AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 18, 1997
                                                       REGISTRATION NO. 333-
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                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
 
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                                   FORM SB-2
                            REGISTRATION STATEMENT
                                     UNDER
                          THE SECURITIES ACT OF 1933
 
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                                 DEPOMED, INC.
          (NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
 
        CALIFORNIA                      8731                  94-3229046
     (STATE OR OTHER             (PRIMARY STANDARD         (I.R.S. EMPLOYER
     JURISDICTION OF         INDUSTRIAL CLASSIFICATION    IDENTIFICATION NO.)
     INCORPORATION OR               CODE NUMBER)
      ORGANIZATION)
 
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                              1170 B CHESS DRIVE,
                         FOSTER CITY, CALIFORNIA 94404
  (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
                   REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
 
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                                 JOHN W. FARA
                     PRESIDENT AND CHIEF EXECUTIVE OFFICER
                              1170 B CHESS DRIVE
                         FOSTER CITY, CALIFORNIA 94404
                                (415) 513-0990
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
                             OF AGENT FOR SERVICE)
 
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                                  Copies to:
           JULIAN N. STERN                         LAWRENCE B. FISHER
         STEPHEN C. FERRUOLO               ORRICK, HERRINGTON & SUTCLIFFE LLP
   HELLER EHRMAN WHITE & MCAULIFFE                  666 FIFTH AVENUE
        525 UNIVERSITY AVENUE                   NEW YORK, NEW YORK 10103
     PALO ALTO, CALIFORNIA 94301               TELEPHONE: (212) 506-5000
      TELEPHONE: (415) 324-7000                FACSIMILE: (212) 506-5151
      FACSIMILE: (415) 324-0638
 
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  APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable following the effectiveness of this Registration Statement.
  If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
  If this Form is filed to register additional securities for an offering
pursuant to Rule 426(b) under the Securities Act of 1933, please check the
following box and list the Securities Act registration number of the earlier
effective registration statement for the same offering: [_]
  If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering: [_]
  If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [_]
 
