)
software; addressing business, research, financial, inventory planning,
production control, product distribution and customer support; 3) firmware;
addressing built-in microprocessors that control production and non-production
equipment; 4) third party suppliers of critical inventory; and 5) third party
service providers.
Calypte established a Year 2000 Task Force earlier this year. The task force
is systematically examining each of the five key readiness areas by 1)
identifying items with Year 2000 compliance concerns; 2) assessing the risk and
impact of noncompliance for each item identified; and 3) correcting
non-compliant items and testing the corrections to ensure readiness at both
component and system levels. Calypte is in the process of contacting key
suppliers to identify any concerns which may arise due to such suppliers'
potential non-compliance. The task force will develop contingency plans if it
discovers areas where there is a substantial possibility that Year 2000
compliance will not be achieved. Calypte has identified items with Year 2000
compliance concerns in three readiness areas: software, third party suppliers of
critical inventory and third party service providers. We expect to complete risk
assessment in each area for our California and Maryland facilities by May 1999,
and the correction, testing and the development of contingency plans will
follow. Until we have completed our risk assessment and developed any necessary
contingency plans, we will not be in a position to identify our most reasonably
likely worst case Year 2000 scenario. We have presently completed correction and
testing in the Hardware readiness area for our California facilities and it is
now Year 2000 compliant in California. As of December 31, 1998, we have spent a
total of approximately $2,300 on our Year 2000 program and have made limited
expenditures related to our Year 2000 program since then.
We estimate that total Year 2000 costs to upgrade systems for our California
and Maryland facilities will range from $24,000 to $35,000 with the majority of
costs to be incurred in the next six months. At this time we do not anticipate
that Calypte will incur significant operating expenses or be required to invest
heavily in computer system improvements because our manufacturing process does
not rely heavily on automation and our existing computer hardware has proven to
be Year 2000 compliant. However, Calypte is continuing to assess and develop
alternatives that will require refinement of its cost estimate over time. There
can be no assurance that there will not be a delay in, or increased costs
associated with, our Year 2000 compliance program. Therefore, the potential
impact of possible complications on Calypte's financial condition and results of
operations cannot be determined at this time. If computer systems used by
Calypte or its suppliers or the product integrity of products provided to
Calypte by suppliers fail or experience significant difficulties related to the
Year 2000, Calypte's operations and financial condition could be adversely
effected.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not believe that there is any material market risk exposure
with respect to derivative or other financial instruments which would require
disclosure under this item.
29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements are included on pages F-1
through F-28 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, 1998 and 1997. 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-28 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.
HISTORICAL QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FIRST SECOND THIRD FOURTH
YEAR ENDED DECEMBER 31, 1998 QUARTER QUARTER QUARTER QUARTER
- ----------------------------------------------------------------------- --------- --------- --------- ---------
Total revenues......................................................... $ 241 $ 296 $ 147 $ 267
Operating expenses..................................................... 1,964 2,576 2,799 2,379
Interest income (expense) and other income............................. 117 86 63 43
Income taxes........................................................... -- (2) -- --
Dividend on mandatorily redeemable Series A preferred stock............ (30) (30) (30) (30)
--------- --------- --------- ---------
Net loss attributable to common stockholders........................... $ (1,636) $ (2,226) $ (2,619) $ (2,099)
--------- --------- --------- ---------
Net loss per share attributable to common stockholders*................ $ (0.12) $ (0.17) $ (0.20) $ (0.16)
--------- --------- --------- ---------
FIRST SECOND THIRD FOURTH
YEAR ENDED DECEMBER 31, 1997 QUARTER QUARTER QUARTER QUARTER
- ----------------------------------------------------------------------- --------- --------- --------- ---------
Total revenues......................................................... $ 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)
--------- --------- --------- ---------
* 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.
30
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, directors, and certain significant employees of the Company
as of February 28, 1999:
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
William A. Boeger(1)................................. 49 President, Chief Executive Officer and Chairman of
the Board of Directors
Howard B. Urnovitz, Ph.D............................. 45 Chief Science Officer and Member of the Board of
Directors
John J. DiPietro..................................... 40 Chief Operating Officer, Chief Financial Officer,
Vice President of Finance and Secretary
Toby Gottfried, Ph.D................................. 61 Director of Research and Development
Richard Van Maanen................................... 40 Director of Marketing, Sales and Business Development
David Collins (1)(2)................................. 64 Vice Chairman of the Board of Directors
Paul Freiman......................................... 64 Member of the Board of Directors
Julius R. Krevans, M.D. (2).......................... 74 Member of the Board of Directors
Mark Novitch, M.D. (1)............................... 66 Member of the Board of Directors
Zafar Randawa, Ph.D.................................. 51 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 Cell Pathways, Inc. 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
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 President of Finance, Chief Financial Officer and Secretary of Meris
Laboratories, Inc., a full service clinical laboratory, from 1991 until 1995.
While at Meris Laboratories, Mr. DiPietro, INTER ALIA, was
31
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. Her
post doctoral fellowship from 1980 until 1988 at the University of California,
Berkeley, was in the area of monoclonal antibody attachment to toxins for
targeting cancer cells. 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.
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. Mr. Collins is also 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, Otsuka America Pharmaceuticals,
Inc., Penwest Corp., 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,
32
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 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
Evaluation 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.
The Company believes that during fiscal year 1998, all the Reporting Persons
complied with all applicable filing requirements subject to the following
exceptions: Dr. Krevans had one late filing of report on Form 4 with respect to
a stock option exercise.
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 received compensation up to $6,000 per month and was
granted 50,000 stock options which vest over the period of
33
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 received 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 agreement has not been renewed for 1999.
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 30,000 Common Stock options granted in 1998 under the Director
Option Plan.
34
EXECUTIVE COMPENSATION
The following table sets forth certain compensation awarded or paid by the
Company during the years ended December 31, 1998, 1997 and 1996 to its Chief
Executive Officer and each of the other executive officers of the Company who
earned at least $100,000 salary and bonus from their employment during fiscal
1998 (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
SECURITIES
UNDERLYING
OPTIONS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) GRANTED (1) COMPENSATION ($)
- ------------------------------ ---- ---------- ------------ -------------- ----------------
William A. Boeger(2) ......... 1998 210,000(3) 74,686(4) 600,000(5) 25,881(6)
President, Chief Executive 1997 50,000(7) 5,385(8) 195,000(9) 15,470(10)
Officer And Chairman of the 1996 83,334(11) 0 0 11,560(12)
Board of Directors
Howard B. Urnovitz ........... 1998 157,846(13) 432 250,000(5) 4,200(14)
Chief Science Officer 1997 87,692 0 150,000 4,200(14)
1996 132,231 61,552(15) 0 85,000(16)
John J. DiPietro(17) ......... 1998 144,911 432 300,000(5) 25,496(12)
Chief Operating Officer, 1997 131,250 0 80,000(9) 36,073(12)
Chief Financial Officer, 1996 126,346 0 10,000(9) 32,201(12)
Vice President of Finance
and Secretary
- ------------------------
(1) All figures in this column represent options to purchase the Company's
common stock.
(2) 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.
(3) $15,000 was paid to Mr. Boeger in 1998 for services rendered by Mr. Boeger
in 1997.
(4) Represents $74,290 for non-cash bonus related to forgiveness of a portion of
a $70,000 note receivable including interest from Mr. Boeger and a $396 cash
bonus.
