<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-----------------------------------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report: March 12, 1997
NEOPROBE CORPORATION
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
Delaware 0-26520 31-1080091
- --------------------------------------------------------------------------------
(State of Other Jurisdiction (Commission File Number) (I.R.S. Employer
of Incorporation) Identification No.)
425 Metro Place North, Suite 400, Dublin, Ohio 43017-1367
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (614) 793-7500
<PAGE> 2
ITEM 7. FINANCIAL STATEMENT AND EXHIBITS
The following exhibits are being filed herewith for the purpose of being
incorporated by reference into the Registrant's Registration Statements on Form
S-3, No. 33-72700 and No. 333-15989:
(23) Consent.
23.1 Consent of Coopers & Lybrand L.L.P.
(27) Financial Data Schedule.
27.1. Financial Data Schedule (submitted electronically for SEC
information only).
(99) Additional Exhibits.
99.1 The financial statements of the Registrant, and the related
notes, together with the report of Coopers & Lybrand L.L.P. dated
February 12, 1997.
-2-
<PAGE> 3
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on behalf of the
undersigned hereunto duly authorized.
NEOPROBE CORPORATION
Date: March 12, 1997 /s/ DAVID C. BUPP
-----------------------
Name: David C. Bupp
Title: President
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this registration statement on
Form S-3 (File No. 33-72700) of our report dated February 12, 1997, on our
audits of the consolidated financial statements of Neoprobe Corporation and
Subsidiaries.
COOPERS & LYBRAND L.L.P.
Columbus, Ohio
March 13, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 30,168,412
<SECURITIES> 19,748,819
<RECEIVABLES> 1,240,474
<ALLOWANCES> 0
<INVENTORY> 216,272
<CURRENT-ASSETS> 53,663,523
<PP&E> 8,280,358
<DEPRECIATION> 1,831,997
<TOTAL-ASSETS> 63,873,168
<CURRENT-LIABILITIES> 7,587,337
<BONDS> 1,008,783
<COMMON> 22,587
0
0
<OTHER-SE> 55,254,461
<TOTAL-LIABILITY-AND-EQUITY> 63,873,168
<SALES> 1,171,186
<TOTAL-REVENUES> 1,171,186
<CGS> 676,773
<TOTAL-COSTS> 676,773
<OTHER-EXPENSES> 16,082,761
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 83,436
<INCOME-PRETAX> (20,969,143)
<INCOME-TAX> 0
<INCOME-CONTINUING> (20,969,143)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (20,969,143)
<EPS-PRIMARY> (1.06)
<EPS-DILUTED> (1.06)
</TABLE>
<PAGE> 1
Exhibit 99.1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Directors and Stockholders of
Neoprobe Corporation
We have audited the accompanying consolidated balance sheets of Neoprobe
Corporation and Subsidiaries (A Development Stage Company) as of December 31,
1995 and 1996, and the related consolidated statements of operations,
stockholders' equity, and cash flows for the years ended December 31, 1994,
1995, and 1996, and for the period from November 16, 1983 (date of inception)
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.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Neoprobe
Corporation and Subsidiaries (A Development Stage Company) as of December 31,
1995 and 1996, and the consolidated results of their operations and their cash
flows for the years ended December 31, 1994, 1995, and 1996, and for the period
from November 16, 1983 (date of inception) to December 31, 1996, in conformity
with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Columbus, Ohio
February 12, 1997
F-1
<PAGE> 2
NEOPROBE CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
December 31, 1995 and 1996
<TABLE>
<CAPTION>
ASSETS 1995 1996
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $10,032,973 $30,168,412
Available-for-sale securities 7,279,659 19,748,819
Stock subscriptions receivable 1,262,513
Accounts receivable 184,330 1,240,474
Inventory 473,004 216,272
Prepaid expenses 442,429 1,605,897
Other current assets 341,587 683,649
------------ -----------
Total current assets 20,016,495 53,663,523
------------ -----------
Note receivable 1,500,000
Property and equipment at cost:
Equipment 4,570,185 7,053,392
Construction in progress 262,026 1,226,966
------------ -----------
4,832,211 8,280,358
Less accumulated depreciation and amortization (1,266,939) (1,831,997)
------------ -----------
3,565,272 6,448,361
------------ -----------
Intangible assets, net of accumulated amortization of $65,626 and
$84,750, respectively 523,249 2,130,335
Other assets 40,314 130,949
------------ -----------
Total assets $ 24,145,330 $63,873,168
============ ===========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-2
<PAGE> 3
NEOPROBE CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1996
---- ----
<S> <C> <C>
Current liabilities:
Accounts payable:
Trade $ 1,558,916 $ 2,368,357
Related parties 25,838 36,298
Accrued expenses 957,049 2,951,430
Deferred revenue 2,000,000
Notes payable to finance company 128,487 155,091
Capital lease obligation, current 244,348 76,161
----------- ------------
Total current liabilities 2,914,638 7,587,337
----------- ------------
Long-term debt 1,100,000 1,000,687
Capital lease obligation 82,043 8,096
----------- ------------
Total liabilities 4,096,681 8,596,120
----------- ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock; $.001 par value; 5,000,000 shares authorized at December
31, 1995 and 1996; none outstanding (500,000 shares designated as
Series A, $.001 par value, at December 31, 1996; none outstanding)
Common stock; $.001 par value; 50,000,000 shares authorized; 17,534,800
shares issued and 17,334,800 shares outstanding at December 31, 1995;
22,586,527 shares issued and outstanding at December 31, 1996 17,335 22,587
Additional paid-in capital 62,964,787 119,293,862
Deficit accumulated during development stage (43,146,860) (64,116,003)
Unrealized gain on available-for-sale securities 46,480 (29,859)
Cumulative foreign currency translation adjustment 166,907 106,461
----------- ------------
Total stockholders' equity 20,048,649 55,277,048
----------- ------------
Total liabilities and stockholders' equity $24,145,330 $ 63,873,168
=========== ============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-3
<PAGE> 4
NEOPROBE CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
November 16,
1983 (Date of
Years Ended December 31, Inception) to
----------------------------------------------------------- December 31,
1994 1995 1996 1996