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                        CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED MAXIMUM MAXIMUM AMOUNT OF TITLE OF EACH CLASS OF AMOUNT TO BE PRICE OFFERING REGISTRATION SECURITIES TO BE REGISTERED REGISTERED PER SHARE (1) PRICE (1) FEE - --------------------------------------------------------------------------------------- Common Stock, no par value (2)..................... 2,875,000 $7.00 $20,125,000 $6,098 - --------------------------------------------------------------------------------------- Common Stock Purchase Warrants ("Warrants") (3)..................... 1,437,500 0.10 143,750 44 - --------------------------------------------------------------------------------------- Common Stock issuable upon exercise of Warrants (4)..................... 1,437,500 9.80 14,087,500 4,269 - --------------------------------------------------------------------------------------- Representative's Warrants (5)..................... 250,000 0.0001 25 -- - --------------------------------------------------------------------------------------- Common Stock issuable upon exercise of Representative's Warrants (5)..................... 250,000 8.40 2,100,000 636 - --------------------------------------------------------------------------------------- Warrants issuable upon exercise of Representative's Warrants (5)..................... 125,000 0.12 15,000 5 - --------------------------------------------------------------------------------------- Common Stock underlying Warrants issuable upon exercise of Representative's Warrants (5)..................... 125,000 8.40 1,050,000 318 - --------------------------------------------------------------------------------------- Totals................. -- -- $37,521,275 $11,370
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- (1) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457 of the Securities Act of 1933, as amended (the "Securities Act"). (2) Includes 375,000 shares of Common Stock that the Underwriters have the option to purchase to cover over-allotments in connection with the Registrant's sale of the securities, if any. (3) Includes 187,500 Warrants that the Underwriters have the option to purchase to cover over-allotments in connection with the Registrant's sale of the securities, if any. (4) Includes 187,500 shares of Common Stock issuable upon exercise of Warrants that the Underwriters have the option to purchase to cover over-allotments in connection with the Registrant's sale of the securities, if any. (5) In connection with the Registrant's sale of the securities, the Registrant is granting to the Representative of the several Underwriters (the "Representative") warrants to purchase 250,000 shares of Common Stock and 125,000 Warrants (the "Representative's Warrants"). --------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF + +ANY SUCH STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED APRIL 18, 1997 PROSPECTUS DEPOMED, INC. 2,500,000 SHARES OF COMMON STOCK AND 1,250,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS ----------- DepoMed, Inc., a California corporation (the "Company"), hereby offers (the "Offering") 2,500,000 shares (the "Shares") of common stock, no par value (the "Common Stock"), and 1,250,000 redeemable common stock purchase warrants (the "Warrants"). The Shares and Warrants are sometimes hereinafter collectively referred to as the "Securities." The Shares and Warrants may only be purchased together on the basis of two shares of Common Stock and one Warrant and will trade separately immediately upon issuance. Each Warrant entitles the registered holder thereof to purchase one share of Common Stock at an exercise price of $ per share [140% of the initial public offering price per share of Common Stock], at any time during the period commencing on , 1998 [twelve months from the date of the Prospectus] until , 2002 [5 years after the date of this Prospectus]. Commencing , 1998 [18 months from the date of the Prospectus], the Warrants are subject to redemption by the Company, in whole but not in part, at $0.10 per Warrant, on 30 days' prior written notice provided that the average closing sale price of the Common Stock as reported on the American Stock Exchange ("AMEX") equals or exceeds $ per share [150% of the initial public offering price per share of Common Stock] for any 20 trading days within a period of 30 consecutive trading days ending on the fifth trading day prior to the date of the notice of redemption. See "Description of Securities--Warrants." Prior to this Offering, there has been no public market for the Common Stock or the Warrants and there can be no assurance that such a market will develop after the completion of this Offering, or, if developed, that it will be sustained. It is currently anticipated that the initial public offering prices will be $6.00-$7.00 per Share and $0.10 per Warrant, respectively. For information regarding the factors considered in determining the initial public offering prices of the Shares and Warrants and the terms of the Warrants, see "Risk Factors" and "Underwriting." Application has been made to include the Shares and Warrants on the AMEX under the symbols "DMI" and "DMI.WS," respectively. ----------- THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE SUBSTANTIAL DILUTION. SEE "RISK FACTORS" COMMENCING ON PAGE 7 AND "DILUTION." ----------- 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. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO PUBLIC DISCOUNT(1) COMPANY(2) - -------------------------------------------------------------------------------- Per Share................................. $ $ $ - -------------------------------------------------------------------------------- Per Warrant............................... $ $ $ - -------------------------------------------------------------------------------- Total(3).................................. $ $ $
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (1) Does not include additional compensation payable to National Securities Corporation, the representative (the "Representative") of the several Underwriters, in the form of a non-accountable expense allowance. In addition, see "Underwriting" for information concerning indemnification and contribution arrangements with the Underwriters and other compensation payable to the Representative. (2) Before deducting expenses payable by the Company estimated at $ , excluding the non-accountable expense allowance payable to the Representative. (3) The Company has granted to the Representative an option, exercisable within 45 days after the date of this Prospectus, to purchase up to 375,000 additional shares of Common Stock and/or up to 187,500 additional Warrants, all upon the same terms and conditions as set forth above, solely to cover over-allotments, if any (the "Over-Allotment Option"). If such Over- Allotment Option is exercised in full, the total Price to Public, Underwriting Discount, Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting." ----------- The Securities are being offered by the Underwriters, subject to prior sale, when, as and if delivered to and accepted by the Underwriters and subject to approval of certain legal matters by their counsel and subject to certain other conditions. The Underwriters reserve the right to withdraw, cancel or modify this Offering and to reject any order in whole or in part. It is expected that delivery of the Securities will be made against payment at the offices of National Securities Corporation, Seattle, Washington, on or about , 1997. NATIONAL SECURITIES CORPORATION THE DATE OF THIS PROSPECTUS IS , 1997. CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK AND WARRANTS, INCLUDING PURCHASES OF THE COMMON STOCK AND/OR WARRANTS TO STABILIZE THEIR RESPECTIVE MARKET PRICES, PURCHASES OF THE COMMON STOCK AND/OR WARRANTS TO COVER SOME OR ALL OF A SHORT POSITION MAINTAINED BY THE UNDERWRITERS IN THE COMMON STOCK AND/OR WARRANTS, RESPECTIVELY, AND THE IMPOSITION OF PENALTY BIDS. FOR A DISCUSSION OF THESE ACTIVITIES, SEE "UNDERWRITING." 2 PROSPECTUS SUMMARY This Prospectus contains forward-looking statements that involve risk and uncertainties. The Company's actual results could differ materially from those anticipated in such forward-looking statements as a result of certain factors, including those set forth under "Risk Factors" and elsewhere in this Prospectus. The following summary is qualified in its entirety by the more detailed information and the Financial Statements and Notes thereto appearing elsewhere in this Prospectus. Except as otherwise noted, all information in this Prospectus (i) assumes no exercise of the Over-Allotment Option, (ii) gives effect to a one-for-three reverse stock split of the Common Stock on , 1997, (iii) assumes the Warrants and the Representative's Warrants are not exercised, (iv) assumes no exercise of 76,923 warrants to purchase Common Stock (the "Bridge Warrants") issued in connection with the Company's Bridge Financing (the "Bridge Financing") completed in April 1997, and (v) reflects the conversion of all outstanding shares of Series A Preferred Stock and Series B Preferred Stock (collectively, the "Preferred Stock") into 908,623 shares of Common Stock effective automatically upon the closing of the Offering. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Description of Securities," "Underwriting" and Notes to Financial Statements. THE COMPANY DepoMed, Inc. (the "Company") is a development stage company engaged in the development of new and proprietary oral drug delivery technologies. Utilizing these technologies, the Company has developed two types of oral drug delivery systems, the Gastric Retention System (the "GR System") and the Reduced Irritation System (the "RI System" and collectively with the GR System, the "DepoMed Systems"). The GR System is designed to be retained in the stomach for an extended period of time while it delivers the incorporated drug or drugs, and the RI System is designed to reduce the gastrointestinal ("GI") irritation that is a side effect of many drugs. In addition, the DepoMed Systems are designed to provide continuous, controlled delivery of an incorporated drug. The Company intends to develop products utilizing the DepoMed Systems in collaboration with pharmaceutical and biotechnology companies, from which the Company expects to receive license fees, research and development funding, milestone payments and royalties. The Company also intends to develop independently certain over-the-counter ("OTC") and generic oral drug products utilizing the DepoMed Systems. The Company currently has a joint research and development agreement with Bristol-Myers Squibb Company ("BMS") to develop a product incorporating a BMS proprietary compound into the GR System. In addition, the Company has entered into a feasibility study with GalaGen Inc. ("GalaGen") to use the GR System to enhance local effectiveness and/or provide continuous, controlled delivery of GalaGen's proprietary immunoglobulin products. The Company is also independently developing a reduced irritation aspirin product and an enhanced absorption calcium supplement product and has identified certain other product candidates expected to benefit from the DepoMed Systems. In April 1997, the Company and Oakmont Pharmaceuticals, Inc. ("Oakmont") signed a letter of intent to enter into an agreement pursuant to which Oakmont will manufacture the Company's reduced irritation aspirin and enhanced absorption calcium supplement products and have rights to distribute and sell these products in territories to be determined. The letter of intent also provides for the Company and Oakmont each to offer rights to future products to the other party. The DepoMed Systems include proprietary formulations of drug-containing polymeric units that allow multihour delivery of an incorporated drug continuously into the stomach either for prolonged, local treatment in the stomach or for enhanced absorption in the GI tract. The Company believes that the GR System has the ability to enhance the bioavailability (blood levels) of drugs that are preferentially absorbed in the stomach, allow for more effective treatment of local stomach disorders, and provide continuous and extended delivery of drugs to the upper part of the small intestine, the site where many drugs are absorbed most efficiently. The RI System is designed to reduce the irritation to the GI tract caused by many commonly used drugs, including aspirin. The Company believes the RI System has the potential to make such drugs less irritating and therefore more widely used. 3 In addition to the benefits described above, the Company believes that the DepoMed Systems may offer additional advantages including multihour release patterns for drugs of almost any solubility and the ability to use drug combinations previously not feasible due to the pharmacokinetic differences of drugs. The Company believes that by reducing the frequency of drug administration, use of the DepoMed Systems may lead to reduced costs and improved patient compliance. Also, by providing new formulations of existing products using the DepoMed Systems, the Company believes that it will be able to provide its collaborative partners with the ability to extend their patent franchises on such products. The Company intends to have the DepoMed Systems used with as many pharmaceutical products as possible with an emphasis on pharmaceutical products which command a large market share or are in large market segments and where the Company believes the DepoMed Systems will provide an advantage over other drug delivery systems. The Company's primary strategy for the development and commercialization of the DepoMed Systems involves establishing collaborative relationships with pharmaceutical and biotechnology companies to develop improved therapeutic products. The Company also intends to develop improved generic and/or OTC products that utilize the DepoMed Systems either independently or jointly by entering into collaborative partnerships with pharmaceutical, biotechnology or other health care companies. The Company was incorporated in the State of California in August 1995. Pursuant to a settlement agreement between M6 Pharmaceuticals, Inc. ("M6") on the one hand, and Dr. John W. Shell and DepoMed Systems, Inc. ("DSI") on the other hand, the Company obtained substantially all the assets, and assumed certain liabilities, attributable to the business conducted by DSI prior to its merger into M6. The Company's executive offices are located at 1170 B Chess Drive, Foster City, California 94404 and its telephone number is (415) 513- 0990. 4 THE OFFERING Securities offered................... 2,500,000 shares of Common Stock and 1,250,000 Warrants. Terms of Warrants.................... Each Warrant entitles the holder thereof to purchase, at any time commencing , 1998 [one year after the date of this Prospectus], until , 2002 [five years after the date of this Prospectus], one share of Common Stock at a price of $ per share [140% of the initial public offering price per share of Common Stock]. Commencing , 1998 [18 months after the date of this Prospectus], the Warrants are subject to redemption by the Company, in whole but not in part, at $.10 per Warrant provided that the average closing sale price of the Common Stock as reported on the AMEX equals or exceeds $ per share [150% of the initial public offering price of the Common Stock] for any 20 trading days within a period of 30 consecutive trading days ending on the fifth trading day prior to the date of the notice of redemption. See "Description of Securities." Common Stock outstanding prior to 4,263,447 shares of Common Stock. the Offering(1)..................... Securities to be outstanding after 6,763,447 shares of Common Stock and the Offering(1)..................... 1,250,000 Warrants. Use of proceeds...................... For research and development, laboratory and facilities capital expenditures, repayment of certain indebtedness and working capital and general corporate purposes. See "Use of Proceeds." Proposed AMEX symbols:(2) Common Stock....................... DMI Warrants........................... DMI.WS Risk Factors......................... An investment in the Securities offered hereby involves a high degree of risk and immediate and substantial dilution, and should be made only by investors who can afford the loss of their entire investment. See "Risk Factors" and "Dilution." - -------- (1) Excludes 196,667 shares of Common Stock issuable upon exercise of outstanding stock options as of March 31, 1997 at a weighted average exercise price of $1.64 per share under the Company's 1995 Stock Option Plan (the "Stock Plan"). Also excludes 128,333 shares available for grant under the Stock Plan. See "Management--1995 Stock Option Plan." (2) Application has been made for listing of the Common Stock and Warrants on the AMEX. There can be no assurance that the Common Stock and Warrants will be accepted for listing on the AMEX. 5 SUMMARY FINANCIAL INFORMATION
PERIOD FROM PERIOD FROM INCEPTION INCEPTION (AUGUST 7, 1995) YEAR ENDED (AUGUST 7, 1995) TO DECEMBER 31, TO DECEMBER 31, 1995 1996 DECEMBER 31, 1996 ----------------- ------------ ----------------- STATEMENT OF OPERATIONS DATA: Product development revenues.................... $ -- $ 317,971 $ 317,971 Operating expenses: Research and development expenses.................. 138,816 390,496 529,312 General and administrative expenses.................. 155,157 393,676 548,833 Purchase of in-process research and development.. 298,154 -- 298,154 --------- ---------- ----------- Total operating expenses..... 592,127 784,172 1,376,299 Loss from operations......... (592,127) (466,201) (1,058,328) Interest expense, net........ 8,541 6,572 15,113 --------- ---------- ----------- Net loss..................... $(600,668) $ (472,773) $(1,073,441) ========= ========== =========== Pro forma net loss per share (1)......................... $ (0.11) ========== Shares used in computing pro forma net loss per share (1)......................... 4,285,653 ========== DECEMBER 31, 1996 ------------------------------ PRO FORMA ACTUAL AS ADJUSTED(2) ------------ ----------------- BALANCE SHEET DATA: Working capital (deficit)...................... $ (516,688) $13,467,574 Total assets................................... 333,127 14,317,389 Notes payable to shareholders.................. 294,238 -- Deficit accumulated during the development stage......................................... (1,073,441) (1,073,441) Total shareholders' equity (net capital defi- ciency)....................................... (381,432) 13,897,068
- -------- (1) See Note 2 of Notes to Financial Statements for an explanation of the determination of the number of shares used in computing pro forma net loss per share. (2) Adjusted to give effect to (i) the sale of 278,500 shares of Series B Preferred Stock in the first quarter of 1997, (ii) the Bridge Financing, and (iii) the receipt of the estimated net proceeds of the Offering upon an assumed initial public offering price of $6.50 per Share and $.10 per Warrant and the initial application of the net proceeds therefrom. See "Use of Proceeds." 6 RISK FACTORS This Prospectus contains forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those discussed in the forward-looking statements as a result of certain factors, including those set forth below and elsewhere in this Prospectus. An investment in the Securities offered hereby involves a high degree of risk and should be made only by investors who can afford the loss of their entire investment. Prospective investors should carefully review and consider the risk factors described below and other information in this Prospectus before purchasing the Securities. EARLY STAGE OF DEVELOPMENT; WORKING CAPITAL DEFICIT; LIMITED REVENUES; LIMITED OPERATING HISTORY The Company is at an early stage of development and is subject to all business risks associated with a new enterprise, including constraints on the Company's financial and personnel resources, lack of established credit facilities and collaborative partnering relationships, and uncertainties regarding product development and future revenues. At December 31, 1996, the Company had an accumulated deficit of $1,073,441 and a working capital deficit of $516,688. The Company anticipates that it will continue to incur substantial additional operating losses for at least the next several years and expects cumulative losses to increase as the Company's research and development efforts expand. The Company has had only minimal revenues to date from collaborative research and development arrangements and feasibility studies, and no revenues from product sales. There can be no assurance as to when or whether it will be able to develop significant sources of revenue or that its operations will become profitable, even if it is able to commercialize any products.The Company has only a limited history of operations, consisting primarily of development of its products and sponsorship of research. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Notes to Financial Statements. GOING CONCERN DISCLOSURE IN INDEPENDENT AUDITORS' REPORT The report of the Company's independent auditors with respect to the Company's financial statements included in this Prospectus includes a "going concern" qualification, indicating that the Company's losses and deficits in working capital and shareholders' equity raise substantial doubt about the Company's ability to continue as a going concern. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Notes to Financial Statements. NO ASSURANCE OF SUCCESSFUL PRODUCT DEVELOPMENT The Company's research and development programs are at an early stage of development. Substantial additional research and development will be necessary in order for the Company to develop the DepoMed Systems, and there can be no assurance that the DepoMed Systems will be developed or that products utilizing the DepoMed Systems will be commercialized by the Company or third parties in a timely manner or at all. In addition to further research and development related to the DepoMed Systems, products utilizing the DepoMed Systems will require clinical testing, regulatory approval and substantial additional investment prior to commercialization. There can be no assurance that products utilizing the DepoMed Systems will be successfully developed, prove to be safe and efficacious in clinical trials, meet applicable regulatory standards, be capable of being produced in commercial quantities at acceptable costs, be eligible for third-party reimbursement from governmental or private insurers, be successfully marketed or achieve market acceptance. Further, the DepoMed Systems may prove to have undesirable or unintended side effects that may prevent or limit their commercial use. The Company or its collaborative partners may find that products that appeared promising in preclinical studies do not demonstrate efficacy in larger-scale, Phase I, Phase II and Phase III clinical trials and/or that such products will not receive regulatory approvals. Accordingly, any product development program undertaken by the Company may be curtailed, redirected or eliminated at any time which could have a material adverse effect on the Company. See "Business--The DepoMed Systems." NEED FOR SUBSTANTIAL ADDITIONAL FUNDS The Company anticipates that the net proceeds from this Offering will enable it to meet its capital and operational requirements for at least the 12 months following the date of this Prospectus. However, this 7 expectation is based on the Company's current operating plan which can change as a result of many factors, and the Company could require additional funding sooner than anticipated. The Company's cash needs may also vary materially from those now planned because of results of research and development, relationships with possible collaborative partners, changes in the focus and direction of the Company's research and development programs, competitive and technological advances, results of clinical testing, requirements of the United States Food and Drug Administration ("FDA") and comparable foreign regulatory processes and other factors. The Company will require substantial funds of its own or from third parties to conduct research and development, preclinical and clinical testing, and to manufacture (or have manufactured) and market (or have marketed) the products utilizing the DepoMed Systems. The net proceeds of this Offering are not expected to be sufficient to fund the Company's operations through commercialization of products yielding sufficient revenues to support the Company's operations. The Company has no credit facility or other committed sources of capital. To the extent capital resources are insufficient to meet future capital requirements, the Company will have to raise additional funds to continue the development of the DepoMed Systems. There can be no assurance that such funds will be available on favorable terms, or at all. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of such securities could result in dilution to the Company's shareholders. If adequate funds are not available, the Company may be required to curtail operations significantly or to obtain funds through entering into collaboration agreements on unattractive terms. The Company's inability to raise capital would have a material adverse effect on the Company. See "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." DEPENDENCE ON AND NEED FOR COLLABORATIVE PARTNERS The Company's strategy for the research, development, clinical testing, manufacturing and commercialization of products utilizing the DepoMed Systems requires entering into collaborative arrangements with pharmaceutical and biotechnology companies. The Company has received substantially all of its revenues since inception from BMS and GalaGen and intends to enter into collaborative arrangements with other companies to apply the DepoMed Systems, fund development, commercialize potential products utilizing the DepoMed Systems and assist in obtaining regulatory approval. Although the Company has entered into a joint research agreement with BMS and a feasibility study with GalaGen, there can be no assurance that either BMS or GalaGen will choose to continue to fund these projects or enter into arrangements to commercialize products utilizing the DepoMed Systems or, if they do, that any products utilizing the DepoMed Systems will be successfully developed or commercialized. Although the Company has entered into a letter of intent with Oakmont pursuant to which Oakmont will manufacture the Company's reduced irritation aspirin and enhanced absorption calcium supplement products and have rights to distribute and sell these products in certain territories, there can be no assurance that the Company and Oakmont will enter into a definitive agreement or, if they do, that the Company will be successful in developing these products or Oakmont will be successful in manufacturing, distributing or marketing them. Further, there can be no assurance that any of the Company's present or future collaborative partners will perform their obligations as expected or will devote sufficient resources to the development, clinical testing or marketing of the Company's potential products developed under the collaborations or that the Company will be able to negotiate future collaborative arrangements on acceptable terms, if at all, or that such collaborations will be successful. Any parallel development by a collaborative partner of alternative technologies, preclusion of the Company from entering into competitive arrangements, failure to obtain timely regulatory approvals, premature termination of an agreement, or failure by a collaborative partner to devote sufficient resources to the development and commercialization of products utilizing the DepoMed Systems could have a material adverse effect on the Company. See "Business--Collaborative Relationships." The Company's agreements with its collaborative partners are likely to be complex. There may be provisions within such agreements which give rise to disputes regarding the rights and obligations of the parties. These and other possible disagreements could lead to delays in collaborative research, development or commercialization of potential products, or could require or result in litigation or arbitration, which would be time-consuming and expensive, and could have a material adverse effect on the Company. 8 FLUCTUATIONS IN OPERATING RESULTS The Company's quarterly operating results will depend upon variations in revenues recognized under collaborative agreements, including milestones, royalties, license fees and other contract revenues, and the timing of new product introductions by the Company and its collaborative partners. The Company's quarterly operating results may also fluctuate significantly depending on other factors, including the introduction of new products by the Company's competitors, regulatory actions, market acceptance of the DepoMed Systems, adoption of new technologies, manufacturing costs and capabilities, changes in government funding, and third-party reimbursement policies. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." COMPETITION; TECHNOLOGICAL CHANGE Competition in the areas of pharmaceutical products and drug delivery systems is intense and is expected to become more intense in the future. Several other companies have developed or are developing novel technologies for oral drug delivery, and these competing technologies may prove superior, either generally or in particular market segments, in terms of factors such as cost, consumer satisfaction or drug delivery profile. The Company's primary competitors in the business of developing and applying drug delivery systems include companies, such as ALZA Corporation ("ALZA"), Dura Pharmaceuticals, Inc. ("Dura") and Elan Corporation plc ("Elan"), which have substantially greater financial, technological, marketing, personnel and research and development resources than the Company. In addition, the Company may face competition from pharmaceutical and biotechnology companies that may develop or acquire drug delivery systems or technologies. Many of the Company's potential collaborative partners have devoted and are continuing to devote significant resources in the development of their own drug delivery systems and technologies. Potential products utilizing the DepoMed Systems will compete both with products employing advanced drug delivery systems and with products in conventional dosage forms. New drugs or future developments in alternative technologies may provide therapeutic or cost advantages over products utilizing the DepoMed Systems. There can be no assurance that developments by others will not render the Company's potential products utilizing the DepoMed Systems or technologies noncompetitive or obsolete. In addition, the Company's competitive success will depend heavily on entering into collaborative relationships on reasonable commercial terms, commercial development of products utilizing the DepoMed Systems, regulatory approvals, protection of intellectual property and market acceptance of such products. See "Business--Competition." NO ASSURANCE OF FDA APPROVAL; GOVERNMENT REGULATION FDA Approval Process. In the United States, pharmaceutical products, including any products utilizing the DepoMed Systems, are subject to rigorous regulation by the FDA. If a company fails to comply with applicable requirements, it may be subject to administrative or judicially imposed sanctions such as civil penalties, criminal prosecution of the company or its officers and employees, injunctions, product seizure or detention, product recalls, total or partial suspension of production and FDA refusal to approve pending premarket approval applications, or supplements to approved applications. Prior to commencement of clinical studies involving human beings, preclinical testing of new pharmaceutical products is generally conducted on animals in the laboratory to evaluate the potential efficacy and the safety of the product. The results of these studies are submitted to the FDA as a part of an Investigational New Drug ("IND") application, which must become effective before clinical testing in humans can begin. Typically, clinical evaluation involves a time consuming and costly three-phase process. In Phase I, clinical trials are conducted with a small number of subjects to determine the early safety profile, the pattern of drug distribution and metabolism. In Phase II, clinical trials are conducted with groups of patients afflicted with a specific disease in order to determine preliminary efficacy, optimal dosages and expanded evidence of safety. In Phase III, large-scale, multi-center, comparative trials are conducted with groups of patients afflicted with a target disease in order to provide enough data to demonstrate the efficacy and safety required by the FDA. The FDA closely monitors the progress of each of the three phases of clinical testing and may, at its discretion, reevaluate, 9 alter, suspend or terminate the testing based upon the data which have been accumulated to that point and its assessment of the risk/benefit ratio to the patient. The results of the preclinical and clinical testing on a nonbiologic drug and certain diagnostic drugs are submitted to the FDA in the form of a New Drug Application ("NDA") for approval prior to commencement of commercial sales. In responding to an NDA, the FDA may grant marketing approval, request additional information or deny the application if the FDA determines that the application does not satisfy its regulatory approval criteria. There can be no assurance that approvals will be granted on a timely basis, if at all. Failure to receive approval for any products utilizing the DepoMed Systems could have a material adverse effect on the Company. Certain OTC products are subject to final monographs issued by the FDA. Such products are subject to various FDA regulations such as those outlining current good manufacturing practices ("cGMP") requirements, general and specific OTC labeling requirements (including warning statements), the restriction against advertising for conditions other than those stated in approved product labeling, and the requirement that in addition to active ingredients OTC drugs contain only suitable inactive ingredients. Facilities which manufacture OTC products are subject to FDA inspection and failure to comply with applicable regulatory requirements may lead to administrative or judicially imposed penalties, as well as delays. Other Regulations. Even if required FDA approval has been obtained with respect to a product, foreign regulatory approval of a product must also be obtained prior to marketing the product internationally. Foreign approval varies from country to country and the time required for approval may delay or prevent marketing. In certain instances the Company or its collaborative partners may seek approval to market and sell certain of its products outside of the United States before submitting an application for United States approval to the FDA. The regulatory procedures for approval of new pharmaceutical products vary significantly among foreign countries. The clinical testing requirements and the time required to obtain foreign regulatory approvals may differ from that required for FDA approval. Although there is now a centralized European Union ("EU") approval mechanism in place, each EU country may nonetheless impose its own procedures and requirements, many of which are time consuming and expensive, and some EU countries require price approval as part of the regulatory process. Thus, there can be substantial delays in obtaining required approvals from both the FDA and foreign regulatory authorities after the relevant applications are filed, and approval in any single country may not be a meaningful indication that the product will thereafter be approved in another country. The Company is also subject to regulation under various federal and state laws regarding, among other things, occupational safety, environmental protection, hazardous substance control and product advertising and promotion. In connection with its research and development activities and its manufacturing, the Company is subject to federal, state and local laws, rules, regulations and policies governing the use, generation, manufacture, storage, air emission, effluent discharge, handling and disposal of certain materials and wastes. The Company believes that it has complied with these laws and regulations in all material respects and it has not been required to take any action to correct any material noncompliance. See "Business--Government Regulation." NO MANUFACTURING, MARKETING OR SALES CAPABILITIES The Company does not have internal manufacturing, marketing or sales resources. In view of its early stage of development and limited resources, the Company does not anticipate spending a material portion of the net proceeds of this Offering to acquire resources and develop capabilities in these areas. Although the Company intends to acquire pilot manufacturing equipment with a portion of the net proceeds from this Offering, the Company does not intend to acquire or establish its own dedicated manufacturing facilities for the foreseeable future. See "Use of Proceeds." Rather, the Company's manufacturing strategy will be to utilize the facilities of its collaborative partners or to develop manufacturing relationships with established contract manufacturers to make products utilizing the DepoMed Systems. In addition, the Company does not intend to establish an internal sales and marketing capability, but will seek to rely on its collaborative partners or distributor arrangements to market and sell the products utilizing the DepoMed Systems. In April 1997, the Company and Oakmont signed 10 a letter of intent to enter into an agreement pursuant to which Oakmont will manufacture the Company's reduced irritation aspirin and enhanced absorption calcium supplement products and to have rights to distribute and sell these products in territories to be determined. There can be no assurance that the Company will be able to enter into manufacturing, marketing or sales agreements on reasonable commercial terms, or at all, with Oakmont or any other third party. Failure to do so could have a material adverse effect on the Company. Manufacturers of products utilizing the DepoMed Systems will be subject to applicable cGMP requirements prescribed by the FDA or other rules and regulations prescribed by foreign regulatory authorities. There can be no assurance that the Company will be able to enter into manufacturing agreements either domestically or abroad with companies whose facilities and procedures comply with cGMP or applicable foreign standards. Should such agreements be entered into, the Company will be dependent on such manufacturers for continued compliance with cGMP and applicable foreign standards. Failure by a manufacturer of products utilizing the DepoMed Systems to maintain cGMP or applicable foreign standards could result in significant time delays or the inability of the Company to commercialize the DepoMed Systems and could have a material adverse effect on the Company. At the present time, due to ongoing consolidation in the chemical and pharmaceutical industries, the Company believes there is a worldwide excess of manufacturing capacity available to the Company. As a result, the Company believes that it will be able to enter into agreements with suppliers and manufacturers on reasonable commercial terms. However, there can be no assurance that there will be manufacturing capacity available to the Company at the time the Company is ready to commercialize the DepoMed Systems. There also can be no assurance that any products utilizing the DepoMed Systems can be manufactured at a cost or in quantities required to make it commercially viable. The Company's inability to contract on acceptable terms and with qualified suppliers for the manufacture of any products utilizing the DepoMed Systems or delays or difficulties in its relationships with manufacturers, would have a material adverse effect on the Company. Contract manufacturers must adhere to cGMP regulations strictly enforced by the FDA on an ongoing basis through its facilities inspection program. Contract manufacturing facilities must pass a pre-approval plant inspection before the FDA will approve an NDA. Certain material manufacturing changes that occur after approval are also subject to FDA review and clearance or approval. There can be no assurance that the FDA or other regulatory agencies will approve the process or the facilities by which any of the products utilizing the DepoMed Systems may be manufactured. The Company's dependence on third parties for the manufacture of products utilizing the DepoMed Systems may adversely affect the Company's ability to develop and deliver products utilizing the DepoMed Systems on a timely and competitive basis. See "Business--Collaborative Relationships" and "Business--Manufacturing, Marketing and Sales." UNCERTAINTY REGARDING PATENTS AND PROPRIETARY RIGHTS The Company's success will depend in part on its ability to obtain and maintain patent protection for its technologies and to preserve its trade secrets. It is the policy of the Company to file patent applications in the United States and foreign jurisdictions. The Company currently holds two issued United States and two foreign patents and has two United States patent applications and two foreign applications pending. No assurance can be given that the Company's patent applications will be approved or that any issued patents will provide competitive advantages for the DepoMed Systems or the Company's technologies or will not be challenged or circumvented by competitors. With respect to already issued patents and any patents which may issue from the Company's applications, there can be no assurance that claims allowed will be sufficient to protect the DepoMed Systems or the Company's technologies. Patent applications in the United States are maintained in secrecy until a patent issues, and the Company cannot be certain that others have not filed patent applications for technology covered by the Company's pending applications or that the Company was the first to file patent applications for such technology. Competitors may have filed applications for, or may have received patents and may obtain additional patents and proprietary rights relating to, compounds or processes that may block the Company's patent rights or compete without infringing the patent rights of the Company. In addition, there can be no assurance that any patents issued to the Company will not be challenged, invalidated or circumvented, or that the rights granted thereunder will provide proprietary protection or commercial advantage to the Company. 11 The Company also relies on trade secrets and proprietary know-how which it seeks to protect, in part, through confidentiality agreements with employees, consultants, collaborative partners and others. There can be no assurance that these agreements will not be breached, that the Company will have adequate remedies for any such breach or that the Company's trade secrets will not otherwise become known or be independently developed by competitors. Although potential collaborative partners and the Company's research partners and consultants are not given access to proprietary trade secrets and know-how of the Company until they have executed confidentiality agreements, these agreements may be breached by the other party thereto or may otherwise be of limited effectiveness or enforceability. The ability to develop the DepoMed Systems or the Company's technologies and to commercialize products using the DepoMed Systems or such technologies will depend on not infringing the patents of others. Although the Company is not aware of any claim of patent infringement against it, claims concerning patents and proprietary technologies determined adversely to the Company could have a material adverse effect on the Company. In addition, litigation may also be necessary to enforce any patents issued or licensed to the Company or to determine the scope and validity of third-party proprietary rights. There can be no assurance that the Company's issued or licensed patents would be held valid by a court of competent jurisdiction. Whether or not the outcome of litigation is favorable to the Company, the cost of such litigation and the diversion of the Company's resources during such litigation could have a material adverse effect on the Company. The pharmaceutical industry has experienced extensive litigation regarding patent and other intellectual property rights. Accordingly, the Company could incur substantial costs in defending itself in suits that may be brought against the Company claiming infringement of the patent rights of others or in asserting the Company's patent rights in a suit against another party. The Company may also be required to participate in interference proceedings declared by the United States Patent and Trademark Office for the purpose of determining the priority of inventions in connection with the patent applications of the Company or other parties. Adverse determinations in litigation or interference proceedings could require the Company to seek licenses (which may not be available on commercially reasonable terms) or subject the Company to significant liabilities to third parties, and could therefore have a material adverse effect on the Company. See "Business-- Patents and Proprietary Rights." RELATIONSHIPS OF ADVISORS WITH OTHER ENTITIES Certain members of the Company's Policy Advisory Board and Development Advisory Board are employed on a full-time basis by academic or research institutions. In some cases, members of the Policy Advisory Board and Development Advisory Board also act as consultants to the other companies. In addition, except for work performed specifically for and at the direction of the Company, any inventions or processes discovered by such persons will be the intellectual property of their institutions or other companies. If the Company desires access to inventions which are not its property, it will be necessary for the Company to obtain licenses to such inventions from these institutions or companies. In addition, invention assignment agreements executed by such persons in connection with their relationships with the Company may be subject to the rights of their primary employers or other third parties with whom they have consulting relationships. See "Business--Advisors to the Company." HEALTHCARE REFORM; UNCERTAIN AVAILABILITY OF HEALTHCARE REIMBURSEMENT The healthcare industry is changing rapidly as the public, government, medical professionals, third-party payors and the pharmaceutical industry examine ways to contain or reduce the cost of health care. Changes in the healthcare industry could impact the Company's business, particularly to the extent that the Company develops the DepoMed Systems for use in prescription drug applications. In certain foreign markets pricing or profitability of prescription pharmaceuticals is subject to government control. In the United States, there have been, and the Company expects that there will continue to be, a number of federal and state proposals to implement similar government control or cost containment, particular with respect to Medicare payments. In addition, emphasis on managed care in the United States has increased and is expected to continue to increase 12 the pressure on pharmaceutical pricing. While the Company cannot predict whether any such legislative or regulatory proposals will be adopted or the effect such proposals or managed care efforts may have on its business, the announcement of such proposals or efforts could have a material adverse effect on the Company's ability to raise capital, and the adoption of such proposals or efforts could have a material adverse effect on the Company. Further, to the extent that such proposals or efforts have a material adverse effect on pharmaceutical and biotechnology companies or other healthcare providers that are prospective collaborative partners for the Company, the Company's ability to establish collaborations may be adversely affected. In addition, in both domestic and foreign markets, sales of products utilizing the DepoMed Systems 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. Third-party payors are increasingly challenging the price and cost-effectiveness of prescription pharmaceutical products. Significant uncertainty exists as to the reimbursement status of newly approved healthcare products. There can be no assurance that products utilizing the DepoMed Systems will be considered cost effective or that adequate third-party reimbursement will be available to the Company's collaborators to maintain price levels sufficient to realize an appropriate return on the Company's investment in the DepoMed Systems. DEPENDENCE ON MANAGEMENT AND OTHER KEY EMPLOYEES The success of the Company is dependent in large part upon the continued services of John W. Shell and John W. Fara, its Chairman and Chief Scientific Officer, and President and Chief Executive Officer, respectively, and other members of the Company's executive management, and on the Company's ability to attract and retain key management and operating personnel. The Company intends to apply for key man life insurance on the lives of Drs. Shell and Fara in the amount of $2,000,000 each. Such persons are in high demand and are often subject to competing offers. In particular, the Company's success will depend, in part, on its ability to attract and retain the services of its executive officers and scientific and technical personnel. The loss of the services of one or more members of management or key employees or the inability to hire additional personnel as needed may have a material adverse effect on the Company. See "Business--Employees" and "Management--Executive Officers and Directors." SUBSTANTIAL CONTROL BY OFFICERS, DIRECTORS AND THEIR AFFILIATES Following the Offering, the Company's officers and directors and their affiliates will beneficially own or control approximately 50.3% of the outstanding shares of Common Stock. Accordingly, such officers, directors and their affiliates may be able to influence the outcome of shareholder votes, including votes concerning election of directors, adoption of amendments to the Company's Articles of Incorporation and Bylaws and approval of mergers and other significant corporate transactions. See "Principal Shareholders." RISK OF PRODUCT LIABILITY; UNCERTAINTY OF AVAILABILITY OF PRODUCT LIABILITY INSURANCE The Company's business involves exposure to potential product liability risks that are inherent in the production and manufacture of pharmaceutical products. Any such claims could have a material adverse effect on the Company. The Company does not currently have any product liability insurance. Although the Company has applied to obtain product liability insurance, there can be no assurance that it will be able to obtain or maintain such insurance on acceptable terms, that the Company will be able to secure increased coverage as the commercialization of its potential products utilizing the DepoMed Systems proceeds or that any insurance will provide adequate protection against potential liabilities. Claims or losses in excess of the limit of any liability insurance coverage obtained by the Company could have a material adverse effect on the Company. See "Business--Product Liability." ABSENCE OF DIVIDENDS The Company has never declared or paid cash dividends on its Common Stock and does not intend to pay any cash dividends in the foreseeable future. See "Dividend Policy." 13 NO PUBLIC MARKET FOR THE SECURITIES; ARBITRARY DETERMINATION OF PUBLIC OFFERING PRICES Prior to the Offering, there has been no public market for the Securities, and there can be no assurance that an active trading market will develop, or, if developed, be sustained in any of the Securities after the Offering. The initial public offering price of the Securities and the exercise price and terms of the Warrants have been determined arbitrarily by negotiations between the Company and the Representative and do not necessarily bear any relationship to the Company's asset value, net worth or other established criteria of value. Factors considered in such negotiations, in addition to prevailing market conditions, included the history and prospects for the industry in which the Company competes, an assessment of the Company's management, the prospects of the Company, its capital structure and certain other factors as were deemed relevant. Accordingly, the initial public offering price of the Securities and the exercise price and terms of the Warrants may not be indicative of prices that may prevail at any time or from time to time in the public market for the Securities. See "Underwriting." PRICE VOLATILITY The securities markets have from time to time experienced significant price and volume fluctuations that may be unrelated to the operating performance of particular companies. In addition, the market prices of the common stock of many publicly traded pharmaceutical or biotechnology companies have in the past been, and can in the future be expected to be, especially volatile. Announcements of technological innovations or new products by the Company or its competitors, developments or disputes concerning patents or proprietary rights, publicity regarding actual or potential medical results relating to products under development by the Company or its competitors, regulatory developments in both the United States and foreign countries, delays in the Company's testing and development schedules, public concern as to the safety of biopharmaceutical or biotechnology products and economic and other external factors, as well as period-to-period fluctuations in the Company's financial results, may have a significant impact on the market price of the Securities. POTENTIAL ADVERSE EFFECT OF REPRESENTATIVE'S WARRANTS At the consummation of the Offering, the Company will sell to the Representative for nominal consideration the Representative's Warrants to purchase up to 250,000 shares of Common Stock and/or 125,000 Warrants. The Representative's Warrants will be exercisable for a period of four years commencing , 1998 [one year after the effective date of this Offering], at an exercise price of $ per share [120% of the initial public offering price per share of Common Stock] and $ per Warrant [120% of the initial public offering price per Warrant]. The Warrants obtained upon exercise of the Representative's Warrants will be exercisable for a period of four years commencing one year after the effective date of this Offering, at an exercise price of $ per share [140% of the initial public offering price per share of Common Stock]. For the term of the Representative's Warrants, the holders thereof will have, at nominal cost, the opportunity to profit from a rise in the market price of the Securities without assuming the risk of ownership, with a resulting dilution in the interest of other security holders. As long as the Representative's Warrants remain unexercised, the Company's ability to obtain additional capital may be adversely affected. Moreover, the Representative may be expected to exercise the Representative's Warrants at a time when the Company would, in all likelihood, be able to obtain any needed capital through a new offering of its securities on terms more favorable to the Company than those provided by the Representative's Warrants. See "Underwriting." POTENTIAL ADVERSE EFFECT OF REDEMPTION OF WARRANTS Commencing , 1998 [18 months after the date of this Prospectus], the Warrants are subject to redemption at $0.10 per Warrant on 30 days' prior written notice to the Warrant holders if the average closing sales price of the Common Stock as reported on the AMEX equals or exceeds $ per share [150% of the initial public offering price per share of Common Stock] for any 20 trading days within a period of 30 consecutive trading days ending on the fifth trading day prior to the date of the notice of redemption. If the Warrants are redeemed, holders of the Warrants will lose their rights to exercise the Warrants after the expiration of the 30 day notice of redemption period. Upon receipt of a notice of redemption, holders would be required to: 14 (i) exercise the Warrants and pay the exercise price at a time when it may be disadvantageous for them to do so, (ii) sell the Warrants at the current market price, if any, when they might otherwise wish to hold the Warrants or (iii) accept the redemption price which is likely to be substantially less than the market value of the Warrants at the time of redemption. See "Description of Securities--Warrants." MANAGEMENT'S DISCRETION IN USE OF PROCEEDS Approximately $2.4 million or approximately 18% of the estimated net proceeds of the Offering has been allocated to working capital and general corporate purposes. Accordingly, the Company's Board of Directors will have discretion with respect to the allocation of such net proceeds. See "Use of Proceeds." DILUTION; DISPARITY OF CONSIDERATION Purchasers of shares of Common Stock in this Offering will experience an immediate and substantial dilution of $4.45 per share based on an assumed initial public offering price of $6.50 per share of Common Stock. Additional dilution to future net tangible book value per share may occur upon exercise of outstanding stock options and warrants and may occur, in addition, if the Company issues additional equity securities in the future. The current shareholders of the Company, including officers and directors, acquired their shares of Common Stock for nominal consideration or for consideration substantially less than the public offering price of the shares of Common Stock offered hereby. As a result, new investors will bear substantially all of the risks inherent in an investment in the Company. See "Dilution" and "Certain Transactions." POTENTIAL ADVERSE EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE Future sales of Common Stock by shareholders and option holders or through the exercise of the Warrants could have an adverse effect on the market prices of the Securities. Upon completion of this Offering, the Company will have 6,763,447 shares of Common Stock outstanding, of which the 2,500,000 shares offered hereby (and the 1,250,000 Warrants) will be transferable without restriction under the Securities Act. The Company, all officers and directors of the Company and all holders of outstanding securities exercisable for or convertible into Common Stock have entered into contractual arrangements (the "Lock-Up Agreements") and have agreed not to directly or indirectly, issue, agree or offer to sell, transfer, assign, distribute, grant an option for purchase of sale of, pledge, hypothecate or otherwise encumber or dispose of any beneficial interest in such securities for a period of 12 months following the date of this Prospectus (the "Lock-Up Period") without the prior written consent of the Representative. As a result, notwithstanding the possible earlier eligibility for sale under the provisions of Rules 144, 144(k) and 701 under the Securities Act of 1933, as amended (the "Securities Act"), shares subject to the Lock-Up Agreements will not be saleable until the Lock-Up Period expires or the terms of the Lock-Up Agreements are waived by the Representative. Assuming that the Representative does not release the shareholders from the Lock-Up Agreements, after the Lock-Up Period all of the shares will be eligible for sale in the public market. Of such shares, 3,355,991 shares of Common Stock will be eligible for sale under Rule 144 (subject to volume limitations imposed by such rule), 815,789 shares of Common Stock will be eligible for sale under Rule 144(k), and 91,667 shares will be eligible for sale under Rule 701. In addition, the Company intends to register on Form S-8 under the Securities Act, as soon as possible after the Effective Date, shares of Common Stock issuable under options granted under the Stock Plan. Such registration becomes effective immediately upon its filing with the Securities and Exchange Commission (the "Commission"). As of March 31, 1997, options to purchase a total of 196,667 shares of Common Stock were outstanding, and options to purchase an additional 128,333 shares of Common Stock were reserved for future issuance under the Stock Plan. No prediction can be made as to the effect that future sales of Common Stock, or the availability of shares of Common Stock for future sale, will have on the market prices of the Common Stock and Warrants prevailing from time to time. The sale or issuance, or the potential for sale or issuance, of Common Stock after the Lock-Up Period could have an adverse impact on the market prices of the Common Stock and/or the Warrants. Sales of substantial amounts of Common Stock or the perception that such sales could occur could adversely affect 15 prevailing market prices for the Common Stock and/or the Warrants. See "Underwriting" and "Shares Eligible for Future Sale." CURRENT PROSPECTUS AND STATE BLUE SKY REGISTRATION REQUIRED TO EXERCISE WARRANTS The Warrants are not exercisable unless, at the time of exercise, the Company has a current prospectus covering the shares of Common Stock issuable upon exercise of the Warrants and such shares have been registered, qualified or deemed to be exempt under the securities or "blue sky" laws of the state of residence of the exercising holder of the Warrants. Although the Company has undertaken to use its best efforts to have all of the shares of Common Stock issuable upon exercise of the Warrants registered or qualified on or before the exercise date and to maintain a current prospectus relating thereto until the expiration of the Warrants, there is no assurance that it will be able to do so. The value of the Warrants may be greatly reduced if a current prospectus covering the Common Stock issuable upon the exercise of the Warrants is not kept effective or if such Common Stock is not qualified or exempt from qualification in the states in which the holders of the Warrants reside. Until completion of this Offering, the Common Stock and the Warrants may only be purchased together on the basis of two shares of Common Stock and one Warrant, but the Warrants will be separately tradeable immediately after this Offering. Although the Securities will not knowingly be sold to purchasers in jurisdictions in which the Securities are not registered or otherwise qualified for sale, investors may purchase the Warrants in the secondary market or move to a jurisdiction in which the shares underlying the Warrants are not registered or qualified during the period that the Warrants are exercisable, the Company will be unable to issue shares to those persons desiring to exercise their Warrants unless and until the shares are qualified for sale in jurisdictions in which such purchasers reside, or an exemption from such qualification exists in such jurisdictions, and holders of the Warrants would have no choice but to attempt to sell the Warrants in a jurisdiction where such sale is permissible or allow them to expire unexercised. See "Description of Securities--Warrants." 16 USE OF PROCEEDS The net proceeds to the Company from the sale of the Securities offered hereby (assuming an initial public price of $6.50 per Share and $0.10 per Warrant), after deduction of underwriting discounts and other estimated expenses relating to the Offering, are estimated to be approximately $14,000,000 (or $16,200,000 if the Over-Allotment Option is exercised in full). The Company intends to use the net proceeds as follows:
NET PROCEEDS PERCENT OF TOTAL ------------ ---------------- Research and development expenses............ $ 7,000,000 50% Laboratory and facilities capital expenditures................................ 3,000,000 21% Repayment of certain indebtedness............ 1,600,000 11% Working capital and general corporate purposes.................................... 2,400,000 18% ----------- --- Total...................................... $14,000,000 100% =========== ===
Research and Development Expenses. The Company intends to continue investing in the further development of its oral drug delivery technologies and the DepoMed Systems. The Company also intends to develop generic compounds, such as a reduced irritation aspirin product and an enhanced absorption calcium supplement product, internally. The Company intends to conduct or fund clinical trials on such products and will undertake the associated regulatory activities. Laboratory and Facilities Capital Expenditures. The Company intends to spend a portion of the net proceeds of this Offering to make capital investments in laboratories and related facilities, including the leasing of laboratory, testing and pilot manufacturing facilities, leasehold improvements and purchase of laboratory and pilot scale manufacturing equipment. Repayment of Certain Indebtedness. Approximately $1,000,000 of the net proceeds of this Offering will be used to repay indebtedness of the Company incurred in connection with the Bridge Financing. In connection with the Bridge Financing, the Company issued promissory notes (the "Bridge Notes") in the aggregate principal amount of $1,000,000 to fund working capital and general corporate purposes. Interest accrues on the Bridge Notes at the rate of 6% per annum and the Bridge Notes will become due and payable on the consummation of the Offering. Approximately $600,000 of the net proceeds of this Offering will be used to repay other indebtedness of the Company, including unpaid salaries and five promissory notes held by officers of the Company. As of March 31, 1997, $250,667 of principal was outstanding and $47,456 of interest was outstanding on such promissory notes. Interest accrues on $150,667 of principal at the rate of 6% per annum and on the remaining $100,000 at the rate of 6.5% per annum. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" and "Certain Transactions." The foregoing represents the Company's best estimate of its allocation of the net proceeds of the Offering, based on the current state of its operations, its current plans and current economic conditions. Proceeds may be reapportioned among categories listed above. The amount and timing of expenditures will vary depending upon a number of factors, including progress of the Company's operations, technical advances, terms of collaborative arrangements, changes in competitive conditions and determinations with respect to the commercial potential of products utilizing the DepoMed Systems. The Company currently anticipates that the net proceeds of this Offering will enable it to meet its operational and capital requirements for at least the 12 months following the date of this Prospectus. However, there can be no assurance the net proceeds of this Offering will satisfy the Company's requirements for any particular period of time. The Company anticipates that additional funding may be required after the use of proceeds of the Offering. No assurance can be given that such additional financing will be available when needed on terms acceptable to the Company, if at all. See "Risk Factors-- Need for Substantial Additional Funds." Pending application of the net proceeds of the Offering, the Company intends to invest such net proceeds in interest-bearing, short-term investment grade financial instruments. 17 DIVIDEND POLICY The Company has never declared or paid any cash dividends on its Common Stock. The Company currently intends to retain its earnings for future growth and, therefore, does not anticipate paying any cash dividends in the foreseeable future. CAPITALIZATION The following table sets forth the capitalization of the Company as of December 31, 1996 (i) on an actual basis, and (ii) pro forma as adjusted to give effect to (a) the sale of 278,500 shares of Series B Preferred Stock in the first quarter of 1997, (b) the Bridge Financing, (c) the estimated net proceeds from the sale of Common Stock and Warrants offered hereby at an assumed initial public offering price of $6.50 per Share and $0.10 per Warrant and the initial application of the estimated net proceeds therefrom (including the repayment of all the Bridge Notes in the principal amount of $1,000,000), and (d) the conversion of the Preferred Stock into 908,623 shares of Common Stock upon consummation of the Offering. This table should be read in conjunction with the Company's Financial Statements and related Notes thereto and Selected Financial Data appearing elsewhere in this Prospectus. See "Use of Proceeds."
DECEMBER 31, 1996 ---------------------------------- ACTUAL PRO FORMA AS ADJUSTED ----------- --------------------- Shareholders' equity (net capital deficiency): Preferred stock, no par value, 10,000,000 shares authorized, 2,447,368 shares issued and outstanding, actual; 5,000,000 shares authorized, none issued and outstanding, pro forma as adjusted..................... $ 682,759 $ -- Common stock, no par value, 25,000,000 shares authorized, 3,354,825 shares issued and outstanding, actual; 6,763,447 shares issued and outstanding, pro forma as adjusted(1)............................... 284,250 15,245,509 Deferred compensation........................ (275,000) (275,000) Deficit accumulated during the development stage....................................... (1,073,441) (1,073,441) ----------- ----------- Total shareholders' equity (net capital deficiency)............................... $ (381,432) $13,897,068 =========== ===========
- -------- (1) Excludes 196,667 shares of Common Stock issuable upon the exercise of outstanding stock options as of March 31, 1997 at a weighted average exercise price of $1.64 per share under the Stock Plan. Also excludes 128,333 shares of Common Stock reserved for future grants of options under the Stock Plan. See "Management--1995 Stock Option Plan." 18 DILUTION As of December 31, 1996, the pro forma net tangible book value (deficit) of the Company's Common Stock was $(102,932), or approximately $(0.02) per share of Common Stock after giving effect to (i) the sale of Series B Preferred Stock in the first quarter of 1997, (ii) the Bridge Financing, and (iii) the conversion of the Preferred Stock into Common Stock upon consummation of the Offering. Pro forma net tangible book value per share represents the total amount of tangible assets less total liabilities divided by the number of shares of Common Stock issued and outstanding. After giving effect to the sale of the Common Stock and Warrants offered hereby at an assumed initial public offering price of $6.50 per share of Common Stock and $0.10 per Warrant (after deducting underwriting discounts and commissions and estimated offering expenses payable by the Company), the pro forma net tangible book value of the Company at December 31, 1996 would have been $13,897,068, or approximately $2.05 per share of Common Stock. This represents an immediate increase in net tangible book value of $2.07 per share of Common Stock to existing shareholders of Common Stock and an immediate dilution in net tangible book value of $4.45 per share of Common Stock to new investors. The following table illustrates this per share dilution: Assumed initial public offering price per share............... $6.50 Pro forma net tangible book value (deficit) per share prior to this Offering................................................ (0.02) Increase per share attributable to this Offering.............. 2.07 ----- Pro forma net tangible book value per share after this Offering..................................................... 2.05 ----- Dilution per share to new investors........................... $4.45 =====
The computations in the table set forth above assume that the Over-Allotment Option is not exercised. If the Over-Allotment Option is exercised in full, the pro forma net tangible book value as of December 31, 1996 would have been $16,095,411 or $2.25 per share of Common Stock, resulting in dilution to new investors of $4.25 per share of Common Stock. The following table summarizes, on a pro forma basis to reflect the same adjustments described above, the number of shares of Common Stock purchased from the Company, the total consideration paid and the average price per share paid by (i) existing shareholders of Common Stock at December 31, 1996, and (ii) new shareholders in the Offering, assuming the sale of the Common Stock and Warrants offered hereby at an assumed initial public offering price of $6.50 per Share. The calculations are based upon total consideration given by new investors and existing shareholders before any deduction of underwriting discounts and offering expenses payable by the Company.
TOTAL SHARES PURCHASED CONSIDERATION ----------------- ------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE --------- ------- ----------- ------- ------------- Existing shareholders(1)... 4,263,447 63% $ 1,037,750 6% $0.24 New investors(2)........... 2,500,000 37% 16,250,000 94% $6.50 --------- --- ----------- --- Total.................... 6,763,447 100% $17,220,509 100% ========= === =========== ===
- -------- (1) Excludes 196,667 shares of Common Stock issuable upon exercise of stock options as of March 31, 1997 with a weighted average exercise price of $1.64 per share outstanding under the Stock Plan. Also excludes 128,333 shares of Common Stock reserved for future grants of options under the Stock Plan. See "Management--1995 Stock Option Plan." (2) Reflects no proceeds received from the sale of the Warrants. 19 SELECTED FINANCIAL DATA The selected statements of operations data for the period from inception (August 7, 1995) to December 31, 1995, for the year ended December 31, 1996 and for the period from inception (August 7, 1995) to December 31, 1996 and the balance sheet data at December 31, 1996 are derived from the financial statements of the Company which have been audited by Ernst & Young LLP, independent auditors. The selected financial data set forth below is qualified in its entirety by, and should be read in conjunction with, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's Financial Statements and related Notes thereto appearing elsewhere in this Prospectus.
PERIOD FROM PERIOD FROM INCEPTION INCEPTION (AUGUST 7, 1995) (AUGUST 7, 1995) TO YEAR ENDED TO DECEMBER 31, DECEMBER 31, DECEMBER 31, 1995 1996 1996 ---------------- ------------ ----------------- STATEMENT OF OPERATIONS DATA: Product development revenues.. $ -- $ 317,971 $ 317,971 Operating expenses: Research and development expenses................... 138,816 390,496 529,312 General and administrative expenses................... 155,157 393,676 548,833 Purchase of in-process research and development... 298,154 -- 298,154 --------- --------- ----------- Total operating expenses...... 592,127 784,172 1,376,299 Loss from operations.......... (592,127) (466,201) (1,058,328) Interest expense, net......... 8,541 6,572 15,113 --------- --------- ----------- Net loss...................... $(600,668) $(472,773) $(1,073,441) ========= ========= =========== Pro forma net loss per share(1)..................... $ (0.11) ========= Shares used in computing pro forma net loss per share(1).. 4,285,653 ========= DECEMBER 31, 1996 ----------------- BALANCE SHEET DATA: Working capital (deficit)................................... $ (516,688) Total assets................................................ 333,127 Notes payable to shareholders............................... 294,238 Capital lease obligation, non-current portion............... 34,634 Deficit accumulated during development stage................ (1,073,441) Total shareholders' equity (net capital deficiency)......... (381,432)
