-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, J0n+FnpQ9UCXVhnlwdOKG41BjQrfjDg7tL+UY6dvDcm+c6cJKJ///Vy29mcPzPtc o/68bDrKWbwfRT/4cwZ+kQ== 0000912057-96-008225.txt : 19960518 0000912057-96-008225.hdr.sgml : 19960518 ACCESSION NUMBER: 0000912057-96-008225 CONFORMED SUBMISSION TYPE: 424B4 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19960506 DATE AS OF CHANGE: 19960516 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: NPS PHARMACEUTICALS INC CENTRAL INDEX KEY: 0000890465 STANDARD INDUSTRIAL CLASSIFICATION: 2834 IRS NUMBER: 870439579 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 424B4 SEC ACT: 1933 Act SEC FILE NUMBER: 333-02566 FILM NUMBER: 96556898 BUSINESS ADDRESS: STREET 1: 420 CHIPETA WAY SUITE 240 CITY: SALT LAKE CITY STATE: UT ZIP: 84108-1256 BUSINESS PHONE: 8015834939 424B4 1 424B4 PROSPECTUS 3,000,000 SHARES [NPS LOGO] COMMON STOCK All of the 3,000,000 shares of Common Stock offered hereby are being sold by NPS Pharmaceuticals, Inc. ("NPS" or the "Company"). The Company's Common Stock is quoted on the Nasdaq National Market under the symbol "NPSP." On May 2, 1996, the last reported sale price for the Common Stock was $16.00 per share. See "Price Range of Common Stock." THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS," BEGINNING ON PAGE 6. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
UNDERWRITING DISCOUNTS AND PROCEEDS TO PRICE TO PUBLIC COMMISSIONS(1) COMPANY(2) Per Share.............................. $15.00 $0.975 $14.025 Total(3)............................... $45,000,000 $2,925,000 $42,075,000
(1) The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting expenses of the Offering payable by the Company, estimated at $300,000. (3) The Company has granted the Underwriters a 30-day option to purchase up to 450,000 additional shares of Common Stock on the same terms and conditions set forth above, solely to cover over-allotments, if any. If such option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions and Proceeds to Company will be $51,750,000, $3,363,750 and $48,386,250, respectively. See "Underwriting." ------------------------ The shares of Common Stock offered by the Underwriters are subject to prior sale, receipt and acceptance by them and subject to the right of the Underwriters to reject any order in whole or in part and certain other conditions. It is expected that delivery of such shares will be made at the offices of the agent of Vector Securities International, Inc., in New York, New York, on or about May 8, 1996. --------------------- Vector Securities International, Inc. Salomon Brothers Inc UBS Securities LLC MAY 3, 1996 NPS-TM-, Norcalcin-TM- and Araxin-TM- are trademarks of the Company. The NPS logo and NPS Pharmaceuticals-Registered Trademark- are registered trademarks of the Company. This Prospectus also contains trademarks of other companies. --------------------- IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING." 2 PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS, INCLUDING INFORMATION UNDER "RISK FACTORS." EXCEPT AS OTHERWISE NOTED, ALL INFORMATION IN THIS PROSPECTUS, INCLUDING FINANCIAL INFORMATION, SHARE AND PER SHARE DATA, ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. SEE "UNDERWRITING." THE COMPANY NPS Pharmaceuticals is engaged in the discovery and development of orally active, small molecule drugs that target cell surface receptors and ion channels. The Company's most advanced product candidate, Norcalcin-TM- for the treatment of hyperparathyroidism ("HPT"), arose from the Company's pioneering work on a new class of cell surface receptors which detect levels of extracellular calcium involved in numerous bodily functions. To date, the Company has conducted two Phase I and two Phase I/II clinical trials of Norcalcin to test its safety and initial efficacy. The Company is also applying its calcium receptor technology to the development of therapies for osteoporosis. The Company's other main programs involve the development of orally active, small molecule drugs which have neuroprotectant properties and target certain calcium channels in order to provide treatments for stroke, head trauma, chronic pain and epilepsy. Additionally, the Company is pursuing several discovery programs which are extensions of its discoveries in calcium receptors and ion channels. NPS has established research collaborations and license arrangements with the pharmaceutical division of Kirin Brewery Company, Limited ("Kirin") and SmithKline Beecham Corporation ("SmithKline Beecham") in the fields of HPT and osteoporosis, respectively, and has established a license arrangement with Amgen Inc. ("Amgen") in the field of HPT. Kirin, SmithKline Beecham and Amgen are referred to herein as the "Licensees." The Licensees are responsible for all costs of product development in their respective territories and fields. As part of these arrangements, the Licensees have paid to NPS an aggregate of $21.0 million in non-refundable license fees and Amgen and an affiliate of SmithKline Beecham have purchased $14.5 million of the Company's Common Stock. The shares of Common Stock purchased by Amgen are being registered with the Securities and Exchange Commission by the Company for resale. Amgen has agreed not to sell any of these shares for a period of 90 days after the date of this Prospectus. In addition, the Licensees have agreed to make up to $56.0 million in milestone payments, of which $3.0 million has been paid to the Company to date under the SmithKline Beecham agreement. SmithKline Beecham and Kirin are also obligated to pay an aggregate of approximately $11.3 million in research support payments. Each of the Licensees is obligated to pay royalties to NPS on any product sales. See "Risk Factors -- Dependence on Collaborative Research and License Relationships" and "Business -- Collaborative Research and License Agreements." HPT is a growing medical concern and is typically characterized as being either primary or secondary. Primary HPT is an age-related disorder that results from excessive secretion of parathyroid hormone ("PTH"), leading to elevated levels of calcium in the blood. Symptoms may include bone loss, muscle weakness, depression and cognitive dysfunction. Approximately 100,000 new patients are diagnosed with primary HPT in the United States each year. There are currently no pharmaceutical therapies for the treatment of primary HPT, with surgery being the only effective treatment. Secondary HPT results from other disease states and is most often associated with renal dysfunction. Symptoms of secondary HPT include excessive bone loss, bone pain, and chronic, severe itching. It is estimated that approximately 80% of the patients in the United States who rely on kidney dialysis, or approximately 140,000 patients, suffer from the effects of secondary HPT. The Company believes that current drug therapy treatments for secondary HPT, such as phosphate binders and calcitriol, have certain disadvantages. The Company's preliminary analysis of the data from its four clinical trials of Norcalcin indicates that Norcalcin was safe and well tolerated in these studies and that the administration of Norcalcin resulted in an expected dose-dependent decrease in the level of PTH in the blood. The higher doses used in the Phase I studies and in the Phase I/II dialysis study resulted in a decrease in the level of calcium in the blood. The Company expects to complete the formal analysis from all four trials and to report its findings in appropriate forums during the latter half of 1996. Amgen is currently formalizing its clinical 3 strategy for the continued development of Norcalcin, and the Company believes Kirin will begin Phase I clinical trials of Norcalcin in Japan in 1996. There can be no assurance that the clinical trials will proceed as indicated or that Norcalcin will prove safe and effective, meet applicable regulatory standards or be successfully marketed. See "Risk Factors -- Early Stage of Product Development; Dependence on Norcalcin" and " -- Dependence on Collaborative Research and License Relationships." In conjunction with SmithKline Beecham, NPS is also applying its calcium receptor technology to the development of orally active therapeutics for the treatment of osteoporosis. Osteoporosis is an age-related disorder affecting more than 200 million people worldwide and is characterized by reduced bone density and an increased susceptibility to fractures. Among the elderly in particular, osteoporosis is a major cause of morbidity and mortality. The Company is pursuing two approaches for the treatment of osteoporosis, stimulation of bone formation and suppression of bone resorption. Most osteoporosis patients are first diagnosed only after they have already lost significant bone mass. As a result, the Company believes that a therapy that not only halts further bone loss, but also builds new bone, would constitute a significant advancement in the treatment of osteoporosis. Under its collaboration with SmithKline Beecham, research efforts are being conducted by NPS concurrently on both approaches to osteoporosis. In January 1996, the Company received a milestone payment of $3.0 million from SmithKline Beecham for progress made in its osteoporosis program. The Company is developing a new class of orally active compounds which modulate certain calcium channels for neuroprotection in stroke and head trauma and also for chronic pain and epilepsy. The influx of calcium through glutamate receptor-operated calcium channels has been linked to a number of neurological disorders, including nerve cell death following stroke and head trauma, and also to certain types of chronic pain and epilepsy. The Company's proprietary compounds antagonize the NMDA (N-methyl-D-aspartate) subtype of glutamate receptor-operated calcium channels ("NMDA receptor-channels"), thereby reducing the influx of calcium. The Company believes that these compounds work through a novel mechanism and exhibit potentially advantageous pharmacological properties. These compounds demonstrated neuroprotectant activity in preclinical animal models of stroke and head trauma and palliative activity in animal models of chronic pain and epilepsy. The Company has designated one of these compounds, NPS 1506, for preclinical development on a time line which currently anticipates an Investigational New Drug ("IND") filing with the United States Food and Drug Administration (the "FDA") in the first half of 1997. However, there can be no assurance that the IND will be filed in this time frame. The Company is actively engaged in several discovery programs which seek to identify molecular targets for the development of new drugs. Among these, the Company believes it has made significant discoveries with regard to metabotropic glutamate receptors ("mGluRs"), having identified small molecules active at these receptors. The Company believes that drugs acting at specific mGluRs may provide relevant therapies for a number of neurological disorders. An investment in the shares of Common Stock offered hereby involves a high degree of risk. The Company is currently in the early stage of product development and Norcalcin is the only product candidate currently under development by the Company or its Licensees that is in human clinical trials. In addition, because the Company has granted exclusive development, commercialization and marketing rights to its Licensees in the fields of HPT and osteoporosis, the success of its existing HPT and osteoporosis programs is dependent upon the efforts of its Licensees. Other risk factors include the Company's lack of product sales, a history of operating losses, the uncertainty of regulatory approvals, rapid technological change and competition, the uncertainty of protection of the Company's patents and proprietary technology, the Company's dependence on third parties for manufacturing, the Company's future capital needs and the uncertainty of additional funding, the Company's lack of marketing capabilities, the uncertainty of third-party reimbursement, the Company's dependence on key personnel and the Company's ability to manage growth. See "Risk Factors." NPS was incorporated in Utah in 1986 and reincorporated in Delaware in 1992. The Company's executive offices are located at 420 Chipeta Way, Salt Lake City, Utah 84108-1256, and its telephone number is (801) 583-4939. 4 THE OFFERING Common Stock offered............................ 3,000,000 shares Common Stock to be outstanding after the 11,187,232 shares (1) Offering....................................... Use of proceeds................................. To fund research and development, capital expenditures and for working capital and other general corporate purposes. Nasdaq National Market symbol................... NPSP
SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
OCTOBER 22, 1986 (INCEPTION) YEAR ENDED DECEMBER 31, THROUGH ----------------------------------------------------- DECEMBER 31, 1991 1992 1993 1994 1995 1995 --------- --------- --------- --------- --------- ------------- STATEMENT OF OPERATIONS DATA: Revenues from research and license agreements................................. $ 1,885 $ 1,259 $ 868 $ 3,861 $ 9,562 $ 22,316 Operating expenses: Research and development.................. 1,609 2,722 6,021 7,765 8,727 30,360 General and administrative................ 754 1,283 2,004 3,122 3,975 12,789 --------- --------- --------- --------- --------- ------------- Total operating expenses................ 2,363 4,005 8,025 10,887 12,702 43,149 --------- --------- --------- --------- --------- ------------- Operating loss.............................. (478) (2,746) (7,157) (7,026) (3,140) (20,833) Net loss.................................... $ (462) $ (2,607) $ (7,159) $ (6,756) $ (3,318) $ (20,517) --------- --------- --------- --------- --------- ------------- --------- --------- --------- --------- --------- ------------- Net loss per share (2)...................... $ (.33) $ (.95) $ (1.91) $ (1.13) $ (.48) --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Weighted average shares outstanding (2)..... 1,386 2,746 3,751 5,977 6,924
DECEMBER 31, 1995 ------------------------------------------- PRO FORMA AS ACTUAL PRO FORMA (3) ADJUSTED (3)(4) --------- ------------- ----------------- BALANCE SHEET DATA: Cash, cash equivalents and marketable investment securities....... $ 8,340 $ 25,840 $ 67,615 Working capital................................................... 5,832 23,172 64,947 Total assets...................................................... 10,600 28,100 69,875 Long-term portion of capital leases and long-term debt............ 747 747 747 Deficit accumulated during development stage...................... (20,517) (10,677) (10,677) Stockholders' equity.............................................. 7,322 24,662 66,437
- - ------------------ (1) Based upon shares outstanding as of March 31, 1996. Excludes: (i) 1,459,331 shares which were subject to outstanding options as of March 31, 1996, at exercise prices ranging from $0.34 to $14.50 per share, with a weighted average exercise price of $3.29 per share, and (ii) 32,542 shares issuable upon exercise of outstanding warrants with an exercise price of $3.69 per share. See "Management -- Directors' Compensation," "-- 1987 Stock Option Plan," "-- 1994 Equity Incentive Plan," "Description of Capital Stock -- Warrant" and Note 6 of Notes to Financial Statements. (2) See Note 1 of Notes to Financial Statements for information concerning the computation of net loss per share. (3) Pro forma balance sheet data reflects the receipt from Amgen of a $10.0 million non-refundable license fee in March 1996, net of applicable taxes, and the sale of 1,000,000 shares of Common Stock to Amgen for $7.5 million also received in March 1996. See "Business -- Collaborative Research and License Agreements." (4) As further adjusted to give effect to the sale of 3,000,000 shares of Common Stock offered by the Company hereby, after deducting underwriting discounts and commissions and the estimated expenses of the Offering. See "Use of Proceeds" and "Capitalization." ------------------ THIS PROSPECTUS CONTAINS, IN ADDITION TO HISTORICAL INFORMATION, FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS OR EXPERIENCE COULD DIFFER SIGNIFICANTLY FROM THOSE DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS," AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS PROSPECTUS. 5 RISK FACTORS IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING FACTORS SHOULD BE CONSIDERED CAREFULLY BY POTENTIAL INVESTORS IN EVALUATING AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY. EARLY STAGE OF PRODUCT DEVELOPMENT; DEPENDENCE ON NORCALCIN. The Company was founded in 1986, and has not completed development of any drugs and does not expect that any drugs resulting from its or its Licensees' research and development efforts will be commercially available for several years, if at all. Norcalcin is the only product candidate currently under development by the Company and its Licensees that is in human clinical trials. No other compound under development by NPS or its Licensees has been scheduled for clinical testing. Clinical trials in humans are necessary to determine whether or not a compound will be a safe, commercially attractive or effective drug. Results obtained in preclinical trials are not necessarily indicative of results that will be obtained in later stages of preclinical development or in human clinical testing. All product candidates developed by the Company or its Licensees, including Norcalcin, will require extensive research, development and preclinical and clinical testing prior to submission of any regulatory application, as well as a lengthy regulatory approval process. Preclinical and clinical testing of safety and efficacy takes several years, and the time required to commercialize new drugs cannot be predicted with accuracy. Product development of new pharmaceuticals is highly uncertain, and unanticipated developments, clinical or regulatory delays, unexpected adverse side effects or inadequate therapeutic efficacy could slow or prevent the product development efforts of the Company and its Licensees, and have a materially adverse effect on the Company's operations. There can be no assurance that the Company's current product candidates, including Norcalcin, or any future product candidates, will advance to clinical trials, prove safe and effective, meet applicable regulatory standards, be capable of being produced in commercial quantities at acceptable cost or be successfully marketed. Also, there can be no assurance that a pharmacological method for the treatment of diseases targeted by the Company, including HPT, will prove to be superior to non-pharmacological treatments. See "Business -- Product Development Programs" and "Risk Factors -- Government Regulation; No Assurance of Regulatory Approval." DEPENDENCE ON COLLABORATIVE RESEARCH AND LICENSE RELATIONSHIPS. The Company's strategy for the development, clinical testing and manufacturing and commercialization of certain of its product candidates and the research and development of new product candidates includes entering into various research, development and license agreements with corporate partners, licensees and others. The Company has entered into a license agreement with Amgen pursuant to which Amgen has assumed control of the development and commercialization of Norcalcin in its territory, a collaborative research and license agreement with Kirin for the development of Norcalcin in Kirin's territory and a collaborative research and license agreement with SmithKline Beecham for research and development in osteoporosis. The Licensees each have received from NPS certain exclusive rights to commercialize products developed under their respective agreements, have paid license fees to NPS and have committed to make milestone payments to NPS upon achievement of specified goals. The Licensees have agreed to fund the research or development efforts in HPT and osteoporosis, conduct human clinical testing of lead compounds, prepare and file submissions for regulatory approval and pay royalties on any resulting products. Because the Company has granted exclusive development, commercialization and marketing rights to the Licensees in the fields of HPT and osteoporosis, the success of its existing HPT and osteoporosis programs is dependent upon the efforts of the Licensees. There can be no assurance that the Licensees will perform their obligations under their respective agreements, that they will successfully develop or proceed to market any products under these agreements, or that the Company will ever receive any royalties or milestone or research support payments under these agreements, any of which could have a material adverse effect on the business of the Company. Furthermore, there can be no assurance that business conflicts will not arise between the Licensees over rights to existing compounds or future compounds with respect to certain indications. The Company's collaborative research and license agreements, including the agreements with the Licensees, generally provide that they may be terminated under a variety of circumstances upon prior written notice. If any of the Licensees terminates or breaches its agreement, such termination or breach may have a material adverse effect on the 6 Company's operations. Furthermore, there can be no assurance that present or future collaborators will not pursue existing or alternative technologies in preference to treatments being developed in collaboration with the Company. NPS also intends to seek additional collaborative or license arrangements to develop and commercialize other product candidates. Many of the Company's competitors are similarly seeking to develop or expand their collaborative and license arrangements with pharmaceutical companies. The success of these efforts by the Company's competitors could have an adverse impact on the Company's ability to form future collaborative arrangements and maintain existing ones. There can be no assurance that the Company will be able to negotiate acceptable collaborative agreements in the future or that efforts under any such collaborative agreements will be successful. To the extent that the Company chooses not to or is unable to enter into future collaborative agreements, it would experience increased capital requirements to undertake research, development and marketing of its product candidates at its own expense. In addition, the Company may encounter significant delays in introducing its product candidates into certain markets or find that the development, manufacture or sale of its product candidates in such markets is adversely affected by the absence of such collaborative agreements. See "Business -- Product Development Programs," "-- Collaborative Research and License Agreements" and "--Manufacturing." LACK OF PRODUCT SALES; HISTORY OF OPERATING LOSSES. Substantially all of the Company's revenues to date have come from collaborative research and license agreements with the Licensees. Aside from the incidental revenues from the sale of research chemicals, no revenues have been generated from product sales. Other working capital has come from equity and debt financings. NPS has incurred cumulative losses through December 31, 1995 of $20.5 million, net of cumulative revenues from research and license agreements of $22.3 million. The Company expects to incur significant operating losses over at least the next several years as the Company continues and expands its research and development and preclinical and clinical testing activities. The Company expects that losses will fluctuate from quarter to quarter and that such fluctuations may be substantial. The Company's ability to achieve profitability depends in part upon its ability, alone or with others, to complete development of Norcalcin and other product candidates, obtain required regulatory approvals and manufacture and successfully market such products, of which there can be no assurance. As such, there can be no assurance that the Company will be able to achieve profitability on a sustained basis, if at all. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business -- Product Development Programs." GOVERNMENT REGULATION; NO ASSURANCE OF REGULATORY APPROVAL. The research and development activities of the Company, as well as the investigation, manufacture, distribution and marketing of therapeutic products, are subject to extensive regulation by numerous governmental authorities in the United States and other countries. Prior to marketing in the United States, a drug must undergo rigorous preclinical and clinical testing and an extensive regulatory approval process implemented by the FDA under federal law, including the Federal Food, Drug and Cosmetic Act, as amended. Receipt of such regulatory approval involves, among other things, satisfying the FDA that the product is both safe and effective. Typically, this process takes several years or more depending upon the type, complexity and novelty of the product and the nature of the disease or other indication to be treated and requires the expenditure of substantial resources. Preclinical studies must be conducted in conformance with the FDA's Good Laboratory Practice regulations. Clinical testing must meet requirements for Institutional Review Board oversight and informed consent by clinical trial subjects and patients, as well as FDA prior review, oversight and the FDA's Good Clinical Practice requirements. Clinical trials may require large numbers of test subjects. Furthermore, the Company or the FDA may suspend clinical trials at any time if either believes that the subjects participating in such trials are being exposed to unacceptable health risks, including undesirable or unintended side effects. While certain of the Company's employees have some experience in conducting and managing the clinical testing necessary to obtain regulatory approval, the Company has conducted only limited clinical trials of one of its product candidates to date and anticipates that it will need to either rely on its collaborative partners, licensees and outside consultants or attract and retain additional employees with expertise in this area. 7 Before receiving FDA approval to market a product, NPS may have to demonstrate that such product represents an improved form of treatment compared to existing therapies. Data obtained from preclinical and clinical activities are susceptible to varying interpretations which could delay, limit or prevent regulatory approvals. In addition, delays or rejections may be encountered based upon additional government regulation from future legislation or administrative action or changes in FDA policy during the period of product development, clinical trials and FDA regulatory review. If regulatory approval of a product is granted, such approval will be limited to those disease states and conditions for which the product is useful, as demonstrated through clinical studies. Furthermore, approval may entail ongoing requirements for post-marketing studies. Even if such regulatory approval is obtained, a marketed product, its manufacturer and its manufacturing facilities are subject to continual review and periodic inspections. The regulatory standards for current Good Manufacturing Practices ("cGMP") are currently being applied stringently by the FDA. Discovery of previously unknown problems with a product, manufacturer or facility may result in restrictions on such product or manufacturer, including costly recalls or even withdrawal of the product from the market. There can be no assurance that any compound developed by the Company alone or in conjunction with others will prove to be safe and effective in clinical trials and will meet all of the applicable regulatory requirements needed to receive marketing approval. RAPID TECHNOLOGICAL CHANGE; INTENSE COMPETITION. NPS is pursuing areas of product development in which the Company believes there is a potential for extensive technological innovation in relatively short periods of time. The Company operates in a field in which new discoveries occur and are expected to occur at a rapid pace. The Company's competitors may succeed in developing technologies or products that are more effective than those of the Company or in obtaining regulatory approvals of their drugs more rapidly than the Company and its collaborative partners and licensees, and such success could render the Company's products obsolete or non-competitive and have a material adverse effect on the Company. Competition in the pharmaceutical and biotechnology industry is intense and is expected to continue to increase. Many of the Company's competitors, including biotechnology and pharmaceutical companies, are actively engaged in the research and development of products in the Company's targeted areas, including the fields of HPT, osteoporosis, neuroprotection, chronic pain and epilepsy. Many of the Company's competitors have substantially greater financial, technical, marketing and personnel resources than the Company as well as considerable experience in preclinical testing, human clinical trials and other regulatory approval procedures. Moreover, certain academic institutions, governmental agencies and other research organizations are conducting research in areas in which the Company is working. These institutions are becoming increasingly aware of the commercial value of their findings and are becoming more active in seeking patent protection and licensing arrangements to collect royalties for use of technology that they have developed. These institutions may also market competitive commercial products on their own or through joint ventures and will compete with the Company in recruiting highly qualified scientific personnel. See "Business -- Product Development Programs," "-- Patents and Proprietary Technology" and "-- Competition." UNCERTAINTY OF PROTECTION OF PATENTS AND PROPRIETARY TECHNOLOGY. The Company's success depends, in part, on its ability to obtain patents, maintain trade secret protection and operate without infringing on the proprietary rights of third parties. Because the patent positions of biotechnology and pharmaceutical companies can be highly uncertain and frequently involve complex legal and factual questions, the breadth of claims allowed in biotechnology and pharmaceutical patents or their enforceability cannot be predicted. None of the Company's principal proprietary rights, including rights related to process, compounds, use and technique related to its calcium receptor science and NMDA receptor-channel technology, are protected by issued patents in the Company's principal potential markets. No assurance can be given that patents will issue from any of the Company's current or anticipated patent applications or that such patent applications will allow the Company to preclude others from practicing some or all of the art described in the publicly available versions of these pending patent applications either before such patent applications issue as patents or after such patent applications issue as patents. Generally, 8 patent applications in the United States are maintained in secrecy until patents issue and publication of discoveries in scientific or patent literature often lag behind actual discoveries. No assurance can be given that, even if published, the Company is aware of all such literature. Accordingly, the