------------------ ----------------- --------------- -------------------
<S> <C> <C> <C> <C>
Net sales $ 933,056 $ 959,984 $ 1,171,186 $ 4,058,997
Cost of goods sold 587,972 505,998 676,773 2,128,297
----------- ----------- ------------ ------------
Gross profit 345,084 453,986 494,413 1,930,700
----------- ----------- ------------ ------------
Operating expenses:
Research and development expenses:
Wages and benefits 2,444,922 3,152,741 5,694,484 14,865,442
Contracted services 348,544 1,646,309 4,709,492 9,246,939
Clinical trials 3,448,335 2,350,814 4,747,008 17,580,200
Other 519,627 679,612 931,777 3,206,753
----------- ----------- ------------ ------------
Total research and development 6,761,428 7,829,476 16,082,761 44,899,334
----------- ----------- ------------ ------------
General and administrative expenses:
Wages and benefits 778,138 1,086,622 2,990,665 8,229,860
Contracted services 544,296 431,220 639,183 2,791,170
Professional services 896,961 455,234 616,441 3,329,532
Depreciation and amortization 488,959 545,337 649,381 2,189,983
Other 1,605,008 1,629,428 2,857,900 9,217,376
----------- ----------- ------------ ------------
Total general and administrative 4,313,362 4,147,841 7,753,570 25,757,921
----------- ----------- ------------ ------------
Loss from operations (10,729,706) (11,523,331) (23,341,918) (68,726,555)
----------- ----------- ------------ ------------
Other income (expense):
Interest income 180,771 603,275 2,179,345 3,765,385
Interest expense (73,003) (121,463) (83,436) (506,040)
Gain (loss) on foreign currency
transactions 15,910 18,195 (43,459) (44,663)
Other (15,318) 263,949 320,325 1,316,517
Minority interest 66,600 79,353
----------- ----------- ------------ ------------
Total other income 174,960 763,956 2,372,775 4,610,552
----------- ----------- ------------ ------------
Net loss $(10,554,746) $(10,759,375) $(20,969,143) $(64,116,003)
============ ============ ============ ============
Loss per share data:
Net loss per share of common stock $ (1.18) (.73) (1.06)
============ =========== ============
Weighted-average number of shares
outstanding during the year 8,926,196 14,725,687 19,743,649
============ =========== ============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-4
<PAGE> 5
NEOPROBE CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
November 16,
1983 (Date of
Years Ended December 31, Inception) to
---------------------------------------------------- December 31,
1994 1995 1996 1996
--------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $(10,554,746) $(10,759,375) $(20,969,143) $(64,116,003)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 495,838 551,992 652,623 2,208,318
Loss on disposal of assets 15,536 9,099 10,199 59,058
Reissuance of treasury stock to 401(k) plan 2,034 20,450
Amortization of bond premium 18,021 18,021
Minority interest (66,600) (79,353)
Non-cash expenditures for research and
development 500,000 500,000
Compensation expense under restricted
stock and stock option plans 1,683,750 1,683,750
Change in operating assets and liabilities:
Accounts receivable (554,935) 396,725 (1,002,799) (1,163,216)
Inventory 202,578 64,757 248,734 211,705
Prepaid expenses and other 21,955 (252,076) (566,291) (1,235,679)
Accounts payable 175,335 19,981 905,883 2,309,625
Accrued expenses 81,825 740,579 1,996,641 2,922,209
Deferred revenue 2,000,000 2,000,000
--------------- --------------- -------------- ---------------
Net cash used in operating activities (10,163,159) (9,228,318) (14,540,403) (54,661,115)
--------------- --------------- -------------- ---------------
Cash flows from investing activities:
Purchases of available-for-sale securities (4,030,743) (16,564,908) (50,061,144) (94,673,416)
Proceeds from sales of
available-for-sale securities 2,605,405 1,243,431 27,607,495 45,989,652
Maturities of available-for-sale securities 2,965,000 10,763,965 9,982,000 28,964,742
Purchases of property and equipment (525,519) (1,434,524) (3,616,297) (6,518,917)
Patents and organization costs (217,993) (132,416) (126,209) (790,179)
Other (78) (48,980)
--------------- --------------- -------------- ---------------
Net cash provided by (used in)
investing activities 796,150 (6,124,452) (16,214,233) (27,077,098)
--------------- --------------- -------------- ---------------
Cash flows from financing activities:
Proceeds from notes payable 169,761 1,243,696 180,242 3,271,822
Proceeds from issuance of common stock, net 8,379,147 23,995,737 50,117,201 101,818,921
Payment of notes payable (161,132) (137,109) (153,638) (2,829,128)
Proceeds under capital leases 392,138 481,545
Payments under capital leases (171,721) (212,199) (241,390) (646,149)
Proceeds from issuance of preferred stock 8,845,879
Treasury stock purchases (25,000)
Proceeds from bank loan 1,000,687 1,000,687
--------------- --------------- -------------- ---------------
Net cash provided by financing 8,608,193 24,890,125 50,903,102 111,918,577
activities --------------- --------------- -------------- ---------------
Effect of exchange rate changes on cash 6,219 (5,157) (13,027) (11,952)
--------------- --------------- -------------- ---------------
Net (decrease) increase in cash and
cash equivalents (752,597) 9,532,198 20,135,439 30,168,412
Cash and cash equivalents, beginning of
period 1,253,372 500,775 10,032,973
--------------- --------------- -------------- ---------------
Cash and cash equivalents, end of period $ 500,775 $ 10,032,973 $ 30,168,412 $ 30,168,412
=============== =============== ============== ===============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-5
<PAGE> 6
NEOPROBE CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Deficit
Accumulated
Common Stock Preferred Stock Additional During the
-------------------------- --------------------------- Paid-in Development
Shares Amount Shares Amount Capital Stage
----------- ----------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, November 16, 1983
(inception):
Sale of common stock
($.002-$7.84 per share),
net of cost 3,647,174 $ 3,647 $ 8,658,415
Payment for stock purchase
option 65,000
Issued at $6 per share for
converting debt to equity 76,817 77 460,913
Conversion of common stock
to preferred stock (270,896) (271) 541,792 $ 2,123,824 (2,123,553)
Sale of preferred stock at
$4.12 per share 484,849 2,000,002
Repurchased shares at
$6 per share (4,166)
Reissued to 401(k) plan at
$6 per share 3,830 (4,550)