- -------- (1) See Note 2 of Notes to Financial Statements for an explanation of the determination of the number of shares used in computing pro forma net loss per share. 20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with "Selected Financial Data" and the Company's Financial Statements and related Notes thereto appearing elsewhere in this Prospectus. Except for the historical information contained herein, the discussion in this Prospectus contains certain forward-looking statements that involve risks and uncertainties, such as statements of the Company's plans, objectives, expectations and intentions. The cautionary statements made in this Prospectus should be read as being applicable to all related forward-looking statements wherever they appear in this Prospectus. The Company's actual results could differ materially from those discussed here. Factors that could cause or contribute to such differences include those discussed in "Risk Factors," as well as those discussed elsewhere herein. GENERAL Since its inception in August 1995, the Company has devoted substantially all its efforts to research and development conducted on its own behalf and through collaborations with pharmaceutical partners in connection with the DepoMed Systems. The Company's primary activities since inception (August 7, 1995) have been, in addition to research and development, establishing its offices and research facilities, recruiting personnel, filing patent applications, developing a business strategy and raising capital. To date, the Company has received only limited revenue, all of which has been from collaborative research and feasibility arrangements. At its inception in 1995, the Company acquired $298,154 of in-process research and development technology. This amount was recognized as operating expense in 1995. There was no such expense in 1996. The Company has generated a cumulative net loss of $1,073,441 for the period from its inception through December 31, 1996. The Company intends to continue investing in the further development of its drug delivery technologies and the DepoMed Systems. The Company also intends to develop generic compounds, such as a reduced irritation aspirin product and an enhanced absorption calcium supplement product, internally. Depending upon a variety of factors, including collaborative arrangements, available personnel and financial resources, the Company will conduct or fund clinical trials on such products and will undertake the associated regulatory activities. The Company will need to make additional capital investments in laboratories and related facilities, including the purchase of laboratory and pilot scale manufacturing equipment. As additional personnel are hired in 1997 and beyond, expenses can be expected to increase from their 1996 levels. Within the next 12 months, the Company will also require additional space for laboratory, testing and pilot manufacturing facilities. See "Use of Proceeds." RESULTS OF OPERATIONS The Company commenced operations in August 1995. Because of the difference in the length of the reported periods, the comparison of the period from inception to December 31, 1995 to the year ended December 31, 1996 is not meaningful and has not been presented. Year Ended December 31, 1996 Revenues in 1996 were $317,971, primarily the result of the joint research agreement with BMS. Research and development expenses in 1996 were $390,496, primarily consisting of personnel costs and laboratory supply expenses. General and administrative expenses in 1996 were $393,676, primarily consisting of personnel costs, facilities expenses and fees paid to outside financial consultants. 21 The Company records and amortizes over related vesting periods deferred compensation representing the difference between the exercise price of options granted and the deemed fair value of its Common Stock at the time of grant. Options generally vest over four years. Deferred compensation of $275,000 has been recorded and is being amortized to both research and development expenses as well as general and administrative expenses over the related vesting periods of the options granted during the period ended December 31, 1996. LIQUIDITY AND CAPITAL RESOURCES Since inception, the Company has financed operations principally from the sale of preferred stock. In 1995, the Company issued 2,447,368 shares of Series A Preferred Stock for net proceeds of $682,759. In the first quarter of 1997, the Company issued 278,500 shares of Series B Preferred Stock for an aggregate purchase price of $278,500. In 1996, the Company borrowed $50,000 from an officer of the Company, which the Company intends to repay with a portion of the net proceeds of this Offering. See "Use of Proceeds" and "Certain Transactions." In April 1997, the Company completed the Bridge Financing and issued the Bridge Notes to fund working capital and general corporate purposes. The Bridge Notes bear interest at the rate of 6% per annum and are due and payable upon the closing of this Offering. The Company intends to use a portion of the net proceeds of this Offering to repay the entire principal amount of and the accrued interest on the Bridge Notes. In connection with the Bridge Financing, the Company issued Bridge Warrants entitling the investors to purchase the number of shares of Common Stock which equals 50% of their investment divided by the initial public offering price per share of the Common Stock. A total of 76,923 shares of Common Stock will be issuable upon exercise of the Bridge Warrants at an exercise price of $6.50 per share of Common Stock, assuming an initial public offering price of $6.50 per share. The Bridge Warrants may be exercised at any time during the four year period beginning 12 months after the date of this Prospectus. See "Use of Proceeds" and Note 9 of Notes to Financial Statements. Cash used in operations in 1996 was $391,316 compared to $194,019 for the period from inception to December 31, 1995. The period from inception to December 31, 1995 included a non-recurring charge of $298,154 for the acquisition of in-process research and development technology. Cash used for operations is expected to increase in 1997 as a result of increased expenditures and working capital requirements to support product development and expanded and continuing research activities. Cash used in investing activities primarily related to capital expenditures for property and equipment. Capital expenditures in 1996 were $28,708. Capital expenditures for the period from inception to December 31, 1995 were $49,645. In addition, in 1996, $56,393 of equipment was acquired and financed under a capital lease. For the period from inception to December 31, 1995 $65,563 of equipment was acquired and financed under a capital lease. Capital expenditures in both years were primarily for research and development equipment. Capital expenditures during the 12 months following the date of this Prospectus may include pilot manufacturing equipment, such as tablet presses for proof of principle, and product development and quality control laboratory equipment. In the future the Company may seek lease financing for certain additional equipment. Upon completion of the Offering, the Bridge Notes, the promissory notes issued to the officers of the Company and accrued, unpaid salaries will be paid with a portion of the net proceeds from this Offering. See "Use of Proceeds" The Company anticipates that the net proceeds from this Offering, will enable it to meet its capital and operational requirements for at least the 12 months following the date of this Prospectus. Cash needs of the Company may vary materially from those now planned because of results of research and development, relationships with possible collaborative partners, changes in the focus and direction of the Company's research and development programs, competitive and technological advances, results of clinical testing, requirements of the FDA and comparable foreign regulatory processes and other factors. The Company will require substantial funds of its own or from third parties to conduct research and development, preclinical and clinical testing, and to manufacture (or have manufactured) and market (or have marketed) the products utilizing the DepoMed Systems. The net proceeds of this Offering are not expected to be sufficient to fund the Company's operations 22 through commercialization of products yielding sufficient revenues to support the Company's operations. The Company has no credit facility or other committed sources of capital. To the extent capital resources are insufficient to meet future capital requirements, the Company will have to raise additional funds to continue the development of its technologies. There can be no assurance that such funds will be available on favorable terms, or at all. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of such securities could result in dilution to the Company's shareholders. If adequate funds are not available, the Company may be required to curtail operations significantly or to obtain funds through entering into collaboration agreements on unattractive terms. The Company's inability to raise capital would have a material adverse effect on the Company. NET OPERATING LOSSES The Company has not generated any taxable income to date. At December 31, 1996, the net operating losses available to offset future taxable income for federal income tax purposes were approximately $500,000. Because the Company has experienced ownership changes, future utilization of carry forwards may be limited in any fiscal year pursuant to Internal Revenue Code regulations. The carryforwards expire at various dates beginning in 2010 through 2011 if not utilized. As a result of the annual limitation, anticipated and future losses, all or a portion of these carryforwards may expire before becoming available to reduce the Company's federal income tax liabilities. 23 BUSINESS The Company is a development stage company engaged in the development of new and proprietary oral drug delivery technologies. Utilizing these technologies, the Company has developed two types of oral drug delivery systems, the GR System and the RI System. The GR System is designed to be retained in the stomach for an extended period of time while it delivers the incorporated drug or drugs and the RI System is designed to reduce the GI irritation that is a side effect of many drugs. In addition, the DepoMed Systems are designed to provide continuous, controlled delivery of an incorporated drug. The Company intends to develop products utilizing the DepoMed Systems in collaboration with pharmaceutical and biotechnology companies, from which the Company expects to receive license fees, research and development funding, milestone payments and royalties. The Company also intends to develop independently certain OTC and generic oral drug products utilizing the DepoMed Systems. The Company currently has a joint research and development agreement with BMS to develop a product incorporating a BMS proprietary compound into the GR System. In addition, the Company has entered into a feasibility study with GalaGen to use the GR System to enhance local effectiveness and/or provide continuous, controlled delivery of GalaGen's proprietary immunoglobulin products. The Company is also independently developing a reduced irritation aspirin product and enhanced absorption calcium supplement product and has identified certain other product candidates expected to benefit from the DepoMed Systems. In April 1997, the Company and Oakmont signed a letter of intent to enter into an agreement pursuant to which Oakmont will manufacture the Company's reduced irritation aspirin and enhanced absorption calcium supplement products and have rights to distribute and sell these products in territories to be determined. The letter of intent also provides for the Company and Oakmont each to offer rights to future products to the other party. The DepoMed Systems include proprietary formulations of drug-containing polymeric units that allow multihour delivery of an incorporated drug continuously into the stomach either for prolonged, local treatment in the stomach or for enhanced absorption in the GI tract. The Company believes that the GR System has the ability to enhance the bioavailability (blood levels) of drugs that are preferentially absorbed in the stomach, allow for more effective treatment of local stomach disorders, and provide continuous and extended delivery of drugs to the upper part of the small intestine, the site where many drugs are absorbed most efficiently. The RI System is designed to reduce the irritation to the GI tract caused by many commonly used drugs, including aspirin. The Company believes the RI System has the potential to make such drugs less irritating and therefore more widely used. In addition to the benefits described above, the Company believes that the DepoMed Systems may offer additional advantages including: multihour release rate patterns for drugs of almost any solubility and the ability to use drug combinations previously not feasible due to pharmacokinetic differences between drugs. The Company believes that by reducing the frequency of drug administration, use of the DepoMed Systems may lead to reduced costs and improved patient compliance. Also, by providing new formulations of existing products using the DepoMed Systems, the Company believes that it will be able to provide its collaborative partners with the ability to extend their patent franchises on such products. The Company intends to have the DepoMed Systems used with as many pharmaceutical products as possible with an emphasis on pharmaceutical products which command a large market share or are in large market segments and where the Company believes the DepoMed Systems will provide an advantage over other drug delivery systems. The Company's primary strategy for the development and commercialization of the DepoMed Systems involves establishing collaborative relationships with pharmaceutical and biotechnology companies to develop improved therapeutic products. The Company also intends to develop improved generic and/or OTC products that utilize the DepoMed Systems either independently or jointly by entering into collaborative partnerships with pharmaceutical, biotechnology or other health care companies. 24 THE DRUG DELIVERY INDUSTRY Drug delivery companies apply proprietary technologies to create new pharmaceutical products utilizing drugs developed by others. These products are generally novel, cost-effective dosage forms that provide any of several benefits including better control of drug concentration in the blood, improved safety and efficacy, improved patient compliance and ease of use. Drug delivery technologies can provide pharmaceutical companies with a means of developing new products as well as extending existing patent franchises. The increasing need to deliver medication to patients efficiently and with fewer side effects has accelerated the pace of invention of new drug delivery systems and the development and maturation of the drug delivery industry. Today, medication can be delivered to a patient through many different delivery systems including transdermal, injection, implant and oral methods. However, these delivery methods continue to have certain limitations. Transdermal patches are often inconvenient to apply, can be irritating to the skin and the rate of release can be difficult to control. Injections are uncomfortable for most patients. In most cases both injections and implants must be administered in a hospital or physician's office and, accordingly, are frequently not suitable for home use. Oral administration remains the preferred method of administering medication. However, conventional oral drug administration also has limitations. Because capsules and tablets have limited effectiveness in providing controlled drug delivery, they frequently result in drug release that is too rapid, causing incomplete absorption of the drug, irritation to the GI tract and other side effects. In addition, they lack the ability to provide localized therapy. The need for frequent dosing of many drugs administered by capsules and tablets also can impede patient compliance with the prescribed regimen. In recent years, drug delivery companies have been able to develop innovative and efficient solutions to some of the limitations of conventional oral drug administration. For example, the improved oral delivery system developed by ALZA in the 1980s reduced the side effects and dosing frequency of the hypertension drug, Procardia(R). The improved product, Procardia XL(R), has substantially increased the sales of the drug and, because of the new formulation, the patent franchise on Procardia(R) was extended. The Company believes that the DepoMed Systems have the potential to offer similar opportunities of improved therapy and extended patent life to pharmaceutical and biotechnology companies. THE DEPOMED SYSTEMS The DepoMed Systems are based on the Company's proprietary oral drug delivery technologies which are designed to include formulations of drug- containing polymeric units that allow multihour delivery of an incorporated drug. Although the Company's formulations are proprietary, the polymers utilized in the DepoMed Systems are commonly used in the food and drug industries. The Company has formulated these polymers into cylinders and spheres that are contained in gelatin capsules for ease of administration. By using different formulations of the polymers, the Company believes that the DepoMed Systems are able to provide continuous, controlled delivery of drugs of varying molecular complexity and solubility. The DepoMed Systems are designed to address certain limitations of drug delivery and to provide for orally administered, conveniently dosed, cost- effective drug therapy that provides continuous, controlled delivery of a drug over a multihour period. The Company believes that the DepoMed Systems can provide one or more of the following therapeutic advantages over conventional methods of drug administration: . Enhance Safety and Efficacy through Controlled Delivery. The Company believes that the DepoMed Systems may improve the ratio of therapeutic effect to toxicity by decreasing the initial peak concentrations of drug associated with toxicity, while maintaining levels of a drug at therapeutic, subtoxic concentrations for an extended period of time. Many drugs demonstrate optimal efficacy when concentrations are maintained at therapeutic levels over an extended period of time. When a drug is administered intermittently, the therapeutic concentration is often exceeded for some period of time, and then the concentration rapidly drops below effective levels. Excessively high concentrations are a major cause of side effects, and subtherapeutic concentrations are ineffective. 25 . Greater Patient and Caregiver Convenience. The Company believes that the DepoMed Systems may offer once-daily dosing for certain drugs that are currently required to be administered several times daily. Such once- daily dosing promotes compliance to dosing regimens. Patient noncompliance with dosing regimens has been associated with increased costs of medical therapies by prolonging treatment duration, increasing the likelihood of secondary or tertiary disease manifestation and contributing to over-utilization of medical personnel and facilities. By improving patient compliance, providers and third-party payors may reduce unnecessary expenditures and improve therapeutic outcomes. . Expand Types of Drugs Capable of Oral Delivery. Some drugs, including certain proteins and peptides, because of their large molecular size and susceptibility to degradation in the GI tract, must currently be administered by injection or by continuous infusion, which is typically done in a hospital or other clinical setting. The Company believes the Depomed Systems may be able to deliver some of these drugs orally. . Proprietary Reformulation of Generic Products. The Company believes that the DepoMed Systems may offer the potential to produce improved formulations of generic products. These proprietary formulations may be differentiated from existing generic products by virtue of reduced dosing requirements, improved efficacy, decreased toxicity or additional indications. THE GASTRIC RETENTION SYSTEM The GR System consists of a proprietary formulation of drug-containing polymeric cylinders which remain in the stomach for an extended period of time to provide continuous, controlled delivery of an incorporated drug. The GR System's design is based in part on principles of human gastric emptying and GI transit. Following a meal, liquids and small particles flow continuously from the stomach into the intestine leaving behind the larger nondigested particles until the digestive process is complete. As a result, drugs in liquid form or those consisting of small particles tend to empty rapidly from the stomach and continue into the intestine, often before the drug has time to act locally or to be absorbed. The drug-containing polymeric cylinders of the GR System are formulated into easily swallowed cylinder shapes which are designed to swell rapidly upon ingestion. The cylinders attain a size after ingestion sufficient to be retained in the stomach for multiple hours while delivering the drug content in solution. The Company has demonstrated multihour gastric retention in humans who have been given the GR System with food. In addition, the Company is currently developing an enhanced version of the GR System designed to be retained in the stomach without the ingestion of food. This process is expected to allow for treatment regimens unrelated to meal times, as well as for retention that is more prolonged and with minimum patient to patient variation in retention time. The Company believes that this feature will make medical treatment less disruptive to a patient's normal schedule. The expected advantages of the GR System over conventional oral drug delivery systems include the following: More Efficient GI Drug Absorption. The Company believes that the GR System can be used for improved oral administration of drugs that are currently inadequately absorbed when delivered as conventional tablets or capsules. Many drugs are primarily absorbed in the stomach, duodenum or upper small intestine, through which drugs administered in conventional oral dosage forms pass quickly. In contrast, the GR System is designed to be retained in the stomach allowing for constant multihour flow of drugs to certain areas of the GI tract. Accordingly, for such drugs, the GR System offers a significantly enhanced opportunity for increased absorption. Unlike some insoluble systems, at the end of its useful life the polymer contained in the GR System dissolves and is passed through the GI tract and eliminated. Under its joint research agreement with BMS, the Company currently is developing a product utilizing this feature of the GR System. See "--Collaborative Relationships." Gastric Delivery for Local Therapy and Absorption. The Company believes that the GR System can be used to deliver drugs which can efficiently eradicate GI- dwelling microorganisms, such as H. pylori, a cause of 26 ulcers, and C. parvum, the causative agent for cryptosporidiosis, a parasitic intestinal disorder which afflicts late stage AIDS patients. The Company is currently conducting a feasibility study with GalaGen on the use of the GR System for the local gastric delivery of immunoglobulin products which may be effective against these microorganisms. See "--Collaborative Relationships." The Company is currently developing a calcium supplement product which utilizes the GR System. Calcium supplements are essential in the treatment of osteoporosis. It is estimated that 20 million people in the United States suffer from osteoporosis and that another 17 million people are at risk. New medications for this debilitating condition are effective but calcium supplementation is essential. In addition, it is estimated that 30 million people in the United States are under long-term treatment with corticosteroids, such as prednisone, which can cause significant bone loss. Accordingly, calcium supplementation is recommended as concomitant treatment with these drugs. Current calcium supplement products are mostly in the form of calcium carbonate, which is soluble only in an acidic medium and which consequently must be retained in the stomach for an extended period of time for efficient dissolution and subsequent absorption. However, conventional calcium carbonate products pass through the stomach too quickly for a significant amount of the calcium salt to dissolve. The Company believes that the GR System will provide for the more efficient dissolution and absorption of an orally administered calcium compound by keeping the product in the stomach for an extended period of time. The Company believes that a possible future application of the GR System is the incorporation of a nonsystemic antacid into the GR System that would be designed to provide sustained local action. Although currently used antacid products are nonsystemic, their duration time is short. Accordingly, individuals who need through-the-night protection from excess stomach acid must resort to systemic antacids, such as Zantac(R) or Tagamet(R), which have a longer on-set of action. The Company believes that the GR System may be designed to provide continuous, controlled local delivery which is expected to allow for a nonsystemic antacid product with more immediate and sustained action. It is estimated that several million people in the United States regularly take antacids. Rational Drug Combinations. The Company believes that the GR System may allow for rational combinations of drugs with different biological half-lives. Physicians frequently prescribe multiple drugs for treatment of a single medical condition. For example, a physician may prescribe captopril/hydrochlorothiazide or nifedipine/triampterine for a patient with a heart condition. Single product combinations have not been considered feasible because the different biological half-lives of these combination drugs would result in an overdosage of one drug and/or an underdosage of the other. By incorporating different drugs into different polymeric cylinders in the same capsule, the GR System is designed to release each of its incorporated drugs continuously at a rate and duration (dose) appropriately adjusted for the specific biological half-lives of the drugs. The Company believes that future rational drug combination products using the GR System have the potential to simplify drug administration, increase patient compliance, and reduce medical costs. Potential for Oral Delivery of Peptides and Proteins. Based on laboratory studies conducted by the Company, the GR System is expected to protect drugs prior to their delivery in the stomach. This feature coupled with gastric retention could allow for continuous delivery of peptides and proteins (i.e., labile drugs) into the upper portion of the small intestine, the most likely site of possible absorption for many such drugs. It is expected that this mechanism will allow effective oral delivery of some drugs that currently require administration by injection. In addition, the Company believes that the GR System can be formulated to provide for continuous, controlled delivery of insoluble or particulate matter, including protein or antigen-laden vesicles, such as liposomes, and microspheres or nanoparticles. THE REDUCED IRRITATION SYSTEM The RI System is designed to provide for significant reduction in local GI irritation from the effects of certain drugs. Local tissue damage occurs when solid crystals of a drug remain at any one site of the GI tract for long periods of time. The RI System consists of an outer capsule, which is designed to rapidly disintegrate upon ingestion to deliver multiple small, spherical pellets. The pellets are composed of an inert matrix of polymeric 27 material in which the active ingredient is homogeneously dispersed in its solid state. The pellets persist for a period of time, but ultimately dissolve and the polymer is eliminated. The RI System is designed to reduce irritation through three distinct mechanisms. First, the small spheres of the RI System are designed to deliver an incorporated drug in solution state, in contrast to a solid or crystalline state which may cause ulcers. Second, the dispersion of the spheres within the stomach contributes further to the dilution of the local drug effects. Third, controlled delivery contributes to the reduction of GI irritation by delivering the incorporated drug over a longer period of time. In addition to the reduced irritation aspirin that the Company is currently developing, the Company believes that other GI irritating compounds such as potassium chloride and erythromycin may benefit from the RI System. The Company is currently developing an aspirin product which utilizes the RI System and is designed to reduce the GI irritation which is common when aspirin is administered in conventional tablet or capsule form. Aspirin usage has been expanding with important new medical indications, including the prevention and treatment of cardiovascular disease. Aspirin is widely recognized for its ability to cause damage to the GI tract and local irritation of the stomach and intestine which often relates to GI discomfort and a patient's intolerance to this drug. The irritation properties of aspirin are mostly local, not systemic in origin. Local damage begins and is sustained by high local drug concentration against the mucosa, particularly when aspirin is administered in a solid, crystalline state as from a rapidly dissolving tablet. These crystals in contact with the mucosa provide a stagnant pool of saturated drug solution against the cell walls, resulting in damage from both cellular mechanisms and from back diffusion of acid into the mucosal cells and into the submucosal capillaries, causing tissue necrosis and bleeding. To minimize local damage, the RI System is designed to deliver its drug in solution, in a controlled manner from a dispersion of polymeric units. 28 The figure below shows the results from a preliminary study completed for the Company by SRI International. Using a standard animal model (considered predictive of local GI irritation in humans), the irritant properties of aspirin were reduced by approximately 72% when delivered from the RI System, compared to the same dose of aspirin administered in conventional tablet form. [FIGURE 2 APPEARS HERE] 29 PRODUCTS UNDER DEVELOPMENT The following table summarizes the Company's principal product development initiatives:
DEPOMED POTENTIAL SYSTEM PROGRAM PARTNER INDICATIONS EXPECTED BENEFIT STATUS - ------- ---------------- -------------- ---------------- ---------------- ----------- GR BMS Proprietary Bristol-Myers Confidential(1) . Less frequent Phase I Compound Squibb Company dosing GR Anti-infective GalaGen Inc. C. parvum, . Prolonged, Feasibility Immunoglobulin intestinal continuous infection delivery for intestinal therapy GR Anti-infective GalaGen Inc. H. pylori . Prolonged, Feasibility Immunoglobulin gastric continuous infection delivery to gastric mucosa GR Calcium In-house Osteoporosis, . Improved Pre- Supplement other calcium calcium clinical deficiencies absorption RI Aspirin In-house Multiple, . Reduced Pre- including gastric clinical cardiovascular irritation therapy . Prolonged low dose delivery
- -------- (1) The potential indication may not be disclosed pursuant to the terms of the agreement between the Company and BMS. See "--Collaborative Relationships." BUSINESS STRATEGY The Company intends to have the DepoMed Systems used with as many pharmaceutical products as possible with an emphasis on pharmaceutical products which command a large market share or are in large market segments and where the Company believes the DepoMed Systems will provide an advantage over other drug delivery systems. The Company's primary strategy for the development and commercialization of the DepoMed Systems involves establishing collaborative relationships with pharmaceutical and biotechnology companies to develop improved therapeutic products. The products will be jointly developed, with the collaborative partner having primary responsibility to clinically test, manufacture, market and sell the products. The Company has retained and intends to continue to retain ownership of its technologies developed for its collaborative partners. The Company believes this practice will provide the Company with the flexibility of entering into collaborative arrangements with other potential partners should the initial partner decide not to pursue the commercialization of a particular product which utilizes the DepoMed Systems. The Company believes that its partnering strategy will enable it to reduce its cash requirements while developing a larger potential products portfolio. By providing new formulations of existing products using the DepoMed Systems, the Company believes that it will not only be able to offer such partners improved products but also may provide them with the ability to extend their patent franchises on such products. The Company believes that the potential for such renewed franchises will be especially attractive to pharmaceutical companies whose patents on existing products are close to expiration. In addition, the Company believes that the DepoMed Systems may offer pharmaceutical and biotechnology companies formulations for products based on new molecular entities, such as antigens and peptides, that can be safely and effectively administered orally. Collaborations with pharmaceutical and biotechnology companies are expected to provide near-term revenues from sponsored development activities and future revenues from license fees and royalties relating to the sale of products. The Company also intends to develop improved generic and/or OTC products that utilize the DepoMed Systems either independently or jointly by entering into collaborative partnerships with pharmaceutical, biotechnology or other healthcare companies. To reduce costs and time-to market, the Company intends to select those products that treat indications with clear-cut clinical end- points and that are reformulations of existing compounds already approved by the FDA. The Company believes that products utilizing the DepoMed Systems will provide favorable product differentiation in the highly competitive generic and OTC drug product markets 30 at costs below those of other drug delivery systems, thereby enabling the Company and its collaborative partners to compete more effectively in marketing improved generic and OTC products. By funding the initial development costs of these improved products, the Company believes that it may be able to enter into collaborative marketing arrangements that provide higher royalty rates or other more favorable payment terms on product sales. The Company is also seeking to establish alliances with overseas sales and marketing partners for the initial sale of the Company's future generic products. The Company believes that due to the more favorable regulatory environments in some foreign countries, it may be able to generate revenues from these markets while awaiting FDA approval in the United States. COLLABORATIVE RELATIONSHIPS Bristol-Myers Squibb Company. In July 1996, the Company and BMS entered into a joint research agreement to develop a product incorporating a BMS proprietary compound into the GR System. Pursuant to the agreement, BMS has an option to obtain an exclusive, worldwide license to products incorporating the BMS compound utilizing the GR System. Based on a pharmacokinetic study in humans that was concluded in February, 1997, a dosage level (drug release rate and duration) for the product has been selected. Further clinical testing is now in progress, while process scale-up and manufacturing methodologies are being finalized. If such license is entered into, the Company will receive a royalty on net sales of the products as well as certain milestone payments. The option expires in February 1999. There can be no assurance, however, that BMS will exercise the option or that, if it does, any resulting product will be approved by the FDA or, if approved, will be commercialized. GalaGen Inc. In May 1996, the Company and GalaGen entered into a feasibility study involving the use of the GR System to deliver oral immunoglobulin products developed by GalaGen. If the outcome of the feasibility study is favorable, the Company may enter into a development agreement with GalaGen. There can be no assurance, however, that such feasibility study will be concluded successfully, and even if successfully concluded that the Company will be able to enter into an agreement with GalaGen on reasonable commercial terms or at all. Oakmont Pharmaceuticals, Inc. In April 1997, the Company and Oakmont signed a letter of intent to enter into an agreement pursuant to which Oakmont will manufacture the Company's reduced irritation aspirin and enhanced absorption calcium supplement products and have rights to distribute and sell these products in territories to be determined. The letter of intent also provides for the Company and Oakmont each to offer rights to future products to the other party. There can be no assurance that the Company and Oakmont will enter into a definitive agreement or, if they do, that the Company will be successful in developing these products or Oakmont will be successful in manufacturing, distributing or marketing them. COMPETITION Competition in the areas of pharmaceutical products and drug delivery systems is intense and is expected to become more intense in the future. Several other companies have developed or are developing novel technologies for oral drug delivery, and these competing technologies may prove superior, either generally or in particular market segments, in terms of factors such as cost, consumer satisfaction or drug delivery profile. The Company's principal competitors in the business of developing and applying drug delivery systems include companies, such as ALZA, Dura and Elan, all of which have substantially greater financial, technological, marketing, personnel and research and development resources than the Company. In addition, the Company may face competition from pharmaceutical and biotechnology companies that may develop or acquire drug delivery technologies. Many of the Company's potential collaborative partners have devoted and are continuing to devote significant resources in the development of their own drug delivery systems and technologies. Products incorporating the Company's technologies will compete both with products employing advanced drug delivery systems and with products in conventional dosage forms. New drugs or future developments in alternate drug delivery technologies may provide therapeutic or cost advantages over any potential products which utilize the DepoMed Systems. There can be no assurance that developments by others will not render any potential products utilizing the DepoMed 31 Systems noncompetitive or obsolete. In addition, the Company's competitive success will depend heavily on entering into collaborative relationships on reasonable commercial terms, commercial development of products incorporating the DepoMed Systems, regulatory approvals, protection of intellectual property and market acceptance of such products. PATENTS AND PROPRIETARY RIGHTS The Company's success will depend in part on its ability to obtain and maintain patent protection for its technologies and to preserve its trade secrets. It is the policy of the Company to file patent applications in the United States and foreign jurisdictions. The Company currently holds two issued United States and two foreign patents and has two United States and two foreign patent applications pending. No assurance can be given that the Company's patent applications will be approved or that any issued patents will provide competitive advantages for the DepoMed Systems or the Company's technologies or will not be challenged or circumvented by competitors. With respect to already issued patents and any patents which may issue from the Company's applications, there can be no assurance that claims allowed will be sufficient to protect the Company's technologies. Patent applications in the United States are maintained in secrecy until a patent issues, and the Company cannot be certain that others have not filed patent applications for technology covered by the Company's pending applications or that the Company was the first to file patent applications for such technology. Competitors may have filed applications for, or may have received patents and may obtain additional patents and proprietary rights relating to, compounds or processes that may block the Company's patent rights or compete without infringing the patent rights of the Company. In addition, there can be no assurance that any patents issued to the Company will not be challenged, invalidated or circumvented, or that the rights granted thereunder will provide proprietary protection or commercial advantage to the Company. The Company also relies on trade secrets and proprietary know-how which it seeks to protect, in part, through confidentiality agreements with employees, consultants, collaborative partners and others. There can be no assurance that these agreements will not be breached, that the Company will have adequate remedies for any such breach or that the Company's trade secrets will not otherwise become known or be independently developed by competitors. Although potential collaborative partners and the Company's research partners and consultants are not given access to proprietary trade secrets and know-how of the Company until they have executed confidentiality agreements, these agreements may be breached by the other party thereto or may otherwise be of limited effectiveness or enforceability. The ability to develop the Company's technologies and to commercialize products using such technologies will depend on not infringing the patents of others. Although the Company is not aware of any claim of patent infringement against it, claims concerning patents and proprietary technologies determined adversely to the Company could have a material adverse effect on the Company. In addition, litigation may also be necessary to enforce any patents issued or licensed to the Company or to determine the scope and validity of third-party proprietary rights. There can be no assurance that the Company's issued or licensed patents would be held valid by a court of competent jurisdiction. Whether or not the outcome of litigation is favorable to the Company, the cost of such litigation and the diversion of the Company's resources during such litigation could have a material adverse effect on the Company. The pharmaceutical industry has experienced extensive litigation regarding patent and other intellectual property rights. Accordingly, the Company could incur substantial costs in defending itself in suits that may be brought against the Company claiming infringement of the patent rights of others or in asserting the Company's patent rights in a suit against another party. The Company may also be required to participate in interference proceedings declared by the United States Patent and Trademark Office for the purpose of determining the priority of inventions in connection with the patent applications of the Company or other parties. Adverse determinations in litigation or interference proceedings could require the Company to seek licenses (which may not be available on commercially reasonable terms) or subject the Company to significant liabilities to third parties, and could therefore have a material adverse effect on the Company. 32 MANUFACTURING, MARKETING AND SALES The Company intends to develop products utilizing the DepoMed Systems for its collaborators and, in some cases, retain rights to manufacture commercial quantities of such products. The manufacture and incorporation of drugs into hydrophilic, polymer matrix pellets used in the DepoMed Systems is accomplished by using a variety of standard techniques. These include direct compression, compression using high speed rotary tablet press or, alternatively, by an extrusion/spheronization process. The Company does not have any internal manufacturing, marketing or sales resources. In view of its early stage of development and limited resources, the Company does not anticipate spending a material portion of the net proceeds of this Offering to acquire resources and develop capabilities in these areas. Although the Company intends to acquire pilot manufacturing equipment with a portion of the net proceeds of the Offering, the Company does not intend to acquire or establish its own dedicated manufacturing facilities for the foreseeable future. See "Use of Proceeds." Rather, the Company's manufacturing strategy will be to utilize the facilities of its collaborative partners, or to develop manufacturing relationships with established contract manufacturers to make products utilizing the DepoMed Systems. In addition, the Company does not intend to establish an internal sales and marketing capability, but will seek to rely on its collaborative partners or distributor arrangements to market and sell the products utilizing the DepoMed Systems. In April 1997, the Company and Oakmont signed a letter of intent to enter into an agreement pursuant to which Oakmont will manufacture the Company's reduced irritation aspirin and enhanced absorption calcium supplement products and have rights to distribute and sell these products in territories to be determined. There can be no assurance that the Company will be able to enter into manufacturing, marketing or sales agreements on reasonable commercial terms, or at all, with Oakmont or with another third party. Failure to do so could have a material adverse effect on the Company. Manufacturers of products utilizing the DepoMed Systems will be subject to applicable cGMP requirements prescribed by the FDA or other rules and regulations prescribed by foreign regulatory authorities. There can be no assurance that the Company will be able to enter into manufacturing agreements either domestically or abroad with companies whose facilities and procedures comply with cGMP or applicable foreign standards. Should such agreements be entered into, the Company will be dependent on such manufacturers for continued compliance with cGMP and applicable foreign standards. Failure by a manufacturer of products utilizing the DepoMed Systems to maintain cGMP or applicable foreign standards could result in significant time delays or the inability of the Company to commercialize the DepoMed Systems and could have a material adverse effect on the Company. At the present time, due to ongoing consolidation in the chemical and pharmaceutical industries, the Company believes there is a worldwide excess of manufacturing capacity available to the Company. As a result, the Company believes that it will be able to enter into agreements with suppliers and manufacturers on reasonable commercial terms. However, there can be no assurance that there will be manufacturing capacity available to the Company at the time the Company is ready to commercialize products utilizing the DepoMed Systems. There also can be no assurance that any products utilizing the DepoMed Systems can be manufactured at a cost or in quantities required to make them commercially viable. The Company's inability to contract on acceptable terms and with qualified suppliers for the manufacture of any products or delays or difficulties in its relationships with manufacturers, would have a material adverse effect on the Company. Contract manufacturers must adhere to cGMP regulations strictly enforced by the FDA on an ongoing basis through its facilities inspection program. Contract manufacturing facilities must pass a pre-approval plan inspection before the FDA will approve an NDA. Certain material manufacturing changes that occur after approval are also subject to FDA review and clearance or approval. There can be no assurance that the FDA or other regulatory agencies will approve the process or facilities by which any of the products utilizing the DepoMed Systems may be manufactured. The Company's dependence on third parties for the manufacture of products utilizing the DepoMed Systems may adversely affect the Company's ability to develop and deliver such products on a timely and competitive basis. 33 GOVERNMENT REGULATION The Company is subject to regulation under various federal laws regarding pharmaceutical products and also various federal and state laws regarding, among other things, occupational safety, environmental protection, hazardous substance control and product advertising and promotion. In connection with its research and development activities, the Company is subject to federal, state and local laws, rules, regulations and policies governing the use, generation, manufacture, storage, air emission, effluent discharge, handling and disposal of certain materials and wastes. The Company believes that it has complied with these laws and regulations in all material respects and it has not been required to take any action to correct any material noncompliance. FDA Approval Process. In the United States, pharmaceutical products, including any products utilizing the DepoMed Systems, are subject to rigorous regulation by the FDA. If a company fails to comply with applicable requirements, it may be subject to administrative or judicially imposed sanctions such as civil penalties, criminal prosecution of the company or its officers and employees, injunctions, product seizure or detention, product recalls, total or partial suspension of production and FDA refusal to approve pending new drug applications, premarket approval applications, or supplements to approved applications. Prior to commencement of clinical studies involving human beings, preclinical testing of new pharmaceutical products is generally conducted on animals in the laboratory to evaluate the potential efficacy and the safety of the product. The results of these studies are submitted to the FDA as a part of an IND application, which must become effective before clinical testing in humans can begin. Typically, clinical evaluation involves a time consuming and costly three-phase process. In Phase I, clinical trials are conducted with a small number of subjects to determine the early safety profile and the pharmcokinetic pattern of a drug. In Phase II, clinical trials are conducted with groups of patients afflicted with a specific disease in order to determine preliminary efficacy, optimal dosages and expanded evidence of safety. In Phase III, large-scale, multi-center, comparative trials are conducted with patients afflicted with a target disease in order to provide enough data to demonstrate the efficacy and safety required by the FDA. The FDA closely monitors the progress of each of the three phases of clinical testing and may, at its discretion, re-evaluate, alter, suspend or terminate the testing based upon the data which have been accumulated to that point and its assessment of the risk/benefit ratio to the patient. The results of the preclinical and clinical testing on a nonbiologic drug and certain diagnostic drugs are submitted to the FDA in the form of an NDA for approval prior to commencement of commercial sales. In responding to an NDA, the FDA may grant marketing approval, request additional information or deny the application if the FDA determines that the application does not satisfy its regulatory approval criteria. There can be no assurance that approvals will be granted on a timely basis, if at all. Failure to receive approval for any products utilizing the DepoMed Systems could have a material adverse effect on the Company. OTC products subject to final monographs issued by the FDA are subject to various FDA regulations such as those outlining cGMP requirements, general and specific OTC labeling requirements (including warning statements), the restriction against advertising for conditions other than those stated in product labeling, and the requirement that in addition to approved active ingredients OTC drugs contain only suitable inactive ingredients. OTC products and manufacturing facilities are subject to FDA inspection, and failure to comply with applicable regulatory requirements may lead to administrative or judicially imposed penalties, as well as delays. Other Regulations. Even if required FDA approval has been obtained with respect to a product, foreign regulatory approval of a product must also be obtained prior to marketing the product internationally. Foreign approval procedures vary from country to country and the time required for approval may delay or prevent marketing. In certain instances the Company or its collaborative partners may seek approval to market and sell certain of its products outside of the U.S. before submitting an application for U.S. approval to the FDA. The regulatory procedures for approval of new pharmaceutical products vary significantly among foreign countries. The clinical testing requirements and the time required to obtain foreign regulatory approvals may differ from that required for FDA approval. Although there is now a centralized EU approval mechanism in place, each EU 34 country may nonetheless impose its own procedures and requirements, many of which are time consuming and expensive, and some EU countries require price approval as part of the regulatory process. Thus, there can be substantial delays in obtaining required approval from both the FDA and foreign regulatory authorities after the relevant applications are filed, and approval in any single country may not be a meaningful indication that the product will thereafter be approved in another country. PRODUCT LIABILITY The Company's business involves exposure to potential product liability risks that are inherent in the production and manufacture of pharmaceutical products. Any such claims could have a material adverse effect on the Company. The Company does not currently have any product liability insurance. Although the Company has applied for product liability insurance, there can be no assurance that it will be able to obtain or maintain such insurance on acceptable terms, that the Company will be able to secure increased coverage as the commercialization of the DepoMed Systems proceeds or that any insurance will provide adequate protection against potential liabilities. ADVISORS TO THE COMPANY The Company has two groups of advisors that advise the Company on business and scientific issues and on future opportunities. As compensation for these services, the Company has granted the advisors options to purchase shares of the Company's Common Stock. These options vest over four years. The Policy Advisory Board Members of the Policy Advisory Board advise management of the Company on medical, regulatory and business issues relating to the Company. Carl C. Peck, M.D. Dr. Peck is Professor of Pharmacology and Medicine and founding Director of the Center for Drug Development Science at Georgetown University Medical Center, Washington, D.C. Formerly he served as Assistant Surgeon General in the U.S. Public Health Service and as Director of the Center for Drug Evaluation and Research (CDER) at the FDA. Dr. Peck holds an M.D. degree from the University of Kansas. Dr. Peck advises the Company on drug development, experimental design and analysis, and regulatory affairs. John Urquhart, M.D. Dr. Urquhart is Professor of Pharmacoepidemiology at Maastricht University in Maastricht, The Netherlands. He is also Chief Scientist of AARDEX, Ltd. in Zurich, Switzerland and Adjunct Professor of Biopharmaceutical Sciences at the University of California, San Francisco. Earlier he was Chief Scientist at ALZA, holding various management positions including President of ALZA Research. Dr. Urquhart holds an M.D. degree from Harvard University. Dr. Urquhart advises the Company on new product opportunities and product specifications. James B. Wiesler. Mr. Wiesler is the retired Vice Chairman of the Bank of America, where he was in charge of global consumer banking. Mr. Wiesler currently serves as a director of Science Applications International Corporation and of the Sidney Kimmel Cancer Center in San Diego. Additionally, he serves on the Board of Trustees of Sharp Memorial Hospital and Alexian Brothers Hospital. Mr. Wiesler advises the Company on financial and business strategy issues. The Development Advisory Board Members of the Development Advisory Board provide the Company with expertise on medical, scientific and product development issues, including government regulations, clinical trial design and manufacturing issues related to the DepoMed Systems. In certain cases, the advisors also provide consulting services to the Company in their area of expertise in addition to their roles as advisors and will receive compensation for such consulting services. Harriet Benson, Ph.D. Dr. Benson, who was until recently Vice President for Regulatory Affairs of ALZA, advises the Company on matters relating to state and federal compliance issues and other regulatory affairs. 35 Roy Kuramoto, Ph.D. Until his recent retirement, Dr. Kuramoto was Senior Vice President in charge of world-wide manufacturing operations for Syntex Corporation. Dr. Kuramoto advises the Company on issues related to pilot scale-up and manufacturing methodologies. John Palmer, M.D., Ph.D. Dr. Palmer is Chairman Emeritus and Professor in the Department of Pharmacology, University of Arizona Medical School. Dr. Palmer advises the Company on matters related to preclinical study design and clinical pharmacology. Virgil Place, M.D. Dr. Place is the founder and Chairman of Vivus, Inc., a medical device company. Dr. Place advises the Company on issues related to product design, regulatory procedures, and medical affairs. EMPLOYEES As of April 1, 1997, the Company had seven full-time employees. None of the Company's employees is represented by a collective bargaining agreement, nor has the Company experienced any work stoppage. The Company believes that its relations with its employees are good. FACILITIES The Company leases approximately 3,300 square feet in Foster City, California, under a lease which expires on February 28, 1999. The Company will need to lease additional space for laboratory, testing and pilot manufacturing facilities within the next 12 months following the date of this Prospectus. See "Use of Proceeds." LEGAL PROCEEDINGS The Company is not a party to any legal proceedings. 36 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The executive officers and directors of the Company and their ages as of March 31, 1997 are as follows:
NAME AGE POSITION ---- --- -------- John W. Shell, Ph.D..... 71 Founder, Chairman of the Board and Chief Scientific Officer John W. Fara, Ph.D...... 54 President, Chief Executive Officer and Director John N. Shell........... 43 Vice President, Operations and Director John F. Hamilton........ 52 Vice President, Finance and Chief Financial Officer Judson A. Cooper(1)..... 38 Director Joshua Schein, 36 Director Ph.D.(1)...............
- -------- (1) Member of Audit Committee John W. Shell, Ph.D., has served as Chairman of the Board of Directors of the Company since its inception in August 1995, and served as the Company's President and Chief Executive Officer from May 1995 to December 1996 when he became the Company's Chief Scientific Officer. Dr. Shell founded DSI in 1991, and served as its Chairman and Chief Executive Officer until its merger with M6 in 1994, and served as President of the DepoMed Division of M6 from March 1994 until May 1995. Prior to founding DSI, from 1987 until 1990 he was Vice President for Research at Johnson & Johnson's IOLAB division. His experience also includes eight years as a Senior Research Scientist at The Upjohn Company, six years as Director of Research for Allergan Pharmaceuticals and fifteen years with ALZA dating from its founding in 1968. Dr. Shell served as Vice President of ALZA Pharmaceuticals, and later as Vice President for Business Development for ALZA. Dr. Shell received B.A., B.S. and Ph.D. degrees from the University of Colorado. John W. Fara, Ph.D., has served as a director of the Company since November 1995 and as its President and Chief Executive Officer since December 1996. From February 1990 to June 1996 he was President and Chief Executive Officer of Anergen, Inc., a biotechnology company. Prior to February 1990 he was President of Prototek, Inc., a biotechnology company ("Prototek"). Prior to his tenure at Prototek, he was Director of Biomedical Research and then Vice President of Business Development during ten years with ALZA. Dr. Fara received a B.S. from the University of Wisconsin and a Ph.D. from UCLA. John N. Shell has served as a director of the Company since its inception in August 1995 and Director of Operations for the Company until December 1996, when he was named Vice President, Operations. From May 1994 to August 1995, Mr. Shell served in a similar capacity at the DepoMed Division of M6. Prior to 1994, Mr. Shell served as Materials Manager for Ebara International Corporation, a multi-national semiconductor equipment manufacturer, and as Materials Manager for ILC Technology, an electro-optics and electronics manufacturer. Mr. Shell received his B.A. from the University of California, Berkeley. John F. Hamilton has served as the Company's Vice President, Finance and Chief Financial Officer since January 1997. Prior to joining the Company, Mr. Hamilton was Vice President and Chief Financial Officer of Glyko, Inc. and Glyko Biomedical Ltd., a carbohydrate instrument and reagents company from May 1992 to September 1996. Previously he was President and Chief Financial Officer of Protos Corporation, a drug design subsidiary of Chiron Corporation, from June 1988 to May 1992 and held various positions with Chiron Corporation, including Treasurer, from September 1987 to May 1992. Mr. Hamilton received a B.A. from the University of Pennsylvania and an M.B.A. from the University of Chicago. 37 Judson A. Cooper has served as a director of the Company since August 1995. Mr. Cooper has been a private investor since September 1993. Prior to 1993, Mr. Cooper served for two years as a Vice President of D. Blech and Company, a merchant bank. Mr. Cooper is a graduate of the Kellogg School of Management. Joshua Schein, Ph.D., has served as a director of the Company since December 1995. Since 1994 Dr. Schein has served as a Vice President of Investment Banking at Josephthal Lyon and Ross Incorporated, and from 1991 until 1994 as a Vice President at D. Blech and Company. Dr. Schein received a Ph.D. in neurosciences from the Albert Einstein College of Medicine, and an M.B.A. from Columbia University Graduate School of Business. BOARD OF DIRECTORS COMMITTEES AND OTHER INFORMATION All directors are elected at the annual meeting of shareholders and hold office until the election and qualification of their successors at the next annual meeting of shareholders. Officers of the Company serve at the discretion of the Board of Directors. Mr. John N. Shell is Dr. Shell's son. There are no other family relationships. The Board currently has an Audit Committee. The Audit Committee oversees the actions taken by the Company's independent auditors and reviews the Company's internal financial and accounting controls and policies. DIRECTOR COMPENSATION Directors do not currently receive any cash compensation from the Company for their services as members of the Board of Directors, although they are reimbursed for certain expenses in connection with their attendance at meetings of the Board of Directors. Upon his election to the Board of Directors in 1995, John W. Fara received an option to purchase 16,666 shares of Common Stock at an exercise price of $0.09 per share. EXECUTIVE COMPENSATION The following table sets forth certain compensation paid by the Company in the fiscal year ended December 31, 1996 to the Company's Chief Executive Officer and former Chief Executive Officer (now the Company's Chairman and Chief Scientific Officer) (collectively, the "Named Executive Officers"). No other executive officer earned in excess of $100,000 during fiscal 1996. SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ---------------------- AWARDS ---------------------- ANNUAL COMPENSATION COMMON STOCK NAME AND PRINCIPAL POSITION SALARY($) UNDERLYING OPTIONS (#) - --------------------------- ------------------- ---------------------- John W. Fara, President and Chief Executive Offi- cer(1)............................. $ 21,917(2) 83,333 John W. Shell, Chairman and Chief Scientific Offi- cer(3)............................. 185,000 --
- -------- (1) Dr. Fara became President and Chief Executive Officer in December 1996. Dr. Fara devoted 40% of his time to the Company until February 1997, when he assumed his duties on a full-time basis. (2) Includes $15,750 that Dr. Fara received in connection with services performed as a consultant to the Company prior to his appointment as President and Chief Executive Officer. (3) Dr. Shell served as President and Chief Executive Officer of the Company until December 1996. 38 The following table provides information concerning grants of options to purchase the Company's Common Stock made to each of the Named Executive Officers during the fiscal year ended December 31, 1996. OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS --------------------------------------------------- POTENTIAL REALIZED PERCENT VALUE AT ASSUMED NUMBER OF OF TOTAL ANNUAL RATES OF STOCK SECURITIES OPTIONS PRICE APPRECIATION FOR UNDERLYING GRANTED TO EXERCISE OPTION TERM (1) OPTIONS EMPLOYEES PRICE EXPIRATION ---------------------- NAME GRANTED (2)(3) IN FY-1996 (4) ($/SH) (5) DATE 5% 10% ---- -------------- -------------- ---------- ---------- ---------- ----------- John W. Fara............ 83,333 96% $0.90 10/25/06 $ 47,167 $ 119,531 John W. Shell........... -- -- -- -- -- --
- -------- (1) Amounts represent hypothetical gains that could be achieved for the respective options if exercised at the end of the option term. The assumed 5% and 10% rates of stock price appreciation are mandated by rules of the Securities and Exchange Commission and do not represent the Company's estimate or projection of the future Common Stock price. (2) The options reflected in this table were all granted under the Stock Plan. The date of grant is 10 years prior to the expiration date listed. For additional material terms of the options, see "Management--1995 Stock Option Plan." (3) The options vest at a rate of 25% per year over four years from the grant date. (4) Based on an aggregate of 86,667 options granted to employees of the Company in fiscal 1996. (5) The exercise price per share of options granted represented the fair value of the underlying shares of Common Stock on the dates the options were granted as determined by the Board of Directors. The Company's Common Stock was not traded publicly at the time of the option grants to the Named Executive Officers. None of the Named Executive Officers exercised options to purchase Common Stock during the year ended December 31, 1996. The following table sets forth certain information regarding the value of exercised and unexercised stock options held by each of the Named Executive Officers as of December 31, 1996. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS OPTIONS AT DECEMBER 31, 1996 AT DECEMBER 31, 1996(1) -------------------------------- ------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ------------- --------------- ----------- ------------- John W. Fara...... 4,167 95,883 $27,085 $546,792 John W. Shell..... -- -- -- --
- -------- (1) The value of the options is based upon the difference between the exercise price and the assumed value of $6.50 per share, the midpoint of the range of the estimated initial public offering price set forth on the cover of this Prospectus. 1995 STOCK OPTION PLAN The Stock Plan was adopted by the Board of Directors and approved by the shareholders in September 1995 and subsequently amended. As of March 31, 1997, a total of 416,667 shares of Common Stock have been reserved for issuance under the Stock Plan. As of March 31, 1997, options to purchase a total of 91,667 shares of Common Stock had been exercised, options to purchase a total of 196,667 shares at a weighted average exercise price of $1.64 per share were outstanding, and 128,333 shares remain available for future option grants. 39 The purpose of the Stock Plan is to attract, retain and motivate officers, key employees, consultants and directors of the Company by giving them the opportunity to acquire stock ownership in the Company. The Stock Plan provides for the granting to employees of the Company (including officers and employee directors) of "incentive stock options" within the meaning of Section 422 of the Code and for the grant of nonstatutory stock options to employees and consultants of the Company. To the extent an optionee would have the right in any calendar year to exercise for the first time incentive stock options for shares having an aggregate fair market value (under all plans of the Company and determined for each share as of the grant date) in excess of $100,000, any such excess options shall be automatically converted to a nonstatutory stock option. The Stock Plan is administered by the Board of Directors or a committee of the Board of Directors (the "Administrator"). The Administrator determines the type and terms of options and purchase rights granted under the Stock Plan, including the number of shares covered, exercise price, term and condition for exercise of the option. The exercise price of all stock options granted under the Stock Plan must be at least 100% of the fair market value of the Common Stock of the Company on the grant date. The term of an incentive stock option may not exceed ten years from the date of grant. With respect to any participant who owns stock possessing more than 10% of the voting power of all classes of stock of the Company, the exercise price of any stock option granted shall be at least 110% of the fair market value of the Common Stock on the grant date and the term of such option may not exceed five years. Payment of the exercise price may be in cash, check, or, at the discretion of the administrator, by promissory notes or shares of stock held by the optionee, or a combination thereof. No option may be transferred by the optionee other than by will or the laws of descent and distribution or pursuant to a qualified domestic relations order ("QDRO"). During the lifetime of an optionee, only the optionee (or the optionee's spouse pursuant to a QDRO) may exercise an option. An option shall be exercisable on or after each vesting date in accordance with the terms set forth in the option agreement; provided, however, that the right to exercise an option must vest at the rate of at least 20% per year over five years from the grant date. In the event of certain changes in control of the Company or a sale of substantially all its assets, the Administrator may cancel each outstanding option upon payment in cash to the optionee of the amount by which any cash and any other property which the optionee would have received for the shares of stock covered by the vested portion of the option exceeds the exercise price of the option. The Board may amend, suspend or terminate the Stock Plan as long as such action does not adversely affect any outstanding option or purchase right and provided that shareholder approval shall be required for any amendment to (i) increase the number of shares subject to the Stock Plan, (ii) materially change eligibility for the grant of options or purchase rights, or (iii) materially increase the benefits accruing to participants. If not terminated earlier, the Stock Plan will terminate in 2005. LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS The Company's Articles of Incorporation limit the liability of directors for monetary damages to the maximum extent permitted by California law. Such limitation of liability has no effect on the availability of equitable remedies, such as injunctive relief or recission. The Company is also empowered under its Articles of Incorporation to enter into indemnification agreements with its director and officers and to purchase insurance on behalf of any person whom it is required to indemnify. The Company's Bylaws provide that the Company will indemnify its directors and officers as a contractual obligation and may indemnify its employees and agents against certain liabilities to the fullest extent permitted by California law. The Company has entered into indemnification agreements with each of its current directors and officers. 40 CERTAIN TRANSACTIONS In March 1994, DepoMed Systems, Inc. ("DSI") a company founded and principally owned by Dr. John W. Shell was merged into M6 Pharmaceuticals, Inc. ("M6"). In July 1995 DSI and Dr. Shell instituted an action against M6 relating to the merger and related events. In August 1995, pursuant to a settlement agreement (the "Settlement Agreement") between DSI and Dr. Shell, on the one hand, and M6, on the other hand, M6 transferred all of the intellectual property and other technology assets of DSI to the Company, and the Company assumed certain liabilities related thereto. In September 1995, the Company issued 2,066,667 shares of its Common Stock to Dr. Shell and other shareholders of DSI in cancellation of the M6 stock received in the merger. In September 1995, the Company issued 1,196,491 shares of Common Stock to CSO Ventures LLC ("CSO") in consideration of the prior agreement of CSO to lend the Company $100,000 to finance the litigation against M6 and to assist the Company in its initial financing. In September 1995, the Company also entered into a consulting agreement with CSO, pursuant to which CSO provided financial advisory services to the Company for an annual fee of $120,000. The consulting agreement terminated in September 1996. In March 1997, the Company entered into a consulting agreement with CSO which provides for business development, operations and financial advisory services to be performed by CSO for an annual fee of $120,000. The agreement has a term of one year and is renewed automatically unless terminated by either party with 60 days written notice. Dr. Schein and Mr. Cooper are members of CSO and also are directors of the Company. In November 1995, the Company sold 1,025,000 shares of Series A Preferred Stock to David P. Ash and 815,000 shares of Series A Preferred to Amore Perpetuo, Inc., each a principal shareholder of the Company. In February 1997, the Company sold 25,000 shares of Series B Preferred Stock to John F. Hamilton, the Company's Chief Financial Officer. See "Principal Shareholders." Pursuant to the terms of the Settlement Agreement, the Company assumed two promissory notes issued to Dr. Shell by DSI in December 1992 and December 1993 for the aggregate principal amount of $100,667 (the "DSI Notes"). In November 1996, the Company issued a promissory note to Dr. Shell (the "1996 Note" and together with the DSI Notes the "Shell Notes") for the principal amount of $50,000. The Shell Notes bear interest at 6% per annum. The Shell Notes will become due and payable upon completion of this Offering. As of December 31, 1996, the aggregate principal amount and related interest on the Shell Notes totaled $171,488. The Company intends to repay the Shell Notes with a portion of the net proceeds from this Offering. See "Use of Proceeds." Pursuant to the terms of the Settlement Agreement, the Company assumed promissory notes (the "Stern Notes") issued to Julian N. Stern, Secretary of the Company, by DSI. The Stern Notes bear interest at 6.5% per annum. The Stern Notes will become due and payable upon completion of this Offering. The Company intends to repay the Stern Notes with a portion of the net proceeds from this Offering. As of December 31, 1996, the aggregate principal amount of the Stern Notes and related interest totaled $122,750. See "Use of Proceeds." 41 PRINCIPAL SHAREHOLDERS The following table sets forth certain information regarding the beneficial ownership of the Company's Common Stock as of March 31, 1997 and, as adjusted to reflect the sale of the Securities offered hereby, by (i) each person who is known by the Company to own beneficially more than 5% of the Company's Common Stock, (ii) each of the Company's directors, (iii) each of the Named Executive Officers, and (iv) by all current directors and executive officers as a group.
SHARES BENEFICIALLY PERCENT BEFORE PERCENT AFTER NAME OF BENEFICIAL OWNER OWNED (1)(2) OFFERING (2) OFFERING (2) ------------------------ ------------------- -------------- ------------- CSO Ventures LLC (3).......... 1,196,491 28.1% 17.7% Cygnus Therapeutics Systems (4).......................... 400,000 9.4 5.9 David P. Ash (5).............. 341,667 8.0 5.1 Amore Perpetuo, Inc. (6)...... 271,666 6.4 4.0 John W. Shell (7)............. 1,566,666 36.7 23.2 John N. Shell (8)............. 502,083 11.8 7.4 John W. Fara (9).............. 4,167 * * Judson A. Cooper (10)......... 1,196,491 28.1 17.7 Joshua Schein (10)............ 1,196,491 28.1 17.7 All directors and executive officers as a group (6 persons) (11).. 3,277,741 76.8 50.3