Company cannot be certain that the named inventors in its patent applications were the first to invent, or that the Company is the first to pursue patent coverage for such inventions. If patents do issue, there can be no assurance that the claims allowed will be sufficiently broad to protect the Company's technology or to prevent competition. No assurance can be given that any patents issued to the Company will not be challenged, invalidated or circumvented or that rights granted thereunder will provide competitive advantages to NPS. Moreover, the Company may have to participate in interference proceedings declared by the United States Patent and Trademark Office to determine priority of invention, which could result in substantial cost to the Company, even if the eventual outcome is favorable to the Company. If certain of the Company's patent applications fail to issue or are successfully challenged, particularly those related to its calcium receptor science and NMDA receptor-channel technology, it may have a material adverse effect on the Company's operations or its ability to maintain or establish collaborations. Furthermore, there can be no assurance that others will not independently develop similar products, duplicate any of the Company's products or design around the patented products or technology developed by NPS. There can also be no assurance that any products developed by NPS will not be found to infringe patents held by third parties, or that, in such cases, licenses from such third parties would be available on commercially attractive terms, if at all. If NPS does not obtain such licenses, it could encounter delays in product market introductions or could find that it is unable to develop, manufacture or sell its products requiring such licenses. In addition, the Company could incur substantial costs in defending lawsuits brought against NPS on such patents or in prosecuting lawsuits by NPS against another party. Additionally, many of the Company's foreign patent applications have been published as part of the patent prosecution process in such countries. Protection of the rights revealed in such published patent applications can be complex, costly and uncertain. The development of therapeutic products for applications in the Company's product fields is intensely competitive. A number of pharmaceutical companies, biotechnology companies, universities and research institutions have filed patent applications or received patents in these and related fields. Some of these applications or patents may limit or preclude the Company's applications and could result in a significant reduction of the coverage of the Company's patents, if issued. NPS also relies on trade secrets and proprietary know-how, which it seeks to protect, in part, by confidentiality agreements with its corporate collaborators, licensees, employees and consultants. NPS expects to continue to rely on trade secrets and know-how to protect certain aspects of its technologies. The Company believes it has, and can maintain, a competitive advantage through its use of written confidential disclosure agreements and invention assignment provisions with its employees, consultants, advisors and potential and actual collaborators and licensees. Nonetheless, no assurance can be given that these agreements will provide meaningful protection for the Company's trade secrets or proprietary know-how as a result of an unauthorized use or disclosure in the public domain. There can be no assurance that these agreements will not be breached, that NPS would have adequate remedies for any breach, or that the Company's trade secrets will not otherwise become known or be independently discovered by competitors. See "Business -- Patents and Proprietary Technology." DEPENDENCE ON THIRD PARTIES FOR MANUFACTURING. To be successful, the Company's products, if successfully developed, must be manufactured in commercial quantities in accordance with regulations prescribed by the FDA and at acceptable costs. NPS does not have the capability to manufacture products under cGMP regulations prescribed by the FDA and does not intend to develop such a capability in the near future. Accordingly, the Company anticipates that, for the foreseeable future, it will pursue a strategy of seeking production capability from corporate collaborators, licensees or contract manufacturers. There can be no assurance that the Company's current or prospective corporate collaborators, licensees or contract manufacturers will be able to manufacture any developed compounds on a commercial scale or that any collaborator, licensee or manufacturer will be able to manufacture products in quantities or at prices which will be commercially viable or beneficial for the Company. The Licensees are 9 responsible for manufacturing any products developed under their respective agreements with the Company. If the Company or its collaborators and licensees encounter difficulty in obtaining third-party manufacturing on commercially acceptable terms, their ability to commercialize products may be delayed or foreclosed. Moreover, any manufacturer of the Company's products must adhere to cGMP regulations enforced by the FDA through its facilities inspection program. If these facilities cannot pass a pre-approval or periodic plant inspection, FDA approval of the product will not be granted or sale of the product may be barred. Presently, the Company relies on contract manufacturers to produce its proprietary compounds for development activities and in sufficient quantities for preclinical and clinical purposes. If the Company were unable to contract for sufficient supply of its compounds on acceptable terms, or if it should encounter delays or difficulties in its relationships with manufacturers, the Company's preclinical and human clinical testing schedule would be delayed. Such delay would adversely affect the schedule for submission of products for regulatory approval and the market introduction and subsequent sales of such products, which would have a materially adverse effect on the Company. FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING. The Company has incurred negative cash flows from operations since its inception. Substantial expenditures will be required to enable NPS to conduct existing and planned preclinical studies and clinical trials, to manufacture or to have manufactured and to market products from current research and development efforts, and to continue research and development activities. The Company anticipates that its existing capital resources, including research and development support payments from existing collaborations, together with the net proceeds of the Offering and interest earned thereon, will be sufficient to enable it to maintain its current and planned operations through at least 1997. However, the Company's future capital needs will be dependent upon many factors, including progress in its research and development activities, the magnitude and scope of these activities, progress with preclinical and clinical trials, the cost of preparing, filing, prosecuting, maintaining and enforcing patent claims and other intellectual property rights, competing technological and market developments, changes in or terminations of existing collaborative arrangements and license arrangements, the establishment of additional collaborative and license arrangements, and the cost of manufacturing scale-up and development of marketing activities, if undertaken by the Company. If Amgen terminates its agreement to develop Norcalcin in the Amgen territory, the Company may not have the resources necessary to complete the development and commercialization of Norcalcin in the Amgen territory. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business -- Collaborative Research and License Agreements," and "Use of Proceeds." Depending on the factors described above, NPS may need to raise substantial additional funds to support its long-term product development and commercialization programs. The Company intends to seek additional funding through corporate collaborations and license agreements. There can be no assurance the Company will be able to negotiate such agreements in the future on acceptable terms, or at all. The Company may also seek additional funding through public or private financings. If additional funds are raised by issuing equity securities, further dilution to stockholders will result. If adequate funds are not available, the Company may be required to delay, reduce the scope of or eliminate one or more of its research and development programs or to obtain funds through arrangements with collaborative partners or others that may require the Company to relinquish rights to certain of its technologies, product candidates or products that the Company may otherwise seek to develop or commercialize on its own, any one of which could have a material adverse effect on the Company's operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." LACK OF MARKETING CAPABILITIES. The Licensees currently have marketing and distribution rights with respect to products under development for the treatment of HPT and osteoporosis; however, such commercialization rights may revert to NPS, under certain circumstances, including upon termination of any of the related agreements. NPS may retain commercialization rights to other products developed in the future. The Company currently lacks sales, marketing and distribution capability. In order to market any of its products directly, the Company would have to develop a marketing and sales force with 10 technical expertise and with supporting distribution capability. There can be no assurance that the Company will be able to establish in-house sales and distribution capabilities or relationships with third parties, or that it will be successful in gaining market acceptance for its products. Outside the United States, the Company's ability to market a product is contingent upon receiving marketing authorization from the appropriate foreign regulatory authorities. The requirements governing the conduct of clinical trials, marketing authorization, pricing and reimbursement vary widely from country to country. This foreign regulatory approval process includes all of the risks associated with FDA approval set forth above. See "Business -- Government Regulation." UNCERTAINTY OF THIRD-PARTY REIMBURSEMENT. There is significant national concern today about the availability and rising cost of health care in the United States. It is anticipated that new federal and/or state legislation will be passed and regulations adopted to attempt to provide broader and better health care and to manage and contain its cost. While NPS cannot predict whether any such legislative or regulatory proposals will be adopted or the effect such proposals may have on its business, the pendency of such proposals could have a material adverse effect on the Company's ability to raise capital, and the adoption of such proposals could have a material adverse effect on the Company in general. In both domestic and foreign markets, sales of the Company's product candidates will depend in part on the availability of reimbursement from third-party payors such as government health administration authorities, private health insurers and other organizations. Under current guidelines, Medicare does not reimburse patients for self-administered drugs. Such policy may adversely affect the market for products designed to treat patients with age-related disorders, such as HPT and osteoporosis. In addition, third-party payors are increasingly challenging the price and cost-effectiveness of medical products and services. Significant uncertainty exists as to the reimbursement status of newly approved health care products. There can be no assurance that the Company's product candidates will be considered cost-effective or that adequate third-party reimbursement will be available to enable NPS to maintain price levels sufficient to realize an appropriate return on its investment in product development. Failure to achieve sufficient price levels for its drugs could adversely affect the Company's business. Legislation and regulations affecting the pricing of pharmaceuticals may change before any of the Company's product candidates are approved for marketing. Adoption of such legislation or regulations could further limit reimbursement for medical products and services. Furthermore, the Company's ability to commercialize its potential product portfolio may be adversely affected to the extent that such legislation has a material adverse effect on the business, financial condition and profitability of other companies that are current or future collaborators for certain of the Company's product candidates. DEPENDENCE ON KEY PERSONNEL; ABILITY TO MANAGE GROWTH. The Company is highly dependent on the principal members of its scientific and management staff. Loss of any of these persons could adversely affect the Company's business. The Company does not have employment contracts. The Company's future success will also depend in large part upon its continued ability to attract and retain other highly qualified scientific and management personnel. The Company faces competition for personnel from other companies, academic institutions, government entities and other organizations. There can be no assurance that NPS will be successful in hiring or retaining personnel. In addition, the Company's anticipated growth and expansion into areas and activities requiring additional expertise, such as clinical trials, government approvals, production and marketing and general pharmaceutical company management are expected to place increased demands on the Company's resources. These demands are expected to require the addition of new management, research and development and administrative personnel, and the development of additional expertise by existing management personnel. The failure to acquire such services or to develop such expertise could materially adversely affect prospects for the Company's success. Certain of these anticipated future needs are expected to be met through the agreements with the Licensees and potential additional corporate collaborations, but there can be no assurance that any services provided by the Licensees or other potential corporate collaborators will be sufficient to meet the Company's personnel or management needs. See "Business -- Employees" and "Management." 11 RISK OF PRODUCT LIABILITY; USE OF HAZARDOUS MATERIALS. The testing, marketing and sale of human therapeutic products entail significant risks. If the Company succeeds in developing products under its product development programs, use of such products in clinical trials and the sale of such products following regulatory approval may expose the Company to liability claims allegedly resulting from use of such products. These claims might be made directly by consumers or others. NPS currently has an aggregate of $5 million insurance for the clinical trials of Norcalcin. There can be no assurance that NPS will be able to maintain such insurance or obtain similar insurance for any of its future clinical trials or that coverage will be in sufficient amount to protect against damages for liability that could have a material adverse effect on NPS. There can also be no assurance that NPS will be able to obtain or maintain product liability insurance in the future on acceptable terms or in sufficient amounts to protect the Company against damages for liability that could have a material adverse effect on the Company. The agreements with the Licensees each provide for certain indemnification against such claims, but there can be no assurance that any claim arising from products sold by a collaborative partner or licensee would not also include claims directly against NPS or that any such claim would be indemnifiable under such agreement. In addition, the Company's research and development activities involve the controlled use of hazardous materials, radioactive compounds and other chemicals. The Company is required to comply with complex local, state and federal regulations involving the use, storage and handling of these materials and may incur certain costs in complying therewith. Although the Company believes that its safety procedures for handling and disposing of such materials comply with the standards prescribed by local, state and federal regulations, the possibility of unintended non-compliance with such regulations or the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of such an accident, the Company could be held liable for any damages that result, and any such liability could exceed the resources of the Company. The Company may incur substantial costs to comply with environmental regulations. The Company contracts with third parties to remove biohazardous waste generated by the Company. The disposal of such waste, third-party waste disposal companies contracted by the Company, and their disposal sites are regulated by the Environmental Protection Agency ("EPA"). The EPA has initiated cleanup of a site where a waste disposal firm contracted by the Company disposed of certain waste generated by the Company. The Company has not accrued any liability with respect to this matter. Although the Company was a small contributor to the site and the Company believes that there are a number of other financially responsible contributors, there can be no assurance that the Company will not be held liable for all or a portion of the cleanup cost or any other costs or damages associated with this disposal site. See "Business -- Environmental Liability." VOLATILE STOCK PRICE. The market price of the shares of Common Stock, like that of the common stock of many other biotechnology and biopharmaceutical companies, has been and is likely to continue to be highly volatile. Factors such as fluctuations in the Company's operating results, announcements of technological innovations or new commercial products by the Company or its competitors, progress with clinical trials, governmental regulation, changes in reimbursement policies, developments in patent or other proprietary rights, developments in the Company's relationships with current or future collaborative partners, public concern as to the safety and efficacy of drugs developed by the Company and its competitors, and general market conditions for biotechnology or pharmaceutical stocks could have a significant adverse effect on the future price of the Common Stock. SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS. Sales of Common Stock in the public market following the Offering or the perception that such sales could occur could have an adverse effect on the price of the Common Stock. Upon completion of the Offering, the Company will have 11,187,232 shares of Common Stock outstanding (assuming no exercise of the Underwriters' over-allotment option). Of these shares, the 3,000,000 shares sold in the Offering, the 1,000,000 shares sold to Amgen in March 1996, and, as of March 31, 1996, approximately 3,449,616 additional shares of Common Stock are freely tradeable without restriction under the Securities Act. The remaining 3,737,616 outstanding shares of Common Stock are restricted shares ("Restricted Shares") under the Securities Act and may only be sold 12 if they are registered or qualify for an exemption from registration under Rule 144 or Rule 701 of the Securities Act. The Company's directors and executive officers and certain stockholders, including Amgen, who immediately after this Offering will hold in the aggregate 4,145,345 shares of Common Stock (of which 2,968,634 are Restricted Shares) have agreed not to sell any of these shares for 90 days after the date of this Prospectus without the prior written consent of Vector Securities International, Inc. Commencing 91 days from the date of this Prospectus, 1,835,196 of the Restricted Shares subject to such agreements will be available for immediate sale in the public market, subject to certain volume, manner of sale and other limitations under Rule 144, and 1,133,438 of the Restricted Shares will be available for immediate sale without limitation under Rule 144(k). Of the 768,982 remaining Restricted Shares not subject to such agreements, 730,745 shares will be available for immediate sale in the public market under Rule 144(k) and 14,950 shares will be available for immediate sale, subject to the limitations provided in Rule 144. In addition, following the closing of this Offering, the holders of 3,129,781 Restricted Shares (including 32,542 shares issuable upon exercise of an outstanding warrant) will be entitled to certain rights with respect to registration of such shares for sale in the public market. See "Description of Capital Stock -- Registration Rights." CONTROL BY EXISTING STOCKHOLDERS; ANTITAKEOVER EFFECTS OF CERTAIN CHARTER AND BYLAW PROVISIONS. The present directors, executive officers and principal stockholders of the Company and their affiliates will beneficially own approximately 33% of the shares of Common Stock outstanding following the Offering (approximately 32% if the Underwriters exercise their over-allotment option in full). Exercise of stock options by executive officers and directors may further impact voting control of the Company. Accordingly, they will have the ability to control the election of the Company's directors and most other stockholders' actions. Certain provisions of the Company's Certificate of Incorporation and Bylaws and Section 203 of the Delaware General Corporation Law could also discourage potential acquisition proposals and could delay or prevent a change in control of the Company. Such provisions could diminish the opportunities for a stockholder to participate in tender offers, including tender offers at a price above the then current market value of the Common Stock. Such provisions may also inhibit fluctuations in the market price of the Common Stock that could result from takeover attempts. In addition, the Board of Directors, without further stockholder approval, may issue Preferred Stock that could have the effect of delaying or preventing a change in control of the Company as well as adversely affecting the voting power of the holders of Common Stock, including the loss of voting control to others. See "Management," "Principal Stockholders" and "Description of Capital Stock -- Preferred Stock" and "-- Delaware Anti-Takeover Law." DILUTION. The Offering price will be substantially higher than the book value per share of Common Stock. Investors purchasing shares of Common Stock in the Offering will therefore incur immediate and substantial dilution of $9.00 per share. To the extent that outstanding options and warrants are exercised, there will be further dilution to new investors. See "Dilution." ABSENCE OF DIVIDENDS. The Company has never paid any cash dividends and does not anticipate paying cash dividends in the foreseeable future. See "Dividend Policy." 13 USE OF PROCEEDS The net proceeds to the Company from the sale of the 3,000,000 shares of Common Stock offered hereby are estimated to be approximately $41.8 million ($48.1 million if the Underwriters' over-allotment option is exercised in full), after deducting underwriting discounts and commissions and the estimated expenses of the Offering. NPS expects to use the net proceeds of the Offering: (i) to fund its research and development programs not already sponsored by its Licensees, including its programs for the treatment of stroke, head trauma, chronic pain and epilepsy, for which approximately $7 million is budgeted for the next two years; (ii) to fund its discovery programs, for which approximately $6 million is budgeted for the next two years; and (iii) for general corporate purposes, including capital expenditures and working capital. The amount and timing of expenditures will depend upon numerous factors, including the progress of the Company's research and development programs, the magnitude and scope of these activities, progress with preclinical and clinical trials, the cost of preparing, filing, prosecuting, maintaining and enforcing patent claims and other intellectual property rights, competing technological and market developments, changes in or terminations of existing collaborative or license arrangements, the establishment of additional collaborative arrangements and the cost of manufacturing scale-up and development of marketing activities, if undertaken by the Company. Furthermore, the net proceeds of the Offering may be used to acquire other companies, technologies or products that complement the business of the Company, although no such transactions are being planned or negotiated as of the date hereof. Pending such application, the Company intends to invest such net proceeds in short-term, interest-bearing investment grade securities. 14 PRICE RANGE OF COMMON STOCK The Company completed its initial public offering on May 26, 1994. The Company's Common Stock is quoted on the Nasdaq National Market under the symbol "NPSP." On May 2, 1996, the last reported sale price for the Company's Common Stock on the Nasdaq National Market was $16.00 per share. The following table sets forth the quarterly high and low closing sales prices for the Company's Common Stock.
HIGH LOW --------- --------- 1994 Second Quarter (from May 26, 1994) $ 6.25 $ 4.38 Third Quarter 5.25 3.75 Fourth Quarter 4.25 3.00 1995 First Quarter $ 4.25 $ 3.25 Second Quarter 5.00 2.88 Third Quarter 8.75 4.50 Fourth Quarter 18.50 6.13 1996 First Quarter $ 17.25 $ 12.50 Second Quarter (through May 2, 1996) 16.63 11.75
On March 31, 1996, there were approximately 160 holders of record of the Company's Common Stock. DIVIDEND POLICY The Company has never declared or paid dividends on its capital stock. The Company currently intends to retain any future earnings to finance the growth and development of its business and therefore does not anticipate paying any cash dividends in the foreseeable future. 15 CAPITALIZATION The following table sets forth as of December 31, 1995: (i) the capitalization of the Company; (ii) such capitalization adjusted to give pro forma effect to receipt from Amgen of a $10.0 million nonrefundable license fee in March 1996, net of applicable taxes, and the sale of 1,000,000 shares of Common Stock to Amgen for $7.5 million also received in March 1996 (the "Amgen Investment"); and (iii) such pro forma capitalization as further adjusted to give effect to the sale of 3,000,000 shares of Common Stock offered by the Company hereby and the receipt of the estimated net proceeds therefrom.
DECEMBER 31, 1995 ----------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED --------- ----------- ----------- (IN THOUSANDS) Long-term portion of capital leases and long-term debt (1)................... $ 747 $ 747 $ 747 --------- ----------- ----------- Stockholders' equity: Preferred stock, $.001 par value; 5,000,000 shares authorized; no shares issued and outstanding.................................................... -- -- -- Common stock, $.001 par value; 20,000,000 shares authorized; 7,072,801 shares issued and outstanding, actual; 8,072,801 shares issued and outstanding, pro forma; and 11,072,801 shares issued and outstanding, pro forma as adjusted (2)..................................................... 7 8 11 Additional paid-in capital................................................. 28,067 35,566 77,338 Deferred compensation...................................................... (235) (235) (235) Deficit accumulated during the development stage........................... (20,517) (10,677) (10,677) --------- ----------- ----------- Net stockholders' equity................................................. 7,322 24,662 66,437 --------- ----------- ----------- Total capitalization................................................... $ 8,069 $ 25,409 $ 67,184 --------- ----------- ----------- --------- ----------- -----------
- - -------------- (1) See Notes 4 and 5 of Notes to Financial Statements for a description of the Company's lease commitments and long-term debt obligations. (2) Excludes: (i) 1,530,924 shares which were subject to outstanding options as of December 31, 1995, at exercise prices ranging from $0.34 to $8.25 per share, with a weighted average exercise price of $3.16 per share, and (ii) 52,792 shares issuable upon exercise of warrants outstanding as of December 31, 1995, with a weighted average exercise price of $4.07 per share. See "Management -- Directors' Compensation," "-- 1987 Stock Option Plan," "-- 1994 Equity Incentive Plan," "Description of Capital Stock -- Warrant" and Note 6 of Notes to Financial Statements. 16 DILUTION The pro forma net tangible book value of the Company at December 31, 1995 was $24.7 million, or $3.06 per share. Pro forma net tangible book value per share is equal to the Company's net tangible assets (tangible assets of the Company less total liabilities) divided by the number of shares of Common Stock outstanding on a pro forma basis, after giving effect to the Amgen Investment. Without taking into account any other changes in pro forma net tangible book value after December 31, 1995 other than to give effect to the sale of the 3,000,000 shares of Common Stock by the Company in the Offering and the receipt of the estimated net proceeds therefrom, the pro forma net tangible book value of the Company as of December 31, 1995 would have been $66.4 million, or $6.00 per share. This represents an immediate increase in pro forma net tangible book value of $2.94 per share to existing stockholders and an immediate dilution in pro forma net tangible book value of $9.00 per share to new investors. The following table sets forth the per share dilution to new investors in the Offering: Offering price per share............................................. $ 15.00 Pro forma net tangible book value per share as of December 31, 1995.............................................................. $ 3.06 Increase per share attributable to new investors................... 2.94 ----- Pro forma net tangible book value per share after the Offering....... 6.00 --------- Dilution per share to new investors.................................. $ 9.00 --------- ---------
The foregoing computations exclude: (i) 1,530,924 shares which were subject to outstanding options as of December 31, 1995, at exercise prices ranging from $0.34 to $8.25 per share, with a weighted average exercise price of $3.16 per share, and (ii) 52,792 shares issuable upon exercise of warrants outstanding as of December 31, 1995, with a weighted average exercise price of $4.07 per share. To the extent that such options and warrants are exercised, there will be further dilution to new investors. See "Management -- Directors' Compensation," "-- 1987 Stock Option Plan," "-- 1994 Equity Incentive Plan," "Description of Capital Stock -- Warrant" and Note 6 of Notes to Financial Statements. 17 SELECTED FINANCIAL DATA The selected financial data presented below for each fiscal year in the five-year period ended December 31, 1995 and the period from October 22, 1986 (inception) through December 31, 1995 have been derived from the Company's financial statements, which have been audited by KPMG Peat Marwick LLP, independent certified public accountants, and are qualified by reference to such Financial Statements and Notes thereto. The Company is considered a development stage company as described in Note 1 of Notes to Financial Statements.