Conversion of preferred
stock to common stock 1,715,205 1,715 (1,026,641) (4,123,826) 10,967,988
Issued to an employee for
services 1,750 2 6,998
Sale of common stock and
warrants in connection
with IPO (1,725,000
units at $6 per unit),
net of costs 1,725,000 1,725 8,177,959
Issued to employees at par
value 80,000 80
Exercise of employee stock
options at $2 per share 9,200 9 18,391
Sale of common stock and
warrants (550,000 units
at $12 per unit), net of
costs 1,100,000 1,100 5,828,636
Issued in connection with
acquisition 128,096 128 688,389
Foreign currency
translation adjustment
Net loss since inception
to December 31, 1993 $(21,832,739)
----------- ----------- ----------- ------------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
Unrealized
Cumulative Gain (Loss)
Foreign on
Currency Available-
Translation Treasury for-Sale
Adjustment Stock Securities Total
------------ ----------- ----------- -------------
<S> <C> <C> <C> <C>
Balance, November 16, 1983
(inception):
Sale of common stock
($.002-$7.84 per share),
net of cost $ 8,662,062
Payment for stock purchase
option 65,000
Issued at $6 per share for
converting debt to equity 460,990
Conversion of common stock
to preferred stock
Sale of preferred stock at 2,000,002
$4.12 per share
Repurchased shares at
$6 per share $ (25,000) (25,000)
Reissued to 401(k) plan at
$6 per share 22,966 18,416
Conversion of preferred
stock to common stock 6,845,877
Issued to an employee for
services 7,000
Sale of common stock and
warrants in connection
with IPO (1,725,000
units at $6 per unit),
net of costs 8,179,684
Issued to employees at par
value 80
Exercise of employee stock
options at $2 per share 18,400
Sale of common stock and
warrants (550,000 units
at $12 per unit), net of
costs 5,829,736
Issued in connection with
acquisition 688,517
Foreign currency
translation adjustment $ 5,790 5,790
Net loss since inception
to December 31, 1993 (21,832,739)
------------ ----------- ---------- -----------
</TABLE>
CONTINUED
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE> 7
NEOPROBE CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Deficit
Accumulated
Common Stock Preferred Stock Additional During the
-------------------------- --------------------------- Paid-in Development
Shares Amount Shares Amount Capital Stage
----------- ----------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 8,212,010 $ 8,212 0 $ 0 $ 32,744,586 $(21,832,739)
Exercise of employee
stock options at $2 per
share 2,000 2 3,998
Exercise of stock
warrants ($3.75 to
$4.50 per share) 12,140 12 50,065
Issued in connection with
acquisition 76,967 77 480,967
Reissued to 401(k) plan
at $6 per share 1,398 1 6,575
Sale of common stock at
$2.27 per share, net of
costs 2,000,000 2,000 4,426,825
Exercise of warrants for
common stock at $.001
per share in exchange
for $550 (par value)
and cancellation of
other warrants of
offsetting value 550,000 550
Foreign currency
translation adjustment
Net loss (10,554,746)
----------- ----------- ----------- ------------ ------------ ------------
Balance, December 31, 1994 10,854,515 10,854 0 0 37,713,016 (32,387,485)
Issued to 401(k) plan 3,253 3 13,065
Exercise of stock
warrants ($3.75 to
$6.00 per share) 549,712 550 2,492,750
Exercise of employee
stock options ($2 to
$6 per share) 97,745 98 328,486
Sale of common stock at
$2.27 per share, net of
costs 3,000,000 3,000 5,914,171
Exercise of unit purchase
option by underwriter
at $2.22 per share, net
of costs 450,000 450 994,073
Sale of common stock at
$5.50 per share, net of
costs 1,650,000 1,650 8,287,902
Sale of common stock at
$10.50 per share, net
of costs 575,000 575 5,696,782
Issued in connection with
investments by
marketing partner
($9.03 to $15.97 per
share), net of costs 154,575 155 1,524,542
Foreign currency
translation adjustment
Unrealized gain on
available-for-sale
securities
Net loss (10,759,375)
----------- ----------- ----------- ------------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
Unrealized
Cumulative Gain (Loss)
Foreign on
Currency Available-
Translation Treasury for-Sale
Adjustment Stock Securities Total
------------ ----------- ----------- -------------
<S> <C> <C> <C> <C>
Balance, December 31, 1993 $ 5,790 $ (2,034) $ 10,923,815
Exercise of employee
stock options at $2 per
share 4,000
Exercise of stock
warrants ($3.75 to
$4.50 per share) 50,077
Issued in connection with
acquisition 481,044
Reissued to 401(k) plan
at $6 per share 2,034 8,610
Sale of common stock at
$2.27 per share, net of
costs 4,428,825
Exercise of warrants for
common stock at $.001
per share in exchange
for $550 (par value)
and cancellation of
other warrants of
offsetting value 550
Foreign currency
translation adjustment 88,222 88,222
Net loss (10,554,746)
------------ ----------- ----------- -------------
Balance, December 31, 1994 94,012 0 5,430,397
Issued to 401(k) plan 13,068
Exercise of stock
warrants ($3.75 to
$6.00 per share) 2,493,300
Exercise of employee
stock options ($2 to
$6 per share) 328,584
Sale of common stock at
$2.27 per share, net of
costs 5,917,171
Exercise of unit purchase
option by underwriter
at $2.22 per share, net
of costs 994,523
Sale of common stock at
$5.50 per share, net of
costs 8,289,552
Sale of common stock at
$10.50 per share, net
of costs 5,697,357
Issued in connection with
investments by
marketing partner
($9.03 to $15.97 per
share), net of costs 1,524,697
Foreign currency
translation adjustment 72,895 72,895
Unrealized gain on
available-for-sale
securities $ 46,480 46,480
Net loss (10,759,375)
------------ ----------- ----------- -------------
</TABLE>
CONTINUED
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
<PAGE> 8
NEOPROBE CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Deficit
Accumulated
Common Stock Preferred Stock Additional During the
-------------------------- --------------------------- Paid-in Development
Shares Amount Shares Amount Capital Stage
----------- ----------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 17,334,800 $17,335 0 $ 0 $ 62,964,787 $(43,146,860)
Exercise of employee
stock options at $2 to
$6 per share 132,075 132 553,139
Exercise of stock
warrants ($3.32 to
$12.60 per share) 2,904,421 2,905 18,165,986
Issued to 401(k) plan
at $3.46 5,426 5 18,792
Issued to employee in
exchange for services 10,000 10 121,240
Sale of common stock at
$18.50 per share, net
of costs 1,750,000 1,750 30,190,777