- -------- * Less than one percent of the outstanding shares of Common Stock. (1) Assumes no exercise of the Over-Allotment Option. Except pursuant to applicable community property laws or as indicated in the footnotes to this table, to the Company's knowledge, each shareholder identified in the table possesses sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by such shareholder. (2) Applicable percentage of ownership for each shareholder is based on 4,263,447 shares of Common Stock outstanding as of March 31, 1997, together with applicable options for such shareholders. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission, and includes voting and investment power with respect to the shares. Shares of Common Stock subject to outstanding options are deemed outstanding for computing the percentage of ownership of the person holding such options, but are not deemed outstanding for computing the percentage ownership of any other person. (3) CSO Ventures LLC's ("CSO") address is 666 3rd Avenue, 30th Floor, New York, New York 10017. (4) These shares are being held by Dr. John W. Shell for delivery to Cygnus Therapeutics Systems ("Cygnus") if certain conditions are met, including the timely tender for cancellation of certificates representing shares of M6 held by Cygnus. (5) Includes 30,000 shares of Common Stock held by the children of Mr. Ash. (6) Amore Perpetuo, Inc.'s address is 4616 West Sahara Avenue #65, Las Vegas, Nevada 89012. (7) Dr. Shell's address is 1170 B Chess Drive, Foster City, California 94404. Includes 400,000 shares of Common Stock held on behalf of Cygnus, of which Dr. Shell disclaims beneficial ownership. See footnote 4. (8) Includes 2,083 shares of Common Stock issuable upon exercise of outstanding options which will vest within 60 days of March 31, 1997. Mr. Shell's address is 1170 B Chess Drive, Foster City, California 94404. (9) Represents 4,167 shares of Common Stock issuable upon exercise of outstanding options which will vest within 60 days of March 31, 1997. Dr. Fara's address is 1170 B Chess Drive, Foster City, California 94404. (10) Represents shares beneficially owned by CSO, of which Mr. Cooper and Dr. Schein disclaim beneficial ownership. (11) Includes 6,250 shares of Common Stock issuable upon exercise of outstanding options which will vest within 60 days of March 31, 1997. Also includes 1,196,491 shares owned by CSO, of which Mr. Cooper and Dr. Schein disclaim beneficial ownership and 8,333 shares of Common Stock held by John F. Hamilton, the Company's Chief Financial Officer. 42 DESCRIPTION OF SECURITIES The following description of the securities of the Company and certain provisions of the Company's Articles of Incorporation and Bylaws to be effective upon completion of the Offering is a summary and is qualified in its entirety by the provisions of the Articles of Incorporation and Bylaws, which have been filed as exhibits to the Company's Registration Statement, of which this prospectus is a part. Upon the closing of the Offering, the authorized capital stock of the Company will consist of 25,000,000 shares of Common Stock, no par value and 5,000,000 shares of Preferred Stock, no par value (the "Preferred Stock"). COMMON STOCK Upon completion of this Offering, there will be 6,763,447 shares of Common Stock issued and outstanding. Holders of Common Stock are entitled to one vote per share on all matters to be voted upon by the shareholders of the Company. Subject to the preferences that may be applicable to any future shares of Preferred Stock outstanding, the holders of Common Stock are entitled to receive ratably such dividends, if any, as may be declared by the Board of Directors out of funds legally available therefor. In the event of liquidation, dissolution or winding up of the Company, the holders of Common Stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to the prior liquidation rights of any future shares of Preferred Stock outstanding. The holders of Common Stock have no preemptive, redemption, conversion, sinking fund or other subscription rights. The outstanding shares of Common Stock are, and the shares offered by the Company in the Offering will be, when issued and paid for, fully paid and nonassessable. The rights, preferences and privileges of holders of Common Stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of Preferred Stock which the Company may designate and issue in the future. PREFERRED STOCK Upon the closing of this Offering, the Board of Directors will have the authority, without further action by the shareholders, 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 in redemption, liquidation preferences, sinking fund terms and the number of shares constituting any series or the designation of such series without any further vote or action by the shareholders. 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 plans to issue any shares of Preferred Stock. BRIDGE WARRANTS Each Bridge Warrant entitles the registered holder thereof to purchase, at anytime during the four year period commencing 12 months after the date of this Prospectus, one share of Common Stock at the initial public offering price of the Company's Common Stock, subject to adjustment upon the occurrence of certain events such as combinations or reclassifications of the Common Stock. The holders of the Bridge Warrants are also entitled to certain registration rights. See "--Registration Rights." WARRANTS The following is a brief summary of certain provisions of the Warrants, but such summary does not purport to be complete and is qualified in all respects by reference to the actual text of the Warrant Agreement between the Company, and Continental Stock Transfer & Trust Company (the "Warrant Agent"), a copy of which has been filed as an exhibit to the Registration Statement of which this Prospectus is a part. 43 Exercise Price and Terms. Each Warrant entitles the registered holder thereof to purchase, at any time commencing , 1998 [12 months after the date of this Prospectus], until , 2002 [5 years after the date of this Prospectus], one share of Common Stock at a price of $ per share [140% of the initial public offering price per share of Common Stock], subject to adjustment in accordance with the anti-dilution provisions referred to below. The holder of any Warrant may exercise such Warrant by surrendering the certificate representing the Warrant to the Warrant Agent, with the subscription form thereon properly completed and executed, together with payment of the exercise price. The Warrants may be exercised at any time in whole or in part at the applicable exercise price until the expiration of the Warrants. No fractional shares will be issued upon the exercise of the Warrants. The exercise price of the Warrants bears no relationship to any objective criteria and should in no event be regarded as an indication of any future market price of the securities offered hereby. Adjustments. The exercise price and the number of shares of Common Stock purchasable upon the exercise of the Warrants are subject to adjustment, upon the occurrence of certain events, including stock dividends, stock splits, combinations or reclassifications of the Common Stock or for a period of two years from the date of this Prospectus, the sale by the Company of shares of its Common Stock or other securities convertible into Common Stock at a price below the initial public offering price of the Common Stock, excluding shares of Common Stock issued in connection with incentive or benefit plans of the Company and strategic alliances. Additionally, an adjustment will be made in the case of a reclassification or exchange of Common Stock, consolidation or merger of the Company with or into another corporation (other than a consolidation or merger in which the Company is the surviving corporation) or sale of all or substantially all of the assets of the Company, in order to enable warrantholders to acquire the kind and number of shares of stock or other securities or property receivable in such event by a holder of the number of shares of Common Stock that might have been purchased upon the exercise of the Warrant. Redemption Provisions. Commencing , 1998 [18 months after the date of this Prospectus], the Warrants are subject to redemption at $.10 per Warrant on 30 days' prior written notice provided that the average closing sales price of the Common Stock as reported on the AMEX equals or exceeds $ per share [150% of the initial public offering price of the Common Stock] (subject to adjustment for stock dividends, stock splits, combinations or reclassifications of the Common Stock), for any 20 trading days within a period of 30 consecutive trading days ending on the fifth trading day prior to the date of the notice of redemption. In the event the Company exercises the right to redeem the Warrants, such Warrants will be exercisable until the close of business on the business day immediately preceding the date for redemption fixed in such notice. If any Warrant called for redemption is not exercised by such time, it will cease to be exercisable and the holder will be entitled only to the redemption price. Transfer, Exchange and Exercise. The Warrants are in registered form and may be presented to the Warrant Agent for transfer, exchange or exercise at any time on or prior to their expiration date five years from the date of this Prospectus, at which time the Warrants become wholly void and of no value. If a market for the Warrants develops, the holder may sell the Warrants instead of exercising them. There can be no assurance, however, that a market for the Warrants will develop, or if it develops, that it will continue. Warrantholders Not Shareholders. The Warrants do not confer upon holders any voting, dividend or other rights as shareholders of the Company. Modification of Warrants. The Company and the Warrant Agent may make such modifications to the Warrants as they deem necessary and desirable that do not adversely affect the interests of the warrantholders. The Company may, in its sole discretion, lower the exercise price of the Warrants for a period of not less than 30 days on not less than thirty (30) days' prior written notice to the warrantholders and the Representative. Modification of the number of securities purchasable upon the exercise of any Warrant, the exercise price and the expiration date with respect to any Warrant requires the consent of two-thirds of the warrantholders. The Warrants are not exercisable unless, at the time of the exercise, the Company has a current prospectus covering the shares of Common Stock issuable upon exercise of the Warrants, and such shares have been registered, qualified or deemed to be exempt under the securities laws of the state of residence of the exercising 44 holder of the Warrants. Although the Company will use its best efforts to have all of the shares of Common Stock issuable upon exercise of the Warrants registered or qualified on or before the exercise date and to maintain a current prospectus relating thereto until the expiration of the Warrants, there can be no assurance that it will be able to do so. The Warrants are separately transferable immediately upon issuance. Although the Securities will not knowingly be sold to purchasers in jurisdictions in which the Securities are not registered or otherwise qualified for sale, purchasers may buy Warrants in the aftermarket or may move to jurisdictions in which the shares underlying the Warrants are not so registered or qualified during the period that the Warrants are exercisable. In this event, the Company would be unable to issue shares to those persons desiring to exercise their Warrants and holders of Warrants would have no choice but to attempt to sell the Warrants in a jurisdiction where such sale is permissible or allow them to expire unexercised. REGISTRATION RIGHTS Certain holders of the Common Stock or their transferees are entitled to certain rights with respect to the registration of shares under the Securities Act. Registration rights are held with respect to 92,834 shares of Common Stock to be issued upon conversion of the Company's Series B Preferred Stock upon consummation of this Offering under the terms of the agreements between the Company and holders of Series B Preferred Stock (the "Registrable Securities"). Subject to certain limitations in such agreements, the holders of Registrable Securities have "piggyback" rights to request that their shares be registered for public resale with respect to up to four registrations of the Company's securities. However, if such piggyback rights are exercised in connection with an underwritten offering of the Company's Common Stock, the underwriter of such offering has the right to reduce to 20% of the total the number of such shares to be included in such public offering or, in the case of the initial public offering, to exclude such shares entirely. In addition, at a time when the Company is eligible to register securities on Form S-3, holders of Registrable Securities not already registered may demand that the Company file a Form S-3, provided that the aggregate offering price of the Registrable Securities would be at least $1,000,000. The Company will pay certain expenses in connection with the exercise of the foregoing rights. These registration rights expire five years after an initial public offering of the Company's securities. Registration rights are also held with respect to 76,923 shares of Common Stock (assuming an initial public offering price of $6.50) issuable upon exercise of the Bridge Warrants (the "Bridge Shares") under the terms of the agreement between the Company and holders of the Bridge Warrants. Subject to certain limitations in such agreement, the holders of Bridge Shares have the right to require the Company, on one occasion, to register the Bridge Shares under the Securities Act. In addition, the holders of the Bridge Shares have "piggyback" rights to request that their shares be registered for public resale with respect to one registration of the Company's securities. However, if such piggyback registration rights are exercised in connection with an underwritten offering of the Company's Common Stock, the underwriter of such offering has the right to reduce or eliminate such shares to be included in such public offering. The Company will pay certain expenses (excluding underwriting discounts and commissions) relating to such registrations. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Company's Common Stock and the Warrant Agent for the Warrants is Continental Stock Transfer & Trust Company, New York, New York. 45 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this Offering, the Company will have 6,763,447 shares of Common Stock outstanding, of which the 2,500,000 shares offered hereby (and the 1,250,000 Warrants) will be transferable without restriction under the Securities Act. The other 4,263,447 outstanding shares of Common Stock are "restricted securities" (as that term is defined in Rule 144 promulgated under the Securities Act) which may be publicly sold only if registered under the Securities Act or if sold in accordance with an applicable exemption from registration, such as Rule 144. In general, under the revised holding period requirements of Rule 144, subject to the satisfaction of certain other conditions, a person, including an affiliate of the Company, who has beneficially owned restricted securities for at least one year, is entitled to sell (together with any person with whom such individual is required to aggregate sales) within any three-month period, a number of shares that does not exceed the greater of 1% of the total number of outstanding shares of the same class, or, if the Common Stock is quoted on the Nasdaq Stock Market or another national securities exchange, the average weekly trading volume during the four calendar weeks preceding the sale. Sales under Rule 144 are also subject to certain manner of sale provisions, notice requirements, and the availability of current public information regarding the Company. A person who has not been an affiliate of the Company for at least three months, and who has beneficially owned restricted securities for at least two years, is entitled to sell such restricted shares under Rule 144(k) without regard to any of the limitations described above. Subject to certain limitations on the aggregate offering price of a transaction and other conditions, Rule 701 generally may be relied upon with respect to the sale of shares purchased from the Company by its employees, directors, officers or consultants prior to the date of this Prospectus pursuant to written compensatory benefit plans such as the Stock Plan and written contracts such as option agreements. Rule 701 is also available for sales of shares acquired by persons pursuant to the exercise of options granted prior to the effective date of this Prospectus, regardless of whether the option exercise occurs before or after the effective date of this Prospectus. Securities issued in reliance on Rule 701 are "restricted securities" within the meaning of Rule 144 and, beginning 90 days after the date of this Prospectus, may be sold by persons other than affiliates of the Company subject only to the manner of sale provisions of Rule 144 and by affiliates under Rule 144 without compliance with its one-year minimum holding period requirement. Options granted under the Stock Plan to purchase a total of 196,667 shares of Common Stock are currently outstanding, and options to purchase an additional 128,333 shares of Common Stock are reserved for future issuance under the Stock Plan. Of the options granted under the Stock Plan, 7,083 of such options were currently exercisable as of March 31, 1997, with the remaining outstanding options to become exercisable at the rate of 28,750 options in 1997 and 49,167 in each of 1998 and 1999, and 62,500 options in 2000 and thereafter. Shares of Common Stock issued upon the exercise of outstanding options will be "restricted securities" and may not be sold in the absence of registration under the Securities Act unless an exemption from registration is available. Potential exemptions include those available under Rule 144 and Rule 701. No prediction can be made as to the effect that future sales of Common Stock, or the availability of shares of Common Stock for future sale, will have on the market prices of the Common Stock and Warrants prevailing from time to time. Pursuant to the Lock-Up Agreements, the Company, all officers and directors of the Company and all holders of outstanding securities exercisable for or convertible into Common Stock have agreed not to, directly or indirectly, issue, agree or offer to sell, transfer, assign, distribute, grant an option for purchase or sale of, pledge, hypothecate or otherwise encumber or dispose of any beneficial interest in such securities for a period of 12 months following the date of this Prospectus without the prior written consent of the Representative. Assuming that the Representative does not release the shareholders from the Lock-Up Agreements, after the Lock-Up Period all of the shares will be eligible for sale in the public market. Of such shares, 3,355,991 shares of Common Stock will be eligible for sale under Rule 144 (subject to volume limitations imposed by such rule), 815,789 shares of Common Stock will be eligible for sale under Rule 144(k), and 91,667 shares will be eligible for sale under Rule 701. The sale or issuance, or the potential for sale or issuance, of Common Stock after such 12-month period could have an adverse impact on the market prices of the Common Stock and/or the Warrants. Sales of substantial amounts of Common Stock or the perception that such sales could occur could adversely affect prevailing market prices for the Common Stock and/or the Warrants. See "Underwriting." 46 UNDERWRITING The Underwriters named below (the "Underwriters"), for whom National Securities Corporation is acting as representative (in such capacity, the "Representative"), have severally agreed, subject to the terms and conditions of the Underwriting Agreement (the "Underwriting Agreement"), to purchase from the Company and the Company has agreed to sell to the Underwriters on a firm commitment basis, the respective number of shares of Common Stock and Warrants set forth opposite their names:
UNDERWRITERS NUMBER OF SHARES NUMBER OF WARRANTS ------------ ---------------- ------------------ National Securities Corporation..... --------- --------- Total............................. 2,500,000 1,250,000 ========= =========
The Underwriters are committed to purchase all the shares of Common Stock and Warrants offered hereby, if any of such Securities are purchased. The Underwriting Agreement provides that the obligations of the several Underwriters are subject to conditions precedent specified therein. The Company has been advised by the Representative that the Underwriters propose initially to offer the Securities to the public at the initial public offering prices set forth on the cover page of this Prospectus and to certain dealers at such prices less concessions not in excess of $ per share of Common Stock and $ per Warrant. Such dealers may reallow a concession not in excess of $ per share of Common Stock and $ per Warrant to certain other dealers. After the commencement of the Offering, the public offering price, concession and reallowance may be changed by the Representative. The Representative has informed the Company that it does not expect sales to discretionary accounts by the Underwriters to exceed five percent of the Securities offered hereby. The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act, or to contribute to payments that Underwriters may be required to make. The Company has also agreed to pay to the Representative a non-accountable expense allowance equal to 2 1/2% of the gross proceeds derived from the sale of the Securities underwritten, of which $50,000 has been paid to date. The Company has granted to the Underwriters the Over-Allotment Option, exercisable during the 45-day period from the date of this Prospectus, to purchase from the Company up to an additional 375,000 shares and/or an additional 187,500 Warrants at the initial public offering prices per share and per Warrant, respectively, offered hereby, less underwriting discounts. Such option may be exercised only for the purpose of covering over-allotments, if any, incurred in the sale of the Securities offered hereby. To the extent such option is exercised in whole or in part, each Underwriter will have a firm commitment, subject to certain conditions, to purchase the number of the additional Securities proportionate to its initial commitment. In connection with this Offering, the Company has agreed to sell to the Representative, for $.0001 per warrant, warrants to purchase from the Company up to 250,000 shares of Common Stock and/or up to 125,000 Warrants (the "Representative's Warrants"). The Representative's Warrants are initially exercisable at a price of $ per share [120% of the initial public offering price per share of Common Stock] and $ per Warrant [120% of the initial public offering price per Warrant] for a period of four years, commencing one year after the date of this Prospectus and are restricted from sale, transfer, assignment or hypothecation for a period of 12 months from the date of this Prospectus, except to officers of the Representative. The Representative's Warrants provide for adjustment in the number of securities issuable upon the exercise thereof as a result of certain subdivisions and combinations of the Common Stock. The Representative's Warrants grant to the holders thereof certain rights of registration for the securities issuable upon exercise thereof. 47 The Company's directors, and executive officers, and all holders of shares of Common Stock, options, warrants or other securities convertible, exercisable or exchangeable for Common Stock have agreed not to offer, sell, or otherwise dispose of any shares of Common Stock for a period of 12 months following the date of this Prospectus without the prior written consent of the Representative. An appropriate legend shall be placed on the certificates representing such securities. Upon the exercise of any Warrants more than one year after the date of this Prospectus, which exercise was solicited by the Representative, and to the extent not inconsistent with the guidelines of the National Association of Securities Dealers, Inc. ("NASD") and the Rules and Regulations of the Commission, the Company has agreed to pay the Representative a commission which shall not exceed five percent (5%) of the aggregate exercise price of such Warrants in connection with bona fide services provided by the Representative relating to any warrant solicitation undertaken by the Representative. In addition, the individual must designate the firm entitled to payment of such warrant solicitation fee. A warrant solicitation fee will only be paid to the Representative or another NASD member when such NASD member is specifically designated in writing as the soliciting broker. However, no compensation will be paid to the Representative in connection with the exercise of the Warrants if (i) the market price of the Common Stock is lower than the exercise price, (ii) the Warrants were held in a discretionary account, or (iii) the exercise of Warrants is not solicited by the Representative. Unless granted an exemption by the Commission from its Rule 101 under Regulation M promulgated under the Securities Act, the Representative will be prohibited from engaging in any market making activities with regard to the Company's securities for the period from five business days (or such applicable periods as Rule 101 under Regulation M may provide) prior to any solicitation of the exercise of the Warrants until the later of the termination of such solicitation activity or the termination (by waiver or otherwise) of any right the Representative may have to receive a fee. As a result, the Representative may be unable to continue to provide a market for the Company's securities during certain periods while the Warrants are exercisable. If the Representative has engaged in any of the activities prohibited by Rule 101 under Regulation M during the period described above, the Representative undertakes to waive unconditionally its rights to receive a commission on the exercise of such Warrants. In connection with this Offering, certain Underwriters and selling group members and their respective affiliates may engage in transactions that stabilize, maintain or otherwise affect the market prices of the Securities. Such transactions may include stabilization transactions effected in accordance with Rule 104 of Regulation M, pursuant to which such persons may bid for or purchase the Common Stock and/or Warrants for the purpose of stabilizing their respective market prices. The Underwriters also may create a short position for the account of the Underwriters by selling more Securities in connection with the Offering than they are committed to purchase from the Company, and in such case may purchase Securities in the open market following completion of the Offering to cover all or a portion of such short position. The Underwriters may also cover all or a portion of such short position, up to 375,000 shares of Common Stock and/or 187,500 Warrants, by exercising the Over-Allotment option referred to above. In addition, the Representative may impose "penalty bids" under contractual arrangements with the Underwriters whereby it may reclaim from an Underwriter (or dealer participating in the Offering) for the account of other Underwriters, the selling concession with respect to the Securities that are distributed in the Offering but subsequently purchased for the account of the Underwriters in the open market. Any of the transactions described in this paragraph may result in the maintenance of the prices of the Securities at a level above that which might otherwise prevail in the open market. None of the transactions described in this paragraph is required, and, if they are undertaken, they may be discontinued at any time. Prior to this Offering, there has been no public market for the Common Stock or the Warrants. Consequently, the initial public offering prices of the Common Stock and Warrants, and the exercise price of the Warrants has been determined by negotiation between the Company and the Representative and does not necessarily bear any relationship to the Company's asset value, net worth or other established criteria of value. The factors considered in such negotiations, in addition to prevailing market conditions, included the history of 48 and prospects for the industry in which the Company competes, an assessment of the Company's management, the prospects of the Company, its capital structure, the market for initial public offerings and certain other factors as were deemed relevant. The foregoing is a summary of the principal terms of the agreements described above and does not purport to be complete. Reference is made to a copy of each such agreement which are filed as exhibits to the Registration Statement of which this Prospectus is a part. For a more complete description thereof, see "Additional Information." LEGAL MATTERS The legality of the Securities offered hereby will be passed upon for the Company by Heller Ehrman White & McAuliffe, Palo Alto, California. Julian N. Stern, the Secretary of the Company, is the owner of 83,333 shares of Common Stock and is the sole stockholder and employee of a professional corporation that is a partner of Heller Ehrman White & McAuliffe. Orrick, Herrington & Sutcliffe LLP, New York, New York has acted as counsel to the Underwriters in connection with the Offering. EXPERTS The financial statements of DepoMed, Inc. at December 31, 1996 and for the period from inception (August 7, 1995) to December 31, 1995, for the year ended December 31, 1996 and for the period from inception (August 7, 1995) to December 31, 1996 and the statement of direct expenses of DepoMed Systems Division of M6 Pharmaceuticals, Inc. for the period from January 1, 1995 to August 6, 1995 appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their reports thereon appearing elsewhere herein and in the Registration Statement, and are included in reliance upon such reports given upon the authority of such firm as experts in accounting and auditing. ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission"), a Registration Statement on Form SB-2 under the Securities Act (the "Registration Statement") with respect to the shares of Common Stock offered hereby. This Prospectus does not contain all the information set forth in the Registration Statement and the exhibits and schedules thereto. For further information with respect to the Company and such Common Stock, reference is made to the Registration Statement and to the exhibits and schedules filed therewith. Statements contained in this Prospectus as to the contents of any contracts 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, each such statement being qualified in all respects by such reference. A copy of the Registration Statement may be inspected by anyone without charge at the Commission's principal office in Washington, D.C., and copies of all or any part of the Registration Statement may be obtained from the Public Reference Section of the Commission, 450 Fifth Street, N.W. Washington, D.C. 20549, upon payment of certain fees prescribed by the Commission. The Commission maintains an Internet World Wide Web site that contains reports, proxy and information reports and other materials that are filed through the Commission's Electronic Data Gathering, Analysis and Retrieval System. The site can be accessed at http://www.sec.gov. The Company intends to furnish its shareholders with annual reports containing financial statements audited by its independent auditors. 49 INDEX TO FINANCIAL STATEMENTS
PAGE ---- DEPOMED, INC. FINANCIAL STATEMENTS Report of Ernst & Young LLP, Independent Auditors.......................... F-2 Balance Sheet.............................................................. F-3 Statements of Operations................................................... F-4 Statement of Shareholders' Equity (Net Capital Deficiency)................. F-5 Statements of Cash Flows................................................... F-6 Notes to Financial Statements.............................................. F-7 DEPOMED SYSTEMS DIVISION OF M6 PHARMACEUTICALS, INC. Report of Ernst & Young LLP, Independent Auditors.......................... F-14 Statement of Direct Expenses............................................... F-15 Notes to Statement of Direct Expenses...................................... F-16
F-1 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors DepoMed, Inc. We have audited the accompanying balance sheet of DepoMed, Inc. (a development stage company) as of December 31, 1996, and the related statements of operations, shareholders' equity (net capital deficiency), and cash flows for the period from inception (August 7, 1995) to December 31, 1995, for the year ended December 31, 1996, and for the period from inception (August 7, 1995) to December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in Note 1 to the financial statements, the Company's recurring losses from operations and net capital deficiency raise substantial doubt about its ability to continue as a going concern. Management's plans as to these matters are also described in Note 1. The 1996 financial statements do not include any adjustments that might result from the outcome of this uncertainty. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of DepoMed, Inc. (a development stage company) at December 31, 1996, and the results of its operations and its cash flows for the period from inception (August 7, 1995) to December 31, 1995, for the year ended December 31, 1996, and for the period from inception (August 7, 1995) to December 31, 1996 in conformity with generally accepted accounting principles. Palo Alto, California January 31, 1997, except for Note 9, as to which the date is April , 1997 - ------------------------------------------------------------------------------- The foregoing report is in the form that will be signed upon completion of the 1 for 3 reverse stock split described in Note 9 to the financial statements. /s/ Ernst & Young LLP Palo Alto, California April 17, 1997 F-2 DEPOMED, INC. (A DEVELOPMENT STAGE COMPANY) BALANCE SHEET
PRO FORMA SHAREHOLDERS' EQUITY (NET CAPITAL DEFICIENCY) DECEMBER 31, AT DECEMBER 1996 31, 1996 ------------ ------------- ASSETS Current assets: Cash and cash equivalents......................... $ 10,802 Accounts receivable............................... 120,898 Other current assets.............................. 31,537 ----------- Total current assets............................ 163,237 Property and equipment, net......................... 155,139 Other assets........................................ 14,751 ----------- $ 333,127 =========== LIABILITIES AND SHAREHOLDERS' EQUITY (NET CAPITAL DEFICIENCY) Current liabilities: Accounts payable.................................. $ 51,746 Accrued compensation.............................. 291,374 Notes payable to shareholders..................... 294,238 Capital lease obligation, current portion......... 19,803 Other current liabilities......................... 22,764 ----------- Total current liabilities....................... 679,925 Capital lease obligation, non-current portion....... 34,634 Commitments Shareholder's equity (net captial deficiency): Preferred stock, no par value, 10,000,000 shares authorized (5,000,000 pro forma); 2,447,368 shares issued and outstanding (none pro forma); aggregate liquidation preference of $750,000 at December 31, 1996......................................... 682,759 $ -- Common stock, no par value, 25,000,000 shares authorized; 3,354,825 shares issued and outstanding, (4,170,614 shares pro forma)..................... 284,250 967,009 Deferred compensation............................. (275,000) (275,000) Deficit accumulated during the development stage.. (1,073,441) (1,073,441) ----------- ----------- Total shareholders' equity (net capital deficiency).................................... (381,432) $ (381,432) ----------- ----------- $ 333,127 ===========
See accompanying notes. F-3 DEPOMED, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF OPERATIONS
INCEPTION INCEPTION (AUGUST 7, (AUGUST 7, 1995) YEAR ENDED 1995) TO TO DECEMBER 31, DECEMBER 31, DECEMBER 31, 1995 1996 1996 ---------------- ------------ ------------ Product development revenue........ $ -- $ 317,971 $ 317,971 Operating expenses: Research and development......... 138,816 390,496 529,312 General and administrative....... 155,157 393,676 548,833 Purchase of in-process research and development................. 298,154 -- 298,154 --------- --------- ----------- Total operating expenses....... 592,127 784,172 1,376,299 Loss from operations............... (592,127) (466,201) (1,058,328) Interest expense, net.............. 8,541 6,572 15,113 --------- --------- ----------- Net loss........................... $(600,668) $(472,773) $(1,073,441) ========= ========= =========== Pro forma net loss per share....... $ (0.11) ========= Shares used in computing pro forma net loss per share................ 4,285,653 =========
See accompanying notes. F-4 DEPOMED, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENT OF SHAREHOLDERS' EQUITY (NET CAPITAL DEFICIENCY) FROM INCEPTION (AUGUST 7, 1995) TO DECEMBER 31, 1996
DEFICIT TOTAL ACCUMULATED SHAREHOLDERS' CONVERTIBLE PREFERRED STOCK COMMON STOCK DURING EQUITY ----------------------------- ------------------- DEFERRED DEVELOPMENT (NET CAPITAL SHARES AMOUNT SHARES AMOUNT COMPENSATION STAGE DEFICIENCY) -------------- ------------- --------- --------- ------------ ------------ ------------- Balances at inception (August 7, 1995)....... -- $ -- -- $ -- $ -- $ -- $ -- Issuance of common shares to founders on August 7, 1995 in exchange for shares held by them in M6 Pharmaceuticals, Inc... -- -- 2,066,667 -- -- -- -- Issuance of common shares for cash to investors at approximately $0.0009 per share on November 15, 1995............... -- -- 1,196,491 1,000 -- -- 1,000 Issuance of Series A convertible preferred stock for cash to investors at approximately $0.31 per share on November 15, 1995, net of issuance costs of $67,241....... 2,447,368 682,759 -- -- -- -- 682,759 Net loss................ -- -- -- -- -- (600,668) (600,668) -------------- ------------- --------- --------- ---------- ------------ ---------- Balances at December 31, 1995...... 2,447,368 682,759 3,263,158 1,000 -- (600,668) 83,091 Issuance of common shares for cash at various dates at $0.09 per share to employees and the Company's counsel pursuant to stock option agreements............. -- -- 91,667 8,250 -- -- 8,250 Deferred compensation related to grants of certain stock options.. -- -- -- 275,000 (275,000) -- -- Net loss................ -- -- -- -- -- (472,773) (472,773) -------------- ------------- --------- --------- ---------- ------------ ---------- Balances at December 31, 1996...... 2,447,368 $ 682,759 3,354,825 $ 284,250 $ (275,000) $ (1,073,441) $ (381,432) ============== ============= ========= ========= ========== ============ ==========
F-5 DEPOMED, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENT OF CASH FLOWS
INCEPTION INCEPTION (AUGUST 7, 1995) YEAR ENDED (AUGUST 7, 1995) TO DECEMBER 31, DECEMBER 31, TO DECEMBER 31, 1995 1996 1996 ---------------- ------------ ---------------- Cash flows from operating activities: Net loss...................... $(600,668) $(472,773) (1,073,441) Adjustments to reconcile net loss to net cash used in in operating activities: Depreciation and amortization............... 12,234 32,878 45,112 Accrued interest expense on shareholder notes.......... 2,930 10,688 13,618 Purchase of in-process research and development... 298,154 -- 298,154 Changes in assets and liabilities: Accounts receivable....... -- (120,898) (120,898) Other current assets...... (9,144) (22,393) (31,537) Other assets.............. (10,076) (4,675) (14,751) Accounts payable.......... 12,000 39,746 51,746 Accrued compensation...... 62,283 161,615 223,898 Other current liabilities.............. 38,268 (15,504) 22,764 --------- --------- ----------- Net cash used in operating activities... (194,019) (391,316) (585,335) --------- --------- ----------- Cash flows from investing activities: Expenditures for property and equipment.................... (49,645) (28,708) (78,353) Purchases of short-term investments.................. (79,582) -- (79,582) Sales of short-term investments.................. -- 79,582 79,582 --------- --------- ----------- Net cash provided by (used in) investing activities......... (129,227) 50,874 (78,353) --------- --------- ----------- Cash flows from financing activities: Payments on capital lease obligations.................. (22,506) (45,013) (67,519) Proceeds on issuance of notes to shareholders.............. -- 50,000 50,000 Proceeds on issuance of common stock........................ 1,000 8,250 9,250 Proceeds on issuance of preferred stock.............. 682,759 -- 682,759 --------- --------- ----------- Net cash provided by financing activities................... 661,253 13,237 674,490 --------- --------- ----------- Net increase (decrease) in cash and cash equivalents.... 338,007 (327,205) 10,802 Cash and cash equivalents at beginning of period.......... -- 338,007 -- --------- --------- ----------- Cash and cash equivalents at end of period................ $ 338,007 $ 10,802 $ 10,802 ========= ========= =========== Supplementary schedule of noncash financing and investing activities: Acquisition of property and equipment under capital leases....................... $ 65,563 $ 56,393 $ 121,956 ========= ========= =========== Assumption of net liabilities of M6 Pharmaceuticals at inception (August 7, 1995)... $ 298,154 $ -- $ 298,154 ========= ========= =========== Supplemental disclosure of cash flow information: Cash paid during the period for interest................. $ 6,493 $ 5,695 $ 12,188 ========= ========= ===========
See accompanying notes. F-6 DEPOMED, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (1) ORGANIZATION AND BASIS OF PRESENTATION Organization DepoMed, Inc. (the "Company"), a development stage company, was incorporated in the State of California on August 7, 1995. The Company is engaged in the research and development of oral drug delivery systems. The Company's primary activities since incorporation have been establishing its offices and research facilities, recruiting personnel, conducting research and development, performing business and strategic planning and raising capital. Basis of Presentation In the course of its development activities, the Company has sustained continuing operating losses and expects such losses to continue over the next several years. Management plans to continue to finance the operations with a combination of stock sales, such as the initial public offering contemplated by the Company and, in the longer term, revenues from corporate alliances and technology licenses. The Company's ability to continue as a going concern is dependent upon the successful execution of financings and, ultimately, upon achieving profitable operations. If adequate funds are not available, the Company may be required to delay, reduce the scope of, or eliminate one or more of its development programs. Since December 31, 1996, the Company has raised $278,500 from the private placement of Series B preferred stock (see Note 9). In March 1994, DepoMed Systems, Inc. ("DSI"), a company founded and principally owned by Dr. John W. Shell, the founder of the Company, was merged into M6 Pharmaceuticals, Inc. ("M6"). In August 1995, pursuant to a settlement agreement (the "1995 Settlement Agreement") among M6, DSI and Dr. Shell, M6 transferred all of the assets related to the research, development, marketing, production and sale of oral drug delivery systems and technology developed by or under the direction of Dr. Shell to the Company, and the Company assumed certain net liabilities totaling $298,154 related thereto. Such amount has been reflected in the statement of operations as a charge for the purchase of in-process research and development. Unaudited Pro Forma Shareholders' Equity (Net Capital Deficiency) If the offering contemplated by this Prospectus is consummated, all of the convertible preferred shares outstanding as of the closing date will automatically be converted into 815,789 shares of common stock based on the shares of convertible preferred stock outstanding as of December 31, 1996. Pro forma shareholders' equity at December 31, 1996, as adjusted for the conversion of preferred stock, is disclosed on the balance sheet. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Cash, Cash Equivalents and Short-Term Investments The Company considers all highly liquid investments purchased with an original maturity from the date of purchase of three months or less to be cash equivalents. As of December 31, 1995, cash equivalents primarily consist of U.S. treasury bills. All other liquid investments are classified as short-term investments and consist of treasury bills with maturities in excess of three months. The Company places its cash, cash equivalents and short-term investments with high quality, U.S. financial institutions and to date has not experienced losses on any of its balances. Depreciation and Amortization Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation is provided using the straight-line method over the estimated useful lives of the respective assets, generally three to five years. Leasehold improvements are amortized over the lesser of the lease term or the estimated useful lives of the related assets, generally four years. F-7 DEPOMED, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Stock-Based Compensation In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). Under SFAS 123, stock-based compensation expense is measured using either the intrinsic value method as prescribed by Accounting Principles Board Opinion No. 25 ("APBO 25") or the fair-value method described in SFAS 123. Beginning in 1996, the Company implemented SFAS 123 using the intrinsic-value method. Accordingly, adoption of the SFAS 123 had no material effect on the Company's financial position or results of operations. Net Loss Per Share Except as noted below, historical net loss per share is computed using the weighted average number of common shares outstanding. Common equivalent shares are excluded from the computation as their effect is antidilutive, except that pursuant to the Securities and Exchange Commission ("SEC") Staff Accounting Bulletins, common and common equivalent shares issued during the 12-month period prior to the initial filing of the proposed offering at prices below the assumed public offering price have been included in the calculation as if they were outstanding for all periods presented (using the treasury stock method for stock options at the estimated public offering price). Historical net loss per share information is as follows:
PERIOD FROM INCEPTION YEAR ENDED (AUGUST 7, 1995) TO DECEMBER 31, DECEMBER 31, 1995 1996 --------------------- ------------ Net loss per share................... $ (0.10) $ (0.14) ========= ========= Shares used in computing net loss per share............................... 3,044,109 3,469,864 ========= =========
Pro forma net loss per share has been computed as described above and also gives effect to the conversion of convertible preferred shares not included above that will automatically convert upon completion of the Company's initial public offering (using the as-if-converted method) from the original date of issuance. Revenue Recognition Product development revenue relates to the reimbursement of costs incurred for research and development and the achievement of milestones as specified in the related agreement and are recorded as earned. (3) BRISTOL MYERS SQUIBB RESEARCH AGREEMENT In July 1996, the Company and Bristol Myers Squibb Company ("BMS") entered into a joint research agreement to develop a product using a BMS proprietary compound and the DepoMed Gastric Retentive System. Pursuant to the agreement, the Company has achieved all the specified milestones and has, therefore, recorded approximately $198,000 in product development revenues in 1996, the entire fee specified in the agreement. The amounts receivable under the agreement totaled $57,778 as of December 31, 1996. F-8 DEPOMED, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Pursuant to the agreement, BMS has an option to obtain an exclusive, worldwide license to products incorporating the BMS compound utilizing the GR System. If such license is entered into, the Company will receive a royalty on net sales of the products as well as certain milestone payments. The option expires in February 1999. Also in 1996, the Company performed contract research services for BMS under an arrangement whereby BMS reimbursed specific research costs relating to the same product. Revenue recognized in accordance with this arrangement amounted to $110,000 in 1996 and the amount receivable under the arrangement totaled $63,120 as of December 31, 1996. (4) PROPERTY AND EQUIPMENT Property and equipment consist of the following:
DECEMBER 31, 1996 ----------------- Furniture and office equipment.......................... $ 15,590 Laboratory equipment.................................... 153,957 Leasehold improvements.................................. 30,704 -------- 200,251 Less accumulated depreciation and amortization.......... (45,112) -------- $155,139 ========
Property and equipment includes assets under capitalized leases of $121,956 at December 31, 1996. Accumulated amortization related to assets under capital leases totaled $33,412 at December 31, 1996, respectively. (5) LEASES The Company leases its facilities under a noncancelable operating lease. The facilities lease expires in 1999 and includes an option to renew the lease for an additional five years. Future minimum lease payments under the capital leases and operating leases at December 31, 1996, together with the present value of the minimum lease payments, are as follows:
OPERATING CAPITAL LEASES LEASES --------- -------- Year ending December 31, 1997................................................ $ 38,676 $ 27,272 1998................................................ 39,468 23,316 1999................................................ 6,600 19,820 -------- -------- Total minimum payments required....................... $ 84,744 70,408 ======== Less amount representing interest..................... (15,971) -------- Present value of future lease payments................ 54,437 Less current portion.................................. (19,803) -------- Noncurrent portion.................................... $ 34,634 ========
Rent expense for the period from inception (August 7, 1995) to December 31, 1995, for the year ended December 31, 1996 and for the period from inception (August 7, 1995) to December 31, 1996 was approximately $15,840, $36,960 and $52,800, respectively. F-9 DEPOMED, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (6) RELATED PARTY TRANSACTIONS Promissory Note to Chairman of the Board DSI entered into a promissory note with an individual who is the Company's founder, a shareholder and the Chairman of the Board of Directors, in each of December 1992 and December 1993 in the aggregate principal amount of $100,667. These notes are among the liabilities assumed by the Company pursuant to the 1995 Settlement Agreement. In November 1996, the Company entered into a promissory note with the same individual in the aggregate principal amount of $50,000. All the notes bear interest at 6% per annum on the outstanding principal balance. The notes are due upon the Company's receipt of at least $1 million in net proceeds in additional equity financing to the Company. The aggregate principal balance of all outstanding notes including the related interest due the Chairman as of December 31, 1996 is $171,488. Promissory Note to Shareholder In July 1993, DSI signed two promissory notes with a shareholder who is also the secretary to the Board of Directors. These notes are among the liabilities assumed by the Company pursuant to the 1995 Settlement Agreement. The principal of the notes aggregates $100,000, bears interest at 6.5% per annum, and is due at the earlier of the Company's receipt of at least $500,000 in net proceeds from additional equity financing, but not later than December 31, 1997. The entire amount and related interest of $122,750 is outstanding as of December 31, 1996. (7) SHAREHOLDERS' EQUITY Convertible Preferred Stock The Company is authorized to issue 10,000,000 shares of preferred, designated as Series A convertible preferred stock (2,505,000 shares designated) and Series B preferred stock (500,000 shares designated). Preferred shareholders are entitled to receive noncumulative dividends at the rate of $0.02451616 and $0.08 per annum, for each share of Series A, and Series B preferred shares outstanding, respectively, when and if declared by the Board of Directors, payable in preference to common stock dividends. No dividends have been declared or paid by the Company. In the event of any liquidation, dissolution, or winding up of the Company, the holders of the Series A and Series B preferred shares shall be entitled to receive, prior to and in preference to any distribution of any of the assets or surplus funds of the Company to the common shareholders, $0.306452 and $1.00, respectively, for each share of Series A and Series B preferred stock, respectively, held by them, and all declared but unpaid dividends on the preferred shares. The holders of each share of preferred stock shall be entitled to the number of votes equal to the number of shares of common stock into which such shares of preferred stock could be converted at the record date for determination of the shareholders entitled to vote on such matter. Each share of preferred stock is convertible at any time at the option of the holder into shares of common stock at the then effective conversion price. The conversion price per share of Series A and Series B preferred stock shall be $0.919356 and $3.00, respectively, and is subject to adjustment as specified in the articles of incorporation. Conversion of preferred shares is automatic upon the closing of a public offering registered under the Securities Act of 1933, with aggregate proceeds of not less than $3,500,000. Such conversion shall be deemed to have been made immediately prior to the closing of such underwritten public offering of securities. F-10 DEPOMED, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Common Shares The Company is authorized to issue 25,000,000 shares of common stock. Holders of common stock are entitled to one vote per share on all matters to be voted upon by the shareholders of the Company. Subject to the preferences that may be applicable to any outstanding shares of preferred stock, the holders of common stock are entitled to receive ratably such dividends, if any, as may be declared by the Board of Directors. 1995 Stock Option Plan The Company's 1995 Stock Option Plan ( the "Plan") was adopted by the Board of Directors and approved by the shareholders in September 1995, and has subsequently been amended. As of December 31, 1996 a total of 416,667 shares of common stock have been reserved for issuance under the Plan. The Plan provides for the granting to employees of the Company, including officers and employee directors, of incentive stock options, and for the granting of nonstatutory stock options to employees and consultants of the Company. The exercise price of all stock options granted under the Plan must be at least 100% of the fair value of the common stock of the Company on the grant date. The term of an incentive stock option may not exceed ten years from the date of grant. An option shall be exercisable on or after each vesting date in accordance with the terms set forth in the option agreement; provided, however, that the right to exercise an option generally vests at the rate of at least 25% per year over four years from the grant date. Stock-Based Compensation During 1996, the Company adopted SFAS 123. In accordance with the Statement, the Company applies APBO 25 in accounting for option grants to employees under the Plan and, accordingly, does not recognize compensation expense for options granted to employees at fair value, only those options granted at prices below fair value. The valuation related to stock options granted to non-employees was immaterial and, therefore, no value was recorded in the financial statements. The Company used the minimum value method to determine the fair value of stock options at the grant date issued in 1995 and 1996 using the following weighted average assumptions for 1995 and 1996, respectively: risk free interest rates of 6.6% and 6.4%, respectively, and a weighted average expected option life of 2 and 4 years, respectively. The weighted average estimated fair value of employee stock options granted during 1995 and 1996 was $0.0014 and $1.13 per share, respectively. The effect of applying the minimum value method of SFAS 123 in determining the fair values of stock options in 1995 and 1996 did not result in pro forma net loss and loss per share that are materially different from historical amounts reported. Therefore, such pro forma information is not presented herein. Future pro forma results of operations may be materially different from actual amounts reported. F-11 DEPOMED, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) A summary of the Company's stock option activity, and related information for the period from inception (August 7, 1995) to December 31, 1995 and for the year ended December 31, 1996 follows:
PERIOD FROM INCEPTION (AUGUST 7, 1995) TO YEAR ENDED DECEMBER 31, 1995 DECEMBER 31, 1996 ------------------------ -------------------- WEIGHTED WEIGHTED AVERAGE AVERAGE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE ------------ ----------- --------- --------- Outstanding at beginning of period..................... -- $ -- 120,000 $ 0.09 Granted at fair value....... 120,000 0.09 3,334 0.09 Granted below fair value.... -- -- 83,333 0.90 Exercised................... -- -- (91,667) 0.09 Forfeited................... -- -- -- -- ------------ --------- Outstanding at December 31.. 120,000 $ 0.09 115,000 $ 0.68 ============ =========
Exercise prices for options outstanding as of December 31, 1996 ranged from $0.09 to $0.90. The following table summarizes information about options outstanding at December 31, 1996:
OUTSTANDING OPTIONS EXERCISABLE OPTIONS ------------------------------ --------------------- WEIGHTED REMAINING WEIGHTED RANGE OF AVERAGE CONTRACTUAL NUMBER AVERAGE EXERCISE NUMBER OF EXERCISE LIFE (IN OF EXERCISE PRICES OPTIONS PRICE YEARS) OPTIONS PRICE -------- --------- -------- ----------- --------- ---------- $0.09................... 31,667 $0.09 8.87 7,083 $ 0.09 $0.90................... 83,333 0.90 9.83 -- -- ------- 115,000 =======
In December 1996, the Company granted an option to purchase 83,333 shares of common stock at $0.90 per share. Deferred compensation of $275,000 was recorded on this option grant based on the deemed fair value of common stock on the date of grant of approximately $4.20. In January 1997, the Company granted options to purchase 81,667 shares of common stock at $3.00 per share and additional deferred compensation of approximately $98,000 will be recorded in the quarter ending March 31, 1997 based on the deemed fair value of common stock on the grant date of $4.20. (8) INCOME TAXES As of December 31, 1996 the Company had federal net operating loss carryforwards of approximately $500,000. The primary difference between the accumulated deficit and the net operating loss carryforwards relates to the exclusion of deferred compensation which will not be paid prior to March 15, 1997 for tax purposes. The net operating loss carryforwards will expire at various dates beginning on 2010 through 2011 if not utilized. Utilization of the net operating losses and credits may be subject to an annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986. The annual limitations may result in the expiration of net operating losses before utilization. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting and the amount used for income tax purposes. F-12 DEPOMED, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Significant components of the Company's deferred tax assets as of December 31 are as follows:
INCEPTION (AUGUST 7, 1995) TO DECEMBER 31, DECEMBER 31, 1995 1996 ------------ ------------ Net operating loss carryforward................ $ 65,000 $ 380,000 Deferred compensation.......................... 50,000 120,000 --------- --------- Total deferred tax assets...................... 115,000 500,000 Valuation allowance for deferred tax assets.... (115,000) (500,000) --------- --------- Total........................................ $ -- $ -- ========= =========
(9) SUBSEQUENT EVENTS In January 1997, the board of directors authorized management of the Company to file a registration statement with the SEC permitting the Company to sell shares of its common stock and warrants to the public. If the initial public offering is consummated under the terms currently anticipated, all of the preferred stock outstanding will automatically convert into 815,789 shares of common stock. Unaudited pro forma shareholders' equity, as adjusted for the assumed conversion of the preferred shares, is set forth on the balance sheet. Also in January 1997, the board of directors of the Company authorized a 3- for-1 reverse stock split, in which three shares of common stock will be exchanged for one share of common stock. Following shareholder approval, the stock split was effected on , 1997. Effective upon closing of the initial public offering, the Company will become authorized to issue 5,000,000 shares of preferred stock and 25,000,000 shares of common stock. All share and per share amounts, as well as the dividend and liquidation preferences from preferred stock, included in the accompanying financial statements have been retroactively adjusted to reflect the reverse stock split. In the first quarter of fiscal 1997, the Company issued 278,500 shares of Series B preferred stock to accredited investors at a purchase price of $1.00 per share of Series B Preferred Stock. If the initial public offering is consummated under the terms currently anticipated, all of the preferred stock outstanding will automatically convert into 92,834 shares of Common Stock. In April 1997, the Company arranged a financing facility of up to $1,000,000 of one-year notes to accredited investors (the "Bridge Financing"). The terms of the borrowing include a mandatory payment requirement upon the closing of an initial public offering prior to the Bridge Financing's maturity. The Bridge Financing bears interest at the rate of 6% per annum and further provides for the issuance of warrants upon the closing of an initial public offering (the "Bridge Warrants"). The Bridge Warrants entitle the investors to purchase the number of shares of Common Stock which equals 50% of their investment divided by the initial public offering price of the Common Stock, exercisable at a price equal to the initial public offering price of the Common Stock. The Bridge Warrants may be exercised during the 4 year period beginning one year after the date of the initial public offering. F-13 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors DepoMed, Inc. We have audited the accompanying statement of direct expenses of DepoMed Systems Division of M6 Pharmaceuticals, Inc. for the period from January 1, 1995 to August 6, 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 audit. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, the statement referred to above presents fairly, in all material respects, the direct expenses of DepoMed Systems Division of M6 Pharmaceuticals, Inc. for the period from January 1, 1995 to August 6, 1995, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Palo Alto, California January 31, 1997 F-14 DEPOMED SYSTEMS DIVISION OF M6 PHARMACEUTICALS, INC. STATEMENT OF DIRECT EXPENSES FOR THE PERIOD FROM JANUARY 1, 1995 TO AUGUST 6, 1995 Operating expenses: Research and development........................................ $ 175,096 General and administrative...................................... 164,688 --------- Total operating expenses.......................................... 339,784 --------- Net loss.......................................................... $(339,784) =========
F-15 DEPOMED DIVISION OF M6 PHARMACEUTICALS, INC. NOTES TO STATEMENT OF DIRECT EXPENSES (1) BASIS OF PRESENTATION In March 1994, DepoMed Systems, Inc. ("DSI"), a company founded and principally owned by Dr. John W. Shell, the inventor of the DSI's proprietary technology related to drug delivery systems, was merged into M6 Pharmaceuticals, Inc. ("M6"). During the period that DepoMed was controlled by M6, it was operated as a division, and, therefore, had no separate legal status. As a result, separate financial statements were not maintained by M6 for the DepoMed division ("Division") during that time. The accompanying statement of direct expenses were prepared to present the direct expenses for the Division for period from January 1, 1995 to August 6, 1995. There were no revenues for the Division during the period. The statement is not intended to be a complete presentation of the results of operations of the Division during that period. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. (2) SIGNIFICANT ACCOUNTING POLICY--DIRECT EXPENSES The accompanying statements include only direct expenses during the period presented. No allocations of corporate expenses have been presented as management believes any allocations would be subjective and not fairly present the results of operations of the Division. This statement of direct expenses is not necessarily indicative of the expenses that would have been incurred had DepoMed Systems operated as a stand-alone business. F-16 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY 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. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. --------------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary....................................................... 3 Risk Factors............................................................. 7 Use of Proceeds.......................................................... 17 Dividend Policy.......................................................... 18 Capitalization........................................................... 18 Dilution................................................................. 19 Selected Financial Data.................................................. 20 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 21 Business................................................................. 24 Management............................................................... 37 Certain Transactions..................................................... 41 Principal Shareholders................................................... 42 Description of Securities................................................ 43 Shares Eligible for Future Sale.......................................... 46 Underwriting............................................................. 47 Legal Matters............................................................ 49 Experts.................................................................. 49 Additional Information................................................... 49 Index to Financial Statements............................................ F-1
--------------- UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- DEPOMED, INC. 2,500,000 SHARES OF COMMON STOCK AND 1,250,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS ----------------- PROSPECTUS ----------------- NATIONAL SECURITIES CORPORATION , 1997 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The registrant has the power to indemnify its directors and officers against liability for certain acts pursuant to Section 317 of the California Corporations Code. Article IV of the registrant's Third Amended and Restated Articles of Incorporation provides as follows: "The liability of the directors of this corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. This corporation is also authorized, to the fullest extent permissible under California law, to indemnify its agents (as defined in Section 317 of the California Corporations Code), whether by by-law, agreement or otherwise, for breach of duty to this corporation and its shareholders in excess of that expressly permitted by Section 371 and to advance defense expenses to its agents in connection with such matters as they are incurred, subject to the limits on such excess indemnification set forth in Section 204 of the California Corporations Code. If, after the effective date of this Article, California law is amended in a manner which permits a corporation to limit the monetary or other liability of its directors or to authorize indemnification of, or advancement of such defense expenses to, its directors or other persons, in any such case to a greater extent than is permitted on such effective date, the references in this Article to "California law" shall to that extent be deemed to refer to California law as so amended." ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following-table sets forth the costs and expenses, other than underwriting discounts and commissions, payable by the registrant in connection with the sale of the Common Stock being registered. All amounts are estimated except the Commission Registration Fee, the NASD Filing Fee and the American Stock Exchange Application Fee. SEC Registration Fee............................................... $ 11,370 NASD Filing Fee.................................................... 4,252 American Stock Exchange Application Fee............................ 42,500 Blue Sky Qualification Fees and Expenses........................... 20,000 Accounting Fees and Expenses....................................... 140,000 Legal Fees and Expenses............................................ 175,000 Transfer Agent and Registrar Fees.................................. 5,000 Directors' and Officers' Insurance................................. 115,000 Printing and Engraving............................................. 120,000 Miscellaneous...................................................... 22,516 -------- Total.......................................................... $655,638 ========
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES. During the past three years, the registrant has issued the securities set forth below which were not registered under the Securities Act of 1933, as amended (the "Securities Act"). In March 1994, DepoMed Systems, Inc. ("DSI") a company founded and principally owned by Dr. John W. Shell was merged into M6 Pharmaceuticals, Inc. ("M6"). In August 1995, pursuant to a settlement agreement between DSI and Dr. Shell, on the one hand, and M6, on the other hand, M6 transferred all of the intellectual property and other technology assets attributable to DSI to the Company, and the Company assumed certain liabilities related thereto. In September 1995, the Company issued 2,066,667 shares of its Common Stock to Dr. Shell and other prior shareholders of DSI in cancellation of the M6 stock received in the merger. The shares were issued under section 4(2) of the Securities Act. II-1 In September 1995, the Company also issued 1,196,491 shares of Common Stock to CSO Ventures LLC ("CSO") in consideration of the prior agreement of CSO to lend the Company $100,000 to finance the litigation against M6 and to assist the Company in its initial financing. The shares were issued under section 4(2) of the Securities Act. In November 1995, the Company sold 2,447,368 shares of Series A Preferred Stock to certain accredited investors. The shares were issued under section 4(2) of the Securities Act. In the first quarter of 1997, the Company sold 278,500 shares of Series B Preferred Stock to eight accredited investors. The shares were issued under section 4(2) of the Securities Act. See "Principal Shareholders." ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits *1.1 Form of Underwriting Agreement 3.1 Third Amended and Restated Articles of Incorporation *3.2 Form of Amended and Restated Articles of Incorporation (to become effective upon closing of the Offering) 3.3 Bylaws *3.4 Form of Amended and Restated Bylaws (to become effective upon closing of the Offering) *4.1 Specimen Common Stock Certificate *4.2 Specimen Warrant Certificate *4.3 Form of Representative's Warrant Agreement including form of Representative's Warrant *4.4 Form of Warrant Agreement *5.1 Opinion of Heller Ehrman White & McAuliffe 10.1 1995 Incentive Stock Plan, as amended +10.2 Agreement dated July 11, 1996 between the Company and Bristol-Myers Squibb Company +10.3 Feasibility Agreement dated May 13, 1996 between the Company and GalaGen Inc. 10.4 Agreement dated March 18, 1997 between the Company and CSO Ventures LLC 10.5 Lease Agreement between the Company and 1170 Chess Drive Limited Partnership dated September 2, 1992 10.6 First Amendment to lease agreement dated January 1, 1996 between the Company and SKW II Real Estate Partnership 11.1 Statement re: computation of net loss per share 23.1 Consent of Ernst & Young LLP, Independent Auditors *23.2 Consent of Heller Ehrman White & McAuliffe (included in Exhibit 5.1) 24.1 Power of Attorney (included on pages II-4 and II-5) 27.1 Financial Data Schedule
- -------- * To be filed by amendment. + Confidential treatment requested. II-2 ITEM 28. UNDERTAKINGS. (1) The undersigned Registrant hereby undertakes that it will: (a) File, during any period in which offers or sales are being made, a post-effective amendment to this registration statement to: (i) Include any prospectus required by Section 10(a)(3) of the Securities Act, (ii) Reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in the registration statement, and (iii) Include any additional or changed material information on the plan of distribution. (b) For determining liability under the Securities Act, treat each post- effective amendment as a new registration statement of the securities offered, and the offering of the securities at that time to be the initial bona fide offering. (c) File a post-effective amendment to remove from registration any of the securities that remain unsold at the end of this offering. (2) The undersigned Registrant hereby undertakes to provide to the Underwriter at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriter to permit prompt delivery to each purchaser. (3) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of each issue. (4) The undersigned Registrant hereby undertakes that it will: (a) For determining any liability under the Securities Act, treat the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4), or 497(h) under the Securities Act as part of this registration statement as of the time it was declared effective. (b) For determining any liability under the Securities Act, treat each post-effective amendment that contains a form of prospectus as a new registration statement for the securities offered in the registration statement, and the offering of such securities at that time as the initial bona fide offering of those securities. II-3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form SB-2 and has duly caused this Registration Statement on Form SB-2 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Foster City, California on April 18, 1997. DEPOMED, INC. /s/ John W. Fara By: ___________________________ John W. Fara President Chief Executive Officer and Director POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints John W. Fara, John W. Shell and John F. Hamilton his true and lawful attorneys-in-fact and agents, each acting alone, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any or all amendments (including post-effective amendments) to the Registration Statement, and to sign any registration statement for the same offering covered by this Registration Statement that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and all post-effective amendments thereto, and to file the same, with all exhibits thereto, and all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, each acting alone, or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement on Form SB-2 has been signed by the following persons in the capacities and on the dates indicated. /s/ John W. Shell Chairman of the April 18, 1997 - ------------------------------- Board of Directors John W. Shell, Ph.D. and Chief Scientific Officer /s/ John W. Fara President, Chief April 18, 1997 - ------------------------------- Executive Officer John W. Fara, Ph.D. and Director (Principal Executive Officer) /s/ John N. Shell Vice President, April 18, 1997 - ------------------------------- Operations and John N. Shell Director II-4 /s/ John F. Hamilton Vice President, April 18, 1997 - ------------------------------- Finance Chief John F. Hamilton Financial Officer (Principal Financial Officer) /s/ Judson A. Cooper Director April 18, 1997 - ------------------------------- Judson A. Cooper /s/ Joshua Schein Director April 18, 1997 - ------------------------------- Joshua Schein, Ph.D. II-5 INDEX TO EXHIBITS
SEQUENTIALLY EXHIBIT NUMBERED PAGE DESCRIPTION PAGE ------- ----------- ------------ *1.1 Form of Underwriting Agreement 3.1 Third Amended and Restated Articles of Incorporation *3.2 Form of Amended and Restated Articles of Incorporation (to become effective upon closing of the Offering) 3.3 Bylaws *3.4 Form of Amended and Restated Bylaws (to become effective upon closing of the Offering) *4.1 Specimen Common Stock Certificate *4.2 Specimen Warrant Certificate *4.3 Form of Representative's Warrant Agreement including form of Representative's Warrant *4.4 Form of Warrant Agreement *5.1 Opinion of Heller Ehrman White & McAuliffe 10.1 1995 Incentive Stock Plan, as amended +10.2 Agreement dated July 11, 1996 between the Company and Bristol-Myers Squibb Company +10.3 Feasibility Agreement dated May 13, 1996 between the Company and GalaGen Inc. 10.4 Agreement dated March 18, 1997 between the Company and CSO Ventures LLC 10.5 Lease Agreement between the Company and 1170 Chess Drive Limited Partnership dated September 2, 1992 10.6 First Amendment to lease agreement dated January 1, 1996 between the Company and SKW II Real Estate Partnership 11.1 Statement re: computation of net loss per share 23.1 Consent of Ernst & Young LLP, independent auditors *23.2 Consent of Heller Ehrman White & McAuliffe (included in Exhibit 5.1) 24.1 Power of Attorney (included on pages II-4 and II-5) 27.1 Financial Data Schedule
- -------- * To be filed by amendment. + Confidential treatment requested.