(5) Option grant was made upon cancellation of certain options previously
granted.
(6) Represents $20,406 in living expenses and $5,475 in car allowance, $75 of
which relates to a 1997 car allowance.
(7) Represents amounts paid to an affiliate of Quest Ventures, a venture capital
partnership of which Mr. Boeger is Managing General Partner.
(8) Represents non-cash bonus related to forgiveness of a portion of a $70,000
note receivable including interest from Mr. Boeger.
(9) These options were cancelled in October of 1998.
(10) Represents $10,595 for living expenses and $4,875 for car allowance.
(11) $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.
(12) Represents living expenses.
35
(13) $5,846 was paid to Dr. Urnovitz in 1998 for services rendered in 1997.
(14) Represents car allowance.
(15) Represents a one-time bonus to defray the tax liability on the deemed
income from the forgiveness of the note receivable from Dr. Urnovitz.
(16) Represents forgiveness of an $85,000 note receivable from Dr. Urnovitz.
(17) Mr. DiPietro joined the Company in October 1995 as Chief Financial Officer
and Vice President of Finance. In December 1997, Mr. DiPietro was named
Chief Operating Officer, Chief Financial Officer and Vice President of
Finance.
The following table sets forth information concerning stock options granted
to the Named Executive Officers during the fiscal year ended December 31, 1998:
STOCK OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
POTENTIAL REALIZABLE
VALUE AT ASSUMED
PERCENT OF ANNUAL RATES OF
NUMBER OF TOTAL OPTIONS STOCK
SECURITIES GRANTED TO PRICE APPRECIATION
UNDERLYING EMPLOYEES IN EXERCISE FOR OPTION TERM (3)
OPTIONS FISCAL YEAR PRICE EXPIRATION --------------------
NAME GRANTED (1) ($/SH) (2) DATE 5% ($) 10% ($)
- ---------------------------------------------- ----------- ------------- ----------- ----------- --------- ---------
William A. Boeger............................. 600,000(4) 31.49% 1.00 10/29/08 377,337 956,245
Howard B. Urnovitz............................ 250,000(4) 13.12% 1.00 10/29/08 157,224 398,436
John J. DiPietro.............................. 50,000(5) 2.62% 4.06 N/A N/A N/A
300,000(4) 15.75% 1.00 10/29/08 188,668 478,123
- ------------------------
(1) Based on aggregate of 1,905,108 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, 1998, 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 become exercisable at the rate of 4.17% of the shares
subject to the option at November 29, 1998 and at the rate of 4.16% per
month thereafter. The options expire ten years from the date of grant, or
earlier upon termination of employment. The grant was made upon the officer
agreeing to the cancellation of certain stock options previously granted.
(5) These options granted to Mr. DiPietro in 1998 were cancelled in October,
1998.
36
The following table sets forth information concerning option exercises for
the year ended December 31, 1998, with respect to each of the Named Executive
Officers.
AGGREGATED OPTION EXERCISES IN 1998
AND DECEMBER 31, 1998 OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-THE-
UNDERLYING UNEXERCISABLE MONEY OPTIONS AT FISCAL
SHARES VALUE OPTIONS AT FISCAL YEAR END ($)
ACQUIRED ON REALIZED YEAR END (#) (EXERCISABLE/UNEXERCISABLE)
NAME EXERCISE (#) ($) (EXERCISABLE/UNEXERCISABLE) (1)
- ----------------------------- ------------- ----------- ------------------------- ----------------------------
William A. Boeger............ -- -- 240,000/550,000 545,000/1,031,250
Howard B. Urnovitz........... 30,000 116,250 136,833/229,167 314,562/ 429,688
John J. DiPietro............. -- -- 60,000/275,000 112,500/ 515,625
- ------------------------
(1) Value realized and value of unexercised in-the-money options is based on a
value of $2.875 per share of the Company's Common Stock, the closing price
on December 31, 1998 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.
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 and Mr.
Collins.
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 1999 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 October 1998, the Company entered into an employment agreement with an
William A. Boeger for a term effective immediately through December 31, 1999,
which provides for an annual salary of $225,000. In addition, Mr. Boeger was
granted 600,000 stock options, which vest over 24 months. Mr. Boeger is also
entitled to a monthly car allowance of $450, 25% bonus upon the achievement of
milestones mutually agreed to by the officer and the Board of Directors,
temporary housing, and travel between his home and the Company. In the event Mr.
Boeger's employment is terminated by the Company other than for cause, he will
receive his base salary for twelve months and all stock options that would have
vested during the 12 month period following termination shall become vested. Mr.
Boeger may not voluntarily terminate his employment until July 1, 1999.
In October 1998, the Company entered into an employment agreement with John
DiPietro for a term effective immediately through December 31, 1999, which
provides for an annual salary of $170,000. In addition, Mr. DiPietro was granted
300,000 stock options, which vest over 24 months. Mr. DiPietro is also entitled
to a monthly car allowance of $350, 25% 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 Mr. DiPietro's employment is
terminated by the Company other than for cause, he will receive his base salary
for twelve months and all
37
stock options that would have vested during the term of this agreement shall
become fully vested. Mr. DiPietro may not voluntarily terminate his employment
until July 1, 1999.
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, 1999 for (i)
all persons 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
- --------------------------------------------------------------------------------------------- ----------- ---------
H&Q Healthcare Investors
50 Rowes Wharf-4th Floor
Boston, MA 02110........................................................................... 1,433,993 8.44%
Otsuka Pharmaceutical Co., Ltd. (2)
463-10 Kagsuno
Kawauchi-cho
Tokoshima Japan............................................................................ 1,293,147 7.61%
Zafar Randawa, Ph.D. (2)..................................................................... 1,293,147 7.61%
William A. Boeger (3)........................................................................ 873,323 4.99%
Howard B. Urnovitz, Ph.D. (4)................................................................ 348,700 2.03%
John DiPietro (5)............................................................................ 117,348 *
David Collins (6)............................................................................ 105,000 *
Mark Novitch, M.D. (7)....................................................................... 32,750 *
Paul Freiman (8)............................................................................. 27,472 *
Julius Krevans, M.D. (9)..................................................................... 20,250 *
All directors and executive officers as a group (8 persons).................................. 2,817,990 15.74%
- ------------------------
* 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 340,001 shares subject to options exercisable within 60 days
owned by Mr. Boeger.
(4) Includes 178,500 shares subject to warrants exercisable within 60 days.
38
(5) Includes 110,000 shares subject to options exercisable within 60 days.
(6) Includes 65,000 shares subject to options exercisable within 60 days.
(7) Includes 28,750 shares subject to options exercisable within 60 days.
(8) Includes 27,472 shares subject to options exercisable within 60 days.
(9) Includes 8,750 shares subject to options exercisable within 60 days.
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 the
Chronic Illness Research Foundation, a research foundation started by Dr.
Urnovitz with which Mr. Boeger is also affiliated. The Company 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. During 1998, the loan was increased from $90,000
to $440,000 subject to the same terms of the initial loan agreement except for
the increase of the funding maximum to $440,000. Also in 1998, the due date was
extended to July 1, 1999. 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.