OCTOBER 22, 1986 (INCEPTION) YEAR ENDED DECEMBER 31, THROUGH ----------------------------------------------------- DECEMBER 31, 1991 1992 1993 1994 1995 1995 --------- --------- --------- --------- --------- ------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenues from research and license agreements... $ 1,885 $ 1,259 $ 868 $ 3,861 $ 9,562 $ 22,316 Operating expenses: Research and development...................... 1,609 2,722 6,021 7,765 8,727 30,360 General and administrative.................... 754 1,283 2,004 3,122 3,975 12,789 --------- --------- --------- --------- --------- ------------- Total operating expenses.................... 2,363 4,005 8,025 10,887 12,702 43,149 --------- --------- --------- --------- --------- ------------- Operating loss.................................. (478) (2,746) (7,157) (7,026) (3,140) (20,833) Other income (expense), net..................... 16 139 (2) 270 322 816 --------- --------- --------- --------- --------- ------------- Loss before income tax expense.................. (462) (2,607) (7,159) (6,756) (2,818) (20,017) Income tax expense.............................. -- -- -- -- 500 500 --------- --------- --------- --------- --------- ------------- Net loss........................................ $ (462) $ (2,607) $ (7,159) $ (6,756) $ (3,318) $ (20,517) --------- --------- --------- --------- --------- ------------- --------- --------- --------- --------- --------- ------------- Net loss per share (1).......................... $ (.33) $ (.95) $ (1.91) $ (1.13) $ (.48) --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Weighted average shares outstanding (1)......... 1,386 2,746 3,751 5,977 6,924
DECEMBER 31, ----------------------------------------------------- 1991 1992 1993 1994 1995 --------- --------- --------- --------- --------- (IN THOUSANDS) BALANCE SHEET DATA: Cash, cash equivalents and marketable investment securities...... $ 119 $ 6,779 $ 6,414 $ 9,323 $ 8,340 Working capital.................................................. (27) 6,363 5,839 8,104 5,832 Total assets..................................................... 544 8,101 12,599 12,084 10,600 Long-term portion of capital leases and long-term debt........... 37 473 830 440 747 Deficit accumulated during development stage..................... (677) (3,284) (10,443) (17,199) (20,517) Stockholders' equity............................................. 354 7,081 7,011 10,165 7,322
- - ------------------ (1) See Note 1 of Notes to Financial Statements for information concerning the computation of net loss per share. 18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of the results of operations and financial condition of NPS should be read in conjunction with the Financial Statements and Notes thereto included elsewhere in this Prospectus. OVERVIEW Since its inception in 1986, NPS has devoted substantially all of its resources to its research and development programs. To date, the Company has not developed any pharmaceutical products for sale and has incurred substantial losses. NPS has incurred cumulative losses through December 31, 1995 of $20.5 million, net of cumulative revenues from collaborative research and license agreements of $22.3 million. The Company expects to incur significant operating losses over at least the next several years as the Company continues and expands its research and development and preclinical and clinical testing activities. Because substantially all of the Company's revenues are derived from license fees, milestone payments and research support payments from its Licensees, which fluctuate from quarter to quarter, the Company expects that losses will fluctuate from quarter to quarter and that such fluctuations may be substantial. The Company's ability to achieve profitability depends in part on its ability, alone and/or with others, to complete development of its product candidates, including Norcalcin, to obtain required regulatory approvals and to manufacture and market such products, of which there can be no assurance. RECENT FINANCIAL RESULTS The Company's revenues and net income for the three months ended March 31, 1996 were $14.5 million and $9.8 million, respectively, compared to revenues of $924,000 and a net loss of $1.7 million, for the three months ended March 31, 1995. The increase in revenues and net income is primarily due to the receipt by NPS of a $10 million non-refundable license fee from Amgen following the execution and closing of a definitive agreement for Amgen to develop and commercialize NPS's Norcalcin and other compounds for the treatment of hyperparathyroidism. Revenues and net income also increased in the first quarter of 1996 due to the receipt by the Company of a $3.0 million payment under the terms of the SmithKline Agreement. While the Company experienced net income in the quarter due to the non-recurring license fee and milestone payment, the Company expects to incur significant operating losses over at least the next several years as it continues to expand its research and development activities and preclinical and clinical activities. RESULTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 Substantially all of the Company's revenues were derived from collaborative research and license agreements with the Licensees. Revenues from such agreements were $600,000 in 1993, $3.6 million in 1994, and $9.4 million in 1995. All of the revenues in 1993 and 1994 and $1.8 million in 1995 were from license fees received under the collaborative agreement with SmithKline Beecham and recognized for accounting purposes as the related research expenses were incurred. In 1995, the Company received and recognized a $5.0 million license fee and $1.0 million in research support from Kirin, and $1.6 million in research support from SmithKline Beecham. Research and development expenses increased from $6.0 million in 1993 to $7.8 million in 1994 and to $8.7 million in 1995. The increases in research and development expenses were principally due to the conducting of clinical trials for Norcalcin in 1994 and 1995, increased activity in each of the Company's principal research and development projects, the associated expansion in staffing and increased 19 purchases of laboratory supplies and consulting services. Research and development expenses are expected to increase significantly in the future as NPS conducts clinical trials for other product candidates and as more research and development personnel are hired. General and administrative expenses increased from $2.0 million in 1993 to $3.1 million in 1994 and to $4.0 million in 1995. The increase in 1995 was primarily due to costs incurred for advisory services in connection with the consummation of the Amgen and Kirin agreements, and the increased costs associated with operating a public company for a full year. The increase in 1994 was primarily due to expansion of facilities, the addition of management and administrative personnel, and the costs associated with becoming a public company. The Company expects that general and administrative expenses will continue to increase in the future as a result of increased activity by the Company in corporate development, investor relations, and legal affairs, and as more personnel and facilities are needed to support research and development activities. Interest income increased from $110,000 in 1993 to $398,000 in 1994 and to $480,000 in 1995 as a result of increases in the Company's cash balances from the net proceeds of the initial public offering in 1994 and the Kirin license fee in 1995. The Company anticipates that interest income will fluctuate in the future as the Company's cash balance and short-term interest rates fluctuate. Interest expense increased from $112,000 in 1993 to $128,000 in 1994 and to $158,000 in 1995, primarily due to the acquisition of equipment through capital leases and completion of a $1.0 million debt financing of existing equipment and leasehold improvements in 1995. Income tax expense of $500,000 in 1995 consisted entirely of a 10% Japanese tax withheld on the license fee paid by Kirin. Future license, milestone and royalty payments from Kirin will be subject to the same 10% tax. As of December 31, 1995, the Company had a federal income tax net operating loss carryforward of approximately $18.4 million and a federal income tax research credit carryforward of approximately $953,000. The Company's ability to utilize these operating loss and research credit carryforwards against future taxable income will be subject to annual limitations in future periods pursuant to the "change in ownership rules" under Section 382 of the Internal Revenue Code of 1986, as amended. See Note 7 of Notes to Financial Statements. The Company has adopted Financial Accounting Standards Board Statement No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The adoption of the statement did not have a material effect on the Company's financial statements. LIQUIDITY AND CAPITAL RESOURCES The Company has financed its operations since inception primarily through collaborative research and license agreements and the private and public placement of equity securities. As of December 31, 1995, the Company had recognized approximately $22.3 million of cumulative revenues from collaborative research and license agreements and approximately $28.1 million in consideration for the sale of equity securities. The Company's principal sources of liquidity are its cash, cash equivalents and marketable investment securities which totaled $8.3 million at December 31, 1995. Also, in connection with the establishment of the Amgen agreement, Amgen paid $7.5 million to NPS for 1,000,000 shares of Common Stock and a non-refundable license fee of $10.0 million in March 1996. The Company receives quarterly payments under the Kirin and SmithKline Beecham agreements to support the Company's research efforts in HPT and osteoporosis, respectively. The Kirin payments are $500,000 per quarter through June 1996 and a total of $5.0 million over the remaining four years of the research term of the agreement. The SmithKline Beecham payments are estimated to be an aggregate of $4.3 million through the scheduled expiration of the agreement in October 1996, of which $1.6 million had been received by December 31, 1995. Amgen will reimburse the Company up to $400,000 per year for a period not to exceed five years for certain costs which may be incurred by the Company in the 20 development of Norcalcin in the Amgen territory, with such participation occuring under the direction of Amgen. The Company could receive additional payments of up to $56.0 million from the Licensees upon the accomplishment of specified research and/or development milestones. Each of these agreements may be terminated before the scheduled expiration date by the respective Licensee and, therefore, no assurance can be given that any future milestone or research or development support payments will be received thereunder. Under its agreement with the Brigham and Women's Hospital, Inc. ("Brigham and Women's"), the Company is obligated to pay an aggregate of $810,000 to Brigham and Women's from February 1996 through February 1998. Additional payments may be required upon the accomplishment of certain research milestones by Brigham and Women's. As of December 31, 1995, the Company's net investment in leasehold improvements, equipment and furnishings was approximately $2.2 million. The Company has financed a portion of such expenditures through capital leases and long-term debt with a total principal obligation of approximately $1.5 million as of December 31, 1995. Additional equipment and facilities will be needed as the Company increases its research and development activities, a portion of which may be financed with debt. Equipment and leasehold improvements subject to the capital leases and the long-term debt have been pledged in support of the leasehold obligations. The Company anticipates that its existing capital resources, including research and development support payments from existing collaborations, as well as the net proceeds of the Offering and the interest earned thereon, will be sufficient to enable it to maintain its current and planned operations through at least 1997. However, actual needs are dependent on numerous factors, including the progress of the Company's research and development programs, the magnitude and scope of these activities, progress with preclinical and clinical trials, the cost of preparing, filing, prosecuting, maintaining and enforcing patent claims and other intellectual property rights, competing technological and market developments, changes in or terminations of existing collaborative research or license arrangements, the establishment of additional collaborative arrangements and the cost of manufacturing scale-up and development of marketing activities, if undertaken by the Company. Substantial expenditures will be required to conduct preclinical studies and clinical trials, manufacture or have manufactured and market products other than Norcalcin from current research and development efforts and perform research and development activities in additional areas. In addition, if Amgen terminates its agreement to develop and commercialize Norcalcin in its territory, the Company may not have sufficient capital to complete the development and commercialization of Norcalcin in Amgen's territory. NPS will need to raise substantial additional funds to support its long-term product development and commercialization programs. The Company also intends to seek additional funding through corporate collaborations and licensing agreements and the Company may seek additional funding through public or private financing. There can be no assurance that additional financing will be available on acceptable terms, if at all. If adequate funds are not available, the Company may be required to delay, reduce the scope of or eliminate one or more of its research and development programs or to obtain funds through arrangements with collaborative partners or others that may require the Company to relinquish rights to certain of its technologies, product candidates or products that the Company may otherwise seek to develop or commercialize on its own. 21 BUSINESS GENERAL NPS Pharmaceuticals is engaged in the discovery and development of orally active, small molecule drugs that target cell surface receptors and ion channels. The Company's most advanced product candidate, Norcalcin-TM- for the treatment of hyperparathyroidism ("HPT"), arose from the Company's pioneering work on a new class of cell surface receptors which detect levels of extracellular calcium involved in numerous bodily functions. To date, the Company has conducted two Phase I and two Phase I/II clinical trials of Norcalcin to test its safety and initial efficacy. The Company is also applying its calcium receptor technology to the development of therapies for osteoporosis. The Company's other main programs involve the development of orally active, small molecule drugs which have neuroprotectant properties and target certain calcium channels in order to provide treatments for stroke, head trauma, chronic pain and epilepsy. Additionally, the Company is pursuing several discovery programs which are extensions of its discoveries in calcium receptors and ion channels. NPS has established research collaborations and license arrangements with the pharmaceutical division of Kirin Brewery Company, Limited ("Kirin") and SmithKline Beecham Corporation ("SmithKline Beecham") in the fields of HPT and osteoporosis, respectively, and has established a license arrangement with Amgen Inc. ("Amgen") in the field of HPT. Kirin, SmithKline Beecham and Amgen are referred to herein as the "Licensees." The Licensees are responsible for all costs of product development in their respective territories and fields. As part of these arrangements, the Licensees have paid to NPS an aggregate of $21.0 million in non-refundable license fees and Amgen and an affiliate of SmithKline Beecham have purchased $14.5 million of the Company's Common Stock. In addition, the Licensees have agreed to make up to $56.0 million in milestone payments, of which $3.0 million has been paid to the Company to date under the SmithKline Beecham agreement. SmithKline Beecham and Kirin are also obligated to pay an aggregate of approximately $11.3 million in research support payments. Each of the Licensees is obligated to pay royalties to NPS on any product sales. See "Risk Factors -- Dependence on Collaborative Research and License Relationships" and "Business -- Collaborative Research and License Agreements." HPT is a growing medical concern and is typically characterized as being either primary or secondary. Primary HPT is an age-related disorder that results from excessive secretion of parathyroid hormone ("PTH"), leading to elevated levels of calcium in the blood. Symptoms may include bone loss, muscle weakness, depression and cognitive dysfunction. Approximately 100,000 new patients are diagnosed with primary HPT in the United States each year. There are currently no pharmaceutical therapies for the treatment of primary HPT, with surgery being the only effective treatment. Secondary HPT results from other disease states and is most often associated with renal dysfunction. Symptoms of secondary HPT include excessive bone loss, bone pain, and chronic, severe itching. It is estimated that approximately 80% of the patients in the United States who rely on kidney dialysis, or approximately 140,000 patients, suffer from the effects of secondary HPT. The Company believes that current drug therapy treatments for secondary HPT, such as phosphate binders and calcitriol have certain disadvantages. The Company's preliminary analysis of the data from its four clinical trials of Norcalcin indicates that Norcalcin was safe and well tolerated in these studies and that the administration of Norcalcin resulted in an expected dose-dependent decrease in the level of PTH in the blood. The higher doses used in the Phase I studies and in the Phase I/II dialysis study resulted in a decrease in the level of calcium in the blood. The Company expects to complete the formal analysis from all four trials and to report its findings in appropriate forums during the latter half of 1996. Amgen is currently formalizing its clinical strategy for the continued development of Norcalcin, and the Company believes Kirin will begin Phase I clinical trials of Norcalcin in Japan in 1996. There can be no assurance that the clinical trials will proceed as indicated or that Norcalcin will prove safe and effective, meet applicable regulatory standards or be successfully marketed. See "Risk Factors - - -- Early Stage of Product Development; Dependence on Norcalcin" and " -- Dependence on Collaborative Research and License Relationships." 22 In conjunction with SmithKline Beecham, NPS is also applying its calcium receptor technology to the development of orally active therapeutics for the treatment of osteoporosis. Osteoporosis is an age-related disorder affecting more than 200 million people worldwide and is characterized by reduced bone density and an increased susceptibility to fractures. Among the elderly in particular, osteoporosis is a major cause of morbidity and mortality. The Company is pursuing two approaches for the treatment of osteoporosis, stimulation of bone formation and suppression of bone resorption. Most osteoporosis patients are first diagnosed only after they have already lost significant bone mass. As a result, the Company believes that a therapy that not only halts further bone loss, but also builds new bone, would constitute a significant advancement in the treatment of osteoporosis. Under its collaboration with SmithKline Beecham, research efforts are being conducted by NPS concurrently on both approaches to osteoporosis. In January 1996, the Company received a milestone payment of $3.0 million from SmithKline Beecham for progress made in its osteoporosis program. The Company is developing a new class of orally active compounds which modulate certain calcium channels for neuroprotection in stroke and head trauma and also for chronic pain and epilepsy. The influx of calcium through glutamate receptor-operated calcium channels has been linked to a number of neurological disorders, including nerve cell death following stroke and head trauma, and also to certain types of chronic pain and epilepsy. The Company's proprietary compounds antagonize the NMDA (N-methyl-D-aspartate) subtype of glutamate receptor-operated calcium channels ("NMDA receptor-channels"), thereby reducing the influx of calcium. The Company believes that these compounds work through a novel mechanism and exhibit potentially advantageous pharmacological properties. These compounds demonstrated neuroprotectant activity in preclinical animal models of stroke and head trauma and palliative activity in animal models of chronic pain and epilepsy. The Company has designated one of these compounds, NPS 1506, for preclinical development on a time line which currently anticipates an Investigational New Drug ("IND") filing with the United States Food and Drug Administration ("FDA") in the first half of 1997. However, there can be no assurance that the IND will be filed in this time frame. The Company is actively engaged in several discovery programs which seek to identify molecular targets for the development of new drugs. Among these, the Company believes it has made significant discoveries with regard to metabotropic glutamate receptors ("mGluRs"), having identified small molecules active at these receptors. The Company believes that drugs acting at specific mGluRs may provide relevant therapies for a number of neurological disorders. STRATEGY The Company's strategy is to utilize its proprietary technologies and expertise in cell surface receptors and ion channels to develop and commercialize small molecule therapeutics. Currently, the Company is focused on product development programs for HPT, osteoporosis, stroke, head trauma, pain and epilepsy. Key elements of the Company's strategy include the following: -THROUGH AMGEN AND KIRIN, CONFIRM SAFETY AND ESTABLISH CLINICAL EFFICACY AND COMMERCIALIZATION OF NORCALCIN FOR THE TREATMENT OF HPT. The Company has granted Amgen an exclusive license to complete the development of and to manufacture and commercialize Norcalcin and certain related compounds worldwide, excluding the territories covered by the Kirin license. The Company has granted a similar license to Kirin in Japan, China, Korea and Taiwan. Amgen is currently formalizing its clinical strategy for the continued development of Norcalcin, and the Company believes that Kirin will begin Phase I clinical trials in Japan in 1996. 23 -IDENTIFY CLINICAL CANDIDATES FOR THE TREATMENT OF OSTEOPOROSIS AND ADVANCE ONE OR MORE LEAD COMPOUNDS INTO CLINICAL TRIALS IN CONJUNCTION WITH ITS COLLABORATOR, SMITHKLINE BEECHAM. In conjunction with SmithKline Beecham, the Company is pursuing two approaches for the treatment of osteoporosis, stimulation of bone formation and suppression of bone resorption. In January 1996, the Company received a $3.0 million milestone from SmithKline Beecham as part of its collaboration. -INITIATE CLINICAL TRIALS OF NPS 1506 FOR NEUROPROTECTION. NPS is developing a new class of proprietary small molecule NMDA receptor-channel antagonists which the Company believes may be effective neuroprotectants as well as effective in the treatment of chronic pain and epilepsy. NPS has demonstrated neuroprotectant activity with these compounds in preclinical animal models of stroke and head trauma, and palliative activity in animal models of chronic pain and epilepsy. The Company has identified NPS 1506 as a lead compound for neuroprotection and estimates that it will file an IND for NPS 1506 in the first half of 1997. -CONTINUE DISCOVERY AND DEVELOPMENT ACTIVITIES TO EXPAND THE COMPANY'S PRODUCT PIPELINE. The Company is actively engaged in several discovery programs which seek to identify new molecular targets for the development of new drugs. Among these, the Company believes it has made significant discoveries with regard to mGluRs, which may lead to relevant therapies for a number of neurological disorders. -ESTABLISH COLLABORATIONS WHICH PROVIDE ENHANCED OPPORTUNITIES FOR DRUG DEVELOPMENT AND COMMERCIALIZATION. The Company generally has conducted the development of its product candidates at least through the preclinical research phase and has used collaborations to supplement its internal research, preclinical and clinical development resources. The Company has established alliances with pharmaceutical companies to conduct clinical trials, prepare regulatory submissions and market and sell the Company's products in exchange for license fees, milestone payments, research support payments and royalties. Under future collaborations, the Company expects to retain strategically important development, manufacturing or marketing rights in order to enhance the value of its drug development opportunities. PRODUCT DEVELOPMENT PROGRAMS The Company is currently developing orally active compounds that target calcium receptors as drug therapies for HPT and osteoporosis. The Company is also developing orally active compounds that target NMDA receptor-channels as neuroprotectants to reduce neurological damage associated with stroke and head trauma and additionally for the treatment of chronic pain and epilepsy. Calcium levels in the blood are tightly regulated, and a modest increase or decrease in circulating calcium can be life-threatening. Calcium receptors are the basis of a newly discovered mechanism by which certain cells detect and respond to small changes in extracellular calcium. One key role of calcium receptors is to regulate circulating levels of PTH and calcitonin, two hormones which play opposing roles in bone and mineral metabolism. The Company believes that manipulation of PTH and calcitonin levels could be beneficial in the treatment of various bone and mineral-related disorders, such as HPT and osteporosis. The Company has utilized its expertise in certain functional screening technologies and its proprietary recombinant cell lines to discover and develop orally active compounds which are novel in that they can directly manipulate the levels of PTH and calcitonin by modulating the activities of calcium receptors. Compounds which mimic the effect of calcium at calcium receptors are referred to as "calcimimetics" (agonists) while those which block the effect of calcium are referred to as "calcilytics" (antagonists). NMDA receptor-channels play critical roles in normal excitatory neurotransmission and are also recognized for their major role in events which lead to much of the neurological damage associated with stroke and head trauma. Several pharmaceutical companies have recognized the potential of NMDA receptor-channels as molecular targets for the development of drugs to treat neurological disorders and 24 have identified various lead compounds. Unfortunately, NMDA receptor-channels are also the site of action of phencyclidine ("PCP"), and most compounds which target NMDA receptor-channels exhibit undesirable PCP-like side effects such as inducing symptoms of psychosis. The Company has utilized its expertise in certain functional screening technologies to discover and develop orally active compounds which antagonize NMDA receptor-channels by binding to a novel site, distinct from the PCP binding site. The Company's compounds have not exhibited PCP-like effects in a variety of IN VITRO and IN VIVO studies in animals intended to identify PCP-like effects. The following chart summarizes the Company's product development programs:
DEVELOPMENT PROGRAM MOLECULAR TARGET COMPOUND/STATUS COMMERCIAL RIGHTS - - -------------------- -------------------- -------------------- -------------------- HYPERPARATHYROIDISM Primary HPT Parathyroid Norcalcin-TM-/Phase Amgen, Kirin calcium receptor I/II(1) Secondary HPT Parathyroid Norcalcin-TM-/Phase Amgen, Kirin calcium receptor I/II(1) OSTEOPOROSIS Stimulation of Parathyroid Preclinical SmithKline bone formation calcium receptor Research(2) Beecham(4) Suppression of C-cell and Preclinical SmithKline bone resorption osteoclast calcium Research(2) Beecham(4) receptors NEUROPROTECTION Stroke, Head NMDA NPS 1506/Preclinical NPS Trauma receptor-channel Development(3) CHRONIC PAIN NMDA Preclinical NPS receptor-channel Research(2) EPILEPSY NMDA Preclinical NPS receptor-channel Research(2) - - ------------------ (1) See "Business -- Hyperparathyroidism Program -- Norcalcin-TM- -- Status of Clinical Trials." (2) "Preclinical Research" refers to one or more active compounds or series of related active compounds which have met predetermined activity criteria in various IN VITRO and/or IN VIVO models. More extensive evaluation of the lead compounds is undertaken to determine if they have the requisite properties to enter preclinical development. (3) "Preclinical Development" refers to ongoing research in the areas of efficacy, pharmacology and toxicology studies in animal models necessary to support an application to the FDA to commence human clinical testing. (4) NPS has certain co-promotion rights in the United States. See "Business -- Collaborative Research and License Agreements -- SmithKline Beecham Corporation."
HYPERPARATHYROIDISM PROGRAM -- NORCALCIN-TM- OVERVIEW. HPT is a growing medical concern and is typically characterized as being either primary or secondary. Primary HPT is an age-related disorder that results from excessive secretion of parathyroid hormone, leading to elevated calcium levels in the blood. Symptoms may include bone loss, muscle weakness, depression and cognitive dysfunction. Approximately 100,000 new patients are diagnosed with primary HPT in the United States each year. There are currently no pharmaceutical therapies for the treatment of primary HPT, with surgery to remove the affected parathyroid gland(s) from the neck region being the only effective treatment. Secondary HPT results from other disease states and is most often associated with renal dysfunction. Symptoms of secondary HPT include excessive bone loss, bone pain, and chronic, severe itching. It is estimated that approximately 80% of the patients in the United States who rely on kidney dialysis, or approximately 140,000 patients, suffer the effects of secondary HPT. Studies have also shown that there is a correlation between kidney dysfunction among patients not on dialysis and elevated PTH levels in the blood. Accordingly, the Company believes that some of these patients may also suffer from secondary 25 HPT. Current treatments for secondary HPT involve drug therapy with phosphate binders and/or calcitriol. The Company believes that these therapies have certain disadvantages. For example, phosphate binders are not well tolerated by many people, and calcitriol often leads to hypercalcemia and hyperphosphatemia which can exacerbate the underlying disease. In severe cases, surgery may be required to remove all or part of the parathyroid glands. Based on its research and preclinical and clinical trials to date, the Company believes that Norcalcin could prove to be effective in treating both types of HPT. PTH secretion is normally regulated by changes in the circulating level of calcium. The parathyroid glands secrete PTH which triggers metabolic changes in bone and the kidney that increase calcium levels in the blood. Increased levels of circulating calcium activate the parathyroid cell calcium receptor, which then suppresses the secretion of PTH. In HPT, however, PTH levels remain elevated. Norcalcin is a calcimimetic (a calcium receptor agonist), which mimics the action of calcium at the calcium receptor on parathyroid cells, thereby reducing the secretion of PTH. The Company has entered into agreements with Amgen and Kirin relating to the development and commercialization of Norcalcin. See "Business -- Collaborative Research and License Agreements." [DIAGRAM] IN HPT, EXCESS PTH TRIGGERS PATHOLOGICAL CALCIMIMETIC DRUGS, SUCH AS NORCALCIN, CHANGES IN BONE AND IN THE KIDNEY, THEREBY ACTIVATE CALCIUM RECEPTORS LEADING TO INCREASING THE LEVEL OF CALCIUM IN THE BLOOD. SUPPRESSION OF PTH SECRETION. IN PATIENTS WITH HPT, CALCIMIMETIC DRUGS ARE EXPECTED TO AMELIORATE SYMPTOMS CAUSED BY EXCESS PTH AND HIGH CALCIUM LEVELS.