 
                                  EXHIBIT 3.1
                                  -----------


                           THIRD AMENDED AND RESTATED
                          ARTICLES OF INCORPORATION OF
                                 DEPOMED, INC.


     Dr. John W. Fara and Julian N. Stern hereby certify that:

     1.  They are the President and Secretary, respectively, of DepoMed, Inc.

(the "Corporation").

     2.  The Articles of Incorporation of the Corporation are hereby amended and

restated to read in full as follows:
                                       I.

     The name of this Corporation is DEPOMED, INC.

                                      II.

     The purpose of this Corporation is to engage in any lawful  act or activity
for which a corporation may be organized under the General Corporation Law of
California other than the banking business, the trust company business or the
practice of a profession permitted to be incorporated by the California
Corporations Code.

                                     III.

          3.1  Authorized Capital Stock. This Corporation is authorized to issue
               ------------------------
two classes of stock, which shall be known as Common Stock and Preferred Stock.
The total number of shares of Common Stock which this Corporation is authorized
to issue is 35,000,000 shares and the total number of shares of Preferred Stock
which this Corporation is authorized to issue is 10,000,000. This Corporation is
authorized to issue a series of Preferred Stock which shall be designated Series
A Convertible Preferred Stock (the "Series A Preferred") and shall consist of
2,505,000 shares of Preferred Stock and a series of Preferred Stock which shall
be designated Series B Convertible Preferred Stock (the "Series B Preferred")
and shall consist of 500,000 shares of Preferred Stock. The remaining shares of
Preferred Stock may be issued from time to time in one or more series. The
rights, privileges, preferences and restrictions applicable to the Preferred
Stock are set forth in Section 3.3.

          3.2  The Board of Directors shall determine the designation of each
additional series of Preferred Stock and the authorized number of shares of each
series.  The Board of Directors is authorized to determine and alter the rights,
preferences, privileges and restrictions granted to or imposed upon any wholly
unissued series of shares of Preferred Stock and to increase or decrease (but
not below the number of shares of

 
such series then outstanding) the number of shares of any such series subsequent
to the issue of shares of that series.  If the number of shares of any series of
Preferred Stock shall be so decreased, the shares constituting such decrease
shall resume the status which they had prior to the adoption of the resolution
originally fixing the number of shares of such series.

     3.3  The rights, privileges, preferences and restrictions of the Preferred
Stock are as follows:

          3.3.1  Dividend Rights.
                 --------------- 

              (a) Dividend Rights of Preferred Stock. The holders of Preferred
                  ----------------------------------
Stock shall be entitled to receive, out of any funds legally available therefor,
when and as declared by the Board of Directors noncumulative dividends on each
outstanding share of Preferred Stock as follows:

                   (i)  Before any amount shall be paid to the holders of Common
Stock, the holders of Series A Preferred and Series B Preferred shall be
entitled to receive an amount equal to $0.02451616 and $0.08, respectively, per
annum for each share of Series A Preferred and Series B Preferred held by them.

                  (ii)  No dividends (other than those payable solely in shares
of Common Stock) shall be payable on any Common Stock during any fiscal year of
this Corporation until dividends in the full respective preferential amount per
share set forth above, and in the full respective preferential amount per share
specified for any series of Preferred Stock authorized in the future, shall have
been paid or declared and set apart for payment to Preferred Stock during that
fiscal year. The right to such dividends on shares of Preferred Stock shall not
be cumulative and no right shall accrue to holders of Preferred Stock by reason
of the fact that dividends on such shares are not declared or paid in any prior
year.

              (b) Dividend Rights of Common Stock.  At any time after the full
                  -------------------------------
preferential dividend per share on Preferred Stock shall have been declared and
paid or set apart for payment in accordance with the provisions of Section
3.3.1(a), dividends may be paid on the outstanding Common Stock out of any funds
legally available therefor.  The holders of Preferred Stock shall not be
entitled to participate in any dividends other than as provided in Section
3.3.1(a).

          3.3.2   Liquidation Preference.  In the event of any liquidation,
                  ----------------------                                   
dissolution, or winding up of the Corporation, either voluntary or involuntary,
distributions to the shareholders of this Corporation shall be made in the
following manner:

              (a) The holders of the Series A Preferred and Series B Preferred
shall be entitled to receive, prior and in preference to any distribution of any
of the assets or surplus

                                      -2-

 
funds of the Corporation to the holders of the Common Stock by reason of their
ownership of such stock, the amount of $0.306452 and $1.00, respectively, for
each share of Series A Preferred and Series B Preferred then held by them,
adjusted for any combinations, consolidations, or stock distributions or
dividends which respect to such shares and, in addition, an amount equal to all
declared but unpaid dividends on the Series A Preferred and Series B Preferred.

              (b)  If upon the occurrence of such event, if the assets and funds
available to be distributed among the holders of the Preferred Stock shall be
insufficient to permit the payment to such holders of the full aforesaid
preferential amounts, then the assets and funds of the Corporation available for
distribution shall be distributed ratably among the holders of the Series A
Preferred and Series B Preferred in proportion to the preferential amount each
such holder is otherwise entitled to receive.

              (c)  After payment has been made to the holders of the Series A
Preferred and Series B Preferred of the full amounts to which they shall be
entitled as provided in paragraphs (a) and (b) above, and after the payment to
the holders of any series of Preferred Stock authorized in the future of the
full preferential amount specified therefor, the remaining assets of the
Corporation available for distribution to shareholders shall be distributed
among the holders of Common Stock ratably in proportion to the numbers of shares
of Common Stock held by them.

              (d)  For purposes of this Section 3.3.2, a merger or consolidation
of the Corporation with or into any other corporation or corporations, or the
merger of any other corporation or corporations into the Corporation, in which
consolidation or merger the shareholders of the Corporation receive
distributions in cash or securities of another corporation or corporations as a
result of such consolidation or merger, or a sale of all or substantially all of
the assets of the Corporation, shall be treated as a liquidation, dissolution or
winding up of the Corporation.

              (e)  Any securities to be delivered to the holders of the
Preferred Stock pursuant to Section 3.3.2(d) above shall be valued as follows:

                   (i) Securities not subject to investment letter or other
similar restrictions on free marketability:

                       (1) If traded on a securities exchange or on the Nasdaq
National Market, the value shall be deemed to be the average of the closing
prices of the securities on such exchange or system over the 30-day period
ending three (3) days prior to the closing;

                                      -3-

 
                       (2) If actively traded over-the-counter, the value shall
be deemed to be the average of the closing bid or sale prices (whichever are
applicable) over the 30-day period ending three (3) days prior to the closing;
and

                       (3) If there is no active public market, the value shall
be the fair market value thereof, as mutually determined by the Corporation and
the holders of a majority-in-interest of the Preferred Stock that would have
been entitled to receive such securities or the same type of securities. 

                   (ii) The method of valuation of securities subject to
investment letter or other restrictions on free marketability shall be to make
an appropriate discount from the market value determined as above in
subparagraphs 3.3.2(e)(1), (2) or (3) to reflect the approximate fair market
value thereof, as mutually determined by the Corporation and the holders of a
majority-in-interest of the Preferred Stock that would be entitled to receive
such securities or the same type of securities.

              (f)  As authorized by Section 402.5(c) of the California
Corporations Code, the provisions of Sections 502 and 503 of the California
Corporations Code shall not apply with respect to repurchase by the Corporation
of shares of Common Stock issued to or held by employees or consultants of the
Corporation or its subsidiaries upon termination of their employment or services
pursuant to agreement providing for the right of said repurchase.

          3.3.3 Voting Rights. Except as otherwise required by law or by Section
                -------------
3.3.5, the holder of each share of Common Stock shall be entitled to one vote
for each share held and the holder of each share of Preferred Stock shall be
entitled to the number of votes equal to the number of shares of Common Stock
into which such share of Preferred Stock could be converted at the record date
for determination of the shareholders entitled to vote on such matter, or, if no
such record date is established, at the date such vote is taken or any written
consent of shareholders is solicited, such votes to be counted together with all
other shares of stock of the Corporation having general voting power and not
separately as a class. Fractional votes by the holders of Preferred Stock shall
not, however, be permitted and any fractional voting rights shall (after
aggregating all shares into which shares of Preferred Stock held by each holder
could be converted) be rounded to the nearest whole number. Holders of Common
Stock and Preferred Stock shall be entitled to notice of any shareholders'
meeting in accordance with the Bylaws of the Corporation.

          3.3.4  Conversion.  The holders of the Preferred Stock have conversion
                 ----------                                                     
rights as follows (the "Conversion Rights"):

                                      -4-

 
                   (a)  Right to Convert. Each share of Preferred Stock shall be
                        ----------------
convertible, at the option of the holder thereof, at any time after the date of
issuance of such share at the office of the Corporation or any transfer agent
for the Preferred Stock. Each share of Preferred Stock shall be convertible into
the number of shares of Common Stock which results from dividing the "Conversion
Price" per share in effect for such series of Preferred Stock at the time of
conversion into the "Conversion Value" per share of such series of Preferred
Stock. The number of shares of Common Stock into which each series of Preferred
Stock is convertible is hereinafter collectively referred to as the "Conversion
Rate" for such series. The initial Conversion Price per share of Series A and
Series B Preferred shall be $0.306452 and $1.00, respectively. The initial
Conversion Price of each series of Preferred Stock shall be subject to
adjustment as hereinafter provided. The Conversion Value per share of Series A
Preferred and Series B Preferred shall be $0.306452 and $1.00, respectively.

                   (b)  Automatic Conversion. Each share of Preferred Stock
                        --------------------
shall automatically be converted into shares of Common Stock at the then
effective Conversion Rate (i) upon the closing of a firm commitment underwritten
public offering pursuant to an effective registration statement under the
Securities Act of 1933, as amended, covering the offer and sale of Common Stock
for the account of the Corporation to the public at an aggregate offering price
to the public of not less than $3,500,000 (prior to deduction of underwriter
commissions and offering expenses); (ii) immediately upon the receipt by the
Corporation of a written request for conversion duly executed by holders of at
least 60% of the then outstanding shares of such series of Preferred Stock; or
(iii) at such time as 60% of the shares of such series of Preferred Stock ever
outstanding have converted into Common Stock.

                   (c)  Mechanics of Conversion.
                        ----------------------- 

                        (i)  Before any holder of Preferred Stock shall be
entitled to convert the same into Common Stock, the holder shall surrender the
certificate or certificates representing the Preferred Stock to be converted,
duly endorsed for transfer, at the office of the corporation or of any transfer
agent for Preferred Stock, and shall give written notice to the corporation at
such office that the holder elects to convert the same and shall state therein
the name or names in which the holder wishes the certificate or certificates for
shares of Common Stock to be issued. The Corporation shall, as soon as
practicable thereafter, issue and deliver at such office to such holder of
Preferred Stock, a certificate or certificates for the number of shares of
Common Stock to which the holder shall be entitled as aforesaid and a check
payable to the holder in the amount of any cash amounts payable as the result of
a conversion into fractional shares of Common Stock pursuant to Section
3.3.4(c)(iv) hereunder and any declared but unpaid dividends on the converted
Preferred Stock to which the holder may be

                                      -5-

 
entitled.  In the case of any conversion pursuant to Section 3.3.4(a), such
conversion shall be deemed to have been made immediately prior to the close of
business on the date of surrender of the shares of Preferred Stock to be
converted, and the person or persons entitled to receive the shares of Common
Stock issuable upon such conversion shall be treated for all purposes as the
record holder or holders of such shares of Common Stock on such date.

                   (ii)  In the case of any conversion pursuant to Section
3.3.4(b)(i), the conversion shall be conditioned upon the closing of the
underwritten public offering, in which event the person(s) entitled to receive
the Common Stock issuable upon such conversion of Preferred Stock shall not be
deemed to have converted such Preferred Stock until immediately prior to such
closing. Written notice of such conversion shall be given by the Corporation to
the holders of Preferred Stock at least ten (10) days prior to the closing of
the sale of such securities. On or after the closing date as specified in such
notice, each holder of Preferred Stock shall surrender the certificate or
certificates representing such Preferred Stock, duly endorsed for transfer, at
the office of the Corporation or any transfer agent for Preferred Stock. The
Corporation shall as soon as practicable thereafter, issue and deliver at such
office to such holder of Preferred Stock, a certificate or certificates for the
number of shares of Common Stock to which he or she shall be entitled as
aforesaid and a check payable to the holder in the amount of any cash amounts
payable as a result of a conversion into a fractional share of Common Stock
pursuant to Section 3.3.4(c)(iv) hereunder and any declared but unpaid dividends
on the converted Preferred Stock. Such conversion shall be deemed to have been
made immediately prior to the closing of such underwritten public offering of
securities, and, notwithstanding that any certificate representing the Preferred
Stock shall not have been surrendered, each holder of such Preferred Stock shall
thereafter be treated for all purposes as the record holder of the number of
shares of Common Stock issuable to such holder upon such conversion.

                  (iii)  In the case of any conversion pursuant to Section
3.3.4(b)(ii) or 3.3.4(b)(iii), such conversion shall be deemed to have been made
as of the date of receipt by the Corporation of a written request for conversion
duly executed by holders of at least 60% of the then outstanding shares of such
series of Preferred Stock, or as of the date as of which 60% of the shares of
such series of Preferred Stock ever outstanding has converted to Common Stock.
Written notice of such conversion shall be given by the Corporation to the
holders of such series of Preferred Stock within twenty (20) days following the
date on which conversion shall be deemed to have occurred. As promptly as
possible after receipt of such notice, each holder of such series of Preferred
Stock shall surrender the certificate or certificates representing such
Preferred Stock, duly endorsed for transfer, at the office of the Corporation or
any transfer agent for Preferred Stock. The corporation shall,

                                      -6-

 
as soon as practicable thereunder, issue and deliver at such office to such
holder of Preferred Stock, a certificate or certificates for the number of
shares of Common Stock to which the holder shall be entitled as aforesaid and a
check payable to the holder in the amount of any cash amounts payable as a
result of a conversion into a fractional share of Common Stock pursuant to
Section 3.3.4(c)(iv) hereunder and any declared but unpaid dividends on the
converted Preferred Stock.  Such conversion shall be deemed to have been made as
of the date aforesaid and, notwithstanding that any certificate representing
such series of Preferred Stock shall not have been surrendered, each holder of
such series of Preferred Stock shall thereafter be treated for all purposes as
the record holder of the number of shares of Common Stock issued to such holder
upon such conversion.

                   (iv)  No fractional shares of Common Stock shall be issued
upon conversion of Preferred Stock. In lieu of any fractional share to which the
holder would otherwise be entitled, the Corporation shall pay cash equal to such
fraction multiplied by the then effective Conversion Price.

              (d)  Adjustment to Conversion Price for Diluting Issues.
                   -------------------------------------------------- 

                   (i)  Special Definitions. For purposes of this Section
                        -------------------
3.3.4(d), the following definitions apply:

                        (A) "Options" shall mean rights, options or warrants to
subscribe for, purchase or otherwise acquire either Common Stock or Convertible
Securities other than rights, options or warrants issued or issuable to
directors or employees of or consultants to the Company pursuant to a stock
grant, option plan or other incentive program approved by the Board of Directors
but not exceeding the rights, options or warrants to subscribe for or purchase
in the aggregate not more than 2,500,000 shares of Common Stock, subject to
adjustment for all subdivisions and combinations and for repurchases of shares
previously issued.

                        (B) "Shares" shall mean shares of Preferred.

                        (C) "Original Issue Date" shall mean the date on which
Shares of were first issued.

                        (D) "Convertible Securities" shall mean any evidence of
indebtedness, shares (other than Common Stock and Shares) or other securities
convertible into or exchangeable for Common Stock.

                        (E) "Additional Shares of Common Stock" shall include
all shares of Common Stock issued (or, pursuant to Section 3.3.4(d)(iii), deemed
to be issued) by the Company after the Original Issue Date, other than shares of
Common Stock issued or issuable: (1) upon the conversion of the

                                      -7-

 
Shares; (2) to Directors or employees of, or consultants to, the Company
pursuant to a stock grant, option plan or other incentive program approved by
the Board of Directors but not exceeding 2,500,000 shares of Common Stock,
subject to adjustment for all subdivisions and combinations and for repurchases
of shares previously issued; (3) as a dividend or distribution on the Shares; or
(4) by way of a dividend or other distribution on shares of Common Stock
excluded from the definition of Additional Shares of Common Stock by the
foregoing clauses (1), (2) and (3), or this clause (4), or on the shares of
Common Stock so excluded.