The note from Dr. Urnovitz is a full recourse obligation. It is secured by
Dr. Urnovitz's employee options in the Company, and requires maintenance of a
collateral value of 200% of the loan value. This maintenance covenant was not
met at all times during the third and fourth quarter of 1998. However, at all
times Calypte had the ability to reach Dr. Urnovitz's personal assets which
Calypte believed were adequate to provide for payment of the loan. Calypte has
also taken a security interest in additional collateral.
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. Mr. Boeger is a founder
and Managing General Partner of Quest. The agreement is automatically renewable
each year subject to three months notice prior to the end of the calendar year.
The agreement was not renewed for 1999.
In 1997, the Company paid Pepgen, a minority-owned affiliate of the Company
$72,000 for an exclusive license to all technology that relates to urine-based
diagnostics developed by Pepgen. Mr. Boeger is President of and a board member
of Pepgen.
In January 1998, Calypte loaned Pepgen $250,000 at an interest rate of 10%.
The loan is secured by all intellectual property of Pepgen and was due on March
31, 1998. The due date was initially extended to May 15, 1998. During June 1998,
the loan was increased to $300,000 under the same terms of the initial loan
agreement and subsequent to June 1998, the due date was extended to December 31,
1998. In August 1998, the loan was increased to $383,000 under the same terms of
the initial loan agreement. During the third quarter of 1998, the Company loaned
Pepgen Corporation an additional $468,000 under the same terms of the initial
note and extension, increasing the total amount due from Pepgen to $768,000. The
loan was further collateralized by a personal guaranty by the Founder and
Chairman of Pepgen and a standby guaranty from Pepgen's President in the event
that the guaranty by the Founder and Chairman proves insufficient. During the
third quarter of 1998, the due date was extended to July 1, 1999.
39
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
2.1^^^ Asset Purchase Agreement, dated as of November 18, 1998, between Calypte and
Cambridge.
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.
4.1^^^^ Rights Agreement between the Registrant and ChaseMellon Shareholders L.L.C.
as Rights Agents dated December 15, 1998.
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.
10.12* Employment Agreement between the Registrant and Howard B. Urnovitz, dated as
of January 25, 1995.
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.
40
10.22^* Master Agreement between the Registrant and Cambridge Biotech Corporation,
dated as of April 12, 1996.
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.
10.27^* 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.
10.33* Form of Option Agreement for Stockholders of Pepgen Corporation, dated 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.
10.39** 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.
10.45^^ Lease extension agreement between the Registrant and Charles A. Grant and
Mark Greenberg, dated April 25, 1998.
10.46 Employment Agreement between the Registrant and William A. Boeger dated as of
October 28, 1998.
10.47 Employment Agreement between the Registrant and John J. DiPietro dated as of
October 28, 1998.
10.48 Guaranty made by Chih Ping Liu for the benefit of the Registrant dated
September 30, 1998.
21.1* Subsidiaries of the Registrant.
23.1 Consent of KPMG LLP, Independent Auditors.
24.1 Power of Attorney (see page II-1).
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
*** Incorporated by reference from exhibits filed with the Company's Report on Form
10-K dated March 25, 1998
41
^^ Incorporated by reference from an exhibit filed with the Company Report on Form
10-Q dated August 12, 1998
^^^ Incorporated by reference from an exhibit filed with the Company's Report on Form
8-K dated January 4, 1999
^^^^ Incorporated by reference from an exhibit filed with the Company's Report on Form
8-K dated December 16, 1998
(b) Reports on Form 8-K
The Registrant filed a Report on Form 8-K on December 16, 1998 regarding the
adoption by the Board of Directors of a Shareholder Rights Plan.
42
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-8
Notes to Consolidated Financial Statements............................................ F-9
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 (the Company) as of December 31, 1998 and
1997, 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, 1998. 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 as of December 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1998, in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
1 to the consolidated financial statements, the Company has suffered recurring
losses from operations and has an accumulated deficit that raise substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 1. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
KPMG LLP
San Francisco, California
February 5, 1999
F-2
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31,
--------------------
1998 1997
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents......................................................... $ 3,121 $ 10,820
Securities available for sale..................................................... 650 --
Accounts receivable............................................................... 157 133
Inventory......................................................................... 1,748 161
Notes receivable--officers and employees.......................................... 498 239
Note receivable--related party.................................................... 768 --
Prepaid expenses.................................................................. 116 111
Stock subscription receivable..................................................... 450 --
Other current assets.............................................................. 100 39
--------- ---------
Total current assets............................................................ 7,608 11,503
Property and equipment, net......................................................... 1,783 1,219
Intangibles, net.................................................................... 346 --
Other assets........................................................................ 208 228
--------- ---------
$ 9,945 $ 12,950
--------- ---------
--------- ---------
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................................. $ 1,147 $ 610
Accrued expenses.................................................................. 1,227 912
Capital lease obligations--current portion........................................ 290 479
Deferred revenue.................................................................. 500 585
--------- ---------
Total current liabilities....................................................... 3,164 2,586
Deferred rent obligation............................................................ 31 37
Capital lease obligations--long-term portion........................................ 23 282
--------- ---------
Total liabilities............................................................... 3,218 2,905
Mandatorily redeemable Series A preferred stock, $0.001 par value; no shares
authorized at December 31, 1998 and 1997; 100,000 shares issued and outstanding at
December 31, 1998 and 1997; aggregate redemption and liquidation value of $1,000
plus cumulative dividends......................................................... 2,096 1,976
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; 30,000,000 and 20,000,000 shares authorized at
December 31, 1998 and 1997, respectively; 13,870,453 and 13,198,781 shares
issued and outstanding as of December 31, 1998 and 1997, respectively........... 14 13
Common stock subscribed........................................................... 3 --
Additional paid-in capital........................................................ 61,476 56,847
Deferred compensation............................................................. (107) (496)
Accumulated deficit............................................................... (56,755) (48,295)
--------- ---------
Total stockholders' equity...................................................... 4,631 8,069
--------- ---------
$ 9,945 $ 12,950
--------- ---------
--------- ---------
See accompanying notes to consolidated financial statements.
F-3
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
Revenues:
Product sales.................................................. $ 951 $ 376 $ 130
--------- --------- ---------
Total revenue................................................ 951 376 130
--------- --------- ---------
Operating expenses:
Product costs.................................................. 1,912 2,305 1,085
Research and development....................................... 3,881 3,685 5,751
Selling, general and administrative............................ 3,925 2,317 3,333
--------- --------- ---------
Total expenses............................................... 9,718 8,307 10,169
--------- --------- ---------
Loss from operations....................................... (8,767) (7,931) (10,039)
Interest income.................................................. 424 350 266
Interest expense................................................. (116) (211) (340)
Other income..................................................... 1 -- 15
--------- --------- ---------
Loss before income taxes................................... (8,458) (7,792) (10,098)
Income taxes..................................................... (2) (2) (2)
--------- --------- ---------
Net loss................................................... (8,460) (7,794) (10,100)
Less dividend on mandatorily redeemable Series A preferred
stock.......................................................... (120) (120) (120)
--------- --------- ---------
Net loss attributable to common stockholders..................... $ (8,580) $ (7,914) $ (10,220)
--------- --------- ---------
Net loss per share attributable to common stockholders (basic and
diluted)....................................................... $ (0.64) $ (0.72) $ (1.17)
--------- --------- ---------
--------- --------- ---------
Weighted average shares used to compute net loss per share
attributable to common stockholders (basic and diluted)........ 13,432 11,028 8,753
--------- --------- ---------
--------- --------- ---------
See accompanying notes to consolidated financial statements.