Issued in exchange for
technology licenses at
$16.03 per share 124,805 125 1,999,875
Issued in exchange for
note receivable and
development activities
at $20.25 per share 125,000 125 2,531,125
Issued in conversion of
debentures at $5.93
per share 200,000 200 1,185,641
Vesting of compensatory
employee options 1,562,500
Foreign currency
translation adjustment
Unrealized loss on
available-for-sale
securities
Net loss (20,969,143)
----------- ----------- ----------- ------------ ------------ ------------
Balance, December 31, 1996 22,586,527 $22,587 0 $ 0 $119,293,862 $(64,116,003)
=========== =========== =========== ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Unrealized
Cumulative Gain (Loss)
Foreign on
Currency Available-
Translation Treasury for-Sale
Adjustment Stock Securities Total
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
Balance, December 31, 1995 $ 166,907 $ 0 $ 46,480 $ 20,048,649
Exercise of employee
stock options at $2 to
$6 per share 553,271
Exercise of stock
warrants ($3.32 to
$12.60 per share) 18,168,891
Issued to 401(k) plan
at $3.46 18,797
Issued to employee in
exchange for services 121,250
Sale of common stock at
$18.50 per share, net
of costs 30,192,527
Issued in exchange for
technology licenses at
$16.03 per share 2,000,000
Issued in exchange for
note receivable and
development activities
at $20.25 per share 2,531,250
Issued in conversion of
debentures at $5.93
per share 1,185,841
Vesting of compensatory
employee options 1,562,500
Foreign currency
translation adjustment (60,446) (60,446)
Unrealized loss on
available-for-sale
securities (76,339) (76,339)
Net loss (20,969,143)
------------ ----------- ----------- ------------
Balance, December 31, 1996 $ 106,461 $ 0 $ (29,859) $ 55,277,048
============ =========== =========== ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-8
<PAGE> 9
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
a. ORGANIZATION AND NATURE OF OPERATIONS: Neoprobe Corporation ("the
Company"), a Delaware corporation, is a development stage enterprise
engaged in the development and commercialization of technologies for the
diagnosis and treatment of cancers. There can be no assurance that the
Company will be able to commercialize its proposed products. No
significant revenues will be derived from the commercial marketing of the
Company's RIGS(R) products until after the necessary government approvals
are obtained, the first of which is not expected until 1997 at the
earliest. Expenses incurred have been primarily for research and
development activities and administration, resulting in an accumulated
deficit of approximately $64,000,000. The Company is dependent on the
proceeds of its securities and other financing vehicles to continue the
commercial development of its proposed products.
b. BASIS OF PRESENTATION: The consolidated financial statements of the
Company include the accounts of the Company and its majority-owned
subsidiaries. All significant intercompany accounts and transactions have
been eliminated in consolidation.
c. FOREIGN CURRENCY TRANSLATION: In accordance with Statement of Financial
Accounting Standards (SFAS) No. 52, Foreign Currency Translation, assets
and liabilities denominated in foreign currencies are translated at
current exchange rates in effect at the balance sheet dates, and revenues
and expenses are translated at the average monthly exchange rate. The
differences resulting from such translations, as compared to the equity
of subsidiaries which is translated at historical rates, are included in
cumulative foreign currency translation adjustments, a separate component
of stockholders' equity.
d. CASH AND CASH EQUIVALENTS: For purposes of the statements of cash flows,
cash and cash equivalents consist of demand deposits, money market funds,
highly liquid debt instruments and certificates of deposit with original
maturities of three months or less.
e. AVAILABLE-FOR-SALE SECURITIES: Information related to amortized cost and
fair value of available-for-sale securities at December 31, 1995 and 1996
is provided below:
<TABLE>
<CAPTION>
GROSS
AMORTIZED UNREALIZED
1995 COST GAINS FAIR VALUE
---- --------- ---------- -----------
<S> <C> <C> <C>
U.S. Treasury and U.S. Government $1,958,822 $40,501 $1,999,323
Corporate debt securities 5,274,357 5,979 5,280,336
---------- ------- ----------
$7,233,179 $46,480 $7,279,659
========== ======= ==========
</TABLE>
<TABLE>
<CAPTION>
GROSS
AMORTIZED UNREALIZED
1996 COST LOSSES FAIR VALUE
---- ---- ------ ----------
<S> <C> <C> <C>
U.S. Treasury and U.S. Government $ 891,851 $(16,026) $ 875,825
Corporate debt securities 18,886,827 (13,833) 18,872,994
----------- -------- -----------
$19,778,678 $(29,859) $19,748,819
=========== ======== ===========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-9
<PAGE> 10
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - [CONTINUED]
The fair value of debt securities at December 31, 1996, by contractual
maturity, are shown below. Expected maturities may differ from
contractual maturities as, under an existing investment agreement, the
Company has the ability and intent to hold all securities for short-term
working capital purposes.
<TABLE>
<CAPTION>
AMORTIZED
1995 COST FAIR VALUE
---- ---- ----------
<S> <C> <C>
Due one year or less $4,928,134 $ 4,967,125
Due after one year through five years 2,016,948 2,023,117
Due after five years through ten years 288,097 289,417
---------- -----------
$7,233,179 $ 7,279,659
========== ===========
</TABLE>
<TABLE>
<CAPTION>
AMORTIZED
1996 COST FAIR VALUE
---- ---- ----------
<S> <C> <C>
Due one year or less $15,483,515 $15,498,661
Due after one year through five years 4,295,163 4,250,158
----------- -----------
$19,778,678 $19,748,819
=========== ===========
</TABLE>
f. INVENTORY: The components of inventory at December 31, 1995 and 1996, are
as follows:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Materials and component parts $101,886 $ 51,264
Work in process 107,786 94,389
Finished goods 263,332 70,619
-------- --------
$473,004 $216,272
======== ========
</TABLE>
Materials and component parts are valued at the lower of moving average
cost or market. Work in process and finished goods are valued at the
lower of cost (first-in, first-out) or market.
g. PROPERTY AND EQUIPMENT: Depreciation is computed using the straight-line
method over the estimated useful lives of the depreciable assets.