                   (ii)  No Adjustment of the Conversion Price. No adjustment in
                         -------------------------------------
the Conversion Price for any series of Preferred Stock shall be made in respect
of the issuance of Additional Shares of Common Stock unless the consideration
per share for an Additional Share of Common Stock issued or deemed to be issued
by the Company is less than the Conversion Price of such series of Preferred
Stock in effect, on the date of and immediately prior to such issuance. No
adjustment in the Conversion Price for any series of Preferred Stock will be
made unless such adjustment would require a change of at least one percent of
the Conversion Price then in effect, but any adjustment that would otherwise be
required to be made shall be carried forward and taken into account in any
subsequent adjustment.

                  (iii)  Deemed Issue of Additional Shares of Common Stock.
                         ------------------------------------------------- 

                         (A) Stock Dividends and Subdivisions. In the event that
the Company at any time or from time to time after the Original Issue Date shall
declare or pay any dividend on the Common Stock payable in Common Stock, or
effect a subdivision of the outstanding shares of Common Stock into a greater
number of shares of Common Stock (otherwise than by payment of a dividend in
Common Stock), then in any such event, Additional Shares of Common Stock shall
be deemed to have been issued:

                             (1) in the case of any such dividend, immediately
after the close of business on the record date for the determination of holders
of any class of securities entitled to receive such dividend; or

                             (2) in the case of any subdivision, at the close of
business on the date immediately prior to the date upon which such corporate
action becomes effective.

                         (B) Options and Convertible Securities. In the event
                             ----------------------------------
the Company at any time or from time to time after the Original Issue Date shall
issue any Options or Convertible Securities or shall fix a record date for the
determination of holders of any class of securities then issued to receive any
such Options or Convertible Securities, then the

                                      -8-

 
maximum number of shares (as set forth in the resolution relating thereto
without regard to any provisions contained therein designed to protect against
dilution) of Common Stock issuable upon the exercise of such Option or, in the
case of Convertible Securities and Options therefore, the conversion or exchange
of such Convertible Securities, shall be deemed to be Additional Shares of
Common Stock issued as of the time of such issue or, in case such a record date
shall have been fixed, as of the close of business on such record date, provided
that Additional Shares of Common Stock shall not be deemed to have been issued
unless the consideration per share (determined pursuant to Section 3.3.4(v)
hereof) of such Additional Shares of Common Stock would be less than the
Conversion Price for a series of Preferred Stock in effect on the date of and
immediately prior to such issue, or such record date, as the case may be, and
provided further that in any such case in which Additional Shares of Common
Stock are deemed to be issued:

                       (1) no further adjustment in the Conversion Price of such
series of Preferred Stock shall be made upon the subsequent issue of Convertible
Securities or shares of Common Stock upon the exercise of such Options or
conversion or exchange of such Convertible Securities;

                       (2) if such Options or Convertible Securities by their
terms provide, with the passage of time or otherwise, for any increase in the
consideration payable to the Company or decrease in the number of shares of
Common Stock issuable, upon the exercise, conversion or exchange thereof, the
Conversion Price for a series of Preferred Stock computed upon the original
issue thereof (or upon the occurrence of a record date with respect thereto),
and any subsequent adjustments based thereon, shall, upon any such increase or
decrease becoming effective, be recomputed to reflect such increase or decrease
in so far as it affects such Options or the rights of conversion or exchange
under such Convertible Securities (provided, however, that no such adjustment of
the Conversion Price of such series of Preferred Stock shall effect the Common
Stock previously issued upon conversion of Shares); and

                       (3) no readjustment pursuant to clause (2) above shall
have the effect of increasing the Conversion Price for a series of Preferred
Stock to an amount which exceeds the lower of (i) the Conversion Price for such
series of Preferred Stock on the original adjustment date, or (ii) the
Conversion Price for a series of Preferred Stock that would have resulted from
any issuance of Additional Shares of Common Stock between the original
adjustment date and such readjustment date.

              (iv)  Adjustment of Conversion Price upon issuance of Additional
                    ----------------------------------------------------------
Shares of Common Stock. In the event the Company shall issue Additional Shares
- ----------------------
of Common Stock (including Additional Shares of Common Stock deemed to be issued
pursuant to

                                      -9-

 
Section 3.3.4(iii)) without consideration or for a consideration per share less
than the Conversion Price of a series of Preferred Stock in effect on the date
of and immediately prior to such issue, then in such event, such Conversion
Price shall be reduced, concurrently with such issue, to a price (calculated to
the nearest U.S. cent) determined by multiplying such Conversion Price by a
fraction, the numerator of which shall be the number of shares of Common Stock
outstanding immediately prior to such issue, plus the number of shares of Common
Stock that could be purchased for the aggregate consideration to be received for
the Additional Shares of Common Stock at the then existing Conversion Price of
such series of Preferred Stock, and the denominator of which shall be the number
of shares of Common Stock outstanding immediately prior to such issue plus the
number of such Additional Shares of Common Stock so issued.  For the purpose of
the preceding sentence, all shares of Common Stock issuable upon conversion of
all of the outstanding Shares and Convertible Securities and exercise of Options
shall be deemed to be outstanding, and immediately after any Additional Shares
of Common Stock are deemed issued pursuant to Section 3.3.4(iii) such Additional
Shares of Common Stock shall be deemed to be outstanding.

                   (v)  Determination of Consideration. For purposes of this
                        ------------------------------
Section 3.3.4, the consideration received by the Company for the issue of any
Additional Shares of Common Stock shall be computed as follows:

                        (A) Cash and Property:  Such consideration shall
                            -----------------                           

                            (1) insofar as it consists of cash, include the
aggregate amount of cash received by the Company exclusive of amounts paid or
payable for accrued interest or accrued dividends;

                            (2) insofar as it consists of property other than
cash, be computed at the fair market value thereof at the time of such issue, as
determined in good faith by the Board of Directors; and

                            (3) in the event Additional Shares of Common Stock
are issued together with other shares or securities or other assets of the
Company for consideration which covers both, be the proportion of such
considerations so received computed as provided in clauses (1) and (2) above, as
determined in good faith by the Board of Directors.

                       (B)  Options and Convertible Securities. The
                            ----------------------------------
consideration per share received by the Company for Additional Shares of Common
Stock deemed to have been issued pursuant to Section 3.3.4(d)(iii)(B), relating
to Options and Convertible Securities, shall be determined by dividing:

                                     -10-

 
                       (1) if the total amount, if any, received or receivable
by the Company as consideration for the issue of such Options or Convertible
Securities, plus the minimum aggregate amount of additional consideration (as
set forth in the resolutions relating thereto, without regard to any provision
contained therein designed to protect against dilution) payable to the Company
upon the exercise of such Options or the conversion or exchange of such
Convertible Securities, or in the case of Options for Convertible Securities,
the exercise of such Options for Convertible Securities and the conversion or
exchange of such Convertible Securities; by

                       (2) the maximum number of shares of Common Stock (as set
forth in such resolutions relating thereto, without regard to any provision
contained therein designed to protect against dilution) issuable upon the
exercise of such Options or the conversion or exchange of such Convertible
Securities.

                   (C) Stock Dividends. Any Additional Shares of Common Stock
                       ---------------
deemed to have been issued relating to stock dividends shall be deemed to have
been issued for no consideration.

              (e) Adjustments for Combinations of Common Stock. In the event the
                  --------------------------------------------
outstanding shares of Common Stock shall be combined by reclassification or
otherwise into a lesser number of shares of Common Stock, the Conversion Price
of each series of Preferred Stock in effect immediately prior to such
combination, or consolidation shall, concurrently with the effectiveness of such
combination or consolidation, be proportionately increased.

              (f) Adjustments for Other Distributions. In the event the
                  -----------------------------------
Corporation at any time or from time to time makes, or fixes a record date for
the determination of holders of Common Stock entitled to receive any
distribution payable in securities of the Corporation other than shares of
Common Stock and other than as otherwise adjusted in this Section 3.3.4, then
and in each such event provision shall be made so that the holders of Preferred
Stock shall receive upon conversion thereof, in addition to the number of shares
of Common Stock receivable thereupon, the amount of securities of the
Corporation which they would have received had their Preferred Stock been
converted into Common Stock on the date of such event and had they thereafter,
during the period from the date of such event to and including the date of
conversion, retained such securities receivable by them as aforesaid during such
period, subject to all other adjustments called for during such period under
this Section 3.3.4 with respect to the rights of the holders of the Preferred
Stock.

              (g) Adjustment for Reclassification, Exchange and Substitution. If
                  ---------------------------------------------------------- 
the Common Stock issuable upon conversion of the Preferred Stock shall be
changed into the same or a different number of shares of any other class or
classes of

                                     -11-

 
stock, whether by capital reorganization, reclassification or otherwise (other
than a subdivision or combination of shares provided for above), the Conversion
Rate of each series of Preferred Stock then in effect shall, concurrently with
the effectiveness of such reorganization or reclassification, be proportionately
adjusted such that the Preferred Stock shall be convertible into, in lieu of the
number of shares of Common Stock which the holders would otherwise have been
entitled to receive, a number of shares of such other class or classes of stock
equivalent to the number of shares of Common Stock that would have been subject
to receipt by the holders upon conversion of the Preferred Stock immediately
before that change.

                   (h)  No Impairment. This Corporation will not, by amendment
                        -------------
of its Articles of Incorporation or through any reorganization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action, avoid or seek to avoid the observance or performance of
any of the terms to be observed or performed hereunder by the Corporation but
will at all times in good faith assist in the carrying out of all the provisions
of this Section 3.3.4 and in the taking of all such action as may be necessary
or appropriate in order to protect the conversion rights of the holders of
Preferred Stock against impairment.

                   (i)  Certificate as to Adjustments. Upon the occurrence of
                        -----------------------------
each adjustment or readjustment of the Conversion Price of a series of Preferred
Stock pursuant to this Section 3.3.4, the Corporation at its expense shall
promptly compute such adjustment or readjustment in accordance with the terms
hereof and furnish to each holder of such series of Preferred Stock a
certificate setting forth such adjustment or readjustment and showing in detail
the facts upon which such adjustment or readjustment is based. The Corporation
shall, upon the written request at any time of any holder of such series of
Preferred Stock, furnish or cause to be furnished to such holder a like
certificate setting forth (i) such adjustments and readjustments, (ii) the
Conversion Price at the time in effect, and (iii) the number of shares of Common
Stock and the amount, if any, of other property which at the time would be
received upon the conversion of such series of Preferred Stock.

                   (j)  Issue Taxes. The Corporation shall pay any and all issue
                        -----------
and other taxes that may be payable in respect of any issuance or delivery of
shares of Common Stock on conversion of shares of Preferred Stock pursuant
hereto; provided, however, that the Corporation shall not be obligated to pay
any transfer taxes resulting from any transfer requested by any holder in
connection with any such conversion .

                   (k)  Reservation of Common Issuable Upon Conversion. The
Corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the shares of Preferred Stock, such number of its shares of Common

                                     -12-

 
Stock as shall from time to time be sufficient to effect the conversion of all
outstanding shares of the Preferred Stock; and if at any time the number of
authorized but unissued shares of Common Stock shall not be sufficient to effect
the conversion of all the then outstanding shares of Preferred Stock, the
Corporation will take such corporate action as may, in the opinion of its
counsel, be necessary to increase its authorized but unissued shares of Common
Stock to such number of shares as shall be sufficient for such purpose.

              (l)  Notices of Record Date. In the event that this Corporation
                   ----------------------
shall propose at any time:

                   (i) to declare any dividend or distribution upon its Common
Stock, whether in cash, property, stock or other securities, whether or not a
regular cash dividend and whether or not out of earnings or earned surplus;

                  (ii) to offer for subscription pro rata to the holders of any
class or series of its stock any additional shares of stock of any class or
series or other rights;

                 (iii) to effect any reclassification or recapitalization of its
Common Stock outstanding involving a change in the Common Stock; or

                  (iv) to merge or consolidate with or into any other
corporation, or sell, lease or convey all or substantially all its property or
business, or to liquidate, dissolve or wind up; then, in connection with each
such event, this Corporation shall send to the holders of the Preferred Stock:

                       (1) at least 20 days' prior written notice of the date on
which a record shall be taken for such dividend, distribution or subscription
rights (and specifying the date on which the holders of Common Stock shall be
entitled thereto) or for determining rights to vote in respect of the matters
referred to in (iii) and (iv) above; an d

                       (2) in the case of the matters referred to in (iii) and
(iv) above, at least 20 days' prior written notice of the date when the same
shall take place (and specifying the date on which the holders of Common Stock
shall be entitled to exchange their Common Stock for securities or other
property deliverable upon the occurrence of such event or the record date for
the determination of such holders if such record date is earlier).

          Each such written notice shall be delivered personally or given by
first class mail, postage prepaid, addressed to the holders of the Preferred
Stock at the address for each such holder as shown on the books of this
Corporation.

                                     -13-

 
          3.3.5  Covenants. In addition to any other rights provided by law, so
                 --------- 
long as shares of Preferred Stock are outstanding, this Corporation shall not
without first obtaining the affirmative vote or written consent of the holders
of not less than a majority of the outstanding shares of Preferred Stock, voting
together as one class:

              (a) amend or repeal any provision of, or add any provision to,
this Corporation's Articles of Incorporation if such action would materially and
adversely directly alter or change the preferences, rights, privileges or powers
of, or the restrictions provided for the benefit of, the Preferred Stock, or
increase or decrease the authorized number of shares of Preferred Stock;

              (b) authorize or issue shares of any class or series of stock
having any preferences or priority as to dividends or assets superior to any
such preference or priority of the Preferred Stock;

              (c) reclassify any class or series of Common Stock into shares
having any preference or priority as to dividends or assets superior to or on a
parity with any such preference or priority of any series of Preferred Stock;

              (d) merge with any other corporation if after such merger the
shareholders of the corporation shall own less than fifty percent (50%) of the
voting shares of the surviving corporation in such merger, or sell all or
substantially all of the assets of the Corporation; or

              (e) pay or declare any dividend on, or redeem (other than stock
repurchases pursuant to contractual arrangements with employees, officers,
directors or consultants) any shares of Common Stock.

                                      IV.

          The liability of the directors of this corporation for monetary
damages shall be eliminated to the fullest extent permissible under California
law. This corporation is also authorized, to the fullest extent permissible
under California law, to indemnify its agents (as defined in Section 317 of the
California Corporations Code), whether by by-law, agreement or otherwise, for
breach of duty to this corporation and its shareholders in excess of that
expressly permitted by Section 317 and to advance defense expenses to its agents
in connection with such matters as they are incurred, subject to the limits on
such excess indemnification set forth in Section 204 of the California
Corporations Code. If, after the effective date of this Article, California law
is amended in a manner which permits a corporation to limit the monetary or
other liability of its directors or to authorize indemnification of, or
advancement of such defense expenses to, its directors or other persons, in any
such case to a greater extent than is permitted on such effective date, the

                                     -14-

 
references in this Article to "California law" shall to that extent be deemed to
refer to California law as so amended.

     3.  The foregoing Third Amended and Restated Articles of Incorporation have
been duly approved by the Board of Directors.

     4.  The foregoing Third Amended and Restated Articles of Incorporation have
been duly approved by the required vote of the shareholders of this Corporation
in accordance with Sections 902 and 903 of the California Corporations Code.
The total number of outstanding shares of Common Stock is 10,049,474 shares.
The total number of outstanding shares Series A Preferred is 2,447,368 shares.
There are no other shares outstanding.  The number of shares voting in favor of
the amendment equaled or exceeded the vote required, such required vote being
more than fifty percent (50%) of the outstanding shares of the Common Stock and
Series A Preferred, each voting separately as a class.

     John W. Fara and Julian N. Stern further declare under penalty of perjury
under the laws of the State of California that the matters set forth in these
Third Amended and Restated Articles of Incorporation are true and correct of
their own knowledge.

     Executed at Foster City, California, this 30th day of December, 1996.



                                      /s/ John W. Fara
                                      ------------------------------
                                      JOHN W. FARA, President



                                      /s/ Julian N. Stern
                                      ------------------------------
                                      JULIAN N. STERN, Secretary

                                     -15-

 
                                     -16-

 
                                  EXHIBIT 3.3
                                  -----------


                                    BYLAWS

                                      OF

                                 DEPOMED, INC.



                                 SHAREHOLDERS
                                 ------------


     1.  Annual Meeting.  Unless the Board of Directors or the President of the
         --------------                                                        
corporation selects a different time or date, the annual meeting of shareholders
shall be held at 11:00 a.m. on the first Tuesday of the fifth calendar month
following the end of the corporation's fiscal year.  The annual meeting shall be
for the purpose of electing a Board of Directors and transacting such other
business as may properly be brought before the meeting.

     2.  Special Meeting.  Special meetings of shareholders may be called at any
         ---------------                                                        
time by the Board of Directors, the Chairman of the Board, the President or the
holders of shares entitled to cast not less than one-tenth of the votes at the
meeting.

     3.  Place.  Meetings of shareholders shall be held at the principal
         -----                                                          
executive office of the corporation or at any other place, within or without
California, which is designated by the Board of Directors or the President.

     4.  Notice.
         ------ 

         (a) Annual and Special Meetings.  A written notice of each meeting of
             ---------------------------                                      
shareholders shall be given not more than 60 days and, except as provided below,
not less than 10 (or, if sent by third-class mail, 30) days before the meeting
to each shareholder entitled to vote at the meeting.  The notice shall state the
place, date and hour of the meeting and, if directors are to be elected at the
meeting, the names of the nominees intended to be presented by the Board of
Directors for election.  The notice shall also state (i) in the case of an
annual meeting, those matters which the Board of Directors intends to present
for action by the shareholders, and (ii),in the case of a special meeting, the
general nature of the business to be transacted and that no other business may
be transacted.  Notice shall be delivered personally, by mail or other means
addressed to each such shareholder at the address of the shareholder appearing
on the books of the corporation, the address given by the shareholder to the
corporation for the purpose of notice or as otherwise provided by law.  Upon
written request to the Chairman of the Board, the President, the Secretary or
any Vice President of the corporation by any person (other than the Board of
Directors) entitled to call a special meeting of shareholders, the person
receiving such request shall cause notice to be given

 
to the shareholders entitled to vote that a meeting will be held at a time
requested by the person calling the meeting not less than 35 nor more than 60
days after receipt of the request.

               (b) Adjourned Meetings. Notice of an adjourned meeting need not
                   ------------------
be given if (i) the meeting is adjourned for 45 days or less, (ii) the time and
place of the adjourned meeting are announced at the meeting at which the
adjournment is taken and (iii) no new record date is fixed for the adjourned
meeting. otherwise, notice of the adjourned meeting shall be given as in the
case of an original meeting.

          5.   Record Date.  The Board of Directors may fix in advance a record
               -----------                                                     
date for the determination of the shareholders entitled to notice of any
meeting, to vote, to receive any dividend or other distribution or allotment of
rights or to exercise any rights.  The record date shall be not more than 60 nor
less than 10 days prior to the date of the meeting nor more than 60 days prior
to such other action.  If no record date is fixed, the record date for
determining shareholders entitled to notice of or to vote at a meeting of
shareholders shall be at the close of business on the business day next
preceding the day on which notice is given or, if notice is waived, the close of
business on the business day next preceding the day on which the meeting
is.held. The record date for determining shareholders entitled to give consent
to corporate action in writing without a meeting, when no prior action by the
Board of Directors has been taken, shall be the day on which the first written
consent is given.  The record date for determining shareholders for any other
purpose shall be at the close of business on the day on which the Board of
Directors adopts the resolution relating thereto, or the 60th day prior to the
date of such other action, whichever is later.  Except as otherwise provided by
law, only shareholders at the close of business on the record date are entitled
to notice and to vote, to receive the dividend, distribution or allotment of
rights or to exercise rights, as the case may be, notwithstanding any transfer
of shares on the books of the corporation occurring after the record date.
Except as otherwise provided by law, the corporation shall be entitled to treat
the holder of record of any shares as the holder in fact of such shares and
shall not be bound to recognize any equitable or other claim to or interest in
such shares on the part of any other person, whether or not the corporation
shall have express or other notice of such claim or interest.  A determination
of shareholders of record entitled to notice of or to vote at a meeting of
shareholders shall apply to any adjournment of the meeting unless the Board of
Directors fixes a new record date.  The Board of Directors shall fix a-new
record date if the adjourned meeting takes place more than 45 days after the
date set for the original meeting.

          6.   Meeting Without Regular Call and Notice.  The transactions of any
               ---------------------------------------                          
meeting of shareholders, however called and noticed and wherever held, are as
valid as though had at a meeting duly held after regular call and notice if a
quorum is

                                      -2-

 
present in person or by proxy and if, either before or after the meeting, each
of the persons entitled to vote who is not present at the meeting in person or
by proxy signs a written waiver of notice, a consent to the holding of the
meeting or an approval of the minutes of the meeting.  Attendance of a
shareholder at a shareholders' meeting shall constitute a waiver of notice of
such meeting unless, at the beginning of the meeting, the shareholder objects to
the transaction of any business because the meeting was not properly called or
convened or, with respect to the consideration of a matter required to be
included in the notice for the meeting which was not so included, the
shareholder expressly objects to such consideration at the meeting.

          7.   Quorum and Required Vote.  A majority of the shares entitled to
               ------------------------                                       
vote, represented in person or by proxy, constitutes a quorum for the
transaction of business.  No business may be transacted at a meeting in the
absence of a quorum other than the adjournment of the meeting, except that if a
quorum is present at the commencement of the meeting, business may be transacted
until the meeting is adjourned even though the withdrawal of shareholders
results in less than a quorum.  If a quorum is present at a meeting, the
affirmative vote of the holders of shares having a majority of the voting power
of the shares represented and voting at the meeting on any matter shall be the
act of the shareholders unless the vote of a larger number or voting by classes
is required by law or the Articles of Incorporation.  If a quorum is present at
the commencement of a meeting but the withdrawal of shareholders results in less
than a quorum, the affirmative vote of a majority of shares required to
constitute a quorum shall be the act of the shareholders unless the vote of a
larger number is required by law or the Articles of Incorporation.  Any meeting
of shareholders, whether or not a quorum is present, may be adjourned by the
vote of a majority of the shares represented at the meeting.

          8.   Proxies.  A shareholder may be represented at any meeting of
               -------                                                     
shareholders by a written proxy signed by the person entitled to vote or by such
persons duly authorized attorney-in-fact.  A proxy must bear a date within 11
months prior to the meeting, unless the proxy specifies a different length of
time.  A revocable proxy is revoked by a writing delivered to the Secretary of
the corporation stating that the proxy is revoked or by a subsequent proxy
executed and delivered to the Secretary by, or by attendance at the meeting and
voting in person by, the person executing the proxy.

          9.   Voting.  Except as provided below or as otherwise provided by the
               ------                                                           
Articles of Incorporation or by law, a shareholder shall be entitled to one vote
for each share held of record on the record date fixed for the determination of
the shareholders entitled to vote or, if no such date is fixed, the date
determined in accordance with law.  Upon the demand of any shareholder made at a
meeting before the voting begins, the election of directors shall be by ballot.
At any election of directors, shareholders may cumulate votes and give one
candidate

                                      -3-

 
a number of votes equal to the number of directors to be elected multiplied by
the number of votes to which the shares are entitled or distribute votes
according to the same principle among as many candidates as desired.  No
shareholder shall be entitled to cumulate votes for any one or more candidates
unless such candidate or candidates' names have been placed in nomination prior
to the voting and at least one shareholder has given notice at the meeting prior
to the voting of such shareholder's intention to cumulate votes.

          10.  Election Inspectors.  One or three election inspectors may be
               -------------------                                          
appointed by the Board of Directors in advance of a meeting of shareholders or
at the meeting by the chairman of the meeting.  If not previously chosen, one or
three inspectors shall be appointed by the chairman of the meeting if a
shareholder or proxyholder so requests.  When inspectors are appointed at the
request of a shareholder or proxyholder, the majority of shares represented in
person or by proxy shall determine whether one or three inspectors shall be
chosen.  The election inspectors shall determine all questions concerning the
existence of a quorum and the right to vote, shall tabulate and determine the
results of voting and shall do all other acts necessary or helpful to the
expeditious and impartial conduct of the vote.  If there are three inspectors,
the decision, act or certificate of a majority of the inspectors is effective as
if made by all.

          11.  Action Without Meeting.  Except as provided below or by the
               ----------------------                                     
Articles of Incorporation, any action which may be taken at a meeting of
shareholders may be taken without a meeting and without prior notice if a
consent in writing setting forth the action so taken is signed by the holders of
outstanding shares having not less than the minimum number of votes which would
be necessary to authorize or take such action at a meeting at which all shares
entitled to vote on such action were present and voted.  Unless the consents of
all shareholders entitled to vote have been solicited in writing, the
corporation shall give to those shareholders entitled to vote who have not
consented in writing (i) a written notice at least 10 days before consummation
of an action authorized by shareholders without a meeting covered by the
following sections of the California corporations Code: 310 (certain
transactions involving interested directors), 317 (indemnification of corporate
agents), 1201 (reorganizations) and 2007 (certain distributions of assets) and
(ii) a written notice promptly after the taking of any other action approved by
shareholders without a meeting.  Subject to Section 305(b) of the California
Corporations Code, directors may not be elected by written consent except by
unanimous written consent of all shares entitled to vote for the election of
directors.

          12.  Reports.  The annual report to shareholders specified in Section
               -------                                                         
1501 of the California Corporations Code is dispensed with, except as the Board
of Directors may otherwise determine, as long as there are less than 100 holders
of record of the corporation's shares.  Any such annual report sent to

                                      -4-

 
shareholders shall be sent at least 15 (or, if sent by third-class mail, 35)
days prior to the next annual meeting of shareholders and not later than 120
days after the close of the fiscal year.

          13.  Lost Stock Certificates.  The corporation may cause a new stock
               -----------------------                                        
certificate to be issued in place of any certificate previously issued by the
corporation alleged to have been lost, stolen or destroyed.  The corporation
may, at its discretion and as a condition precedent to such issuance, require
the owner of such certificate to deliver an affidavit stating that such
certificate was lost, stolen or destroyed or to give the corporation a bond or
other security sufficient to indemnify it against any claim that may be made
against it, including any expense or liability, on account of the alleged loss,
theft or destruction or the issuance of a new certificate.


                               BOARD OF DIRECTORS
                               ------------------

          14.  Number.  The authorized number of directors of this corporation
               ------                                                         
shall not be less than three nor more than five.  The exact number of directors
shall be fixed by resolution of the Board of Directors.  The indefinite number
of directors may be changed or a definite number fixed without provision for an
indefinite number by an amendment to the Articles of Incorporation or by
amendment to these bylaws duly adopted by the vote or written consent of holders
of a majority of the outstanding shares entitled to vote.  An amendment reducing
the minimum number of directors to a number less than five cannot be adopted if
the votes cast against its adoption at a meeting of the shareholders, or the
shares not consenting in the case of action by written consent, are equal to
more than 16-2/3% of the outstanding shares entitled to vote.' No amendment may
change the maximum number of authorized directors to a number greater than two
times the minimum number of directors minus one.

          15.  Powers.  Subject to the limitations imposed by law or contained
               ------                                                         
in the Articles of Incorporation, the business and affairs of the corporation
shall be managed and all corporate powers shall be exercised by or under the
ultimate direction of the Board of Directors.

          16.  Election, Term of Office and Vacancies.  At each annual meeting
               --------------------------------------                         
of shareholders, directors shall be elected to hold office until the next annual
meeting.  Each director, including a director elected to fill a vacancy, shall
hold office until the expiration of the term for which the director was elected
and until a successor has been elected.  The Board of Directors may declare
vacant the office of any director who has been declared to be of unsound mind by
court order or convicted of a felony.  Vacancies on the Board of Directors not
caused by removal may be filled by a majority of the directors then in office,
regardless of whether they constitute a quorum, or by a sole remaining director.
The shareholders may elect a director

                                      -5-

 
at any time to fill any vacancy not filled, or which cannot be filled, by the
Board of Directors.  No reduction in the authorized number of directors shall
have the effect of removing any director prior to the expiration of his term of
office.

          17.  Removal.  Except as provided below, any or all of the directors
               -------                                                        
may be removed without cause if such removal is approved by the affirmative vote
or written consent of a majority of the outstanding shares entitled to vote.
Unless the entire Board of Directors is so removed, no director may be removed
if (i) the votes cast against removal, or not consenting in writing to such
removal in the case of written consent, would be sufficient to elect such
director if voted cumulatively at an election at which the same total number of
votes was cast or, if such action is taken by written consent, all shares
entitled to vote were voted and (ii) the entire number of directors authorized
at the time of the director's most recent election were then being elected.

          18.  Resignation.  Any director may resign by giving notice to the
               -----------                                                  
Chairman of the Board, the President, the Secretary or the Board of Directors.
The resignation of a director shall be effective when given unless the director
specifies a later time.  The resignation shall be effective regardless of
whether it is accepted by the corporation.

          19.  Compensation.  If the Board of Directors so resolves, the
               ------------                                             
directors, including the Chairman of the Board, shall receive compensation and
expenses of attendance for meetings of the Board of Directors and of committees
of the Board.  Nothing herein shall preclude any director from serving the
corporation in another capacity and receiving compensation for such service.

          20.  Committees.  The Board of Directors may, by resolution adopted by
               ----------                                                       
a majority of the authorized number of directors, designate one or more
committees, each consisting of two or more directors, to serve at the pleasure
of the Board.  The Board may designate one or more directors as alternate
members of a committee who may replace any absent member at any meeting of the
committee.  To the extent permitted by the resolution of the Board of Directors,
a committee may exercise all of the authority of the Board except:

               (a) the approval of any action which, under the California
Corporations Code, must be approved by the outstanding shares or approved by the
shareholders;

               (b) the filling of vacancies on the Board or any committee;

               (c) the fixing of compensation of the directors for serving on
the Board or any committee;

               (d) the adoption, amendment or repeal of By-laws;

                                      -6-

 
               (e) the amendment or repeal of any resolution of the Board which
by its express terms is not so amendable or repealable;

               (f) a distribution to the shareholders of the corporation, except
at a rate, in a periodic amount or within a price range determined by the Board;
and

               (g) the appointment of any other committees of the Board or the
members of such committees.

          21.  Inspection of Records and Properties.  Each director may inspect
               ------------------------------------                            
all books, records, documents and physical properties of the corporation and its
subsidiaries at any reasonable time.  Inspections may be conducted either by the
director or the director's agent or attorney.  The right of inspection includes
the right to copy and make extracts.

          22.  Time and Place of Meetings and Telephone Meetings.  Unless the
               -------------------------------------------------             
Board of Directors determines otherwise, the Board shall hold a regular meeting
during each quarter of the corporation's fiscal year. one such meeting shall
take place immediately following the annual meeting of shareholders.  All
meetings of directors shall be held at the principal executive office of the
corporation or at such other place, within or without California, as shall be
designated in the notice of the meeting or in a resolution of the Board of
Directors.  Directors may participate in a meeting through use of conference
telephone or similar communications equipment, provided that all members so
participating can hear each other.

          23.  Call.  Meetings of the Board of Directors, whether regular or
               ----                                                         
special, may be called by the Chairman of the Board, the President, the
Secretary, any Vice President or any two directors.

          24.  Notice.  Regular meetings of the Board of Directors may be held
               ------                                                         
without notice if the time of such meetings has been fixed by the Board.
Special meetings shall be held upon four days' notice by mail or 48 hours'
notice delivered personally or by telephone or telegraph, and regular meetings
shall be held upon similar notice if notice is required for such meetings.
Neither a notice nor a waiver of notice must specify the purpose of any regular
or special meeting.  Notice of the time and place of holding an adjourned
meeting need not be given to absent directors if the time and place of the
adjourned meeting is announced at the meeting at which the adjournment is taken,
but if a meeting is adjourned for more than 24 hours, notice of the adjourned
meeting shall be given prior to the time of such meeting to the directors who
were not present at the time of the adjournment.

          25.  Meeting Without Regular Call and Notice.  The transactions of any
               ---------------------------------------                          
meeting of the Board of Directors, however called and noticed or wherever held,
are as valid as though had

                                      -7-

 
at a meeting duly held after regular call and notice if a quorum is present and
if, either before or after the meeting, each of the directors not present signs
a written waiver of notice, a consent to the holding of the meeting or an
approval of the minutes of the meeting.  For such purposes, a director shall not
be considered present at a meeting if, although in attendance at the meeting,
the director protests the lack of notice prior to the meeting or at its
commencement.

          26.  Action Without Meeting.  Any action required or permitted to be
               ----------------------                                         
taken by the Board of Directors may be taken without a meeting, if all of the
members of the Board individually or collectively consent in writing to such
action.

          27.  Quorum and Required Vote.  A majority of the authorized number of
               ------------------------                                         
directors shall constitute a quorum for the transaction of business.  Subject to
the provisions of Section 310 (relating to certain transactions involving
interested directors) and Section 317(e) (relating to indemnification of
corporate agents) of the California Corporations Code, every act or decision
done or made by a majority of the directors present at a meeting duly held at
which a quorum is present is the act of the Board.  A meeting at which a quorum
is initially present may continue to transact business notwithstanding the
withdrawal of directors, if any action taken is approved by at least a majority
of the required quorum for such meeting.  A majority of the directors present.at
a meeting, whether or not a quorum is present, may adjourn the meeting to
another time and place.

          28.  Committee Meetings.  The principles set forth in Sections 22
               ------------------                                          
through 27 of these By-laws shall apply to committees of the Board of Directors
and to actions taken by such committees.

          29.  Indemnification of Directors and Officers.
               ----------------------------------------- 

               (a) Indemnification.  To the fullest extent permissible under
                   ---------------                                          
California law, the corporation shall indemnify its directors and officers
against all expenses, judgments, fines, settlements and other amounts actually
and reasonably incurred by them in connection with any proceeding, including an
action by or in the right of the corporation, by reason of the fact that such
person is or was a director or officer of the corporation, or is or was serving
at the request of the corporation as a director, officer, trustee, employee or
agent of another corporation, or of a partnership, joint venture, trust or other
enterprise (including service with respect to employee benefit plans).  To the
fullest extent permissible under California law, expenses incurred by a director
or officer seeking indemnification under this By-law in defending any proceeding
shall be advanced by the corporation as they are incurred upon receipt by the
corporation of an undertaking by or on behalf of the director or officer to
repay such amount if it shall ultimately be determined that the director or
officer is not entitled to be indemnified by the corporation for those

                                      -8-

 
expenses.  If, after the effective date of this By-law, California law is
amended in a manner which permits the corporation to authorize indemnification
of or advancement of expenses to its directors or officers, in any such case to
a greater extent than is permitted on such effective date, the references in
this By-law to "California law" shall to that extent be deemed to refer to
California law as so amended.  The rights granted by this By-law are contractual
in nature and, as .such, may not be altered with respect to any present or
former director or officer without the written consent of that person.

               (b) Procedure. Upon written request to the Board of Directors by
                   ---------
a person seeking indemnification under this By-law, the Board shall promptly
determine in accordance with Section 317(e) of the California Corporations Code
whether the applicable standard of conduct has been met and, if so, the Board
shall authorize indemnification. If the Board cannot authorize indemnification
because the number of directors who are parties to the proceeding with respect
to which indemnification is sought prevents the formation of a quorum of
directors who are not parties to the proceeding, then, upon written request by
the person seeking indemnification, independent legal counsel (by means of a
written opinion obtained at the corporation's expense) or the corporation's
shareholders shall determine whether the applicable standard of conduct has been
met and, if so, shall authorize indemnification.

               (c) Definitions. The term "proceeding" means any threatened,
                   -----------
pending or completed action or proceeding, whether civil, criminal,
administrative or investigative. The term "expenses" includes, without
limitation, attorneys' fees and any expenses of establishing a right to
indemnification.


                                   OFFICERS
                                   --------

          30.  Titles and Authority.  The officers of the corporation shall
               --------------------                                        
include a Chairman of the Board or a President or both, a Secretary and a
Treasurer.  The Board of Directors may also choose one or more Vice Presidents,
Assistant Secretaries, Assistant Treasurers or other officers.  Any number of
offices may be held by the same person.  All officers shall perform their duties
and exercise their powers subject to the direction of the Board of Directors.
Deeds, notes, contracts, and any other instrument or document may be executed on
behalf of this corporation by the single signature of the Chairman of the Board
or the President or by the signatures of any two officers, provided that the
signing officers shall not both be Assistant Vice Presidents, Assistant
Secretaries, Assistant Treasurers or other subordinate officers.
Notwithstanding the foregoing, any officer is authorized to sign (i) a proxy or
consent solicited by the directors or management of any company in which this
corporation owns shares or (ii) any notice given by this corporation to any
other person.

                                      -9-

 
          31.  Election, Term of Office and Vacancies.  At its regular meeting
               --------------------------------------                         
after each annual meeting of shareholders, the Board of Directors shall choose
the officers of the corporation.  The Board may choose additional officers or
fill vacant offices at any other time.  No officer must be a member of the Board
of Directors except the Chairman of the Board.  The officers shall hold office
until their successors are chosen, except that the Board of Directors may remove
any officer at any time.

          32.  Resignation.  Any officer may resign at any time upon notice to
               -----------                                                    
the corporation without prejudice to the rights, if any, of the corporation
under any contract to which the officer is a party.  The resignation of an
officer shall be effective when given unless the officer specifies a later time.
The resignation shall be effective regardless of whether it is accepted by the
corporation.

          33.  Chairman of the Board; President.  If the Board of Directors
               --------------------------------                            
elects a Chairman of the Board, such officer shall preside over all meetings of
the Board of Directors and of shareholders.  If there be no Chairman of the
Board, the President shall perform such duties.  The Board of Directors shall
designate either the Chairman of the Board or the President as the chief
executive officer and may prescribe the duties and powers of the chief executive
officer.  If there be no Chairman of the Board, the President shall be the chief
executive officer.

          34.  Secretary.  Unless otherwise determined by the Board of Directors
               ---------                                                        
or the chief executive officer, the Secretary shall have the following powers
and duties:

               (a) Record of Corporate Proceedings.  The Secretary shall attend
                   -------------------------------                             
meetings of shareholders and the Board of Directors and its committees and shall
record all votes and the minutes of such meetings in a book to be kept at the
principal executive office of the corporation or at such other place as the
Board may determine.  The Secretary shall keep at the corporation's principal
executive office, if in California, or at its principal business office in
California if the principal executive office is not in California, the original
or a copy of these By-laws, as amended.

               (b) Record of Shares. Unless a transfer agent is appointed by the
                   ----------------
Board of Directors to keep a share register, the Secretary shall keep a share
register at the principal executive office of the corporation showing the names
of the shareholders and their addresses, the number and class of shares held by
each, the number and date of certificates issued and the number and date of
cancellation of each certificate surrendered for cancellation.

               (c) Notices.  The Secretary shall give such notices as may be
                   -------                                                  
required by law or these By-laws.

          35.  Treasurer.  Unless the Board of Directors
               ---------                                

                                     -10-

 
designates another chief financial officer, the Treasurer shall be the chief
financial officer of the corporation.  Unless otherwise determined by the Board
of Directors or the chief executive officer, the Treasurer shall have custody of
the corporate funds and securities, shall keep adequate and correct accounts of
the corporation's properties and business transactions, shall disburse such
funds of the corporation as may be ordered by the Board or the chief executive
officer (taking proper vouchers for such disbursements), and shall render to the
chief executive officer and the Board, at regular meetings of the Board or
whenever the Board may require, an account of all transactions and the financial
condition of the corporation.