F-4
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
PERIOD FROM DECEMBER 31, 1995 THROUGH DECEMBER 31, 1998
(IN THOUSANDS EXCEPT SHARE DATA)
CONVERTIBLE PREFERRED STOCK ADDITIONAL
---------------------------------------------------------- COMMON PAID-IN
SERIES B SERIES C SERIES D SERIES E STOCK CAPITAL
------------- ------------- ------------- ------------- ------------- -----------
Balances at December 31, 1995............ $ 1 $ 2 $ 2 $ 2 $ 1 $ 28,013
Exercise of Series E convertible warrants
for 732,571 shares of Series E
convertible preferred stock............ -- -- -- -- -- 4,924
Cost of issuance of Series E preferred
stock.................................. -- -- -- -- -- (129)
Exercise of stock options for 13,577
shares of common stock................. -- -- -- -- -- 11
Issuance of 2,300,000 shares of common
stock through an Initial Public
Offering............................... -- -- -- -- 2 13,798
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
Cost of issuance of common stock for
initial public offering (including
underwriters' fees).................... -- -- -- -- -- (1,995)
Exercise of warrants for 7,136 shares of
common stock........................... -- -- -- -- -- 37
Common stock of 3,643 shares issued under
the Employee Stock Purchase Plan....... -- -- -- -- -- 15
Dividend requirements of mandatorily
redeemable Series A preferred stock.... -- -- -- -- -- (120)
Compensation relating to granting of
stock options.......................... -- -- -- -- -- 299
Amortization of deferred compensation.... -- -- -- -- -- --
Net loss................................. -- -- -- -- -- --
--- --- --- --- --- -----------
Balances at December 31, 1996............ $ -- $ -- $ -- $ -- $ 10 $ 46,270
--- --- --- --- --- -----------
--- --- --- --- --- -----------
TOTAL
STOCK-
DEFERRED ACCUMU- HOLDERS'
COMPEN- LATED EQUITY
SATION DEFICIT (DEFICIT)
----------- ----------- -----------
Balances at December 31, 1995............ $ (366) $ (30,401) $ (2,746)
Exercise of Series E convertible warrants
for 732,571 shares of Series E
convertible preferred stock............ -- -- 4,924
Cost of issuance of Series E preferred
stock.................................. -- -- (129)
Exercise of stock options for 13,577
shares of common stock................. -- -- 11
Issuance of 2,300,000 shares of common
stock through an Initial Public
Offering............................... -- -- 13,800
Conversion of Series B, C, D and E
convertible preferred stock to common
stock.................................. -- -- --
Exercise of underwriters' overallotment
of 236,259 shares of common stock...... -- -- 1,417
Cost of issuance of common stock for
initial public offering (including
underwriters' fees).................... -- -- (1,995)
Exercise of warrants for 7,136 shares of
common stock........................... -- -- 37
Common stock of 3,643 shares issued under
the Employee Stock Purchase Plan....... -- -- 15
Dividend requirements of mandatorily
redeemable Series A preferred stock.... -- -- (120)
Compensation relating to granting of
stock options.......................... (299) -- --
Amortization of deferred compensation.... 302 -- 302
Net loss................................. -- (10,100) (10,100)
----------- ----------- -----------
Balances at December 31, 1996............ $ (363) $ (40,501) $ 5,416
----------- ----------- -----------
----------- ----------- -----------
See accompanying notes to consolidated financial statements.
F-5
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
PERIOD FROM DECEMBER 31, 1995 THROUGH DECEMBER 31, 1998
(IN THOUSANDS EXCEPT SHARE DATA)
TOTAL
ADDITIONAL STOCKHOLDERS'
COMMON PAID-IN DEFERRED ACCUMULATED EQUITY
STOCK CAPITAL COMPENSATION DEFICIT (DEFICIT)
------------- ----------- --------------- ------------ --------------
Balances at 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 warrant
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-6
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
PERIOD FROM DECEMBER 31, 1995 THROUGH DECEMBER 31, 1998
(IN THOUSANDS EXCEPT SHARE DATA)
COMMON ADDITIONAL
COMMON STOCK PAID-IN DEFERRED ACCUMULATED
STOCK SUBSCRIBED CAPITAL COMPENSATION DEFICIT
----------- ------------- ----------- --------------- ------------
Balances at December 31, 1997................. $ 13 $ -- $ 56,847 $ (496) $ (48,295)
Exercise of stock options for 265,787 shares
of common stock............................. -- -- 144 -- --
Common stock of 5,885 shares issued under the
Employee Stock Purchase Plan................ -- -- 16 -- --
Issuance of 400,000 shares of common stock for
purchase of certain assets of Cambridge
Biotech Corporation......................... 1 -- 1,589 -- --
Costs associated with purchase of certain
assets of Cambridge Biotech Corporation..... -- -- (71) -- --
3,102,500 shares of common stock subscribed
through a Private Placement -- 3 3,099 -- --
Cost of subscription of common stock for a
Private Placement........................... -- -- (30) -- --
Dividend requirements of mandatorily
redeemable Series A preferred stock......... -- -- (120) -- --
Compensation relating to granting of stock
options..................................... -- -- 82 (82) --
Amortization of deferred compensation......... -- -- -- 360 --
Deferred compensation reversed for cancelled
options..................................... -- -- (80) 80 --
Compensation relating to acceleration of stock
option vesting acceleration................. -- -- -- 31 --
Net loss...................................... -- -- -- -- (8,460)
----- ------ ----------- ----- ------------
Balances at December 31, 1998................. $ 14 $ 3 $ 61,476 $ (107) $ (56,755)
----- ------ ----------- ----- ------------
----- ------ ----------- ----- ------------
TOTAL
STOCKHOLDERS'
EQUITY (DEFICIT)
-----------------
Balances at December 31, 1997................. $ 8,069
Exercise of stock options for 265,787 shares
of common stock............................. 144
Common stock of 5,885 shares issued under the
Employee Stock Purchase Plan................ 16
Issuance of 400,000 shares of common stock for
purchase of certain assets of Cambridge
Biotech Corporation......................... 1,590
Costs associated with purchase of certain
assets of Cambridge Biotech Corporation..... (71)
3,102,500 shares of common stock subscribed
through a Private Placement 3,102
Cost of subscription of common stock for a
Private Placement........................... (30)
Dividend requirements of mandatorily
redeemable Series A preferred stock......... (120)
Compensation relating to granting of stock
options..................................... --
Amortization of deferred compensation......... 360
Deferred compensation reversed for cancelled
options..................................... --
Compensation relating to acceleration of stock
option vesting acceleration................. 31
Net loss...................................... (8,460)
------
Balances at December 31, 1998................. $ 4,631
------
------
See accompanying notes to consolidated financial statements.