Maintenance and repairs are charged to expense as incurred, while
renewals and improvements are capitalized. Equipment includes $770,545
and $571,563 of equipment under capital leases and accumulated
amortization of $423,958 and $393,384 at December 31, 1995 and 1996,
respectively.
h. INTANGIBLE ASSETS: Intangible assets consist primarily of the cost of
patents and acquired technology licenses. Patent costs are amortized on a
straight-line basis over the remaining lives of the patents. Patent
application costs are deferred pending the outcome of patent
applications. Costs associated with unsuccessful patent applications and
abandoned intellectual property are expensed when determined to be
worthless. The Company evaluates the potential alternative uses of
intangible assets, as well as the recoverability of the carrying values
of intangible assets on a recurring basis.
i. SALES REVENUE: The Company has derived revenues from the sale of blood
group serology products and from sales of its radiation detection
instruments. These sale transactions are independent of the clinical
testing agreements and are not contingent upon the completion or results
of clinical testing. The Company recognizes sales revenue when the
product is shipped.
j. RESEARCH AND DEVELOPMENT COSTS: All costs related to research and
development are expensed as incurred.
F-10
<PAGE> 11
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - [CONTINUED]
k. INCOME TAXES: The Company accounts for income taxes in accordance with
SFAS No. 109, Accounting for Income Taxes. Under SFAS No. 109, deferred
tax assets and liabilities are recognized based on temporary differences
between the financial statement and tax basis of assets and liabilities
using current statutory tax rates. SFAS No. 109 also requires a valuation
allowance against net deferred tax assets if, based on the available
evidence, it is more likely than not that some or all of the deferred tax
assets will not be realized.
l. USE OF ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
m. NET LOSS PER COMMON SHARE: Net loss per common share is based on the
weighted average number of common shares outstanding during the year. The
loss per share for all periods presented excludes the number of common
shares issuable upon the conversion of convertible debentures, and the
number of shares issuable upon exercise of outstanding stock options and
warrants into the Company's common stock since such inclusion would be
antidilutive.
n. RECLASSIFICATIONS: Certain amounts have been reclassified to conform
with the 1996 presentation.
2. ACCOUNTS RECEIVABLE:
Accounts receivable at December 31, 1995 and 1996 consist of the following:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Trade $176,434 $ 856,682
Related Parties 7,896 28,771
Other 355,021
-------- ----------
$184,330 $1,240,474
======== ==========
</TABLE>
3. NOTE RECEIVABLE:
At December 31, 1996, note receivable represents a convertible debenture
from XTL Biopharmaceuticals Ltd. held by the Company related to an
Investment and Research & Development Agreement (Note 11). The debenture is
due on February 13, 1998, bears interest at 5%, and is payable annually.
4. ACCRUED EXPENSES:
Accrued expenses at December 31, 1995 and 1996 consist of the following:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Royalties $ 27,524 $ 46,628
Compensation 440,417 1,223,160
Taxes 64,470 36,712
Contracted Services &
Other 424,638 1,644,930
--------- ----------
$ 957,049 $2,951,430
========= ==========
</TABLE>
5. LONG-TERM DEBT:
In 1995, Neoprobe (Israel) Ltd. ("Neoprobe (Israel)"), a subsidiary of the
Company, and the Company issued convertible debentures in the amount of
$1,100,000 due February 10, 1997. During 1996, all of the debentures were
converted into 200,000 shares of the Company's common stock.
F-11
<PAGE> 12
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - [CONTINUED]
In 1994, Neoprobe (Israel) received notification from the state of Israel's
Finance Committee that a financial program had been approved for the
construction and operation of a radiolabeling facility by Neoprobe (Israel)
near Dimona, Israel. The amount of the approved investment is currently
approximately $4.8 million. Neoprobe (Israel) has submitted a request to
increase the approved investment by approximately $3.5 million. Under the
approved program, Neoprobe (Israel) is entitled to government grants and
government loan guarantees equal to a percentage of the total loan taken for
the construction and operation of the facility. Amounts received under the
agreement are collateralized by certain property obtained through the use of
proceeds received. As of December 31, 1996, Neoprobe (Israel) has received
approximately $1 million and $173,000 in the form of loans and grants,
respectively. Amounts received as loans bear interest at the LIBOR rate plus
a specified percentage based on the exchange rate differential between the
Israeli shekel and the U.S. dollar, or approximately 7% at December 31, 1996.
Principal payments are due at various dates based on the date of each
respective loan draw. Based on loan draws received to date, principal
amounts of approximately $13,770, $202,460, $439,636, $236,342 and $108,479
become due in 1998 through 2002.
6. INCOME TAXES:
As of December 31, 1996, net deferred tax assets approximated $24.1 million
related principally to net operating loss carryforwards of approximately
$55.6 million available to offset future taxable income, if any, through
2011 and tax credit carryforwards of approximately $1.9 million (principally
research and development) available to reduce future income tax liability
after utilization of tax loss carryforwards, if any, through 2011. Due to
the uncertainty surrounding the realization of these favorable tax
attributes in future tax returns, all of the net deferred tax assets have
been fully offset by a valuation allowance.
Under Section 382 of the Internal Revenue Code of 1986, as amended, the
utilization of net operating loss carryforwards may be limited under the
change in stock ownership rules of the Internal Revenue Code. As a result of
ownership changes which occurred in September 1994 and March 1989, the
Company's operating tax loss carryforwards and tax credit carryforwards are
subject to these limitations.
7. EQUITY:
a. COMMON STOCK:
In April 1996, the Company completed the sale of 1,750,000 shares of
common stock at a price of $18.50 per share in a secondary offering.
Gross proceeds from this offering were $32.4 million, and proceeds net of
underwriting discounts were $30.5 million.