The Company's studies in animals have shown that Norcalcin offers a novel and direct means of regulating PTH secretion. In animal tests conducted by the Company, orally administered Norcalcin reduced circulating levels of PTH in a dose-dependent manner. This reduction of PTH further resulted in decreases in levels of calcium in the blood. The Company has also completed, and is continuing to analyze the data from, a six-month toxicology study of Norcalcin in rats and a 12-month toxicology study in dogs. 26 STATUS OF CLINICAL TRIALS. The chart below summarizes the Company's Norcalcin clinical trials conducted to date:
PRELIMINARY ANALYSIS OF RESULTS NUMBER OF CLINICAL TRIAL PROTOCOL DAILY DOSE ANNOUNCED SUBJECTS - - ---------------- ---------------- ---------------- --------------- ---------------- Phase I Placebo-controlled, 10-400 June 1994 18 healthy, (single-site) double blinded, milligrams post- menopausal single dose, women over the dose escalation age of 40 Phase I Placebo-controlled, 20-400 January 1996 48 healthy men (single-site) double blinded, milligrams and women over multiple dose, the age of 40 dose escalation PhaseI/II Placebo-controlled, 4-160 milligrams January 1996 20 women with (multi-site) double blinded, mild, primary single dose, HPT dose escalation Phase I/II Open label, 40-200 April 1996 8 male dialysis (single-site) single dose, milligrams patients with dose escalation, secondary HPT on and off dialysis
Since filing its IND for Norcalcin in December 1993, the Company has conducted four clinical trials of Norcalcin. As indicated in the table above, these include two Phase I safety and tolerance studies, a multi-site, Phase I/II study in women with mild, primary HPT and a Phase I/II study in kidney dialysis patients with secondary HPT. The Company's preliminary analysis of the data from these studies indicates that Norcalcin was safe and well tolerated in these studies and that the administration of Norcalcin resulted in an expected dose-dependent decrease in the level of PTH in the blood. The higher doses used in the Phase I studies and in the Phase I/II dialysis study resulted in a decrease in the level of calcium in the blood. The observed adverse events in these trials were consistent with the underlying diseases and the Company believes that the adverse events are unrelated to Norcalcin. Blood and urine samples collected from each of the four clinical trials are currently being analyzed in a pharmacokinetic study. The Company expects to complete the formal analysis of the data from all four trials and to report its findings in appropriate forums during the latter half of 1996. Amgen is currently formalizing its clinical strategy for continued development of Norcalcin, and the Company believes Kirin will begin Phase I clinical trials in Japan in 1996. There can be no assurance that clinical trials will proceed as indicated or that Norcalcin will prove safe and effective, meet applicable regulatory standards or be successfully marketed. See "Risk Factors -- Early Stage of Product Development; Dependence on Norcalcin" and "-- Dependence on Collaborative Research and License Relationships." OSTEOPOROSIS PROGRAM OVERVIEW. Osteoporosis is an age-related disorder which affects more than 200 million people worldwide and is characterized by reduced bone density and an increased susceptibility to fractures. Osteoporosis is a major cause of morbidity and mortality among the elderly. It has been estimated that the United States market for osteoporosis treatments will more than triple by the end of the decade. Throughout life, bone undergoes constant remodeling involving anabolic processes leading to bone formation and catabolic processes leading to bone resorption. The balance between these two processes determines whether there is net bone loss, net bone formation or no net change. In osteoporosis, this balance has shifted in favor of bone resorption, resulting in net bone loss. 27 Current drugs approved for the treatment of osteoporosis include estrogen, injectable calcitonin, and alendronate (a bisphosphonate). These drugs are anti-resorptives and act to suppress bone resorption. The Company believes that each of these therapies presents one or more disadvantages. For example, use of estrogen is believed to be associated with increased risk of breast cancer, calcitonin is expensive and cannot currently be administered orally and bisphosphonates have been associated with side effects such as gastrointestinal distress. Moreover, long-term studies on bisphosphonates have not yet been performed. In contrast, anabolic agents stimulate new bone formation. While no anabolic agents are currently available for the treatment of osteoporosis, the FDA's Endocrinologic and Metabolic Drugs Advisory Committee has recently recommended that slow-release fluoride, an anabolic agent, be approved for the treatment of osteoporosis in post-menopausal patients who have suffered a fracture. Most osteoporosis patients are first diagnosed after they have already lost significant bone mass. As a result, the Company believes that a therapy that not only halts further bone loss but also builds new bone would constitute a significant advancement in the treatment of osteoporosis. Under its collaboration with SmithKline Beecham, research efforts are being conducted by NPS concurrently on both stimulation of bone formation and suppression of bone resorption. Both of these approaches are focused on the development of orally active molecules that are particularly suitable for long-term therapy. BONE FORMATION. NPS's primary approach to the treatment of osteoporosis is currently focused on calcilytic compounds (calcium receptor antagonists) which block the action of calcium at calcium receptors and thus are expected to have effects opposite to those of calcimimetic compounds. The Company believes that this novel approach, which is intended to manipulate the body's own PTH reserves, could provide an effective anabolic therapy for osteoporosis, stimulating new bone formation to replace bone which has already been lost to the disease. While chronically high levels of PTH are known to cause bone loss as in HPT, PTH levels fluctuate daily and this is thought to play a key role in regulating the normal balance between bone resorption and bone formation. Recent studies in animals and in humans have shown that frequent (usually daily) injections of exogenous PTH sufficient to cause intermittent increases in circulating PTH levels result in significant stimulation of new bone formation. Several published animal studies have evaluated the structure of the newly formed bone and have found that the increases in bone mass achieved with PTH injections are accompanied by improvements in biomechanical strength and in certain indices of bone structure thought to be related to biomechanical strength. Although the anabolic effects of PTH on bone were first noted over 60 years ago, evaluation of the therapeutic potential of PTH treatment has only recently begun. Because of its potential as an effective anabolic therapy for osteoporosis, certain other companies are currently conducting clinical trials of injectible PTH or PTH analogs for osteoporosis. However, PTH is currently expensive to manufacture and cannot be administered orally. The Company believes that orally administered, calcilytic drugs acting on the parathyroid cell calcium receptor to increase PTH release from the body's own PTH reserves could provide a cost-effective means of intermittently increasing PTH levels and could lead to greater patient compliance and therefore greater acceptance. 28 [DIAGRAM] THE COMPANY IS WORKING IN COLLABORATION WITH SMITHKLINE BEECHAM TO DEVELOP CALCILYTIC DRUGS THAT, BY BLOCKING THE PARATHYROID CELL CALCIUM RECEPTOR, WOULD STIMULATE LOW-LEVEL, INTERMITTENT SECRETION OF PARATHYROID HORMONE, THEREBY STIMULATING NEW BONE FORMATION. The Company has demonstrated in IN VIVO animal studies that intermittent increases in circulating levels of PTH can be obtained by regulating the activity of calcium receptors on the parathyroid cells. Increased levels of PTH achieved by this mechanism are equivalent to levels of PTH achieved by an injection of PTH sufficient to cause bone growth. These studies provide support for the underlying premise that the body's own internal reserves of releasable PTH are sufficient to cause bone growth. SUPPRESSION OF BONE RESORPTION. Bone resorption is the function of specialized bone cells called osteoclasts. NPS is pursuing new anti-resorptive therapies which involve calcimimetic drugs acting either directly on osteoclasts or indirectly via C-cells of the thyroid. The Company believes that orally active calcimimetic drugs could provide cost-effective alternatives to current anti-resorptive drugs and could potentially lead to greater patient compliance. When bone is broken down by the osteoclast, calcium is released and accumulates in very high concentrations near the osteoclast. High concentrations of extracellular calcium inhibit further bone resorption by the osteoclast. NPS believes that the effect of extracellular calcium may be mediated by a cell surface calcium receptor on the osteoclast. NPS scientists are currently working to identify this receptor and to develop compounds that mimic the effects of extracellular calcium to directly suppress osteoclastic bone resorption. [DIAGRAM] IN RESORBING BONE, OSTEOCLASTS ATTACH TIGHTLY TO THE SURFACE OF BONE AND SECRETE ENZYMES AND PROTONS. THE ENZYMES DEGRADE THE ORGANIC MATRIX OF BONE (MOSTLY COLLAGEN), AND THE PROTONS CREATE AN ACIDIC ENVIRONMENT THAT DISSOLVES THE INORGANIC MATRIX OF BONE. AS THE MINERALIZED MATRIX IS DISSOLVED, CALCIUM ACCUMULATES TO VERY HIGH LEVELS NEAR THE OSTEOCLAST. 29 C-cells of the thyroid produce the protein hormone, calcitonin. Osteoclasts are known to possess cell membrane receptors for calcitonin which acts to suppress osteoclastic bone resorption. Studies in animals and in humans have shown that repetitive injections of calcitonin (usually daily) are effective at inhibiting bone resorption, and injectable calcitonin is currently used in some countries as a therapy for osteoporosis. The Company's novel approach is to develop orally active drugs which can be used to manipulate the body's own internal reserves of calcitonin in order to achieve a similar effect. NPS and its collaborators at Brigham and Women's have confirmed that calcium receptors are present on C-cells of the thyroid and that activation of C-cell calcium receptors induces calcitonin secretion. In animal studies, the Company has demonstrated that oral administration of calcimimetic compounds stimulates secretion of calcitonin and can lead to increased circulating calcitonin levels. Further IN VIVO studies are necessary to determine if this approach will result in a significant decrease in bone resorption. [DIAGRAM] CALCIMIMETIC DRUGS THAT ACTIVATE C-CELL CALCIUM RECEPTORS INCREASE CALCITONIN LEVELS IN THE BLOOD. CALCITONIN ACTS DIRECTLY ON OSTEOCLAST CALCITONIN RECEPTORS TO SUPPRESS BONE RESORPTION ACTIVITY. CALCIMIMETIC DRUGS ACTING ON A DISTINCT OSTEOCLAST CALCIUM RECEPTOR THAT NPS IS WORKING TO IDENTIFY WOULD MIMIC THE EFFECT OF EXTRACELLULAR CALCIUM, DIRECTLY SUPPRESSING BONE RESORPTION ACTIVITY. PRECLINICAL RESEARCH STATUS. NPS has made significant progress on both of its approaches to osteoporosis. In January 1996, the Company received the first milestone payment of $3.0 million from SmithKline Beecham for progress made in its osteoporosis program. Medicinal chemistry efforts at NPS are being applied to various lead compounds with the goal of identifying proprietary clinical development candidates. NPS has produced a human cell line that expresses the parathyroid and C-cell calcium receptors and serves as a proprietary tool for the high throughput screening of compounds to identify new drug candidates. The Company continues to screen SmithKline Beecham and NPS compound libraries to identify additional compounds with calcilytic or calcimimetic activity. There can be no assurance that lead compounds will be identified as proprietary clinical development candidates, that 30 preclinical and clinical trials will proceed as indicated or that such candidates will prove safe and effective, meet applicable regulatory standards or be successfully marketed. See "Risk Factors -- Early Stage of Product Development; Dependence on Norcalcin." NEUROPROTECTION PROGRAM -- NPS 1506 OVERVIEW. Stroke is the third leading cause of death in the United States, with over 500,000 cases reported each year. In stroke, a blood vessel becomes blocked, leading to inadequate blood supply (ischemia) to the brain. While many stroke victims survive, approximately 100,000 to 150,000 per year are left severely and permanently disabled by nerve damage resulting from stroke. Much of this damage occurs within the first 24 to 48 hours after the incident and is caused by the excessive release of glutamate and the resultant influx of calcium into nerve cells. Published research in animals has shown that much of this damage can be prevented by blocking the influx of calcium into cells, especially the influx which results from the activation of NMDA receptor-channels. Calcium influx resulting from the activation of NMDA receptor-channels also appears to cause neuronal damage associated with head trauma. Approximately two million traumatic brain injuries occur each year in the United States, with 25% of such injuries requiring hospitalization and about one percent resulting in death. Certain medical procedures are associated with an increased risk of stroke. For example, strokes occur in three to seven percent of coronary artery bypass, carotid endarterectomy and heart valve replacement surgeries. Mild to severe central nervous system dysfunction occurs in up to 80% of such procedures. This is thought to result from multiple micro-strokes caused by the release into the circulation of numerous tiny blood clots. The Company believes that it might be possible to lessen the severity of neuronal damage and cognitive dysfunction occurring as a result of such procedures by prophylactic treatment with certain of the Company's neuroprotective compounds. Because of the importance of glutamate receptor-operated calcium influx in various neurological disorders, a number of companies are attempting to develop antagonists of NMDA receptor-channels as therapeutics. Most of these compounds have been associated with significant adverse side effects such as symptoms of psychosis. There are currently no effective neuroprotective therapeutics available that act to slow or stop the progression of brain damage once a stroke or head trauma has occurred. PRECLINICAL DEVELOPMENT STATUS. Systemic administration of the Company's proprietary class of lead compounds, particularly NPS 1506, has demonstrated significant neuroprotectant activity in certain animal models of ischemic stroke and head trauma. In these animal studies, significant neuroprotectant activity was still observed when administration of the compound was delayed for two hours following the ischemic event. In addition, the Company's compounds have not exhibited PCP-like effects in a variety of IN VITRO and IN VIVO animal studies intended to identify PCP-like effects. The Company is currently conducting preclinical efficacy, pharmacology and toxicology studies and estimates that it will file an IND for NPS 1506 in the first half of 1997. There can be no assurance that the IND will be filed, or that NPS 1506 or any of the other lead compounds, will prove safe and effective, meet applicable regulatory standards or be successfully marketed. See "Risk Factors -- Early Stage of Product Development; Dependence on Norcalcin." CHRONIC PAIN PROGRAM It is estimated that up to 30% of the populations of industrialized countries experience some degree of recurring or chronic pain. Chronic pain can be defined as that pain which persists a month or longer past the normal time of healing or which recurs at intervals for months or years. Although chronic pain often results secondarily from a cause of acute pain, such as an injury, the underlying mechanisms 31 causing chronic pain are believed to be different from those causing acute pain. The majority of medications used currently to treat chronic pain are the same as those used to treat acute pain: conventional analgesics, including narcotic analgesics such as morphine. Tricyclic antidepressants and anticonvulsant drugs are also sometimes used to treat chronic pain. Many of the more effective of these drugs have been associated with undesirable side effects including drowsiness, constipation, cognitive changes and potential addiction. Glutamate receptor-operated calcium channels, particularly NMDA receptor-channels, have been shown in published studies to play a major role in transmitting neuronal activity associated with chronic pain. The Company has tested certain of its NMDA receptor-channel antagonist compounds in several widely used animal models of pain. These compounds have demonstrated palliative activity, specifically in animal models of chronic pain. In preclinical animal studies of the Company's NMDA receptor-channel antagonists, the compounds did not exhibit the PCP-like side effects which are often associated with many other NMDA receptor-channel antagonists. The Company is conducting preclinical research with its lead compounds with the goal of identifying a candidate for preclinical development. There can be no assurance that lead compounds will be identified as proprietary clinical development candidates, that preclinical and clinical trials will be conducted, or that such candidates will prove safe and effective, meet applicable regulatory standards or be successfully marketed. See "Risk Factors -- Early Stage of Product Development; Dependence on Norcalcin." EPILEPSY PROGRAM Approximately 2.5 million Americans have been diagnosed with epilepsy. It has been estimated that at least 25% of all patients with epilepsy are not controlled adequately by existing medications. In addition, severe side effects are commonly associated with currently available drugs, including drowsiness, depression, memory loss and a decrease in mental acuity. Glutamate, which is the major excitatory transmitter in the brain, has long been suspected to play a major role in seizure activity and to contribute to epilepsy. Preclinical studies conducted by the Company have demonstrated that the systemic administration of certain of its proprietary NMDA receptor-channel antagonists provides significant anticonvulsant activity in a variety of animal models of epilepsy. In addition these compounds are active following oral administration, as would be required for an anticonvulsant drug being utilized on a chronic basis. Similarly, in these preclinical animal studies, the NPS compounds did not exhibit PCP-like side effects typically associated with other NMDA receptor-channel antagonists. NPS is conducting preclinical research with its lead compounds with the goal of identifying a candidate for preclinical development. There can be no assurance that lead compounds will be identified as proprietary clinical development candidates, that preclinical and clinical trials will be conducted, or that such candidates will prove safe and effective, meet applicable regulatory standards or be successfully marketed. See "Risk Factors -- Early Stage of Product Development; Dependence on Norcalcin." DISCOVERY PROGRAMS The Company is actively engaged in several other discovery programs which seek to identify new molecular targets for the development of new drugs. These discovery programs are extensions of the Company's discoveries in calcium receptors and ion channels. METABOTROPIC GLUTAMATE RECEPTORS Metabotropic glutamate receptors ("mGluRs") are distinct from glutamate receptor-operated calcium channels and are uniquely related in structure and function to the parathyroid cell calcium 32 receptor. The Company believes that its experience in the discovery and development of drug candidates which act at calcium receptors provides the Company with certain advantages in the mGluR field. mGluRs are involved in the regulation of a number of important brain functions, and the Company believes that drugs which target specific mGluRs may be useful in treating various neurological disorders, including neurodegenerative disorders such as Alzheimer's disease, cognitive dysfunction, anxiety and certain psychiatric disorders. NPS scientists have discovered proprietary small molecules which are active at mGluRs. In addition, NPS scientists have cloned a novel mGluR and have developed proprietary assays, cell lines and chimeric receptors for use in the Company's mGluR program. The Company's compounds have substantially different structures than existing compounds active at mGluRs which the Company believes could allow them to reach the brain more efficiently. Medicinal chemistry efforts with these lead compounds are ongoing at the Company. ADDITIONAL CALCIUM RECEPTOR THERAPEUTICS The Company has established that it is possible to preferentially target calcium receptors in distinct tissues. Norcalcin, for example, has been shown in animals to be about 40 times more potent at affecting PTH secretion than at affecting calcitonin secretion. Norcalcin thus acts preferentially at the parathyroid as compared to the C-cells of the thyroid. The Company has further established that calcium receptors are not only present on parathyroid cells and on C-cells but are also present on several other cell types, including certain cells in the kidney, intestine, pituitary gland, pancreas and brain. Calcium receptors on such cells represent potential drug targets for the treatment of diseases other than HPT and osteoporosis. The Company is actively pursuing drug candidates which target calcium receptors in distinct tissues for the treatment of several disorders. In the kidney, for example, NPS and its collaborators at Brigham and Women's have shown that calcium receptors are abundantly expressed in certain cells which regulate the excretion and reabsorption of calcium, magnesium and certain electrolytes. Calcium receptors are also expressed in cells that regulate excretion and reabsorption of water in the kidney. The Company believes that these calcium receptors participate in the regulation of mineral, electrolyte and fluid balance in the body and that drugs which target calcium receptors in the kidney may provide therapies for abnormal states of ion and water retention. Such abnormal states occur in congestive heart failure, for example, and in nephrolithiasis (kidney stone formation). INORGANIC ION RECEPTORS The Company believes that calcium receptors are representative of a new and important class of cell surface receptors, receptors that are able to detect and respond to changes in the concentration of inorganic ions such as sodium, chloride, potassium and phosphate. It has been known for some time that many different tissues respond to changes in the level of such ions. For example, Vitamin D synthesis and certain critical kidney functions are regulated in part by changes in circulating phosphate ion concentrations. Similarly, certain functions of the adrenal gland are affected by changes in potassium levels, and the maintenance of fluid concentrations by the brain may depend on the activation of sodium receptors. Therapeutic agents that act directly on receptors for other ions could provide effective treatments for many disease states. As a result, inorganic ion receptors are attractive targets for the development of novel therapeutic agents. The Company's scientists and its collaborators at Brigham and Women's are actively engaged in research to clone new inorganic ion receptors, to determine their roles in human physiology, and to discover new drug candidates which act selectively on such inorganic ion receptors. 33 NEURONAL ION CHANNELS The Company has isolated, from its unique library of arthropod venoms, various peptides that target neuronal ion channels, in particular, certain calcium channels and certain potassium channels. The Company believes that its discoveries of such peptide leads provide the Company with opportunities for the discovery of drugs to treat various neurological disorders. For example, one such peptide modulates a particular neuronal potassium channel by binding at a previously unknown site on this channel. Blocking this potassium channel in nerve cells is known to enhance specific neural activities, especially the prolongation of neuronal signals that may have a potential palliative effect in disorders such as Parkinson's disease, Alzheimer's disease and multiple sclerosis. DRUG DISCOVERY TECHNOLOGIES The Company's approach to the discovery of novel drugs is to identify new drug targets and to identify small molecules which modulate the activities of these targets (or of previously identified targets) in ways that provide unique and effective therapies. NPS has pioneered the use of various whole cell and tissue functional screens in its drug discovery programs. The Company believes that its functional screens substantially enhance its abilities to discover new receptors and ion channels and new drug candidates which modulate the activities of specific receptors or ion channels through novel mechanisms. Functional screens were of critical importance, for example, in the Company's discovery of Norcalcin and related molecules that modulate calcium receptor function by an unusual mechanism. In its drug discovery programs, the Company utilizes a unique library of invertebrate venoms. These venoms are isolated from a wide variety of species of spiders, scorpions, centipedes, parasitic wasps and other invertebrates collected from around the world. Lead molecules from this library have been useful in the discovery phases of many of the Company's programs. Examples include the first-generation, small molecule Araxin-TM- ("arachnid toxin") compounds which identified a novel site on NMDA receptor-channels, peptide leads being used in the Company's ion channel discovery efforts, and early calcium receptor agonist leads. The Company believes this library represents a collection of compounds with unusual biological activities and is a significant resource to the Company. COLLABORATIVE RESEARCH AND LICENSE AGREEMENTS NPS is pursuing research and product development both on an independent basis and in collaboration with others. NPS currently has collaborative research and/or license agreements with Amgen, Kirin, SmithKline Beecham and with Brigham and Women's. See "Risk Factors -- Dependence on Collaborative Research and License Relationships." AMGEN INC. In March 1996, the Company entered into a development and license agreement with Amgen effective December 1995 (the "Amgen Agreement") which grants Amgen the exclusive right to develop and commercialize Norcalcin and certain other compounds for the treatment of HPT and indications other than osteoporosis worldwide, excluding Japan, China, Korea and Taiwan (the "Kirin Territory"). Under the terms of the Amgen Agreement, NPS may receive from Amgen up to an aggregate of $43.5 million and royalties from any future product sales in exchange for exclusive rights to develop, manufacture and sell Norcalcin and certain other compounds for the treatment of HPT worldwide, excluding the Kirin Territory. Amgen has assumed full control, authority and responsibility for conducting, funding and pursuing all aspects of the development, submissions for regulatory approvals, manufacture and commercialization of Norcalcin and certain related compounds in the Amgen Territory, including conducting clinical trials and making regulatory submissions. Amgen has paid NPS an initial non-refundable license fee of $10.0 million and purchased one million shares of Common Stock at the 34 price of the Company's Common Stock in November 1995 when the Amgen Agreement was negotiated for an aggregate purchase price of $7.5 million. The balance of the $43.5 million includes up to $26.0 million payable to NPS upon the achievement of specific development milestones. NPS has the option to participate with Amgen, under the direction of Amgen, in the development of Norcalcin for HPT, and Amgen is required to reimburse NPS for such participation which is limited to a total cost of $400,000 per year for a maximum time period of five years. Amgen may terminate the Amgen Agreement for any reason upon 90 days written notice. Termination of the Amgen Agreement will result in the reversion to NPS of its technology, patent and commercialization rights in the Amgen Territory. There can be no assurance that Amgen will not terminate the Amgen Agreement. Upon a termination of the license agreement with Kirin, Amgen would receive worldwide rights to develop and commercialize Norcalin. See "Risk Factors -- Dependence on Collaborative Research and License Relationships." KIRIN BREWERY COMPANY, LIMITED In June 1995, the Company entered into a five-year collaborative research and license agreement with Kirin (the "Kirin Agreement") to develop and commercialize Norcalcin and other compounds for the treatment of HPT in the Kirin Territory. Under the terms of the Kirin Agreement, NPS may receive from Kirin up to an aggregate of $25.0 million and royalties from any future product sales in exchange for exclusive rights to develop, manufacture and sell Norcalcin and certain other compounds for the treatment of HPT in the Kirin Territory. Kirin is responsible for conducting clinical trials and obtaining regulatory approvals of Norcalcin in the Kirin Territory. Kirin has paid NPS an initial, non-refundable license fee of $5.0 million and committed to make $7.0 million in research payments for the development of back-up compounds over the next five years. Of this $7.0 million, a total of $2.0 million is payable by the end of the first year of the Kirin Agreement. The remaining $13.0 million will be payable to NPS upon achievement of specific development milestones in the United States and the Kirin Territory. Kirin is required to pay all costs of developing and commercializing products within the Kirin Territory and will pay royalties to NPS on any product sales. Kirin may terminate the Kirin Agreement after June 1996 for any reason upon 90 days written notice. Termination of the Kirin Agreement will result in the reversion to NPS of its technology, patent and commercialization rights in the Kirin Territory. There can be no assurance that Kirin will not terminate the Kirin Agreement. See "Risk Factors -- Dependence on Collaborative Research and License Relationships." SMITHKLINE BEECHAM CORPORATION In November 1993, NPS entered into a three-year collaborative research and license agreement with SmithKline Beecham (the "SmithKline Agreement") to collaborate on the discovery, development and marketing of drugs to treat osteoporosis and other bone metabolism disorders. Under the SmithKline Agreement, SmithKline Beecham has the exclusive license to develop and market worldwide any calcium receptor-active compounds developed under the SmithKline Agreement that are useful for treating osteoporosis and other bone metabolism disorders, excluding HPT. In addition, SmithKline Beecham has a six-month right of first negotiation of a research and license agreement with NPS with respect to any compounds relating to osteoporosis not covered under the SmithKline Agreement. Once compounds have been selected for development, SmithKline Beecham has agreed to conduct and fund all development of such products, including all human clinical trials and regulatory submissions. NPS has the right to co-promote (up to 20% in the United States territory) with SmithKline Beecham any resulting products in the United States. In 1992, S.R. One, an affiliate of SmithKline Beecham, purchased $2.0 million of the Company's Preferred Stock. In 1993, at the time NPS entered into the SmithKline Agreement, S.R. One purchased an additional $7.0 million in equity of the Company, and it acquired $495,000 of Common Stock in the Company's initial public offering. All of the Preferred Stock was converted into Common Stock upon the closing of the Company's initial public offering. 