F-7
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
Cash flows from operating activities:
Net loss............................................................... $ (8,460) $ (7,794) $ (10,100)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization........................................ 536 637 797
Amortization of deferred compensation................................ 391 239 302
Forgiveness of note receivable from officer.......................... 73 5 43
Changes in operating assets and liabilities:
Accounts receivable................................................ (24) (109) (24)
Inventory.......................................................... (706) 44 (205)
Other current assets and prepaid expenses.......................... (66) 20 585
Other assets....................................................... 20 35 (137)
Accounts payable, accrued expenses and deferred revenue............ 767 294 (385)
Deferred rent obligation........................................... (6) (18) (33)
--------- --------- ---------
Net cash used in operating activities............................ (7,475) (6,647) (9,157)
--------- --------- ---------
Cash flows from investing activities:
Purchase of equipment, net............................................. (203) (95) 29
Notes receivable from officers and employees........................... (332) (244) --
Purchase of securities available for sale.............................. (1,873) -- --
Sale of securities available for sale.................................. 1,223 -- --
Loan to Pepgen......................................................... (768) -- --
--------- --------- ---------
Net cash (used in) provided by investing activities.............. (1,953) (339) 29
--------- --------- ---------
Cash flows from financing activities:
Proceeds from sale of stock............................................ 160 11,152 20,204
Expenses paid related to sale of stock................................. -- (824) (2,124)
Proceeds from common stock subscribed.................................. 2,652 -- --
Expenses related to subscription of common stock....................... (30) -- --
Purchase of certain assets of Cambridge Biotech Corp................... (500) -- --
Expenses related to purchase of certain assets of Cambridge Biotech
Corp................................................................. (71) -- --
Principal payments on notes payable.................................... -- (1,000) (3,258)
Principal payments on capital lease obligations........................ (482) (446) (329)
Proceeds from notes payable............................................ -- 1,000 --
--------- --------- ---------
Net cash provided by financing activities........................ 1,729 9,882 14,493
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents..................... (7,699) 2,896 5,365
Cash and cash equivalents at beginning of period......................... 10,820 7,924 2,559
--------- --------- ---------
Cash and cash equivalents at end of period............................... $ 3,121 $ 10,820 $ 7,924
--------- --------- ---------
--------- --------- ---------
Supplemental disclosure of cash flow activities:
Cash paid for interest................................................. $ 116 $ 211 $ 359
Cash paid for income taxes............................................. 2 2 2
Supplemental disclosure of noncash activities:
Acquisition of equipment through obligations under capital leases...... 34 -- 733
Dividend on mandatorily redeemable Series A preferred stock............ 120 120 120
Deferred compensation attributable to stock grants..................... 2 372 299
Purchase of certain assets of Cambridge Biotech Corporation............ 1,590 -- --
See accompanying notes to consolidated financial statements.
F-8
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
(1) THE COMPANY
Calypte Biomedical Corporation (the Company) was incorporated on November
11, 1989. The Company's primary activities are to sell its FDA-approved urine
Human Immunodeficiency Virus Type I (HIV-1) enzyme immunoassay (EIA) screening
test, its FDA-approved urine and serum HIV-1 Western Blot supplemental tests,
perform research and development on new products and obtain FDA approval for its
urine-based diagnostic tests. Prior to March 31, 1998, Calypte was considered a
development stage enterprise. On June 1, 1998, the Company announced that the
FDA licensed the urine HIV-1 Western Blot test that confirms the presence of
antibodies to HIV-1 in urine samples. The new test is used on samples that are
repeatedly reactive in the Company's HIV-1 urine antibody screening test. The
new test completes the only available urine-based HIV-1 test method.
Accordingly, the Company ceased being a development stage enterprise.
In December 1998, Calypte acquired from Cambridge Biotech Corporation
certain assets relating to the Western Blot product line for certain infectious
diseases. The acquisition included the urine-based and serum-based HIV-1 Western
Blot products, as well as a supplemental test for Lyme Disease and Human
T-Lymphotropic Virus (HTLV).
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 markets. International and other U.S. markets will be addressed
utilizing diagnostic product distributors. To date, in countries that have an
approval process for diagnostic tests, the Company has received approval for the
sale of its product in Indonesia only. Several international approvals are
pending, and 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 has incurred net losses of $8.5 million, $7.8 million, and $10.1
million in 1998, 1997, and 1996, respectively. The accumulated deficit at
December 31, 1998 was $56.8 million. Although the Company believes current cash
will be sufficient to meet the Company's operating expenses and capital
requirements for the next six months, the Company's future liquidity and capital
requirements will depend on numerous factors, including market acceptance of its
products, regulatory actions by the FDA and other international regulatory
bodies, intellectual property protection, and the ability to raise additional
capital in a timely manner. Management plans to raise additional capital,
however, the Company may not be able to obtain additional financing on
acceptable terms, or at all.
(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 Company's predecessor entity). 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 13).
F-9
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997, AND 1996
(2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
SECURITIES AVAILABLE FOR SALE
At December 31, 1998, securities available for sale represent high grade
commercial paper maturing in less than one year. At December 31, 1998,
unrealized gains and losses were insignificant.
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.
INTANGIBLES
Intangibles consists of tradenames and trademarks related to the acquisition
of certain assets from Cambridge Biotech Corporation (Note 3), and are carried
at cost less accumulated amortization which is calculated on a straight-line
basis over five years. Accumulated amortization at December 31, 1998 was $3,000.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial assets and liabilities have carrying values which approximate
their fair values for all periods presented, except for related party financial
assets. 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 and when
all requirements related to the shipments have occurred.
F-10
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997, AND 1996
(2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 or when all obligations related to the revenue are fulfilled.
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
Basic net loss per share attributable to common stockholders is computed by
dividing net loss by the weighted average number of shares of common stock
outstanding during the year. The computation of diluted earnings per common
share is similar to the computation of basic net loss per share attributable to
common stockholders, except that the denominator is increased for the assumed
conversion of convertible securities and the exercise of dilutive options using
the treasury stock method. The weighted average shares used in computing basic
and diluted net loss per share attributable to common stockholders were the same
for the three years ended December 31, 1998, 1997 and 1996. Options and warrants
were excluded from the computation of loss per share as their effect is
antidilutive.
F-11
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997, AND 1996
(2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATIONS OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of cash and cash equivalents,
trade accounts receivable and notes 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. Concentrations of credit risk with
respect to notes receivable are limited due to the fact that the notes are
either fully collateralized or guaranteed.
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 certain
components. Establishment of additional or replacement suppliers for these
components cannot be accomplished quickly. The Company has some single-source
components, and any delay or interruption in the supply of these components
could have a material adverse effect on us by significantly impairing our
ability to manufacture products in sufficient quantities, particularly as we
increase our manufacturing activities in support of commercial sales.
RECENT ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
130, "Reporting Comprehensive Income," on January 1, 1998. SFAS No. 130
establishes standards for reporting and display in the financial statements of
total net income and the components of all other nonowner changes in equity,
referred to as comprehensive income. The Company does not have any comprehensive
income other than the revenue and expense items included in its consolidated
statements of operations. As a result, comprehensive income (loss) equals net
income (loss) for the years ended December 31, 1998, 1997 and 1996.
The Company also adopted SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information," in 1998. SFAS No. 131 requires disclosure
of business and geographic segments in the consolidated financial statements of
the Company. Currently, the Company operates in a single segment. All of the
Company's assets are located in the U.S. and approximately 97% of Calypte's
revenues arose from sales in the U.S.
(3) ACQUISITIONS
On December 17, 1998, the Company acquired the assets relating to the
Western Blot product line for certain infectious diseases from Cambridge Biotech
Corporation for a total purchase price of $2,090,000. The consideration was
$500,000 in cash, 400,000 shares of Calypte common stock, 200,000 warrants of
F-12
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997, AND 1996
(3) ACQUISITIONS (CONTINUED)
Calypte common stock at $8.00 per share, 200,000 warrants of Calypte common
stock at $10.00 per share, and 200,000 warrants of Calypte common stock at
$12.00 per share. The warrants expire on December 17, 2001 and were valued at
$440,000 using the Black-Scholes option pricing model. In connection with the
acquisition, approximately $71,000 of acquisition-related expenses were incurred
as of December 31, 1998.