In November 1992 and December 1993, the Company issued a total of
2,330,000 Class E Redeemable Common Stock Purchase Warrants ("Class E
Warrants"). The Class E Warrants were exercisable over a three-year
period beginning November 10, 1993 and expiring on November 12, 1996.
During 1996, the Company received proceeds from the exercise of Class E
Warrants of approximately $15.0 million.
b. STOCK OPTIONS:
At December 31, 1996, the Company has two stock-based compensation plans
which are described below. The Company applies APB Opinion No. 25 and
related interpretations in accounting for its plans. Accordingly, no
compensation cost has been recognized related to fixed options granted
under the plans. The compensation cost that has been charged against
income related to performance-based plans was $1.7 million for 1996. Had
compensation cost for the Company's two stock-based compensation plans
been determined based on the fair value at the grant dates for awards
under those plans, consistent with FASB Statement No. 123, the Company's
net loss per share would have been increased to the pro forma amounts
indicated below:
F-12
<PAGE> 13
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - [CONTINUED]
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C> <C>
Net Loss As reported $(10,759,375) $(20,969,143)
Pro forma $(11,319,278) $(22,017,227)
Loss per Share As reported $ (0.73) $ (1.06)
Pro Forma $ (0.77) $ (1.12)
</TABLE>
Under the Amended and Restated Stock Option and Restricted Stock Purchase
Plan (the "Amended Plan"), and under the 1996 Stock Incentive Plan (the
"1996 Plan"), which was adopted by the Board of Directors on January 18,
1996, the Company may grant incentive stock options, nonqualified stock
options, and restricted stock awards to full-time employees, and
nonqualified stock options and restricted awards may be granted to
consultants and agents of the Company. Total shares authorized under each
plan are 2 million shares and 1.5 million shares, respectively. Under
both plans, the exercise price of each option equals the market price of
the Company's stock on the date of the grant.
Options granted under the Amended Plan generally vest on a monthly basis
over two to four years. Options granted under the 1996 Plan generally
vest on an annual basis over three years. However, approximately 400,000
options and 50,000 options have been granted under the Amended Plan and
the 1996 Plan, respectively, which vest based on the achievement of
various Company goals such as execution of a strategic worldwide
marketing agreement and obtaining regulatory approvals related to the
Company's products. During 1996, the Company recorded approximately $1.6
million in compensation expenses related to the achievement of these
goals.
Outstanding options under the plans, if not exercised, will generally
expire ten years from their date of grant or on the date of an optionee's
separation from employment with the Company, except for those options
granted in conjunction with employment agreements, which will expire ten
years from their date of grant or two years after cessation of the
optionee's employment, whichever occurs first.
The fair value of each option grant was estimated on the date of the
grant using the Black-Scholes option-pricing model with the following
assumptions for 1995 and 1996, respectively: average risk-free interest
rates of 7.4% and 5.7%; expected average lives of three and four years;
no dividend rate for either year; and volatility of 181% for both years.
A summary of the status of the Company's stock option plans as of
December 31, 1994, 1995, and 1996, and changes during the years ended on
those dates is presented below:
<TABLE>
<CAPTION>
1994 1995 1996
-------------------------- ------------------------- --------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
----------- ----------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 1,094,560 $2.95 1,211,300 $3.29 1,723,543 $ 2.93
Granted 142,500 $6.32 680,780 $2.64 457,700 $15.38
Forfeited (23,760) $6.00 (70,792) $5.68 (47,030) $ 6.92
Exercised (2,000) $2.00 (97,745) $3.36 (132,075) $ 4.19
--------- --------- ---------
Outstanding at
end of year 1,211,300 $3.29 1,723,543 $2.93 2,002,138 $ 5.60
========= ========= =========
Options exercisable
at end of year 655,292 931,762 1,265,893
</TABLE>
Included in outstanding options as of December 31, 1996 are 351,333
options exercisable at a weighted-average price of $4.53 per share which
vest on the meeting of certain Company achievements.
F-13
<PAGE> 14
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - [CONTINUED]
The following table summarizes information about the Company's stock
options outstanding at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- --------------------------------
WEIGHTED
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
RANGE OF DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
EXERCISE PRICES 1996 LIFE PRICE 1996 PRICE
------------------ ---------------- ------------ ------------ ---------------- ------------
<S> <C> <C> <C> <C> <C>
$2.00 to $3.88 772,959 7 Years $ 2.60 439,081 $ 2.68
$5.75 to $6.50 785,479 6 Years $ 6.03 745,479 $ 6.03
$12.25 to $17.75 443,700 9 Years $15.47 81,333 $15.47
--------- ---------
2,002,138 1,265,893
========= =========
</TABLE>
c. STOCK WARRANTS:
At December 31, 1996, there are approximately 160,000 warrants
outstanding to purchase common stock of the Company. The warrants are
exercisable at prices ranging from $3.00 to $17.92 per share with a
weighted average exercise price per share of $4.96. The warrants expire
on various dates from 1997 through 2000.
During 1995, the Company issued 450,000 shares of common stock related to
the conversion of a unit purchase option issued during 1992. In exchange,
the Company received cash and promissory notes totaling $999,500. The
promissory notes were collected during 1995.
During 1996, the Company issued warrants to purchase 150,000 shares of
common stock (which were exercised) related to a 1992 license agreement.
d. COMMON STOCK RESERVED: Shares of authorized common stock have been
reserved for the exercise of all options and warrants outstanding.
e. STOCK SUBSCRIPTIONS RECEIVABLE: During 1996, the Company collected $1.3
million related to subscriptions for common stock outstanding at December
31, 1995.
8. SHAREHOLDER RIGHTS PLAN:
During July 1995, the Company's Board of Directors adopted a Shareholder
Rights Plan. Under the plan, one "Right" is to be distributed for each share
of common stock held by shareholders on the close of business on August 28,
1995. The Rights are exercisable only if a person and its affiliate
commences a tender offer or exchange offer for 15% or more of the common
stock, or if there is a public announcement that a person and its affiliate
has acquired beneficial ownership of 15% or more of the common stock, and if
the Company does not redeem the Rights during the specified redemption
period. Initially, each Right, upon becoming exercisable, would entitle the
holder to purchase from the Company one unit consisting of 1/100th of a
share of Series A Junior Participating Preferred Stock at an exercise price
of $35 (which is subject to adjustment). Once the Rights become exercisable,
if any person, including its affiliate, acquires 15% or more of the common
stock of the Company, each Right other than the Rights held by the acquiring
person and its affiliate becomes a right to acquire common stock having a
value equal to two times the exercise price of the Right. The Company is
entitled to redeem the Rights for $0.01 per Right at any time prior to the
expiration of the redemption period. The Shareholder Rights Plan and the
Rights will expire on August 28, 2005.