35 Under the terms of the SmithKline Agreement, in addition to the $7.0 million equity purchase, SmithKline Beecham paid the Company a $6.0 million non-refundable license fee and agreed to make additional payments to the Company upon the achievement of specific milestones. A $3.0 million milestone payment was made in January 1996. In July 1995, the Company began receiving payments from SmithKline Beecham to support the Company's research efforts, and such payments are expected to be approximately $4.3 million through the scheduled expiration of the research term in October 1996. NPS is entitled to royalties on sales of products for osteoporosis and other bone metabolism disorders developed by SmithKline Beecham under the SmithKline Agreement and a share of the profits from any co-promotion of such products. The SmithKline Agreement may be terminated by SmithKline Beecham upon 30 days written notice, with NPS having the right to extend the SmithKline Agreement for an additional period of time, provided that drug marketing has commenced. Funded research under the SmithKline Agreement will terminate in October 1996. Under certain circumstances, NPS has the right to terminate the SmithKline Agreement after October 1997. Termination of the SmithKline Agreement will result in reversion to NPS of its technology, commercialization and patent rights in the licensed field of osteoporosis and other bone and mineral disorders as well as all additional technology developed in the course of the collaboration. There can be no assurance that SmithKline Beecham will not terminate the SmithKline Agreement or that funded research will be extended upon its termination in October 1996. See "Risk Factors -- Dependence on Collaborative Research and License Relationships." THE BRIGHAM AND WOMEN'S HOSPITAL, INC. In February 1993, NPS entered into two agreements with Brigham and Women's, a sponsored collaborative research agreement (the "Brigham Research Agreement") and a patent license agreement (the "Brigham License Agreement"). Brigham and Women's, an affiliate of Harvard University Medical School, is a leading research group in the area of calcium receptors. During the three-year period from February 1993 through January 1996, NPS paid license fees and made research support and milestone payments to Brigham and Women's totaling approximately $1.0 million. In February 1996, the Company reached an agreement with Brigham and Women's to extend the Brigham Research Agreement. Under the terms of the extension, NPS has agreed to continue funding research on calcium receptors and other inorganic ion receptors at Brigham and Women's for an additional two years. The extended Brigham Research Agreement calls for NPS to make research support and advance royalty payments of $810,000 to Brigham and Women's during the period from February 1996 through February 1998. Of this, a $100,000 prepaid royalty was paid in February 1996 incident to the agreed extension. The Brigham License Agreement grants NPS an exclusive license to calcium receptor and inorganic ion receptor technology arising under the Brigham Research Agreement. The Brigham Research Agreement also grants NPS a right of first negotiation for exclusive license rights to any other patentable subject matter arising out of the sponsored research. NPS also has agreed to pay Brigham and Women's a royalty on sales of any products covered by an issued patent under the Brigham License Agreement and to promote sales of any licensed products for HPT for which the Company receives regulatory approval. PATENTS AND PROPRIETARY TECHNOLOGY Periodically the Company files patent applications to protect technology, inventions and improvements which the Company believes are important to the development of its business. The Company also relies on trade secrets, know-how, continuing technological innovations and licensing opportunities to develop and maintain its competitive position. The Company files patent applications in its own name, and when appropriate, it has filed, and expects to continue to file, applications jointly with its collaborators. These patent applications cover compositions of matter, methods of treatment, methods of discovery, use of novel compounds and novel modes of action, and recombinantly expressed receptors and gene sequences which are believed by the Company to be important in its research and development activities. None of the Company's principal proprietary rights, including rights related to process, compounds, use and technique related to its 36 calcium receptor science and NMDA receptor-channel technology, are protected by issued patents in the Company's principal markets. The Company believes that its pending patent applications in the fields of calcium receptors, inorganic ion receptors, mGluRs and NMDA receptor-channels and compounds active at the same give the Company a competitive advantage. The Company intends to file additional patent applications as appropriate relating to its technology and to specific products of the Company. The patent positions of pharmaceutical and biotechnology firms, including the Company, are uncertain and involve complex legal and factual questions. In addition, the scope of the claims in a patent application can be significantly modified during prosecution before the patent is issued. Consequently, the Company does not know whether any of its applications will result in the issuance of patents or, if any patents are issued, whether they will provide significant proprietary protection or will be circumvented or invalidated. Generally, patent applications in the United States are maintained in secrecy until patents issue and publication of discoveries in the scientific or patent literature often lag behind actual discoveries. In addition, no assurance can be given that, even if published, the Company is aware of all such literature. Accordingly, the Company cannot be certain that the named inventors were the first to invent or that the Company is the first to pursue patent coverage for such inventions. Moreover, the Company may have to participate in interference proceedings declared by the United States Patent and Trademark Office to determine priority of invention, which could result in substantial cost to the Company, even if the eventual outcome is favorable to the Company. There can be no assurance that the Company's pending patent applications, if issued, would be held valid. An adverse outcome could subject the Company to significant liabilities to third parties, could require disputed rights to be licensed from third parties or require the Company to cease or modify its use of such technology. Additionally, many of the Company's foreign patent applications have been published as part of the patent prosecution process in such countries. Protection of the rights revealed in such published patent applications can be complex, costly and uncertain. See "Risk Factors -- Uncertainty of Protection of Patents and Proprietary Technology." The development of therapeutic products for applications in the Company's product fields is intensely competitive. A number of pharmaceutical companies, biotechnology companies, universities and research institutions have filed patent applications or received patents in these and related fields. Some of these applications or patents may limit or preclude the Company's applications and could result in a significant reduction of the coverage of the Company's patents, if issued. NPS also relies on trade secrets and contractual arrangements to protect its trade secrets. There can be no assurance that these agreements will be adequate, that they 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 or be independently discovered by competitors. Much of the know-how important to the Company's technology and many of its processes are dependent upon the knowledge, experience and skills of key scientific and technical personnel and are not the subject of pending patent applications or issued patents. To protect its rights to its know-how and technology, the Company requires all employees, consultants, advisors and collaborators to enter into confidentiality agreements that prohibit the unauthorized use and restrict the disclosure of confidential information, and require disclosure and assignment to the Company of ideas, developments, discoveries and inventions made by them. There can be no assurance that these agreements will effectively prevent disclosure of the Company's confidential information or will provide meaningful protection for the Company's confidential information if there is unauthorized use or disclosure. It must also be recognized that competitors may develop substantially equivalent know-how and technology. In connection with certain research in the field of calcium and other ion receptors, NPS has sponsored research by various university and government laboratories. For example, the Company has executed a license agreement and a research agreement regarding research in the area of calcium and other ion receptors with Brigham and Women's. See "Collaborative Research and Licensing Agreements -- The Brigham and Women's Hospital, Inc." 37 The Company has also sponsored work at other government and academic laboratories for various evaluations, assays, screenings and tests of its natural products library and lead compounds in the central nervous system field. Generally, under these agreements the Company funds the work of investigators in exchange for the results of the specified works and the right or option to a license to any patentable inventions that may result in designated areas. Generally, if the sponsored work produces patentable subject matter, the Company has the first right to negotiate for license rights therein. Any resulting license would be expected to require the Company to pay royalties on net sales of licensed products. There can be no assurance that any such inventions will arise, that any patent applications thereon will be filed or, if filed, that any patents will issue, that any license thereon can be negotiated, or that any license agreement would give the Company valuable rights. MANUFACTURING NPS anticipates that all of its products will be made by synthetic chemical manufacturing techniques. As such, the Company believes the compounds can be precisely defined and characterized and should generally have relatively low manufacturing costs compared to recombinant proteins produced by the fermentation methods common to currently available biotechnology products. NPS has no manufacturing facilities. Under the Amgen, Kirin and SmithKline Agreements, each of such Licensee is responsible for the manufacture of the applicable product. The Company relies on other manufacturers to produce its proprietary compounds for research and development activities and in sufficient quantities for preclinical and clinical purposes. The proposed pharmaceutical products under development by the Company have never been manufactured on a commercial scale, and there can be no assurance that such products can be manufactured at a cost or in quantities to make them commercially viable. If the Company were unable to contract for sufficient supply of its compounds on acceptable terms, or if it should encounter delays or difficulties in its relationships with manufacturers, the Company's preclinical and human clinical testing schedule would be delayed. Such delay might postpone the submission of products for regulatory approval or the market introduction and subsequent sales of such products, which would have a materially adverse effect on the Company. Moreover, contract manufacturers that the Company may use must adhere to cGMP regulations enforced by the FDA through its facilities inspection program. GOVERNMENT REGULATION The production and marketing of the Company's product candidates and its research and development activities are subject to regulation for safety, efficacy and quality by numerous governmental authorities in the United States and other countries. In the United States, drugs are subject to rigorous FDA regulation. The Federal Food, Drug and Cosmetic Act, as amended, and the regulations promulgated thereunder, and other federal and state statutes and regulations govern, among other things, the testing, manufacture, safety, efficacy, labeling, storage, record keeping, approval, advertising and promotion of the Company's products. Product development and approval within this regulatory framework take a number of years and involve the expenditure of substantial resources. The steps required before a pharmaceutical agent may be marketed in the United States include: (i) preclinical laboratory tests, animal pharmacology and toxicology studies and formulation studies; (ii) the submission to the FDA of an IND for human clinical testing, which must become effective before human clinical trials commence; (iii) adequate and well-controlled human clinical trials to establish the safety and efficacy of the drug; (iv) the submission of a New Drug Application ("NDA") to the FDA; and (v) FDA approval of the NDA prior to any commercial sale or shipment of the drug. In addition to obtaining FDA approval for each product, each domestic drug manufacturing establishment must be registered with, and approved by, the FDA under cGMP regulations. Domestic drug manufacturing establishments are subject to regular inspections by the FDA and must comply with cGMP regulations. 38 To supply products for use in the United States, foreign manufacturing establishments must comply with cGMP regulations and are subject to periodic inspection by the FDA or by corresponding regulatory agencies in their home countries under reciprocal agreements with the FDA. Preclinical studies include the laboratory evaluation of IN VITRO pharmacology product chemistry and formulation, as well as animal studies to assess the potential safety and efficacy of the product. Compounds must be formulated according to cGMP, and preclinical safety tests must be conducted by laboratories that comply with FDA regulations regarding Good Laboratory Practices. The results of the preclinical tests are submitted to the FDA as part of an IND and are reviewed by the FDA prior to the commencement of human clinical trials. Unless the FDA objects to an IND, the IND will usually become effective 30 days following its receipt by the FDA. There can be no assurance that submission of an IND will result in FDA authorization to commence clinical trials. Clinical trials involve the administration of the investigational new drug to healthy volunteers and to patients under the supervision of a qualified principal investigator. Clinical trials are conducted in accordance with Good Clinical Practices under protocols that detail the objectives of the study, the parameters to be used to monitor safety and the efficacy criteria to be evaluated. Each protocol must be submitted to the FDA as part of the IND. Further, each clinical study must be conducted under the auspices of an Internal Review Board ("IRB") at the institution at which the study will be conducted. The IRB will consider, among other things, ethical factors, the safety of human subjects and the possible liability of the institution. Clinical trials typically are conducted in three sequential phases, which phases may overlap. In Phase I, the initial introduction of the drug into healthy subjects, the drug is tested for safety (adverse effects), dosage tolerance, metabolism, distribution, excretion and pharmacodynamics (clinical pharmacology). Phase II involves studies in a limited patient population to: (i) determine the efficacy of the drug for specific, targeted indications; (ii) determine dosage tolerance and optimal dosage; and (iii) identify possible adverse effects and safety risks. When a compound is found to be effective and to have an acceptable safety profile in Phase II evaluations, Phase III trials are undertaken to evaluate further clinical efficacy and to test further for safety within an expanded patient population at geographically dispersed clinical study sites. There can be no assurance that Phase I, Phase II or Phase III testing will be completed successfully within any specific time period, if at all, with respect to any of the Company's products subject to such testing, including Norcalcin. Furthermore, the Company, its collaborators, Licensees or the FDA may suspend clinical trials at any time if they feel that the subjects or patients are being exposed to an unacceptable health risk. See "Risk Factors - - -- Government Regulation; No Assurance of Regulatory Approval." The results of the pharmaceutical development, preclinical studies and clinical studies are submitted to the FDA in the form of an NDA for approval of the marketing and commercial shipment of the drug. The testing and approval process is likely to require substantial time and effort, and there can be no assurance that any approval will be granted on a timely basis, if at all. The FDA may deny an NDA if applicable regulatory criteria are not satisfied, require additional testing or information, or require post-marketing testing and surveillance to monitor the safety of the Company's products if the FDA does not view the NDA as containing adequate evidence of the safety and efficacy of the drug. Notwithstanding the submission of such data, the FDA may ultimately decide that the application does not satisfy its regulatory criteria for approval. Moreover, if regulatory approval of a drug is granted, such approval may entail limitations on the indicated uses for which it may be marketed. Finally, product approvals may be withdrawn if compliance with regulatory standards is not maintained or if problems occur following initial marketing. Among the conditions for NDA approval is the requirement that the prospective manufacturer's quality control and manufacturing procedures conform to cGMP, which must be followed at all times. In complying with standards set forth in these regulations, manufacturers must continue to expend time, money and effort in the area of production and quality control to ensure full technical compliance. See "Risk Factors -- Government Regulation; No Assurance of Regulatory Approval." 39 In addition to regulations enforced by the FDA, the Company is also subject to regulation under the Occupational Safety and Health Act, the Environmental Protection Act, the Toxic Substances Control Act, the Resource Conservation and Recovery Act and other present and future federal, state or local regulations. The Company's research and development activities involve the controlled use of hazardous materials, chemicals and various radioactive compounds. Although the Company believes that its safety procedures for handling and disposing of such materials comply with the standards prescribed by state and federal regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of such an accident, the Company could be held liable for any damages that result, and any such liability could exceed the resources of the Company. See "Risk Factors -- Risk of Product Liability; Use of Hazardous Materials." Outside the United States, the Company's ability to market a product is contingent upon receiving a marketing authorization from the appropriate regulatory authority. This foreign regulatory approval process includes all of the risks associated with FDA approval set forth above. COMPETITION NPS is pursuing areas of product development in which the Company believes there is a potential for extensive technological innovation in relatively short periods of time. The Company operates in a field in which new discoveries occur and are expected to occur at a rapid pace. The Company's competitors may succeed in developing technologies or products that are more effective than those of the Company or in obtaining regulatory approvals of their drugs more rapidly than the Company and its collaborative partners, and could render the Company's products obsolete or noncompetitive. Competition in the pharmaceutical industry is intense and is expected to continue to increase. Many of the Company's competitors, including biotechnology and pharmaceutical companies, are actively engaged in the research and development of products in the Company's targeted areas, including the fields of HPT, osteoporosis, neuroprotection, chronic pain and epilepsy. Many of the Company's competitors have substantially greater financial, technical, marketing and personnel resources than the Company. In addition, some of them have considerable experience in preclinical testing, human clinical trials and other regulatory approval procedures. Moreover, certain academic institutions, governmental agencies and other research organizations are conducting research in areas in which the Company is working. These institutions are becoming increasingly aware of the commercial value of their findings and are becoming more active in seeking patent protection and licensing arrangements to collect royalties for use of technology that they have developed. These institutions may also market competitive commercial products on their own or through joint ventures and will compete with the Company in recruiting highly qualified scientific personnel. There can be no assurance that a pharmacological method of treatment for certain diseases, such as HPT, will prove to be superior to existing or newly discovered approaches to the treatment of those diseases. See "Risk Factors -- Rapid Technological Change; Intense Competition." ENVIRONMENTAL LIABILITY On November 29, 1995, the Company received a letter from the EPA notifying the Company that it may have incurred liability under section 107(a) of the Comprehensive Environmental Response, Compensation and Liability Act, as amended, for two barrels of radioactive waste taken by a third party contractor to a hazardous and radioactive waste storage, treatment and disposal facility in Denver, Colorado. Upon the EPA's request, the Company has identified the waste and has verified that the barrels containing the waste have been removed from the Denver, Colorado facility. Removal of wastes from the facility and remediation of soil and groundwater at this site is currently underway. To date, the EPA has spent $2.1 million to clean up this facility. However, the ultimate cost of removal and remediation actions and the length of time for such actions are difficult to estimate. Based upon its inspection of the site, the Company is of the belief that the barrels containing the waste disposed of by the Company were neither leaking nor damaged. Although the Company was a small contributor to the site and the 40 Company believes that there are a number of other financially responsible contributors, there can be no assurance that the Company will not be held liable for all or a portion of the cleanup cost or any other costs or damages associated with this disposal site. See "Risk Factors -- Risk of Product Liability; Use of Hazardous Materials." EMPLOYEES As of March 31, 1996, NPS employed 79 individuals full-time, 21 of whom hold Ph.D. or M.D. degrees and 16 of whom hold other advanced degrees. Approximately 60 full-time employees are engaged in research and development activities, including a variety of disciplines within the areas of molecular biology, pharmacology, medicinal chemistry, computer sciences and clinical development. Approximately 19 full-time employees are employed in finance, legal and regulatory affairs, market research, corporate development and general administrative activities. None of the Company's employees is covered by collective bargaining agreements, and management considers relations with its employees to be good. Additionally, NPS augments its full-time staff through consulting arrangements with experienced scientists and managers. The Company's anticipated growth and expansion will require the hiring of additional management, research and development, and administrative personnel. FACILITIES NPS currently occupies approximately 34,000 square feet of leased laboratory, support and administrative space in the University of Utah Research Park and has an option for an additional 10,000 square feet. The Company pays approximately $525,000 annually under its facilities lease. The lease on these facilities expires in September 1999. The Company believes that these facilities should be sufficient to meet the Company's needs through September 1999. 41 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth certain information concerning directors and executive officers of the Company:
NAME AGE POSITION - - --------------------------------------------- --- ------------------------------------------------------------ Hunter Jackson, Ph.D......................... 45 Chief Executive Officer, President and Chairman of the Board James U. Jensen, J.D......................... 51 Vice President, Corporate Development and Legal Affairs, Secretary and Director Thomas B. Marriott, Ph.D..................... 47 Vice President, Development Research Robert K. Merrell............................ 40 Vice President, Finance, Chief Financial Officer and Treasurer Edward F. Nemeth, Ph.D....................... 43 Vice President, Research Doug Reed, M.D............................... 41 Vice President, Business Development and Director Santo J. Costa, J.D.......................... 49 Director James G. Groninger (1)(2).................... 51 Director Donald E. Kuhla, Ph.D........................ 52 Director Thomas N. Parks, Ph.D........................ 45 Director Timothy J. Rink, M.D., Sc.D. (1)............. 50 Director Jesse I. Treu, Ph.D. (1)(2).................. 48 Director
- - -------------- (1) Member of the Compensation Committee (2) Member of the Audit Committee HUNTER JACKSON, PH.D., has been Chief Executive Officer and Chairman of the Board since founding the Company in 1986. He was appointed to the additional position of President in January 1994. Prior to founding the Company, he was an Associate Professor in the Department of Anatomy at the University of Utah School of Medicine. Dr. Jackson received a B.A. in English from the University of Illinois and a Ph.D. in Psychobiology from Yale University. He received postdoctoral training in the Department of Neurosurgery, University of Virginia Medical School. JAMES U. JENSEN, J.D., has been Vice President, Corporate Development and Legal Affairs since August 1991. He has been Secretary and a director of the Company since 1987. From 1986 to July 1991, he was a partner in the law firm of Woodbury, Jensen, Kesler & Swinton, P.C. (or its predecessor firm) concentrating on technology transfer and licensing and corporate finance. Currently, he also serves as counsel to Woodbury & Kesler, P.C. From July 1985 until October 1986, he served as chief financial officer of Cericor, a software company, and from 1983 to July 1985, as outside general counsel. From 1980 to 1983, he served as General Counsel and Secretary of Dictaphone Corporation, a subsidiary of Pitney Bowes Inc. He serves as a director of Wasatch Funds, Inc., a registered investment company, and of Interwest Home Medical, Inc., a public home use medical equipment distributor. Mr. Jensen received a B.A. in English/Linguistics from the University of Utah and a J.D. and an M.B.A. from Columbia University. THOMAS B. MARRIOTT, PH.D., has been Vice President, Development Research since August 1993. From February 1990 to July 1993, he served as Director, Clinical Investigations for McNeil Pharmaceutical, a subsidiary of Johnson & Johnson, with responsibility for developing and implementing clinical trial strategies for a number of products. From 1986 until 1990, Dr. Marriott was Director, Drug Metabolism for McNeil Pharmaceutical with responsibility for planning, initiating and completing bioanalytical drug disposition and clinical biopharmaceutics and pharmacokinetics research required for INDs and NDAs. 42 In this position, he participated in the preparation of several INDs and NDAs with responsibility for preparing or supervising the preparation of the IND preclinical drug metabolism section and the NDA preclinical and clinical metabolism and biopharmaceutics sections, and was responsible for integrating the pharmacology, toxicology and clinical sections of INDs and NDAs. He received a B.S. in Chemistry from Carleton College and a Ph.D. in Chemistry from the Institute of Molecular Biology at the University of Oregon. ROBERT K. MERRELL has been Vice President, Finance, Chief Financial Officer and Treasurer since January 1995 and previously was Director of Finance and Administration and Treasurer from December 1993 to December 1994. He joined the Company as Controller/Treasurer in September 1988. Prior to that time, he was a Senior Manager at KPMG Peat Marwick LLP. Mr. Merrell has been a licensed C.P.A. since 1980. He received a B.A. in Accounting from the University of Utah and an M.M. from Northwestern University. EDWARD F. NEMETH, PH.D., has been Vice President, Research since January 1994. He joined the Company as Director of Pharmacology in March 1990. From 1986 until joining the Company, Dr. Nemeth was an Assistant Professor in the Department of Physiology and Biophysics at Case Western Reserve University School of Medicine. He holds a B.A. in Chemistry and Psychology from Lawrence University and a Ph.D. in Pharmacology from Yale University. Dr. Nemeth was a postdoctoral fellow in Neurobiology at the National Institutes of Health. DOUG REED, M.D., has been Vice President, Business Development since April 1996 and has been a director of the Company since 1992. Prior to becoming an officer of the Company, Dr. Reed was a member of the Audit and Compensation Committees from 1994 to 1996. From May 1989 until joining the Company, Dr. Reed was a Vice President of S.R. One, a venture capital firm. From 1985 to 1987, he was Assistant Professor at Yale University School of Medicine. He is a director of IBAH, Inc., a clinical research and pharmaceutical formulation development company as well as several private companies. Dr. Reed received an M.D. from the University of Missouri and an M.B.A. from the Wharton School at the University of Pennsylvania. SANTO J. COSTA, J.D., has served as a director since January 1995. Mr. Costa has served as President, Chief Operating Officer and a director of Quintiles Transnational Corporation, a publicly held global contract research organization, since April 1994. From 1986 to 1993, he was employed by Glaxo, Inc. where he served as Senior Vice President, Administration and General Counsel and was a member of that company's Board of Directors. From 1977 to 1986 he was employed by Merrell Dow Pharmaceuticals (now Hoechst Marion Roussel) where he served as U.S. Area Counsel and from 1971 to 1977 as Food & Drug Counsel for Norwich/Eaton Pharmaceuticals. Mr. Costa received his B.S. in Pharmacy and his J.D. from St. John's University. JAMES G. GRONINGER has served as a director since 1988 and as a member of the Audit and Compensation Committees since 1994. Mr. Groninger founded in January 1995 and is President of The Bay South Company, a Richmond, Virginia-based provider of financial advisory and investment banking services. From 1988 through 1994, he served as a Managing Director, Investment Banking Division, of PaineWebber Incorporated. Currently he serves on the Board of Directors of Designs, Inc., a specialty retailer, and Cygne Designs, Inc., a manufacturer of apparel. Mr. Groninger received a B.S. in Industrial Administration from Yale University and an M.B.A. from Harvard Business School. DONALD E. KUHLA, PH.D., has been a director of the Company since 1991. Since 1994, he has been Vice President of Plexus Ventures, Inc. ("Plexus"), a biotechnology investment and consulting firm. From 1990 to 1994, Dr. Kuhla held senior management positions with two venture capital backed, biotechnology start-up companies. His early career was spent in research and development and operations management positions with Pfizer Inc. and Rorer Group, Inc., his last position at Rorer being Senior Vice President of Operations. Dr. Kuhla received a B.A. in Chemistry from New York University and a Ph.D. in Organic Chemistry from Ohio State University. 43 THOMAS N. PARKS, PH.D., has been a director of the Company since its founding in 1986. Dr. Parks also serves as a scientific consultant to NPS. He is currently the George and Lorna Winder Professor of Neuroscience and Chairman of the Department of Neurobiology and Anatomy at the University of Utah Medical School. In 1978, Dr. Parks joined the faculty at the University of Utah Medical School as an assistant professor. Dr. Parks received a B.S. in Biology from the University of California at Irvine and a Ph.D. in Psychobiology from Yale University. He was a postdoctoral fellow in Development Neurology at the University of Virginia Medical School. TIMOTHY J. RINK, M.D., SC.D., has been a director of the Company since 1991 and a member of the Compensation Committee since 1994. Dr. Rink also serves as a scientific consultant to the Company. Since February 1996, Dr. Rink has been Chairman, Chief Executive Officer and President of Aurora Biosciences Corporation, a biotechnology company focused on ultra high throughput drug screening. From 1990 through 1995 he was President, Chief Technical Officer and director of Amylin Pharmaceuticals, Inc., a biotechnology company. He is also a director of CoCensys, Inc., a publicly held biotechnology company. Dr. Rink is an adjunct Professor of Pharmacology at the University of California at San Diego and was a lecturer in physiology at the University of Cambridge, United Kingdom, from 1978 to 1984. From 1984 to 1990, he was Vice President of Research at SmithKline Beecham, plc. Dr. Rink received an M.D. and an Sc.D. from the University of Cambridge. JESSE I. TREU, PH.D., has been a director of the Company since 1992 and a member of the Audit and Compensation Committees since 1994. He is a general partner of Domain Associates, a venture capital firm specializing in life sciences. Dr. Treu is a director of DNX Corporation, a pharmaceutical testing company, Geltex Pharmaceuticals, Inc., a developer of polymer based pharmaceuticals, and Lumisys, Inc., an electro-optical systems company. Before joining Domain Associates in 1986, he was a principal of Channing, Weinberg and Company, Inc. and its venture capital spin-off CW Ventures, and was a director of several development-stage companies. From 1977 to 1982, Dr. Treu was a technical director of Technicon Corporation responsible for marketing strategy and new product development in immunology and histopathology and previously held research and development management and corporate staff positions at General Electric Company. Dr. Treu received a Ph.D. in Physics from Princeton University. Several of the Company's directors also serve as officers or directors of other biotechnology companies, and areas of interest to the Company may from time to time overlap with the interest of other companies for which the Company's directors also serve as directors. Notwithstanding provisions of the Company's Certificate of Incorporation and Bylaws eliminating monetary liability and providing for indemnification of directors generally, the Company's directors have a duty of loyalty to the Company under Delaware law. See "-- Limitation of Liability and Indemnification Matters." The Company believes that its directors are sophisticated in their understanding of fiduciary duties. Such directors typically have their own counsel to provide guidance with respect to any issues that may arise with respect to such duties. It is the Company's belief that, in most cases, there is no actual or potential conflict of interest because other companies for which the Company's directors serve as directors are engaged in unrelated or otherwise distinct areas of research and development. To date, service by its directors on the boards of directors or as officers of other biotechnology companies has not presented any significant issues for the Company. Should any such issues arise, the Company will institute appropriate procedures, which may include having a particular director recuse himself, or otherwise limiting dissemination of information regarding particular product programs that overlap with areas of interest of another company for which such director also serves as a director. COMMITTEES The Audit Committee consists of Mr. Groninger and Dr. Treu. The Audit Committee makes recommendations to the Board regarding the selection of independent auditors, reviews the results and scope of audits and other services provided by the Company's independent auditors and reviews and evaluates the Company's internal audit controls. 44 The Compensation Committee consists of Mr. Groninger, Dr. Rink and Dr. Treu. The Compensation Committee makes recommendations to the Board concerning cash and long-term incentive compensation for employees of the Company. The Compensation Committee also makes recommendations to the Board regarding the number of shares that should be subject to options, the timing of grants of options under the Company's 1987 Stock Option Plan and 1994 Equity Incentive Plan and the number of shares and the timing of offerings of such shares to employees under the Employee Stock Purchase Plan. DIRECTORS' COMPENSATION The Company's directors do not currently receive any cash compensation for service on the Board or any Committee thereof. Directors may be reimbursed for certain expenses in connection with attendance at Board and Committee meetings. Directors are eligible to receive stock options and stock bonuses under the stock plans described below. In January 1994, the Board adopted, and the stockholders subsequently approved, the 1994 Non-Employee Directors' Stock Option Plan (the "Directors' Plan"). Under the Directors' Plan, non-employee directors of the Company are eligible to receive options. Options granted under the Directors' Plan are non-discretionary and do not qualify as Incentive Stock Options ("ISOs") under the Internal Revenue Code of 1986, as amended (the "Code"). Pursuant to the terms of the Directors' Plan, each person who is elected for the first time to be a director of the Company and who is not otherwise employed by the Company or an affiliate of the Company (a "Non-Employee Director") will automatically be granted an option to purchase 15,000 shares of Common Stock (subject to adjustment as provided in the Directors' Plan) upon the date of his or her election to the Board. On December 1 of each year, beginning in 1994, each person who is then a Non-Employee Director and has been a Non-Employee Director for at least three months will automatically be granted an option to purchase 3,000 shares of Common Stock (subject to adjustment as provided in the Directors' Plan) pursuant to the Directors' Plan. A total of 90,000 shares of Common Stock has been reserved for issuance under the Directors' Plan. No option granted under the Directors' Plan may be exercised after the expiration of ten years from the date such option was granted. Options granted under the Directors' Plan vest at a rate of 28% of the shares subject to the option one year after date of grant and 3% of the shares become exercisable each month thereafter, provided that the optionee has, during the entire period prior to such vesting date, continuously served as a Non-Employee Director. If the optionee's service as a Non-Employee Director terminates for any reason other than death, the option will remain exercisable for 12 months after the date of termination, or until the option's expiration date, if earlier. If the optionee dies, the option will remain exercisable for 18 months following the date of death or until the expiration date of the option, whichever is earlier. The exercise price of options granted under the Directors' Plan is 100% of the fair market value of the Common Stock on the date of grant. Options granted under the Directors' Plan are generally non-transferable. Unless otherwise terminated by the Board, the Directors' Plan automatically terminates in January 2004. As of December 31, 1995, options to purchase a total of 54,000 shares of Common Stock had been granted under the Directors' Plan at exercise prices from $3.00 to $8.25 per share, and a weighted average exercise price of $5.04 per share. As of that date, no options had been exercised under the Directors' Plan. Prior to the adoption of the Directors' Plan, the Company granted options to directors under the 1987 Stock Option Plan. In December 1994, the Board adopted the Non-Employee Directors' Stock Bonus Program under the 1994 Equity Incentive Plan (the "Stock Bonus Program"). Under the Stock Bonus Program, Non-Employee Directors are eligible to receive grants of shares of Common Stock for attendance at Board and Committee meetings. The Stock Bonus Program provides each Non-Employee Director of the Company with a non-discretionary award of 200 shares of Common Stock for each Board and/or Committee meeting attended by such Non-Employee Director. A total of 12,400 shares was granted under the Stock Bonus Program for meetings attended in 1995. 45 The right to receive awards under the Stock Bonus Program is generally non-transferable. The stock awards are made at the end of each calendar year. Non-Employee Directors entitled to stock bonus awards shall not possess any rights of a stockholder of the Company until such shares are delivered to the Non-Employee Director. Unless otherwise terminated by the Board, the Stock Bonus Program terminates in January 2004. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Mr. Groninger and Drs. Reed, Rink and Treu served on the Compensation Committee in fiscal 1995. Upon becoming an officer of the Company in April 1996, Dr. Reed resigned as a member of the Compensation and Audit Committees. No officer or employee of the Company sits on the Compensation Committee. No member of the Compensation Committee has at any time been an officer or employee of the Company. Dr. Treu, a director of the Company since 1992, is a general partner of Domain Associates, which is the United States venture capital advisor to Biotechnology Investments Limited ("BIL") pursuant to a contractual arrangement, and a general partner of One Palmer Square Associates II, L.P., which is the general partner of Domain Partners II, L.P. In the Company's initial public offering in May 1994, Domain Partners II, L.P. and BIL purchased 180,000 and 50,000 shares of Common Stock, respectively. Dr. Reed, a director of the Company since 1992, is a Vice President of S.R. One. In November 1993, the Company entered into a three-year collaborative research and license agreement with SmithKline Beecham to collaborate on the discovery, development and marketing of drugs to treat osteoporosis and other bone metabolism disorders. In 1992, S.R. One, an affiliate of SmithKline Beecham, purchased $2.0 million of the Company's Preferred Stock. In November 1993, at the time NPS entered into the SmithKline Agreement, S.R. One purchased an additional $7.0 million of Preferred Stock, and it acquired $495,000 of Common Stock (90,000 shares) in the Company's initial public offering. The 869,049 shares of Preferred Stock purchased by S.R. One converted into 1,701,301 shares of Common Stock upon the closing of the Company's initial public offering in May 1994. SmithKline Beecham has paid license fees of $6.0 million to the Company under the SmithKline Agreement and may be required to make additional payments upon the occurrence of certain milestones (of which $3.0 million was paid to NPS in January 1996). In addition, SmithKline Beecham is scheduled to fund all clinical development under the SmithKline Agreement, has dedicated a scientific team to the program, and since July 1, 1995 has supported the Company's research efforts in osteoporosis and will continue to do so through the scheduled expiration of the research term in October 1996, if not previously terminated. SmithKline Beecham is required to pay NPS royalties on sales of any products for treating osteoporosis and other bone metabolism disorders developed under the SmithKline Agreement. See "Business -- Collaborative Research and License Agreements." Dr. Kuhla, a director of the Company since 1991, is Vice President of Plexus. The Company had a consulting agreement with Plexus through December 31, 1995, whereunder Plexus assisted the Company with its effort to establish a collaboration for Norcalcin in Europe. During the years ended December 31, 1994 and 1995, the Company paid fees to Plexus totaling $34,000 and $84,500, respectively. Plexus will earn an additional fee as payments are received from Amgen. Under the agreement the maximum additional fee is $500,000, but the Company and Plexus have agreed to negotiate in good faith for an increase in the maximum because of the non-European territory licensed to Amgen. Mr. Groninger is a brother-in-law of Dr. Jackson, the Company's Chief Executive Officer, President and Chairman of the Board. 46 EXECUTIVE COMPENSATION The following table shows for the fiscal years ended December 31, 1995, December 31, 1994 and December 31, 1993, certain compensation awarded or paid to, or earned by, the Company's Chief Executive Officer and its other four most highly compensated executive officers (the "Named Executive Officers"): SUMMARY COMPENSATION TABLE