The acquisition was accounted for using the purchase method of accounting.
The allocation of purchase price to the assets acquired has been made using
estimated fair values which include values based on management estimates. These
estimates may be adjusted to actual amounts; however, any resulting adjustment
is not expected to be material. The allocation of the $2,090,000 purchase prices
is as follows: inventory $881,000, property & equipment $860,000 and intangibles
$349,000.
Results of operations of the Western Blot product line from Cambridge
Biotech Corporation are included in the Consolidated Statement of Operations for
December 31, 1998 since the acquisition date. The following unaudited pro forma
information has been prepared assuming the Western Blot product line acquisition
had taken place on January 1, 1997 (in thousands, except per share data):
1997 1998
---------- ----------
Product sales......................................................... $ 3,518 $ 4,184
Total expenses........................................................ 14,147 14,975
Loss from operations.................................................. (10,629) (10,791)
Net loss.............................................................. $ (10,492) $ (10,484)
---------- ----------
---------- ----------
Net loss attributable to common stockholders.......................... $ (10,612) $ (10,604)
---------- ----------
---------- ----------
Net loss per share attributable to common stockholders................ $ (0.93) $ (0.77)
---------- ----------
---------- ----------
(4) INVENTORIES
Inventories as of December 31, 1998 and 1997 consisted of the following:
1998 1997
------------- ---------------
(IN (IN THOUSANDS)
THOUSANDS)
Raw materials.................................................. $ 300 $ 53
Work-in-process................................................ 1,134 103
Finished goods................................................. 314 5
------ -----
Total inventory.............................................. $ 1,748 $ 161
------ -----
------ -----
F-13
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997, AND 1996
(5) PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 1998 and 1997 consisted of the
following:
1998 1997
--------------- ---------------
(IN THOUSANDS) (IN THOUSANDS)
Computer equipment............................................. $ 452 $ 364
Machinery and equipment........................................ 2,756 1,975
Furniture and fixtures......................................... 257 238
Leasehold improvements......................................... 1,675 1,466
------ ------
5,140 4,043
Accumulated depreciation and amortization...................... (3,357) (2,824)
------ ------
Property and equipment, net.................................... $ 1,783 $ 1,219
------ ------
------ ------
The Company recognized depreciation expense of $533,000, $637,000, and
$797,000 for the years ended December 1998, 1997, and 1996, respectively.
(6) ACCRUED EXPENSES
Accrued expenses as of December 31, 1998 and 1997 consisted of the
following:
1998 1997
------------- ---------------
(IN (IN THOUSANDS)
THOUSANDS)
Accrued royalty payments....................................... $ 521 $ 290
Accrued bonus.................................................. 188 200
Other.......................................................... 518 422
------ -----
Total accrued expenses....................................... $ 1,227 $ 912
------ -----
------ -----
(7) LINE OF CREDIT
In January 1999, 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 1 1/4%. The
agreement requires the Company to maintain certain financial covenants and
comply with certain reporting and other requirements. In addition, borrowings
under the line of credit agreement are secured by Calypte's assets. In January
1999, Calypte drew down $2.0 million on the line of credit.
(8) 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 has 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).
F-14
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997, AND 1996
(8) LEASE COMMITMENTS (CONTINUED)
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.
Equipment acquired under the lease lines of credit and included in property
and equipment as of December 31, 1998 and 1997 consisted of the following:
1998 1997
------------- -------------
(IN (IN
THOUSANDS) THOUSANDS)
Machinery and equipment........................................ $ 1,632 $ 1,598
Other.......................................................... 105 105
------ ------
1,737 1,703
Accumulated depreciation and amortization...................... (1,353) (1,000)
------ ------
$ 384 $ 703
------ ------
------ ------
Future minimum lease payments under capital leases as of December 31, 1998
were:
YEAR ENDED DECEMBER 31, (IN THOUSANDS)
- ------------------------------------------------------------------------------- ---------------
1999........................................................................... $ 322
2000........................................................................... 13
2001........................................................................... 14
-----
349
Amount representing interest................................................... (36)
-----
Present value of capital lease obligations..................................... 313
Current portion of capital lease obligations................................... (290)
-----
Capital lease obligations--long-term portion................................... $ 23
-----
-----
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. The Company also leases space in Rockville, Maryland under two
operating subleases. Total rent expense under these leases was $581,000,
$541,000, and $517,000 for the years ended December 1998, 1997, and 1996,
F-15
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997, AND 1996
(8) LEASE COMMITMENTS (CONTINUED)
respectively. Future minimum rental payments under all noncancelable operating
leases as of December 31, 1998 were:
(IN
YEAR ENDED DECEMBER 31, THOUSANDS)
- ------------------------------------------------------------------------------- -------------
1999......................................................................... $ 973
2000......................................................................... 813
2001......................................................................... 367
2002......................................................................... 366
2003......................................................................... 320
Thereafter................................................................... --
------
Total........................................................................ $ 2,839
------
------
(9) 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, 1998, cumulative preferred dividends totaling
$1,096,000 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, 1998 it
remains outstanding. The holders of such shares maintain the same rights as held
before the reincorporation.
(10) STOCKHOLDERS' EQUITY
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.
F-16
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997, AND 1996
(10) STOCKHOLDERS' EQUITY (CONTINUED)
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.
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.
On January 20, 1999, Calypte completed an additional private placement of
3,102,500 shares of its common stock at $1.00 per share. The Company received
proceeds of approximately $2.8 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.
On December 15, 1998, the Board of Directors of Calypte declared a dividend
distribution of one preferred share purchase right (a "Right") for each
outstanding share of Common Stock, par value $.001 of the Company. The dividend
is payable to the stockholders of record on January 5, 1999 with respect to
share of Common Stock issued thereafter until the Distribution Date (as defined
in a Rights Agreement) and, in certain circumstances, with respect to shares of
Common Stock issued after the Distribution Date. Except as set for in the Rights
Agreement, each Right, when it becomes exercisable, entitles the registered
holder to purchase from the Company one one-thousandth (1/1000th) of a share of
Series RP Preferred Stock of the Company, $.001 par value per share, at a price
of $15 per one one-thousandth (1/1000th) of a share of Preferred Stock, subject
to adjustment. The description and terms of the Rights are set forth in a Rights
Agreement between the Company and ChaseMellon Shareholder Services, L.L.C., as
Rights Agent, dated as of December 15, 1998.
The Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire the Company
without conditioning the offer on the Rights being redeemed or a substantial
number of Rights being acquired. However, the Rights should not interfere with
any tender offer or merger approved by the Company because the Rights do not
become exercisable in the event of a permitted offer or other acquisition
exempted by the Board.
F-17
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997, AND 1996
(11) 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 3,740,992 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, 1998, 1997 and 1996, the
Company has recorded deferred compensation of $82,000, $407,000 and $299,000,
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, 1998, 1997 and 1996, $391,000,
$239,000 and $302,000, respectively, were amortized.