F-14
<PAGE> 15
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - [CONTINUED]
9. INTERNATIONAL OPERATIONS:
The following information relates to (New)MonoCarb AB (Sweden) and Neoprobe
(Israel), the Company's international subsidiaries:
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Net sales $ 850,000 $ 803,000 $ 391,000
Loss from operations 1,060,000 1,680,000 3,558,000
Identifiable assets 1,230,000 3,290,000 5,500,000
</TABLE>
For the year ended December 31, 1996, approximately $328,000 of net sales
were concentrated among two customers. For the year ended December 31, 1995,
approximately $696,000 of net sales were concentrated among two customers.
For the year ended December 31, 1994, approximately $750,000 of net sales
were concentrated with a single customer.
10. RELATED-PARTY TRANSACTIONS:
A partner of a law firm which provides various legal services to the
Company, including patent and trademark filings and prosecuting patent and
trademark applications, is a director and officer of the Company. Fees
related to services performed by this firm approximated $346,000, $201,000
and $201,000 for the years ended December 31, 1994, 1995, and 1996,
respectively, and $1,513,000 for the period November 16, 1983 (inception)
through December 31, 1996. The Company owed this law firm approximately
$13,000 and $12,500 at December 31, 1995 and 1996, respectively. Also see
Note 11.
11. AGREEMENTS:
a. RESEARCH AND DEVELOPMENT:
Under a research and development agreement between the Company, The Ohio
State University, and the Department of Development of the State of Ohio,
the Company must pay the State of Ohio periodic royalties calculated as a
percentage of net sales of products utilizing the results of the
sponsored research, a sharing of proceeds received from the sale of
technology, and a portion of the royalties collected from any license the
Company may grant. The Company has an option to terminate its royalty
obligation following completion of the research period by making a
termination payment to the State of Ohio.
b. LICENSE AND TECHNOLOGY AGREEMENTS:
In July 1992, the Company entered into a revised agreement with The Dow
Chemical Company (Dow) for an exclusive global commercial sublicense to a
specific antibody for use in RIGS system products subject to the approval
of the National Cancer Institute of the National Institutes of Health
(NCI/NIH). The NCI/NIH approved the sublicense arrangement in 1993. The
agreement provides that the Company will pay Dow royalties on RIGS
surgical system antibody product revenues. In October 1995, the Company
entered an exclusive worldwide license agreement with Dow for use of its
iodination technology. Under this agreement, the Company must pay
royalties to Dow on net sales of radiolabeled targeting agents produced
with Dow's iodination technology. The license lasts through the life of
any patent covering this process. An officer of Dow is a director of the
Company.
In April 1993, the Company entered into a long-term clinical and
commercial supply agreement with Nordion International Inc. (Nordion) for
the radiolabeling of the Company's monoclonal antibody for clinical
trials and commercial sale after regulatory approval to market has been
granted. The agreement will remain in force for a minimum of three years
after the Company is granted approval to market in the U.S. or Europe.
The Company agreed to purchase certain quantities of the radiolabeled
antibody throughout the term of the agreement at prices already set or to
be determined based on current information at the time of commercial
approval. The Company incurred costs of approximately $560,000, $350,000,
and $1.3 million for the years ended December 31, 1994, 1995, and 1996,
respectively, and $2.5 million since execution of the agreement
through December 31, 1996.
F-15
<PAGE> 16
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - [CONTINUED]
In February 1995, the Company signed a manufacturing and supply agreement
with Bio-Intermediair B.V. (Bio-Intermediair) for the manufacture of the
CC49 monoclonal antibody. The agreement is for a minimum of three years
after the Company is granted regulatory approval to market with automatic
one-year extensions thereafter. The Company has incurred costs of
approximately $510,000 and $700,000 for the years ended December 31, 1995
and 1996, respectively, under this agreement.
In July 1995, the Company entered into an agreement with Neoprobe
(Israel) and Rotem Industries Ltd. (Rotem) which amended and superseded a
similar agreement dated April 1994 for Rotem's assistance in the
construction and operation of a radiolabeling facility for the Company's
targeting agents. In consideration for their assistance, Rotem received
a 5% equity interest in Neoprobe (Israel) and a monthly retainer until
the facility is complete. Once the radiolabeling facility is complete,
Rotem will be paid a management fee based on the volume of production.
Rotem has the option to acquire an additional 5% equity interest in
Neoprobe (Israel) during the period from July 1, 1996 to June 30, 1998 at
a purchase price to be determined later. If certain sales levels have not
been met by the end of 1999, Rotem has the right to receive an additional
4% equity interest. Rotem is guaranteed a 5% equity interest in Neoprobe
(Israel) until such time as the contributed equity investment by the
Company exceeds $2 million and the expenditures on the facility exceed
$8,000,000 or the annual units shipped exceed 50,000.
In August 1995, the Company signed a Cooperative Research and Development
Agreement (CRADA) with the National Cancer Institute to develop and use
specific monoclonal antibodies in RIGS surgeries. The agreement calls for
the Company to contribute $750,000 for expenditures over the five-year
term of the CRADA. The Company incurred costs of $31,000 and $85,000 for
the years ended December 31, 1995 and 1996, respectively, under this
program.
In February 1996, the Company and XTL Biopharmaceuticals Ltd. ("XTL")
executed a series of agreements, including an Investment Agreement and a
Research and Development Agreement whereby XTL will perform specific
research activities using XTL's proprietary technology for the
development of future products for the Company. The Company purchased
$1.5 million of convertible debentures of XTL, convertible into
approximately a 15% equity interest in XTL as of the date of purchase.
The Company also acquired a warrant affording Neoprobe the option to
purchase an additional 10% equity interest in XTL. Neoprobe issued
125,000 shares of common stock to XTL in exchange for the convertible
debentures, a three year warrant, and future (approximately $1 million)
product development activities.