CASH COMPENSATION LONG-TERM COMPENSATION AWARDS --------------------- ------------------------- NAME AND PRINCIPAL POSITION YEAR SALARY($) STOCK OPTIONS GRANTED(#) - - -------------------------------------------------------------------- --------- ---------- ------------------------- Hunter Jackson, Ph.D................................................ 1995 189,033 45,000 Chief Executive Officer, President and 1994 180,000 45,000 Chairman of the Board 1993 145,511 75,000 James U. Jensen, J.D................................................ 1995 147,072 25,000 Vice President, Corporate Development and 1994 140,000 15,000 Legal Affairs and Secretary 1993 125,000 18,000 Thomas B. Marriott, Ph.D............................................ 1995 157,629 25,000 Vice President, Development Research 1994 150,000 30,000 1993 86,923 63,000 Robert K. Merrell................................................... 1995 110,422 20,000 Vice President, Finance, Chief Financial 1994 105,000 15,000 Officer and Treasurer 1993 93,000 15,000 Edward F. Nemeth, Ph.D.............................................. 1995 136,603 30,000 Vice President, Research 1994 130,000 30,000 1993 98,000 45,000
1987 STOCK OPTION PLAN The 1987 Stock Option Plan (the "1987 Plan") was adopted in June 1987. The purposes of the 1987 Plan were to attract and retain qualified personnel, to provide additional incentives to employees, officers, advisors, directors and consultants of the Company and to promote the success of the Company's business. No options have been granted under the 1987 Plan since December 1993, and the Company will not make any future grants under the 1987 Plan. As of March 31, 1996, options to purchase a total of 535,493 shares of Common Stock had been exercised for cash and services under the 1987 Plan at a weighted average exercise price of $0.64 per share. As of March 31, 1996, options to purchase a total of 782,604 shares of Common Stock were outstanding, with exercise prices ranging from $0.34 to $4.00 per share and a weighted average exercise price per share of $1.30. Options granted under the 1987 Plan generally became exercisable at a rate of one-third of the shares subject to the option on the first anniversary of the option grant and one-third of the remaining shares subject to the option on each of the second and third anniversary of the option grant. The maximum term of a stock option under the 1987 Plan was 10 years; however, if the optionee at the time of grant had voting power over more than 10% of the Company's outstanding capital stock (a "10% Holder"), the maximum term of any incentive stock option granted under the 1987 Plan was five years. The aggregate fair market value of the stock with respect to which incentive stock options are exercisable for the first time by an optionee in any calendar year may not exceed $100,000. The exercise prices of incentive stock options granted under the 1987 Plan were at least equal to 100%, 110% with respect to 10% Holders, of the fair market value of the stock subject to the option on the date of grant. Although no minimum exercise price of non-qualified stock options was required under the 1987 Plan, the exercise price of non-qualified stock options previously granted under the 1987 Plan generally has been at least 47 equal to the fair market value of the stock subject to the option on the date of the grant. Any option that is exercisable at the time of grant and which expires no sooner than three years from the grant date is subject to an option exercise price equal to the fair market value of the option on the grant date. 1994 EQUITY INCENTIVE PLAN In January 1994, the Board adopted the 1994 Equity Incentive Plan (the "1994 Plan"), which was subsequently approved by the stockholders in February 1994, and an amendment to increase the number of shares available for grant under the 1994 Plan from 442,503 shares to 942,503 shares was approved by the stockholders in May 1995. A total of 942,503 shares of Common Stock has been reserved for issuance under the 1994 Plan. The purposes of the 1994 Plan are to attract and retain qualified personnel, to provide additional incentives to employees, officers, directors and consultants of the Company and its affiliates and to promote the success of the Company's business. Under the 1994 Plan, the Company may grant non-qualified stock options to employees, officers, directors and consultants to the Company and its affiliates and may grant incentive stock options to employees of the Company and its affiliates. As of March 31, 1996, options to purchase a total of 19,873 shares of Common Stock had been exercised for cash and services under the 1994 Plan at a weighted average exercise price of $13.85 per share. As of March 31, 1996, options to purchase 622,727 shares of Common Stock with exercise prices ranging from $3.00 to $14.50 per share, and a weighted average exercise price per share of $5.61, were outstanding. Options granted under the 1994 Plan generally become exercisable at a rate of 28% of the shares subject to the option at the end of the first year and 3% of the shares subject to the option at the end of each calendar month thereafter. The maximum term of a stock option under the 1994 Plan is 10 years; however, if the optionee who is granted an incentive stock option at the time of grant is a 10% Holder, the maximum term of any incentive stock option granted under the 1994 Plan is five years. If an optionee terminates his or her service to the Company, the optionee may exercise only those option shares vested as of the date of termination and must effect such exercise within three months of termination of service for any reason other than death or disability, one year after termination due to disability, and 18 months after termination due to death. The aggregate fair market value with respect to which incentive stock options are exercisable for the first time by an optionee in any calendar year may not exceed $100,000. The exercise price of incentive stock options granted under the 1994 Plan must be at least 100%, 110% with respect to 10% Holders, of the fair market value of the Common Stock of the Company on the date of grant. Upon completion of this Offering, no employee will be a 10% Holder. The exercise price of non-qualified stock options granted under the 1994 Plan is the fair market value of the Company's Common Stock on the date of grant or such other exercise price as is set by the Board at the date of grant. Payment of the exercise price may be made in cash or by shares of the Company's Common Stock valued at the fair market value of such shares on the date of exercise or in any other form acceptable to the Board. The 1994 Plan also allows the Company to grant stock bonuses, reload options, rights to purchase restricted stock and stock appreciation rights. The 1994 Plan may be amended at any time by the Board, although certain amendments require stockholder approval. The 1994 Plan will terminate in January 2004, unless earlier terminated by the Board. 48 The following table sets forth each grant of options to purchase Common Stock made during the year ended December 31, 1995 to each of the Named Executive Officers. Grants of options to each of the Named Executive Officers were made under the 1994 Plan: OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE % OF TOTAL VALUE AT ASSUMED NUMBER OF OPTIONS ANNUAL RATES OF STOCK SECURITIES GRANTED TO EXERCISE OR PRICE APPRECIATION FOR UNDERLYING EMPLOYEES BASE PRICE OPTION TERM($)(4) OPTIONS IN FISCAL PER SHARE EXPIRATION ---------------------- NAME GRANTED(#)(1) YEAR(2) ($/SH) DATE(3) 5% 10% - - ------------------------------------ ------------- ----------- ------------- ----------- ---------- ---------- Hunter Jackson...................... 45,000 12.03% $ 8.25 12/14/05 $ 233,477 $ 591,677 James U. Jensen..................... 25,000 6.68 8.25 12/14/05 129,710 328,709 Thomas B. Marriott.................. 25,000 6.68 8.25 12/14/05 129,710 328,709 Robert K. Merrell................... 20,000 5.35 8.25 12/14/05 103,768 262,968 Edward F. Nemeth.................... 30,000 8.02 8.25 12/14/05 155,651 394,451
- - -------------- (1) Options granted under the 1994 Plan become exercisable at the rate of 28% of the shares subject to the option one year after the date of grant and 3% of the shares subject to the option each month thereafter. (2) Based on an aggregate of 374,000 options granted under the 1994 Plan to employees of the Company, including the Named Executive Officers. (3) These options have a 10-year term, subject to earlier termination upon death, disability or termination of employment. (4) The potential realizable value is calculated based on the term of the option at its time of grant (10 years). It is calculated by assuming that the stock price on the date of grant appreciates at the indicated annual rate compounded annually for the entire term of the option and that the option is exercised and sold on the last day of its term for the appreciated stock price. No gain to the optionee is possible unless the stock price increases over the option term, which will benefit all stockholders. The following table sets forth information with respect to (i) the exercise of stock options by the Named Executive Officers during the fiscal year ended December 31, 1995; (ii) the number of unexercised options held by the Named Executive Officers as of December 31, 1995; and (iii) the value as of December 31, 1995 of unexercised in-the-money options. OPTION EXERCISES IN 1995 AND YEAR-END VALUE TABLE
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS(#) OPTIONS($)(2) SHARES ACQUIRED VALUE REALIZED EXERCISABLE/ EXERCISABLE/ NAME ON EXERCISE(#) ($)(1) UNEXERCISABLE UNEXERCISABLE - - ------------------------------ ----------------- -------------- ----------------------- ---------------------- Hunter Jackson................ 67,800 $ 494,478 107,600/102,400 $ 1,681,850/1,247,950 James U. Jensen............... 64,400 157,477 28,700/41,800 449,225/470,400 Thomas B. Marriott............ 3,000 16,155 47,400/67,600 748,470/871,950 Robert K. Merrell............. 18,643 113,758 69,057/35,800 1,119,779/410,510 Edward F. Nemeth.............. 30,000 88,650 83,400/66,600 1,320,150/806,550
- - -------------- (1) Value realized is based on the fair market value of the Company's Common Stock on the date of exercise (the closing sales price reported on the Nasdaq National Market on such date) minus the exercise price, and does not necessarily indicate that the optionee sold such stock. (2) Represents the difference between the option exercise price and the closing price of the Company's Common Stock as reported on the Nasdaq National Market on December 31, 1995 ($17.25) times the corresponding number of shares. 49 EMPLOYEE STOCK PURCHASE PLAN In January 1994, the Board adopted the Employee Stock Purchase Plan (the "Purchase Plan"), which was subsequently approved by the stockholders in February 1994. The Purchase Plan provides a means by which employees may purchase Common Stock of the Company through payroll deductions. The Purchase Plan is implemented by offerings of rights to eligible employees. Generally, each offering is of 24 months' duration with purchases occurring every six months. Common Stock is purchased for accounts of employees participating in the Purchase Plan at a price per share equal to the lower of (i) 85% of the fair market value of a share of Common Stock on the date of commencement of participation in the offering, or (ii) 85% of the fair market value of a share of Common Stock on the date of purchase. Generally, all employees, including executive officers, who work at least 20 hours per week and are customarily employed by the Company or an affiliate of the Company for at least five months per calendar year may participate in the Purchase Plan and may authorize payroll deductions of up to 15% of their base compensation for the purchase of Common Stock under the Purchase Plan. A total of 90,000 shares of Common Stock has been reserved for issuance under the Purchase Plan. As of March 31, 1996, a total of 51,362 shares of Common Stock had been purchased under the Purchase Plan at prices from $2.76 to $5.42 per Share with a weighted average price of $3.20 per share. The Purchase Plan will terminate in January 2004. 401(K) PLAN In October 1990, the Company adopted the Employee 401(k) Profit Sharing Plan (the "401(k) Plan") covering all of the Company's employees. Pursuant to the 401(k) Plan, employees may elect to reduce their current compensation by up to the lesser of 15% of eligible compensation or the statutorily prescribed annual limit ($9,500 in 1996) and 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. The Company has not made any such contributions to date. The 401(k) Plan is intended to qualify under Section 401 of the Code so that contributions by employees or by the Company to the 401(k) Plan, and income earned on plan contributions, are not taxable to employees until withdrawn, and contributions by the Company, if any, will be deductible by the Company when made. LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS The Company's Bylaws provide that the Company shall indemnify its directors and officers and may indemnify its employees and other agents to the fullest extent permitted by Delaware law. The Company has entered into indemnification contracts with its directors and officers and has purchased directors and officers' insurance. In addition, the Company's Certificate of Incorporation provides that the Company's directors will not be liable for monetary damages for breach of the directors' fiduciary duty of care to the Company and its stockholders. This provision in the Certificate of Incorporation does not eliminate the duty of care, and in appropriate circumstances equitable remedies such as an injunction or other forms of non-monetary relief would remain available under Delaware law. Each director will continue to be subject to liability for breach of the director's duty of loyalty to the Company, for acts or omissions not in good faith or involving intentional misconduct or knowing violations of law, for any transaction from which the director derived an improper personal benefit and for payment of dividends or approval of stock repurchases or redemptions that are unlawful under Delaware law. This provision also does not affect a director's responsibilities under any other laws, such as the federal securities laws or state or federal environmental laws. 50 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Dr. Kuhla, a director of the Company, is a Vice President of Plexus, a consulting firm, which assisted the Company with its effort to establish a collaboration for Norcalcin in Europe. See "Management -- Compensation Committee Interlocks and Insider Participation." James U. Jensen is currently "of counsel" to the law firm of Woodbury & Kesler, P.C. which provided legal services to the Company during the last fiscal year. The dollar amount of fees paid to that law firm did not exceed five percent of the law firm's gross revenues for its last full fiscal year. S.R. One, an affiliate of SmithKline Beecham, is a stockholder of the Company and has entered into various stockholder agreements with the Company. See "Management -- Compensation Committee Interlocks and Insider Participation." In May 1994, BIL and Domain Partners II, L.P. purchased 50,000 and 180,000 shares of Common Stock, respectively. Dr. Treu, a director of the Company since 1992, is a general partner of Domain Associates which is the U.S. venture capital advisor to BIL pursuant to a contractual arrangement. Dr. Treu is a general partner of One Palmer Square Associates II, L.P., which is the general partner of Domain Partners II, L.P. 51 PRINCIPAL STOCKHOLDERS The following table sets forth certain information regarding the ownership of the Company's Common Stock as of March 31, 1996 as adjusted to reflect the sale of the 3,000,000 shares of Common Stock being offered hereby (assuming no exercise of the Underwriters' over-allotment option), by (i) each person or entity who is known by the Company to own beneficially more than 5% of the Company's Common Stock, (ii) each director and Named Executive Officer of the Company, and (iii) all directors and executive officers of the Company as a group.
PERCENT BENEFICIALLY NUMBER OF OWNED(2) SHARES -------------------------- BENEFICIALLY PRIOR TO AFTER BENEFICIAL OWNER (1) OWNED(2) OFFERING OFFERING - - ------------------------------------------------------------------------------- ----------- ------------ ------------ S. R. One, Limited (3) ........................................................ 1,797,091 21.93% 16.05% Bay Colony Executive Park 565 East Swedesford Road, Suite 315 Wayne, PA 08542 Amgen Inc. .................................................................... 1,000,000 12.21 8.94 1840 DeHavilland Drive Thousand Oaks, CA 91320-1789 State of Wisconsin Investment Board ........................................... 645,000 7.88 5.77 P.O. Box 7842 Madison, WI 53707 Biotechnology Investments Limited (4) ......................................... 635,938 7.77 5.68 P.O. Box 58 St. Julian's Court St. Peter Port, Guernsey, Channel Islands Domain Partners II, L.P. (5) .................................................. 575,938 7.03 5.15 One Palmer Square Princeton, NJ 08542 Doug Reed, M.D. (6)............................................................ 1,798,891 21.96 16.07 Jesse I. Treu, Ph.D. (7)....................................................... 584,798 7.14 5.23 Hunter Jackson, Ph.D. (8)...................................................... 509,528 6.14 4.51 Thomas N. Parks, Ph.D. (9)..................................................... 355,090 4.33 3.17 James G. Groninger (10)........................................................ 171,852 2.09 1.53 Edward F. Nemeth, Ph.D. (11)................................................... 121,856 1.47 1.08 James U. Jensen, J.D. (12)..................................................... 111,369 1.35 * Robert K. Merrell (13)......................................................... 67,807 * * Thomas B. Marriott, Ph.D. (14)................................................. 51,138 * * Donald E. Kuhla, Ph.D. (15).................................................... 36,840 * * Timothy J. Rink, M.D., Sc.D. (16).............................................. 36,640 * * Santo J. Costa, J.D. (17)...................................................... 7,650 * * 3,853,459 44.75 33.19 All directors and executive officers as a group (12 persons) (18)..............
- - ------------------ * Less than 1 percent. (1) Except as set forth herein, the address of the persons set forth above is the address of the Company appearing elsewhere in this Prospectus. (2) This table is based upon information supplied by officers, directors and principal stockholders and Schedules 13D and 13G filed with the Securities and Exchange Commission (the "Commission"). Beneficial ownership is determined in accordance with the rules of the Commission and generally includes voting or investment power with respect to securities. Except as indicated by footnotes and subject to community property laws, where applicable, the persons named above have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them. Beneficial ownership also includes shares of stock subject to options and warrants exercisable or convertible within 60 days. (3) Includes 5,790 shares subject to options exercisable within 60 days of March 31, 1996 by Dr. Reed, who on March 31, 1996 was a Vice President of S.R. One. Upon exercise, such shares will be transferred to and held by S.R. One. Dr. Reed shares voting and 52 investment power with the other officers of S.R. One. Those officers are: Peter A. Sears, President, Brenda D. Gavin, Vice President, Donald F. Parman, Vice President and Secretary, and William J. Shulby, Treasurer. Dr. Reed disclaims beneficial ownership of the shares held by S.R. One, except to the extent of his pro rata interest therein. See footnote (6) below. (4) Excludes shares subject to options exercisable within 60 days of March 31, 1996 by Dr. Treu, a general partner of Domain Associates, which is the United States venture capital advisor to BIL pursuant to a contractual arrangement. Domain Associates has no voting or investment power over shares owned by BIL. BIL disclaims beneficial ownership of the shares issuable to Dr. Treu upon exercise of options. BIL is a publicly held, Guernsey, Channel Islands corporation whose shares are traded on the London Stock Exchange. The directors of BIL who share voting and investment power with respect to the shares held by BIL are as follows: Lord Armstrong of Ilminster, GCB, CVO (Chairman); Dr. John Bradfield, CBE (Deputy Chairman); Simon Chandler, FCA; William Lane, QC; Air Chief Marshal Sir Peter Le Cheminant, GBE, KCB, DFC; Alan Le Page, FCIB; Geoffrey Robinson, ASCA; and Robert Sinclair, FCA. See footnotes (5) and (7) below. (5) Excludes (i) 2,790 shares subject to options exercisable within 60 days of March 31, 1996 by Dr. Treu, a general partner of One Palmer Square Associates II, L.P. ("Palmer Square II"), which is the general partner of Domain Partners II, L.P. ("Domain II") and (ii) 1,250 shares beneficially owned by Palmer Square II. Domain II disclaims beneficial ownership of the shares issuable to Dr. Treu upon exercise of options and of the shares held by Palmer Square II. Dr. Treu shares voting and investment power with the other general partners of Palmer Square II, James C. Blair, Richard S. Schneider and Brian H. Dovey, with respect to the shares held by Domain II. See footnotes (4) and (7). (6) Includes 1,791,301 shares beneficially owned by S.R. One. Dr. Reed is Vice President of S.R. One. Also includes 5,790 shares subject to options exercisable within 60 days of March 31, 1996. Upon exercise, such shares will be transferred to, and be held by, S.R. One. With respect to the shares held by S.R. One, Dr. Reed shares voting and investment power with the other officers of S.R. One. Dr. Reed disclaims beneficial ownership of the shares held by S.R. One. On April 15, 1996, Dr. Reed became a full-time employee and Vice President, Business Development of the Company. See footnote (3) above. (7) Includes 575,938 shares beneficially owned by Domain II and 1,250 shares beneficially owned by Palmer Square II. Dr. Treu is a general partner of Palmer Square II, which is the general partner of Domain II. See footnote (5) above. Does not include the shares beneficially owned by BIL. Dr. Treu is a general partner of Domain Associates, which is the United States venture capital advisor to BIL pursuant to a contractual arrangement. Domain Associates has no voting or investment power over the shares owned by BIL. See footnote (4) above. Also includes 2,790 shares subject to options exercisable within 60 days of March 31, 1996. Dr. Treu's address is the address of Domain II above. (8) Includes 75,000 shares held in a trust and 2 shares held by Dr. Jackson's children, of which he disclaims beneficial ownership. Also includes 106,350 shares subject to options exercisable within 60 days of March 31, 1996. (9) Includes 5,790 shares subject to options exercisable within 60 days of March 31, 1996. (10) Includes 63,450 shares held by Mr. Groninger's children, of which he disclaims beneficial ownership. Also includes 16,290 shares subject to options exercisable within 60 days of March 31, 1996. (11) Includes 87,900 shares subject to options exercisable within 60 days of March 31, 1996. (12) Includes 31,250 shares held by a trust. Also includes 30,950 shares subject to options exercisable within 60 days of March 31, 1996. (13) Includes 64,307 shares subject to options exercisable within 60 days of March 31, 1996. (14) Includes 41,297 shares subject to options exercisable within 60 days of March 31, 1996. (15) Includes 20,040 shares subject to options exercisable within 60 days of March 31, 1996. (16) Includes 35,040 shares subject to options exercisable within 60 days of March 31, 1996. (17) Includes 6,450 shares subject to options exercisable within 60 days of March 31, 1996. (18) Includes an aggregate of 422,994 shares subject to options exercisable within 60 days of March 31, 1996. See footnotes (6) through (17) above. 53 DESCRIPTION OF CAPITAL STOCK The Company's Certificate of Incorporation provides that the authorized capital stock of the Company is 20,000,000 shares of Common Stock, $.001 par value, and 5,000,000 shares of Preferred Stock, $.001 par value. Upon completion of the Offering, 11,187,232 shares of Common Stock (including the shares of Common Stock offered hereby) and no shares of Preferred Stock will be outstanding. As of March 31, 1996, there were approximately 160 holders of record of the Company's Common Stock. COMMON STOCK The holders of Common Stock are entitled to one vote for each share held of record on all matters submitted to a vote of the stockholders. The holders of Common Stock are not entitled to cumulative voting rights with respect to the election of directors and, as a consequence, minority stockholders will not be able to elect directors on the basis of their votes alone. Subject to preferences that may be applicable to any then outstanding shares of Preferred Stock, holders of Common Stock are entitled to receive ratably such dividends as may be declared by the Board out of funds legally available therefor. See "Dividend Policy." In the event of a liquidation, dissolution or winding up of the Company, holders of the Common Stock are entitled to share ratably in all assets remaining after payment of liabilities and the liquidation preference of any then outstanding Preferred Stock. Holders of Common Stock have no preemptive rights and no right to convert their Common Stock into any other securities. There are no redemption or sinking fund provisions applicable to the Common Stock. All outstanding shares of Common Stock are, and all shares of Common Stock to be outstanding upon completion of the Offering will be, fully paid and nonassessable. PREFERRED STOCK The Board has the authority, without further action by the stockholders, to issue up to 5,000,000 shares of Preferred Stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof, including dividend rights, conversion rights, voting rights, terms of redemption, liquidation preferences, sinking fund terms and the number of shares constituting any series or the designation of such series. The issuance of Preferred Stock could adversely affect the voting power of holders of Common Stock and the likelihood that such holders will receive dividend payments and payments upon liquidation and could have the effect of delaying, deferring or preventing a change in control of the Company. The Company has no present plan to issue any shares of Preferred Stock. REGISTRATION RIGHTS Pursuant to agreements with the Company, holders of an aggregate of 2,097,239 outstanding shares of Common Stock (the "Registrable Shares") are entitled to certain registration rights ("Registration Rights"). Such holders may, subject to certain limitations, require the Company to register at least 20% of their Registrable Shares for public resale at the Company's expense. In addition, these holders have the right to include their Registrable Shares, subject to certain limitations, in any registration of shares of Common Stock by the Company under the Securities Act. These holders also have the right to request up to two registrations on Form S-3 in any 12-month period. The Company is required to bear all registration expenses, other than underwriters' discounts and commissions, for all Company-initiated registrations and for the first registration on Form S-3. The Company has filed a registration statement on Form S-3 for the resale of the 1,000,000 shares of Common Stock sold to Amgen (the "Amgen Shares") pursuant to its obligations under the related stock purchase agreement. The Company has agreed to keep the registration statement effective for a period of three years or until all such shares are sold. Amgen also has the right, subject to certain limitations, to include such shares in any registration of Common Stock by the Company under the Securities Act. The Company is required to bear all registration expenses with respect to the registration of the Amgen 54 Shares on Form S-3 and is required to bear all registration expenses, other than underwriters' discounts and commissions, with respect to any future Company-initiated registration in which Amgen may have the right to include its shares. Amgen has waived its registration rights with respect to this Offering. In addition, the holder of a warrant to purchase 32,542 shares of Common Stock is entitled to include such shares in any registration effected by the Company under the Securities Act which is initiated by the holders of Registrable Shares, but only to the extent the inclusion of such shares would not reduce the number of Registrable Shares to be included in such registration. The holder of such warrant to purchase Registrable Shares is also entitled, subject to certain limitations, to participate in a registration initiated by the Company. The holders of Registrable Shares and the warrantholder have waived all registration rights with respect to this Offering. WARRANT The Company has issued to an equipment financing company a warrant to purchase 32,542 shares of Common Stock at $3.69 per share. The warrant expires in June 2002. DELAWARE ANTI-TAKEOVER LAW The Company is subject to the provisions of Section 203 of the Delaware General Corporation Law, an anti-takeover law. In general, the statute prohibits a publicly held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. For purposes of Section 203, a "business combination" includes a merger, asset sale or other transaction resulting in a financial benefit to the interested stockholder, and an "interested stockholder" is a person who, together with affiliates and associates, owns (or within three years prior, did own) 15% or more of the corporation's voting stock. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Company's Common Stock is American Securities Transfer, Incorporated. 55 UNDERWRITING Subject to the terms and conditions of the Underwriting Agreement, the underwriters (the "Underwriters") named below, for whom Vector Securities International, Inc., Salomon Brothers Inc and UBS Securities LLC are acting as representatives (the "Representatives"), have severally agreed to purchase, subject to the terms and conditions of the Underwriting Agreement, and the Company has agreed to sell to the Underwriters, the following respective number of shares of Common Stock.