          36.  Other officers.  The other officers of the corporation, if any,
               --------------                                                 
shall exercise such powers and perform such duties as the Board of Directors or
the chief executive officer shall prescribe.

          37.  Salaries.  The Board of Directors shall fix the salary of the
               --------                                                     
chief executive officer and may fix the salaries of other employees of the
corporation, including the other officers.  If the Board does not fix the
salaries of the other officers, the chief executive officer shall fix such
salaries.

                                 AMENDMENT OF
                                    BYLAWS
                                    ------

          38.  Bylaws may be adopted, amended or repealed by the affirmative
vote of a majority of the outstanding shares entitled to vote or by the Board of
Directors, except that an amendment changing the authorized number of directors
may only be adopted as provided in Section 14.


                                 CERTIFICATION
                                 -------------

          This is to certify that the foregoing is a true and correct copy of
the bylaws of the corporation named in the title of these bylaws and that such
bylaws were duly adopted by the Board of Directors of such corporation effective
August 8, 1995.



                                      /s/   Julian N. Stern
                                     -----------------------------
                                     Julian N. Stern, Secretary

                                     -11-

 
                                 EXHIBIT 10.1
                                 ------------


                            1995 STOCK OPTION PLAN

                                      OF

                                 DEPOMED, INC.


 1.   PURPOSES OF THE PLAN
      --------------------

      The purposes of the 1995 Stock Option Plan (the "Plan") of DepoMed, Inc.,
a California corporation (the "Company"), are to:

      (a) Encourage selected employees, directors and consultants to improve
operations and increase profits of the Company;

      (b) Encourage selected employees, directors and consultants to accept or
continue employment or association with the Company or its Affiliates; and

      (c) Increase the interest of selected employees, directors and consultants
in the Company's welfare through participation in the growth in value of the
common stock of the Company (the "Common Stock").

      Options granted under this Plan ("Options") may be "incentive stock
options" ("ISOs") intended to satisfy the requirements of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), or "nonstatutory
options" ("NSOs").

 2.   ELIGIBLE PERSONS
      ----------------

      Every person who at the date of grant of an Option is a full-time employee
of the Company or of any Affiliate (as defined below) of the Company is eligible
to receive NSOs or ISOs under this Plan.  Every person who at the date of grant
is a consultant to, or non-employee director of, the Company or any Affiliate
(as defined below) of the Company is eligible to receive NSOs under this Plan.
The term "Affiliate" as used in the Plan means a parent or subsidiary
corporation as defined in the applicable provisions (currently Sections 424(e)
and (f), respectively) of the Code.  The term "employee" includes an officer or
director who is an employee, of the Company.  The term "consultant" includes
persons employed by, or otherwise affiliated with, a consultant.

 3.   STOCK SUBJECT TO THIS PLAN
      --------------------------

      Subject to the provisions of Section 6.1.1 of the Plan, the total number
of shares of stock which may be issued under

 
options granted pursuant to this Plan shall not exceed 750,000 shares of Common
Stock.  The shares covered by the portion of any grant under the Plan which
expires unexercised shall become available again for grants under the Plan.

 4.   ADMINISTRATION
      --------------

      (a) This Plan shall be administered by the Board of Directors of the
Company (the "Board") or, either in its entirety or only insofar as required
pursuant to Section 4(b) hereof, by a committee (the "Committee") of at least
two Board members to which administration of the Plan, or of part of the Plan,
is delegated (in either case, the "Administrator").

      (b) From and after such time as the Company registers a class of equity
securities under Section 12 of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), it is intended that this Plan shall be administered in
accordance with the disinterested administration requirements of Rule 16b-3
promulgated by the Securities and Exchange Commission ("Rule 16b-3"), or any
successor rule thereto.

      (c) Subject to the other provisions of this Plan, the Administrator shall
have the authority, in its discretion: (i) to grant Options; (ii) to determine
the fair market value of the Common Stock subject to Options; (iii) to determine
the exercise price of Options granted; (iv) to determine the persons to whom,
and the time or times at which, Options shall be granted, and the number of
shares subject to each Option; (v) to interpret this Plan; (vi) to prescribe,
amend, and rescind rules and regulations relating to this Plan; (vii) to
determine the terms and provisions of each Option granted (which need not be
identical), including but not limited to, the time or times at which Options
shall be exercisable; (viii) with the consent of the optionee, to modify or
amend any Option; (ix) to defer (with the consent of the optionee) the exercise
date of any Option; (x) to authorize any person to execute on behalf of the
Company any instrument evidencing the grant of an Option; and (xi) to make all
other determinations deemed necessary or advisable for the administration of
this Plan.  The Administrator may delegate nondiscretionary administrative
duties to such employees of the Company as it deems proper.

      (d) All questions of interpretation, implementation, and application of
this Plan shall be determined by the Administrator.  Such determinations shall
be final and binding on all persons.

      (e) With respect to persons subject to Section 16 of the Exchange Act, if
any, transactions under this Plan are intended to comply with the applicable
conditions of Rule 16b-3, or any successor rule thereto.  To the extent any
provision of this Plan or action by the Administrator fails to so comply, it
shall be deemed null and void, to the extent permitted by law and deemed
advisable by the Administrator.  Notwithstanding the

                                      -2-

 
above, it shall be the responsibility of such persons, not of the Company or the
Administrator, to comply with the requirements of Section 16 of the Exchange
Act; and neither the Company nor the Administrator shall be liable if this Plan
or any transaction under this Plan fails to comply with the applicable
conditions of Rule 16b-3 or any successor rule thereto, or if any such person
incurs any liability under Section 16 of the Exchange Act.

 5.   GRANTING OF OPTIONS; OPTION AGREEMENT
      -------------------------------------

      (a) No Options shall be granted under this Plan after ten years from the
date of adoption of this Plan by the Board.

      (b) Each Option shall be evidenced by a written stock option agreement, in
form satisfactory to the Company, executed by the Company and the person to whom
such Option is granted; provided, however, that the failure by the Company, the
optionee, or both to execute such an agreement shall not invalidate the granting
of an Option, although the exercise of each option shall be subject to Section
6.1.3.

      (c) The stock option agreement shall specify whether each Option it
evidences is a NSO or an ISO.

      (d) Subject to Section 6.3.3 with respect to ISOs, the Administrator may
approve the grant of Options under this Plan to persons who are expected to
become employees, directors or consultants of the Company, but are not
employees, directors or consultants at the date of approval.

 6.   TERMS AND CONDITIONS OF OPTIONS
      -------------------------------

      Each Option granted under this Plan shall be subject to the terms and
conditions set forth in Section 6.1.  NSOs shall be also subject to the terms
and conditions set forth in Section 6.2, but not those set forth in Section 6.3.
ISOs shall also be subject to the terms and conditions set forth in Section 6.3,
but not those set forth in Section 6.2.

      6.1  Terms and Conditions to Which All Options Are Subject.  All Options
           --------------------------------------------- -------              
granted under this Plan shall be subject to the following terms and conditions:

           6.1.1 Changes in Capital Structure. Subject to Section 6.1.2, if the
                 ----------------------------
stock of the Company is changed by reason of a stock split, reverse stock split,
stock dividend, or recapitalization, combination or reclassification,
appropriate adjustments shall be made by the Board in (a) the number and class
of shares of stock subject to this Plan and each Option outstanding under this
Plan, and (b) the exercise price of each outstanding Option; provided, however,
that the Company shall not be required to issue fractional shares as a result of
any such adjustments. Each such adjustment shall be subject to approval by the
Board in its sole discretion.

                                      -3-

 
          6.1.2  Corporate Transactions.  In the event of the proposed
                 ----------------------                               
dissolution or liquidation of the Company, the Administrator shall notify each
optionee at least 30 days prior to such proposed action.  To the extent not
previously exercised, all Options will terminate immediately prior to the
consummation of such proposed action.  In the event of a merger or consolidation
of the Company with or into another corporation or entity in which the Company
does not survive, or in the event of a sale of all or substantially all of the
assets of the Company in which the stockholders of the Company receive
securities of the acquiring entity or an affiliate thereof, all Options shall be
assumed or equivalent options shall be substituted by the successor corporation
(or other entity) or a parent or subsidiary of such successor corporation (or
other entity).  If such successor does not agree to assume the Options or to
substitute equivalent options therefor, unless the Administrator shall determine
otherwise, the Options will expire upon such event.

          6.1.3  Time of Option Exercise.  Subject to Section 5 and Section
                 -----------------------                                   
6.3.4, Options granted under this Plan shall be exercisable (a) immediately as
of the effective date of the stock option agreement granting the Option, or (b)
in accordance with a schedule related to the date of the grant of the Option,
the date of first employment, or such other date as may be set by the
Administrator (in any case, the "Vesting Base Date") and specified in the
written stock option agreement relating to such Option; provided, however, that
the right to exercise an Option must vest at the rate of at least 20% per year
over five years from the date the option was granted.  In any case, no Option
shall be exercisable until a written stock option agreement in form satisfactory
to the Company is executed by the Company and the optionee.

          6.1.4  Option Grant Date.  Except in the case of advance approvals
                 -----------------                                          
described in Section 5(d), the date of grant of an Option under this Plan shall
be the date as of which the Administrator approves the grant.

          6.1.5  Nonassignability of Option Rights.  No Option granted under
                 ---------------------------------                          
this Plan shall be assignable or otherwise transferable by the optionee except
by will or by the laws of descent and distribution.  During the life of the
optionee, an Option shall be exercisable only by the optionee.

          6.1.6  Payment.  Except as provided below, payment in full, in cash,
                 -------                                                      
shall be made for all stock purchased at the time written notice of exercise of
an Option is given to the Company, and proceeds of any payment shall constitute
general funds of the Company.  At the time an Option is granted or exercised,
the Administrator, in the exercise of its absolute discretion after considering
any tax or accounting consequences, may authorize any one or more of the
following additional methods of payment:

                                      -4-

 
               (a) Acceptance of the optionee's full recourse promissory note
for all or part of the Option price, payable on such terms and bearing such
interest rate as determined by the Administrator (but in no event less than the
minimum interest rate specified under the Code at which no additional interest
would be imputed and in no event more than the maximum interest rate allowed
under applicable usury laws), which promissory note may be either secured or
unsecured in such manner as the Administrator shall approve (including, without
limitation, by a security interest in the shares of the Company); and

               (b) Delivery by the optionee of Common Stock already owned by the
optionee for all or part of the Option price, provided the value (determined as
set forth in Section 6.1.11) of such Common Stock is equal on the date of
exercise to the Option price, or such portion thereof as the optionee is
authorized to pay by delivery of such stock; provided, however, that if an
optionee has exercised any portion of any Option granted by the Company by
delivery of Common Stock, the optionee may not, within six months following such
exercise, exercise any Option granted under this Plan by delivery of Common
Stock without the consent of the Administrator.

          6.1.7  Termination of Employment. If for any reason other than death
                 -------------------------                                    
or disability, an optionee ceases to be employed by the Company or any of its
Affiliates (such event being called a "Termination"), Options held at the date
of Termination (to the extent then exercisable) may be exercised in whole or in
part at any time within one (1) month of the date of such Termination, or such
other period of not less than thirty (30) days after the date of such
Termination as is specified in the Option Agreement (but in no event after the
Expiration Date); provided, that if such exercise of the Option would result in
                  --------                                                     
liability for the optionee under Section 16(b) of the Exchange Act, then such
one-month period automatically shall be extended until the tenth (10th) day
following the last date upon which optionee has any liability under Section
16(b) (but in no event after the Expiration Date).  If an optionee dies or
becomes disabled (within the meaning of Section 22(e)(3) of the Code) while
employed by the Company or an Affiliate or within the period that the Option
remains exercisable after Termination, Options then held (to the extent then
exercisable) may be exercised, in whole or in part, by the optionee, by the
optionee's personal representative or by the person to whom the Option is
transferred by devise or the laws of descent and distribution, at any time
within twelve (12) months after the death or twelve (12) months after the
disability of the optionee, or such other period of not less than six (6) months
from the date of Termination as is specified in the Option Agreement (but in no
event after the Expiration Date).  For purposes of this Section 6.1.7,
"employment" includes service as a director or as a consultant.  For purposes of
this Section 6.1.7, an optionee's employment shall not be deemed to terminate by
reason of sick leave, military leave or other leave of absence approved by the

                                      -5-

 
Administrator, if the period of any such leave does not exceed 90 days or, if
longer, if the optionee's right to reemployment by the Company or any Affiliate
is guaranteed either contractually or by statute.

          6.1.8  Repurchase of Stock.  At the option of the Administrator, the
                 -------------------                                          
stock to be delivered pursuant to the exercise of any Option granted to an
employee, director or consultant under this Plan may be subject to a right of
repurchase in favor of the Company with respect to any employee, or director or
consultant whose employment, or director or consulting relationship with the
Company is terminated.  Such right of repurchase either:

                 (a) shall be at the Option exercise price and (i) shall lapse
at the rate of at least 20% per year over five years from the date the Option is
granted (without regard to the date it becomes exercisable), and must be
exercised for cash or cancellation of purchase money indebtedness within the
later of (x) 30 days after the acquisition of stock upon exercise of such Option
or (y) 90 days after such termination, and (ii) if the right is assignable by
the Company, the assignee must pay the Company upon assignment of the right
(unless the assignee is a 100% owned subsidiary of the Company or is an
Affiliate) cash equal to the difference between the Option exercise price and
the value (determined as set forth in Section 6.1.11) of the stock to be
purchased if the Option exercise price is less than such value; or

                 (b) shall be at the higher of the Option exercise price or the
value (determined as set forth in Section 6.1.11 or as otherwise provided in the
grant of Option) of the stock being purchased on the date of termination, and
must be exercised for cash or cancellation of purchase money indebtedness within
the later of (x) 30 days after the acquisition of stock upon exercise of such
Option or (y) 90 days after such termination, and such right shall terminate
when the Company's securities become publicly traded.

      Determination of the number of shares subject to any such right of
repurchase shall be made as of the date the employee's employment as an
employee, consultant or director of the Company terminates, not as of the date
that any Option granted to such employee, director or consultant is thereafter
exercised.

          6.1.9  Withholding and Employment Taxes.  At the time of exercise of
                 --------------------------------                             
an Option or at such other time as the amount of such obligations becomes
determinable (the "Tax Date"), the optionee shall remit to the Company in cash
all applicable federal and state withholding and employment taxes.  If
authorized by the Administrator in its sole discretion after considering any tax
or accounting consequences, an optionee may elect to (i) deliver a promissory
note on such terms as the Administrator deems appropriate, (ii) tender to the
Company

                                      -6-

 
previously owned shares of Stock or other securities of the Company, or (iii)
have shares of Common Stock which are acquired upon exercise of the Option
withheld by the Company to pay some or all of the amount of tax that is required
by law to be withheld by the Company as a result of the exercise of such Option,
subject to the following limitations:

                 (a) Any election pursuant to clause (iii) above by an optionee
subject to Section 16 of the Exchange Act shall either (x) be made at least six
months before the Tax Date and shall be irrevocable; or (y) shall be made in (or
made earlier to take effect in) any ten-day period beginning on the third
business day following the date of release for publication of the Company's
quarterly or annual summary statements of earnings and shall be subject to
approval by the Administrator, which approval may be given at any time after
such election has been made. In addition, in the case of (y), the Option shall
be held at least six months prior to the Tax Date.

                 (b) Any election pursuant to clause (ii) above, where the
optionee is tendering Common Stock issued pursuant to the exercise of an Option,
shall require that such shares be held at least six months prior to the Tax
Date.

      Any of the foregoing limitations may be waived (or additional limitations
may be imposed) by the Administrator, in its sole discretion, if the
Administrator determines that such foregoing limitations are not required (or
that such additional limitations are required) in order that the transaction
shall be exempt from Section 16(b) of the Exchange Act pursuant to Rule 16b-3,
or any successor rule thereto.  In addition, any of the foregoing limitations
may be waived by the Administrator, in its sole discretion, if the Administrator
determines that Rule 16b-3, or any successor rule thereto, is not applicable to
the exercise of the Option by the optionee or for any other reason.

      Any securities tendered or withheld in accordance with this Section 6.1.9
shall be valued by the Company as of the Tax Date.

          6.1.10 Other Provisions.  Each Option granted under this Plan may
                 ----------------                                          
contain such other terms, provisions, and conditions not inconsistent with this
Plan as may be determined by the Administrator, and each ISO granted under this
Plan shall include such provisions and conditions as are necessary to qualify
the Option as an "incentive stock option" within the meaning of Section 422 of
the Code.  If Options provide for a right of first refusal in favor of the
Company with respect to stock acquired by employees, directors or consultants,
such Options shall provide that the right of first refusal shall terminate upon
the earlier of (i) the closing of the Company's initial registered public
offering to the public generally, or (ii) the date ten years after the grant
date as set forth in Section 6.1.4.

                                      -7-

 
          6.1.11 Determination of Value.  For purposes of the Plan, the value of
                 ----------------------                                         
Common Stock or other securities of the Company shall be determined as follows:

                 (a) If the stock of the Company is listed on any established
stock exchange or a national market system, including without limitation the
National Market System of the National Association of Securities Dealers, Inc.
Automated Quotation System, its fair market value shall be the closing sales
price for such stock or the closing bid if no sales were reported, as quoted on
such system or exchange (or the largest such exchange) for the date the value is
to be determined (or if there are no sales for such date, then for the last
preceding business day on which there were sales), as reported in the Wall
                                                                      ----
Street Journal or similar publication.
- --------------

                 (b) If the stock of the Company is regularly quoted by a
recognized securities dealer but selling prices are not reported, its fair
market value shall be the mean between the high bid and low asked prices for the
stock on the date the value is to be determined (or if there are no quoted
prices for the date of grant, then for the last preceding business day on which
there were quoted prices).

                 (c) In the absence of an established market for the stock, the
fair market value thereof shall be determined in good faith by the
Administrator, with reference to the Company's net worth, prospective earning
power, dividend-paying capacity, and other relevant factors, including the
goodwill of the Company, the economic outlook in the Company's industry, the
Company's position in the industry and its management, and the values of stock
of other corporations in the same or a similar line of business.

          6.1.12  Option Term.  Subject to Section 6.3.5, no Option shall be
                  -----------                                               
exercisable more than ten years after the date of grant, or such lesser period
of time as is set forth in the stock option agreement (the end of the maximum
exercise period stated in the stock option agreement is referred to in this Plan
as the "Expiration Date").

          6.1.13  Exercise Price.  The exercise price of any Option granted to
                  --------------                                              
any person who owns, directly or by attribution under the Code currently Section
424(d), stock possessing more than ten percent of the total combined voting
power of all classes of stock of the Company or of any Affiliate (a "Ten Percent
Stockholder") shall in no event be less than 110% of the fair market value
(determined in accordance with Section 6.1.11) of the stock covered by the
Option at the time the Option is granted.

      6.2  Terms and Conditions to Which Only NSOs Are Subject.  Options granted
           ---------------------------------------------------                  
under this Plan which are designated as NSOs shall be subject to the following
terms and conditions:

                                      -8-

 
           6.2.1  Exercise Price.  Except as set forth in Section 6.1.13, the
                  --------------                                             
exercise price of a NSO shall be not less than 85% of the fair market value
(determined in accordance with Section 6.1.11) of the stock subject to the
Option on the date of grant.

      6.3  Terms and Conditions to Which Only ISOs Are Subject. Options granted
           ---------------------------------------------------                 
under this Plan which are designated as ISOs shall be subject to the following
terms and conditions:

           6.3.1  Exercise Price.  Except as set forth in Section 6.1.13, the
                  --------------                                             
exercise price of an ISO shall be determined in accordance with the applicable
provisions of the Code and shall in no event be less than the fair market value
(determined in accordance with Section 6.1.11) of the stock covered by the
Option at the time the Option is granted.

           6.3.2  Disqualifying Dispositions.  If stock acquired by exercise of
                  --------------------------                                   
an ISO granted pursuant to this Plan is disposed of in a "disqualifying
disposition" within the meaning of Section 422 of the Code, the holder of the
stock immediately before the disposition shall promptly notify the Company in
writing of the date and terms of the disposition and shall provide such other
information regarding the Option as the Company may reasonably require.

           6.3.3  Grant Date. If an ISO is granted in anticipation of employment
                  ----------
as provided in Section 5(d), the Option shall be deemed granted, without further
approval, on the date the grantee assumes the employment relationship forming
the basis for such grant, and, in addition, satisfies all requirements of this
Plan for Options granted on that date.

           6.3.4  Vesting.  Notwithstanding any other provision of this Plan,
                  -------                                                    
ISOs granted under all incentive stock option plans of the Company and its
subsidiaries may not "vest" for more than $100,000 in fair market value of stock
(measured on the grant dates(s)) in any calendar year.  For purposes of the
preceding sentence, an option "vests" when it first becomes exercisable.  If, by
their terms, such ISOs taken together would vest to a greater extent in a
calendar year, and unless otherwise provided by the Administrator, ISOs with
lower exercise prices shall vest before ISOs with higher exercise prices,
regardless of the grant date.

           6.3.5  Term.  Notwithstanding Section 6.1.12, no ISO granted to any
                  ----                                                        
Ten Percent Stockholder shall be exercisable more than five years after the date
of grant.

     7.   MANNER OF EXERCISE
          ------------------
 
          (a) An optionee wishing to exercise an Option shall give written
notice to the Company at its principal executive office, to the attention of the
officer of the Company designated by the Administrator, accompanied by payment
of the exercise

                                      -9-

 
price as provided in Section 6.1.6.  The date the Company receives written
notice of an exercise hereunder accompanied by payment of the exercise price
will be considered as the date such Option was exercised.

         (b) Promptly after receipt of written notice of exercise of an Option,
the Company shall, without stock issue or transfer taxes to the optionee or
other person entitled to exercise the Option, deliver to the optionee or such
other person a certificate or certificates for the requisite number of shares of
stock. An optionee or permitted transferee of an optionee shall not have any
privileges as a stockholder with respect to any shares of stock covered by the
Option until the date of issuance (as evidenced by the appropriate entry on the
books of the Company or a duly authorized transfer agent) of such shares.

    8.   EMPLOYMENT OR CONSULTING RELATIONSHIP
         -------------------------------------

         Nothing in this Plan or any Option granted thereunder shall interfere
with or limit in any way the right of the Company or of any of its Affiliates to
terminate any optionee's employment or consulting at any time, nor confer upon
any optionee any right to continue in the employ of, or consult with, the
Company or any of its Affiliates.

    9.   FINANCIAL INFORMATION
         ---------------------

         The Company shall provide to each optionee during the period such
optionee holds an outstanding Option, and to each holder of Common Stock
acquired upon exercise of Options granted under the Plan for so long as such
person is a holder of such Common Stock, annual financial statements of the
Company as prepared either by the Company or independent certified public
accountants of the Company. Such financial statements shall include, at a
minimum, a balance sheet and an income statement, and shall be delivered as soon
as practicable following the end of the Company's fiscal year.

    10.  CONDITIONS UPON ISSUANCE OF SHARES.
         ---------------------------------- 

         Shares of Common Stock shall not be issued pursuant to the exercise of
an Option unless the exercise of such Option and the issuance and delivery of
such shares pursuant thereto shall comply with all relevant provisions of law,
including, without limitation, the Securities Act of 1933, as amended (the
"Securities Act").

    11.  NONEXCLUSIVITY OF THE PLAN.
         -------------------------- 

         The adoption of the Plan shall not be construed as creating any
limitations on the power of the Company to adopt such other incentive
arrangements as it may deem desirable, including, without limitation, the
granting of stock options other than under the Plan.


                                     -10-

 
    12.  MARKET STANDOFF.
         --------------- 
 
         Each Optionee, if so requested by the Company or any representative of
the underwriters in connection with any registration of the offering of any
securities of the company under the Securities Act shall not sell or otherwise
transfer any shares of Common Stock acquired upon exercise of Options during the
180-day period following the effective date of a registration statement of the
company filed under the Securities Act; provided, however, that such restriction
shall apply only to the first two registration statements of the Company to
become effective under the Securities Act which includes securities to be sold
on behalf of the Company to the public in an underwritten public offering under
the Securities Act. The Company may impose stop-transfer instructions with
respect to securities subject to the foregoing restriction until the end of such
180-day period.

    13.  AMENDMENTS TO PLAN
         ------------------

         The Board may at any time amend, alter, suspend or discontinue this
Plan. Without the consent of an optionee, no amendment, alteration, suspension
or discontinuance may adversely affect outstanding Options except to conform
this Plan and ISOs granted under this Plan to the requirements of federal or
other tax laws relating to incentive stock options. No amendment, alteration,
suspension or discontinuance shall require stockholder approval unless (a)
stockholder approval is required to preserve incentive stock option treatment
for federal income tax purposes, or (b) the Board otherwise concludes that
stockholder approval is advisable.

    14.  EFFECTIVE DATE OF PLAN
         ----------------------

         This Plan shall become effective upon adoption by the Board provided,
however, that no Option shall be exercisable unless and until written consent of
the stockholders of the Company, or approval of stockholders of the Company
voting at a validly called stockholders' meeting, is obtained within 12 months
after adoption by the Board. If such stockholder approval is not obtained within
such time, Options granted hereunder shall terminate and be of no force and
effect from and after expiration of such 12-month period.  Options may be
granted and exercised under this Plan only after there has been compliance with
all applicable federal and state securities laws.

                                     -11-

 
THE SYMBOL '**' IS USED THROUGHOUT THIS EXHIBIT TO INDICATE THAT A PORTION OF
THE EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION

                                  EXHIBIT 10.2
                                  ------------
                                                                   July 11, 1996


Dr. John W. Shell
President and Chief Executive Officer
DepoMed, Inc.
1170 B Chess Drive
Foster City, CA 94404-1167

Dear Dr. Shell:

This Letter Agreement ("Agreement") sets forth the terms and conditions under
which Bristol-Myers Squibb Company ("BMS") and DepoMed, Inc. ("DepoMed") will
collaborate in a joint research project (the "Research") to determine optimal
conditions for the production of a product (the "Product") consisting of
formulations of the chemical compound known as [**] ("[**]") incorporated in the
DepoMed GR System (the "DP System"). The specific terms and conditions of this
Agreement are as follows:

1.  THE RESEARCH
    ------------

     A.   DepoMed agrees to use its diligent efforts to implement and complete
          the Research Plan attached herewith and fully incorporated herein as
          Appendix A. Specific milestones and targets of the Research Plan are
          also summarized in Appendix A. Said milestones and targets may be
          modified, but only by mutual written agreement of BMS and DepoMed (the
          "Parties") at any time during the term of this Agreement.

     B.   BMS agrees to collaborate with and assist DepoMed in the
          implementation and completion of the Research Plan set forth in
          Appendix A by providing to DepoMed:

          1.   Bulk [**] in sufficient quantities to perform the Research Plan;

          2.   Appropriate analytical and handling procedures for [**]; and

          3.   Such other technology and expertise possessed by BMS which may be
               deemed necessary, by subsequent mutual agreement of the Parties,
               to achieve the objectives of this Agreement.

     C.   All [**] shall remain the sole property of BMS. DepoMed agrees not to
          make any modifications of the BMS Materials provided by BMS hereunder,
          except as required in the performance of the Research Plan.

     D.   The [**] shall be used solely to conduct the Research Plan, and not
          for any other purpose. The [**] shall not be made available to anyone
          other than employees of DepoMed working in furtherance of the Research
          Plan, shall not be transferred to any other persons outside of DepoMed
          for any purpose, and shall not be transferred to another institution
          or company without the prior written consent of

** CONFIDENTIAL TREATMENT REQUESTED

 
Mr. John W. Shell 
DepoMed, Inc.
July 11, 1997
Page 2

          BMS, except to authorize subcontractors as provided in Article I.H
          hereinbelow. The [**] shall not be used by DepoMed for research,
          testing or treatment involving human subjects or for making any
          decisions relating to human diagnosis or care.

     E.   Nothing herein shall create or imply any license in intellectual
          property rights related to [**] owned or controlled by BMS to DepoMed,
          except for the non-exclusive license to use the [**] for the research
          purposes expressly set forth herein.

     F.   Upon conclusion of the Research Plan, or upon request by BMS, DepoMed
          shall discontinue use of the [**] and will arrange for the return to
          BMS of all unused [**].

     G.   DepoMed will take appropriate steps to inform all Research Plan
          personnel of their obligations under this Agreement and to obtain
          their agreement to abide by the terms and conditions of this Agreement
          in the same manner as DepoMed.

     H.   DepoMed shall have no right to subcontract portions of the Research
          Plan to be performed by it without the prior written consent of BMS,
          except for the gastric retention study described in Appendix A,
          Section II.B2; provided, however, that (a) any such subcontracts shall
                         --------  -------                                      
          not involve the transfer of confidential information of BMS to the
          subcontracted third party; (b) the subcontracted third party shall
          enter into a written confidentiality agreement with DepoMed adequate
          to preserve the confidentiality of [**] formulations developed
          pursuant to the Research Plan and DepoMed Project Proprietary
          Information, and the rights granted to BMS under this Agreement; and
          (c) promptly after entering into such subcontract, DepoMed shall give
          written notice thereof to BMS.

II.  TERM
     ----

     A.   This Agreement is effective as of April 15, 1996, and shall continue
          in effect for a period of eight and one-half months, until December
          31, 1996, or until DepoMed notifies BMS in writing that the milestones
          and targets set forth in Appendix A have been realized, if earlier.

     B.   The term of this Agreement may be extended at the same rate of
          compensation as is then in effect (pro rated) for up to six (6) months
          at BMS' election, if the aforementioned milestones and targets are not
          realized at the end of the Agreement term.  This election shall be
          made by written notice to DepoMed at least fifteen (15) days prior to
          December 31, 1996, specifying the desired term of the extension.  The
          term of this Agreement may also be extended by an amendment in writing
          executed by both Parties.

** CONFIDENTIAL TREATMENT REQUESTED

 
Mr. John W. Shell 
DepoMed, Inc.
July 11, 1997
Page 3


III  COSTS/PAYMENTS
     --------------

     A.   DepoMed agrees to perform and complete the Research Plan for a total
          fee of one hundred ninety-seven thousand, seven hundred seventy-eight
          dollars ($197,778.00) in accordance with this Paragraph 3.

     B.   BMS therefore agrees to make the following payments to DepoMed as full
          and complete consideration for the performance and completion of the
          Research Plan by DepoMed:

          1.   A payment of seventy thousand dollars ($70,000.00) which shall be
               paid to DepoMed by BMS within thirty (30) days of the complete
               execution of this Agreement by the Parties.

          2.   A second payment of seventy thousand dollars ($70,000.00) which
               shall be paid to DepoMed by BMS upon completion by DepoMed of the
               work described in Appendix A, Section II.

          3.   A final payment of fifty-seven thousand, seven hundred seventy-
               eight dollars ($57,778.00), payable upon release by BMS of
               formulation for a clinical pharmacokinetic study.

     C.   BMS and DepoMed understand that developments, unforeseen circumstances
          beyond the reasonable control of DepoMed or changes in the scope of
          the Research or DepoMed's responsibilities for the Research may
          increase the funding requirements for the Research.  BMS will consider
          requests for additional funding should such a need arise.  The
          decision to supply such additional funding shall be in the sole
          discretion of BMS.

IV.  PROGRESS REPORTS/JOINT MEETINGS
     -------------------------------

     A.   Commencing with the first day of the first month following the
          effective date of this Agreement, and for each subsequent month for
          the duration of the term of this Agreement, DepoMed shall submit to
          BMS monthly progress reports containing summaries of all Research Plan
          tasks completed or still in progress at the date of such progress
          report.  The Parties agree that information contained in the
          aforementioned progress reports shall be general rather than detailed
          in nature.  All of such information contained in such progress reports
          shall be and shall remain non-enabling proprietary information ("Non-
          Enabling Project Proprietary Information").  It is the express intent
          of the Parties that all Non-Enabling Project Proprietary Information
          provided to BMS by DepoMed shall be in such reasonable detail as shall
          permit BMS to assess DepoMed's progress versus the Research Plan and
          milestones and targets but shall not contain such information or
          detail as might reasonably be expected to enable BMS to reproduce or
          utilize in any way (other than the assessment as aforesaid) DepoMed's
          Enabling Project Proprietary Information (as defined in Paragraph V,

 
Mr. John W. Shell 
DepoMed, Inc.
July 11, 1997
Page 4


          hereinbelow).  Progress reports submitted to BMS by DepoMed may also
          contain and address any conclusions, problems or issues, which, in the
          opinion of DepoMed are significant matters requiring the attention of
          BMS and, if appropriate, recommendations for necessary action by BMS.

     B.   At least twice during the term of this Agreement and at more frequent
          intervals if deemed necessary by mutual agreement, representatives of
          BMS and DepoMed shall meet at mutually acceptable times and places to
          discuss and evaluate the status and progress of the Research which is
          the subject of this Agreement.


V.   PROPRIETARY/CONFIDENTIAL INFORMATION
     ------------------------------------

     A.   DepoMed and BMS agree that, with the exception of Non-Enabling Project
          Proprietary Information (as defined in Paragraph IV.A, hereinabove),
          any and all data, information, materials and technology produced,
          developed or generated by DepoMed as a result of the Research which
          specifically relates to the DepoMed technology for the formulation of
          [**] shall be enabling proprietary information of DepoMed ("DepoMed
          Enabling Project Proprietary Information"). DepoMed agrees to fully
          disclose to BMS any and all DepoMed Enabling Project Proprietary
          Information referred to in Appendix A, and upon written request from
          BMS, any and all additional DepoMed Enabling Project Proprietary
          Information to BMS.

     B.   BMS and DepoMed agree that all DepoMed Project Proprietary
          Information (i.e. Non-Enabling Project Proprietary Information and
          Enabling Project Proprietary Information) transferred to BMS shall
          be governed by the provision of the [**] Confidentiality Agreement
          dated February 8, 1996, among the Bristol-Myers Squibb
          Pharmaceutical Research Institute, DepoMed, Inc., and [**]
          (hereinafter, the "Prior Agreement"). DepoMed understands and agrees
          that all DepoMed Project Proprietary Information transferred to BMS
          may be transferred by BMS to [**] pursuant to the provisions of the
          Prior Agreement.

     C.   The transfer of all confidential information of the Parties other than
          DepoMed Project Proprietary Information shall be governed by the
          provisions of the Prior Agreement.

     D.   Notwithstanding anything to the contrary contained in this Agreement
          or the Prior Agreement, DepoMed shall have no right to disclose any
          DepoMed Project Proprietary Information to any third party, or use
          such DepoMed Project Proprietary Information for any purpose other
          than for the purpose of collaborating with BMS.


VI.  OPTION
     ------

     A.   DepoMed hereby grants to BMS an option (on terms provided or to be
          negotiated in accordance with Paragraph VI.B) for two (2) years
          following completion of the

** CONFIDENTIAL TREATMENT REQUESTED

 
Mr. John W. Shell 
DepoMed, Inc.
July 11, 1997
Page 5

          clinical pharmacokinetic study referred to in Article III.B.3
          hereinabove, but in no event later than three (3) years from the date
          of this Agreement, to obtain an exclusive, worldwide license under the
          DepoMed Project Proprietary Information and DepoMed Intellectual
          Property (i.e., any patents, patent applications, know-how, trade
          secrets, licenses or any other intellectual property rights of
          whatever nature, owned or controlled by DepoMed, including without
          limitation DepoMed Patent Rights as defined below) to make, have made,
          use, import, offer for sale and sell the Product incorporating
          formulations of [**]. Such license shall include the right of BMS to
          sublicense any license granted to BMS under DepoMed Project
          Proprietary Information and DepoMed Intellectual Property. Such
          license shall also include the right of BMS to utilize any
          improvements to DepoMed Project Proprietary Information and DepoMed
          Intellectual Property developed by DepoMed during the two (2) years
          following the completion of work under the Research Plan.

     B.   The terms and conditions of any license acquired by BMS from DepoMed
          under the option provided for in Paragraph VI.A., above, shall be as
          agreed by BMS and DepoMed in good faith negotiations regarding the
          terms and conditions of a definitive license agreement consistent with
          this Article VI.B which shall commence upon DepoMed's receipt of BMS'
          written notice of its intention to exercise its option and acquire
          said license.  Any license agreement entered into by BMS and DepoMed
          shall be in a form reasonably acceptable to DepoMed and BMS, and shall
          be consistent with industry standards and permit BMS to fully exploit
          the licensed rights in a manner consistent with this Agreement.  Any
          license agreement entered into between BMS and DepoMed shall provide
          for the following:

          1.   BMS shall be required to pay to DepoMed the following royalty
               amounts:

               a.   [**] of net sales of Licensed Product sold by BMS, its
                    affiliates or sublicensees for the first [**] of net sales
                    of Licensed Product per calendar year within the United
                    States, and [**] of net sales of Licensed Product sold by
                    BMS, its affiliates or sublicensees for net sales of
                    Licensed Product greater than [**] per calendar year within
                    the United States; and

               b.   [**] of net sales of Licensed Product sold by BMS, its
                    affiliates or sublicensees for the first [**] of net sales
                    of Licensed Product per calendar year outside of the United
                    States, and [**] of net sales of Licensed Product sold by
                    BMS, its affiliates or sublicensees for net sales of
                    Licensed Product greater than [**] per calendar year outside
                    of the United States.

          "Licensed Product" shall mean a Product, the manufacture, use or sale
          of which is covered within a country by a claim of an issued and
          unexpired patent included within the DepoMed Intellectual Property
          licensed to BMS by DepoMed which has not been

** CONFIDENTIAL TREATMENT REQUESTED

 
Mr. John W. Shell 
DepoMed, Inc.
July 11, 1997
Page 6

          held permanently revoked, unenforceable or invalid by a decision of a
          court or other government agency of competent jurisdiction,
          unappealable or unappealed within the time allowed for appeal and
          which has not been abandoned, or admitted to be invalid or
          unenforceable through reissue, disclaimer or otherwise.  The
          obligation to pay royalties will expire on a country-by-country basis
          upon the expiration, invalidity or abandonment of all patents included
          within the DepoMed Intellectual Property covering any such Licensed
          Product within such a country, and not withstanding the number of
          patents included within the DepoMed Intellectual Property licensed to
          BMS by DepoMed, only a single royalty will be due with respect
          thereto.

          2.   BMS shall be required to pay to DepoMed the following milestone
               payments upon the first occurrence of each event set forth below:

               a.   [**] upon complete execution by DepoMed and BMS of the
                    license agreement;

               b.   [**] upon filing by BMS with the United States Food and Drug
                    Administration or the successor thereto of the first New
                    Drug Application for a Licensed Product; and

               c.   [**] upon receipt by BMS of the required marketing approval
                    from the United States Food and Drug Administration or the
                    successor thereto of the first New Drug Application for a
                    Licensed Product.