In March 1996, the Company executed a Subscription and Option Agreement
with Cira Technologies, Inc.("Cira"), under which the Company received a
10% equity interest in Cira and an option to increase its interest in
Cira by 15%. The exercise price for the option shall be 15% of the fair
market value of Cira's outstanding securities on the earlier of (a) the
third anniversary date of the license agreement, or (b) the commencement
of a pivotal clinical trial study. The option price is subject to a
minimum of $1.95 million and a maximum of $4.5 million. The Company's
Chairman is a director and shareholder of Cira. Additionally, a partner
of a law firm, who is a director of the Company which provides various
legal services to the Company, is a principal shareholder of Cira. The
Company and Cira also entered into an agreement under which it will
provide financial, clinical, and technical support to Cira for Cira to
conduct a clinical study using Cira's technology, and the Company will
have an option to acquire an exclusive global license for Cira's
technology. The Company's financial commitment for this clinical study
will not exceed $500,000, and the Company has the right to terminate the
agreement upon review of interim results of the clinical study. The
Company has incurred expenses of approximately $125,000 for the year
ended December 31, 1996 under this agreement.
In May 1996, the Company executed two license agreements with Dow,
whereby the Company was granted an exclusive license to technology
covered by patents held by Dow. In exchange, the Company issued Dow
124,805 shares of common stock valued at $2 million. Dow would also
receive a specified percentage of any sublicense revenue received related
to licensed technology. In addition, the Company agreed to make lump sum
payments to Dow following marketing approval of certain initial products
and on the achievement of certain sales milestones by the Company. Dow
would also be paid royalties based on future net sales by the Company.
Approximately $1.5 million of the cost of the license agreements was
recorded as an intangible asset representing assets with alternative
future uses. Management believes that no significant impairment of the
intangible assets associated with the license agreement has occurred.
F-16
<PAGE> 17
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - [CONTINUED]
In September 1996, the Company executed a marketing license agreement
(the "Agreement") with United States Surgical Corporation ("USSC") giving
USSC exclusive sales and marketing rights (excluding Korea, Thailand,
Taiwan, Malaysia, and Singapore) for the Company's RIGS surgical cancer
detection products. USSC will also provide surgeon training and
professional education worldwide for RIGS products. The initial term of
the Agreement is for five years from the later date on which the Company
receives U.S. or European regulatory approval, and is renewable for
successive five-year periods. Upon execution of the Agreement, the
Company received a $2 million payment which has been recorded as deferred
revenue. In addition, USSC agreed to pay the Company an additional $3.5
million upon receiving notification of marketing approval in the U.S. and
Europe. Payments received under the Agreement are nonrefundable,
providing the Agreement is not terminated subject to certain conditions
as defined in the Agreement. Under the Agreement, the Company will pay
USSC a commission on all RIGS-related product sales. USSC will make
payments to the Company based on commissions collected from RIGS product
sales to fund research and development on future RIGS products. In
addition, USSC will pay royalties to the Company for all sales of RIGS
disposable cancer detection products.
c. EMPLOYMENT:
The Company has employment agreements through December 31, 1998 with two
of its executive officers which provide for restricted stock purchase
agreements. The agreements provide that the officers can purchase up to
an aggregate of 80,000 shares of the Company's common stock at par value
subject to vesting provisions. Vesting of the shares does not commence
unless there is a change in control of the Company. The unvested portion
of the restricted shares will be forfeited no later than June 4, 2006.
The Company has not recognized any expense under the agreement due to the
contingent nature of the vesting provision and the risk of forfeiture.
12. LEASES:
The Company leases certain office and manufacturing equipment under capital
leases which expire on various dates through 2000. In December 1996, the
Company entered into a seventy-seven month lease agreement for office space,
commencing January 1, 1997. In June 1996, the Company entered into a lease
agreement for MonoCarb's manufacturing facility, which will terminate in
May, 2004.
The future minimum lease payments for the years ending December 31 are as
follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------ ------
<S> <C> <C>
1997 $86,183 $689,138
1998 6,336 663,712
1999 676,206
2000 679,257
2001 681,108
------- ----------
$92,519 $3,389,421
Less amount representing interest 8,262
-------
Present value of net minimum
lease payments $84,257
=======
</TABLE>
F-17
<PAGE> 18
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - [CONTINUED]
Total rental expense under operating leases was approximately $529,000,
$492,000, and $621,000 for the years ended December 31, 1994, 1995, and
1996, respectively, and $2,188,000 for the period November 16, 1983
(inception) to December 31, 1996.
13. EMPLOYEE BENEFIT PLAN:
The Company maintains an employee benefit plan under Section 401(k) of the
Internal Revenue Code. The plan allows employees to make contributions and
the Company may, but is not obligated to, match a portion of the employee's
contribution with the Company's common stock, up to a defined maximum. The
Company recorded expenses of $13,000, $18,700, and $19,500 related to common
stock to be contributed to the plan in 1994, 1995, and 1996, respectively,
and $71,400 for the period November 16, 1983 (inception) through December
31, 1996.
14. SUPPLEMENTAL DISCLOSURE FOR STATEMENTS OF CASH FLOWS:
The Company paid interest, net of amounts capitalized, aggregating $70,972,
$37,182, and $35,917 for the years ended December 31, 1994, 1995, and 1996,
respectively, and $367,403 for the period November 16, 1983 (inception)
through December 31, 1996.
During 1995, the Company completed a strategic marketing agreement related
to certain Asian markets for an additional investment of $700,000, of which
$200,013 was included in subscriptions receivable as of December 31, 1995.
The Company also received subscription agreements with other parties for the
exercise of 200,000 warrants for which $1,062,500 is recorded as
subscriptions receivable at December 31, 1995.
During 1996, the Company issued common stock valued at a total of $5.7
million in exchange for license rights, convertible debentures, warrants,
and product development activities. The Company also incurred capital lease
obligations of approximately $146,000, and $29,000 in 1994 and 1995,
respectively, to finance equipment.
15. CONTINGENCIES:
The Company is subject to legal proceedings and claims which arise in the
ordinary course of its business. In the opinion of management, the amount of
ultimate liability with respect to these actions will not materially affect
the financial position of the Company.
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