UNDERWRITERS NUMBER OF SHARES - - ------------------------------------------------------------------------------------- ----------------- Vector Securities International, Inc................................................. 589,000 Salomon Brothers Inc................................................................. 588,000 UBS Securities LLC................................................................... 588,000 Bear, Stearns & Co. Inc.............................................................. 65,000 Alex. Brown & Sons Incorporated...................................................... 65,000 CS First Boston Corporation.......................................................... 65,000 Donaldson, Lufkin & Jenrette Securities Corporation.................................. 65,000 A.G. Edwards & Sons, Inc............................................................. 65,000 Lehman Brothers Inc.................................................................. 65,000 Merrill Lynch, Pierce, Fenner & Smith Incorporated................................... 65,000 Montgomery Securities................................................................ 65,000 Morgan Stanley & Co. Incorporated.................................................... 65,000 Oppenheimer & Co., Inc............................................................... 65,000 Prudential Securities Incorporated................................................... 65,000 Allen & Company Incorporated......................................................... 65,000 Cowen & Company...................................................................... 35,000 Crowell, Weedon & Co................................................................. 35,000 Duff & Phelps, Inc................................................................... 35,000 Jefferies & Company, Inc............................................................. 35,000 Ladenburg, Thalmann & Co. Inc........................................................ 35,000 McDonald & Company Securities, Inc................................................... 35,000 Needham & Company, Inc............................................................... 35,000 Rauscher Pierce Refsnes, Inc......................................................... 35,000 Raymond James & Associates, Inc...................................................... 35,000 Starr Securities, Inc................................................................ 35,000 Sutro & Co. Incorporated............................................................. 35,000 Van Kasper & Company................................................................. 35,000 Yamaichi International (America), Inc................................................ 35,000 -------- Total.............................................................................. 3,000,000 -------- --------
The Underwriting Agreement provides that the obligations of the Underwriters are subject to certain conditions precedent, including the absence of any material adverse change in the Company's business and the receipt of certain certificates, opinions and letters from the Company and its counsel. The nature of the Underwriters' obligation is such that they are committed to purchase all shares of Common Stock offered hereby if any of such shares are purchased. The Underwriters propose to offer the shares of Common Stock directly to the public at the public offering price set forth on the cover page of this Prospectus, and to certain dealers at such price less a concession not in excess of $.58 per share. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $.10 per share to certain other dealers. After the public offering of the shares of Common Stock, the offering price and other selling terms may be changed by the Representatives. The Company has granted to the Underwriters an option, exercisable at any time during the 30-day period after the date of this Prospectus, to purchase up to an additional 450,000 shares of Common Stock at the public offering price set forth on the cover page of this Prospectus, less underwriting discounts and 56 commissions. The Underwriters may exercise such option solely for the purpose of covering over-allotments, if any, in connection with the Offering. To the extent such option is exercised, each Underwriter will be obligated, subject to certain conditions, to purchase approximately the same percentage of such additional shares as the number of shares of Common Stock set forth next to such Underwriter's name in the preceding table bears to the total number of shares listed in the table. The offering of the shares is made for delivery when, as and if accepted by the Underwriters and subject to prior sale and to withdrawal, cancellation or modification of this Offering without notice. The Underwriters reserve the right to reject an order for the purchase of shares in whole or in part. The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act, and to contribute to payments the Underwriters may be required to make in respect thereof. The executive officers, directors and certain other stockholders of the Company have agreed that they will not, without the prior written consent of Vector Securities International, Inc., offer, sell or otherwise dispose of any shares of Common Stock, options or warrants to acquire shares of Common Stock or securities exchangeable for or convertible into shares of Common Stock owned by them for a period of 90 days after the date of this Prospectus. The Company has agreed that it will not, without the prior written consent of Vector Securities International, Inc., offer, sell or otherwise dispose of any shares of Common Stock, options or warrants to acquire shares of Common Stock or securities exchangeable for or convertible into shares of Common Stock for a period of 90 days after the date of this Prospectus, except that the Company may grant additional options under its stock option plans, or issue shares upon the exercise of outstanding stock options or warrants. In connection with this Offering, certain Underwriters and selling group members (if any) who are qualifying registered market makers on the Nasdaq National Market may engage in passive market-making transactions in the Common Stock on the Nasdaq National Market in accordance with Rule 10b-6A under the Securities Exchange Act of 1934 during the two business day period before commencement of sales in this Offering. The passive market making transactions must comply with applicable volume and price limits and be identified as such. In general, a passive market maker may display its bid at a price not in excess of the highest independent bid for the security. If all independent bids are lowered below the passive market maker's bid, however, such bid must then be lowered when certain purchase limits are exceeded. Net purchases by a passive market maker on each day are generally limited to a specified percentage of the passive market making average daily trading volume in the Common Stock during a price period and must be discontinued when such limit is reached. Passive market making may stabilize the market price of the Common Stock at a level above that which might otherwise prevail, and, if commenced, may be discontinued at any time. 57 LEGAL MATTERS The validity of the shares of Common Stock offered hereby will be passed upon for the Company by Pillsbury Madison & Sutro LLP, San Francisco and Menlo Park, California. Certain legal matters in connection with the sale of shares of Common Stock in this Offering will be passed upon for the Underwriters by Skadden, Arps, Slate, Meagher & Flom, Chicago, Illinois. EXPERTS The financial statements of NPS, a development stage company, as of December 31, 1994 and 1995, and for each of the years in the three-year period ending December 31, 1995, and for the period from October 22, 1986 (inception) through December 31, 1995, included herein and elsewhere in the Registration Statement, have been included herein and in the Registration Statement in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. The statements in this Prospectus under the captions "Risk Factors -- Uncertainty of Protection of Patents and Proprietary Technology" and "Business - - -- Patents and Proprietary Technology," insofar as they constitute matters of patent law, have been reviewed by Lyon & Lyon, and are subject to an opinion to be rendered to the Underwriters. ADDITIONAL INFORMATION The Company has filed with the Commission a Registration Statement on Form S-1 under the Securities Act with respect to the shares of Common Stock offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto. For further information with respect to the Company and the Common Stock offered hereby, reference is made to such Registration Statement and to the exhibits and schedules filed therewith. Statements contained in this Prospectus as to the contents of any contract or other document referred to are not necessarily complete and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement. The Registration Statement, together with the exhibits and schedules thereto, may be inspected without charge at the offices of the Commission at 450 Fifth Street, N.W., Washington, DC 20549 or at its regional offices located at 500 West Madison Street, Chicago, Illinois 60661 and 14th Floor, 75 Park Place, New York, New York 10007. Copies of such material may be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, DC 20549 at prescribed rates. The Company is subject to the information requirements of the Securities and Exchange Act of 1934, as amended, and in accordance therewith files reports, proxy statements and other information with the Commission. Such reports, proxy statements and other information can be inspected and copied at the Public Reference Section of the Commission at Room 1024, 450 Fifth Street, N.W., Washington, DC 20549; and at the Commission's regional offices at Northwestern Atrium Center, Suite 1400, 500 West Madison Street, Chicago, Illinois 60661 and 14th Floor, 75 Park Place, New York, New York 10007. Copies of such material can be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, DC 20549 at prescribed rates. The Company's Common Stock is quoted on the Nasdaq National Market, and such reports, proxy statements, and other information concerning the Company can be inspected at the Public Reference Section of the Nasdaq National Market at 1735 K Street, N.W., Washington, D.C. 20006. 58 INDEX TO FINANCIAL STATEMENTS Report of KPMG Peat Marwick LLP, Independent Auditors................................. F-2 Balance Sheets........................................................................ F-3 Statements of Operations.............................................................. F-4 Statements of Stockholders' Equity.................................................... F-5 Statements of Cash Flows.............................................................. F-8 Notes to Financial Statements......................................................... F-10
F-1 INDEPENDENT AUDITORS' REPORT The Board of Directors NPS Pharmaceuticals, Inc.: We have audited the accompanying balance sheets of NPS Pharmaceuticals, Inc. (a development stage company) as of December 31, 1994 and 1995, and the related statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1995, and for the period from October 22, 1986 (inception) through December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of NPS Pharmaceuticals, Inc. (a development stage company) as of December 31, 1994 and 1995, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1995, and for the period from October 22, 1986 (inception) through December 31, 1995, in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP Salt Lake City, Utah February 7, 1996, except as to note 11 which is as of March 18, 1996 F-2 NPS PHARMACEUTICALS, INC. (A DEVELOPMENT STAGE COMPANY) BALANCE SHEETS ASSETS
PRO FORMA DECEMBER 31, (NOTE 11) ---------------------------- DECEMBER 31, 1994 1995 1995 ------------- ------------- ------------- Current assets: Cash and cash equivalents.......................................... $ 5,931,082 $ 8,039,625 $25,539,625 Marketable investment securities (note 2).......................... 3,392,135 300,000 300,000 Accounts receivable................................................ 260,000 23,000 23,000 ------------- ------------- ------------- Total current assets............................................. 9,583,217 8,362,625 25,862,625 ------------- ------------- ------------- Plant and equipment (note 4): Equipment.......................................................... 2,039,441 2,272,006 2,272,006 Leasehold improvements............................................. 1,603,424 1,635,189 1,635,189 ------------- ------------- ------------- 3,642,865 3,907,195 3,907,195 Less accumulated depreciation and amortization..................... 1,209,298 1,711,551 1,711,551 ------------- ------------- ------------- Net plant and equipment.......................................... 2,433,567 2,195,644 2,195,644 Other assets, at cost................................................ 67,028 42,154 42,154 ------------- ------------- ------------- $ 12,083,812 $ 10,600,423 $28,100,423 ------------- ------------- ------------- ------------- ------------- ------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current installments of obligation under capital leases (note 4)... $ 413,001 $ 435,230 $ 435,230 Current installments on long-term debt (note 5).................... -- 331,746 331,746 Accounts payable................................................... 924,480 1,036,464 1,036,464 Accrued expenses................................................... 141,511 139,714 139,714 Deferred income.................................................... -- 587,500 587,500 Income tax payable (note 7)........................................ -- -- 160,000 ------------- ------------- ------------- Total current liabilities........................................ 1,478,992 2,530,654 2,690,654 Obligations under capital leases, excluding current installments (note 4)............................................................ 440,098 53,761 53,761 Long-term debt, excluding current installments (note 5).............. -- 693,528 693,528 ------------- ------------- ------------- Total liabilities................................................ 1,919,090 3,277,943 3,437,943 ------------- ------------- ------------- Commitments and contingencies (notes 3, 4, 9 and 12)................. Stockholders' equity (note 6):....................................... Preferred stock, $.001 par value; 5,000,000 shares authorized; no shares issued and outstanding..................................... -- -- -- Common Stock, $.001 par value; 20,000,000 shares authorized; issued and outstanding 6,787,358 shares at December 31, 1994, 7,072,801 shares at December 31, 1995, and 8,072,801 shares pro forma....... 6,787 7,073 8,073 Additional paid-in capital......................................... 27,847,067 28,067,130 35,566,130 Deferred compensation.............................................. (489,958) (234,458) (234,458) Deficit accumulated during development stage....................... (17,199,174) (20,517,265) (10,677,265) ------------- ------------- ------------- Net stockholders' equity......................................... 10,164,722 7,322,480 24,662,480 ------------- ------------- ------------- $ 12,083,812 $ 10,600,423 $28,100,423 ------------- ------------- ------------- ------------- ------------- -------------
See accompanying notes to financial statements. F-3 NPS PHARMACEUTICALS, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF OPERATIONS
OCTOBER 22, 1986 (INCEPTION) YEAR ENDED DECEMBER 31, THROUGH ----------------------------------------- DECEMBER 31, 1993 1994 1995 1995 ------------ ------------ ------------- -------------- Revenues from research and license agreements........ $ 867,568 $ 3,860,706 $ 9,562,319 $ 22,315,849 Operating expenses: Research and development........................... 6,021,126 7,765,326 8,727,316 30,360,190 General and administrative......................... 2,003,699 3,121,688 3,975,379 12,788,445 ------------ ------------ ------------- -------------- Total operating expenses......................... 8,024,825 10,887,014 12,702,695 43,148,635 ------------ ------------ ------------- -------------- Operating loss................................... (7,157,257) (7,026,308) (3,140,376) (20,832,786) Other income (expense): Interest income.................................... 110,314 398,388 480,029 1,256,844 Interest expense................................... (111,638) (128,413) (157,744) (475,713) Other.............................................. -- -- -- 34,390 ------------ ------------ ------------- -------------- Total other income (expense)..................... (1,324) 269,975 322,285 815,521 ------------ ------------ ------------- -------------- Loss before income tax expense................... (7,158,581) (6,756,333) (2,818,091) (20,017,265) Income tax expense (note 7).......................... -- -- 500,000 500,000 ------------ ------------ ------------- -------------- Net loss............................................. $ (7,158,581) $ (6,756,333) $ (3,318,091) $ (20,517,265) ------------ ------------ ------------- -------------- ------------ ------------ ------------- -------------- Net loss per common share (note 1)................... $ (1.91) $ (1.13) $ (.48) ------------ ------------ ------------- ------------ ------------ ------------- Weighted average shares outstanding (note 1)......... 3,751,000 5,977,300 6,924,400
See accompanying notes to financial statements. F-4 NPS PHARMACEUTICALS, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF STOCKHOLDERS' EQUITY OCTOBER 22, 1986 (INCEPTION) THROUGH DECEMBER 31, 1995
SERIES A SERIES B SERIES C SERIES D SERIES E PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED STOCK STOCK STOCK STOCK STOCK ----------- ----------- ------------- ------------- ------------- Issuance of 1,125,000 shares of common stock for cash and equipment valued at fair value upon incorporation at October 22, 1986........................................ $ -- $ -- $ -- $ -- $ -- Net loss................................................. -- -- -- -- -- ----------- ----------- --- --- --- Balances, December 31, 1986.............................. -- -- -- -- -- Repurchase of 375,000 shares of common stock............. -- -- -- -- -- Issuance of 82,500 shares of common stock for services... -- -- -- -- -- Net income............................................... -- -- -- -- -- ----------- ----------- --- --- --- Balances, December 31, 1987.............................. -- -- -- -- -- Issuance of 55,556 shares of preferred stock for cash.... 5,556 -- -- -- -- Issuance of 11,448 shares of common stock for cash upon exercise of stock options............................... -- -- -- -- -- Issuance of 97,500 shares of common stock for services... -- -- -- -- -- Net loss................................................. -- -- -- -- -- ----------- ----------- --- --- --- Balances, December 31, 1988.............................. 5,556 -- -- -- -- Issuance of 37,037 shares of preferred stock for cash.... -- 3,704 -- -- -- Issuance of 7,500 shares of common stock for services.... -- -- -- -- -- Net loss................................................. -- -- -- -- -- ----------- ----------- --- --- --- Balances, December 31, 1989.............................. 5,556 3,704 -- -- -- Issuance of 37,037 shares of preferred stock for cash.... -- 3,703 -- -- -- Issuance of 2,475 shares of common stock for cash upon exercise of stock options............................... -- -- -- -- -- Net loss................................................. -- -- -- -- -- ----------- ----------- --- --- --- Balances, December 31, 1990.............................. 5,556 7,407 -- -- -- DEFICIT ACCUMULATED ADDITIONAL DEFERRED DURING NET COMMON PAID-IN COMPEN- DEVELOPMENT STOCKHOLDERS' STOCK CAPITAL SATION STAGE EQUITY ----------- ----------- ----------- ------------ ------------- Issuance of 1,125,000 shares of common stock for cash and equipment valued at fair value upon incorporation at October 22, 1986........................................ $ 1,125 $ 13,875 $ -- $ -- $ 15,000 Net loss................................................. -- -- -- (12,477) (12,477) ----------- ----------- ----------- ------------ ------------- Balances, December 31, 1986.............................. 1,125 13,875 -- (12,477) 2,523 Repurchase of 375,000 shares of common stock............. (375) (4,625) -- -- (5,000) Issuance of 82,500 shares of common stock for services... 83 1,017 -- -- 1,100 Net income............................................... -- -- -- 121,274 121,274 ----------- ----------- ----------- ------------ ------------- Balances, December 31, 1987.............................. 833 10,267 -- 108,797 119,897 Issuance of 55,556 shares of preferred stock for cash.... -- 294,446 -- -- 300,002 Issuance of 11,448 shares of common stock for cash upon exercise of stock options............................... 11 1,516 -- -- 1,527 Issuance of 97,500 shares of common stock for services... 98 32,402 -- -- 32,500 Net loss................................................. -- -- -- (105,643) (105,643) ----------- ----------- ----------- ------------ ------------- Balances, December 31, 1988.............................. 942 338,631 -- 3,154 348,283 Issuance of 37,037 shares of preferred stock for cash.... -- 336,296 -- -- 340,000 Issuance of 7,500 shares of common stock for services.... 7 2,493 -- -- 2,500 Net loss................................................. -- -- -- (5,025) (5,025) ----------- ----------- ----------- ------------ ------------- Balances, December 31, 1989.............................. 949 677,420 -- (1,871) 685,758 Issuance of 37,037 shares of preferred stock for cash.... -- 336,297 -- -- 340,000 Issuance of 2,475 shares of common stock for cash upon exercise of stock options............................... 2 898 -- -- 900 Net loss................................................. -- -- -- (212,976) (212,976) ----------- ----------- ----------- ------------ ------------- Balances, December 31, 1990.............................. 951 1,014,615 -- (214,847) 813,682
F-5 NPS PHARMACEUTICALS, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED) OCTOBER 22, 1986 (INCEPTION) THROUGH DECEMBER 31, 1995
SERIES A SERIES B SERIES C SERIES D SERIES E PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED STOCK STOCK STOCK STOCK STOCK ----------- ----------- ----------- ----------- ----------- Issuance of 4,500 shares of common stock for cash upon exercise of stock options............................... $ -- $ -- $ -- $ -- $ -- Net loss................................................. -- -- -- -- -- ----------- ----------- ----- ----- ----- Balances, December 31, 1991.............................. 5,556 7,407 -- -- -- Issuance of 3,675 shares of common stock for cash upon exercise of stock options............................... -- -- -- -- -- Issuance of 230,334 shares of common stock upon conversion of 129,630 shares of preferred stock......... (5,556) (7,407) -- -- -- Repurchase and cancellation of 83,334 shares of common stock for cash.......................................... -- -- -- -- -- Issuance of 781,250 shares of preferred stock for cash, net of offering costs................................... -- -- 781 -- -- Issuance of 678,573 shares of preferred stock for cash, net of offering costs................................... -- -- -- 679 -- Issuance of 101,452 shares of common stock for services related to preferred stock offering..................... -- -- -- -- -- Net loss................................................. -- -- -- -- -- ----------- ----------- ----- ----- ----- Balances, December 31, 1992.............................. -- -- 781 679 Issuance of 37,524 shares of common stock for cash upon exercise of stock options............................... -- -- -- -- -- Issuance of 583,334 shares of preferred stock for cash, net of offering costs................................... -- -- -- -- 583 Issuance of 6,050 shares of preferred stock for services................................................ -- -- -- -- 6 Deferred compensation related to grant of stock options................................................. -- -- -- -- -- Net loss................................................. -- -- -- -- -- ----------- ----------- ----- ----- ----- Balances, December 31, 1993.............................. -- -- 781 679 589 DEFICIT ACCUMULATED ADDITIONAL DEFERRED DURING NET COMMON PAID-IN COMPEN- DEVELOPMENT STOCKHOLDERS' STOCK CAPITAL SATION STAGE EQUITY ----------- ---------- ----------- ------------ ------------- Issuance of 4,500 shares of common stock for cash upon exercise of stock options............................... $ 5 $ 2,245 $ -- $ -- $ 2,250 Net loss................................................. -- -- -- (462,054) (462,054) ----------- ---------- ----------- ------------ ------------- Balances, December 31, 1991.............................. 956 1,016,860 -- (676,901) 353,878 Issuance of 3,675 shares of common stock for cash upon exercise of stock options............................... 4 2,221 -- -- 2,225 Issuance of 230,334 shares of common stock upon conversion of 129,630 shares of preferred stock......... 230 12,733 -- -- -- Repurchase and cancellation of 83,334 shares of common stock for cash.......................................... (83) (299,917) -- -- (300,000) Issuance of 781,250 shares of preferred stock for cash, net of offering costs................................... -- 4,937,462 -- -- 4,938,243 Issuance of 678,573 shares of preferred stock for cash, net of offering costs................................... -- 4,693,794 -- -- 4,694,473 Issuance of 101,452 shares of common stock for services related to preferred stock offering..................... 101 (101) -- -- -- Net loss................................................. -- -- -- (2,607,359) (2,607,359) ----------- ---------- ----------- ------------ ------------- Balances, December 31, 1992.............................. 1,208 10,363,052 -- (3,284,260) 7,081,460 Issuance of 37,524 shares of common stock for cash upon exercise of stock options............................... 38 25,545 -- -- 25,583 Issuance of 583,334 shares of preferred stock for cash, net of offering costs................................... -- 6,968,115 -- -- 6,968,698 Issuance of 6,050 shares of preferred stock for services................................................ -- 72,594 -- -- 72,600 Deferred compensation related to grant of stock options................................................. -- 766,500 (745,458) -- 21,042 Net loss................................................. -- -- -- (7,158,581) (7,158,581) ----------- ---------- ----------- ------------ ------------- Balances, December 31, 1993.............................. 1,246 18,195,806 (745,458) (10,442,841) 7,010,802
F-6 NPS PHARMACEUTICALS, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED) OCTOBER 22, 1986 (INCEPTION) THROUGH DECEMBER 31, 1995
SERIES A SERIES B SERIES C SERIES D SERIES E PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED STOCK STOCK STOCK STOCK STOCK ----------- ----------- ----------- ----------- ----------- Issuance of 3,475,666 shares of common stock upon conversion of 2,049,207 shares of preferred stock....... $ -- $ -- $ (781) $ (679) $ (589) Issuance of 2,000,000 shares of common stock for cash, net of offering costs................................... -- -- -- -- -- Issuance of 20,000 shares of common stock for services... -- -- -- -- -- Issuance of 46,118 shares of common stock for cash upon exercise of options..................................... -- -- -- -- -- Amortization of deferred compensation.................... -- -- -- -- -- Net loss................................................. -- -- -- -- -- ----------- ----------- ----- ----- ----- Balances, December 31, 1994.............................. -- -- -- -- -- Issuance of 242,385 shares of common stock for cash upon exercise of options..................................... -- -- -- -- -- Issuance of 39,771 shares of common stock for cash....... -- -- -- -- -- Issuance of 3,287 shares of common stock for services.... -- -- -- -- -- Amortization of deferred compensation.................... -- -- -- -- -- Net loss................................................. -- -- -- -- -- ----------- ----------- ----- ----- ----- Balances, December 31, 1995.............................. $ -- $ -- $ -- $ -- $ -- ----------- ----------- ----- ----- ----- ----------- ----------- ----- ----- ----- DEFICIT ACCUMULATED ADDITIONAL DEFERRED DURING NET COMMON PAID-IN COMPEN- DEVELOPMENT STOCKHOLDERS' STOCK CAPITAL SATION STAGE EQUITY ----------- ---------- ----------- ------------ ------------- Issuance of 3,475,666 shares of common stock upon conversion of 2,049,207 shares of preferred stock....... $ 3,475 $ (1,426) $ -- $ -- $ -- Issuance of 2,000,000 shares of common stock for cash, net of offering costs................................... 2,000 9,530,252 -- -- 9,532,252 Issuance of 20,000 shares of common stock for services... 20 95,958 -- -- 95,978 Issuance of 46,118 shares of common stock for cash upon exercise of options..................................... 46 26,477 -- -- 26,523 Amortization of deferred compensation.................... -- -- 255,500 -- 255,500 Net loss................................................. -- -- -- (6,756,333) (6,756,333) ----------- ---------- ----------- ------------ ------------- Balances, December 31, 1994.............................. 6,787 27,847,067 (489,958) (17,199,174) 10,164,722 Issuance of 242,385 shares of common stock for cash upon exercise of options..................................... 243 100,378 -- -- 100,621 Issuance of 39,771 shares of common stock for cash....... 40 109,827 -- -- 109,867 Issuance of 3,287 shares of common stock for services.... 3 9,858 -- -- 9,861 Amortization of deferred compensation.................... -- -- 255,500 -- 255,500 Net loss................................................. -- -- -- (3,318,091) (3,318,091) ----------- ---------- ----------- ------------ ------------- Balances, December 31, 1995.............................. $ 7,073 $28,067,130 $(234,458) ($20,517,265) $ 7,322,480 ----------- ---------- ----------- ------------ ------------- ----------- ---------- ----------- ------------ -------------
See accompanying notes to financial statements. F-7 NPS PHARMACEUTICALS, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF CASH FLOWS
OCTOBER 22, 1986 (INCEPTION) YEAR ENDED DECEMBER 31, THROUGH ---------------------------------------- DECEMBER 31, 1993 1994 1995 1995 ------------ ------------ ------------ -------------- Cash flows from operating activities: Net loss............................................ $ (7,158,581) $ (6,756,333) $ (3,318,091) $ (20,517,265) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization..................... 366,933 596,842 674,039 2,413,028 Gain on sale of equipment......................... -- -- -- (28,720) Issuance of common and preferred stock in lieu of cash for services................................ 72,600 95,978 9,861 214,539 Amortization of deferred compensation............. 21,042 255,500 255,500 532,042 Decrease (increase) in operating assets: Accounts receivable............................. 97,747 (226,788) 237,000 (23,000) Other assets.................................... 28,819 (21,553) 24,874 (45,754) Increase (decrease) in operating liabilities: Accounts payable and accrued expenses........... 435,818 142,592 110,187 1,176,178 Deferred income................................. 3,400,000 (3,400,000) 587,500 587,500 ------------ ------------ ------------ -------------- Net cash used in operating activities......... (2,735,622) (9,313,762) (1,419,130) (15,691,452) Cash flows from investing activities: Net sale (purchase) of marketable investment securities......................................... 1,589,384 (3,392,135) 3,092,135 (300,000) Acquisition of equipment and leasehold improvements....................................... (1,206,683) (1,048,020) (373,171) (4,059,126) Proceeds from sale of equipment..................... 648,274 -- -- 1,048,484 ------------ ------------ ------------ -------------- Net cash provided by (used in) investing activities................................... 1,030,975 (4,440,155) 2,718,964 (3,310,642)