          3.   Except for such royalties and milestone payments as provided in
               this Agreement, no other payments, royalties, or other
               consideration will be payable with respect to any license granted
               to BMS by DepoMed.  Such royalty and milestone payments shall be
               reduced by the amount of any fees, royalties or other
               consideration (not to exceed [**] of such royalties and milestone
               payments payable to DepoMed) payable by BMS to any third parties
               having dominant rights to DepoMed Project Proprietary Information
               or to DepoMed Intellectual Property.

          4.   BMS shall have the right to terminate any license agreement upon
               sixty (60) days prior written notice to DepoMed.  Termination of
               any such license agreement shall not relieve BMS of the
               obligation to make payments of royalties or milestone payments
               accruing prior to the effective date of such termination.

     C.   Notwithstanding anything to the contrary contained in this Agreement,
          in the event that BMS does not elect to exercise its option as
          aforesaid, or in the event the parties are unable to reach agreement
          on license terms, DepoMed shall have no right, whether by itself or
          with or by any affiliate or third party, to make, have made, use,
          import, offer for sale, sell, develop or otherwise commercialize any
          formulations of [**] developed pursuant to this Agreement, any DepoMed
          Project Proprietary

** CONFIDENTIAL TREATMENT REQUESTED

 
Mr. John W. Shell 
DepoMed, Inc.
July 11, 1997
Page 7

          Information related solely to [**], or any Inventions related solely
          to [**].

     D.   The decision as to whether to proceed with the preclinical and
          clinical development and marketing of any Product containing
          formulations of [**] developed pursuant to this Agreement shall be in
          the sole discretion of BMS. Nothing contained in this Agreement shall
          be interpreted as requiring BMS to develop or market any such
          formulations of [**].


VII.  PATENTS
      -------

     A.   All rights, title and interest to inventions, discoveries or
          improvements first conceived or made as a result of the performance of
          the Research Plan ("Inventions")

          (i)  shall belong solely to DepoMed, if made solely by DepoMed or its
               employees,

          (ii) shall be jointly owned by DepoMed and BMS, if made jointly by
               DepoMed or one or more employees of DepoMed and by one or more
               employees of BMS ("Joint Inventions"), and

          (iii)  shall belong solely to BMS, if made solely by BMS.

          Determinations of inventorship shall be made in accordance with U.S.
          law.  DepoMed's interest in any Inventions and patent rights
          pertaining thereto described under (i) and (ii) above is referred to
          hereinafter as "DepoMed Patent Rights." BMS's interest in any
          Inventions and patent rights pertaining thereto described under (ii)
          and (iii) above shall not be subject to the terms and conditions of
          this Agreement.

     B.   DepoMed represents and warrants to BMS that any Inventions that may be
          made by its employees in the performance of the Research Plan are
          owned by and shall be assigned to DepoMed, wholly and completely.

     C.   DepoMed will promptly notify BMS in writing of any Inventions that
          relate solely to [**], including without limitation formulations of
          [**], conceived and/or made by DepoMed as a result of the performance
          of the Research Plan. Such notice shall describe the substance of any
          such Invention in writing in sufficient detail so as to enable BMS to
          determine if a patentable Invention has been made.

     D.   BMS shall have the sole right to have prepared, filed and prosecuted
          the necessary papers for obtaining patent protection for any
          Inventions that relate solely to [**], including without limitation
          formulations of [**], in any and all countries of the world which BMS,
          in its sole judgment, determines are of sufficient interest to merit
          such filing. BMS shall bear all costs incurred in connection with the
          preparation, filing, prosecution, issuance and maintenance of any such
          U.S.

** CONFIDENTIAL TREATMENT REQUESTED

 
Mr. John W. Shell 
DepoMed, Inc.
July 11, 1997
Page 8

          and foreign patent applications.  DepoMed agrees that it will
          cooperate and do whatever is necessary to assist BMS in obtaining and
          maintaining such patent rights at the request and expense of BMS.  In
          the event that BMS, in its sole discretion, decides it is not
          appropriate to file a patent application which constitutes a DepoMed
          Patent Right that relates solely to [**], including without limitation
          formulations of [**], DepoMed shall have no right to file any patent
          applications thereon.

     E.   Except as provided in Article VII.D hereinabove, DepoMed shall have
          the sole right to have prepared, filed and prosecuted the necessary
          papers for obtaining patent protection for any Inventions that relate
          to the DP System in any and all countries of the world which DepoMed,
          in its sole judgment, determines are of sufficient interest to merit
          such filing.  DepoMed shall bear all costs incurred in connection with
          the preparation, filing, prosecution, issuance and maintenance of any
          such U.S. and foreign patent applications.


VIII.  PUBLICITY
       ---------

     A.   Neither BMS or DepoMed shall disclose any material terms of this
          Agreement or any of the information contained in the Appendix to this
          Agreement to any third party other than their professional advisors
          and third parties whose rights are or may be affected thereby
          without the prior written permission of the other Party, except
          where such disclosure is required by law. [**]. Such permission
          shall not be unreasonably withheld or delayed, and shall be deemed
          given unless the party from whom permission is requested responds to
          a request with consent or specific reasons for objection within
          fourteen (14) days after the request is received.

     B.   Neither BMS nor DepoMed shall use the name of the other Party in any
          advertising or promotional context in any medium, provided, that upon
          execution of this Agreement by both Parties, a mutually agreeable
          press release may be jointly published by the Parties.

IX.  COVENANT AND WARRANTY
     ---------------------

     DepoMed hereby covenants that it will use its diligent efforts to conduct
     and complete the Research Plan set forth in Appendix A in accordance with
     the milestones and targets set forth therein.  DepoMed hereby warrants, as
     of the date hereof, and covenants that (a) it has all necessary rights and
     is legally entitled to grant the rights it has agreed to grant to BMS
     hereunder, and (b) its entry into this Agreement and its performance of its
     obligations hereunder do not and will not conflict with any other
     restrictions or obligations of whatsoever nature by which DepoMed is bound.

** CONFIDENTIAL TREATMENT REQUESTED

 
Mr. John W. Shell 
DepoMed, Inc.
July 11, 1997
Page 9

X.   ASSIGNMENT
     ----------

     This Agreement may not be assigned by either party without the prior
     written consent of the other Party.  No obligations or rights under this
     Agreement may be assigned or delegated by DepoMed without the prior written
     consent of BMS.  This Agreement shall be binding upon and inure to the
     benefit of and be enforceable by the Parties hereto and their respective
     heirs, legal and personal representatives, successors and permitted
     assigns.

XI.  NOTICES
     -------

     All notices permitted or required under this Agreement shall be deemed
     effective upon receipt by the Party to whom it is addressed, if made in
     writing and deposited, postage prepaid in a facility for the collection of
     mail maintained by the United States Post Office or if deposited with
     Federal Express or any other generally recognized expedited delivery
     service, or if personally delivered, or if transmitted by fax, addressed as
     follows:

     To Bristol-Myers Squibb Company:
     ------------------------------- 

     A.   Scientific and Technical Matters:

          Dr. Peter Timmins
          Director, International Development Laboratories
          Bristol-Myers Squibb Pharmaceutical Research Institute
          Reeds Lane, Moreton, Wirral
          Merseyside L46 1QW, England
          FAX: 011-44-151-677-0869

     B.   All Business and Other Matters:

          Ms. Mary Furlong
          Director, Business Development, U.S.
          Bristol-Myers Squibb Company
          P.O. Box 4000
          Princeton, New Jersey 08543-4000
          FAX: (609) 252-3974

     To DepoMed:
     ---------- 

     A.   Scientific and Technical Matters:

          Dr. John W. Shell
          President and Chief Executive Officer
          DepoMed, Inc.
          1170 B Chess Drive
          Foster City, CA 94404-1167
          FAX: (415) 513-0999

 
Mr. John W. Shell 
DepoMed, Inc.
July 11, 1997
Page 10

     B.  All Business and Other Matters:

         Dr. John W. Shell
         President and Chief Executive Officer
         DepoMed, Inc.
         1170 B Chess Drive
         Foster City, CA 94404-1167
         FAX: (415) 513-0999

XII.  GOVERNING LAW
      -------------

      This Agreement shall be governed by and construed in accordance with the
      laws of the State of New Jersey. Caption and paragraph headings are for
      convenience only and shall not form an interpretive part of this
      Agreement. This Agreement shall not be strictly construed against either
      Party hereto.

XIII. TERMINATION
      -----------

      A.   This Agreement may be terminated by BMS, with or without cause, upon
           thirty (30) days written notice to DepoMed.

      B.   Upon any material breach by a party to the Agreement, the other party
           may terminate this Agreement by thirty (30) days written notice to
           the breaching party, specifying the material breach, default or other
           defect. The termination becomes effective, at the option of the non-
           breaching party, at the end of the thirty (30) day period unless the
           breaching party cures the breach during the thirty (30) day period.

      C.   Upon expiration or termination of this Agreement, the provisions of
           Articles I.F, V, VI, VII, VIII, IX and XII shall continue in full
           force and effect, as well as any other provision herein which, by its
           intent or meaning, is intended to survive such expiration or
           termination.

      D.   Any expiration or early termination of this Agreement shall not
           affect the rights and obligations of the parties accruing under this
           Agreement prior to the effective date of such expiration or
           termination, including, but not limited to, any rights and
           obligations accruing under Articles I.F, V, VI, VII, VIII, IX and
           XII.

XIV.  INDEPENDENT CONTRACTOR
      ----------------------

      For purposes of this Agreement, and in the performance of all services
      hereunder, the relationship of BMS to DepoMed is, and shall be deemed to
      be, one of independent contractors and not as agents or employees of one
      to the other.

XV.   SEVERABILITY
      ------------

 
Mr. John W. Shell 
DepoMed, Inc.
July 11, 1997
Page 11

     The provisions of this Agreement are severable.  If any item or provision
     of this Agreement shall to any extent be invalid or unenforceable, the
     remainder of this Agreement shall not be affected thereby, and each term
     and provision of this Agreement shall be valid and shall be enforced to the
     fullest extent permitted by law.

XVI. ENTIRE AGREEMENT
     ----------------

     This Agreement and the Prior Agreement constitute the entire agreement
     between BMS and DepoMed with respect to the subject matter hereof and
     supersede any and all previous understandings or agreements between the
     Parties, whether written or verbal.  No terms or provisions of this
     Agreement may be varied or modified by the parties hereto except by a
     written instrument specifically referring to and executed in the same
     manner as this Agreement.  No provision of this Agreement may be waived by
     any act, omission or knowledge of a Party or its agents or employees,
     except by a writing expressly waiving such provision and signed by the
     waiving Party.  The failure of a Party at any time or times to require
     performance of any provision hereof shall in no manner affect its rights at
     a later time to enforce the same.  No waiver by a Party of any condition,
     remedy or term in any one or more instance shall be construed as a
     continuing waiver of such condition, remedy or term or any other condition,
     remedy or term on any successive occasion.  Any inconsistency between the
     terms of this Agreement and any Appendix shall be resolved in favor of the
     text of this Agreement.

If this Letter correctly sets forth the terms and conditions of our Agreement,
please indicate the acceptance thereof by DepoMed in the space provided below
and return an original counterpart of this Agreement to the address first shown
above.  The other original counterpart should be retained in your files.  Thank
you.

                              Sincerely,

                              BRISTOL-MYERS SQUIBB COMPANY


                              By:   /s/  Robert A. Lipper
                                    ------------------------------------------
                              Title:    Vice President, Biopharmaceutics R&D
                                    ------------------------------------------

Accepted and agreed this 15th
day of July, 1996

DEPOMED, INC.


By:   /s/  John W. Shell
      ----------------------
Title:      President
      ----------------------

 
                                                                      Appendix A
                                                                     Page 1 of 2

RESEARCH PLAN
[**] FORMULATION DEVELOPMENT


[**]


** CONFIDENTIAL TREATMENT REQUESTED

 
[**]



** CONFIDENTIAL TREATMENT REQUESTED

 
THE SYMBOL '**' IS USED THROUGHOUT THIS EXHIBIT TO INDICATE THAT A PORTION OF
THE EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION

                                  EXHIBIT 10.3
                                  ------------


                             FEASIBILITY AGREEMENT



This Agreement is by and between DepoMed, Inc., 1170 B Chess Drive, Foster City,
CA 94404 (DepoMed), and GalaGen Inc., 4001 Lexington Avenue North, Arden Hills,
Minnesota 55126-2998 (GalaGen).

Whereas, both parties have entered into a Mutual Nondisclosure Agreement dated
April 3, 1995;

The parties hereto agree as follows:

1.     GalaGen will provide a quantity of their [**]to DepoMed for the purpose
of certain feasibility studies to be conducted by DepoMed and GalaGen according
to the Protocol and Research Plan (the "Studies") in Schedule A, and not for any
other purposes.

2.     The parties will perform such Studies and provide results of such Studies
to each other.

3.     Results of such Studies will be kept confidential from any third party by
DepoMed and GalaGen in accordance with the terms and conditions of the Mutual
Nondisclosure Agreement.  However, the parties may disclose the results from the
Studies to potential development and commercialization partners and investors
bound by similar terms of confidentiality as the Mutual Nondisclosure Agreement.

4.     DepoMed grants to GalaGen the right to use its proprietary technology and
know-how for testing purposes during the term of this Agreement and any
extensions.  Except as provided in Section 5.(c) below, rights to use DepoMed's
proprietary technology and know-how do not extend beyond the term of this
Agreement.

5.(a)  Rights to any invention invented by either party (including persons
obligated to assign inventions to either party) and resulting from such
Studies shall be assigned to DepoMed if pertaining solely to the drug delivery
technology of DepoMed or to GalaGen if pertaining solely to the [**]
technology of GalaGen. Any invention involving the use of DepoMed technology
to deliver an [**] shall be a "Joint Invention" assigned to DepoMed. None of
the present patent rights of either party shall be affected by this Agreement.
Neither Party shall receive any rights to use or

** Confidential Treatment Requested

 
license any Products or technology of the other Party other than to perform the
Studies.

5.(b)  Should the results of this Agreement lead to a mutual decision to conduct
additional product development studies between the parties, then the parties
shall enter into an appropriate agreement that includes applicable intellectual
property and an exclusive option for a commercial license.  The terms of this
option to license and commercial license shall include, but not be limited to,
the following:

       5(b)i   Payments: Reasonable costs mutually agreed prior to the start of
               the Studies and related directly to the product development and
               incurred by DepoMed will be paid by GalaGen on a reimbursement
               basis.  The Parties shall mutually agree to appropriate milestone
               payments made by GalaGen to DepoMed.

       5(b)ii  Field: FIELD shall be the use or delivery of any [**]
               formulated with DepoMed technology delivered orally in humans and
               non-human animals.

       5(b)iii Territory: TERRITORY shall be all countries of the world.

       5(b)iv  Rights: RIGHTS shall be exclusive and royalty bearing.

5.(c)  Should the results of this Agreement lead to a decision by either party
not to conduct additional product development studies between the parties,
DepoMed agrees to offer to GalaGen an exclusive license of any patent or
technology based on a Joint Invention under commercially reasonable terms to be
negotiated in good faith.  Such offer shall be held open for a period of one (1)
year from the effective date of this Agreement.  Such license shall provide that
if during the two (2) year period following the effective date of the license,
GalaGen has not taken reasonable steps to commercially develop a product based
on such Joint Invention such license shall be renegotiated in good faith between
the parties.

6.     Neither party may, without the prior written consent of the other, file
or prosecute any patent application that effectively discloses Proprietary
Information received from the other, provided such consent shall not be
unreasonably withheld.

7.     GalaGen and DepoMed agree to use diligent efforts to complete the
research activities outlined in Schedule A.

8.     This Agreement shall be binding upon and inure to the benefit of the
successors and assignees of the parties hereto, but neither of the parties
hereto shall assign this Agreement without the prior written consent of the
other.


** Confidential Treatment Requested

                                      -2-

 
9.     This Agreement may be terminated at any time by either party with written
notice to the other party and unless so terminated shall remain in effect for a
period of two (2) years from the date hereof.  The obligations regarding use of
transferred material and confidentiality shall survive termination of this
Agreement for the same period defined in the Mutual Nondisclosure Agreement.

10.    No modification or waiver of any of the provisions of this Agreement
shall be valid unless in writing and signed by both parties hereto.

11.    Each party receiving information under this Agreement or the Mutual
Nondisclosure Agreement agrees not to analyze or have a third party analyze any
tangible products or materials including Proprietary Information except for the
studies set forth in Schedule A, and all results of any such analysis shall be
considered results of the studies for the purposes of this Agreement and subject
to the obligations of Section 3 above.

12.    This Agreement embodies the entire understanding between the parties and
supersedes all previous Agreements, commitments, and writings with respect
thereto, excepting the Mutual Nondisclosure Agreement.

13.    The effective date of this Agreement is the date of the last signature
below.


AGREED

for DepoMed:



/s/  John W. Shell
- ---------------------
John W. Shell, Ph.D.
President & CEO


     13 May  1996
- ---------------------
(Date)


for GalaGen:



/s/  Peter N. Gray
- ---------------------
Peter N. Gray, Ph.D.
Vice President, Research and Development


     11 May 1996
- ---------------------
(Date)

                                      -3-

 
                                   SCHEDULE A

                           PROTOCOL AND RESEARCH PLAN




[**]

** Confidential Treatment Requested

                                      -i-

 
[**]

** Confidential Treatment Requested

                                      ii

 
[**]

** Confidential Treatment Requested

                                     -iii-

 
[**]

** Confidential Treatment Requested
                                     -iv-

 
     Notes:  [**]

** Confidential Treatment Requested

                                      -v-

 
                                 EXHIBIT 10.4



March 18, 1997

CSO Ventures, LLP
666 3/rd/ Avenue, 30/th/ Floor
New York, NY 10017

Attention:  Mr. Judson Cooper

Dear Judson:

This will confirm the retention of CSO Ventures, LLC ("CSO") by DepoMed, Inc.
(the "Company") as a consultant to the Company to provide business development,
operations and financial advisory services. This consulting engagement is
effective upon the closing of a $1 million bridge loan. Consulting services
shall be provided for a fixed minimum annual fee of $120,000 and for a term of
not less that one year, payable quarterly.

It is also understood that subsequent to the closing of the Company's initial
public offering, CSO will agree to continue its representation on the Company's
Board of Director's with one seat.

This agreement shall commence upon the closing of the bridge loan and shall
automatically be renewed for successive one-year periods unless either party
elects in writing to the other, at least 60 days before the anniversary date,
not to renew the term of this agreement. We also agree to negotiate in good
faith additional success fees for work performed in connection with financings,
merger and acquisition activity, strategic alliances and other corporate
transactions. Success fees for merger and acquisition activity, strategic
alliances and other corporate transactions shall be based on the standard Lehman
formula as follows: 5% of the first $1,000,000; 4% of the second $1,000,000; 3%
of the third $1,000,000; 2% of the next $7,000,000; and 1% of all amounts in
excess of $10,000,000.


Very truly yours,                       Agreed:

DepoMed, Inc.                           CSO Ventures, LLC

By:                                     By:

   /s/ John W. Shell                        /s/ Judson Cooper
________________________                ______________________
   John W. Shell, Ph.D.                    Judson Cooper
      Chairman

 
                                  EXHIBIT 10.5
                                  ------------



                              W I T N E S S E T H:



THAT WHEREAS, Owner, as Landlord, did execute a Lease dated September 2, 1992
with Lessee, as Tenant, covering a portion of that certain real property
described in Exhibit "A" attached hereto and by this reference incorporated
herein; and

WHEREAS, Owner has previously executed, a deed of trust and note in the sum of
$7,225,000.00 dated October 4, 1988, in favor of UNION BANK (hereinafter
referred to as "Lender"), payable with interest and upon the terms and
conditions described therein, which deed of trust was recorded October 6, 1988,
as instrument No. 88135299 in the official Records of San Mateo County,
California;

WHEREAS, it is to the mutual benefit of the parties hereto that Lender has made
such loan to Owner;

NOW, THEREFORE, in consideration of the mutual benefits accruing to the parties
hereto and other valuable consideration, the receipt and sufficiency of which
consideration are hereby acknowledged, it is hereby declared, understood and
agreed as follows:

     1.   That Lender would not have made the loan described above without the
          right to have Lessee enter into this Agreement.

     2.   That this Agreement shall be the whole and only agreement between the
          parties hereto and shall supersede and cancel any prior agreements as
          to those provisions contained in the Lease above mentioned, which may
          or do provide for the subordination of the Lease and leasehold
          interest of Lessee to the deed or deeds of trust or a mortgage or
          mortgages to be thereafter executed.

     3.   Lessee and Owner hereby agree and the recordation of this Agreement by
          or on behalf of Lender shall constitute Lender's agreement as follows:

          (a)  In the event of foreclosure of said deed of trust, Lender will
               not join Lessee in any summary proceedings so long as Lessee is
               not in default under any of the terms, covenants or conditions of
               the Lease.

          (b)  It is the express intent of the parties hereto that a foreclosure
               of said deed of trust, the exercise of the power of sale, or the
               exercise of any other remedies provided therein, or provided in
               any other instruments securing the indebtedness

 
               secured by said deed of trust, or the delivery of a deed to the
               subject premises in lieu of foreclosure, shall not, of itself,
               result in the termination of or otherwise affect the Lease, but
               Lender and any purchaser or other grantee upon foreclosure of
               said deed of trust or conveyance in lieu of foreclosure shall
               thereby automatically succeed to the position of Owner under the
               Lease.

          (c)  If, by dispossession, foreclosure, exercise of the power of sale,
               or otherwise, Lender, its successors or assigns, or any purchaser
               at the foreclosure sale, or otherwise, shall come into possession
               of or become the owner of the premises demised by the Lease, such
               person shall succeed to the interest of Owner under the Lease,
               and, if no default then exists under the terms, conditions and
               provisions of the Lease, the Lease shall remain in effect as a
               lease of said demised premises, together with all of the rights
               and privileges therein contained, between such person and Lessee
               for the balance of the term of the Lease between Owner and
               Lessee.

               Lessee agrees to attorn to accept such person as Lessor under the
               Lease and to be bound by and to perform all of the obligations
               imposed by the Lease upon the Lessee therein, and Lender, its
               successors or assigns, or any purchaser at a foreclosure or
               trustee's sale, or otherwise, will not disturb the possession of
               Lessee and will be bound by all of the obligations imposed by the
               Lease upon the Lessor therein; provided, however, that Lender, or
               any purchaser at a foreclosure or trustee's sale or otherwise
               shall not be

                    (i)  liable for any act or omission of a prior lessor
                         (including Owner); or

                   (ii)  subject to any offsets or defenses which Lessee might
                         have against any prior lessor (including Owner); or

                  (iii)  bound by any rent or additional rent which Lessee might
                         have paid in advance to any prior lessor (including
                         Owner) for any period beyond the month in which the
                         foreclosure, sale termination or conveyance occurs; or

                   (iv)  bound by any agreement or modification of the Lease
                         made without the consent of Lender.

                                      -2-

 
          (d)  Upon the written request of either Lessee or Lender given to the
               other at the time of a foreclosure of said deed of trust or sale
               under power of sale therein contained or conveyance in lieu of
               foreclosure, and if no default then exists under the terms,
               conditions and provisions of the Lease, Lessee and Lender agree
               to execute a lease of the premises demised by the Lease upon the
               same terms and conditions as the Lease between Owner and Lessee,
               which lease shall cover any unexpired terms of the Lease existing
               prior to such foreclosure, trustee's sale or conveyance in lieu
               of foreclosure.

     4.   This Agreement shall be binding upon and inure to the benefit of
          Lender and the parties hereto and their respective successors and
          assigns upon recordation by or on behalf of Lender.


LESSEE                              OWNER


DepoMed Systems, Inc.,              1170 Chess Drive Limited
a California Corporation            Partnership,
                                    a Texas Limited Partnership


BY:/s/  John W. Shell               BY:
   --------------------------          ------------------------
                                         J. McDonald Williams,
                                         General Partner

                                    BY:  Trammell Crow Foundation,
                                         Ltd., a Texas Limited
                                         Partnership,
                                         General Partner

UNION BANK                             BY: TCF, Inc., a Texas
                                       Corporation, General Partner

BY_________________________              BY:___________________  
Daniel L. Rosenbaum,                         Trammell Crow,
Assistant Vice President                     President



BY_________________________
  Kathleen A. Ormseth,
  Vice President & Manager

                                      -3-

 
                      This page intentionally left blank.

                                      -4-

 
                                   EXHIBIT A

                                        
Attached to and made a part of Non-Disturbance and Attornment Agreement

  All that property situated in the State of California, County of San Mateo,
  City of Foster City described as follows:

  PARCEL I
  --------

  Lots 23, 24 and a portion of Lot 29, as designated on the map entitled "Tract
  No. 820 Foster City- Industrial Park No. 1 in unincorporated territory San
  Mateo County, California", which map was filed in the office of the recorder
  of the County of San Mateo, State of California on January 15, 1964 in Book 59
  of Maps at Pages 35, 36 and 37, said portion of Lot 29 being are particularly
  described as follows:

  Beginning at the most Southerly Corner of said Lot 29; thence from said point
  of beginning along the Southwesterly Line of said Lot 29, North 47 degrees 48'
  14" West 218.63 feet; thence North 3 degrees 33' 57" West 134.12 feet; thence
  along the Northerly line of said Lot 29 North 86 degrees 26' 03" East 33.97
  feet; thence crossing Lot 29, South 35 degrees 47' 43" East 297.54 feet to a
  point on the Northwesterly line of Chess Drive as shown on said Map; thence
  along said Northwesterly line South 42 degrees 11' 46" West 56.00 feet to the
  point of beginning.

  This deed is made and accepted upon the covenants and restrictions set forth
  in that Declaration of Restrictions recorded January 15, 1964 in Book 4628 of
  Official Records, San Mateo County at Page 1, and the amendment thereto
  recorded March 18, 1966 in Book 5130 of Official Records, San Mateo County at
  Page 138, all of which are incorporated herein by reference to said
  Declaration with the sam effect as though fully set forth herein.

  PARCEL 2
  --------

  Parcel A as said Parcel is shown on the certain map entitled "Parcel Map 8-73
  in the incorporated territory of the City of Foster City, County of San Mateo,
  State of California, being a resubdivision of Parcels A & B of parcel map
  recorded in Book 12 of parcel maps at Page 21, and also being a resubdivision
  of Lots 25 and 26 Tract No. 820, Foster City, Industrial Park Unit No. 1,
  recorded in Book 59 of Maps at Pages 35 to 37 inclusive, San Mateo County
  Records", which map was filed in the office of the Recorder of the County of
  San Mateo, State of California on July 6, 1973 in Book 21 of Parcel Maps, Page
  19.

  PARCEL 3
  --------

  Parcel "B" as said parcel is shown on that certain nor entitled "Parcel Map 8-
  73 in the incorporated territory of the City of

                                      -5-

 
  Foster City, County of San Mateo, State of California being a resubdivision of
  Parcel A & B of parcel map recorded in Book 12 of parcel maps at Page 21 and
  also being a resubdivision of Lots 25 & 26 Tract No. 820, Foster City-
  Industrial Park Unit No. 1 recorded in Volume 59 of Maps at Page 35 to 37
  inclusive, San Mateo County Records", which map was filed in the Office of the
  Recorder of the County of San Mateo, State of California on July 6, 1973 in
  Volume 21 of parcel maps at Page 19.

  PARCEL 4
  --------

  Together with a non-exclusive easement for ingress and egress over and across
  the South 10 feet of the West 62 feet of Parcel "C" as said Parcel is shown on
  that certain map entitled "Parcel Map 8-73 in the incorporated territory of
  the City of Foster City, County of San Mateo, State of California being a
  resubdivision of Parcels A & B of parcel map recorded in Book 12 of parcel
  maps at Page 21 and also being a resubdivision of Lots 25 and 26 Tract No.
  820, Foster City-Industrial Park Unit No. 1 recorded in Volume 59 of Maps at
  Pages 35 to 37 inclusive, San Mateo County Records", which map was filed in
  the Office of the Recorder of the County of San Mateo, State of California on
  July 6, 1973 in Volume 21 of parcel maps at Page 19.

                                      -6-

 
State of California           )
County of California          )


On February 2, 1993 before me, Judith I. Berrett, personally appeared JOHN W.
SHELL, President of DepoMed Systems, Inc. personally known to me (or proved to
me on the basis of satisfactory evidence) to be the person whose name is
subscribed to the within instrument and acknowledged to me that he executed the
same in his authorized capacity, and that by his signature on the instrument the
person, or the entity upon behalf of which the person acted, executed the
instrument.

    WITNESS my hand and official seal.


Signature:  /s/ Judith I. Berrett
            ------------------------

                                                 [OFFICIAL STAMP]


State of California          )
County of ___________________)


On _________  __ ____, before me, _____________________, personally appeared
__________  personally known to me (or proved to me on the basis of satisfactory
evidence) to be the person(s) whose name(s) is/are subscribed to the within
instrument and acknowledged to me that he/she/they executed the same in
his/her/their authorized capacity(ies), and that by his/her/their signature(s)
on the instrument the person(s), or the entity upon behalf of which the
person(s) acted, executed the instrument.

  WITNESS my hand and official seal.

Signature: 
           --------------------


State of California             )
County of ______________________)

On _________  __ ____, before me, _____________________, personally appeared
________________  personally known to me (or proved to me on the basis of
satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to
the within instrument and acknowledged to me that he/she/they executed the same
in his/her/their authorized capacity(ies), and that by his/her/their
signature(s) on the instrument the person(s), or the entity upon behalf of which
the person(s) acted, executed the instrument.

  WITNESS my hand and official seal.

Signature: 
           ----------------------

                                      -7-

 
                                   EXHIBIT B
                                        
                          TENANT ESTOPPEL CERTIFICATE

Tenant:    Depomed Systems, Inc.
           ---------------------

THIS IS TO CERTIFY:

  1.    That the undersigned is the Tenant under that certain Lease dated
                                                                         
September 15, 1992, by and between 1170 Chess Drive Limited Partnership
- ------------------                 ------------------------------------
("Landlord") and the undersigned ("Tenant") covering  those certain premises as
more particularly described in the Lease (the "Premises").

  2.    A true and correct copy of the Lease and all amendments thereto is
attached hereto as Exhibit A. The Lease is in full force and effect and is the
                   ---------                                                  
only lease or agreement between the Tenant and the Landlord affecting the
Premises.

  3.    To the best of Tenant's knowledge, the information set forth below is
true and correct:

                                                     
     (a)  Square footage of the premises:            3,300
                                                     -------
     (b)  Annual rent as of the commencement
          of Lease:                                  31,680
                                                     ------
     (c)  Current annual rent (if different 
          than at commencement):
     (d)  Lease term commenced:                      9/15/92
                                                     -------
     (e)  Lease termination date:                    3/31/95
                                                     -------
     (f)  Rent is paid to and                        
          including:                                 4/30/93
                                                     ------- 
     (g)  Security Deposit:                          3,389
                                                     -------
     (h)  Prepaid rent for and in                    0
          amount of:                                 -------

     (i)  Current charges outstanding
          as of 4/8/93
                ------
DATE AMOUNT DESCRIPTION ---- ------ ----------- 3/26/93 $455.89 Electric billback (2/2-3/4) ------- ------- --------------------------- 3/26/93 $122.93 Gas billback (2/2-3/4) ------- ------- ---------------------------
4. The Tenant, unless otherwise stated on Exhibit B, now occupies the Premises, accepts the Premises in their current condition, and is not aware of any defect in the Premises. No rent has been collected in the current month other than disclosed in Paragraph 3 above. No free rent or other concessions benefits, or inducements other than as specified in the lease have been granted to Tenant or undertaken by Landlord. 5. The Tenant has not been granted any renewal, expansion or purchase options and has not been granted any rights of first refusal except as disclosed in writing in the Lease. -1- 6. Neither Tenant nor Landlord is in default under the Lease and there has not occurred any event, which by notice or lapse of time or both or otherwise, will result in any default. 7. As of the date hereof and except as set forth in the Lease, the undersigned is entitled to no credit, offset, or deduction in rent. Tenant knows of no liabilities or obligations of Landlord which have accrued but are unsatisfied under the Lease as of the date of this Certificate. 8. To the best of Tenant's knowledge, there are no actions, whether voluntary or otherwise, pending against the undersigned under the Bankruptcy laws or other laws for the relief of debtors of the United States or any state thereof. DATED this 21st day of April, 1993. ---- ----- Tenant Depomed Systems Inc. ------------------------- ------------------------- a California corporation By: /s/ John W. Shell ---------------------- Its: President & CEO ---------------------

 
                                 EXHIBIT 10.6
                                 ------------

                           FIRST AMENDMENT TO LEASE


     THIS FIRST AMENDMENT TO LEASE ("First Amendment") is effective as of
January 1, 1996, by and between SKW II Real Estate Limited Partnership, a
Delaware limited partnership ("Landlord"), and DepoMed, Inc., a California
corporation ("Tenant").

                                    RECITALS
                                    --------

     A.  Original Lease.  Pursuant to that certain Lease dated as of September
         --------------                                                       
2, 1992 (the "Original Lease"), Landlord's predecessor-in-interest, 1170 Chess
Drive Limited Partnership, a Texas limited partnership, leased to Tenant's
predecessor in interest, DepoMed Systems, Inc., a California corporation,
certain premises consisting of approximately 3,300 rentable square feet commonly
known as and located at 1170 B Chess Drive, Foster City, California (the
"Premises"), more particularly described in the Original Lease.  Unless defined
otherwise in this First Amendment, all defined terms used in this First
Amendment shall have the same meaning and definition as given them in the
Original Lease.

     B.  Lease.  The Original Lease, as amended by this First Amendment, shall
         -----                                                                
be referred to herein as the "Lease."

     C.  Purpose.  Landlord and Tenant desire to amend the Original Lease as
         -------                                                            
more fully set forth herein.


                                   AGREEMENT
                                   ---------

     NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, Landlord and Tenant hereby agree that
the Original Lease shall be amended as follows:

     1.  Term.  The Basis Lease Information and paragraph 3 of the Original
         ----                                                              
Lease are hereby amended by addition of the following:

          The term of the Lease is extended for a period of 36 months,
          commencing March 1, 1996 and terminating February 28, 1999.

     2.   Base Rent.  The Basic Lease Information and paragraphs 6 and 38 of the
          ---------                                                             
Original Lease are hereby amended by addition of the following:

 
          The Base Rent for the Premises payable by Tenant hereunder shall be as
          follows:

          Monthly Period         Monthly Rate           Base Rent Per Month
          --------------         ------------           -------------------

          03/01/96-02/28/97      $0.96 NNN/Square Feet  $3,168.00
          03/01/97-02/28/98      $0.98 NNN/Square Feet  $3,234.00
          03/01/98-02/28/99      $1.00 NNN/Square Feet  $3,300.00

     3.   Tenant Improvements.  Paragraph 39 of the Original Lease is deleted in
          -------------------                                                   
its entirety and the following is substituted in its place:

          Tenant shall lease the Premises in an "as-is, where-is" condition,
          with all faults.

     4.   Landlord's Address.  The paragraph in the Basis Lease Information of
          ------------------                                                  
the Original Lease entitled "Landlord's Address" is deleted in its entirety and
the following is substituted in its place:

          Landlord's Address:  SKW II Real Estate Limited
                               Partnership
                               c/o Lincoln Property Company
                               101 Lincoln Centre Drive
                               Foster City, California 94404-1167
                               Telephone:  (415) 571-2200
                               Facsimile:  (415) 571-2211

     5.   Brokers.  The paragraph in the Basis Lease Information of the Original
          -------                                                               
Lease entitled "Broker" is deleted in its entirely and the following is
substituted in its place:

          Broker:  CB Commercial and Lincoln Property Company.  Landlord shall
          pay a brokerage commission to Broker in accordance with a separate
          agreement between Landlord and Broker.  Tenant hereby makes to
          Landlord the warranty set forth in paragraph 36 of the Original Lease
          with respect to the Broker referenced above.

     6.   Security Deposit.  Landlord and Tenant hereto acknowledge and agree
          ----------------                                                   
that upon execution of this First Amendment, Landlord is holding a deposit in
the sum of $3,389.00 as security for the performance and observance by Tenant of
all Tenant's obligations under the Original Lease.

     7.   Full Force And Effect.  Except as expressly provided in this First
          ---------------------                                             
Amendment, the Original Lease shall remain in full force and effect for the
entire remaining Term and any extensions thereof, and the terms and provisions
of the Original Lease shall remain unchanged except as modified by this First
Amendment.

                                      -2-

 
     8.   First Amendment Shall Prevail.  In the event of any conflict or
          -----------------------------                                  
inconsistency between the terms and provisions of the Original Lease and the
terms and provisions of this First Amendment,the terms and provisions of this
First Amendment shall prevail.


     IN WITNESS WHEREOF, the parties have executed this First Amendment
effective as of the date first set forth above.


LANDLORD;                                TENANT:


SKW II REAL ESTATE LIMITED               DEPOMED, INC.
PARTNERSHIP, a Delaware limited          a California corporation
partnership



By:  SKW II GEN-PAR, INC.,               By: /s/  John W. Shell
     a Delaware corporation, General         --------------------
     Partner                        
                                         Name:   John W. Shell
                                                 -------------

                                         Title:  President
                                                 ---------


By: /s/ Derrick E. McGavis
    ------------------------------
    Derrick E. McGavic
    Assistant Vice President

                                      -3-

 
                                                                    EXHIBIT 11.1
 
                                 DEPOMED, INC.
                STATEMENT RE: COMPUTATION OF NET LOSS PER SHARE
 
PERIOD FROM INCEPTION (AUGUST 7, 1995) TO YEAR ENDED DECEMBER 31, 1995 DECEMBER 31, 1996 --------------------- ----------------- Weighted average common shares outstanding.......................... 2,859,992 3,285,747 Common equivalent shares pursuant to Staff Accounting Bulletin Nos. 55, 64 and 83............................... 184,117 184,117 --------- --------- Shares used in computing net loss per share................................ 3,044,109 3,469,864 ========= ========= Shares used in computing pro forma net loss per share: Shares from above................... 3,469,864 Assumed conversion of preferred stock at the date of issuance...... 815,789 --------- Shares used in computing pro forma net loss per share................. 4,285,653 =========

 
                                                                    EXHIBIT 23.1
 
               CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
 
  We consent to the references to our firm under the captions "Selected
Financial Data"and "Experts" and to the use of our report dated January 31,
1997 (except for Note 9, as to which the date is April  , 1997) with respect to
the financial statements of DepoMed, Inc. and our report dated January 31, 1997
with respect to the statement of direct expenses of DepoMed Systems Division of
M6 Pharmaceuticals, Inc., in the Registration Statement (Form SB-2) and related
Prospectus of DepoMed, Inc., for the registration of shares of its common
stock.
 
 
Palo Alto, California
   1997
 
 
- --------------------------------------------------------------------------------
 
  The foregoing consent is in the form that will be signed upon completion of
the one-for-three reverse common stock split as described in Note 9 to the
financial statements of DepoMed, Inc.
 
                                                          /s/ Ernst & Young LLP
Palo Alto, California
April 17, 1997
 


5 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 10,802 0 120,898 0 0 163,237 200,251 45,112 333,127 679,925 0 0 682,759 284,250 (275,000) 333,127 0 317,971 0 784,172 0 0 6,572 (472,773) 0 0 0 0 0 (472,773) (0.11) (0.11)