F-18
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997, AND 1996
(11) INCENTIVE STOCK AND STOCK OPTIONS PLANS (CONTINUED)
The following table summarizes activity under the Stock Plan:
WEIGHTED
AVERAGE
OPTIONS EXERCISE PRICE
---------- ---------------
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
Granted......................................................... 1,905,108 1.18
Exercised....................................................... (265,787) 0.54
Canceled........................................................ (910,891) 3.51
---------- -----
Outstanding as of December 31, 1998............................... 2,558,006 $ 1.09
---------- -----
Exercisable as of December 31, 1996............................... 841,478 $ 0.63
---------- -----
---------- -----
Exercisable as of December 31, 1997............................... 1,019,933 $ 1.39
---------- -----
---------- -----
Exercisable as of December 31, 1998............................... 783,453 $ 1.09
---------- -----
---------- -----
As of December 31, 1998, 659,781 shares of common stock were available for
grant under the Stock Plan. The per share weighted-average fair value of stock
options granted during 1998, 1997 and 1996 was $0.92, $3.36 and $5.02 on the
date of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions: 1998--expected dividend yield 0.0%, risk free
interest rate of 4.5%, volatility of 80%, and an expected life of 8 years;
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.
The following table summarizes information about stock options outstanding
under the Stock Plan at December 31, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- --------------------------
WEIGHTED- WEIGHTED-
NUMBER WEIGHTED-AVG AVG NUMBER AVG
OUTSTANDING REMAINING YEARS EXERCISE EXERCISABLE EXERCISE
RANGE OF EXERCISE PRICES AT 12/31/98 TO EXPIRATION PRICE AT 12/31/98 PRICE
- --------------------------------- ----------- --------------- ------------- ----------- -------------
$0.50............................ 547,576 1.95 $ 0.50 531,877 $ 0.50
$1.00............................ 1,868,680 9.59 $ 1.00 158,994 $ 1.00
$4.00--$5.00..................... 126,750 8.89 $ 4.21 77,582 $ 4.14
$7.00............................ 15,000 7.97 $ 7.00 15,000 $ 7.00
----------- -----------
$0.50--$7.00..................... 2,558,006 7.91 $ 1.09 783,453 $ 1.09
----------- -----------
----------- -----------
F-19
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997, AND 1996
(11) INCENTIVE STOCK AND STOCK OPTIONS PLANS (CONTINUED)
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.
F-20
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997, AND 1996
(11) INCENTIVE STOCK AND STOCK OPTIONS PLANS (CONTINUED)
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
Granted........................................................... 30,000 2.72
Exercised......................................................... -- --
Canceled.......................................................... -- --
--------- -----
Outstanding as of December 31, 1998................................. 67,000 4.37
--------- -----
--------- -----
Exercisable as of December 31, 1996................................. -- $ --
--------- -----
--------- -----
Exercisable as of December 31, 1997................................. 6,250 $ 6.53
--------- -----
--------- -----
Exercisable as of December 31, 1998................................. 26,000 $ 5.13
--------- -----
--------- -----
As of December 31, 1998, 133,000 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 1998, 1997 and 1996 were $2.72, $4.01 and $3.91
on the date of grant using the Black-Scholes option-pricing model with the
following assumptions: 1998--expected dividend yield 0.0%, risk free interest
rate 5.0%, volatility of 80%, and expected life of 10 years; 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-21
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997, AND 1996
(11) INCENTIVE STOCK AND STOCK OPTIONS PLANS (CONTINUED)
The following table summarizes information about stock options outstanding
under the Director Option Plan at December 31, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- --------------------------
NUMBER WEIGHTED-AVG WEIGHTED-AVG NUMBER WEIGHTED-AVG
OUTSTANDING REMAINING YEARS EXERCISE EXERCISABLE EXERCISE
RANGE OF EXERCISE PRICES AT 12/31/98 TO EXPIRATION PRICE AT 12/31/98 PRICE
- --------------------------------- ----------- --------------- ------------- ----------- -------------
$1.38............................ 15,000 9.82 $ 1.38 3,750 $ 1.38
$4.00--$7.00..................... 52,000 8.78 $ 5.23 22,250 $ 5.77
----------- -----------
$1.38--$7.00..................... 67,000 9.01 $ 4.37 26,000 $ 5.13
----------- -----------
----------- -----------
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, 1998, 1997 and 1996, 17,617, 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 1998 and
1996 were $3.04 and $2.50, respectively on the date of grant using the
Black-Scholes option-pricing model with the following assumptions:
1998--expected dividend yield 0.0%, risk free interest rate of 5.6%, volatility
of 80%, and an expected life of 2 years; 1996--expected dividend yield 0.0%,
risk free interest rate of 5.5%, volatility of 50%, and an expected life of 1.25
years.
F-22
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997, AND 1996
(11) INCENTIVE STOCK AND STOCK OPTIONS PLANS (CONTINUED)
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:
1998 1997 1996
(IN (IN (IN
THOUSANDS) THOUSANDS) THOUSANDS)
------------- ------------- -------------
Net loss attributable to common stockholders
As reported...................................................... $ (8,580) $ (7,914) $ (10,220)
Pro forma........................................................ (9,718) (8,851) (10,297)
Net loss per share attributable to common stockholders
As reported...................................................... $ (0.64) $ (0.72) $ (1.17)
Pro forma........................................................ (0.72) (0.80) (1.18)
Pro forma net loss reflects only options granted since 1995 as well as
purchase rights granted in 1998 and 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.
(12) 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.
(13) 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
F-23
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997, AND 1996
(13) INVESTMENT IN PEPGEN CORPORATION (CONTINUED)
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 may, but has no
obligation to, provide additional funding 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 1998, the Company loaned Pepgen $768,000 at an interest rate of 10%.
The loan is secured by all intellectual property of Pepgen as well as a personal
guaranty from Pepgen's Founder and Chairman and a standby guaranty from Pepgen's
President in the event that the guaranty by the Founder and Chairman proves
insufficient. The entire loan plus interest is due July 1, 1999.
Subsequent to 1996, Pepgen raised additional capital from third parties. As
a result, the Company's equity interest in Pepgen is less than the original 49%.
(14) 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,
-------------------------------
1998 1997 1996
--------- --------- ---------
(IN THOUSANDS)
Computed "expected" tax expense................... $ (2,876) $ (2,649) $ (3,413)
Meals and entertainment expenses, and officer's
life insurance not deductible for income
taxes........................................... 8 5 8
Research expenses................................. 32 50 32
State tax expense................................. 1 1 1
Losses and credits for which no benefits have been
recognized...................................... 2,885 2,595 3,466
Change in the beginning of year valuation
allowance due to change in state tax rate....... -- -- (38)
Stock option compensation......................... (48) -- --
Other............................................. -- -- (54)
--------- --------- ---------
$ 2 $ 2 $ 2
--------- --------- ---------
--------- --------- ---------
F-24
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997, AND 1996
(14) INCOME TAXES (CONTINUED)
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets is presented below:
DECEMBER 31,
--------------------
1998 1997
--------- ---------
(IN THOUSANDS)
Deferred tax assets:
Employee benefit reserves, including accrued vacation
and bonuses........................................... $ 128 $ 88
Start-up and other capitalization....................... 547 390
Fixed assets, due to differences in depreciation........ 424 372
Deferred rent and revenue............................... 211 214
Net operating loss carryover............................ 17,505 15,611
Research and development credit......................... 1,164 1,034
Purchased research and development...................... -- 772
Other operating reserves................................ 146 275
Other................................................... 164 162
--------- ---------
Total gross deferred tax assets....................... 20,289 18,918
Valuation allowance....................................... (20,289) (18,918)
--------- ---------
Net deferred tax asset.................................. $ -- $ --
--------- ---------
--------- ---------
The net change in the valuation allowance for the years ended December 1998,
1997 and 1996 was an increase of $1,371,000, $3,906,000, and $3,785,000,
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 $157,000 of deferred tax assets will
be creditable to paid-in capital.