F-8 NPS PHARMACEUTICALS, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF CASH FLOWS (CONTINUED)
OCTOBER 22, 1986 (INCEPTION) YEAR ENDED DECEMBER 31, THROUGH ---------------------------------------- DECEMBER 31, 1993 1994 1995 1995 ------------ ------------ ------------ -------------- Cash flows from financing activities: Proceeds from note payable to bank................... $ -- $ -- $ -- $ 123,855 Proceeds from issuance of preferred stock and collection of subscription receivable............... 2,968,698 4,000,000 -- 17,581,416 Proceeds from issuance of common stock............... 25,583 9,558,775 210,488 9,811,748 Proceeds from long-term debt......................... -- -- 1,166,434 1,166,434 Principal payments on note payable to bank........... -- -- -- (123,855) Principal payments under capital lease obligations... (53,618) (287,539) (427,053) (879,415) Principal payments on long-term debt................. (11,489) -- (141,160) (338,464) Repurchase of preferred stock........................ -- -- -- (300,000) ------------ ------------ ------------ -------------- Net cash provided by financing activities.......... 2,929,174 13,271,236 808,709 27,041,719 ------------ ------------ ------------ -------------- Net increase (decrease) in cash and cash equivalents... 1,224,527 (482,681) 2,108,543 8,039,625 Cash and cash equivalents at beginning of period....... 5,189,236 6,413,763 5,931,082 -- ------------ ------------ ------------ -------------- Cash and cash equivalents at end of period............. $ 6,413,763 $ 5,931,082 $ 8,039,625 $ 8,039,625 ------------ ------------ ------------ -------------- ------------ ------------ ------------ -------------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid for interest................................. $ 91,038 $ 149,013 $ 171,752 $ 475,713 Cash paid for taxes.................................... -- -- 500,000 500,000 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Acquisition of equipment through incurrence of capital lease obligations..................................... $ 648,274 $ 25,669 $ 62,945 $ 1,368,406 Acquisition of leasehold improvements through incurrence of debt.................................... -- -- -- 197,304 Issuance of preferred stock for stock subscription receivable............................................ 4,000,000 -- -- 4,000,000 Accrual of deferred offering costs..................... 150,000 -- -- 150,000
See accompanying notes to financial statements. F-9 NPS PHARMACEUTICALS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1993, 1994, AND 1995 (1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NPS Pharmaceuticals, Inc. (the "Company"), considered a development stage company under the guidelines of STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 7, is engaged in the discovery and commercial development of novel pharmaceutical products, primarily small molecule drugs that target cell surface receptors and ion channels. Since inception, the Company's principal activities have been performing research and development, raising capital, and establishing research and license agreements. The following significant accounting policies are followed by the Company in preparing its financial statements: (a) CASH EQUIVALENTS Cash equivalents of $4.8 million and $5.4 million at December 31, 1994 and 1995, respectively, consist of short-term securities and certificates of deposit with an initial term of less than three months. For purposes of the statements of cash flows, the Company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents. (b) REVENUE RECOGNITION The Company recognizes revenue from its research agreements as related research costs are incurred and from its license fees and milestone payments as earned. Cash received in advance of the performance of the related research is recorded as deferred income. (c) PLANT AND EQUIPMENT Plant and equipment are stated at cost. Equipment under capital lease is stated at the lower of the present value of minimum lease payments at the beginning of the lease term or fair value of the equipment at the inception of the lease. Depreciation and amortization of equipment (including equipment held under capital lease) is calculated on the straight-line method over their estimated useful lives of five years. Leasehold improvements are amortized using the straight-line method over the shorter of the life of the asset or remainder of the lease term. Amortization of assets held under capital leases is included with depreciation and amortization expense. (d) NET LOSS PER SHARE The Company's loss per share is based on the weighted average number of common shares outstanding during the periods. Common stock equivalents (stock options and warrants) have been excluded in the computation as their inclusion would have an antidilutive effect. For periods prior to May 26, 1994, the date of the Company's initial public offering, upon which all outstanding shares of preferred stock were converted to shares of common stock, the loss presented is pro forma after giving retroactive effect to the conversion of Series C, D, and E preferred stock and the inclusion of common stock options issued for consideration below the initial public offering price during the twelve-month period prior to the date of the initial filing of the Registration Statement, even when antidilutive, pursuant to Securities and Exchange Commission Staff Accounting Bulletin No. 83, using the treasury-stock method. F-10 NPS PHARMACEUTICALS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1993, 1994, AND 1995 (1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (e) INCOME TAXES The Company accounts for income taxes using the asset and liability method. Under the asset and liability method, 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, 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. 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. (f) USE OF ESTIMATES Management of the Company has made estimates and assumptions relating to reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. (g) MARKETABLE INVESTMENT SECURITIES The Company adopted the provisions of Statement of Financial Accounting Standards No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY ("Statement 115"), January 1, 1994. Statement 115 requires that debt and equity securities be grouped in one of three categories: trading, available- for-sale, or held-to-maturity. Trading securities are bought and held principally for the purpose of selling them in the near term. Held-to-maturity securities are those securities in which the Company has the ability and intent to hold the security until maturity. All other securities not included in trading or held-to-maturity are classified as available-for-sale. The effect of this adoption of Statement 115 was not material to the Company's financial statements. Available-for sale securities are recorded at fair value. Held-to-maturity securities are recorded at amortized cost, adjusted for the amortization or accretion of premiums or discounts. Unrealized holding gains and losses, net of the related tax effect, on available-for-sale securities are excluded from earnings and are reported as a separate component of stockholders' equity until realized. Realized gains and losses from the sale of available-for-sale securities are determined on a specific-identification basis. A decline in the market value of any available-for-sale or held-to-maturity security below cost that is deemed other than temporary results in a reduction in carrying amount to fair value. The impairment is charged to earnings and a new cost basis for the security is established. Premiums and discounts are amortized or accreted over the life of the related held-to-maturity security as an adjustment to yield using the effective interest method. Dividend and interest income are recognized when earned. F-11 NPS PHARMACEUTICALS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1993, 1994, AND 1995 (2) MARKETABLE INVESTMENT SECURITIES The amortized cost, gross unrealized holding gains, gross unrealized holding losses and fair value for available-for-sale and held-to-maturity securities by major security type and class of security at December 31, 1994 and 1995, were as follows:
GROSS GROSS UNREALIZED AMORTIZED UNREALIZED HOLDING COST HOLDING GAINS LOSSES FAIR VALUE ------------ --------------- ------------- ------------ At December 31, 1994 Held-to-maturity: Corporate obligations (due within one year)................ $ 3,392,135 -- $ 296 $ 3,391,839 At December 31, 1995 Available-for-sale: Corporate obligations (due within one year)................ $ 300,000 -- -- $ 300,000
(3) COLLABORATIVE AND LICENSE AGREEMENTS The Company is pursuing product development both on an independent basis and in collaboration with others. Following is a description of significant current collaborations and license agreements. (a) KIRIN BREWERY COMPANY, LIMITED Effective June 30, 1995, NPS entered into a five year agreement with the pharmaceutical division of Kirin Brewery Company, Limited (a Japanese company), to develop and commercialize Norcalcin in Japan, China, Korea, and Taiwan. Kirin paid to NPS a $5.0 million license fee and has agreed to pay up to $7.0 million in research support, potential additional milestone payments totaling $13.0 million, and royalties on product sales. The Kirin research support payments are $500,000 per quarter through June 1996 and a total of $5.0 million over the remaining four years. Kirin received exclusive rights to develop and sell Norcalcin within its territory. Both parties will participate in a collaborative research program around NPS's parathyroid calcium receptor technology. The Company recognized the $5.0 million nonrefundable license fee and $1.0 million in research support as revenue in 1995. The agreement may be terminated by Kirin after June 30, 1996. (b) SMITHKLINE BEECHAM CORPORATION Effective November 1, 1993, the Company entered into the SmithKline Beecham Agreement ("SB Agreement") to collaborate on the discovery, development and marketing of drugs to treat osteoporosis and other bone metabolism disorders, excluding hyperparathyroidism. The SB Agreement establishes a three year research collaboration between the parties, which may be extended on mutual agreement. Under the SB Agreement, the Company granted SmithKline Beecham the exclusive license to develop and market worldwide compounds described under the SB Agreement, subject to the Company's right to co-promote in the United States. Once compounds have been selected for development, SmithKline Beecham has agreed to conduct and fund all development of such products, including all human clinical trials and regulatory submissions. The Company received an initial licensing fee payment of $4.0 million in November 1993 and received an additional $2.0 million payment in January 1995. The Company recognized this revenue as the related research costs were incurred, and recognized $600,000 in 1993, $3.6 million in 1994 and $1.8 million in 1995. Commencing on July 1, 1995, the Company began receiving quarterly research F-12 NPS PHARMACEUTICALS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1993, 1994, AND 1995 (3) COLLABORATIVE AND LICENSE AGREEMENTS (CONTINUED) (b) SMITHKLINE BEECHAM CORPORATION (CONTINUED) payments from SmithKline Beecham to support research efforts through the scheduled expiration of the research term on October 31, 1996, if not previously terminated. The Company recognized $1.6 million from such payments in 1995. The Company is also entitled to receive payments upon the achievement of specific development and regulatory milestones. The Company will receive royalties on sales of such compounds by SmithKline Beecham and a share of the profits from co-promoted products. S.R. One, Limited, an affiliate of SmithKline Beecham, is an equity investor in the Company. Subsequent to year-end, the Company reached its first milestone under the SB Agreement and received a corresponding milestone payment of $3.0 million. (c) THE BRIGHAM AND WOMEN'S HOSPITAL, INC. In February 1993, the Company entered into two agreements with The Brigham and Women's Hospital, Inc. (the "Hospital"). Under the first agreement, the Company received an exclusive license to the Hospital's calcium receptor patentable technology at that date. The Company will pay milestone payments to the Hospital and a royalty on sales of products covered by any issued patent under the license. The Company also entered into an agreement to sponsor research through February 28, 1996 at the Hospital in the amount of $300,000 per year and the Hospital granted to the Company a right of first negotiation for license rights to any newly discovered patentable calcium receptor technology. During 1993, 1994, and 1995, the Company paid to the Hospital $400,241, $320,121, and $306,777, respectively, in sponsored research payments and license fees. On February 7, 1996, the Company reached an agreement with the Hospital to extend the sponsored collaborative research agreement. Under the terms of the extension, the Company has agreed to continue funding research for an additional two years. The extended research agreement calls for the Company to make research support and advance royalty payments of $810,000 to the Hospital during the period from February 1996 to February 1998. (d) SMALL BUSINESS INNOVATION RESEARCH GRANTS The Company recognized revenue of $267,568, $260,706, and $126,444 during 1993, 1994, and 1995, respectively, under the terms of Small Business Innovation Research grants from three government agencies. F-13 NPS PHARMACEUTICALS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1993, 1994, AND 1995 (4) LEASES The Company is obligated under capital leases for equipment that expire at various dates during the next three years. The Company also has a noncancelable operating lease for office space that expires in September 1999. Rental expense for this operating lease was $340,276, $413,552, and $493,667 for 1993, 1994, and 1995, respectively. The present value of future minimum lease payments on capital leases and future lease payments under the noncancelable operating lease as of December 31, 1995 are:
CAPITAL OPERATING LEASES LEASE ---------- ------------ Year ending December 31: 1996.............................................................. $ 466,129 $ 525,919 1997.............................................................. 48,123 525,919 1998.............................................................. 9,127 525,919 1999.............................................................. -- 394,439 ---------- ------------ Total minimum lease payments.................................... 523,379 $ 1,972,196 ------------ ------------ Less amounts representing interest (at rates ranging from 6% to 16%)............................................................... 34,388 ---------- Present value of net minimum capital lease payments................. 488,991 Less current installments of obligations under capital leases....... 435,230 ---------- Obligations under capital leases, excluding current installments................................................... $ 53,761 ---------- ----------
At December 31, 1994 and 1995, the gross amount of equipment and related accumulated amortization recorded under capital leases was as follows:
1994 1995 ------------ ------------ Equipment......................................................... $ 1,232,980 $ 1,212,699 Less accumulated amortization..................................... 572,090 748,881 ------------ ------------ Net equipment................................................. $ 660,890 $ 463,818 ------------ ------------ ------------ ------------
The Company has granted a leasing company a warrant to purchase 20,250 common shares at $4.67 per share. The warrant expires in May 1996. (5) LONG-TERM DEBT Long-term debt at December 31, 1995 consists of the following notes payable to a financial institution: 10% to 16% notes payable in monthly installments of $37,105 including interest, due June 1, 1998 through June 1, 1999; secured by certain equipment and leasehold improvements........ $1,025,274 Less, current installments...................................... 331,746 --------- Long-term debt, excluding current installments.............. $ 693,528 --------- ---------
The aggregate maturities of long-term debt for each of the years subsequent to December 31, 1995 are as follows: 1996, $331,746; 1997, $378,613; 1998, $302,065; and 1999, $12,850. F-14 NPS PHARMACEUTICALS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1993, 1994, AND 1995 (5) LONG-TERM DEBT (CONTINUED) In connection with these notes payable, the Company granted the financial institution a warrant to purchase 32,542 shares of common stock at $3.69 per share. The warrant expires in June 2002. (6) CAPITAL STOCK The Company is incorporated under the laws of the State of Delaware with authorized capital of 5,000,000 shares of preferred stock and 20,000,000 shares of common stock, all with a par value of $.001. No shares of preferred stock were issued or outstanding at December 31, 1994 and 1995. The Company has three stock option plans: the 1987 Stock Option Plan (the "1987 Plan"), the 1994 Equity Incentive Plan (the "1994 Plan"), and the 1994 Non-Employee Directors' Stock Option Plan (the "Directors' Plan"). An aggregate of 2,390,000 shares are authorized for issuance under the three plans. As of December 31, 1995, there are no shares reserved for future grant under the 1987 Plan, there are 315,503 shares reserved for future grant under the 1994 Plan, and there are 36,000 shares reserved for future grant under the Directors' Plan. Under the Company's 1994 Plan, the exercise price of options granted is not less than the fair market value on the date of grant. The number of shares, terms, and exercise period are determined by the Board of Directors on an option-by-option basis, but the exercise period does not extend beyond ten years from the date of the grant. Under the Directors' Plan, each new director who is not an employee of the Company will be granted an option to purchase 15,000 shares of common stock. Additional options will be granted at December 31 of each subsequent year. The exercise price of options granted is the fair market value on the date of grant. A summary of activity related to aggregate options under all three plans is indicated in the following table:
1993 ------------------------- 1994 1995 EXERCISE --------------------------- --------------------------- OPTIONS PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE ---------- ------------- ---------- --------------- ---------- --------------- Outstanding, beginning of year..................... 719,400 $ .34 - .81 1,192,875 $ .34 - 4.00 1,419,125 $ .34 - 6.00 Granted................... 511,500 .74 - 4.00 309,800 3.00 - 6.00 374,000 3.50 - 8.25 Exercised................. (37,524) .34 - .74 (46,118) .34 - .74 (257,633) .34 - 2.00 Canceled.................. (501) - .74 (37,432) .34 - 4.00 (4,568) 2.00 - 3.00 ---------- ------------- ---------- --------------- ---------- --------------- Outstanding, end of year..................... 1,192,875 $ .34 - 4.00 1,419,125 $ .34 - 6.00 1,530,924 $ .34 - 8.25 ---------- ------------- ---------- --------------- ---------- --------------- ---------- ------------- ---------- --------------- ---------- ---------------
Exercise of options by employees, consultants, and directors has been made subject to vesting based on job tenure and as of December 31, 1995, options to purchase 802,540 shares of common stock are vested and exercisable. In November and December 1993, the Company issued options to purchase 378,750 and 4,500 shares of common stock, respectively, at an exercise price of $2.00 and $4.00 per share, respectively, to employees, officers, and directors of the Company. For financial statement presentation purposes, the Company has recorded as deferred compensation expense the excess of the deemed value of the common stock at the date of grant over the exercise price. The compensation expense will be amortized ratably over the F-15 NPS PHARMACEUTICALS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1993, 1994, AND 1995 (6) CAPITAL STOCK (CONTINUED) three-year vesting period of the options and will aggregate $766,500 over such period. During 1995, employees exercised 257,633 stock options utilizing 15,248 common shares and cash for 242,385 common shares. The Company's 1994 Employee Stock Purchase Plan (the "Purchase Plan") has 90,000 shares authorized for purchase by employees of the Company. Employees have purchased 39,771 shares under the Purchase Plan as of December 31, 1995, and 50,229 shares remain available for future purchase. (7) INCOME TAXES The Company has income tax expense of $500,000 for the year ended December 31, 1995 consisting of current foreign taxes. Income tax expense differed from the amounts computed by applying the U.S. federal income tax rate of 34 percent to net income (loss) before income taxes as a result of the following:
1993 1994 1995 ------------ ------------ ------------ Computed expected tax benefit............................... $ (2,433,918) $ (2,297,153) $ (958,150) Change in the beginning-of-the-year balance of the valuation allowance for deferred tax assets allocated to income tax expense.................................................... 2,621,555 2,376,354 1,279,785 Foreign taxes net of federal income tax benefit............. -- -- 330,000 Other....................................................... (187,637) (79,201) (151,635) ------------ ------------ ------------ $ -- $ -- $ 500,000 ------------ ------------ ------------ ------------ ------------ ------------
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets at December 31, 1994 and 1995 are presented below:
1994 1995 ------------ ------------ Deferred tax assets: Deferred revenue............................................... $ -- $ 220,000 Equipment and leasehold improvements, principally due to differences in depreciation................................... 183,000 159,000 Net operating loss carryforward................................ 5,815,000 6,873,000 Research activities credit carryforward........................ 803,000 953,000 ------------ ------------ Total gross deferred tax assets.............................. 6,801,000 8,205,000 Less valuation allowance..................................... 6,801,000 8,205,000 ------------ ------------ Net deferred tax assets...................................... $ -- $ -- ------------ ------------ ------------ ------------
Subsequently recognized tax benefits relating to the valuation allowance for deferred tax assets as of December 31, 1995 will be allocated as an income tax benefit to be reported in the statement of operations. The valuation allowance for deferred tax assets as of January 1, 1994 was $4.2 million. The net change in the Company's total valuation allowance for the years ended December 31, 1994 and 1995 was an increase of $2.6 million and $1.4 million, respectively. F-16 NPS PHARMACEUTICALS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1993, 1994, AND 1995 (7) INCOME TAXES (CONTINUED) At December 31, 1995, the Company had net operating loss and research credit carryforwards to offset future income for federal income tax purposes approximately as follows:
NET OPERATING LOSS NET OPERATING LOSS CARRYFORWARD FOR CARRYFORWARD FOR RESEARCH REGULAR INCOME TAX ALTERNATIVE MINIMUM CREDIT PURPOSES TAX PURPOSES CARRYFORWARD ------------------ -------------------- ------------ Expiring 2002......................................... $ -- $ -- $ 2,000 2003......................................... -- -- 14,000 2004......................................... 159,000 90,000 18,000 2005......................................... 292,000 273,000 20,000 2006......................................... 1,377,000 1,385,000 48,000 2007......................................... 1,141,000 1,321,000 49,000 2008......................................... 3,132,000 3,425,000 335,000 2009......................................... 9,493,000 9,492,000 317,000 2010......................................... 2,832,000 2,939,000 150,000 ------------------ ----------- ------------ $ 18,426,000 $ 18,925,000 $ 953,000 ------------------ ----------- ------------ ------------------ ----------- ------------
Under the rules of the Tax Reform Act of 1986, the Company has undergone a greater than 50 percent change of ownership since 1986. Consequently, use of the Company's net operating loss carryforward and research credit carryforward against future taxable income in any one year may be limited. The maximum amount of carryforwards available in a given year is limited to the product of the Company's fair market value on the date of ownership change and the federal long-term tax-exempt rate, plus any limited carryforward not utilized in prior years. (8) EMPLOYEE BENEFIT PLAN In October 1990, the Company adopted a tax-qualified employee savings and retirement plan (the "401(k) Plan") covering all of the Company's employees. Pursuant to the 401(k) Plan, employees may elect to reduce their current compensation by the lesser of 15 percent of eligible compensation or the prescribed annual limit ($9,240 in 1995) and 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. The Company has not made any such contributions to date. (9) CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS A director of the Company is Vice President of Plexus Ventures, Inc. ("Plexus"). The Company had a consulting agreement with Plexus through December 31, 1995, whereunder Plexus assisted the Company with its effort to estalish a collaboration for Norcalcin in Europe. During the years ended December 31, 1994, and 1995, the Company paid fees to Plexus totaling $34,000 and $84,500, respectively. Plexus will earn an additional fee as payments are received from Amgen. Under the agreement the maximum additional fee is $500,000, but the Company and Plexus have agreed to negotiate in good faith for an increase in the maximum because of the non-European territory licensed to Amgen. (10)ACCOUNTING STANDARDS NOT YET ADOPTED In October of 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK BASED COMPENSATION ("FASB 123"). The Company is F-17 NPS PHARMACEUTICALS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1993, 1994, AND 1995 (10)ACCOUNTING STANDARDS ISSUED NOT YET ADOPTED (CONTINUED) required to adopt the provisions of this statement for years beginning after December 15, 1995. This statement encourages all entities to adopt a fair value based method of accounting for employee stock options or similar equity instruments. However, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic-value method of accounting prescribed by APB opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB 25"). Entities electing to remain with the accounting in APB 25 must make pro forma disclosures of net income and earnings per share as if the fair value based method of accounting defined in this statement had been applied. It is currently anticipated that the Company will continue to measure compensation costs in accordance with APB 25 and provide the disclosures required by FASB 123. (11)SUBSEQUENT EVENTS On March 18, 1996, the Company entered into a development and license agreement with Amgen Inc. ("Amgen") to develop and commercialize Norcalcin-TM- and other compounds for the treatment of hyperparathyroidism and indications other than osteoporosis. Amgen agreed to pay to the Company a $10.0 million non-refundable license fee, potential additional development milestone payments totaling $26.0 million, and royalties on any future product sales. Amgen also agreed to purchase one million shares of the Company's common stock for $7.5 million. Amgen is required to pay all costs of developing and commercializing products. Amgen received exclusive worldwide rights excluding Japan, China, Korea and Taiwan. The agreement may be terminated by Amgen at any time. The Company received the $10.0 million license fee upon the signing of the definitive agreement in March 1996. It is anticipated that closing of the stock agreement and issuance of the shares will take place in March 1996. The pro forma balance sheet at December 31, 1995 reflects receipt from Amgen of the $10.0 million license fee and the issuance of the Common Stock for cash of $7.5 million. (12)CONTINGENCY The Company is subject to federal, state and local environmental laws and regulations. It is the policy of the Company to comply with these laws and regulations. The Company has received a letter from the United States Environmental Protection Agency notifying the Company that it may have incurred a liability for two barrels of radioactive waste taken by a third party contractor to a hazardous and radioactivity waste storage treatment and disposal facility. The Company has verified that the two barrels containing the waste have been removed from the disposal facility and believes, based upon an inspection, that the barrels neither leaked nor were damaged. The Company has made no provision for any future liability for this contingency since any amount of potential liability is not reasonably estimable. F-18 - - -------------------------------------------- -------------------------------------------- - - -------------------------------------------- -------------------------------------------- NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED HEREIN AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITY OTHER THAN THE SECURITIES OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SUCH SECURITIES TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. ------------------------ TABLE OF CONTENTS
PAGE --------- Prospectus Summary............................... 3 Risk Factors..................................... 6 Use of Proceeds.................................. 14 Price Range of Common Stock...................... 15 Dividend Policy.................................. 15 Capitalization................................... 16 Dilution......................................... 17 Selected Financial Data.......................... 18 Management's Discussion and Analysis of Financial Condition and Results of Operations............ 19 Business......................................... 22 Management....................................... 42 Certain Relationships and Related Transactions... 51 Principal Stockholders........................... 52 Description of Capital Stock..................... 54 Underwriting..................................... 56 Legal Matters.................................... 58 Experts.......................................... 58 Additional Information........................... 58 Index to Financial Statements.................... F-1
--------------------- 3,000,000 SHARES [LOGO] COMMON STOCK ------------------- PROSPECTUS ------------------- Vector Securities International, Inc. Salomon Brothers Inc UBS Securities LLC MAY 3, 1996 - - -------------------------------------------- -------------------------------------------- - - -------------------------------------------- -------------------------------------------- -----END PRIVACY-ENHANCED MESSAGE-----