As of December 31, 1998, the Company had federal tax net operating loss
carryforwards of approximately $49,072,000, which will expire in the years 2004
through 2018. The Company also has federal research and development credit
carryforwards as of December 31, 1998 of approximately $889,000, which will
expire in the years 2005 through 2018.
State tax net operating loss carryforwards were approximately $14,063,000
and state research and development credit carryforwards were $411,000 as of
December 31, 1998. The state net operating loss carryforwards will expire in the
years 1999 through 2003 and the state research and development credits will
carryforward indefinitely.
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.
(15) 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.
F-25
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997, AND 1996
(15) ROYALTY, LICENSE, AND RESEARCH AGREEMENTS (CONTINUED)
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.
(16) DISTRIBUTION AGREEMENTS
ALEXON-TREND
In August 1998, Seradyn, a former subsidiary of Mitsubishi Chemical
Corporation was acquired by Alexon-Trend, a subsidiary of Sybron Laboratory
Products Corporation. 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 extended 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. The Company is currently is discussions with Alexon-Trend
regarding extension 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 gave 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. 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. In December 1998,
Otsuka and Calypte
F-26
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997, AND 1996
(16) DISTRIBUTION AGREEMENTS (CONTINUED)
entered into a letter of intent purusant to which Otsuka would withdraw as
distributor of the Company's product in all countries except Japan.
TEVA MEDICAL LTD (FORMERLY TRAVENOL LABORATORIES LTD.)
In December 1994 the Company entered into an agreement with TEVA Medical
Ltd. ("TEVA"),. The agreement gives TEVA exclusive rights to distribute the
HIV-1 test and to use the trademark "Calypte" within Israel. Under the
agreement, TEVA 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.
(17) 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 1999 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 October 1998, the Company entered into an employment agreement with an
officer for a term effective immediately through December 31, 1999, which
provides for an annual salary of $225,000. In addition, the officer was granted
600,000 stock options, which vest over 24 months. The officer is also entitled
to a monthly car allowance of $450, 25% bonus upon the achievement of milestones
mutually agreed to by the officer and the Board of Directors, temporary housing,
and travel between his home and the Company. In the event the officer's
employment is terminated by the Company other than for cause, the officer will
receive his base salary for twelve months and all stock options that would have
vested during the 12 month period following termination shall become vested. The
officer may not voluntarily terminate his employment until July 1, 1999.
In October 1998, the Company entered into an employment agreement with an
officer for a term effective immediately through December 31, 1999, which
provides for an annual salary of $170,000. In addition, the officer was granted
300,000 stock options, which vest over 24 months. The officer is also entitled
to a monthly car allowance of $350, 25% 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 the officer's employment is
terminated by the Company other than for cause, the officer will receive his
base salary for twelve months and all stock options that would have vested
during the term of this agreement shall become fully vested. The officer may not
voluntarily terminate his employment until July 1, 1999.
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 received compensation of $6,000 per month and was granted 50,000
stock options which vested 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. The 50,000 options granted were valued at
$170,000 using the Black-Scholes option pricing model and recognized as
compensation expense over the period of the agreement.
F-27
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997, AND 1996
(17) CONSULTING AND EMPLOYEE AGREEMENTS (CONTINUED)
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 received 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 agreement has not been renewed for 1999. The
50,000 options granted were valued at $170,000 using the Black-Scholes option
pricing model and is being recognized as compensation expense over the vesting
period.
The Company has entered into other employee and consulting agreements with
varying terms, in the ordinary course of business.
(18) RELATED PARTIES
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 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. During
1998, the loan was increased from $90,000 to $440,000 subject to the same terms
of the initial loan agreement except for the increase of the funding maximum to
$440,000. Also in 1998, the due date was extended to July 1, 1999. 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.
The note from the officer is a full recourse obligation. It is secured by
the officer's employee options in the Company, and requires maintenance of a
collateral value of 200% of the loan value. This maintenance covenant was not
met at all times during the third and fourth quarter of 1998. However, at all
times Calypte had the ability to reach the officer's personal assets which
Calypte believed were adequate to provide for payment of the loan. Calypte has
also taken a security interest in additional collateral.
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 such venture capital firm $50,000
per year payable in monthly installments. The agreement was not renewed for
1999.
F-28
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997, AND 1996
(19) COMMITMENTS AND CONTINGENCIES
On November 19, 1998, the Company received a Warning Letter from the FDA
following an inspection by the FDA of the Company's manufacturing facility in
Berkeley, California. On December 11, 1998, the Company responded in writing to
each of the alleged deficiencies cited in the Warning Letter. Subsequently, the
Company received a letter from the FDA in which the FDA requested further
responses from the Company with regard to certain of such alleged deficiencies.
The Company is in the process of responding to such letter. If the FDA is not
satisfied with the Company's responses and corrective actions, it could take
regulatory actions against the Company including license suspension, revocation,
or denial, seizure of products or injunction, or civil penalties or criminal
sanctions. Any such FDA action would have a material adverse effect upon the
Company's ability to conduct operations. In addition, failure of the Company to
satisfy the FDA as to such Warning Letter could adversely affect the Company's
pending FDA license application for the Alameda facility.
F-29
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, 1999 By: /s/ WILLIAM A. BOEGER
-----------------------------------------
William A. Boeger
PRESIDENT, CHIEF EXECUTIVE OFFICER AND
CHAIRMAN OF THE BOARD OF DIRECTORS
and
By: /s/ JOHN J. DIPIETRO
-----------------------------------------
John J. DiPietro
CHIEF 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
- ------------------------------ -------------------------- -------------------
President, Chief Executive
/s/ WILLIAM A. BOEGER Officer and Chairman of
- ------------------------------ the Board of Directors March 25, 1999
William A. Boeger (Principal Executive
Officer)
/s/ HOWARD B. URNOVITZ, PH.D
- ------------------------------ Chief Science Officer and March 25, 1999
Howard B. Urnovitz, Ph.D. Director
II-1
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
Chief Operating Officer,
Vice President of
/s/ JOHN J. DIPIETRO Finance, Chief Financial
- ------------------------------ Officer and Secretary March 25, 1999
John J. DiPietro (Principal Financial and
Accounting Officer)
/s/ DAVID COLLINS
- ------------------------------ Vice Chairman of the Board March 25, 1999
David Collins of Directors
/s/ PAUL FREIMAN
- ------------------------------ Director March 25, 1999
Paul Freiman
/s/ JULIUS R. KREVANS, M.D
- ------------------------------ Director March 25, 1999
Julius R. Krevans, M.D.
/s/ MARK NOVITCH, M.D
- ------------------------------ Director March 25, 1999
Mark Novitch, M.D.
/s/ ZAFAR I. RANDAWA, PH.D
- ------------------------------ Director March 25, 1999
Zafar I. Randawa, Ph.D.
II-2